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 28, 2005                    Le 28 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 Noël                       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 28, 2005                Le 28 septembre 2005

           TABLE DES MATIÈRES / TABLE OF CONTENTS

 

 

                                                 PAGE / PARA

 

 

PRESENTATION BY / PRÉSENTATION PAR

 

Yak Communications (Canada) Inc.                  697 / 3770

 

Cybersurf                                         745 / 4040

 

Xit Telecom                                       806 / 4375

 

UTC Canada                                        834 / 4471

 

Consumer Groups                                   884 / 4779

 

Canadian Cable Telecommunications Association     971 / 5199

 

                  Gatineau Quebec / Gatineau (Québec)

‑‑‑ Upon resuming on Wednesday, September 28, 2005

    at 0930 / L'audience reprend le mercredi

    28 septembre 2005 à 0930

3763             THE CHAIRPERSON:  Order, please.  A l'ordre, s'il vous plaît.

3764             Good morning, everyone.  Before opening the session I would like to inform you that one of the parties who is based far away from here has requested the ability to do the final comments by teleconference.  We have now checked and this can be done and we will have an interactive teleconference. So if there are other parties who wish to do that, they can let the Secretary of the hearing know that.

3765             It is Wednesday morning.  We are not yet certain whether we will be able to finish by tomorrow afternoon. So this may be tomorrow afternoon or, if necessary, it will be Friday morning.  We aren't going to sit as late as we sat yesterday today or tomorrow so we will have to see.

3766             If you do wish to do that, it will either be Thursday afternoon or Friday morning and you may wish to let the Secretary know.

3767             Madam Secretary, would you call the next party, please.

3768             THE SECRETARY:  Thank you, Mr. Chairman.

3769             Bonjour, mesdames et messieurs.  We will now move on with Yak Communications (Canada) Inc., panel No. 8.

PRESENTATION / PRÉSENTATION

3770             MR. ROVET:  Good morning, Mr. Chairman and Commissioners.

3771             My name is Benjamin Rovet, Corporate and Regulatory Counsel at Yak Communications Inc.  I would first like to thank the Commission for this opportunity to provide Yak's concerns directly to the Commission today.

3772             This time last year, almost to the day, I appeared before the Commision in the VoIP proceeding, which led to the Commission's landmark decision "Regulatory framework for voice communication services using Internet Protocol".  I mention that, because last year we focused our prsentation on specific issues that were important to Yak from the perspective of an innovative reseller that does not own its own facilities and is thus dependant on the underlying access and related services of the ILECs.

3773             In our VoIP presentation, we discussed the importance of ensuring that the ILECs did not use their control of the underlying access facility to discriminate against resellers like Yak and that the Commission reaffirm its commitment to open access networks by extending equal access in the context of VoIP services.  The ILECs generally submitted that such wholesale/access obligations were not required.

3774             We were very pleased that the Commission accepted many of our arguments and its recommendations in its VoIP framework decision released earlier this year, particularly the Commission's determination that the existing equal access obligation will apply to LECs providing VoIP services and it would rely on section 27(2) of the Telecommunications Act to ensure that underlying internet access providers could not discriminate against access independent VoIP providers like Yak.

3775             While we were relieved to learn that the Commission made equal access a mandatory obligation, and reaffirmed its commitment to an "open access" network, that relief was short-lived.  In the context of this proceeding, the concerns we expressed 12 months ago are re-emerging and are even greater now.

3776             I will use my time to describe the relationship between the forbearance of local exchange services and the risk forbearance poses for the continuation of interconnection arrangements and access/wholesale services.

3777             Yak Communications (Canada) Inc. is a wholly owned subsidiary of Yak Communications Inc., a publicly traded company.  Yak is the primary operating company of Yak Communications Inc. and both are headquartered in Toronto.  A second operating company, Yak Communications (America) Inc. provides VoIP and long distance services in the United States.  Yak's consolidated revenues are approximately $110 million, the majority of which are derived from the Canadian dial-around long distance market.

3778             Yak began offering service in Toronto and Montreal in 1999 and today we provide service throughout the country.  We operate a private leased network and opur own gateway switches. We have a customer base of approximately 900,000 monthly users and we are the largest supplier in the Canadian dial-around long distance market.

3779             We have an expanded portfolio of services, including a 1+ long distance product, a VoIP service, a dial-around toll service available to wireless subscribers.  We also provide resale services to small business customers.

3780             Yak is one of the few remaining competitors in Canada today that is independent of an ILEC or a cable company.  As the telcommunications industry has become increasingly concentrated in Canada, the role of remaining independent operators such as Yak has become increasingly important in ensuring that consumers really do have a meaningful choice of competitive alternatives for telecommunications services.

3781             A byproduct of this consolidation of the Canadian telecommunications industry is that the remaining competitors are becoming even more reliant on access to incumbent services and facilities.  Competitors have always been dependent on the incumbents for underlying services and often had to pay out more than 50 percent of operating revenues in acquiring incumbent services.  But as new facilities-based entrants emerged, they could and did buy from each other.  Not only did such arrangements less dependence on the ILECs, but the increasing competitiveness of this wholesale market forced all suppliers to provide lower prices and better quality.

3782             With the reduction in the number of facilities-based competitors, however, the competitiveness of the wholesale market is decreasing and the reliance on the ILECs is increasing.

3783             BCE's recent acquisition of Group Telecom and Rogers acquisition of Call-Net just a couple of months ago has significantly lessened facilities-based competition and left few choices for wholesale services to companies like Yak.

3784             The dwindling supply of facilities-based providers in the Canadian market is relevant for this proceeding.  Smaller companies like Yak are forced to rely more heavily on the ILECs. Should the Commission decide to forebear from retail price regulation of the ILECs local telephone services, they would have greater opportunity to limit competition from smaller companies.  Reducing the number of wholesale services available, introducing onerous terms and conditions, delays and price squeezing are some of the ways that the ILECs can make it difficult to compete.

3785             In the context of considering forebearance for ILEC retail services, Yak submits that it is an opportune time to consider instituting a more viable interconnection and wholesale/access regulatory framework.

3786             Interconnection of competitors' networks with the telephone companies' local netowrks has been a mainstay of the Commission's policy in allowing competition.  Since 1979, when the Commission first created the interconnection arrangements between a facilities-based private line company and Bell, the Commission has mandated interconnection arrangements between wireless and wireline companies, between long distance companies and the ILECs ‑‑ and later all LECs ‑‑ and between CLECs and ILECs.

3787             The provision by ILECs of wholesale services to competitors is less well developed.  There are numerous examples of where incumbents were required to provide wholesale services, such as unbundled local loops by telephone companies and third party internet access to cable company facilities.

3788             There are other examples where the Commission has denied wholesale services, for example the Commission's refusal to permit new entrants a resale discount on ILEC local telephone services in Decision 97-8.

3789             It is the combination of interconnection arrangements and wholesale services which make it possible for new entrants to compete directly with the ILECs.

3790             From Yak's perspective, equal access and the obligation to bill and collect are probably the most important wholesale interconnection service.  The ILECs and CLECs are mandated to provide equal access interconnection, including the type of interconnection needed to support dial‑around long distance services.

3791             Yak's leading product, dial‑around long distance, is provided to our customers through equal access and billing and collection services, both of which are mandated by the Commission.

3792             We are aware in Public Notice 2005‑2, the Commission excluded competitor services from the scope of this proceeding.  However, Yak is concerned that forbearance of local exchange services may lead to the implicit finding that ILECs also do not have market power in the underlying access facilities used to provide interconnection and other competitor services.

3793             This in turn could lead to the loss of certain essential competitor services. Indeed, there are indications that this is already beginning.  In this proceeding, the ILECs suggest that once retail forbearance has been granted the wholesale regulatory framework should also be dismantled.

3794             For instance, in CRTC Interrogatory 303, Bell Canada indicates that if forbearance has been granted for retail service, the continued availability of Category 2 competitor services should not be a requirement. Bell also hints that with local forbearance it may also be found that facilities currently considered essential or near essential are no longer necessary to ensure competition.

3795             Telus is a little more blunt.  In CRTC Interrogatory 505, Telus says that its forbearance test ensures that there is at least one full facilities‑based competitor to the ILEC.  Therefore, competitors have no need for new competitor services that make available parts on the ILECs' networks in order to have local exchange competition.

3796             We understand Bell and Telus to be saying, first, that if the Commission grants forbearance for retail service, it is because the ILEC does not have market power in the supply of that retail service.

3797             If the ILEC does not have market power in the supply of service, then any Category 2 competitor services used by competitors to compete with the ILEC should not be a requirement.

3798             Second, we understand them to say that if the Commission grants forbearance for a retail service, that means there is a competitive supply of the underlying facilities.  Otherwise the ILEC would have market power and the Commission would not grant forbearance.

3799             The competitive supply of the underlying facilities could mean that certain Category 1 and Category 2 services could also be supplied by other facilities‑based carriers and therefore they should not be under a regulatory requirement to continue the provision of competitor services.

3800             Third, any services self-supplied by cable companies to provide competitive local telephone services should not be considered competitor services and the ILECs should not be obligated to provide them.

3801             We would have asked the ILECs further interrogatories had the process of this proceeding allowed, as it is not entirely clear what they intend.

3802             Nevertheless, it is apparent that the ILECs have identified forbearance from regulation of local exchange services either as a reason to remove certain wholesale interconnection arrangements, such as a competitor services, or as a reason to reconsider the regulatory obligation to provide wholesale interconnection arrangements currently provided under tariff.

3803             Yak's observation is that the wholesale interconnection arrangements which it and other competitors require are already in jeopardy.  In fact, the potential threats to competition that Yak identified in the VoIP proceeding last year are becoming a reality.

3804             We have observed at least three clear examples of this.

3805             The first example is Bell Canada's decision not to offer equal access for its digital voice service, in flagrant contravention of the Commission's VoIP decision.  Although this issue is now before the Commission in Public Notice 2005‑9, Yak is concerned that this action is but the start of an erosion of the Commission's interconnection/wholesale regulatory framework.

3806             The second example that equal access and wholesale services are increasingly in jeopardy arises from the response provided by Telus to CRTC Interrogatory 505.

3807             Telus states that once forbearance is granted with respect to the ILEC's local exchange service, any further development of wholesale services which would otherwise be competitor services, should be left to negotiation between the various parties.

3808             Third, Bell has made a similar proposal in the telecom policy review. There Bell has proposed that the Commission should no longer determine terms and conditions for access to networks. Instead, under Bell's proposal, interconnection arrangements would be negotiated between Bell and each new competitor on a bilateral basis.

3809             Bell also proposals that the Commission only intervene as a last resort.

3810             Furthermore, recourse to the Commission would be available only for essential facilities or grandfathered wholesale services and only if the competitor could provide evidence of the failure of meaningful bilateral negotiations.

3811             Finally, unless Bell and the new competitor agree, presumably prior to negotiations, the Commission would not have jurisdiction to resolve disputes.

3812             One could well imagine that Bell would not enter into bilateral negotiations unless the competitor chose a dispute resolution party other than the Commission.

3813             In any event, the overall fallacy of Bell's proposal is the underlying assumption that the ILECs have an incentive to negotiate with competitors for the provision of interconnection arrangements.

3814             Why would they have such an incentive?  The ILECs that control access services required by their competitors have a strong incentive to deny access to competitors.  The ILEC's economic objective is to drive shareholder value by controlling retail markets and eliminate competitors.

3815             The consequences of such a regulatory regime would likely result in prices, terms and conditions for wholesale interconnection arrangements that would be entirely unattractive to any competitor.  The result would be new disputes between the ILECs and the competitors over the reasonableness of the wholesale/interconnection services.  The delay and deterrence of new or continued competitive entry would result.

3816             One can gain a preview of what such negotiations would be like with unregulated incumbent carriers by examining the attitude of the wireless operators.

3817             Yak has attempted to negotiate wholesale/interconnection arrangements with all three operators.  We would like to offer inexpensive long distance service to their customers who are charged long distance prices many times the level found in the wireline market, where competition from Yak and other independent operators has forced prices down.

3818             Yak would also like to resell wireless services to its customer base.

3819             None of the cellular operators has expressed any interest in negotiating seriously with Yak.  It is not surprising that the mobile wireless operators do not want a new competitor to offer low price long distance service to their customers.

3820             Why would any incumbent want to enable another operator that might undercut its pricing?  Why would they want to enable a competitor that could threaten their own cozy market with two well‑known competitors, with each making ever‑increasing profits?

3821             Yak is concerned that these examples would be the model for future interconnection arrangements and wholesale services in a forborne environment.

3822             Unless the Commission also considers the interconnection wholesale framework, the criteria developed in this proceeding for a forbearance of local exchange services could result in erosion of the competitor services and the continued provision of equal access and wholesale services will be in jeopardy.

3823             One of the more important decisions that the Commission issued to start to develop a viable wholesale framework was Order 2001‑184, "Sunset clause for near-essential facilities".  Many competitors participated in that proceeding, requesting that the Commission extend the sunset for near‑essential facilities.

3824             After considering the evidence, the Commission concluded that entrants in the local market faced substantial barriers to entry, which limit their ability to expand their networks and acquire customers through self-supply of such facilities and that not extending the current mandated access period for near-essential facilities would make it more difficult for entrants to acquire the critical mass of customers necessary to make entry and expansion of their networks economic and would significantly limit the development of competition in the local exchange market.

3825             The Commission's determination in Order 2001‑184 was both inciteful and prescient.  However, more work needs to be done to create a viable wholesale regime.

3826             In CRTC Interrogatory 206, MTS Allstream pointed out many shortcomings of the current wholesale regulatory framework, including instances where the ILECs have not fully embundled and tariffed all of their underlying facilities and services used to provision local services;

3827             essential and near‑essential facilities not being priced at Category 1 competitor service rates;

3828             no mechanism to ensure that essential and near‑essential facilities are priced at rates that currently represent the cost of the underlying facility or service and not an historic or outdated cost;

3829             lack of access to ILEC remotes;

3830             ILEC failure to meet competitor QoS standards indicators and lack of compliance with local competition rules.

3831             The evidence of this proceeding suggests that more work and consideration of interconnection and wholesale issues is required.

3832             Yak urges the Commission to carefully consider whether the criteria it develops for forbearance of local services will have direct or indirect consequences for competitor services and competitors' ability to obtain the necessary wholesale and interconnection arrangements needed to compete with the ILECs.

3833             In this regard, we note that OFCOM recently held an extensive proceeding on the UK telecommunications market and concluded that establishing an effective and viable wholesale regime was a necessary precondition before relaxing retail regulatory requirements for BT.

3834             OFCOM concluded that a robust and pro‑competitive wholesale/interconnection framework should consist of two elements:  product level equivalence and institutional behavioural equivalence on the part of BT.

3835             At the product level, wholesale customers should have access to the same or substantially similar wholesale/interconnection products as the ILEC's own retail products at the same prices and using the same or substantially similar transactional processes as the incumbent's own retail activities.

3836             Institutional behavioural changes on the part of the ILECs should also be examined.

3837             Clearly there is no institutional incentive for incumbents to treat competitors in an equal manner to their own retail activities.

3838             Given the importance that continued access to interconnection arrangements and wholesale services has for competitors and the development of competition, Yak recommends that prior to granting forbearance to the ILECs, the Commission should hold a public consultation to develop and consider a more viable wholesale access regulatory framework.  This should include the development of rules to implement changes to the ILEC carrier services group described in our response to CRTC 206(c); a list of wholesale/interconnection services, cost‑oriented prices for such services, and terms and conditions of service.

3839             This concludes Yak's oral presentation.

3840             To sum up, Yak urges the Commission to carefully consider the issue of interconnection and wholesale services in the context of considering local forbearance criteria.

3841             Yak strongly believes that a more viable wholesale access framework is required and that the development of such a framework would facilitate successful competition and shortly thereafter the Commission would have much clearer evidence whether the ILECs no longer have market power in the provision of retail local services.

3842             Thank you.  I would be pleased to answer any questions.

3843             THE CHAIRPERSON:  Thank you.

3844             Commissioner Noël?

3845             COMMISSIONER NOËL:  Good morning, Mr. Rovet.

3846             If I understand well your presentation, and it is also in your written arguments, you suggest that what we should regulate is the access to the underlying facilities, access and interconnection.

3847             MR. ROVET:  I say that more our belief is that it is already regulated, but that is the area focus that the Commission should concentrate on prior to granting retail forbearance and that more work is needed to make it more viable.

3848             COMMISSIONER NOËL:  Would that mean, in your view, that we should also regulate access and interconnection from the facilities‑based competitors?

3849             Let's say you want to have access to facilities of Rogers, would that mean that we should also regulate the newcomers at the access level?

3850             MR. ROVET:  Well, they are already regulated on the access level for internet services because the Commission determined that they have market power in that supply.

3851             COMMISSIONER NOËL:  You mentioned they just purchased Call-Net, which is a CLEC.

3852             MR. ROVET:  Yes.

3853             COMMISSIONER NOËL:  CLECs, do you think we should need more regulation at the access level of all the facilities‑based carriers, not withstanding if they are an ILEC, a CLEC or some other type of carrier?

3854             MR. ROVET:  Our thoughts are generally no.  Only where the Commission finds that they have market power in the underlying supply of access services ‑‑ and on the cable side internet access is a good example of that ‑‑ then that would be desirable.

3855             But just because a cable company is entering the market as a facilities‑based provider, it is very likely that it wouldn't have market power, it wouldn't have the same ubiquitous network as the ILECs for that underlying access.

3856             COMMISSIONER NOËL:  They may not have the same ubiquitous market footprint in the entire territory of the ILEC, but they certainly have ubiquitous systems in the area where their footprint is.

3857             MR. ROVET:  But, for instance, they likely wouldn't have the same underlying network to provide transit and transport services.

3858             Is the cable facility to the home, the last mile, really appropriate to provide local telephone service on other than through VoIP, which it is already required through TPIA to provide underlying access to?

3859             So our thoughts were we wouldn't want to preclude it entirely, but other than where the Commission has found that it has market power now, we wouldn't think they would have market power in other areas of local market.

3860             COMMISSIONER NOËL:  So in your view you think it is premature to look at forbearance at this point in time?

3861             MR. ROVET:  For ILECs? Yes.

3862             COMMISSIONER NOËL:  For retail services.

3863             MR. ROVET:  Yes, it is. We believe it is premature.

3864             First of all, we believe they still have market power in retail services, but for the reasons I gave in the presentation, that without really looking more at the underlying wholesale access framework, forbearance first would, in our view, be detrimental to that.

3865             COMMISSIONER NOËL:  Mr. Rovet, you mentioned that you are a dial‑around long distance service provider, which is usually referred to as a casual calling.

3866             MR. ROVET:  Yes.

3867             COMMISSIONER NOËL:  In your written argument of September 15 ‑‑ sorry, I mixed them up. Let's go back a little bit.

                      "The Commission determined in CRTC Decision 2005‑25 that VoIP service is a substitute to PEZ, as VoIP services need not be ..."

3868             I have a hard time reading my handwriting:

                      "... need not be carried over a supplier's own network, but could be carried on a third party facility."

3869             Is it possible in your view that a form of competition can develop in the residential market without having, as you mentioned in your written submission of June, three facilities‑based competitors in the resale market before forbearance?

3870             MR. ROVET:  Are you asking whether two would be more appropriate than three?

3871             COMMISSIONER NOËL:  Yes. Three facilities‑based competitors before forbearance can be envisaged, that is your proposal?

3872             MR. ROVET:  That is, yes.

3873             COMMISSIONER NOËL:  Don't you think that because VoIP can piggyback on some other installation there would be competition without necessarily having three facilities‑based competitors in the same LIR, because the unit that you are suggesting, geographic market that you are suggesting, is the LIR.

3874             MR. ROVET:  I think specifically on VoIP, it is still in early stage to consider whether resellers like Yak, like a Vonage, like a Primus are going to be viable alternatives for primary exchange service.

3875             My observation is that they are doing well on that, but I'm not really sure if customers are taking it up as a replacement service directly to compete against the ILECs or to replace the ILEC service.

3876             COMMISSIONER NOËL:  So what you are telling me is that you don't consider VoIP services to be a substitute for PEZ.

3877             MR. ROVET:  No, I don't say that entirely, but I think it is premature.

3878             In the issue of forbearance of retail services of the ILECs, because you have VoIP competitors out there to say they are going to be replacement services for the ILEC primary line service, I think that might be premature in the context of forbearance for retail.

3879             I think the Commission got it exactly right in the VoIP decision, though, that these are potential substitutes or they are substitutes and therefore the ILEC service should be treated as the same as its own local service.

3880             COMMISSIONER NOËL:  Why three facilities‑based competitors before you could ‑‑ I'm not talking about the second threshold, which is the market share, but why three facilities‑based carriers as a threshold?

3881             MR. ROVET:  Especially from the context of access to wholesale services, we believe that with three there would be much more rivalrous behaviour in that particular market segment and there would be more availability of underlying wholesale services to competitors to resellers like Yak.

3882             So if the Commission was to really follow our recommendations and look at the wholesale framework for the ILECs first, maybe we would have less concern about two versus three down the road, if the Commission fixed the wholesale framework first.

3883             COMMISSIONER NOËL:  In your September 15 submission at paragraph 11 you state that "The competitors" ‑‑ and when you talk of "the competitors" I understand that you are talking about FCI and Yak:

                      "... made large investments to compete with the ILECs based on the assumption that the market would not be forborne for some period."  (As read)

3884             That is what I understand of your submission.

3885             FCI is not here today, but you, Yak, as a reseller of long distance services and a provider of VoIP services that piggyback on another access providers' installations, could you describe what you mean by large investments made to compete with the ILECs?

3886             MR. ROVET:  To be fair, that particular paragraph probably more represents FCI Broadband which has entered the market and has a CLEC in it, a facilities‑based CLEC in certain exchanges particularly.

3887             But with respect to our investments, although we are facilities less as defined by the Telecommunications Act, we still have as a proportion of our revenues made some big investments including puchasing a Class 4/Class 5 switch and created our own VoIP network on the backend.  As well, we had to develop the software, the customer‑facing processes to take orders in as a VoIP reseller.  That was in the millions of dollars.

3888             COMMISSIONER NOËL:  Okay. But you are not doing your own billing. You are counting on the ILEC ‑‑

3889             MR. ROVET:  No.

3890             COMMISSIONER NOËL: ‑‑ facility to do your own billing?

3891             MR. ROVET:  No. We do our own billing for VoIP. Only for dial‑around services do we rely on the ILECs.

3892             COMMISSIONER NOËL:  Okay. And what proportion of your revenues come from dial‑around services?

3893             MR. ROVET:  Right now it 2s probably 90‑95 percent.

3894             COMMISSIONER NOËL:  Ninety‑five percent, which are billed through the ILECs?

3895             MR. ROVET:  Yes.

3896             COMMISSIONER NOËL:  Thank you.

3897             At paragraph 42 of your comments of June 22 you determined that:

                      "The relevant geographic market is the LIR, or local interconnection region."  (As read)

3898             Could you comment on some of the alternatives proposed such as the local calling area or the individual exchanges of the ILECs?

3899             Why did you choose the LIR as opposed to local calling area or the local exchange or, as some of the other of the submissions we received, the entire ILEC territory?

3900             MR. ROVET:  I'm sorry, I just have some notes on this question exactly.

3901             Kind of the reasons why we chose the LIR for determining the geographic market included:  the LIR boundaries generally reflect the community of interest; they are neutral, they are existing, provincially described administrative regions; they are not reliant on any network architecture and are therefore competitively neutral, and they are well specified and readily available.

3902             I also believe ‑‑ I hope this is still the case.  This is going back a few years when I was at a broadband wireless company.  I believe Industry Canada, in granting licences to the company I was with, based it on LIRs, the equivalent of LIRs.  So there would be some congruity there.

3903             COMMISSIONER NOËL:  What do you think of the alternatives that were presented?  Are there reasons why you discarded those alternatives or preferred the LIR?

3904             MR. ROVET:  Well, we think the LIR is more reasonable than a whole province.  I think that is making it very difficult for the ILECs.

3905             But, on the other hand, exchanges we believe are too small and that they are not really a good test of whether an ILEC still has market power.

3906             COMMISSIONER NOËL:  Wabout the local calling area?

3907             MR. ROVET:  I think the problem with the local calling area is it is a little bit unclear what it always is and that there could be overlaps.  So I think it would be hard to measure.

3908             COMMISSIONER NOËL:  What about the Telus proposal of the overlap of the footprints, which would eliminate, as they mention, pockets of unserved customers by the new entrant?

3909             MR. ROVET:  Well, again, given our preference that two is too small, two facilities‑based competitors is too small, we wouldn't really think that the Telus proposal would work that way.

3910             As well, I don't really know if that is a good gauge.  Presumably they were measuring it against the cable footprint and that may be not reflective of areas where there may be pockets where they are not really providing local service and are concentrating just on one core area.

3911             COMMISSIONER NOËL:  Okay. If we look at the business market, Aliant suggested that it should be divided into four categories:  the basic business services, single‑line business, multi‑line business and small Centrex with 30 or less accesses; mid‑size Centrex 31 to 1,500 accesses; Enterprise Centrex, which are greater than 1,5000 and digital trunks.

3912             Could you comment on the relevant business markets proposed by Aliant and whether they should vary form ILEC territory to ILEC territory depending on the business structure?

3913             MR. ROVET:  I'm not really ‑‑ from Yak's perspective, although we do resell local business, we are not really in a good position to comment on the overall business market.

3914             COMMISSIONER NOËL:  Fair enough.

3915             MR. ROVET:  But I can undertake in our final reply to think about that a bit more if you wish.

3916             COMMISSIONER NOËL:  Thank you.

3917             What do you think of the Competition Bureau's proposal that divides the residential market into a first line and second line market, or primary line and kids line market?

3918             That is another thing that you are not ‑‑

3919             MR. ROVET:  All I can say is, I think the evidence I heard in these presentations is that the second line market there really are not many users on that.  I believe it was Aliant that stated that.

3920             COMMISSIONER NOËL:  It is difficult to identify what is a first line and a second line.

3921             MR. ROVET:  Exactly.

3922             COMMISSIONER NOËL:  Okay.

3923             In CYBERSURF/CRTC-20-JULY-2005-211 ‑‑ you don't need to go there, I will give you what they said ‑‑ Cybersurf indicated that:

                      "It could be desirable to make local calling areas symmetrical, irrespective of exchange of origin of calls before forbearance is considered."  (As read)

3924             Could you comment on that?

3925             MR. ROVET:  Sorry, could you just repeat?  I'm just trying to picture it.

3926             COMMISSIONER NOËL:  Cybersurf indicated that:

                      "It could be desirable to make local calling areas symmetrical, irrespective of exchange of origin of calls before forbearance is considered."  (As read)

3927                 MR. ROVET:  That is a hard one to answer.

3928             Just my hunch is it is complicated and wouldn't really be that practical.

3929             COMMISSIONER NOËL:  You are mostly in the long distance market?

3930             MR. ROVET:  Well, yes.

3931             COMMISSIONER NOËL:  Okay. Let's move to pockets.

3932             What do you think if only a portion of an exchange has an alternative to an ILEC's voice service?  Do you think that it would be possible for the ILEC in that territory to raise prices for the customers who do not have a choice of providers and use this income to subsidize its competitive services in the same geographic area?

3933             MR. ROVET:  My hunch is the answer is definitely.

3934             I have been giving this some thought.  You see just in the long distance market that there are certain customers that continue to get the DDD service which are at vastly inflated rates. I believe the figure is about 20 percent.  To me, that seems that is a subsidy from certain long distance customers who aren't really aware or have no interest in looking at a competitive plan, are subsidizing the long distance users that are more savvy.

3935             I think there is another stat from the Governor in Council report saying that that only 41 percent of all subscribers, all long distance subscribers, have even tried a competitor other than the ILEC.

3936             So I think it sort of goes to the issue of customer inertia.

3937             COMMISSIONER NOËL:  Which doesn't mean that those who stayed with the ILEC stayed with the old tariff?

3938             MR. ROVET:  No, but it reflects that if if only 40 percent even tried a competitor and if 20 percent are still on the old DDD, that represents that there is a lot of inertia just in the long distance market.  I believe that there would be a lot more inertia in the long distance market and I think the fact that it has taken so long to even, in most areas, get down to 95 percent is in part reflective of the fact there is more inertia with local.

3939             But going back to your question directly, I think, yes, what you would see is that the ILECs would tailor a local product ‑‑ have a very competitive local product for more of the savvy consumers that they are worried about losing and perhaps they would offer optional local services for free, but then the less savvy customers, the ones that they are not necessarily marketing to, they continue to reap more monopoly rents from.  A good example of this is the fact that optional local services are priced so highly above costs.  I imagine you would see that.

3940             COMMISSIONER NOËL:  You partly answered my question because I was asking you if the ILEC would have an incentive to raise the prices, but if the Commission were to put a ceiling on the rates for the customers who don't have an option, would that alleviate your concerns?

3941             MR. ROVET:  Not from a predatory pricing perspective because we still believe ‑‑ I would imagine that again you would see very aggressive pricing in a forborne environment to more of the savvy customers that they are worried about losing and they would recoup that.

3942             COMMISSIONER NOËL:  But the prices would have to meet the imputation test.

3943             MR. ROVET:  Which, the prices charged to the customers that aren't ‑‑

3944             COMMISSIONER NOËL:  That are forborne.

3945             MR. ROVET:  In a forborne environment.  Unless you left that as a condition, in a forborne environment there wouldn't be any ‑‑

3946             COMMISSIONER NOËL:  It could be a condition.

3947             MR. ROVET:  Well, if as a condition for forbearance they still had to price above costs, there would be less ‑‑ I mean, that sounds a lot like the Commission's recent decision on promotions.

3948             COMMISIONER NOËL:  Okay. What do you think of customer inertia? I think you partly answered that already.

3949             MR. ROVET:  Yes. As I stated, just in the long distance market we believe there is a couple of stats that point out there is a lot of customer inertia there and, I think, given the statistics in the local market and the slow development, and even in Atlantic Canada where EastLink has made some good strides, that has taken them ‑‑ I'm just trying to get my math right ‑‑ eight years, seven or eight years just to get to 20 or 30 percent in a couple of areas.

3950             So I think the slow development of local competition in general is a reflection of more customer inertia in local markets.  If you think about it, if there is customer inertia for long distance where all you really have to do is get picked, have your new company pick you, it is not a lot of technical work being done. nut to switch local providers there is a lot more.  You may be out of local service for a short period of time.

3951             So I think the indications are that inertia would be much more greater in local.

3952             COMMISSIONER NOËL:  Thank you.

3953             Could you comment on the test proposed by the Commissioner of Competition? One of the conditions of that test is that the variable costs of provision on the two networks are similar or that the cost of the entrant is lower and neither network is capacity‑constrained?

3954             Could you give us your views on that test proposed by the Commissioner of Competition?

3955             MR. ROVET:  Well, in our proposal we suggested that the Commission stick with the forbearance test in 94‑19 more or less.  As variables under that test I think it may be worth looking at, but we don't think it would be components to replace the 94 test.

3956             COMMISSIONER NOËL:  So you think that the Commission should examine the entrants' and the incumbents' cost structure before granting forbearance?

3957             MR. ROVET:  As a factor under 94‑19 test, perhaps, if it is practical.

3958             COMMISSIONER NOËL:  What about the time it takes?

3959             MR. ROVET:  As I said, if it is practical.  If those are variables under 94‑19 framework test that the Commission believes should be examined then we would agree with that, but not as a replacement for that.

3960             COMMISSIONER NOËL:  The Companies, in their answer to CRTC 305, at page 5, stated that:

                      "Germany, The Netherlands, Sweden, Australia and New Zealand abandoned or substantially revised ex ante tariff requirements for local services when the incumbents still had very high market shares.  The Companies also included as Attachment 3 a study filed as an Appendix D7 to Bell Canada's submission to the Telecom Policy Revenue Panel.  That attachment indicates that the countries mentioned in the response are replacing regulation of retail rates with regulation of rates at the wholesale level."  (As read)

3961             Could you discuss whether a switch from retail to wholesale regulation of local services in the countries mentioned above would be an appropriate precedent for forbearance from regulations of local services by the Commission?

3962             MR. ROVET:  Our view is we like what OFCOM did and in considering how they are going to regulate the market, the telecommunications market ‑‑ again, Canada and the U.K. might not be an apples to apples comparison, but they did say first they have to get the wholesale access framework, regulatory framework right.

3963             Then from that, after that is set, and there is evidence that that is working well, then they would consider retail forbearance from the ILECs. They were actually fairly strong that they would expect that that would happen fairly soon thereafter.

3964             But the big precondition was that they believed strongly that they needed to get the wholesale access framework right.

3965             COMMISSIONER NOËL:  Okay.  If we go back to your preconditions to forbearance for a minute, in addition to a number of conditions, including at least three facilities‑based competitors in the market, you mentioned that the entrants needed at least 30 percent of the relevant market.

3966             Could you tell us why you selected the 30 percent level and whether it is your opinion that at that level of market penetrations competitors could be viable?

3967             MR. ROVET:  Well, a couple of factors.

3968             I think, as we stated, that generally the Competition Bureau's merger guidelines indicate between 50 and 80 percent, so 70 percent is kind of at the high end.  I think 70 percent is also congruous with the market share that the ILECs have in long distance.

3969             So we think 70 percent is fairly reasonable, yet conservative in the sense that the ILEC probably would have at least some market power at 70 percent, but it is definitely more reasonable than 95 percent as they propose.

3970             COMMISSIONER NOËL:  In your submission you mention that three facilities‑based carriers must be in the market before any forbearance is envisaged on top of the 30 percent.

3971             Could you tell us what your views are on a duopoly type competition, like two facilities‑based competitors in each market, are they sufficient to create a truly competitive market and, if not, why?

3972             MR. ROVET:  From the perspective as a reseller competitor, just focusing on that part of it, we don't think it would be viable unless you had, as we stated, a viable wholesale access regulatory framework already in place, because we don't think that the competition between just two-facilities providers, particularly a cable company who generally have not expressed as much interest as compared, let's say, to a Group Telecom which has now gone to provide wholesale services on its own.

3973             As well, it doesn't have the same ubiquity as the ILEC as well.  So we don't think from that perspective, from the market for the underlying supply of access services, a duopoly would be viable for reseller entry into the local markets or, for that matter, interconnection arrangements from the long distance markets.

3974             COMMISSIONER NOËL:  In the same ligne de pensée, for potential customers to adopt the VoIP product it is dependant upon high-speed facilities ‑‑

3975             MR. ROVET:  Correct, yes.

3976             COMMISSIONER NOËL:  ‑‑ either cable modems or DSL, because there is no wireless broadband yet available, although we hear that it is coming.  Yourself, you are a reseller, you would be piggy‑backing on those facilities.

3977             Could you tell us how vulnerable you would be to anti‑competitive practices if we were to deregulate or forbear?

3978             MR. ROVET:  Forbear from retail services?

3979             COMMISSIONER NOËL:  Yes. would that have an impact on your business activities?

3980             MR. ROVET:  Well, from the retail side presumably there would be a much greater chance that the ILECs would price below cost, you know, to compete with VoIP services either on their own VoIP product or their own primary line service, so in that sense it would be hard to compete.

3981             In terms of the underlying access facility, I guess it depends on the scope of the forbearance order.  If the Commission kept or strengthened its findings in the VoIP decision, including the requirement to provide dry‑DSL and the requirement for TPI and requirement for wholesale access to high-speed internet, there may be less concern.  I think it really goes to what the underlying wholesale access market would be before you could really assess that.

3982             COMMISSIONER NOËL:  Thank you.

3983             Does the nature of the entrant, a cable company, a standalone non‑facilities‑based VoIP provider, and other ILECs from out‑of‑market, matter or should they all be treated the same?

3984             MR. ROVET:  For determining forbearance?  For judging whether the Commission should forbear?

3985             COMMISSIONER NOËL:  Yes.

3986             MR. ROVET:  It is a hard question.

3987             My hunch is it should be treated the same, but do have ‑‑ again, coming at it from the perspective that we want to make sure that there is a viable wholesale market, we would be more concerned with a cable company being a facilities‑based entrant as opposed to a Group Telecom, which show a lot more eagerness to provide wholesale services.

3988             COMMISSIONER NOËL:  What about an ILEC which is operating out of its territory?

3989             MR. ROVET:  Yes, it would presumably have the same incumbent mentality to new entrants.

3990             COMMISSIONER NOËL:  But not exactly the same facilities as the cable?

3991             MR. ROVET:  The same concern though, as I think I said earlier, we all think that the cable companies would be as ubiquitous as the ILECs.  I would imagine that an out‑of‑territory ILEC would be even less ubiquitous, have to construct its own facilities from scratch and presumably would just, as the case is now, now it is presumably focusing on business markets.

3992             COMMISSIONER NOËL:  What do you think of marketing safeguards such as promotions and winbacks?

3993             Should they be retained in all markets irrespective of the degree of competition, or what do you think?

3994             MR. ROVET:  I believe we said in our submissions that there shouldn't be a transitional regime and that they should be maintained.

3995             Having said that, just over the last couple of days I have given it some thought and in the Aliant situation, where they are already facing 30 percent decline in market share, it could be appropriate to relax some of the safeguards there, for instance the winback which the Commission extended to 12 months, which from our perspective we thought was a very good decision in the context of what it was a few years ago presumably in Ontario and Quebec where the prime competitor at that time, Call‑Net, really wasn't having much success, in part because of all the factors that I pointed out with the short winback period. So 12 months is appropriate there.

3996             But in a situation where the ILEC has already lost 25‑30 percent market share, maybe going back to the original winback period of three months might be appropriate.

3997             I know the Commission has relaxed the promotion rules somewhat, or reinstituted the promotion rules recently, maybe relaxing them in areas where more competition like the EastLink/Aliant's situation might be appropriate as well.

3998             COMMISSIONER NOËL:  Thank you.

3999             Going to social issues.  Were you here when ARCH made its presentation yesterday?

4000             MR. ROVET:  Yes, I was.

4001             COMMISSIONER NOËL:  They provided recommendations to ensure persons with disabilities receive telecom services on a nondiscriminatory basis in a forborne market.  For example:

                      "Telecom services providers should audit their services and products to identify barriers to disabled persons and design and implement barrier removal strategies.  They also suggested that the telecom services provided should file an annual report with the Commission regarding the accessibility of services for disabled persons and plans for barrier removal.  They also suggested the public notice yesterday at the hearing."  (As read)

4002             Could you provide your comments on the cost and practicability of these recommendations?

4003             MR. ROVET:  That is a hard question.

4004             I think those are reasonable positions.  I think the Commission has instituted, on the social side, a uniform obligation to provide special needs services ‑‑ and it applies to ILECs, CLECs, long distance providers and even resellers, and the LECs are supposed to enforce that through their underlying resellers.

4005             So our general tenancy is that is a reasonable request, it would just have to be balanced about the overall cost as well.

4006             I know, too, that we also operate services in the U.S. and the FCC and the PUCs generally are very much on top of this as well, so there are obligations there that flow to all providers, just not the ILECs.

4007             COMMISSIONER NOËL:  Are you aware of any machinery, since you are operating in the States, that we don't know about here that would allow or help disabled persons to communicate, things that do not seem to be available here in Canada?

4008             MR. ROVET:  Not specifically.  I'm just thinking that in the FCC's VoIP proceeding they kind of hived off the access issues for special needs persons and had their own form on that.  On the one hand they seem to have a deregulatory trend in VoIP. although I have to say with 9-1-1 that is a huge, huge, huge obligation for all VoIP providers in the States.  They really came at it very strong, but as well on the line they are also very focused on access needs as well for special needs persons.  That is something I expect they will be issuing a special decision on.

4009             COMMISSIONER NOËL:  If we go to quality of service, how do you think quality of service will be maintained in the competitive market?  I'm talking at the retail level.

4010             MR. ROVET:  In the present day, without a more robust wholesale framework that we are proposing, we would be very very worried about that.

4011             Sorry, are you talking about quality of service to competitors or just generally?

4012             COMMISSIONER NOËL:  No, at the retail level, to the customers, to the end users.

4013             MR. ROVET:  Well I think if you are truly confident that the ILECs have no market power, then they would be less concerned about quality of services on the retail level, because presumably the market would discipline.

4014             Although you could see, just from the last question ‑‑

4015             COMMISSIONER NOËL:  But if, for example, you have a competitor that comes in and offers a very low-cost service but that doesn't have all the bells and whistles, the intervals, the dial tone at the right time or, you know, a lower quality type of service, do you think that competition could bring down the whole quality of service that we are used to in an ILEC environment?

4016             MR. ROVET:  Well, it doesn't necessarily have to go that way.  In fact, in Decision 97‑8 the Commission did regulate CLECs and imposed a number of section 24 conditions on those issues and it still has the power to strengthen them and I believe that there have been some proceedings to strengthen them.

4017             So that mechanism could still be achieved in a forborne environment.

4018             COMMISSIONER NOËL:  Thank you. Those are my questions.

4019             THE CHAIRPERSON:  Thank you.

4020             Counsel.

4021             MR. WILSON:  Thank you, Mr. Chairman.  Just a couple of questions.

4022             Vonage, in their September 15th argument, had mentioned their view that for access independent VoIP providers customer acquisition costs can be substantial, including the cost of building brand awareness.

4023             From your company's perspective, what has your experience been in terms of acquisition costs and the level of those?

4024             MR. ROVET:  We would tend to agree with Vonage, it is fairly expense.  Probably we have been experimenting with different ways to do that, but it is much different rolling out a VoIP product which could be potentially a primary replacement service as opposed to especially a long distance service, especially dial‑around service.

4025             So generally we would agree with that, the costs are fairly high.

4026             MR. WILSON:  To maybe just touch on that notion that you just talked about, rolling out, and in your conversation with Commissioner Noël you talked about the LIR as your proposed geographic reason.

4027             When you roll out your VoIP service, do you roll it out on the basis of offering it in a LIR, do you roll it out on the basis of a local calling area in exchange, or do you have some other sort of area that you sort of incrementally roll out?

4028             How do you go about doing that?

4029             MR. ROVET:  No, we have actually have been fairly universal in rolling out, offering anywhere in the United States and Canada, Hawaii and Alaska excluded.  That is just the nature of the service, because all you require in terms of the last mile is that the customer have high-speed internet access.

4030             MR. WILSON:  So literally if I am anywhere in Canada I have high-speed internet, I can pick‑up the phone and call you and get service.

4031             How do you deal with issues in terms of getting local phone numbers sort yof on each exchange?

4032             MR. ROVET:  Yes. From that perspective we would not ‑‑ that is a good point.

4033             We have local numbers through our underlying CLEC.  It provides us numbers for 13 exchanges/  So we would be limited to providing native numbers to those 13 exchanges, but we could offer non‑native numbers to other exchanges.

4034             MR. WILSON:  Those are my questions, Mr. Chairman.

4035             THE CHAIRPERSON:  Thank you.

4036             Thank you very much, Mr. Rovet.

4037             MR. ROVET:  Thank you.

4038             THE CHAIRPERSON:  Madam Secretary.

4039             LE SECRÉTAIRE:  Nous allons maintenant poursuivre avec la plaidoirie de Cybersurf, panel numéro 9. Merci.

‑‑‑ Pause

PRESENTATION / PRÉSENTATION

4040             MR. TACIT:  Good morning, Mr. Chairman and Commissioners.

4041             My name is Chris Tacit, I am Vice‑President, Law and General Counsel at Cybersurf Corp. With me today, also representing Cybersurf, is Mr. Marcel Marcia, who is Vice‑President of Corporate Operations.

4042             We are very pleased to appear before you today to provide the perspective of a small independent competitor striving to compete on a national basis.  I would like to start our presentation with a brief overview of the company.

4043             Cybersurf is headquartered in Calgary and also has an office in Ottawa. The company currently has approximately 120 employees and provides a variety of telecommunication services. These include long distance telephone services and internet services.

4044             The company's internet services are provided using both regular dial‑up and high-speed ILEC, DSL and cable carrier platforms.

4045             The company is also in the process of entering the local telephony market as a reseller and is planning to roll out VoIP services.

4046             To the best of our knowledge, Cybersurf has been the first ISP to request third‑party internet access from a number of cable carriers.

4047             Although in our written argument we have provided a set of responses to all of the questions posed by the Commission in the Public Notice, in this oral presentation Mr. Marcia and I will be focusing exclusively on certain criteria to be applied to determine whether the relevant local telephony markets are sufficiently competitive for forbearance.

4048             More specifically, we submit that the establishment and enforcement of an appropriate regulatory regime for wholesale services that competitors require from the ILECs to provide their own local services must be a precondition to forbearance of ILEC local services.

4049             While we do not view the establishment and enforcement of such a regime on its own to be sufficient for the development of sustainable and vibrant competition at the retail level, we do view it as one absolutely necessary precondition to such competition and hence to ILEC forbearance.

4050             The stakes for consumers are very high.  Whether or not a proper wholesale regime is established will determine whether the form of competition that develops in the markets for local services will involve numerous competitors and be geographically widespread or whether it will develop into a limited form of duopoly between the ILECs and the cable carriers and those more limited geographic areas and market segments where ILEC and cable carrier networks overlap.

4051             Some parties suggest that competition based on two facilities‑based carriers may be sufficient, since the full benefits of competition can accrue to consumers in a duopoly under certain specified conditions.

4052             The problem with this argument is that it is highly theoretical and impossible to validate.  However, it is clear that in a multi‑competitor environment the argument becomes moot.

4053             At the same time, the real world experience demonstrates that multiservice provider environments are more beneficial to consumers than an ILEC cable carrier duopoly.

4054             Mr. Marcia will now describe how Cybersurf's presence in one specific market alongside the dominant ILEC and cable carrier has already made a significant difference to consumers to the extent that regulatory action has assisted Cybersurf in overcoming crucial access problems.

4055             We are convinced that the same kind of benefits would be achieved if multiple competitors enter the local services market.

4056             At the same time, Mr. Marcia will also show how an ILEC cable carrier duopoly environment in which third party access to ILEC and/or cable carrier facilities is not enforced can frustrate the development of a more competitive environment.

4057             MR. MARCIA:  Thank you, Chris.

4058             Good morning, Commissioners.

4059             We have chosen to use high‑speed internet as an example of what can go right or wrong from a competitive point of view in a market that starts out as a duopoly.  We have done this for three reasons.

4060             First, Cybersurf is actually delivering high‑speed internet service in selected markets where decisive regulatory action has provided the company the access that it needs to ILEC and/or cable company networks and Cybersurf continues to roll out its services in those markets.

4061             Second, we have experienced firsthand the difficulties of gaining access to the networks of the ILECs and cable carriers in a duopolistic environment so that we could offer our own high‑speed services.

4062             Our experience is that the presence of more than one facilities‑based competitor has not led to significant competition at the wholesale level. Rather, both ILECs and cable carriers have done their best to prevent or at least slow down access to their networks by other competitors offering high‑speed internet services.  There is no reason to expect that this situation is or will be any different in the case of local services.

4063             Finally, high‑speed internet service is itself a required input for the provision of VoIP services that are expected to compete directly with wireline local exchange service.  As such, to the extent that competition in the provision of high‑speed internet service is facilitated through the establishment and enforcement of proper access rules, more competitive VoIP options and service bundles that includes VoIP, high‑speed internet and other services would be available.  This is crucial, since most competition for local services will take place in the form of bundles that include local and other services.

4064             When listening to the ILEC presentations in the proceeding, one cannot help but be struck by the marketing advantage that the ability to bundle services confers upon them and the cable companies.

4065             The ILECs and cable carriers are easily able to compete on this basis due to their extensive networks, last‑mile reach and access to broadcasting services. A lack of ability by other competitors to create such service bundles due to lack of access to underlying ILEC or cable carrier services and facilities will merely guarantee that the market remains an ILEC/cable carrier duopoly which is the actual state of competition in local services today.

4066             For all these reasons, the lessons learned from both what has gone right and what has gone wrong in the development of competition in high‑speed internet markets are very relevant as the Commission attempts to establish the appropriate criteria to be applied to determine whether relevant local telephony markets are sufficiently competitive for forbearance.

4067             Thanks to the Commission, despite great resistance from the ILECs and cable carriers as they seek to maintain the duopolistic market structure, Cybersurf has been able to provide retail high‑speed internet services in some geographic markets.

4068             I now want to talk about the benefits that consumers are reaping in such cases by focusing on some of the regular and promotional rates offered by ILECs and cable carriers and Cybersurf.

4069             First, on a few regular standalone prices for retail high‑speed internet services.  In Alberta and B.C. Telus charges $51.95 a month for two and a half meg downstream 640 kilobyte upstream service with no contract, while Shaw charges $37.95 a month for a 5 meg service. Cybersurf charges $29.95 for the same 5 meg service.

4070             In Ontario, Bell and Rogers both charge $44.95 for a 3 meg high‑speed service and Cybersurf's price is $29.95 for the same 3 meg service.

4071             Let's now look at some of the promotional prices for such services in the same areas.       In Alberta and B.C., Telus charges $34.95 for six months and provides one month of free service with a one‑year contract for their two and half meg DSL service, while Shaw charges $29.95 per month for six months and provides one month of service free with a one‑year contract for a 5 meg service.  Cybersurf's offer is $9.95 for three months with no contract on the 5 meg service where available.

4072             In Ontario, Bell Canada has promotional offers of $20 for three months plus $25 online sign-up credit for a 3 meg service and Rogers has a promotional offer of $38.95 for 12 months, plus a $10 online sign‑up credit and 30 free Yahoo prints for the 3 meg service.  Cybersurf's promotional offer is $9.95 for the first three months for the 3 meg service, where available.

4073             I want to stress that these gains for the benefit of consumers have been made despite very significant obstacles and delays that we have encountered and we are still having substantial problems accessing certain markets.

4074             As a result of some of these problems we are not yet able to provide ubiquitous coverage throughout all major Canadian markets.

4075             For example, EastLink and Aliant both offer a 5 meg regular high‑speed internet service in Nova Scotia and P.E.I. priced at $44.95.

4076             EastLink offers no promotional pricing for its 5 meg service on a standalone basis, and Aliant has a promotional offer for $39.95 for 12 months with a one‑year contract.

4077             Cybersurg is not yet able to compete in these markets because Aliant has no ADSL tariff and Cybersurf has not yet been able to negotiate a wholesale arrangement with EastLink.

4078             How can Aliant be seriously asking this Commission for regulatory forbearance when it is not providing the access to its networks that third party competitors require to provide their own service bundles that include local VoIP?

4079             Aliant still has no wholesale ADSL tariff and it is not yet known when such a tariff application will be filed.

4080             These kinds of problems are not just limited to the Atlantic provinces. At this point in time viable wholesale ADSL tariffs are also still not available in the operating territories of Telus, SaskTel and MTS.  This is despite the fact that Mcab complained about the lack of such tariffs in an application filed with the Commission as far back as November 2002.

4081             Cybersurf has also had and continues to have its share of challenges in obtaining access to cable company networks as well, as the Commission well knows.

4082             Equitable wholesale arrangements have never been more important, particularly with the consolidation of facilities and competitive options that has occurred due to the acquisition of GT360 Networks by Bell Canada and Call-Net by Rogers.

4083             With this consolidation, two of the most significant CLECs are now owned by ILECs and cable companies respectively.

4084             The ultimate acquisition of the facilities of 360 Networks by Bell Canada also demonstrates that assets of failed competitors will not necessarily be recycled by new competitors.  Sometimes such assets are actually purchased by dominant carriers, thereby reducing competition.  For example, in one instance Cybersurf has not been able to get an ILEC‑owned CLEC to bid on a contract due to a noncompetition agreement that the CLEC has with an ILEC.

4085             When all is said and done, the ILEC and cable companies and their captive CLECs are not very interested in granting access to competitors such as Cybersurf when they can avoid doing so, particularly given the additional downward pressure on retail rates represented by competitors such as Cybersurf, as illustrated by the rate comparisons that I have just described.

4086             In light of all these factors, forbearance of ILEC local services before access issues are adequately addressed would be disastrous for sustainable competition.  Therefore Cybersurf recommends that the Commission establish and enforce an appropriate wholesale regime.

4087             The application of a correct set of principles and rules will also lead to prices, terms and conditions for wholesale services that are as correct as possible to achieve from an economic perspective when regulation is necessary to protect the interest of consumers by fostering multi‑service provider competition rather than relying on a duopoly to that end.

4088             It is absolutely vital that the Commission establish and consistently enforce framework for wholesale offerings that is based on sound principles and is also straightforward and discourages ILECs and cable companies to use the Commission as a means of delay and obfuscation.

4089             Our experience in obtaining access to the cable platform was that it still took us more than three years following initial approval of TPIA tariffs in Order 2000‑789 to actually access the cable company market using TPIA.

4090             To this day we continue to rehash entry issues with carriers that have already been decided by the Commission because the carrier suffers no adverse consequence due to such behaviour.  They are free to offer new retail services without having first to provide the underlying access without which competitors cannot compete on a retail basis.

4091             So why wouldn't they try to delay or prevent a competitor entry by obstructing or denying access to underlying wholesale services?  It would do Cybersurf or any other competitor little good to gain actual access to local telephony markets two or three years after an ILEC forbearance.

4092             Chris is now going to provide an overview of the proposed wholesale regime.

4093             MR. TACIT:  Thank you, Marcel.

4094             Cybersurf recommends that the existing regulatory framework for the supply of wholesale facilities and services be reworked in order to ensure that all bottleneck facilities and services are unbundled and made available to competitive service providers.  This regulatory framework should be governed by the following principles:

4095             One, unbundling.  Any carrier that controls a bottleneck facility or service that is required by another service provider in order to provision its own services must unbundle those facilities or services so that they can be used by other service providers.

4096             The term "bottleneck facility or service" includes facilities that are exclusively or predominantly provided by a single or limited number of suppliers in the relevant market, including current local access and transport facilities, as well as next generation variants of these facilities and services.

4097             This principle applies regardless of whether the facility or service in question makes use of conventional circuit switching technologies, packet switching technologies or other technologies.

4098             Two, tariff approval.  No carrier that controls a bottleneck facility or service may use those facilities or services to provide a retail telecommunications service, whether regulated or forborne, until the Commission has approved a tariff for each facility or service in question.

4099             Three, wholesale pricing.  The rates charged for all facilities and services that are subject to the unbundling and tariffing requirements referenced above must be no greater than the price that the carrier who supplies the facility or service pays itself in order to use the facility or service in question.

4100             These prices shall remain in effect until the bottleneck facility or service is no longer a bottleneck facility or services.  In practice, this requirement may have to be met by ensuring that all such rates reflect the most current underlying costs of the services in question and that mark‑ups on Phase 2 costs never exceed 15 percent, whether the services are classified as Competitor 1 or 2.

4101             Paragraphs 27 to 29 of our written argument provide more details on how these principles can be given effect in practice.  Those details are based on the responses of MTS Allstream to Interrogatories CRTC-206, 303, 304 and 501 and for the most part we have adopted those responses, as our written argument indicates.

4102             We also have three further recommendations related to an appropriate wholesale regime in order to foster sustainable competition by multiple service providers.

4103             First, Cybersurf recommends that all remaining regulatory restrictions on reseller entry into the local services market be eliminated immediately.

4104             More specifically, resellers should, on a mandatory basis, be granted access to unbundled local loop central office connecting links and collocation on the same rates, terms and conditions as CLECs;

4105             be treated as coequals to the ILECs and CLECs so they can exchange local exchange service traffic with these entities on a bill-and-keep basis and share equally in the costs of interconnection;

4106             given the right to gain access to Canadian telephone number resources and local number portability database; and

4107             given the right to receive subsidies if the reseller provides local exchange services to residential customers located in high cost areas of the country.

4108             The fact is that a focus strictly on facilities‑based competition has not resulted in a significant degree of local competition to date. Encouraging competition by way of resale is the best way to develop the critical mass required to encourage competitors who are initially resellers to build their own facilities.  It is also the best way to ensure that competitors are available to serve consumers who are not situated in areas in which ILECs and cable companies complete with each other.

4109             The second additional recommendation that we are making is that BDU signals be made available for resale on a mandatory and tariffed basis, otherwise only the cable carriers and ILECs will be able to compete on the basis of triple play bundles and other independent competitors will frozen out of the markets for most bundled services that include local exchange services.

4110             We acknowledge that a proceeding under the Broadcasting Act will be necessary to achieve that objective and request that such a proceeding be initiated as soon as possible.

4111             Finally, the Commission's affiliate rules should be strictly enforced without exception in order to ensure that none of the preceding recommendations can be circumvented.

4112             In conclusion, we believe that the establishment of a proper wholesale regime is a critical precondition to sustainable competition in the markets for local telephony services.  As such, it is also a precondition to forbearance pursuant to subsection 34(3) of the Telecommunications Act.

4113             Accordingly, we encourage the Commission to adopt our recommendations.

4114             Mr. Marcia and I would now be pleased to answer your questions.

4115             THE CHAIRPERSON:  Thank you.

4116             Commissioner Williams.

4117             COMMISSIONER WILLIAMS:  Good morning, Mr. Marcia and Mr. Tacit.  Your filings with the Commission have been very full and complete so I only have a few questions.

4118             Could you please tell us a bit more about Cybersurf?

4119             Earlier this morning we heard that the revenue of Yak was $120 million. What is the revenue of Cybersurf?

4120             MR. MARCIA:  Presently I think we are about $18 million a year.

4121             COMMISSIONER WILLIAMS:  $18 million?  Is Cybersurf publicly traded?

4122             MR. MARCIA:  Yes.

4123             COMMISSIONER WILLIAMS:  Cybersurf's retail internet prices for both regular and promotional prices is very attractive compared to others in the market.

4124             Are your products technically equal or superior to those offered by others in the marketplace?  In essence, are they of similar or better quality and how is this so?

4125             MR. MARCIA:  Well, in the case of the cable, it is a direct resale of Shaw right now.  We are in the process of building TPIA, so I would say it is the exact service.

4126             In the case of DSL, that is the Bell HSA GAS provided service, so it is supposedly equal to Bell's retail service offerings.

4127             COMMISSIONER WILLIAMS:  So the products are equal in quality, but they are priced differently.

4128             Are these prices sustainable?  Is Cybersurf profitable?

4129             MR. MARCIA:  Well, yes, we are growing quickly.  We have been offering these prices for two years and we have offered discount prices on dial going on 10 years now.  When the LECs were offering it for $20 for dial‑up we were selling it for $9.00. Right now we have bundles for dial at $5.  So we have been doing this for a while, yes.

4130             COMMISSIONER WILLIAMS:  On a profitable basis?

4131             MR. MARCIA:  Just recently, yes.

4132             COMMISSIONER WILLIAMS:  Which Canadian markets do you currently operate in?

4133             MR. MARCIA:  For dial we operate in all the provinces except P.E.I. and Saskatchewan and for high‑speed we operate in all the provinces except the Maritimes.

4134             COMMISSIONER WILLIAMS:  When you say "all the provinces", I guess that would be a larger centre or two in each of those provinces that you do operate in?

4135             MR. MARCIA:  Yes. We have most of the primary market in each of the provinces except in Saskatchewan, we don't have Regina.

4136             COMMISSIONER WILLIAMS:  Okay. In response to interrogatory from Aliant, CRTC-207, Aliant submitted that the business local exchange services should be segmented into four relevant product markets:  basic business services; mid‑side Centrex, enterprise Centrex and digital trunks.

4137             Could you comment on the relevant business markets proposed by Aliant and whether they should vary by ILEC territory?

4138             MR. TACIT:  Perhaps I can address that issue.

4139             I think to the extent that different markets reflect genuine substitutability of products based on both product features and geographic reach, there is no particular reason to keep them separate.

4140             In one sense, for example, residential and business rates have been kept separate artificially, largely due to regulatory policy.  So to the extent that competitors are in the same market geographically and serving the same customers, I wouldn't see that we would have to necessarily separate those markets.

4141             But there are circumstances under which separation is required.  For example, cable networks don't tend to pass by the business centres as much as the ILEC networks do, so there might not be the same degree of coverage so in those situations you would need to treat the markets as separate for forbearance purposes.

4142             The Centrex market, especially the large Centrex market, in many ways is more of a national or provincial market, so you can't look at that on an exchange or LIR basis necessarily, so there may well be some merit to treating that as a separate market.

4143             So it all boils down to substitutability of products based on price, features, and geography, as far as we are concerned.

4144             COMMISSIONER WILLIAMS:  Okay. Thank you, Mr. Tacit.

4145             The Competition Bureau in its argument on page 9, paragraph 48, submitted that first lines of residential customers could be in one relevant market and the second lines, mobile, wireless, VoIP services, could be in a different relevant market.

4146             Could you comment on Competition Bureau's proposed vision of the market?

4147             MR. TACIT:  Well, I guess that depends on whether you believe that local VoIP services are genuinely substitutable with the local exchange of the traditional wireline service, which is ‑‑

4148             COMMISSIONER WILLIAMS:  What is your view on that?

4149             MR. TACIT:  I think it depends.  I think to the extent that we are working towards solving a lot of the problems that exist initially with things like 9-1-1 and so on, we still have a ways to go towards full substitutability, but hopefully over time we are going to get there.

4150             I think the consumer marketplace is still cautious about this and I don't think that yet we have seen widespread embracing of VoIP to kick out people's primary exchanges service, although, you know, we may be on the cusp of that, too.

4151             So it's hard to say.      I think we are going to have to see how the marketplace plays out in the next year or two perhaps.  I think it's just a little bit early to make that call completely.

4152             But certainly there is no question that there are some aspects of VoIP that are not 100 percent the same as wireline in this.  People have to be made aware of that and if they choose it for other reasons, cost, convenience and so on, that is great, and it may become substitutable in that sense.

4153             In some ways it reminds me of the early days of the dial and high‑speed and over time the market segment moved.  Initially the marketplace ‑‑ and the Commission perhaps treated the two as somewhat substitutable, I would argue that today they are not anymore, so we have gone the other way there, but in terms of VoIP and wireline we may end up with substitutability in a matter of time.

4154             COMMISSIONER WILLIAMS:  Thank you.

4155             In one of your 20th of July responses you reaffirmed your original position that:

                      "The local calling area is the appropriate geographic area for purposes of forbearance."  (As read)

4156             However, you indicated:

                      "It may be desirable to make local calling areas symmetrical.  (As read)

4157             I think Commissioner Langford a couple of days ago gave you a bit of a heads up that we would be interested in your comments in this area.

4158             MR. TACIT:  Yes, that is what comes of staying up too late at night to write responses, so I wasn't as clear as I should have be on that one.

‑‑‑ Laughter / Rires

4159             MR. TACIT:  There are two things I want to say in response to this.

4160             One is, first of all, our position has evolved somewhat since then and we are now even more persuaded after reviewing the record that perhaps the LIR is a more appropriate unit for forbearance.

4161             But even if one were to look at the local calling area, what we were getting at there is that when community of interest rules are established for the purpose of local calling between exchanges, they are not necessarily bidirectional.

4162             So, for example, in Ottawa ‑‑ I do not know whether it is still the case today or not, but you could call from the Ottawa exchange to either Kanata or Orleans free of charge, but you couldn't necessarily make a call from Kanata to Orleans without paying a toll.

4163             So to the extent that you do not have bidirectional free calling, yet you group a whole bunch of exchanges together, you may actually create a scenario where some people who do not really have that local calling option to call Point A to Point B, you know, are in a forborne market.  So that is what we were trying to get at there.

4164             But, as I say, a lot of this has been superseded by our adoption of the LIR as the appropriate unit.

4165             COMMISSIONER WILLIAMS:  Could you give us your views as to whether as part of the forbearance test the Commission should examine the entrant's and incumbent's cost structures, including whether the entrant has similar or lower variable costs than the incumbent?

4166             MR. TACIT:  I think that is a very risky exercise and it is, frankly, one of the fundamental problems I have with the Competition Bureau's approach to this and the SROR.

4167             I think that costing exercises by their nature are very difficult exercises to do and the costs are constantly changing, especially in telecommunications.

4168             Frankly, our view is that there is really no substitute for a really good, solid market analysis along the lines of the 94‑19 analysis, to avoid the premature forbearance type of error from occurring.

4169             MR. MARCIA:  I just want to make a comment on that.

4170             I guess the other vulnerability that I see on the two facilities‑based operators are going to be the answer to the problems of local competition is that, number one, like you said, is the difference in cost and delivery. If we forbear local on the ILECs, can the cable companies compete?

4171             As Chris said, I don't think we are ever really going to know.  We have been through the costing before and I think at the end of the day a lot of it is still suspect, from our view anyway, especially when we go through costing exercises.

4172             If you look at our proposal where we had a resale access to the wholesale services then it doesn't matter.  Then we are not faced with these issues of well what are the costs, because our costs are going to be the same as the ILEC's cost or our cost is going to be the same as the cable company's cost for delivery.

4173             The rest of the business rationale will be in service and marketing and overhead and burden and that is for us to manage.  But if we have the same service delivery we can compete.  We don't run into the problems of pockets and orphaned customers and all these other problems that are erupting by having two different facilities to deliver a service, because we are on their facilities. And we have done this with internet.

4174             So any place you can get Bell Sympatico you can get our offer.  Any place you can get Rogers in Ottawa or Toronto, you can get our offer.  That is because we are on their facilities.

4175             So I think the best way to address some of the issues that have come up from the Competition Bureau's proposal or submission is exactly what we have in our submission, and that is wholesale resale access.

4176             COMMISSIONER WILLIAMS:  Okay. Are two facilities‑based competitors in each market sufficient to create a truly competitive market?

4177             MR. TACIT:  No, absolutely not.

4178             The proof of the pudding in that is what has happened in the high‑speed internet market.  The theory that we heard is, well, you know, these people are going to have excess capacity, they are going to want to fill that with applications and so they are going to compete for wholesale business.

4179             Well, that sure as heck didn't happen in the high‑speed internet market.  We had to fight for every scrap of access that we were able to get in that marketplace and we don't see why this is going to be any different.

4180             We don't view the theory that a duopoly may be sufficient to protect the interests of consumers as being a good enough guarantee, when you can have the alternative of actual multi‑competitor marketplaces.

4181             So in that sense we think that the best course of action is for the Commission to set the framework for access and wholesale right to begin with to encourage that rollout by multiple competitors.

4182             It's true, we are not saying that you are going to have a third facilities‑based carrier on day one, nor are we saying that we necessarily have to wait for that in order to forbear.  But what we are saying is that over time if those conditions are right, you will get resellers who develop enough of their own critical mass that they will deploy facilities and you will have alternatives and that is what we want.

4183             We want to nurture that organic growth to happen over time, but it cannot happen without the initial critical mass.

4184             By the way, we have already been there in that regard.  That is exactly how Call-Net started its business.  In 90‑3 the Commission authorized resale of joint private lines for joint use so that Call-Net could offer long distance services and Call-Net became a vibrant and strong facilities‑based competitor because it had that critical mass.

4185             So I think that the preoccupation with two facilities players or facilities‑based competition, if it is not tempered with the benefits of resale to fill in the gaps and provide the critical mass it is not going to happen.

4186             MR. MARCIA:  I also wanted to comment on that, just to further Chris's point.

4187             If you look at the initial stages of the TPIA endeavour to create access, the cable companies' initial reaction was that this wasn't a necessary application, it wasn't a necessary process, because eventually it only made sense that they were going to wholesale.  They never did.

4188             In the same respect, if you look right now they have a capacity right now to wholesale local service.  Nobody has called me and asked me if we are interested in wholesaling their local service.

4189             We have been long trying to get access to wireless.  There is capacity, but they are not selling it to us.  The reason they don't sell it to us is because they are scared we are going to devalue the retail offer.

4190             So they are not going to give it to us because in certain markets they know we are going to come in and be aggressively priced.

4191             So they may be able to sell off some their wholesale assets or get utilization, but they are going to risk the much bigger piece of the pie in the retail by doing that.  So I don't think that it is feasible to rely on a theory from the Competition Bureau that eventually capacity is going to drive a wholesale market, because our experience is it just doesn't.

4192             COMMISSIONER WILLIAMS:  Does the nature of the entrant cable company, standalone, nonfacilities‑based, VoIP provider, another ILEC from out-of-market matter, or should they all be treated equally?

4193             MR. TACIT:  Matter for what purpose, sir?

4194             COMMISSIONER WILLIAMS:  Matters in the terms of, say, selective forbearance, the nature of market entry.

4195             MR. TACIT:  Well, I think personally that in many ways cable carriers have had a pretty good deal. I think they should be more strongly regulated and certainly with regards to both access and ‑‑ I don't know how the retail aspect is going to develop, but certainly to the extent that we only have two providers that are capable of triple play bundles right now, there is an issue there for the Commission.  It may be beyond the scope of this proceeding, it may not, so I don't want to go there, but certainly for other kinds of resellers and more minor players who don't have the last‑mile access and that ubiquitous coverage and relationship with all these customers, virtually every one in the local calling area, I don't think that is necessary.

4196             But for ILECs and cable companies who do have those two big benefits which gives them that market power, that market power originates from the ubiquity of their networks, from their last‑mile access and from their existing relationships with all of the customers in their serving areas.  There is an issue there of market power.

4197             COMMISSIONER WILLIAMS:  You indicated in your submission that forbearance may be appropriate if in addition to several other conditions entrants served 35 percent of the relevant market.

4198             Could you discuss why you selected the 35 percent level and whether it is your opinion that at that level of market penetration all competitors would be viable?

4199             MR. TACIT:  Let me say at the outset that we do not believe in a bright‑line test at all. So we are doing the sort of reverse of what the Bureau does.

4200             It harkens back to the question that was asked ‑‑

4201             COMMISSIONER WILLIAMS:  Late yesterday by the Chair.

4202             MR. TACIT:  That's right.  Basically we are saying you shouldn't even look at it below that threshold.  We are not saying that that threshold is sufficient, but we are saying unless there is some very unusual circumstance, probably below that level it is pretty safe to assume that there is still a considerable amount of market power.

4203             COMMISSIONER WILLIAMS:  Okay.

4204             MR. MARCIA:  I also wanted to comment on Telus' idea of bright‑line.

4205             COMMISSIONER WILLIAMS:  Please do.

4206             MR. MARCIA:  If the Commission took on the task of saying, okay, "On an exchange‑by‑exchange basis we are going to forbear, first of all Janet Yale's submission that "Oh, yes, the billing will be straightforward, we can do it postal code-by- postal code" ‑‑ I mean, we have all been here when repeatedly there has been applications against ILECs because of their billing and marketing practices.

4207             How are we possibly going to enforce them being able to market literally by postal code?  It is not going to be possible for anybody to ensure that they are only offering forborne bundles or forborne local in block areas.

4208             The other problem with that is that the only way that marketing can work, because I know in our case ‑‑ and we are much smaller and much more flexible than Telus or Bell ‑‑ it is very difficult to market in specific areas.

4209             The only way you can really do that is with a flyer drop.  You can't do that with radio, you can't do it with newspaper and you can't do it with TV.  The only way you can do it is through telemarketing, winbacks, or through doing a flyer drop to specific postal codes.

4210             I don't think it is a tenable scenario.  I think it is administratively impossible.  A scenario like that will just mean we will be here shortly after with applications where they were offering their services to people they shouldn't have been, because the geography is far too small to be able to administer.

4211             Also, the argument that, "Well, if you got 30 percent of one exchange" ‑‑ basically we would lose Saskatoon. Because if you use too big a geographic area then we would actually be facing more than competitive competition in certain areas.

4212             In our case as an independent, much of our customer base is demographically targeted.  We get specific customers, as most independents do.  They either get an ethnic demographic or a certain income demographic.

4213             If you allow them to do that, you are basically allowing them to surgically market to our customers, because it isn't likely I am going to duplicate our penetration in one neighbourhood in the next neighbourhood over.

4214             So it would be an extremely pervasive tactic by the ILECs to be able to do that.

4215             COMMISSIONER WILLIAMS:  If the Commission determines that it needs to retain marketing safeguards, such as competitive safeguards on promotions and winbacks as well as competitive measure to prevent cross-subsidization in forborne markets, are there instances whereby these should differ according to unique marketing needs?

4216             MR. TACIT:  I wouldn't say so.  I mean, if you need to discipline market power you need to discipline market power and if those are the tools that are found to be minimally necessary to do that, I don't see how they can vary that much.

4217             I'm not a subscriber to the transitional approach either.  I think one has either got market power or not and one is either in a competitive market or one isn't and you have to live with the consequences of that either way.

4218             COMMISSIONER WILLIAMS:  How is quality of service maintained in a competitive market?  If companies are enticing new customers with ever‑cheaper prices ‑‑ I guess this kind of goes back to some of my questions at the beginning ‑‑ isn't it possible that this type of consumer market will lead to a race to the bottom in service quality?

4219             MR. TACIT:  Well, I don't think so.  The same kind of arguments were made in other markets and I don't think they bore out.

4220             I think in the long distance market we heard the same kind of threats. Internet, wireless, all these markets function because at the end of the day if you don't offer a product that is adequate for consumer needs, consumers aren't going to buy it.

4221             To the extent that we are talking about getting the Rolls Royce versus the Volkswagen Bug, that is just part of market differentiation and that is a normal thing that should happen in the marketplace anyway.

4222             Where there are things that have to be protected, such as access to 9-1-1, MRS accessibility, the Commission is able to set a set of rules that apply to everybody so those social requirements can be met.  We are certainly willing to abide by those like the next carrier.

4223             COMMISSIONER WILLIAMS:  Go ahead, Mr. Marcia.

4224             MR. MARCIA:  Also, I think from our experience, the customer expectation is they are far less forgiving of us than they are of an ILEC or a incumbent.  If they switch and the service isn't there, they switch back.

4225             COMMISSIONER WILLIAMS:  So it's not just purely a price decision then.

4226             MR. MARCIA:  Oh, no. I don't think it has ever ‑‑ if it was we would be the biggest provider in Canada and we are not. Right?

4227             So it is not.  I mean, there is marketing, there is service levels, there is ‑‑ you know, ILECs and cablecos are entrenched in the minds of the customer.

4228             So price is not enough.  Price is very lucrative, but I wouldn't say it is ever enough.

4229             MR. TACIT:  I think what Marcel is saying, to paraphrase, brand recognition is a huge impediment to overcome so we have to work hard and provide good service.

4230             COMMISSIONER WILLIAMS:  If the current competitive safeguards and promotions are removed if certain criteria are met, can you comment on which consumer groups are or are not likely to benefit?

4231             Similarly, if the current winback rules are removed, please comment on which consumer groups are not likely to benefit and if the residential winback rules are lessened, say from 12 months to three months, could you give us your views on the effect on competition and consumers?

4232             MR. TACIT:  Those are a lot of questions.

4233             COMMISSIONER WILLIAMS:  Well, we can back it up.

4234             MR. TACIT:  Yes. Just back up to the first one, because I'm still trying to digest that one.

4235             COMMISSIONER WILLIAMS:  Okay, sure.

4236             If current competitive safeguards and promotions are removed, who will benefit or not benefit?

4237             MR. TACIT:  I think it will be the dominant carriers that benefit, because at the end of the day the reason for those rules is to try to establish an equitable footing in the sense of overcoming the market power of the incumbent.  So to the extent that, let's say, there is more competition going on in residential markets today than there is in the small business market, then residential consumers are going to be hurt the most by the removal of those rules because they are the ones that would otherwise be benefiting by their presence more than other markets that may inherently not be there yet in terms of competitiveness for whatever other reasons.

4238             I think the same is true with regards to the subsequent layers of your question.

4239             COMMISSIONER WILLIAMS:  Yes. What if we lessened the rules from 12 months to three months?  How would that affect competition and consumers?

4240             MR. TACIT:  Maybe Marcel can comment on the practicality of that.

4241             I think the Commission has it right at 12 months, personally, but from a business standpoint maybe Marcel could ‑‑

4242             COMMISSIONER WILLIAMS:  Okay.

4243             MR. MARCIA:  Obviously, as the previous answer was alluding, the brand recognition and the power of ‑‑ I mean, Bell, to most Canadians is a staple; it is an icon.

4244             So if I was to switch a customer, and even before the customer had a chance to use the service and try the service, even at our cheaper prices, Bell is soliciting them, I think it is a highly effective means to get the customer back.  They admitted it and they said that right here.

4245             So the greater the cushion that we can get, I think it is better for us to retain a customer.  If the Commission's policy is to push towards a facility‑based approach, then what we are proposing is, well, the first step to that is a good resale arrangement so we can build the mass of customers we need to warrant the economies. To get the revenue required to build facilities we need to have some customer retention.

4246             Also, as Commissioner Langford said, if they don't like the service they can switch back.  Bell is free to advertise to them in the newspaper or billboards or whatever.

4247             So I don't see that the winbacks are really hobbling the ILECs as much as they want you to believe.

4248             COMMISSIONER WILLIAMS:  But at the same time, 12 months would be better than three months?

4249             MR. MARCIA:  As I said, the longer we can retain customers of course the longer we have a chance to build revenue and recapture the return on investment in acquiring that customer.

4250             As you heard here from all the participants, the greatest cost is in the acquisition of the customers.  So if I dole out $100 to acquire a customer and they immediately switch back, I have lost the $100.  Right?

4251             COMMISSIONER WILLIAMS:  Right.

4252             MR. TACIT:  What Marcel said just made me think of one other thing along the same lines, and that is that it gives us the opportunity to build our brand recognition, which again is an important element of overcoming their market power.

4253             COMMISSIONER WILLIAMS:  Okay, gentlemen.  Thank you very much for your clear and concise answers.

4254             Those are all my questions, Mr. Chairman.

4255             THE CHAIRPERSON:  On that last point of building up from resale to facilities‑based, I was interested, Mr. Tacit, in your characterization of Call‑Net as a facilities‑based provider.  Could you elaborate?

4256             MR. TACIT:  Well, I mean, eventually they became a CLEC through Sprint Canada and they did have some interexchange facilities and so on.  So over time they became a facilities‑based entrant after 92‑12 was rendered.  I don't know the precise extent of all of their coverage, Marcel would know more than ‑‑

4257             THE CHAIRPERSON:  You mean in the CLEC sense, but in terms of last mile.  Do you know if they had any residential last mile facilities?

4258             MR. TACIT:  I'm not aware of what they have.

4259             MR. MARCIA:  Oh, yes, they do.  Of all the CLECs Call‑Net has the widest coverage to the central office.  Our resale agreement for local was with Call‑Net, now Rogers, and one of the reasons we went with them was because of their coverage. They have last mile facilities in most of the major ‑‑ well, Vancouver, Calgary, Montreal, Toronto and Ottawa.

4260             THE CHAIRPERSON:  You don't have any percentage in mind?

4261             MR. TACIT:  We wouldn't be able to tell you that on a non‑confidential basis in any event, but I'm not sure that we do.

4262             Do we?

4263             MR. MARCIA:  Yes, we do.

4264             MR. TACIT:  Okay. If we do and you would like it, we could provide it in confidence.

4265             MR. MARCIA:  Well, I guess it would be ‑‑

4266             THE CHAIRPERSON:  I think we will have Call‑Net.  I gather Mr. Linton will be here and we could perhaps ask him that question.

4267             MR. TACIT:  That's probably a good idea.

4268             THE CHAIRPERSON:  Thank you.

4269             Commissioner Cram...?

4270             COMMISSIONER CRAM:  Thank you.

4271             So my first question is why not Regina?

‑‑‑ Laughter / Rires

4272             COMMISSIONER CRAM:  But never mind that.

4273             MR. TACIT:  Cable access.

4274             MR. MARCIA:  Yes, access to the cable ‑‑

4275             MR. TACIT:  And SaskTel, same thing. The SaskTel ADSL tariff is not economically viable. There is no way we could offer even ILEC rates, let alone our own rates, and I don't think we have any way of accessing the cable company there either.

4276             COMMISSIONER CRAM:  Seriously, Mr. Tacit, I wanted to know why you have moved from local calling area to LIR.

4277             MR. TACIT:  Well, I guess part of it was realizing that the LIR perhaps is a more economically rational unit in the sense that competitors do have more of an equivalent opportunity to equalize the cost of serving an entire area in an LIR.

4278             Also the LIRs, as I understand it, have been defined based on community of interest, population centres and so on.  To me that suggests it is the same sort of criteria that the Commission used to look at as it expands local calling areas through a community of interests.  It tells me, "Well, okay, there is some sort of inherently natural community for local callings, some community of interest."

4279             The other thing is, one has to think about the administrative practicalities of these things too.  No matter how much one likes to endorse this economic view or that economic view, at the end of the day if it doesn't work administratively it not going to be of much use.

4280             For some of the reasons, for example that Marcel stated, if you drill down too far you would have no way to supervise that what you think is happening is actually happening, would be one problem.

4281             If you go too high up, then you disadvantage the ILEC unfairly by not giving them an appropriate opportunity to make an application for an area that is proper for forbearance.

4282             So there has to be some tradeoff and because of some of those factors of being able to get access to an entire region through a point of interconnection in a LIR, having that community of interests and it being a reasonable tradeoff from an administrative perspective and providing some protection against targeted marketing that could be done more covertly at a lower level if you drill down too far, I think for those reasons, in reviewing the record, we came to just appreciate that the LIR is the more natural unit.

4283             COMMISSIONER CRAM:  I must say the penny dropped when Mr. Marcia was talking because an LIR would be closer to, I suppose, the circulation of a newspaper that you would be using for advertising and the contours, as we say on broadcasting, of radio. So in terms of the administration and, as you say, Mr. Marcia, supervising or the enforcing of promotions, winbacks, non‑promotions, it would be roughly equivalent to the circulation of a newspaper and contours.

4284             MR. MARCIA:  That's right.  When we are marketing we don't say, "Well, which exchanges are covered?"  We look at a city market and we say we are going to do a drop in the Toronto Star; we are going to use the Calgary Heral; we are going to go look at the City TV in Edmonton.

4285             We do demographic‑type marketing with flyers and we try to get flyers to the people we know will respond to them, but when you are doing sort of this broadcast sort of advertising that's what you do, you do. You do it by city, you don't do it by city block.

4286             COMMISSIONER CRAM:  I wanted to know, Mr. Tacit, on page 11 you talked about the regulatory restrictions ‑‑ it is the large paragraph there in the middle ‑‑ and you talk about being given the right to receive subsidies if the reseller provides local exchange services to residential customers.

4287             I just logically cannot ‑‑ if you are reselling, you are buying a loop from the ILEC, let us say, who gets the subsidy, but that cost of the loop won't be discounted, so how could you make a business of going into band F?

4288             MR. TACIT:  All we are looking for here ‑‑ and I must tell you, we will be very candid with you ‑‑ we haven't looked at the economics of this.  We have a lot of other problems we are trying to sort out from a business perspective.

4289             So going to band F, frankly, we just haven't done that yet.  But assuming that some of these other issues do get resolved we may end up looking at that.

4290             All we are saying is this, the message is pretty straightforward: Don't treat resellers differently than CLECs if you want the critical mass to build and if you want the true facilities competition to develop over time.

4291             Now, if it turns out that for some reason this one aspect can't be treated differently, well, we could have that discussion and see if there is a valid reason to distinguish on this one point, but certainly on the others we see no reason to.

4292             Even on this one there may be some very good reasons why resellers and CLECs should be put on an equal footing. If resellers don't take the opportunity or it is not economical, well, it's not, but giving them the right to doesn't take anything away from that.

4293             COMMISSIONER CRAM:  Thank you. I would prefer that you went for Regina rather than band F as a priority.

4294             Thank you.

4295             THE CHAIRPERSON:  Thank you.

4296             Commissioner French...?

4297             COMMISSIONER FRENCH:  Are you under the impression that the subsidy for high‑cost serving areas is for the purposes of marketing and overhead and billing?

4298             MR. TACIT:  I didn't say that.

4299             COMMISSIONER FRENCH:  No. I am trying to understand what the logic would be of a reseller receiving a contribution in such a situation. After all, the contribution was intended to subsidize the cost of building the local loop which is incurred by the builder.

4300             MR. TACIT:  Okay. Well, point well taken.

4301             COMMISSIONER FRENCH:  Okay.

4302             COMMISSIONER FRENCH:  I think I have another point well taken, but we will see what you think.

‑‑‑ Laughter / Rires

4303             COMMISSIONER FRENCH:  You have said that costs are suspect ‑‑ with which I personally and wholeheartedly agree ‑‑ and then you said we should set the framework for wholesale right.  But if the wholesale framework is not based on costs and our understanding thereof and, therefore, setting wholesale prices, I don't know what it is based on.

4304             So how can we get that framework right if costs are suspect?

4305             MR. TACIT:  For one thing, I think that we are talking about different kinds of costs when we talked about the kind of analysis that the Competition Bureau has been suggesting. We are talking about costs that come from all sorts of different sources that we don't know exactly how they were comprised.  There may be conflicting information. To the extent that an ILEC knows that something like this is coming they may kind of even leave a trail for a few years.

4306             It is possible for this sort of stuff to happen.  So that's one thing.

4307             Phase 2 costs is a different thing in the sense that it is a methodology that has been in use for many years.  We still have problems with some of the outcomes of that methodology but the debate around that is largely around what is included and what is excluded in terms of what comprises a service for the purpose of costing and the markups.

4308             Frankly, the biggest problem we have been having lately has been with the ability of competitors to price their competitor to services which we, from our standpoint, view as absolutely essential to our business, at extremely high markups.

4309             We have seen some of the numbers that MTS Allstream put on the record of 86 percent, 200 percent, 100 percent, and what it tells me is that the only reason those markups are sustainable is because they have market power, which is the very thing you are trying to defeat by offering competitors' services.  So if that is the case why would you allow them to build in that markup?

4310             So that is part of the biggest problem that we have with the costing. Costing is not precise. You are never going to get it 100 percent right.  It is not possible.  But I think it is important in terms of making sure one doesn't forbear prematurely to make the effort to get the access framework as right as humanly possible.

4311             You have more assurances there when you are looking at things on a service‑by‑service basis than when you are trying to make this global prognostication on will somebody today or maybe tomorrow when technology changes, be a lower cost provider overall than somebody else.

4312             COMMISSIONER FRENCH:  So if I could summarize, you have confidence in Phase 2 costs but you don't have confidence in the Commission or, for that matter, the Bureau's ability to accurately assess variable or incremental costs on a customer‑by‑customer ‑‑

4313             MR. TACIT:  Well, it's a matter of administration.  It is not a matter of ‑‑ I mean, I am not dogmatic about these things. All of these things are flawed.

4314             I am just saying looking at things at the service level you have a higher chance of getting it within the right ballpark.  It may not be precisely where everybody would agree it should be, but you have ‑‑ the problem with the sort of overall market assessment is you are trying to look at costs historically, but the fact is the telecom industry is moving very quickly and cost structures are changing, so you are trying to make a very huge, one‑time decision on the basis of a moving target.

4315             Whereas with access services you can revisit those costs and as the costs come down you can adjust the access rates downward or upward or whichever way the technology is moving and you can have a policy about what the markup should be and you can have a policy about what you are going to include or exclude in the service definitions and those are more workable.

4316             They won't be perfect, no, and we don't think they will be, but it will be close enough to get us to the result of a sustainable market.

4317             COMMISSIONER FRENCH:  So wholesale rates ‑‑ I'm sorry, Mr. Marcia.

4318             MR. MARCIA:  I think where we are coming from and where I was coming from when I made that comment is, I understand there is a process and there is a means for the Commission to come up with how things were costed and what they are worth, but it is funny to me how everything that comes out in a tariff or a tariff proposal from an ILEC is costed just enough that we can't compete.  It is just costed right there where if we have to add our overhead, our marketing, our support costs, we are going to be in the same price as they are. I can tell you right now, we don't spend anywhere close to what they spend on marketing.

4319             We know.  We are in the industry. We have a sense of what things cost. For instance, Bell's ADSL GAS tariff at $20, we know what the costs are in delivering DSL.  We have a sense of it.  I can't tell you blow-by-blow what their costs are, but from our perspective it is way overpriced.

4320             So then when they come out and say, "Well, that is the cost and that's what" ‑‑ and then the Commission does their diligence on it and you come up with a price.  Right after you come up with a price they come up with a retail offer close to that price.  So how do they do that?

4321             I understand the Commission's philosophy has been just because they are pricing it cheaply doesn't mean that that isn't the cost, but when you compare that to what they are saying in their investment and in their financials, it doesn't match.  You have the cablecos and ILECs giving you costs and saying this is what it costs us going to the market and giving you the impression they are selling it below costs, but in their financials saying internet was the best business they ever did because it has been money, money, money for them.

4322             So there is some disparity from our point of view in how the Commission comes up with the costing and the actual pricing that allow us to enter and compete.

4323             COMMISSIONER FRENCH:  Costs are suspect.

‑‑‑ Laughter / Rires

4324             THE CHAIRPERSON:  Commissioner Arpin.

4325             COMMISSIONER ARPIN:  Thank you.

4326             I am drawing your attention to your page 12, the top of your page 12 with your second recommendation regarding making BDU signals available for resale. Could you expand on that?

4327             I understand it is not part of today's agenda but I am interested.

4328             MR. TACIT:  The idea is this:  One of the big advantages that the cable companies have had where their market power initially comes from ‑‑ and it is something that because of their sheer size and consumer reach, the telephone companies are also able to develop ‑‑ is access to the broadcasting signals that allows them to bundle telephone, internet and broadcasting services as a package.

4329             So when we are looking in this proceeding at local forbearance, we are looking at a tiny slice, because most of the local services are not going to be offered on a standalone basis.  They are going to be captured in bundles with other services.

4330             So if other competitors are not given the opportunity to have access on a resale business, initially at least, to these broadcasting signals, there will always just be a duopoly in every market for the vast majority of local business because the vast majority of local business is going to bundled with broadcasting, internet and so on.

4331             So that is the theory behind opening up the resale.

4332             The Commission has gone part way in making resale permissive but, as with high‑speed internet, making it permissive isn't enough.  We have seen that in these other markets.  You have to do more than make it permissive.  You have to make it mandatory if it is really going to happen.

4333             MR. MARCIA:  To comment on that as well, it goes to Commissioner Williams and the point about service.

4334             Bundles are a very, very powerful means of acquiring customers.  I think that the ILECs' concern about the cable companies entering the local business has more to do with not losing the local revenue, as Commissioner Langford was pointing out, but it has to do with losing the opportunity to bundle and sell a suite of services to the customer.

4335             Local and broadcasting are core.  Everybody has local and just about everybody has TV.  So those are core services that other services are bundled to.  Our inability to offer those services is quite hobbling in trying to acquire customers.  It is very difficulty to get people to leave, to take a standalone service where they can get all their billing and support in one place.

4336             MR. TACIT:  We can already go a long way.  We can do long distance, we can do high‑speed internet and soon we will be able to do local as well and we still face this market impediment.

4337             COMMISSIONER ARPIN:  Except that when I'm looking at the ILECs as BDU, there is only Bell that has BDU facilities.  The other organizations like Telus, SaskTel, MTS don't have BDU.  Well, they do have BDU, terrestrial BDU.  They are emerging, I will say, rather than having been in place for a long period of time.

4338             MR. TACIT:  If that is true then there is no better time to open up the resale market now, because otherwise what will happen is exactly what happened in the high‑speed internet market where two players got a huge head start and everybody else is playing catch‑up way after the fact and a lot of markets still aren't open.

4339             Part of the whole point of our presentation is do it at the beginning. Make them unbundled before they make their retail offering.  Make them resell before they give their retail offering.  If you do it afterwards, they have already exercised their market power.  They have already built up their brand. You are making the obstacle of overcoming their market power that much more difficult for us.

4340             COMMISIONER ARPIN:  BDUs have affiliation agreement with the services.  When you are asking to resell those services, are you intending to have affiliation agreements with the services or only in agreement with the BDU?

4341             MR. TACIT:  I think initially for administrative simplicity it would probably be agreements with the ‑‑ when you do a resale you are usually just dealing with the wholesaler.  So that would be the way that we would envision it working initially.

4342             As the market develops and as we acquire sophistication in our own capability and so on, we may choose to start dealing with these parties directly and it may make sense for us to do that.

4343             But again, to build up the critical mass initially and to allow us to be on a more equitable footing for bundling purposes, we need to have the ability to do it in a relatively simple way because nobody is going to be in a position to spend millions of dollars doing this and be viable and overcome that market power.

4344             COMMISSIONER ARPIN:  Thank you.

4345             THE CHAIRPERSON:  Thank you.

4346             Commissioner Langford...?

4347             COMMISSIONER LANGFORD:  You have been more than helpful this morning.  I really just have one question for you.

4348             Going back to the same pages that I'm sure attracted all of my colleagues' attentions, pages 11 and 12 of your oral presentation today where you kind of have your wish list ‑‑ you have already dropped a contribution, but still your wish list is there.

4349             I think if we were to just bring that kind of cold turkey, as it were, into the head offices of Rogers or Bell or Telus they would be either reaching for a gun or for hemlock, one or the other, depending on what they thought we meant by it.

4350             MR. MARCIA:  I could live with that.

‑‑‑ Laughter / Rires

4351             COMMISSIONER LANGFORD:  Well, we won't go there, as my kids say.

4352             It seems to me that using that old middle class notion that with every right there should be a corresponding duty, I'm kind of wondering what you are going to put on the table other than the promise that if you give us all this someday we will grow and be a strong competitor and that will be a benefit.

4353             I don't downplay that.  That would be a benefit, but would you be willing to contemplate going back to some very strict sunset clauses, even if there were milestones in them in some way, where you would undertake to become more facilities‑based as time went on?

4354             Clearly, you can see that without some sort of a structure here ‑‑ though the system and consumers would gain a competitor, and I agree with that ‑‑ but there is no guarantee that you would do anything other than use other people's products and other people's facilities to make your shareholders rich.

4355             MR. TACIT:  I understand that fear, but I think that the realities of business are such that if we can perceive that we can build out cheaper once we have a critical mass, we are going to do it.  We are not going to be lazy and say, "Oh, we have those DSL facilities from Bell, we are not going to bother becoming a DSL SP".

4356             One of the things we do now in our line of business is wholesale to other smaller providers.  We love that business and we want to do more of it.  As it grows we are going to build our facilities in order to accommodate that business.

4357             Again, I would caution against some sort of a sunset timing, because by its very nature it is going to be arbitrary and you don't know what is going to happen when you reach the end point.

4358             I'm not saying that it may not be appropriate to have some periodic reviews of how the whole thing is working.  That's a different question.  But to say ahead of time, "We have decided that this is only going to be available for five or seven years" I think would be a mistake because it might take away the very incentive you are trying to create by putting fear in our minds that we are never going to build that critical mass, because we have already been kind of beaten up in that sense.

4359             So yes, reviews every few years to see how the whole thing is working, and at that time the contemplation, perhaps eventually, of sunset clauses if appropriate, sure.  But I wouldn't say that from day one when this happens there should be a sunset clause, because again I think that is going to take away from that very incentive you are trying to create.

4360             MR. MARCIA:  I think we can give you some comfort there in that currently ‑‑ first of all I have to say, with facilities-based, engaging in building facilities one of the biggest problems is the obstacles you get from the LEC or from the cable company.  If they were more accommodating to building facilities we would build facilities because it is cheaper.

4361             MTS sat here and told you that they pay $0.25 to the incumbent to deliver their services.  We pay 80 to 90 percent for delivery of our services to a LEC or to an incumbent.

4362             As technologies progress, their density gets better where you can service more people with less hardware.  They become cheaper to deliver.  It only makes sense to start going down the road of delivering your own products over your own facilities.

4363             Currently for example on service, we are in a dispute with Shaw over QoS over our resale.  We wouldn't have those kinds of obstacles and problems.  We wouldn't have to match ILEC offers.  I don't have to give you a 3 meg service because that is what Shaw is giving you, I can give you a 10 meg service.

4364             So there is lots of incentive for us to build facilities.  Right now, the obstacle to us building facilities is the ILECs.  We investigated using the virtual collocation tariff to place our own DSLs and it is near impossible.

4365             In the same instance with Shaw, when you gave us a ruling that gave us resale they became incented to allow us to build facilities and they became very cooperative and we are building those facilities.

4366             COMMISSIONER LANGFORD:  Thank you very much.  That's my question.

4367             THE CHAIRPERSON:  Thank you.

4368             We will put a sunset now on this morning's proceedings.  You have been helpful.  Thank you.

4369             MR. MARCIA:  Thank you.

4370             THE CHAIRPERSON:  We will resume in 15 minutes.  Nous reprendrons dans 15 minutes.

‑‑‑ Upon recessing at 1150 / Suspension à 1150

‑‑‑ Upon resuming at 1212 / Reprise à 1212

4371             THE CHAIRPERSON:  Order, please.  A l'ordre, s'il vous plaît.

4372             Madame la Sécretaire.

4373             THE SECRETARY:  Thank you, Mr. Chairman.

4374             Nous allons maintenant poursuivre avec la présentation de Monsieur François Ménard pour Xit Telecom Inc.

PRESENTATION / PRÉSENTATION

4375             MR. MÉNARD:  Good afternoon.  I am François Ménard of Xit Telecom Inc., I am Project Manager at this engineering company of 25 employees based in Trois-Rivières, Québec.

4376             We have participated fully in this proceeding representing the interest of the engineering side of our business along with that of our non‑dominant carrier subsidiary Xit Telecommunications and that of our proposed CLEC.

4377             We are a facilities‑based ‑‑ almost I would say purely facilities‑based ‑‑ carrier in Québec where we own and manage close to 1,000 kilometres of fibre optic networks in different portions of the province.

4378             We have been actively assessing over the last two years the business case of entering the local exchange market, particularly on the residential side in partnerships with regional ISPs in the province.

4379             So as an active participant in the previous proceeding, 2004-2, the current one, several working groups and many discussions with equipment suppliers and extensive investments in engineering studies looking at the cost of entering the local exchange market, we have come to the conclusion that the barriers to entry that the ILECs characterize as being low are actually unduly high, particularly in light of the fact that the ILECs have actually, by today, made massive investments in voice over IP technology.

4380             So presently the fact that we have yet to enter the local exchange market, it is indicative of the fact that the barriers to entry are still high enough to foreclose our entry.

4381             We therefore question what good is being done to the public interest if the ILECs are allowed, at the peak of their market power, to invest into voice over IP technology and then keep those benefits only for themselves.

4382             We disagree completely with the ILEC claims that their market power has been effectively constrained upstream under today's ex post regime to which their retail IS and WAN services have been subjected to for the last five years. ILECs have been routinely calling almost ‑‑ not almost, but a lot of regulated services, retail IS and WAN, to get around regulations.  The worst fact is that they have been getting away with this up to this date.

4383             We also note that the Commission is now faced with major examples of competitors being restricted in their ability to enter the market on a facilities‑based basis because of a price squeeze that is excessive and undue.  We therefore consider the issue of greater conduciveness of the Commission's administration of the current regulatory framework, the conduciveness to further facilities‑based competitive entry as a key issue that is unequivocally within the scope of defining a forbearance framework for local exchange services.

4384             Consequently, we argue that the removal of undue barriers to entry to facilities‑based competition should be the cornerstone of forbearance framework for local exchange services.

4385             We would advise against forbearing on the basis of a market share loss that cannot be readily correlated to an increase of sustainable competition. Yet, this is precisely what the ILECs are advising you to do by depicting voice over IP service providers providing service over unregulated retail IS as sustainable competitors.

4386             In the transition to a triple play head‑on battle between the ILECs and the cable carriers, competitors are barred from unbundled access to BDU bandwidth, that is if you think that you can own a device as an ILEC you could also own it under your BDU license as an ILEC and then only offer a certain subset of the bandwidth on the telecom side.

4387             Say, for instance, you have 100 megs to the home, you provide 4 megs for internet access, 96 megs for TV, therefore you only unbundle 4 megs and you keep the 96 other megs to yourself.

4388             So this is particularly problematic when the ILEC becomes the BDU.  So this is a problem that should be of utmost concern to the Commission as competitors begin to systematically face market eviction.

4389             We argue that the elimination of undue price squeeze accompanied by a predictable enforcement of the Commission's unbundling regime and a predictable enforcement of the Commission's competitive safeguards, particularly those involving dark fibre and support structures, as key elements of the regulatory framework that would be conducive to a consideration of forbearance.

4390             On a similar note, we are quite realistic about where we have the opportunity of providing triple play services where we do not already own facilities but, where we do, the effect of premature forbearance will essentially foreclose us from entering the market as it will deprive us of the opportunities to reach economies of scale that will allow us to become sustainable in a triple play environment where we currently own facilities.

4391             I would like to say that we have close to 1,000 kilometres of fibre optic network reaching to really small places in the province and we are clearly trying to see how we can enter the local exchange market leveraging that asset and, to date, we have not been able to do so.

4392             So even if the revenues are increased through the much more arduous road of providing triple play services, we find that it is the decision to bundle local exchange services that ultimately leads to the greatest source of costs, headaches, problems, delays and so forth.  Therefore, given that facilities‑based entry is already today being justified on the basis of a known price floor for a bundle of retail IS and local exchange services ‑‑ obviously if ILEC rates for local exchange services are known then some of local exchange services and retail IS cannot be below the price of local exchange services.  Therefore, you base your competitive entry on the basis that they would not totally give away retail IS.

4393             An ILEC must therefore not be allowed to enter the retail IS market following the entry of a competitor such as Xit Telecom with the opportunity to give away local exchange services as part of a bundle on a below-cost basis. We therefore question the legitimacy of price floors that are unknown, such as currently the case with relation to the issues at hand with the price ranges in another proceeding.

4394             All of this is not theoretical.  We have witnessed firsthand several locations where incumbents have deployed broadband facilities after the entry of a wireless internet service provider that has been able to capitalize on Village Branch fibre optic backbone infrastructure deployed in the province.

4395             They have been promising entering for years, years, years, years and the ISP deploys them a couple of weeks after they deploy broadband and they start making it quite rough for the wireless ISP to remain in business.  So if it is rough today for just retail IS, with a wireless infrastructure, with the fact that it is over unlicenced spectrum, you are going to have a tough time trying to sell to your customers that you can provide a reliable local exchange service that can be subject to interference, let alone a triple play bundle such that you can prove that you have enough juice over the wireless infrastructure to stream both video and data and telephony.

4396             So it has been recently suggested to us that we might be getting more mileage of our regulatory interventions if we instead focused our energy on the filing of very targeted competitive disputes rather than to try to make our case in a forebearance public notice.

4397             We reply that a public notice is the appropriate vehicle for making policy determinations and we would likely not be able to make our case as part of a competitive dispute if issues involved public policy in a major way.

4398             More specificially, we note that only the ILECs are arguing that a detailed analysis of barriers to entry should not be considered in this public notice and that the mere evidence of existing entry is sufficient to benchmark whether forbearance is appropriate.

4399             We replied that the fact that we have not yet entered the market, the local exchange market, where we have facilities due to barriers of entry that are deemed irrelevant by the ILECs is obviously a self-serving statement on the part of the ILEC that is without merit.

4400             We are sure that you would be glad to know that we have several more competitive disputes that come to our mind.  However, we doubt our ability to make the most important gains rapidly enough to justify the risks of providing a triple play service in a local exchange market that may be foreborne prematurely.

4401             For instance, we are convinced that we would prevail in arguing that local network interconnection should be outright today declared technology agnostic and that the existing ILEC investments and voice over IP technology and Ethernet technology are totally sufficient to support the immediate transition away from Sonnet and ISDN Bell trucks using proprietary closed source software, as I call it, to the new world of gigabit Ethernet, cheap, cheap, cheap, using session initiation protocol, and Enom, all open source software you can download from the internet and you can basically download a telephone switch. Xorcom.com, I tried it, it installs in 10 minutes, and you have a DMS 100 sitting on your desktop in 15 minutes flat.

4402             So the fact is that these are the issues at hand and a transition to IP-based interconnection would reduce our cost by a factor of 10. It is absolutely important that the consideration of that be given as part of a forbearance framework.

4403             As a competitor without any TDM customer, we cannot rationalize taking bad debt, buying legacy telephone technology just so that we may be able to terminate calls over the legacy ILEC telephone technology, particularly in the context where the ILECs have by now invested massively in voice over IP technology.  This would be financially irresponsible to our shareholders.

4404             For instance, in this environment there would also be no reason for the first local network interconnection between an ILEC and a CLEC to take six months to engineer in an IP environment.

4405             So even then, assuming that this is in place, we would still question ourselves every day as to how we will be able to capitalize in the long run from such a transition of local network interconnection to the new world, if we are ultimately unable to transition to a fully facilities-based state, but free from price squeeze.

4406             One of the sources of price squeeze that face us every day is the current rates for support structures.  I think that is a case that has been made quite well by us to the Commission in the past where we pay handsomely much more expensive rates for support structures than the ILECs are providing to certain customers.

4407             We also question why it is necessary to design the provision of 9-1-1 service on the basis of building or leasing facilities to an ILEC switch which is more than 150 kilometres away to achieve 9-1-1 network interconnection that is redundant when this could locally be arranged with a cooperative PSAP.

4408             For instances, as a CLEC today Xit Telecom is barred from subscribing to their recently approved 9-1-1 ECRS, Emergency Call Routing Service, because 97-8 says that we have to provide E-9-1-1, yet this is an obligation that the Commission has waived for voice over IP service providers.

4409             So voice over IP service providers can provide 9-1-1 service for $0.50 a month, the ILEC provides 9-1-1 service for $0.50 a month, and our cost to provide 9-1-1 service in Trois-Rivières has to take into consideration the cost of backhauling a few T1s to Saint-Jérome 150 kilometres away.

4410             We have to sell 9-1-1s for $3.00, $4.00, $5.00, $6.00, $7.00, $8.00 a month just to break even.  This is obviously unfair.  We should be able to at least get the same benefits to the VISP and that is another issue that is faced that has been brought to the Commission's attention in a tariff notice on ACRS.

4411             As if the aforementioned barriers to entry and local network interconnection and lengthy delays are not sufficient enough to discourage entry, there exists far greater barriers to entry and sources of greater price squeeze in the issues that are related to further facilities-based entry.

4412             In fact, we find it surprising that the Commission staff has been so keen as to warn us that seeking some remedies could actually work to our disadvantage in the long run.

4413             As a first example, in the deferral account proceeding we asked the Commission to consider the portion of the ILEC copper network between the home and the cross-connect panel at the entry of a neighbourhood, the big brown box, as an essential facility to be priced at Phase 2 cost plus 15 percent. However, we were told that the rates that would result from such a price-setting exercise would probably be higher instead of being lower than today's rates for unbundled loops. Nonetheless, we intend to pursue on this important issue.

4414             As a second example, we were told, again by the Commission staff, that if we petitioned the Commission to revalue the cost studies behind the existing ILEC support structure services on the basis, for instance, of a change in demand from two people per pole to three people per pole, which is the case in several places of Québec after Village Branch, and this after having seen that ILECs routinely figured out that they could give away access to their poles for way cheaper than they were pricing it to us, then we would risk ending up with a more expensive support structure rate than what we have today.

4415             Yet Telus goes as far as to advocate that they should be allowed to waive charging both their support structure tariff and their dark fibre tariff once they buy back a facility containing fibre subject to an existing title of ownership.  Doing so, they have been able to delay competitive entry in a substantial portion of their territory for nearly three years.

4416             Irrespective of what the Commission decides to do in the case of the Telus, we argued that the follow-up to Decision 2005-8 should result in the recosting of support structure services such that the rates become lower than from today's levels.

4417             As a third example, we were told that Commission inspectors do not have the expertise to get down a manhole and make a space capacity finding assessment. This has allowed Telus to delay competitive entry in the City of British Columbia more than three years.

4418             As an engineering firm, Xit Telecom is professionally liable for making the right determination that a support structure has the capacity to support the installation of additional fibre optic cables, yet ILECs are allowed to require that their own engineer second guess a determination made by another engineer.  We question why it is that the process of obtaining access to ILEC undergound and aerial support structure is pretty much equivalent to cutting a blank check for permit analysis fees that are three times the amount of our own fees for doing the engineering.

4419             So we recommend that the Commission be prepared to set a space capacity assessment benchmark as part of a forebearance framework for local exchange services.  This benchmark would then be applied evenly across the country.  This is essential to make further facilities-based entry a feasible proposal.

4420             We view that all these barriers to entry foreclosing greater competition in the local exchange market as undue and unwarranted.

4421             We respectfully request the Commission not to satisfy itself that forebearance is warranted until such time as it becomes absolutely convinced that further facilities-based competitive entry into the local exchange market is not unduly being impeded.

4422             We therefore view with a certain level of scepticism the ability to develop a single forebearance framework such as a bright-line test as advocated by the ILEC theoreticians and that can be considered in the public interest.

4423             We trust the Commission to be capable of distinguishing theory from practice and to see in its upcoming identified readiness to consider ILEC petitions for forebearance of local exchange services as an unparallelled opportunity to make such forebearance a conditional reward to the full commercial availability of remedies to the existing barriers of entry.

4424             Basically the point we would like to make is that if the ILECs have incentives to solve the current barriers to entry by that being linked in some way to the prospect of forebearance, we might actually be able to have something becoming available sooner rather than too late.

4425             Nous voulons remercier le conseil de la présente opportunité de partager avec vous notre point de vue. Nous serons privilégiés de répondre à toute question que vous pourriez avoir. Merci.

4426             LE PRÉSIDENT : Merci bien. Monsieur le conseiller Arpin.

4427             CONSEILLER ARPIN : Merci, Monsieur le président. Monsieur Ménard, avec votre permission, je vais faire l'interrogatoire en français. J'ai bien lu ce que vous avez déposé au conseil dans le cadre du processus en cours. Je viens de prendre connaissance aussi de votre présentation orale. Il y a bien des choses qui sont complémentaires ou qui ne sont pas nécessairement parties de la consultation présentement en cours mais qui viennent peut-être appuyées ou documentées votre prétention. Cependant, je vais m'en tenir, dans mes questions, au processus lui-même de consultation qui est en cours.

4428             En premier lieu, j'ai juste un point de clarification. Quand j'ai lu votre mémoire initial, celui que vous aviez déposé le 22 juin, vous référez à plusieurs reprises au paragraphe 6 de votre mémoire. Mais je pense bien que vous vouliez dire le paragraphe 5 parce que le paragraphe, c'est le nom de vos experts, à moins que je me trompe et que ce soit vos critères. Donc, on se comprend bien.

4429             Je reviens au paragraphe 5 de votre mémoire initial qui est le paragraphe 6 de votre plaidoyer du mois de septembre. Vous proposez un critère rigoureux pour déterminer le moment où existera une véritable concurrence. Vous n'en avez pas parlé dans votre présentation orale, ce matin, mais je rappelle que ce critère est à l'effet qu'il faut au moins trois opérateurs de téléphone avec fils avant de considérer l'abstention réglementaire. C'est votre prétention. Vous n'êtes pas le seul d'ailleurs. Ce matin, on a entendu d'autres intervenants faire le même type de représentations.

4430             Vous ajoutez que les niveaux proposés par les divers intervenants, que ce soit 5 ou 30 pour cent, ne sont pas une preuve suffisante pour déterminer le niveau adéquat de concurrence. Encore ce matin, vous revenez sur cette question-là.

4431             Dans un régime à trois opérateurs, quels devraient être les niveaux adéquats pour déterminer s'il y a réellement concurrence ?

4432             M. MÉNARD : En termes de part de marché?

4433             CONSEILLER ARPIN : Oui.

4434             M. MÉNARD : Je pense que même le Bureau de la concurrence argumente que la part de marché n'est pas un critère pertinent en soi et que c'est plutôt une notion de capacité qui est le test approprié. Donc, si on regarde la notion de capacité comme étant le niveau de capacité qui permet de justifier qu'il y a une proportion à une concurrence robuste, l'argumentation qu'on a fait valoir c'est qu'une application très chirurgicale d'un cadre d'abstention, par exemple, une circonscription téléphonique très précise. On a vu des endroits où une entreprise titulaire s'est fait sortir totalement d'une circonscription téléphonique. Il me semble que c'est raisonnable de considérer que dans un environnement comme ça, la déréglementation pourrait cibler l'échange téléphonique comme commandité ou ce serait dérèglementé, mais pas avant que le concurrent ait obtenu une économie d'échelle suffisante. On a proposé à l'envergure d'une région d'interconnections locales pour soutenir une perte de revenus qui seraient associée à une déréglementation dans un de ces châteaux forts, essentiellement. Donc, dès que la déréglementation est mise en fonction, il y a une perte de revenus absolument substantielle à laquelle le concurrent peut être victime. Conséquemment, s'il n'y a pas une masse critique à une envergure plus grande que cette circonscription, il peut se faire complètement démolir.

4435             Donc, l'argumentaire que l'on fait valoir, peut-être prise dans un plus grand contexte, c'est que les barrières à l'entrée, si elles sont éliminées, vont nous permettre de cibler des endroits où c'est presque certain que, à la conclusion de cet appel public, il est presque illusoire de croire que le critère de trois fournisseurs locaux sera retenu par le conseil. On est réaliste par rapport à cela. Conséquemment, ce qu'on cherche à obtenir, au moins, à travers ce processus, c'est une conviction ferme et nette que le conseil est prêt à adresser et à régler le problème des barrières à l'entrée en concurrence. On peut partir avec cela. Au moins, on peut comprendre qu'il y aurait un duopole et que là on peut cibler d'autres marchés où la bataille duopolistique n'est peut-être pas aussi intense.

4436             CONSEILLER ARPIN : Vous avez fait référence tantôt à la commissaire à la concurrence qui, dans son plaidoyer, proposait quatre conditions pour limiter l'habilité des entrepreneurs titulaires d'exercer un pouvoir de marché additionnel dans la fourniture de services de téléphonie locale.

4437             Selon vous, les critères que la commissaire a mis de l'avant sont suffisants pour autoriser l'abstention réglementaire?

4438             M. MÉNARD : Je ne les connais pas par coeur. Pour une raison bien particulière, c'est que je doute fortement de la capacité du Bureau de la concurrence de faire une analyse de demande de permis de poteaux. Conséquemment, je doute fortement de la capacité d'une analyse macroscopique des coûts d'une entreprise titulaire de se comparer avantageusement à une analyse de coûts, service par service, et d'avoir essentiellement les capacités de faire ce new diligence, que le conseil a tout une équipe fantastique qui est équipée pour faire ce travail. Je ne les ai pas mémorisés mais si vous me les donnez un par un, je peux vous donner des opinions sur chacun des quatre.

4439             CONSEILLER ARPIN : Je vois bien que vous êtes capable de donner des opinions. Dans les faits, un de ces critères c'est qu'il y a des coûts variables d'offre du service local qui sont identiques ou inférieurs aux coûts variables d'offre. Donc, c'est une analyse économique qu'elle propose des coûts d'exploitation et des coûts comparables du titulaire et du nouvel entrant.

4440             M. MÉNARD : Non, si on parle spécifiquement des coûts variables, je pense qu'il y a eu plusieurs interventions qui ont été faites au conseil à date, particulièrement dans le dossier de l'appel public 2004-1 qui démontre que le coût incrémental pour une entreprise téléphonique titulaire de déployer du VDSL-2 à partir d'unités distantes ou de JIW est beaucoup moins grand que le coût incrémental pour un concurrent de bâtir une infrastructure filaire jusqu'au domicile ou même souvent beaucoup moins grand particulièrement lorsqu'on considère le coût des truck roads qui sont nécessaires à l'installation d'une antenne sans fil, quand tu peux aller chez Radio Shack pour t'acheter un modèle DSL à 50 $, l'amener chez vous, le brancher dans ta prise téléphonique puis obtenir le service DSL, ça se compare avantageusement à 400 $ ou 500 $ pour amener un bidule qui coûte 300 $, l'installer sur un poteau de huit pieds sur le toit de ton domicile pour pouvoir, éventuellement pouvoir obtenir un service d'Internet sans fil qui, somme toute, va avoir peut-être 20, 30 ou 40 pour cent de la vitesse de ce que les entreprises titulaires prévoient déployer dans, si je ne me trompe pas, d'ici décembre 2006, parce que c'est la condition de licence que vous avez donnée à Bell Canada de déployer la technologie télévision iP sur DSL d'ici décembre 2006 parce que je sache ils n'ont pas demandé d'extension encore.

4441             Donc, effectivement, les coûts variables vont pratiquement, et de façon certaine, être toujours moins grands pour l'entreprise titulaire.

4442             CONSEILLER ARPIN : Donc, selon vous, ce n'est pas effectivement... ce n'est pas la chose principale sur laquelle le Conseil devrait attacher son analyse?

4443             M. MÉNARD : Pas du tout.  Il faudrait plus regarder le coût des concurrents pour entrer dans le marché puis de regarder si, lorsqu'un concurrent décide d'entrer dans le marché, de mesurer le * price squeeze + qu'il y a présentement entre les niveaux * wholesale + puis les niveaux de détail.  Puis ça, cette demande-là, on l'a fait au Telecom Review, dans laquelle on a demandé que le Conseil ajoute à son processus de tarification de services aux concurrents une obligation de faire une analyse de * price squeeze + puis ça, c'est un critère qui est en place dans la Communauté économique européenne mais qui est, malheureusement, très mal appliqué.

4444             Mais théoriquement, ce * due diligence + doit être faite puis, présentement, lorsqu'on a des discussions avec votre équipe de tarification de services aux concurrents, on sait pertinemment bien qu'ils procède sans faire une analyse des taux au détail, puis le * price squeeze + qui en résulte et d'une évidence atroce.

4445             CONSEILLER ARPIN : Dans son mémoire du 15 septembre, la commissaire à la concurrence soutient que les premières lignes de clients de secteur de résidence pourraient constituer un marché pertinent et que les deuxièmes lignes, les services sans fil et les services * voix sur Internet + pourraient en constituer un autre.  Que pensez-vous de la segmentation que propose la commissaire, à savoir que les premières lignes forment un marché de résidence pertinent et que, ensemble, les deuxièmes lignes, le sans-fil et la voix sur iP, en forment un deuxième groupe?

4446             M. MÉNARD : Je vous dirais que ça se rapproche de très près de ma conviction profonde personnelle, je dirais, à ce moment-ci, que les services téléphoniques résidentiels 911 sont un service qui fait partie d'un marché distinct de la téléphonie locale.

4447             Puis ultimement, quand j'ai pris la décision personnelle de prendre la téléphonie iP puis de la mettre aux poubelles puis de rebrancher ma ligne téléphonique résidentielle chez moi, mon critère, c'était : qu'est-ce qui va se passer s'il faut que je compose le 911 puis qu'il y a du * packet loss + sur Internet?

4448             Donc conséquemment, ultimement, ce n'est pas une ligne téléphonique primaire versus une ligne téléphonique secondaire, c'est la portion 911 de la ligne téléphonique primaire versus le service de téléphonie local.  Donc ça, c'est, je vous dirais, compatible peut-être de façon transposée avec l'argumentaire du Bureau de la concurrence. J'y souscris.

4449             CONSEILLER ARPIN : Alors, vous préconisez que la base de mesure de la concurrence soit la région d'interconnection locale.  Étant donné que les câbles, pour ne nommer que ces derniers, ne couvrent pas toujours le même territoire, y a-t-il lieu de se demander quand on pourrait trouver qu'il y aurait suffisamment de concurrence pour décréter l'abstention réglementaire?

4450             M. MÉNARD : Alors, on ne propose pas la région d'interconnection locale, on propose un échange téléphonique ou une portion d'un échange téléphonique, ce, pour autant qu'un concurrent a pu déployer un infrastructure dans... à l'ensemble d'une région d'interconnection locale de façon à avoir une économie d'échelles adéquates pour survivre à une déréglementation chirurgicale d'un échange téléphonique.

4451             Donc conséquemment, ça, ce n'est pas nécessairement un critère absolu d'être là physiquement présent à l'envergure d'une région d'interconnection locale.  Mais vous voyez un peu la logique derrière ça, c'est effectivement déraisonnable de croire qu'une entreprise titulaire ne devrait pas être déréglementée dans une circonscription téléphonique, quand elle vient de se faire sortir totalement d'une circonscription téléphonique.

4452             Donc conséquemment, le test, c'est, s'il y a une déréglementation, est-ce que le concurrent va survivre?  Puis ça, c'est plus l'approche qu'on a prise dans notre argumentaire.

4453             CONSEILLER ARPIN : Dans sa réponse à la demande de renseignements révisée, Aliant/CRTC-207, Aliant soutient que les services locaux d'affaires devraient être divisés en quatre marchés de produits pertinents, à savoir les services d'affaires de base, qui comprennent le service monoligne, le service multilignes et le Centrex pour les petites entreprises, le Centrex pour entreprises moyennes, comme deuxième catégorie; troisième catégorie, le Centrex pour les grandes entreprises et quatrième catégorie, les circuits numériques.

4454             D'après Aliant, il faut établir le marché pertinent en fonction de la structure de marché qui existe dans le secteur envisagé et cette structure n'est pas forcément pareille dans toutes les régions.  Que pensez-vous des marchés pertinents que propose Aliant dans le cas du service d'affaires?  Croyez-vous que ces marchés devraient changer selon le territoire?

4455             M. MÉNARD : Bien moi, je crois personnellement que l'abstention de réglementation des services Centrex lorsque le marché est perçu comme étant à l'envergure d'une province, par exemple, est totalement défavorable à la concurrence sur la base de nouvelles installations parce que, essentiellement, je vous dirais l'exemple : ça a typiquement été utilisé dans le passé pour enlever un acteur participant important d'un réseau de fibre optique local puis le sortir complètement d'un processus d'agglutination... d'agglomération de demandes de façon à justifier le déploiement d'une infrastructure du village branché.

4456             Alors, par exemple, prenons un hôpital qui a potentiellement 200 ou 300 lignes Centrex dans un contexte de réseau RTSS à l'envergure de la province, ç'a fait en sorte que les lignes téléphoniques qui sont fournies dans une zone... pas une zone de desserte à coût élevé, mais disons en bande C, les lignes téléphoniques sont vendues à 10 $, 12 $ par mois, alors qu'en réalité, un concurrent qui fournirait un service téléphonique local à cet endroit-là ne serait jamais capable de déployer une infrastructure pour justifier de fournir ce service-là en ayant un revenu de 10 $, 12 $ par mois par ligne.

4457             Donc, la notion de séparation de service téléphonique d'affaires en fonction Centrex ou non-Centrex, je pense que ce n'est pas pertinent.  Je crois beaucoup plus à une approche peut-être plutôt française du problème, qui est : on regarde le nombre de NAS qui est desservi par un * wire centre + puis, dépendamment du nombre de NAS qui est desservi par un * wire centre +, s'il y a une concurrence dans l'échange téléphonique où ce nombre de NAS-là est suffisamment élevé, bien là, à ce moment-là, les critères d'abstention de réglementation varient en fonction de la densité de la population.

4458             Donc, la tarification des services de gros, en France, au niveau du DSL, c'est 25 000 lignes et moins par centrale téléphonique, X prix, puis 25 000 lignes et plus par centrale téléphonique, Y prix.  Ça, cette approche-là n'a jamais été considérée au Canada puis de dérèglementer les services Centrex à la manière proposée par Aliant, sans valider une densité de population, un nombre de lignes par centrale téléphonique, puis considérer ça à l'ensemble d'une province, je pense que ça aurait comme conséquence d'essentiellement permettre à une entreprise titulaire de prendre un client important puis de la soustraire à un effort de conciliation régionale pour bâtir une infrastructure de fibre optique moderne.

4459             CONSEILLER ARPIN : Dans son mémoire final, les compagnies, qui sont essentiellement le Groupe Bell, dressent la liste des certaines difficultés que représente le choix de la zone d'appel locale en tant que marché géographique pertinent.  Or, la zone d'appel locale comprend de nombreuses circonscriptions, dont chacune fait partie d'autres zones d'appel locales, de sorte que celles-ci se chevauchent et qu'on ne sait pas toujours sur quelle zone on devrait se fonder dans le cadre d'une demande d'abstention de réglementation.

4460             Pourriez-vous nous indiquer s'il conviendrait, dans le cadre de la demande d'abstention de la réglementation que l'entreprise titulaire requérante choisisse une circonscription centrale et ses zones d'appel locales associées?  Par exemple, si je prends le cas d'Ottawa, ce pourrait être la zone d'appel locale de la circonscription d'Ottawa.  Est-ce une solution réaliste pour choisir un marché géographique pertinent approprié et est-ce que cela pourrait réduire le problème de chevauchement des zones d'appel locale?

4461             On a entendu ce matin que la zone d'Ottawa comprenait évidemment la ville d'Ottawa, comprenait Orléans et Kanata.  Évidemment, si je suis à Orléans et je veux appeler à Kanata, je serai tarifer, mais si je suis à Ottawa, bien, évidemment, je peux appeler à Orléans et à Kanata.

4462             M. MÉNARD : Mais je vous dirais, considérant le fait qu'on a proposé que la circonscription téléphonique soit l'entité pertinente pour établir l'unité de déréglementation parce que c'est relativement chirurgicalement gérable comme endroit puis c'est facile de valider si, effectivement, un concurrent a une infrastructure concurrente à l'ensemble d'une circonscription téléphonique, mais c'est très difficile de valider ça, si c'est le cas à l'ensemble d'une ailière.

4463             Moi, je crois qu'on perd notre temps à considérer une zone d'appel locale comme une unité pertinente, je pense que le test devrait être fait circonscription téléphonique par circonscription téléphonique avec une validation diligente et systématique prévisible de la couverture concurrente d'une infrastructure à l'intérieur d'une circonscription.

4464             CONSEILLER ARPIN : Alors, Monsieur le Président, ça complète mes questions.

4465             LE PRÉSIDENT : Merci.  Ce sont nos questions, merci beaucoup.  Je pense qu'au lieu de commencer maintenant, on va prendre notre pause pour le déjeuner et on va revenir à 14 heures.

4466             We will recess now until 2:00 p.m.

‑‑‑ Upon recessing at 1253 / Suspension à 1253

‑‑‑ Upon resuming at 1405 / Reprise à 1405

4467             THE CHAIRPERSON:  Order, please.  A l'ordre, s'il vous plaît.

4468             Madame la secrétaire.

4469             LA SECRÉTAIRE:  Merci, Monsieur le président.

4470             We will now proceed with panel No. 11, UTC Canada.

PRESENTATION / PRÉSENTATION

4471             MR. COLLINS:  Good afternoon, Commissioners.

4472             My name is Ian Collins.  I am the Chairman of the Board of UTC Canada.  I am also President of FibreWired Hamilton, the telecommunications division of Hamilton Utilities Corporation.

4473             With me today is David Dobbin, President of Toronto Hydro Telecom and UTC Canada's Regulatory Committee Chair.

4474             As you know, UTC Canada is an industry association that has members all across Canada.  The association is made up of utilities and energy companies as well as affiliated providers of telecommunications infrastructure and information technology services.

4475             Many of our members are also facilities‑based telecommunications carriers that are registered with the CRTC as non‑dominant carriers.

4476             The association was formed to address common regulatory issues facing our members and to provide a forum for co‑operation on technical marketing issues.

4477             As outlined in the submissions we filed in this proceeding, UTC Canada is urging the Commission to adopt a cautious approach to the issue of forbearance in local telephone markets.

4478             The development of viable alternatives to the local exchange services provided by the ILECs has been slow to develop since this segment of the market was opened to competition in 1997.

4479             The evidence filed in this proceeding demonstrates that each of the ILECs remains dominant in the local exchange markets they serve and there has been no evidence presented that contradicts this reality.

4480             We believe that considerable damage could be inflicted on the Canadian telecommunications industry if local markets are prematurely forborne from regulation.

4481             It has taken eight years to get to the stage where we find ourselves today with a toehold on competition in a local market still dominated by the ILEC and the prospect of increased competition on the horizon.

4482             Based on recent history, caution is warranted in making the leap of faith from what we know the competitive situation to be today to what we may think it might be in the future.

4483             If a decision to forbear is made based on projections that do not come to pass within the anticipated timeframe, the ILECs may be able to use their existing market power to eliminate the competitors that do exist and to foreclose further market entry.

4484             In this circumstance, given what it has taken to get this far down the road, it appears risky to gamble on competition suddenly taking off rather than waiting another year or two to see whether it materializes.

4485             Given that, this is the first opportunity UTC Canada has had to appear before the Commission.  We would like to start by providing you with some background information on our association and membership.

4486             Prior to 1999 a number of electrical utilities in Canada operated telecommunications networks in order to monitor electricity distribution and to provide communication services to remote locations.

4487             With the advent of fibre optic technology, some of these utilities upgraded their existing microwave equipment to take advantage of more sophisticated communications and monitoring equipment.  Some also began leasing their excess capacity on those networks to telephone companies and other telecommunications common carriers that could make use of it.

4488             In 1998, the Ontario government introduced legislation to reform the electricity generation transmission and distribution industry and to introduce competition in these sectors.

4489             The legislation also addressed the corporate structure of electricity distributors and transmitters and prohibited them from carrying on other business. The legislation therefore denied electric utilities the opportunity to lease or sell their excess capacity to third parties or to provide telecommunications services to the public except through a separate corporate entity.

4490             As a result of these legislative reforms several Ontario electrical utilities established corporate affiliates to acquire their telecommunications assets and to provide telecommunications services to third parties.  In some cases the electrical utilities have retained part of the fibre assets to continue performing electric network monitoring services and in other cases they have contracted with their respective affiliate to provide the underlying network.

4491             Once these telecom affiliates acquired the telecom transmission facilities and began operating services to third parties for compensation, they registered with the Commission as non-dominant telecommunications common carriers and began to compete with other carriers and telecommunications service providers in their various geographic markets.

4492             Many of these UTelcos, as they are known, have since acquired or built additional transmission facilities and have extended their networks to better serve their customers.  Some have also augmented their fibre networks with radio spectrum‑acquired and Industry Canada spectrum options and others are experimenting with new technologies such as broadband over power line.

4493             Several UTelcos have also cooperated to link their networks to provide broader regional coverage to their customers.

4494             The UTelcos provide a number of telecommunications services to the public. They include the provision of dark fibre to other carriers' ILECs, the provision of bandwidth to business customers, carriers and resellers, and the provision of internet services to both business and residential customers.

4495             With the exception of broader based internet services most of the service provided by UTelcos tend to be suited to larger public sector and business customers, carriers and resellers that require high volume transmission capacity.

4496             To date, the UTelcos have focused on point‑to‑point transmission services and the establishment of high‑capacity local area networks for their clients.

4497             None of the UTelcos have begun to offer local exchange service, although some do resell voice over IP.

4498             In February 2004 the UTelcos formed UTC Canada.  Since then UTC Canada has participated in a number of CRTC proceedings, including the voice over IP proceeding, the proceeding to strengthen the price floor rules for ILECs and Bell Canada's application to streamline the tariff approval process.

4499             Since entering the market UTC Canada's members have achieved some success. The UTelcos have begun to provide a much needed alternative to the ILEC in the provision of large capacity transmission facilities to the public sector clients like school boards and government departments, to other nondominant carriers and resellers and to large businesses that require transmission capacity between their offices.

4500             The annual revenues of the members reached a hundred million in 2004. While this is obviously a small share of the telecommunication market that exceeds 32 billion, it represents a start in a market that has seen very little facilities‑based competition in recent memory.

4501             The fact that UTC Canada's members have begun to compete with other communication service providers and the prospect that somewhere down the road UTelcos will be a facilities‑based competitor in the local exchange market are the primary reasons UTC Canada is participating in this proceeding.

4502             The success that our members have achieved to date has attracted the attention of the ILECs both in the market and in the regulatory arena.  In the marketplace, competition in the ILECs has been fierce and in some well‑documented cases Bell Canada simply ignored the regulatory safeguards imposed by the CRTC and has won competitive bids with below‑price or off‑tariff deals.

4503             Since UTC Canada's members do not have ubiquitous networks, it is still relatively easy for the ILECs to target low pricing offers to customers that can be served by the UTelcos while retaining higher prices elsewhere.

4504             UTC Canada recognizes that our participation in this proceeding, and the relatively small degree of success that our members have achieved so far in the telecommunications markets, are providing the ILECs with ammunition to use in their push for local forbearance.

4505             The reality is, however, that none of the UTelcos currently provide local exchange services in competition with the ILECs.

4506             With that marketplace reality in mind, UTC Canada is urging the Commission to adopt a cautious approach to local forbearance.

4507             In the proceeding leading up to telecom Decisions 97‑8 and 97‑9, and in the many recent proceedings, the ILECs have repeatedly called on the Commission to relax regulatory constraints despite their dominant position in the marketplace.

4508             The experience over the past eight years bears testament to the fact that the CRTC was correct in 1997 when it refused to accept the ILECs' argument and projections relating to the imminent entry of new competitors into the local market and the corresponding rapid loss of the market share.

4509             Eight years later we are in a position where very little progress has been made in reducing the ILECs' dominance in the provision of local services.

4510             In the latest national data released by the CRTC in Public Notice 2005‑11 competitors had managed to garner only 3 percent of the national residential market by the end of 2004, while competitors' share of the local business market fared somewhat better at 8 percent.

4511             In the past two years we have witnessed renewed calls by the ILECs for elimination of the marketing safeguards and pricing restraints placed on them by the CRTC.

4512             As in 1997, the anticipated broad-based entry of the cable television companies forms the basis of calls for regulatory forbearance, but this time there are other developments which the ILECs rely on for justifying deregulation.

4513             These other factors include voice over IP services; the deployment of high‑speed internet access services by the cable companies, which are capable of delivering voice over IP; the high penetration of mobile wireless services; and the advent of new facilities‑based carriers including UTC Canada members, that are deploying local fibre facilities in combination with Wi-Fi and other access technologies.

4514             While these developments hold the promise of competition in at least some local markets, the Commission needs to recognize that many of these developments are still at the very early stages.  For example, entry into the local market by Rogers Cable has only recently occurred eight years after the market was opened.

4515             As for the substitutability of wireless services for local telephony services, it has been documented that only about 2 percent of wireless phone users actually use cellular or PSC as a substitute for wireline service.

4516             In addition, while UTC Canada's members have extensive fibre facilities on some routes within the ILECs' local exchanges, none of them cover the ILECs' local footprint and all of them will have to look to other technologies to provide broad-based local telephony services.

4517             Even voice over IP, which is touted as the major catalyst for change, has yet to prove its ability to replace local telephone service on a broad basis.

4518             In this environment caution is certainly warranted.  We would note that section 34(3) of the Telecommunications Act prohibits the Commission from forbearing from regulation where it finds that to refrain would be likely to impair unduly the establishment or continuance of a competitive market.

4519             We believe that a decision to prematurely open up the local market to unbridled competition from the ILEC, would most certainly impair unduly the establishment of a competitive local telephony market.

4520             It has taken eight years to get to the point we are today.  Even then the local market is still dominated by the ILECs, with provincial market shares ranging from a low of 89.5 percent to a high of 100 percent.

4521             Based on a recent history that is littered with failed attempts to compete with ILECs, UTC believes that caution is warranted.

4522             If the projections made by the ILECs about the developing competitive market fail to materialize in the timeframe, the ILECs will be able to use their market power to crush competition and prevent others from entering the market.

4523             From a regulatory perspective this is an important fact.  In UTC Canada's view, the Commission should regulate telecommunications carriers in the context of the market structure that exists today, not on the basis of what might ultimately be.

4524             We can only make informed guesses at what might be based on the current state of competition.  The Telecommunications Act provides the Commission with the necessary tools to adapt to changes in market structure as they occur.  In this respect the forbearance powers in the Act enable the Commission to lighten or remove regulation when competitive forces grow to an extent capable of tempering the ILEC's market power.  However, these steps can only be taken when the market is sufficiently competitive to project the interests of users.

4525             It makes no sense to deregulate a market segment that is so overwhelmingly dominated by incumbent monopolists before there is actual evidence of sustainable competition in that market.

4526             Until competitors have developed to a stage where they can complete across a broader cross‑section of the market, unregulated ILECs will be in a position to target below cost pricing in limited areas where they face the competition and to recoup their losses in other segments by charging higher pricing.

4527             All that stands between the ILECs and re‑monopolization of the market is the CRTC and its regulatory safeguards.  These safeguards need to be strengthened, not relaxed or eliminated in the manner proposed by the ILECs.

4528             While UTC Canada has provided the Commission with its views on the relevant geographic and product market definitions, we want to emphasize that we are not holding ourselves out as experts on these matters.

4529             We have also looked at the tests used by the Commission, the Competition Bureau and others for determining market dominance and from a layperson's perspective they appear to make a lot sense.

4530             UTC Canada acknowledges that the question of when a local market will be subject to enough competition to merit forbearance is not easy to answer.  It is important to gather evidence on all of the factors that are limiting new entrants and their market share before drawing any conclusions as to the ability of competitive market forces to do a better job of constraining the abuse of the ILECs' market power.

4531             Given the uneven development of local competition in Canada, we also recognize that it may be difficult to develop a simple set of principles to identify market power in a specific market.  However, UTC Canada believes that a bright‑lines test might provide guidance to the Commission to identify clear‑cut case of dominance.

4532             As the Commission is no doubt aware, market shares are often used by competition authorities as prima facia evidence of market power.  This is true in Canada, where the Competition Bureau's Merger Enforcement Guidelines use a 35 percent market share to identify mergers that are unlikely to have anticompetitive consequences.

4533             A similar 35 percent market share threshold is applied by the Bureau when it conducts analysis of whether a firm is engaging in anticompetitive behaviour. A market share of less than 35 percent will not give rise to those concerns of market power dominance.

4534             Similarly, the Competition Tribunal has gone further in stating that 80 percent market share gives rise to a presumption of dominance that can only be rebutted by showing an absence of barriers to entry.

4535             The European Community similarly uses a 40 percent market share as raising a red flag for possible dominance.

4536             Given the mechanisms employed by these competition authorities, UTC Canada is advocating the use by the Commission of a bright‑lines threshold to create a presumption of market power.  If market shares of those magnitudes are used as a red flag to justify a detailed review of market power, it would be logical to use them inversely to demonstrate on a prima facia basis that a detailed review of market power is not justified.

4537             It would therefore be entirely consistent with Canadian and B.C. competition law for the Commission to use market share evidence as a bright‑line test for local forbearance, a notion of book‑ending where if we look at the 35 percent threshold and an 80 percent threshold as the metrics for engaging in a competition review.

4538             UTC Canada has also believed that it is important to establish a time period during which a market share threshold would be maintained before forbearance can be granted.  In our view, a one‑year period would be appropriate.  This would give the Commission time to assess whether customers are finding that alternative services are viable substitutes to the ILEC services.  This timeframe would also enable the Commission to assess the ILECs' competitive response to new entry and determine whether an aggressive response recaptures market share.  It will similarly provide an opportunity to gauge the ability of the new entrant to withstand competitive response.

4539             Before closing today, UTC Canada would likely to briefly touch on three other issues raised in this proceeding: the importance of ensuring that facilities‑based competition exists before forbearance is granted, the need for ex ante regulation as long as ILECs have significant market power; and third, the importance of guarding against the development of cable/ILEC duopoly.

4540             UTC Canada believes that the benefits of consumer choice, price, competition and innovative services will come from facilities‑based competition and not from the resale of wholesale services using a common technology platform and a common cost base.

4541             It is our view that the regulation of wholesale rates alone would not justify deregulation at the retail level, absent real facilities‑based competition at that level.

4542             We adopt this view for several reasons:

4543             First, true price competition will not be possible and service innovation will be limited if a common technology platform is used by all providers.

4544             Second, setting the perfect rate for wholesale service is fraught with difficulties and could result in endless regulation by the CRTC and disputes between resellers and ILECs.

4545             Third, regulating wholesale alone will not stimulate facilities‑based competition.

4546             Finally, without retail price regulation an incumbent can raise or lower prices in response to competitive entry or even rumours of such. New entrants will not take the chance of entering the market and facing rate reductions if they are reliant on incumbents for network services and do not enjoy a real cost advantage over the ILECs.

4547             In UTC Canada's view, it is better to be patient, to wait for facilities‑based competition to develop and then forbear from regulation when the ILEC no longer possesses that power.

4548             On the issue of ex ante versus ex post regulation, it is UTC Canada's view that ex ante regulation is justified as long as the ILEC possesses significant market power in a given market.  Once significant market power is lost and a market is forborne, complaint‑driven ex post regulation is justified in respect of the powers that the CRTC has retained.

4549             History has repeatedly demonstrated that the ILEC will take advantage of their market power whenever they can enhance their market position.  In fact, most of their regulatory safeguards currently in place were only devised after the fact when the ILEC's abuse of its market power was investigated by the Commission.  Over the years, the ILECs have shown no propensity to resist a natural economic urge to exploit their advantage.  In many cases, the damage has been done by the time the abuse is stopped and to suggest that safeguards should not be approved and applied on an ongoing basis would simply encourage more infractions.

4550             Moreover, the prospect of having to re‑regulate a market or market segment will lead to significant confusion of that market.  Re‑regulation will send confusing signals to consumers, potential competitors and investors and should be avoided.

4551             UTC Canada does see some signs of a duopoly forming between the ILECs and the cable companies in at least some segments of the residential and business, local telephone high‑speed internet markets.

4552             While the cable companies and the ILECs may have the incentive to compete with each other, they may also have the incentive to limit the ability of other service providers to capture market share.  Their ability to engage in this type of conduct will be enhanced by their control of the two principle networks; one might argue even three, with the recent discussions between Bell and Rogers on their wireless activities used to provide high‑speed broadband access to Canadians.

4553             They clearly have a large head start over all other players and their revenues dwarf the rest of the industry.  Great care will therefore have to be taken to ensure that they do not collude in an expressed or behavioural manner to either limit competition between themselves or by third parties.  This calls for ongoing regulatory supervision to ensure access to the networks.

4554             In closing, UTC Canada does not believe that forbearance should occur until such time as the Commission is assured that competition will protect consumers and business from the ILECs' market power.  Once this stage is reached the Competition Act will apply.

4555             UTC Canada appreciates this opportunity to comment in this hearing and we are pleased to respond to any questions at this time.

4556             Thank you.

4557             THE CHAIRPERSON:  Thank you.

4558             Commissioner Pennefather...?

4559             COMMISSIONER PENNEFATHER:  Thank you, Mr. Chairman.

4560             Good afternoon, gentlemen.  I am over here.

4561             MR. DOBBIN:  Sorry.

4562             COMMISSIONER PENNEFATHER:  Thank you for your presentation which reflects quite completely your submission and your written comments.

4563             What I am going to do is just clarify some of the basic concepts you have put forward and perhaps ask you a few questions about the presentation which put a new colour onto some of your proposals.  I will just want to go through that with you.

4564             I will be using your written arguments and your submission and a couple of other references.  I don't think we will need to jump into the actual texts too often, but just to let you know I will be using that material.

4565             Before I get to really the main point of my discussion, which is the bright‑lines test proposal and how you see that being effective in light of the situation that you have described which concerns your group, I wanted to just go back a little bit to one of the key issues in front of us when we are discussing the analysis or not analysis related to forbearance, and that is the geographic market.

4566             I think you say it is an important component of such a discussion, but in your written argument at page 8 in paragraph 43, you do say that:

                      "The evidentiary record of this proceeding does not provide an answer to the question of whether an exchange, a local calling area or an LIR is the appropriate geographic market." (As read)

4567             I think, in fairness, you have discussed various possibilities around the local calling area and the LIR but perhaps we could explore that just a little further and see why you came to that conclusion and perhaps get your sense of what the basics are in terms of the geographic market.

4568             So if I look at page 843, you do say that ‑‑ and this is also pointed out in your response to Interrogatory 210(d):

                      "The ability of a new entrant to initiate service within an area that is smaller than a local calling area may be limited my marketing considerations." (As read)

4569             Could you expand on that point?

4570             MR. DOBBIN:  Generally, marketing activities, it is very difficult to limit a marketing activity to a local calling area and that question of how big is a local calling area, SaskTel made the perfect point the other day.  I mean, the local calling area can be Regina; a local calling area can stretch from Oakville to Ajax.  I mean, very, very different sizes, very different population bases.

4571             So when looking at it we thought it was probably more advantageous to look at what happens in reality with sales and marketing efforts and the way trucks roll and all those sorts of ideas.

4572             Metropolitan areas make more sense to us.  For example, if we want to take an ad or if somebody wants to take a split‑run ad in the Globe & Mail for Ottawa, they get Ottawa.  They get the city of Ottawa and the surrounding geographic area.

4573             We don't have a lot of experience with LIRs so we don't know how an LIR interacts with that area.  We had to have a dissertation on what an LIR actually is.  But the metropolitan area makes the most sense to us, we think.

4574             COMMISSIONER PENNEFATHER:  I guess you touched on it, but it is practical considerations that you are concerned about.

4575             MR. DOBBINS:  Yes.

4576             COMMISSIONER PENNEFATHER:  And marketing.

4577             MR. DOBBINS:  Yes.

4578             COMMISSIONER PENNEFATHER:  So you are looking for a kind of natural marketing area as opposed to the ‑‑ and which definition would suit that best in your view?

4579             MR. DOBBINS:  We think metropolitan area would be.

4580             COMMISSIONER PENNEFATHER:  In terms, though, of what we have in front of us, would the local calling area, the exchange or the LIR come closest to what you think is the bottom line?

4581             MR. DOBBIN:  Local calling area probably.

4582             COMMISSIONER PENNEFATHER:  In looking at that there were a couple of suggestions around the local calling area. One of them was from The Companies' final argument, page 24, paragraph 87.

4583             Could you discuss whether it might be appropriate as part of the application for forbearance for the applicant ILEC to pick a central exchange in its associated local calling area; for example, in the case of Ottawa it could be the local calling area of the Ottawa exchange.

4584             In light of what you just said, is this a workable solution?

4585             MR. DOBBIN:  Well, Ottawa is an interesting example with the Kanata/Orleans problem.  This is why we are torn between metropolitan area and local calling area.  As you have heard earlier today, calling from Kanata to Orleans is a toll call. In Ian's city in Hamilton, calling across the new city of Hamilton is a toll call.  So it is a difficult question.

4586             That is why we keep leaning towards metropolitan area, because we think it makes more sense.  When you run advertising or when you have service centres you run in the metropolitan area.

4587             COMMISSIONER PENNEFATHER:  I noted you made it very clear in your presentation as to where the companies are active currently and that at the present time you are not in the business, or your members are not in the business of local service, residential, but I am assuming your comments are touching on both residence and business.

4588             Could you focus a little bit on the business market and discuss the same question? How does it work in that sense? Is it still the local calling area, in your view, that is the appropriate geographic market?

4589             MR. DOBBIN:  Yes.

4590             COMMISSIONER PENNEFATHER:  There is no difference?

4591             MR. DOBBIN:  No.

4592             COMMISSIONER PENNEFATHER:  Perhaps, then, you could comment on the Aliant proposal in their interrogatory from the CRTC-207.  They submitted that business local exchange services would be segmented into four relevant product markets.

4593             MR. DOBBIN:  As we have said in our submissions, we believe that the product markets and the geographic markets are two separate issues.

4594             We hadn't contemplated business service as being divided into four markets of business telephony.  We had considered two, the first being single line business services.  We see those as being interchangeable with single line residential service.  There is really no difference.  The small office/home office is the perfect example of that.  It is an interchangeable service.

4595             The big difference is when you get into large multi‑line services. That is clearly a different product market; Centrex, for example, a very different product market than single line. We don't see four.  We see two.

4596             But those two product markets can be overlaid on many geographic markets. So it is a different argument. You know, you can have multi‑line Centrex in downtown Toronto and single line phone service in downtown Toronto. There could be a different geographic market from Sudbury.

4597             COMMISSIONER PENNEFATHER:  Well, you can understand where I am coming to in terms of discussing a bright‑lines test.

4598             MR. DOBBIN:  Yes.

4599             COMMISSIONER PENNEFATHER:  That one of the basics is to be clear and as precise as we can be in terms of the definition of these markets and geographic market in particular.

4600             Cybersurf also suggested an approach regarding adopting the local calling area to the relevant geographic market; in other words:

                      "...to make local calling areas symmetrical irrespective of exchange of origin of the calls." (As read)

4601             Any comment on their proposal?

4602             MR. DOBBIN:  They converted to LIRs this morning, didn't they?

4603             COMMISSIONER PENNEFATHER:  Oh, that's true.

‑‑‑ Laughter / Rires

4604             COMMISSIONER PENNEFATHER:  Yes, I think there is another player who has converted as well, so we will see how the conversion goes.

4605             This brings me, then, to one final question on this.

4606             Just so I have your position clear, in Interrog 210, UTC/CRTC-210.  You seem, though, to be leaning to:

                      "The new entrant will have difficulty entering a local market unless it can market its services to the local calling area. Even if it can effectively serve a single exchange it will have great difficulty targeting its market to that single exchange." (As read)

4607             So the focus here is the combination of the ability to market in the geographic area consistently?

4608             MR. DOBBIN:  Yes. Where does an exchange end and begin? Does the newspaper that you place an ad in know where the exchange begins and ends or where the buildings are? It is a very different issue.  So it has to be on a larger area.

4609             COMMISSIONER PENNEFATHER:  Let's move on then to the safeguards.  You mentioned them again today and at page 7 in your written arguments at paragraph 41:

                      "If forbearance is granted in the geographic areas that are not fully served by competing suppliers of substitute services then safeguards may be required to stop price discrimination within that market and to protect customers with no competitive choice." (As read)

4610             Can you expand on that paragraph and just clarify for us the nature of the safeguards you are referring to?

4611             MR. DOBBINS:  Which paragraph are we referring to, sorry?

4612             COMMISSIONER PENNEFATHER:  Page 41, page 7, written arguments.

‑‑‑ Pause

4613             MR. COLLINS:  What we were suggesting there, typically a competitor if they are to serve that market and they don't have ubiquitous coverage, they would have to rely on the ILEC's services to complete their package.

4614             What we are suggesting there is, if the ILEC understands where those boundaries are, safeguards would have to be put in place to ensure that price controls or unfair pricing tactics weren't occurring in areas where the competition was not active.

4615             COMMISSIONER PENNEFATHER:  So your focus is on price, safeguards, pricing safeguards?

4616             MR. COLLINS:  Yes.

4617             MR. DOBBIN:  There is an interesting issue here that is fundamental to our argument.  We question whether resale of services can actually exist past forbearance.

4618             For example, if you are buying a circuit from the ILEC for X dollars and the market is forborne, and as soon as that market is forborne the ILEC re‑prices their service to X plus 5 percent, the reseller is finished. Right?

4619             So there has to be some control of that compact competitive market to control pricing discrimination either up or down.

4620             COMMISSIONER PENNEFATHER:  Which brings me to clarify, too, when we come to the discussion of your bright‑lines test you are talking about facilities‑based carriers?

4621             MR. DOBBIN:  Absolutely.

4622             COMMISSIONER PENNEFATHER:  Okay.

4623             MR. DOBBIN:  There are a lot of issues in there.  There is a lot of noise raised about, for example, wireless substitution.

4624             What counts as real competition?  Does a competitor reselling the ILEC's phone lines and the ILEC being topped up by a deferral fund count as real competition when they are made whole?  Does an ILEC losing one of their own telephone lines to a mobile phone count as real competition?

4625             If I take revenue from my regulated right hand and move it to my deregulated left hand is that a real loss for me?  Does that count or not?

4626             We don't believe that any of those things should, purely because on the resell example margins squeeze upon forbearance immediately will kill competitors that are in the resell business, and substitution we don't believe is a valid argument.

4627             So facilities‑based competition is what we believe is key to forbearance in a market.

4628             COMMISSIONER PENNEFATHER:  In its argument, the Competition Bureau at page 9 proposed the division of the relevant residential market into a first line market and another market it includes as second line is mobile, wireless services and VoIP services.

4629             Following on what you just said, could you comment on that?

4630             MR. DOBBIN:  UTC Canada wholeheartedly agrees with the CRTC's decision that voice over IP is a primary exchange service and they are interchangeable.

4631             Mobile, I think is a little more complicated for the reason that I cited earlier, that if an ILEC is losing a line to their own mobile company is that in fact churn?  We don't believe that it is.  If they are losing it to an authentic competitor then it is churn.

4632             As far as other types of loss ‑‑ hang on one second ‑‑ secondary line service, yes, those should be counted.  They are the same as a primary line.

4633             COMMISSIONER PENNEFATHER:  Just before I get back to that and discussing what in fact is in your calculations for market share, I wanted your comment on a subject that we have before us in some proposals and some input regarding customer inertia and since you were mentioning practical considerations and marketing considerations.

4634             In your view, how does customer inertia or brand loyalty come into the picture?  How would it affect competition, in your view?

4635             MR. COLLINS:  Certainly brand loyalty is indeed a factor in customer choice; the notion of inertia, it is just easier to stay where I am, is a hurdle that competitors have to overcome.  A lot of times you do it with the product offering, but most of the time it is done with some sort of a price trigger that is below the market situation.

4636             MR. DOBBIN:  There is, however, a difference between real customer or product inertia and potential customer or product inertia.  A lot of this proceeding is based around voice over IP and what it might be and what kind of a threat to the monopoly that might be.

4637             We use a great analogy when we talk about potential inertia and what it actually means.  Our predecessor companies, the electric utilities.  In the early 1970s they faced an imminent threat to their monopoly as well or what was perceived to be one.  There was a lot of worry at the time and a lot of concern raised, but solar panels and alkaline batteries never turned out to be the electricity monopoly breaker that people thought they would be.

4638             So you never know what is real and what is perceived.

4639             COMMISSIONER PENNEFATHER:  Well, we will come back to that because what I want to end up with is also the time period that you mentioned in your remarks in terms of:  (a) don't move now until you get it right, and that is a couple of years; (b) sustainability can be assessed over a year.

4640             So when we are discussing your market share proposal I would like to keep that in mind as well and come back to your point about technology.

4641             In terms of the criteria for forbearance, your proposal which is outlined today at page 14 of your written argument, comes down to ‑‑ and correct me if I am wrong ‑‑ 35 percent as the key number.  I think your arguments are clear on where you got the 35 percent, although in one of your interrogs you say 40 percent, but I assume that it is 35 that you are using as your proposal.

4642             MR. DOBBIN:  Thirty‑five, forty.  We are not competition lawyers.

‑‑‑ Laughter / Rires

4643             COMMISSIONER PENNEFATHER:  I'm not either but ‑‑

4644             MR. DOBBIN:  Whatever, pick one.

4645             COMMISSIONER PENNEFATHER:  I think it is important because various proposals are coming forward and, yes, it is a moving target we are looking at.

4646             But your proposal, if I can focus on it, let's say is 35 percent, because based on competition law ‑‑ here and you use several examples, and thank you for that -- that on less than 35 percent market share it is automatic forbearance for the ILEC.  Correct?

4647             MR. DOBBIN:  Yes.

4648             COMMISSIONER PENNEFATHER:  More than 35 it is a red flag, a signal that full analysis should occur if a request for forbearance comes in the door.  Correct?

4649             MR. COLLINS:  That's correct.

4650             MR. DOBBINS:  Yes.

4651             COMMISSIONER PENNEFATHER:  Let's take that second step, then, and say ‑‑

4652             MR. DOBBIN:  Well, there is a third step to that.

4653             COMMISSIONER PENNEFATHER:  Okay.

4654             MR. DOBBIN:  We said that, if you take as an example Competition Tribunal rulings, that 80 percent, above 80 percent, you wouldn't even look.  There is market dominance.

4655             So you book-end it between 80 and 35. If it is in there, you do a detailed analysis; if it is above, don't even look; if it is below, automatic forbearance.

4656             COMMISSIONER PENNEFATHER:  Okay. That's clear.

4657             Now, between the 35 and 80, let's discuss that piece.

4658             MR. DOBBIN:  Okay.

4659             COMMISSIONER PENNEFATHER:  Assuming that much of the literature says that market share alone is not necessarily an indicator of market dominance ‑‑

4660             MR. DOBBIN:  We agree.

4661             COMMISSIONER PENNEFATHER:  ‑‑ then have you a proposal on how we should approach examining that space between 35 and 80 and on what basis we would say that we have reached an acceptable point to allow forbearance?

4662             MR. DOBBIN:  First off, why we think there should be caution is because once you forbear a market and you want to go back, it is a little like trying to put the toothpaste back in the toothpaste tube.  It is very, very difficult.  So we think the Commission should be prudent when doing this.

4663             The analysis would have to go into a lot of factors.  For example, is the market share loss resale of ILEC circuits or is it true facilities‑based market share loss?  How much wireless substitution is the ILEC's own wireless network?  Is voice over IP a real factor in the market?  Is the competition sustainable over the long term?

4664             What does the rest of the territory look like that the ILEC is in and is this the only territory with competition in it and is there a likelihood that the ILEC could use market power in other areas to fund a market war in a competitive territory?

4665             I think there would have to be a very, very in‑depth and very cautious analysis of any forbearance territory, because once the genie comes out it is not going back in.

4666             COMMISSIONER PENNEFATHER:  You are aware of the proposal by the Commissioner of Competition, the structured rule of reason test?

4667             MR. DOBBIN:  No.

‑‑‑ Laughter / Rires

4668             COMMISSIONER PENNEFATHER:  Okay.

4669             MR. DOBBIN:  We are making it easy, no.

4670             COMMISSIONER PENNEFATHER:  All right. Then, I won't ask you to comment on it.

4671             MR. DOBBIN:  Great.

‑‑‑ Laughter / Rires

4672             MR. DOBBIN:  It has got a great title, though.

4673             COMMISSIONER PENNEFATHER:  Except for one element.

4674             MR. DOBBIN:  It sounds really impressive.

4675             COMMISSIONER PENNEFATHER:  I will ask Commissioner French to comment, but there is one element I will ask you to comment on.  In fact, what we have here is a list of four and, yesterday, five or six elements which would go into an analysis along the lines you have described.

4676             One of them is the variable costs of the two service providers.  Now, in this thesis consumers have access to two independent facility‑based service providers offering similar services, functionalities and quality of access.

4677             Two, the variable costs of these two service providers are similar, and the variable costs of the entrant are lower and neither competitor is capacity‑constrained.

4678             What I wanted to ask you was to comment on this.  We have raised it during the proceeding, on the ability and the importance and the practicality of measuring these variable costs.

4679             Can you comment on that?

4680             MR. DOBBIN:  I think it would be very difficult.

4681             COMMISSIONER PENNEFATHER:  Can you give me a little more?

4682             MR. COLLINS:  Well, looking at the variable cost of the ILEC, for instance, I mean, that is information they traditionally don't like to give.  Competitors ‑‑

4683             MR. DOBBIN:  Like to give it less.

4684             MR. COLLINS:  Yes.

4685             You have to have a fairly structured method of what is included and what is not because, as we heard earlier today in other discussions, you know, they can put a lot of stuff into your variable cost components to make your numbers look as good or bad as you need them to do for these type of things. I think it would have to be extremely well documented as to what can be included and what can't be in the variable cost elements.

4686             COMMISSIONER PENNEFATHER:  Your bottom line is you would find it extremely difficult because of the lack of availability of information?

4687             MR. COLLINS:  I mean, when you start talking about a provider's cost structures that is very competitive information.  So that is not normally public information and made available.  It would have to be done in camera with the Commission.

4688             COMMISSIONER PENNEFATHER:  You are not going to comment on the structured rule of reason test, but what about the Telus test compared to yours?

4689             MR. COLLINS:  The 5 per cent?

4690             COMMISSIONER PENNEFATHER:  Yes. Do you have any comment on that?

4691             MR. COLLINS:  Yes, I have a really good opinion of that.

‑‑‑ Laughter / Rires

4692             MR. DOBBIN:  You know, our companies were born out of monopolies and you know what, 95 percent of a market smells like monopoly to us.

4693             MR. COLLINS:  I think one has to ask themselves:  The 5 percent, what is the error in the calculation?  I have got 5 percent market ‑‑ I have lost 5 percent of my market plus or minus 2, 3 percent.

4694             I think it is very difficult to intuitively grasp the concept that a 5 percent loss of market share in a market where you previously had 100 can even be construed as a competitive environment.

4695             So I think the number is just wrong.

4696             COMMISSIONER PENNEFATHER:  Well, the Commissioner of Competition does also indicate that in terms of the 5 percent the bright‑line test is proposed, but it is also proposed as an indicator of access to choice.

4697             Do you have any comment on that in seeing it that way?

4698             MR. COLLINS:  Well, that could be used in that context as, okay, something is going on here.  What is it?

4699             You would have to look in grave detail what is going on with respect to the market.  What 5 percent?  Have they lost the 5 percent to their mobility affiliate or have they lost the 5 percent to a completely new entrant vis‑à‑vis the cable company or a non‑facilities‑based voice over IP provider?

4700             Certainly it is something that you might want to bring and say, "Look, let's address this."  But I suspect you would have to really dig deep into the information to see where the 5 percent went.

4701             MR. DOBBIN:  And 5 percent market loss?  If some of that is resale, is it actually a market loss?  If the ILEC is being paid for the circuit on the backend and being topped up, is that a real market loss?

4702             For example, the CDNA tariff, is it a loss of a DS‑3?  When a carrier sells a DS‑3 at CDNA price, gets their money back to bring them back to their whole price from the deferral account, is that actually a lost circuit for them?

4703             Does that count as a lost circuit?

4704             They are whole on the revenue, so I don't think it is a loss.

4705             So you would have to look at what is in the 5 percent.

4706             COMMISSIONER PENNEFATHER:  One of the other pieces of the test is the number of competitors. To say that (a) using the 35 percent is a signal, or (b) making an assessment that you can forbear at a particular point, is the number of competitors in the market.

4707             Do you have any comment on whether two, three or five is the appropriate number or any other number, and why?

4708             MR. COLLINS:  I think the number is as relevant as the sustainability of that competitor as well. I think you could have two competitors that are very regional and very weak, or two competitors, one of which is very strong and is likely to provide a sustainable offering and be around two years from now.

4709             So I think it is not just the number of competitors in a market.  It has to be the viability of that competitor in the market.

4710             COMMISSIONER PENNEFATHER:  When we talk about market share in your analysis, what are you including in your assessment of 35 percent?  For example, the nominator/denominator, what services are you including in your calculation?   Is it local exchange service, wireless service, voice over IP, Access independent voice ‑‑

4711             MR. DOBBIN:  Anything that would be classed as primary exchange service.

4712             COMMISSIONER PENNEFATHER:  I'm sorry, I didn't hear you.

4713             MR. DOBBIN:  Anything classed as primary exchange service, so phone lines.

4714             COMMISSIONER PENNEFATHER:  Phone lines.

4715             MR. DOBBIN:  Yes.

4716             COMMISSIONER PENNEFATHER:  So are you including VoIP in your assessment, in your bright‑lines test?

4717             MR. DOBBIN:  Yes, we did.

4718             COMMISSIONER PENNEFATHER:  You did?

4719             MR. DOBBIN:  Yes.

4720             COMMISSIONER PENNEFATHER:  You made a point earlier, I think on VoIP being one of those elements that is very difficult to know where we are at, but you would suggest if we adopted your bright‑lines test that we include it?

4721             MR. DOBBIN:  Yes. Well, primary exchange service is primary exchange service.  So whether somebody is using ‑‑

4722             COMMISSIONER PENNEFATHER:  I agree.

4723             MR. DOBBIN:  ‑‑ somebody is using it over an internet connection or a phone line, it is primary exchange service.

4724             COMMISSIONER PENNEFATHER:  You also mention sustainability in your comments and I wanted to ask you to tell us what you think is sustainability, what are the characteristics of a sustainable competition.

4725             MR. COLLINS:  Sustainability, in our view, is the ability to reinvest in your infrastructure to be able to maintain your network, your quality of service, grow your business, continue your marketing activities, and continue to grow your market share.

4726             COMMISSIONER PENNEFATHER:  I understand, too, that from your comments today you reference:

                      "... if the projections made by the ILECs about the ... market failed to materialize in the timeframe." (As read)

4727             You recommend at some point, I believe, that one year is an appropriate period of time to assess the market.  Let's say we get above 35 percent ‑‑ correct me if I am wrong ‑‑ and we are doing an analysis, we would use a base of a year to assess whether ‑‑ and wait for forbearance.

4728             Can you explain why you feel that's an appropriate timeframe and why it makes sense considering the speed of technological change and innovation?

4729             MR. DOBBIN:  We thought a year was reasonable because market reality is people can move very quickly in the market.  Marketing plans can change upon forbearance and things like that.  We thought that giving a market a year to adapt would be prudent.  Again, we think we should be very careful with where forbearance is granted and the more thought and analysis goes into it, the better.

4730             The current winback is 12 months as well, so it kind of fit.

4731             COMMISSIONER PENNEFATHER:  When you discuss your analysis ‑‑ and let us assume that we have done an analysis in the 35 to 80 percent range; perhaps you have said this and I missed it ‑‑ and forbearance looks acceptable on the basis of the analysis you have described, you do say today, in discussing your point on duopoly and your concerns about a duopoly, that ongoing regulatory supervision is required.

4732             Can you be precise on what you mean?

4733             I am assuming that that is for the forborne parties, ongoing regulatory supervision.

4734             Is that correct?  If not, please correct me.

4735             MR. DOBBIN:  You are correct.

4736             COMMISSIONER PENNEFATHER:  What would be the components of this ongoing regulatory supervision?  What are you talking about there?

4737             MR. DOBBIN:  Well, you would have to monitor it to make sure they complied with the ‑‑

4738             COMMISSIONER PENNEFATHER:  Sorry, I am having trouble hearing you.

4739             MR. DOBBIN:  You would have to monitor it to make sure that both parties continue to comply with the public policy objectives; you know 9‑1‑1, MRS, all those sorts of things.  There would have to be monitoring to make sure that there was no collusion in a duopoly.

4740             However, I think in a forborne market that might be the Competition Bureau that would monitor that.

4741             COMMISSIONER PENNEFATHER:  Thank you very much for responding to my questions or not, according to your reading.

4742             Those are my questions.  Thank you, Mr. Chairman.

4743             THE CHAIRPERSON:  Those are our questions.  Thank you very much.

4744             Oh, I'm sorry.

4745             MR. DOBBIN:  Thank you very much.

4746             THE CHAIRPERSON:  Sorry, we do have a question from Commissioner Cram.

4747             COMMISSIONER CRAM:  You can't get away that easy.

4748             MR. DOBBIN:  We are not in Regina.

‑‑‑ Laughter / Rires

4749             COMMISSIONER CRAM:  Is SaskPower a member of your utility?

4750             MR. DOBBIN:  SaskPower doesn't have a telecom utility.

4751             COMMISSIONER CRAM:  I didn't think so.  They don't want to compete with themselves.

4752             I wanted to talk about your division of product.

4753             Was I understanding what you are really saying is that all single lines, bus and res single line would be one product line, because you said that the business single line could be pretty well substitutable?

4754             MR. DOBBIN:  They are functionally the same thing, aren't they?  I mean, they do the same thing.  They act the same.  They seem the same to us.

4755             COMMISSIONER CRAM:  That's a good "duck argument".

4756             MR. DOBBIN:  We are simple people.

4757             COMMISSIONER CRAM:  But that would also, then, get rid of the problem of forbearing in a res market in a 15‑storey condominium building or whatever with the dry cleaners on the main floor and them not being forborne, I suppose.

4758             MR. DOBBIN:  Yes.

4759             COMMISSIONER CRAM:  You know, we have a mixed population of bus and res.

4760             MR. DOBBIN:  Yes, absolutely.  And we wouldn't recommend forbearing one building.

4761             COMMISSIONER CRAM:  No, no, I hear you, yes.  But there is the intrinsic problem of if we forbear on one, what is the impact going to be on the other?  But if we have the product grouping, as you suggest, that go a long way to dealing with that problem.

4762             MR. DOBBIN:  A single line is a single line.

4763             COMMISSIONER CRAM:  Yes. Thank you very much.

4764             Thank you, Mr. Chair.

4765             THE CHAIRPERSON:  Thank you. Those are our questions and we will ‑‑ those are not our questions.

4766             Counsel has a question as well.

4767             MR. WILSON:  Just one point of clarification.  Again, it revolves around this question with respect to the business market.

4768             In your presentation today you talked about dividing the business market between the sort of single line and multi-line.  If I can take you back to your September 15th argument, I think paragraph 37, it seemed to me that you had sort of mentioned a third sort of possible segmentation which was sort of national Centrex.

4769             So am I correct in thinking there is sort of three segments to the sort of business product market?  So can I just clarify, am I correct in thinking there is sort of three segments to the sort of business product market?

4770             MR. DOBBIN:  That seems reasonable.

4771             MR. WILSON:  Okay. I sort of see where the dividing line is with sort of single line and single line to ‑‑

4772             MR. DOBBIN:  Small, medium, really big.

4773             MR. WILSON:  Okay. So it is just a function of sort of the characteristics of the customer I guess.

4774             Is that fair to say?

4775             MR. DOBBIN:  Absolutely, yes.

4776             MR. WILSON:  Okay. Thank you.

4777             THE CHAIRPERSON:  Thank you very much.

4778             COMMISSIONER LANGFORD:  Yes, we especially like the three bear approach to business.  We are there for baby bear, mamma bear and papa bear.  We got it.

‑‑‑ Pause

PRESENTATION / PRÉSENTATION

4779             MR. JANIGAN:  Good afternoon, Mr. Chair and Commissioners.  My name is Michael Janigan, I am the Executive Director and General Counsel of the Public Interest Advocacy Centre, which represents the Consumer Groups in this proceeding.  Those groups consist of the Consumer's Association of Canada, the National Anti‑Poverty Organization and l'Union des Consommateurs.

4780             With me this afternoon are Professor Johannes Bauer of the Department of Telecommunication, Information Studies and Media at Michigan State University sitting on my left; and Chris Taylor, outside counsel to PIAC in this proceeding.  Mr. John Lawford, counsel at PIAC will be joining us I believe in the course of this presentation as unfortunately he was double‑booked at this time.

4781             As the Commission knows, Mr. Chairman, this is an extremely important hearing.  Local telephony is an essential service and no one disputes this fact.  In our written submissions we had proposed a balanced approach which relies on both market forces and regulation to ensure that the policy objectives of the Telecommunications Act are met and the interests of consumers fully protected at all stages of regulation leading up to forbearance and thereafter.

4782             Unlike most parties to this proceeding, the Consumer Groups support a transition regime.  We believe it makes sense to slowly remove regulatory constraints as the market evolves rather than attempt a flash cut to forbearance.  We have also proposed forbearance at a relatively early stage of market development when an ILEC will still have considerable market power. We believe this would be reasonable if the Commission forbears on a conditional basis with adequate safeguards in place, including a robust mechanism for de‑forbearance.  If the Commission proceeds on this basis we believe consumers will get the benefit of increased competition while retaining the protection of necessary regulation.

4783             My colleagues will now provide you with more details concerning our proposal. Mr. Taylor will begin with a few points about the legal framework.  Professor Bauer will discuss the definition of the market and the criteria for forbearance.  Mr. Taylor will also describe the safeguards proposed by the Consumer Groups, and I will provide our closing remarks.

4784             MR. TAYLOR:  Thank you, Michael.  As the Commission is aware, the Telecommunications Act requires that all telecommunication services offered by Canadian carriers must be regulated unless and until the Commission decides otherwise.  Section 7 of the act sets out the nine policy objectives which are to guide regulation.  Promoting increased reliance on market forces is one of those objectives, but it is only one.  Contrary to the suggestions of some parties, this objective does not have priority over the other eight.  And, in particular, the Commission is not required to get out of the way of market forces, as Bell Canada has so forcefully put it.

4785             Rather, all nine objectives must be implemented by the Commission in the exercise of its powers and duties under the act.  This last point is made very clear by section 47 of the act, which states and I quote:

                      "The Commission shall exercise its powers and performance duties under this Act and any special Act

                      (a)  with a view to implementing the Canadian telecommunications policy objectives and ensuring that Canadian carriers provide telecommunication services and charge rates in accordance with section 27..."

4786             It is important to note that section 47 applies to the exercise of all of the Commission's powers under the Telecommunications Act, including the exercise of it forbearance powers under section 34.  This means that when making a forbearance decision the Commission must seek to implement all of the section 7 policy objectives and, at the same time, ensure that rates will continue to be just and reasonable and that there will be no unjust discrimination in the provision of services.  This is a tall order.

4787             However section 34 is designed to give the Commission the flexibility to meet this requirement.  Under section 34 the Commission can forbear in whole or in part, conditionally or unconditionally.  In other words, the Commission can fine tune its forbearance decision to ensure that any necessary protections and safeguards are in place.

4788             The proposal the Consumer Groups have put forward in this proceeding takes full advantage of this flexibility in order to ensure that the interests of consumers are fully met and that all of the policy objectives of the act are fully implemented.

4789             I will now turn it over to Professor Bauer to describe the Consumer Groups' view on market definition and criteria for forbearance.

4790             DR. BAUER:  Thanks, Chris.

4791             Mr. Chairman, Commissioners, I will begin by discussing the definition of the local exchange market and then turn to the criteria for forbearance.

4792             The written submissions of the Consumer Groups discuss in detail the definition of the local exchange market for the purpose of a forbearance analysis. Given the time constraints I will not go into the economic analysis in any depth, but instead focus on the conclusions.

4793             All parties agree that the geographic component cannot be defined on the basis of economic theory alone.  Rather, consideration must be given to the broader purposes and administrative requirements of a forbearance analysis in its decision.  The Consumer Groups recommend the Commission use local interconnection regions as the geographic market.  These are well‑defined, moderately sized geographic areas which reflect existing political boundaries cumulative interests.  They would be convenient from an administrative perspective given their size and limited number.  It could also be expected that competition would be relatively homogenous in these areas and that there should not be wild variations in market share as might be experienced in a much smaller area.  Overall, we believe these areas are the most reasonable choice.

4794             With respect to the product component, a key decision is whether mobile wireless and access independent Voice over IP services should be included in the market.  Our view is that they should not.  Mobile wireless service is viewed by the vast majority of consumers as complimentary to local exchange service, not as a substitute.  Access independent Voice over IP requires a separate broadband collection and is deficient in a number of important ways, such as reliability, security and the availability of 911 calling.  At this time, both of these products are, at best, weak substitutes for wire and local exchange services and should not be included in the same market for the purpose of a forbearance analysis.

4795             Let me now turn to the criteria for forbearance.  As Michael indicated in his overview, the Consumer Groups do not believe it is necessary or appropriate to wait until an ILEC no longer has market power before forbearing from regulation.  The existence of barriers to entry and market fragmentation means that the ILECs are likely to retain some market power for the foreseeable future.  It would not be in the interest of consumers for the Commission to wait until that market power has been fully eliminated before forbearing.

4796             Instead, the Consumer Groups propose that, assuming that appropriate safeguards are put in place, the Commission should forbear with respect to residential local exchange services in a geographic market if:  first, that market is served by three or more facilities‑based competitors, each with a market share of not less than 5 percent; and second, the ILEC has had a market share of less than 70 percent for 12 consecutive months.

4797             I would like to emphasize that the requirement of three facilities‑based service providers is a safeguard against the pitfalls of a duopolistic market. As the Consumer Groups point out in the written argument, even Dr. Khan, Telus' expert witness, has concerns about duopoly.  For Dr. Khan, those concerns are met by his belief that mobile wireless service is a substitute for local exchange service.  As I have already mentioned, the Consumer Groups' analysis leads to the conclusion that mobile wireless service is not a substitute and so the concerns about duopoly remain.

4798             I will now turn things over to Chris Taylor to describe the forbearance conditions considered appropriate by the Consumer Groups.

4799             MR. TAYLOR:  Thank, Johannes.  I would like to start by once again citing ‑‑ or I would like to resume by once again citing Telus' expert witness, Dr. Khan.  When asked whether there are any public policy objectives which are not adequately served by competition Dr. Khan responded:

                      "There are all sorts of public policy objectives that may not be adequately served by competitive markets alone." (As read)

4800             Dr. Khan went on to state:

                      "The ideal public policy would identify those other objectives and serve them in ways that interfere minimally with the competitive process or distort it."  (As read)

4801             We agree fully with this sentiment.  The forbearance conditions proposed by the Consumer Groups are designed to achieve the policy objectives that are not adequately served by competitive markets alone and those conditions are intended to interfere minimally with the competitive process.

4802             The Consumer Groups are proposing two types of conditions.  The first, is a set of conditions which would be applicable to all LECS serving a market, including a forborne ILEC.  None of these conditions are price related.

4803             Instead, these conditions are intended to provide elementary terms of service and consumer protections that should be required irrespective of pricing and market conditions.  They are designed to be competitively neutral.

4804             The second set of conditions is specific to the forborne ILEC and relates to price, quality of service, market share, and service availability.  These conditions, which include the Consumer Groups' proposed de‑forbearance mechanism, are designed to address the ongoing market power and leadership position of the forborne ILEC in the local exchange market.

4805             Over the longer term, some or all of these latter conditions could be modified or removed if market conditions justify such changes.

4806             Turning first to the obligations for all LECS.  These are based, for the most part, on the CLEC obligations established by the Commission in its local competition decision, Telecom Decision 97‑8.  These obligations relate to privacy and calling features, confidentiality of customer information, service and service provider information, message relay service, alternative billing formats and 911 service.  In our submission, all of these obligations should apply to all LECS, including forborne ILECS.

4807             In addition, all LECS should continue to be subject to existing regulatory obligations in respect of telemarketing and access to MUDs and inside wire or MDUs if you prefer that term instead of MUDs.

4808             We are also proposing that certain consumer safeguards in the ILEC terms of service should be extended to all LECS in a forborne environment.  In particular, all LECS should be required to abide by reasonable terms of service in respect of long‑term commitment, deposits, payment terms and suspension or termination of service.  This would create a level playing field for all competitors that at the same time would adequately protect the interests of consumers.

4809             Finally, we believe the White Pages directory should continue to be supplied by the ILEC, but all LECS serving a forborne area should contribute to the cost of the directory creation and distribution.  This would ensure that the interests of all consumers would be met in a competitively neutral manner.

4810             Turning now to the ILEC specific safeguards.  In addition to the applicable requirements I have described above, the following are the ILEC specific ones.

4811             First, we believe that consumers should have the choice to buy basic telephone service on a standalone basis.  They should not be forced to buy bundles which include services they don't want and at prices that some consumers can't afford.

4812             We therefore propose that the ILEC, in a forborne market, should be required to continue to provide basic telephone service on a standalone basis.  This would not, of course, prevent the ILEC from also offering basic local exchange service as part of service bundle.

4813             The remaining ILEC specific conditions proposed by the Consumer Groups involve soft and hard de‑forbearance triggers relating to price, quality of service and market conditions.  The Consumer Groups propose two price protection triggers.

4814             The first is a hard trigger, which would require de‑forbearance if the ILEC's standalone price for a local exchange service were to rise above the last approved tariff rate for that local exchange service in that market. This trigger is, in effect, a cap on the standalone price for local exchange service.  However, unlike most price caps, this one is extremely simple to understand and administer.  It does not involve inflation or productivity factors, it is simply a flat tap, frozen at the last tariff rate approved by the Commission.

4815             The second price protection is a soft trigger which, if met, would require the Commission to enquire as to whether or not de‑forbearance would be appropriate.  This mechanism would be triggered if the ILEC's standalone price for a local exchange service were to rise more than 10 percent in a quarter.  For example, if the last tariff rate for basic telephone service was $25.00, the rate then dropped down to $20.00, but then in a quarter it rose up to $23.00, the soft trigger point would be met.  The idea behind the trigger is that if prices were to rise in this manner something must be wrong and an investigation by the Commission would be appropriate.

4816             The next area of concern is quality of service.  Canadians expect and require high quality local service. Consequently, the Consumer Groups propose that a forborne ILEC be required to continue to file quality of service reports with the Commission and post those results on its website.  In addition, the Consumer Groups propose hard and soft quality of service triggers.  The hard trigger point is designed to signal a serious degradation of service quality, indicating a significant problem that warrants de‑forbearance.

4817             The soft trigger point signals a less serious problem, which nonetheless warrants investigation by the Commission.

4818             Finally, since forbearance is premised in part on market share and structure, we believe it would be appropriate to use these factors as a basis for de‑forbearance.  As with the other areas, we are proposing two triggers.

4819             First, if an ILEC's market share were to rise above 85 percent in a forborne market, this would indicate a radical change in market circumstances and would warrant immediate de‑forbearance.  The second, soft trigger, would be met if an ILEC's market share were to rise above 70 percent in a forborne market or the number of LECs serving a market, who each had more than 5 percent share, were to drop below 3.

4820             This would strongly suggest a significant weakening in market forces and, accordingly, the Commission should initiate a proceeding to investigate the state of the local market and determine if de‑forbearance would be appropriate.

4821             Those are the conditions we believe are necessary to implement the non‑market policy objectives of the Telecommunications Act and protect the interests of consumers and protect the competitive process itself.

4822             MR. JANIGAN:  Thanks very much, Chris.  That is a brief summary.

4823             In closing, I would like to touch upon two final issues.  In the course of this proceeding the Commission has heard a lot about getting out of the way so the market can work and prices can move to competitive levels.  The ILECs would have you believe that prices set by the Commission are inherently wrong and prices set by a market, any market, even one dominated by an ILEC, are inherently good.  We don't believe this is the case.

4824             When we asked the ILECs and their experts how the Commission or anyone else could know whether the regulated prices were too high, which the ILECs alleged, or too low, which the ILECs also alleged, we got a consistent answer, there is no way of knowing.  Telus put it very succinctly, a regulator cannot know precisely what a competitive price might be.

4825             Yet, the ILECs claim to know that the prices are too high or too low and that the Commission is getting it all terribly wrong.  Well, we think that this is singularly unhelpful and aimed at convincing the Commission to forbear before competition gets firmly rooted.

4826             The only sound way to look at prices is on the basis of costs, that is what basic economic theory and common sense tell us.  So if, while waiting for competition to evolve, the Commission sets prices on the basis of costs it cannot go very far wrong.

4827             Secondly, the Commission has also heard a lot about the dangers of forbearing too early or too late.  This is the so‑called Type 1 and Type 2 errors.  In our view, the choice between these errors is clear.  If the Commission waits longer than is strictly necessary to forbear consumers may be denied some of the benefits of full robust competition.  This would be an unfortunate thing, but not disastrous.

4828             On the other hand, if the Commission were to forbear too soon competition could be seriously undermined.  Prices could rise and there could be a serious deterioration in quality of service.  The timeframe for service initiation or repair could become unacceptably wrong. People could be left without service for days, some people might be even forced to drop their local exchange service if they were in severe financial difficulties.  This scenario could easily lead to severe consequences for some Canadians.

4829             In our submission there can be no doubt, if the Commission is to err it should err on the side of caution, it should not forbear too soon.  However, we believe there is no need for the Commission to err at all.  The Consumer Groups have proposed a moderate balanced approach to regulation which aims to give full effect to all of the policy objectives of the act and protect the interests of consumers at every stage.  We have proposed a practical, competitively neutral approach that will protect and benefit consumers.

4830             We will be happy to take any questions that you might have about our proposals.

4831             THE CHAIRPERSON:  Thank you, Mr. Janigan, gentlemen.

4832             Commissioner Pennefather...?

4833             COMMISSIONER PENNEFATHER:  Thank you, Mr. Chairman.

4834             Good afternoon, gentlemen.  Thank you for your proposals and thank you for the chart that is attached to your presentation.  I think that there may be a piece missing and that is the de‑forbearance proposals, but I am assuming they are comprised in the final square and I will go through that with you.  But if we wanted to get a full picture of your regulatory framework, I have seen it as three stages ‑‑ three steps, the transition regime, forbearance itself and de‑forbearance or re‑regulation, three components.  Would I be correct that there are essentially three components to the framework you are proposing?

4835             MR. JANIGAN:  I think that would be correct, Madam Commissioner.

4836             COMMISSIONER PENNEFATHER:  Okay. So I would like to go through those components just to be sure that we have full understanding and perhaps clarify a few points.

4837             The transition regime which you rightly say is not supported by many parties to this proceeding, first of all it is described in some detail in your June submission on page 36 and, in fact, runs from paragraphs 116 to 125.  But it comes down to three stages and three thresholds.

4838             Is that correct?

4839             MR. JANIGAN:  Yes, that is correct, Madam Commissioner.

4840             COMMISSIONER PENNEFATHER:  Essentially we are looking at if LECs were to gain or maintain 10 percent or more of a market share in a market for a period of 12 consecutive months, that is step 1.  You say at that point, we could eliminate the no contact restriction under the winback rules.

4841             Forgive me if I'm shortening the discussion a little bit for time, but that is the first step.

4842             MR. JANIGAN:   That is correct.

4843             COMMISSIONER PENNEFATHER:  The second step would be should the competing LECs gain and maintain 15 percent or more then an ILEC could file a tariff to set out a maximum/minimum rate for local exchange services in the relevant market.

4844             Correct?

4845             MR. JANIGAN:  That is correct.

4846             COMMISSIONER PENNEFATHER:  Finally, if competing LECs were to gain and maintain 20 percent or more for 12 consecutive months the Commission could permit the ILECs to offer promotions in that market which would not be required to be offered across an entire rate band.

4847             So those are the steps, leading us from what I call your marketing flexibility box, that is the transition regime in your graph here and when ILEC's share mains 80 to 90 percent.

4848             So just a couple of questions about that.  Those are the components.  Each of them have a 12 consecutive month period to say that while a LEC has gained 10, 15 or 20 percent, it is also maintained over that 12 month period.

4849             What is your comment on that approach in light of the fact that, as you have noted yourself in your submission, and certainly in Professor Bauer's discussion, technological change and innovation is a very important component not only today, but going forward, which will affect analysis of market share, affect conditions, affect the approaches we want to take here?

4850             What is your comment on whether your transition regime proposal is realistic in light of the speed of technological change, particularly with ‑‑ I am assuming we could be, at a minimum, at a three‑year period here, of three stages, three years, 12, 12 and 12.  They may be not exactly that way, but can you just comment on this timeframe and why you have chosen this timeframe?

4851             MR. JANIGAN:  I'm going to ask Professor Bauer to address that.

4852             DR. BAUER:  Technology makes us all very excited and we tend to overestimate how fast technology progresses.  I can't resist the temptation to give you a forecast as to what the number of Voice over IP subscribers will be three years down the road.  It says in a forecast by a reputed consulting firm there will be 16 million Voice over IP users in the United States.  This forecast was made 10 years.  We are a far cry, you know, from those number of competitors, so your concern is legitimate.  I think our framework poses a timeline on it that is compatible with the speed of technological change as we indeed experience it, not as we think it will unfold, but as we experience it.

4853             Now let me also say one other thing, because I think this is very important early on to understand.  We do not believe that the framework that we establish here is a panacea.  This is really a proxy to make good and simple policy. What we ideally would like to have in order to make forbearance decisions are performance data that show us how this is marketed and a more liberal framework unfold.  What are the prices?  What is the service quality?  Unfortunately, at the time a decision needs to be made those data are not available.  So as a second best approximation of the knowledge, we propose these thresholds and we think they are given ‑‑ many many years of empirical economic research and given a lot of experience with regulatory forum in North America and other places, that these are reasonable thresholds and that they are fairly robust to technological change and also to the speed of technological change.

4854             I think our framework is also flexible enough if conditions should change radically.  In fact, you know, if our expectations as to the speed of technological change are wrong, then it could be modified.  So we don't look at this as cast in stone, but given current conditions and reasonable expectations of technological change we think this is a reasonable approach.

4855             COMMISSIONER PENNEFATHER:  Thank you, Professor Bauer.

4856             MR. TAYLOR:  Can I add just one little thing, because if I am reading your concern, Commissioner Pennefather, correctly, we are not proposing that you have to spend three years in the transition regime.  If the LECs gain market share up to 20 percent in the first 12 months they get, you know, the first two ‑‑ all three of those additional measures of flexibility would kick in.  The 12 month is just to make sure that it is not a transitory thing, that it actually exists for some period of time.

4857             COMMISSIONER PENNEFATHER:  Thank you, Mr. Taylor.  That point has been raised, that the 12 month, with some parties is also to see it is ‑‑ make sure it is maintained.  That is why I used a bit more inflection on the word maintain because I am assuming that.  But I wanted to take it as a model, that if you stretched it to a certain point it could be three years and why.

4858             One of the other interesting questions about your transition period is the choice of flexibility.  You are proposing flexibility in the safeguards on promotions and winback rules.

4859             One of the questions we have is if in fact we proceed to go for your approach and grant that flexibility for competitive safeguards on promotions and winback rules, for example, can you comment on the effect this would have on Consumer Groups?  Which Consumer Groups would benefit, which Consumer Groups would not?  I am looking at this now, not from the sense of timing, but from the sense of, in fact, in actuality, and you make the point of let us look at the actual situation, Professor Bauer, not what will be, but what is.  If those are the flexible tools, what will be the impact on consumers in terms of choice, in terms of competition in your view?

4860             MR. JANIGAN:  I think, Commissioner Pennefather, that is a little bit difficult to predict, because we have to sort of anticipate what kind of winbacks or promotions that the ILECs themselves may choose to offer.

4861             I think as a general rule, it is probably fair to say that the higher volume consumers are the consumers that are ‑‑ consume, you know, the higher volume of telecommunication services would likely be the key beneficiaries of any winback or promotions associated with this flexibility, but not necessarily exclusively.

4862             COMMISSIONER PENNEFATHER:  Okay, I think the reason I‑‑amongst others‑‑the reason I was asking was that competitive safeguards such as the promotions winback restrictions are there to assure competition and therefore ensure choice as much as possible to consumers.  Basically, on this staged approach you are backing of those safeguards which might assume the opposite. But you are saying to us that 10 percent, 15 percent and 20 percent there is some security to that effect?

4863             MR. JANIGAN:  Well, because we have established a transitional regime with some degree of flexibility, we are hoping that we can both potentially allow the consumer market to take advantage of benefits associated with the winbacks and promotion of the ILECs at the same time, not compromise unduly the emerging competitive market.

4864             Once again, as Professor Bauer has stated, these proposals are not written in stone, they are an attempt to meet those competing demands and to provide some kind of realistic framework so that some flexibility can be provided and the benefits that may be associated with these winbacks can be provided to consumers.

4865             COMMISSIONER PENNEFATHER:  Thank you.

4866             You will see where, as we go through each of the steps, one of the concerns I had in trying to understand how it would all work in the end is that everyone of these steps changes the picture.  It is a moving target, as my colleague Madam Noël keeps whispering, is one of the challenges here, that as you take your 10, 15, 20 percent steps you are changing the environment in which you are going to analyse your next step at 80 percent to 70 percent market share.

4867             So again, it is important to understand the details and how and why you picked those particular flexible points.  If we get then to the third box in, which is the ILEC shares 70 to 80 percent and, again to summarize, your position, it is at this stage‑‑and you will correct me if I am wrong‑‑that the Commission could forbear.  In other words, there would be three or more facilities‑based competitors in the market‑‑and we will get back to a discussion of geographic and product market in a moment‑‑each with at least 5 percent share and the ILEC's share is less than 70 percent for 12 consecutive months.

4868             Have I got it?

4869             MR. JANIGAN:  That is correct, Commissioner.

4870             COMMISSIONER PENNEFATHER:  So if I understand then, in terms of competitors they have to be facilities‑based?

4871             MR. JANIGAN:  That is correct.

4872             COMMISSIONER PENNEFATHER:  Three as opposed to two, as some others have recommended ‑‑ and as you said, Professor Bauer, in your paper some theory says five is a minimum to assure competition ‑‑ and each would have to have at least 5 percent, so say simplistically that is 15 percent.  And say that the ILEC's share was at 70, who else then is in the market to make‑up the balance?

4873             DR. BAUER:  The 5 percent threshold was just to make sure that you don't have a midget of a competitor who is irrelevant.  There is a danger to just count competitors and not look at the size distribution of competitors.  So the 5 percent is a safeguard against that phenomenon occurring if there is three, but one is irrelevant.

4874             Secondly, the three competitor criterion is proposed as a way to mitigate against some of the pitfalls of duopoly.  Now, a number of the submissions have emphasized that in markets for this high sunk cost, such as telecommunications markets are, duopoly is sufficient for intense competition.  But they only point out one possible behaviour of those two competitors, is that they engage in fierce price competition, but there is at least two other options.

4875             There is that one of the duopolists, the one who is more experienced in one service takes on a leading role and the other falls tacitly, or that they correlate behaviour.  If you look at those, the likelihood of these three behaviours to occur, price competition factors in many cases the least likely type of behaviour.

4876             But the third competitor changes the situation very very strongly, even if it is a small competitor.

4877             Now, we do take into account in specifying these thresholds the fact that telecommunications is a unique business that you have high sunk costs. In other industries where sunk costs are less those thresholds would be much lower, you would want to have more competitors, you would want to have higher market shares.  So our proposal, in fact, already recognizes explicitly that we are in a unique business, the merits because of the high sunk cost nature of some of its investment increasing, inching those thresholds up, compared to other yardsticks that are used in anti‑trust law for example.

4878             COMMISSIONER PENNEFATHER:  So if we look at it another way then and we say that the ILEC share is 70 and competitors have achieved, amongst them, 30 percent for sake of argument, within that 30 percent or at least three players, each of which has 5 percent, because then they can be assumed to be viable and sustainable if I understand you correctly.

4879             Some of the submissions have, including the Commissioner of Competition, have however said‑‑and if I think I have understood this ‑‑ that this ILEC loss of a minimum of 30 percent of households would not serve consumers, that in fact would deny consumers the full benefits of competition.  Would you care to comment?

4880             MR. TAYLOR:  Before Professor Bauer or Michael picks up on that question, there appears to be a misunderstanding in terms of what the three competitors ‑‑ the three competitors are the ILEC, one other competitor and one other competitor.  So we are talking about, you know, the ILEC would have 70 percent, somebody else has 5 percent and somebody else has 25 percent.  We are not requiring that there be four competitors in the market, four facilities‑based competitors.  With respect to the question ‑‑

4881             COMMISSIONER PENNEFATHER:  Thank you, that was not clear to me.

4882             MR. TAYLOR:  Yes, Okay.

4883             COMMISSIONER PENNEFATHER:  I had assumed that you were talking about three in addition.

4884             MR. TAYLOR:  Yes, no I'm sorry.

4885             COMMISSIONER PENNEFATHER:  Do you have any comment though ‑‑ it would be interesting to hear your comment on the point I raised about even if achieving a 70/30 balance, that it still is too high a market share and that consumers would not benefit.

4886             MR. JANIGAN:  Commissioner Pennefather, could you reference that portion of the argument of the Commissioner of Competition?

4887             COMMISSIONER PENNEFATHER:  Page 5, paragraph 23, about 8 lines down.

4888             MR. BAUER:  It is important to keep in mind that in our proposal the ILEC gains considerable competitive flexibility before it is fully forborne.  So in that sense the proposal allows ILECs to compete more effectively by offering new services, innovative pricing plans and so forth.

4889             As we heard in this proceeding, as you heard, competition has many dimensions: how we bundle services, how we price services, the quality of service that is being offered, and so forth.  In our proposal, because it is staged, there is an increasing range of flexibility for the ILEC.  So I don't see why this would deny consumers the benefits of competition.

4890             The 70 percent is chosen as a threshold because given the current state of technology, given our knowledge of the economics of these markets, it is a reliable and cautious threshold when you can conclude that markets will be robust. And it doesn't necessarily say that competition may not work if the market share of the ILEC is higher. What it means is that we have to question where the market will work and markets will work in any case.  So those duopolies may work under certain conditions, but it is relatively unlikely compared to a situation where the ILEC has less than 70 percent of the market.  That is why we propose the 70 percent as a very safe threshold.  It is safe enough that you can trust the market forces, from this point one can be relied upon.

4891             COMMISSIONER PENNEFATHER:  Just getting back to the previous point, to be very clear on your proposal, I am at page 12, paragraph 44.

4892             So the Commission should read that:

                      "With respect to local exchange services in a geographic market if the market is served by three or more facilities‑based competitors, each with a market share of not less than 5 percent, and the ILEC has a market share of less than 70 for 12 consecutive months."

4893             So three of more includes the ILEC?  You can understand a misreading of the paragraph, however?

4894             MR. BAUER:  Yes. Maybe it was ambiguous, but Mr. Taylor clarified the meaning of it.  So three, including the ILEC.

4895             Of course that means in mathematical terms, if you say the minimum market share has to be three, that one of the three has to be more than 5 percent market share.

4896             COMMISSIONER PENNEFATHER:  Well, that was my question ‑‑

4897             MR. BAUER:  Right.

4898             COMMISSIONER PENNEFATHER:  ‑‑ is where was the balance of percentage in the sense of ‑‑ and you do a bit of math.

4899             MR. BAUER:  All I am saying is the ILEC cannot be more than 70 and the others have to be minimum of 5, but in order to reach 100 percent one of the carriers, of course, has to fill the gap.

4900             COMMISSIONER PENNEFATHER:  When we look at the ‑‑ just before I go on to the conditions and safeguards which you propose for the forbearance period, if I have that correct, when you are looking at market share in the transition regime you have stated that what you include in the market share, that is to say the close substitutes which you have quite a bit of discussion on, does not include wireless, does not include VoIP -- am I correct -- and only includes local exchange service and cable telephony.

4901             Is that correct?

4902             MR. JANIGAN:  That is correct, Commissioner.

4903             COMMISSIONER PENNEFATHER:  Is that the same for your assessment of market share at the 70 to 80 percent level? Would you take the same approach in your nominator and denominator?

4904             MR. BAUER:  The same approach would be used throughout.  Let me clarify, though, just to make sure how this proposal is to be interpreted.

4905             What we are saying is that in looking at let us say the denominator, the total market against which we measure the market share of the ILEC, we do not include all wireless consumers, the reason being is that more of these wireless consumers both subscribe to fixed service and to wireless service. So the majority of consumers wireless is a complement at this point in time.  I think the evidence is very compelling.

4906             However, we say that in order to come up with a careful analysis, we would have to include in the denominator consumers who have elected, who have revealed their preference to sign off fixed service and only have wireless service. So consumers who have replaced wireless service with, let us say, Voice over IP or with wireless service, those would logically have to be counted in the total size of the market.

4907             But we do not propose to generally consider Voice over IP consumers who may have Voice over IP in addition to a fixed line or wireless consumers who may have wireless service in addition to a fixed line, to include those in the total of the market.  We want to measure the ILEC size and the size of competitors based on those consumers who are either local exchange carriers or have explicitly elected to unsubscribe local service and have only wireless or have only Voice over IP.

4908             COMMISSIONER PENNEFATHER:  Professor Bauer, I have read your paper and of course the submissions, and this is discussed at length and you have charts and so on, but it would be helpful in fact if you could provide us with a clarification on the nominator/denominator transition regime and nominator/denominator in the ‑‑ I call it the decision to forbearance analysis of the 70 to 80 percent.

4909             Could you just make that clear for us?

4910             MR. BAUER:  I hope I didn't create the impression that the method how market shares are assessed changes.  It is the same method, you know ‑‑

4911             COMMISSIONER PENNEFATHER:  Okay.

4912             MR. BAUER:  In fact, it is a contingency framework, it is very simple.  You look at the share of the ILEC and the size of the market, as defined, those unique customers of local exchange service, of wireless and Voice over IP ‑‑

4913             COMMISSIONER PENNEFATHER:  What I am asking is just a demonstration of that in writing if you could.

4914             MR. JANIGAN:  We can undertake to provide that, Commissioner Pennefather.

4915             COMMISSIONER PENNEFATHER:  Thank you.

4916             In your framework as well, one of the important components of that framework is the simple conditions and safeguards, which you described as well today, which would be part of the conditions to agree to forbearance.

4917             They are set out at page 20 of your written agreement and you have repeated them today, I think, Mr. Taylor, in your subbing presentation here.

4918             If I have understood it correctly, when we come to the forborne ILECs, other than service availability, which I believe is the point dealing with a requirement to offer standalone service, the other three, price, quality of service and market share, are also triggers for re‑forbearance.

4919             Am I correct?

4920             MR. TAYLOR:  That is correct.

4921             COMMISSIONER PENNEFATHER:  So in addition to analyzing those points to agree to forbear at that market share level, and market share being one of those conditions, on an ongoing basis those would be the triggers to assess whether there would be re‑forbearance?

4922             MR. TAYLOR:  That is correct, yes.

4923             COMMISSIONER PENNEFATHER:  And that is the column that I think is missing here in terms of looking at the complete picture of what you are proposing.

4924             MR. TAYLOR:  Well, that is quite correct.  I guess with respect to the chart, the chart is optimistic, but once you forbear you won't have to de‑forbear, so we never make that loop back up.  But you are quite correct, it is not shown.

4925             COMMISSIONER PENNEFATHER:  Well, the reason I raise it is that in fact it was interesting in Professor Bauer's paper to read your description of forbearance can be seen as a form of conditional deregulation under conditions of incomplete information and uncertainty.

4926             In other words there is a sense -- and I will come back to this at the end -- where this total picture is really one of conditional regulation.

4927             If you look at the triggers that are included in the reasons to forbear, they are the triggers that would ask you to re‑forbear.  And if I am being overbearing, forgive me.

--- Laughter / Rires

4928             MR. TAYLOR:  No. That is quite right.

4929             I mean, the Consumer Groups in considering this had to decide whether or not to take an approach which would require the type of analysis discussed to some extent in Dr. Bauer's paper of what you do to look at to make sure, to determine whether or not there is any market power and the type of analysis that the Competition Bureau has put forward here, and then go through that analysis, determine that no, there is no market power, okay, you can forbear or to take a slightly more lighter-handed approach which permits the ILEC's flexibility at various stages but always has a safety net behind it that says oops, maybe things aren't working you.

4930             The very first piece of flexibility would be the winback contact.  That is simply the ability to call somebody and say are you sure you don't want to come back to us?  It is not offering them any sort of special deal; it is just a call, a winback contact.  That gives them a little bit more flexibility.

4931             If as a result of that their market share goes back up to 95 percent, the Commission is now in a position to say whoops, giving them that ability to do that winback is not working so we need to, you know, look at this again.

4932             COMMISSIONER PENNEFATHER:  That is my point exactly, Mr. Taylor.  The transitional regime and right through to the trigger, soft or hard, at the end to say whoops we have to go back, is all a picture.  It is all the framework that you are proposing to us and it is in fact ‑‑

4933             MR. TAYLOR:  That is right.

4934             COMMISSIONER PENNEFATHER:  ‑‑ as Professor Bauer has said, a form of deregulation.  In other words, unlike the previous presentation, it isn't so much an approach that says get it right at the beginning, wait, and then there will be less need to de‑forbear.  Really, you are looking at the safety net as being an essential component of the decision to forbear.

4935             MR. TAYLOR:  That is 100 percent correct.  The safety net is key.

4936             COMMISSIONER PENNEFATHER:  Got it. You are aware of the structured rule of reason test as proposed here by the Commissioner of Competition; correct?

4937             MR. JANIGAN:  Yes, we are.

4938             COMMISSIONER PENNEFATHER:  Looking at an analysis and assuming that we are in the phase of analyzing, the ILEC share is approaching the 70/80 percent so we are looking at a discussion on that analysis.  Do you have a comment on the part of the test which would examine the entrants' and incumbents' cost structures, including whether the entrant has similar or lower variable costs than the incumbent?

4939             Would you care to comment on that component of the test?

4940             MR. BAUER:  This may be a piece of information that might be very difficult to produce. What concerns me with the particular approach proposed, this rule of reason test, is that it is based on a conceptual model and I doubt whether it is adequate to analyze the situation that we are trying to understand.

4941             Just looking at the variable costs alone gives a very incomplete picture, but it ‑‑

4942             COMMISSIONER PENNEFATHER:  I am sorry to interrupt.  It is not suggested as a ‑‑

4943             MR. BAUER:  No, as opposed to ‑‑

4944             COMMISSIONER PENNEFATHER:  ‑‑ it is a component of several steps.

4945             MR. BAUER:  Right, right.  As opposed to, for example, also looking at the capital costs.  The capital costs I did not see mentioned in the test.  I understand that there are other components of the test, I am fully aware of this.  But, as I said, it will be very difficult probably to come up with good estimates as to what the variable costs are of different carriers.

4946             If I may just say one more thing about this test, one problem is ‑‑ and we discussed at length among ourselves what would be an administratively simple approach, and I think we would all feel comfortable with a test that looks on a market by market basis, uses antitrust and competitive analysis to assess the situation.

4947             Our main concern was that it might be an administratively very time consuming process.  So the pragmatism drove us to a certain degree to propose sort of a simplified, if in a sense perhaps second-best framework, but that would be administratively feasible.

4948             COMMISSIONER PENNEFATHER:  As I understand it, the structured rule of reason test is really an analysis of whether to forbear, and if I have mistaken this I am sorry about that.  I am really trying to get a look at your whole framework and you are looking at not just the test to analyze to forbear, but you are looking at tests right through inclusive of whether to re‑regulate. Correct?

4949             So in the post‑forbearance ‑‑ let's call it ‑‑ period where you are looking at your hard and soft triggers, is looking at costs an important component or is it also impractical in that sense?

4950             MR. BAUER:  In our framework looking at the cost is not an explicit component.  It is essentially service quality market shares.

4951             MR. JANIGAN:  Further on that, what we have attempted to do is to take a look at the body of evidence and tried to develop tests that are simple to apply and reflect as best as we are able the appropriate measures that would give the Commission confidence.

4952             Certainly, the six‑part or four‑part analysis that is associated with the Commissioner of Competition's decision is an alternate route. The difficulty with it, and when you go through the steps, is that many of these steps require subjective judgments that may be based on objective or economic analysis and considerations, things like degree of rivalry, estimates of economic innovation and development.

4953             All of those are very difficult kinds of things for the Commission to grapple with and would require proceedings that would probably be as lengthy as the ones we are here on today. 

4954             What Dr. Bauer has attempted to do in his evidence is to try to synthesize that into some test that most of the economic evidence would support and may be easy to apply from the Commission's standpoint.

4955             COMMISSIONER PENNEFATHER:  Thank you.

4956             Let me just step back a bit, as I said I would do earlier, and verify with you your position now on the geographic market.

4957             As I understand it, you are now looking at the LIR as an appropriate definition and I understand there is a number of concerns and discussion, and considerable lengthy discussion, on this point in your submissions and your paper.

4958             On that point, I noted in looking through the various interrogatories that, for example, the Coalition has discussed the LIR as inappropriate because pockets of consumers post‑forbearance would have no choice.  Others have said, for example the Coalition again, that consumers have simply no concept of what an LIR is.

4959             Can you clarify for us briefly why you have come to that position and comment on, from a consumer point of view, less an economic theory point of view -- I am trying to focus our discussion more now to the consumer's side and get your views on these matters as representing the Consumer Groups obviously -- the concerns that have been put to us that there is difficulty in protecting consumers in such a wide area.

4960             MR. TAYLOR:  Okay, I will start.  As you know, our first cut at this as the local calling area and as a result of some interrogatories from the Commission pointed out an administrative defect or problem with that approach.

4961             The basis for choosing the local calling area was primarily community of interest.  It is large enough to permit stability and given the overall package includes a de‑forbearance mechanism, we don't want swings back and forth in market share to be triggering forbearance or de‑forbearance, that sort of stuff.  So you need a large enough area where that would be unlikely to happen, and a local calling area we felt was that.

4962             Well then it became clear that administratively a local calling area was not likely to work because it would not be well defined, the choice was well where do we go and we felt the local interconnection region was the more appropriate landing ground for that.

4963             With respect to the idea it again has a definition that is defined according to municipal/political boundaries, et cetera, and so it is to some extent a recognizable region for people, certainly more meaningful than a local exchange ‑‑ I mean, I do not know anybody around here who can identify the boundaries of their local exchange.  And it is a larger and more likely to be more stable.

4964             Our view is that it is almost certain, not entirely certain, almost certain that in either the local calling area or an LIR there will likely be pockets of consumers who will not be served.  That is why we put in the price ceiling as a safeguard, that the last‑approved tariffed rate is a price ceiling.  You cannot go above that.  You go above that ‑‑ we made that a hard trigger, rather than a soft trigger to make sure that it was an effective safeguard ‑‑ you go above that, you are reregulated.  That is all there is to it.

4965             So no, in our view, no ILEC is going to go above that and risk deforbearance in those circumstances.

4966             So the way to protect the consumers in that larger geographic area where there will be pockets, and there are almost certain to be pockets in any geographic area, is to have that type of a safeguard.

4967             Will they get the full benefits of competition?  Namely will they necessarily always get marketed to them the best prices?  Maybe not. But at least they will have the ceiling protection.

4968             COMMISSIONER PENNEFATHER:  One of the points of a trigger to review a forbearance decision and re‑initiate reregulation is consumer harm and I was wondering that if we, the Commission, determine that harm to consumers would constitute a criterion for reviewing forbearance, then can you provide us with examples of harm to consumers that could be used as a basis for a review of forbearance decision?

4969             MR. TAYLOR:  Well, the three areas that we have identified as conditions on the ILEC that could be considered to be consumer harm were quality of service and that if there was a degradation in quality of service, you know, if it is a serious degradation then you are looking, you know, couple of quarters worth or very serious in a single quart, that is consumer harm.  You either come back with an immediate reregulation or you look at it to try and deal with it.

4970             The second one is the price protection.

4971             And the third one that we identified was the availability on a standalone basis and we felt that if the market were to move in a way to make standalone service unavailable, then a number of consumers ‑‑ there is a certain consumer segment that would be very harmful to them, because they either simply do not want or perhaps do not want and cannot afford to buy the bundle of services that would be offered, so those were the three protections that we came up with.

4972             COMMISSIONER PENNEFATHER:  Thank you.

4973             I had assumed that the standalone service was there and that my understanding of your proposal that it would remain a requirement throughout the regulatory framework that you've proposed; is that correct?

4974             MR. TAYLOR:  That's correct, yes.

4975             COMMISSIONER PENNEFATHER:  Thank you for answering my questions.

4976             Those are all my questions, thank you, Mr. Chairman.

4977             THE CHAIRPERSON:  Thank you. We'll break for 15 minutes now and resume with the questioning after that.

‑‑‑ Upon recessing at 4:04 p.m.

‑‑‑ Upon resuming at 4:20 p.m.

4978             THE CHAIRPERSON:  Order, please.  À l'ordre, s'il vous plaît.

4979             I think we are in a position at this point to give you a sense of the scheduling for the balance of the hearing.

4980             We will finish with this panel, of course, and then take this the CCTA panel. I am not sure we'll finish that panel. We will probably go until 6:30 tonight and the balance of the presentations tomorrow and we will begin the reverse order presentations at 9:30 on Friday morning.

4981             So for those of you who need to plan, that is our thinking for the balance of the hearing.

4982             We will resume the questioning now.  Commissioner Langford.

4983             COMMISSIONER LANGFORD:  Thank very much, Mr. Chairman.  Welcome back, folks.

4984             I do not have very many questions and I think I want to start right near the end, if I can, basically referring to your pages 11 and 12 of your oral presentation today and whatever pages those come on on all the other paper that you gave us.

4985             What I'm wondering about, very simply, is about the kind of ‑‑ I don't know much, the sort of currency of the triggers you give, how long they would be current.

4986             I understand what you are trying to do with them, but it seems to me that after a number of years a set frozen last tariff price might have less meaning.

4987             I did read your full submission and I read your final argument.  I don't recall whether you in any way tied it to the cost of living or anything like that.

4988             Would you have some way of trying to keep it current?

4989             MR. TAYLOR:  That is an excellent question and the decision we made when discussing what type of price ceiling safeguards ‑‑ pricing safeguard to put in was to ‑‑ I guess you could say since "error" seems to be in the air, to error on the side of simplicity rather than to propose something that looks an awful lot like ongoing price cap regulation or something of that sort, so we did not include any sort of inflation, we did not include any sort of productivity factor or anything of that sort.

4990             And so you are quite right.  If you were in a situation where, you know, the Ottawa‑based LIR was forborne and there were certain consumers who were not being served in a competitive fashion, they would enjoy the protection of that ceiling, but that ceiling would not give them the benefit of the productivity improvements that would occur over time.

4991             And, in particular, if you are looking at a situation where there are significant technological changes, such as we all hear about every minute, where costs could go down quite significantly with new services coming on board, they arguably might not get the full benefit of some of those.

4992             Now, if it is a really radical change and you are having to switch out your terminal equipment and you are really talking about a true VoIP‑based service, well, if that customer is going to get that service in their location, presumably they will get it priced ‑‑ well, I would assume from a practical point of view it would be priced uniformly throughout most of an LIR, because to do specific pricing may not ‑‑ but the short answer is yes, it is limited in its protection.

4993             COMMISSIONER LANGFORD:  Okay. I am not ‑‑ this is not an exercise in trying to display your limitations, but I want to poke at it a little more, if I can, as gently as I can.

4994             But it seems to me that other things could happen to this thing that we are now calling, you know, basic telephone service sort of thing, I think is the term you use here, and we can give it a number of services, but it is your basic phone.

4995             We have seen the price of long distance in certain bundling configurations drop to almost nothing and we have heard experts tell us that they could make an argument that it has no value under the present technological configurations and that it could be given away at the same price as local telephone service.

4996             So what happens if the whole notion of what basic telephone service is begins to change incredibly dramatically in that way as people spar for, you know, market share and to try and attract customers.  Some people have told us in this hearing they do not have access to all the bundling capacity, so they would rely more on service, more on different products.

4997             I just wonder whether there is not another way we could do this ‑‑ and it is pretty hard to ask you to do this at the drop of a hat ‑‑ but I just wonder whether there are not any number of ways in which this figure could lose its currency.

4998             And since it is such an important trigger to re‑forbear, I just wonder whether you have thought it through in that sense as well, in the sense of product changes.

4999             MR. JANIGAN:  I think it is clear that the trigger that we proposed has a time‑limited characteristic associated with it and certainly if the conditions in the market changed this trigger may wish to be ‑‑ the Commission may wish to revisit that in order either to change the trigger or change the characteristic of the trigger from a hard trigger to a soft trigger.

5000             But we have taken the ‑‑ to some extent we have taken the ILECs at their word, as Telus noted yesterday, that they felt that this proceeding was about price cutting rather than price increasing.

5001             COMMISSIONER LANGFORD:  We have other parties in here who have taken the ILECs at their word at their peril, they tell us.

5002             Well, if you've got that kind of faith, then that is a wonderful, refreshing thing to see in these ever‑changing times.

5003             MR. TAYLOR:  Can I add one small thing, which is, I mean, we did put in the caveat in our remarks today, and I believe in the written submissions as well, that, you know, these ‑‑ these conditions, the ILEC‑specific conditions, if market conditions justify modifications, you know, we would envision modifications being made.

5004             Now, the primary type of modification we are envisioning is the market developing in a, you know, flourishing manner and therefore these safeguards not being as necessary.

5005             But an alternative take on that would be the sort of thing that you are hinting at or suggesting might occur, which is, you know, five years out the market takes a left turn that none of us actually anticipated because of radical technological change or something, in which case, you know, a reassessment certainly of these conditions would be appropriate.

5006             COMMISSIONER LANGFORD:  Well, maybe you will want to think about that.  You get another five minutes tomorrow, so I will leave that with you.

5007             On another area, on the opposite end, on the getting in rather than the getting out of forbearance, I am a little vague on how to read your three competitors all told, you know two competitors an an ILEC, and I am not entirely sure, perhaps because I am a product of the present environment, but I am not entirely sure how you define a facilities‑based competitor.

5008             I certainly do not have any trouble with the ILEC.  I do not have any trouble if one of the facilities‑based competitors, say Rogers or Shaw, that is pretty clear, but what about the next one, assuming it is not a second cable company?

5009             MR. TAYLOR:  Well, I imagine Professor Bauer may have additional comments he wants to make, but we are looking at rather than a reseller, like a loop reseller, that would not be a facilities‑based competitor in our take.  And as the previous panel up here, the UTC folks, pointed out, I mean, that type of loop reseller is vulnerable and cannot in our view discipline the potential duopoly activity in the same way that a true facilities‑based competitor could.

5010             So who would be a potential ‑‑ if we're looking at the ILEC, everybody is looking at the cable industry behind me and we could also look potentially at the UTC people.  You know, the power utilities could be a potential.  There could be a new fixed wireless competitor come in.

5011             Up until a year ago you could have perhaps argued more forcefully that a mobile wireless could be more likely to develop into a true competitor given the directions that Microcell was going in, but since its no longer there ‑‑ but who knows, there could be a change in heart of how people approach mobile wireless.

5012             COMMISSIONER LANGFORD:  What about an organization like Allstream, that has a lot of facilities, but told us yesterday that they are still renting some, they are still leasing some.  They do not have it all, but they are pretty close.

5013             I mean, what I find interesting about your test is that you have given us a full package.  You are, you know, one of the few people who have come to us and you've given us the full meal deal here and it is interesting.  You have told us how to get in; you have told us about a transition if we need it; you have told us about some escape hatches; you have told us how to get out of forbearance if it is not working.

5014             And it is interesting to get the full spectrum and I don't mean to be just sort of poking holes in it as an academic exercise, but I have trouble if the package has a few fatal flaws.

5015             Let me try another one on the kind of ‑‑ leaving you with the Allstream example, but let me pile another one on top of it.  I.

5016             Am not quite sure what would happen if it got to sort of a duopoly, which is perhaps nobody's favourite, but it literally was a 50/50 market share.  If the worse fears of Telus and Bell that we heard Monday, Tuesday, whenever ‑‑ it is all one blur now ‑‑ came true that their lunch did get eaten big time, or if nobody ‑‑ I mean, you have said in your reaction to the Aliant application, well, it is easy, there is only one facilities‑based competitor, so deny.

5017             But what if they get up to 50 percent, EastLink?  It just seems to me that there has to be a time or logically there has to be a time where even if you're three player test isn't met, the duopoly is so strong ‑‑ what did Eugene Whalen used to say ‑‑ "even a blind man on a galloping horse" could see problem.

5018             I will leave it at that.

5019             DR. BAUER:  Let me to try to answer this.  This is a very good question.  We discussed this and we are aware of the issues that you raised.  It's not that we tried to ignore those.

5020             But what we would suggest is if situations emerge in a specific relevant geographic market, it is relatively unlikely at this point in the foreseeable future that the scenario that you described will emerge on a national basis, so there might be, though, some markets where this is the case.

5021             Clearly, those thresholds may not be the best to assess the situation and at least I think in my evidence I mentioned the fact that those thresholds could be rebuttable, so one could ‑‑ in cases where special factors are at work ‑‑ argue that these are not the valid thresholds.

5022             Now, this is not a framework for eternity.  This is a framework for just a number of years and it is contingent upon technology, as you rightly point out.

5023             COMMISSIONER LANGFORD:  Contingent upon what?

5024             DR. BAUER:  Upon technology.

5025             COMMISSIONER LANGFORD:  Right, yes.

5026             DR. BAUER:  The state of the markets and those change ‑‑ that framework may lose its validity.

5027             We are pretty convinced that this framework will hold for the next five, maybe even ten years as a framework to decide most cases and that was really was the driving spirit, to come up with a relatively simple framework that does not force the Commission to decide whether there is market power or not market power, because that is not how real markets work.  That is a fiction.  Market power comes in shades and we tried to mimic this in the framework.

5028             Secondly, to create a framework that allows more or less by the competitive interaction that it allows to unfold, the market to create the data that we are currently missing.  In other words, by the time, perhaps, we reach that scenario that you pointed out, there will be a empirical record of how the incumbents, how the new competitors have behaved, what prices they charged, what services they bundled, what they packaged.

5029             Maybe that framework will then not be useful anymore, but I think in that process, you know, get to this point, the framework provides the safeguards and the yardsticks that probably would be good guidance for the Commission to make those decisions.

5030             So, in other words, if the scenario that you described becomes characteristic for most of Canada, we are in a different situation, we need to come up with a different blueprint and I think, you know, we made some comments in that regard in the parallel proceeding, in the telecom review panel.

5031             MR. TAYLOR:  And just to add that, I mean, it should be fairly clear from the written and oral submissions today that the consumer groups have a inherent distrust of duopoly and do not ‑‑ are not convinced that a two service provider is going to be ‑‑ is going to adequately ‑‑ provide adequate competition.

5032             And so in the event that you end up in the special circumstances that Professor Bauer was referring to, you know, we would think that you need to take a look at that and say, okay, realistically we are dealing with a duopoly, are they being competitive or not?  And what can the Commission ‑‑ what form of regulation can the Commission impose to deal with that?

5033             It may be that forbearance of the character that is generally being discussed today in the sense of, you know, well, no more rate regulation, et cetera, and, you know, some certain social obligations, it may be that that form of regulatory framework would be appropriate.  But.

5034             It may be also that given the performance that they have demonstrated, that some other form of regulatory framework where you look it and you say, well, guys, you know, we all know technology is advancing and we all expect that your prices would have been going down a little bit more and they are not and your shareholders are doing really well out of this, but consumers are not getting the benefits they should, therefore what we are going to do is put on a simplistic price cap or something, and you are going ‑‑ we are going to force your price down.  Who knows?

5035             We are not there, but we think that the big message is we are not comfortable with a straightforward duopoly type thing.  We are not confident.

5036             COMMISSIONER LANGFORD:  I think I got that.

5037             I know many of my colleagues have questions and I said I would be short, but I think it is fair for me also to say to you that I understand, Professor Bauer, your comment about this may be sort of a starting type of process and it may work for a few years and it may need to be massaged for technical changes. I think that's a fair answer and I think it is an acceptable answer, because we are in that kind of an uncertain world.

5038             But the part of your answer that leaves me troubled, just so you will know how far you have gotten in response to my questions, is the opening step and I am not at all yet satisfied in my mind that you have defined the second facilities‑based competitor.

5039             ILEC, fine; cable company, we know they are there.  But the second one, I have a little trouble with precisely what you mean by that, because I can't think in my mind of any other one ‑‑ there may be some, there are so many of them, they come and go like kind of senators or something, but I can't think of one, with the exception of maybe of CallNet, but they have now been eaten, so I don't know.

5040             So how pure does it have to be?  How pure a facilities‑based competitor does it have to be?

5041             MR. TAYLOR:  Fundamentally it has to be pretty pure, and again Johannes may have some additional comment on this, but the concept is someone who controls their network who is not in a position to be price squeezed by the ILEC.

5042             You know, if the power utilities come onto the playground, you have your third competitor right there.

5043             Could Allstream do it?  If Allstream decided to reenter the residential market, Allstream may very well do it.

5044             Are there shades of, well, you know, 50 percent of the customers are served by their own network and 50 percent are leased loops, well, yeah, I mean, maybe some of that sort of thing starts to look like close enough for horseshoes, you know.

5045             COMMISSIONER LANGFORD:  I have to tell you that at this point it sounds like it is impossible to forebear under that scenario, which troubles me, because you have a very, very interesting package overall.

5046             But you have five more minutes tomorrow, so maybe you will give it some thought.

5047             Those are my questions, Mr. Chair.

5048             THE CHAIRPERSON:  Thank you.

5049             Just on that last point, I gathered from what Professor Bauer said that you would include in calculating in the numerator, I think you said, access‑independent VoIP.

5050             Leaving aside issues about market definition, do you consider them to be facilities‑based carriers along with tests that Mr. Taylor just mentioned?

5051             DR. BAUER:  Well, we discussed this issue, too, and I think we probably do not have just one unique opinion on this issue.

5052             A lot depends ‑‑ and it goes back to the former question a certain degree, too.  A lot depends on the wholesale framework that is in place.  I think the more stringent the wholesale framework is the more open access is to essential facilities, the more open access is to network platforms.

5053             Probably, the easier it will be to classify a service provider is an independent competitor even if it doesn't have in the strict sense its own access loop.

5054             So for example, a voice over IP service provider, in my view, who does have its own customer relations, have its own switches, its own computers to surf the network, in an environment where access to final customers on broadband platforms is easy and open would classify as an independent competitor. But we have to openly admit that we don't wholeheartedly agree on that aspect.

5055             May I just also say, just for the sake of clarity, the third competitor doesn't mean a third technology.  So it can well mean, you know, a third competitor ‑‑

5056             THE CHAIRPERSON:  I understand, I understand.

5057             DR. BAUER:  ‑‑ you know, using the same technology.

5058             THE CHAIRPERSON:  But what you have just defined as a reseller and what Mr. Taylor was just talking about, network control and so on, was a facilities‑based carrier and your model, I thought, was based on facilities‑based competitors.

5059             DR. BAUER:  Right.

5060             THE CHAIRPERSON:  So I still don't ‑‑ while an access‑independent VoIP provider may be independent and may provide service, I don't think by any stretch could we consider it a facilities‑based carrier in the way that we normally use that term.  I could be wrong and maybe Mr. Taylor can help you out.

5061             DR. BAUER:  This is not ‑‑ I didn't talk about a reseller because a reseller just takes the service and resells it on a different brand name, whereas a voice over IP service provider has its own, in part at least, infrastructure to provide the service.

5062             Here, there is a real issue I think that the Commission ‑‑

5063             THE CHAIRPERSON:  Just let me, without interrupting you ‑‑ I mean, you do draw the distinction on page 14 of your submission in the footnote where you draw the distinction between access‑independent, which is a distinction that has been before us, as you know, and a managed IP‑based service.

5064             But I took you to say you would count access‑independent VoIP providers and, I guess I am trying to reconcile that with the facilities‑based approach, no more complex than that.

5065             DR. BAUER:  Right, right.

5066             So my point is that in the new emerging world of communications, perhaps we will have to recognize that a carrier such as a voice over IP service provider which has some facilities of their own and very open access to a transportation platform, for our purposes might have to be considered as a facilities‑based service provider.  But this is contingent ‑‑ please understand me right here ‑‑ on the existence of a very open wholesale system.

5067             So in other words, we need open access to the platform upon which access‑independent voice over IP is also ‑‑

5068             THE CHAIRPERSON:  I don't think we are getting anywhere, Professor Bauer.  I am not understanding your point, but perhaps you either want to clarify it or we can just leave it.

5069             Commissioner Cram.

5070             COMMISSIONER CRAM:  Can I maybe modify the modification?  We are talking about, Professor Bauer, three facilities‑based competitors but they have to be in the residential market?

5071             DR. BAUER:  That is correct.

5072             COMMISSIONER CRAM:  Yes.

5073             DR. BAUER:  Our submission focused on the residential market.

5074             COMMISSIONER CRAM:  And the real issue about all of them and the reason you have to have them or you need them, is the issue of the ability to discipline prices?

5075             DR. BAUER:  That is correct.

5076             COMMISSIONER CRAM:  So if we are looking at a third "facilities‑based competitor" it should have some control over some of its facilities but the more important issue is if it has an ability to discipline prices?

5077             DR. BAUER:  That is correct.

5078             COMMISSIONER CRAM:  I may as well be sitting there.

‑‑‑ Laughter / Rires

5079             COMMISSIONER CRAM:   I am a little worried about "putting the toothpaste back in the tube", so if I can come to your eminently easy‑to‑read attachment?

5080             I don't have any problems, and we have got the three, if I can call them "drop dead" where the prices go over, the share goes over, that sort of issue.

5081             Do I understand, especially listening to you, Mr. Taylor, that the hope is that the ILEC would manage its affairs such that none of the hard triggers ever happen?

5082             MR. TAYLOR:  That's correct.  I mean, you will notice in particular with respect to the market share, not that we are suggesting the ILECs will manipulate market share, but the market share trigger is an asymmetric trigger. You de‑forbear ‑‑ so you forbear at 70 percent; you don't de‑forbear until 85 percent. That's where the hard trigger is for the market share.

5083             So things have to be going very badly in the market in order to de‑forbear there.  So that's the point there and we feel at that level you have got a very strong signal that something dreadfully wrong is happening out there.

5084             On the other two, those are issues that are entirely within the ILEC's control. You know, does it raise its price above the last approved tariff rate, yes or no?  So we would expect that of course it wouldn't.  The reason, as I explained to Commissioner Pennefather, you make it a hard trigger to make sure that there is no goofing around about it because while it may be ‑‑ if it was a soft trigger or some sort of condition that you didn't really know what would happen if they breached this condition, then you might get some goofing around about it.

5085             But if it is a hard trigger that says, "You guys do this, bang, you are dead.  You are filing tariffs again", then it would seem to me pretty clear that no ILEC in this room or ‑‑ I don't know if any of them are actually attending for our appearance but I don't expect that they would ever contemplate doing that.

5086             And with respect to the quality of service, we are looking at a very serious degradation of quality of service.  Again, the lesser, the soft trigger is something, well, maybe they have a problem and so they have a serious degradation in quality of service but they can explain that to the Commission when the Commission investigates.

5087             But the very serious hard trigger quality of service we say, "No, when it gets that bad that's within your control.  You shouldn't have let that happen.  The fact that you let that happen means that there is a real problem out there.  You clearly feel that the market is not going to discipline you on this and we are sure not going to let you get away with that because we" ‑‑ meaning the Commission ‑‑ "have to protect consumers here".

5088             COMMISSIONER CRAM:  So the soft trigger, though, when we would investigate presumably would give us some ability then to add maybe some safeguards that would maybe bring things back into whack?

5089             MR. TAYLOR:  Exactly, yes.  And the soft trigger all it says is investigate.

5090             Actually, to come back to thinking about it during the break to my response to Commissioner Pennefather ‑‑ an honest response with respect to the investigation of incremental costs ‑‑ I mean, that's not part of our test. But suppose you have ‑‑ the soft trigger is triggered to investigate why your third competitor died or the 70 percent market share is ‑‑ you have gone up through the 70 percent market share and so the Commission is going to investigate.  In the course of that investigation the Commission may very well decide that it needs to do a fairly thorough analysis of the nature of the market and including things like looking at, comparing the costs of the competitors to see whether or not there is actually ‑‑ whether it is possible to have sustainable competition in that market.

5091             So it is open.  It is designed to be open ended in terms of what you would look at and what you might decide to do.

5092             COMMISSIONER CRAM:  So 80 to 90 percent there is marketing flexibility which, in your mind, is the winbacks; is that correct?

5093             MR. TAYLOR:  Well, it includes the winbacks.  The very first one is simply the ability to call the customer.  But again, that's not offering any promotions or any special deals or anything ‑‑ you can only give the customer what is already a tariff service, right, in terms of contacting the customer with respect to that.

5094             And then we suggest, well, but then you could also get this price range but everybody has to get the price range.  If you choose ‑‑ if it is between 20 and 25 bucks and you decide to offer it, but everybody has to get that price.

5095             COMMISSIONER CRAM:  Right.

5096             MR. TAYLOR:  Then you get promotions. The third one is some additional flexibility in promotions but, again, all the consumers in the area where the promotions are going to be given, it has to be available to everybody, not just winbacks.  It has got to be a generally available promotion.

5097             So we are hanging onto some of the Commission's existing protections.  We are suggesting loosening up on a few of them.

5098             COMMISSIONER CRAM:  Yes, okay.

5099             So is that marketing flexibility or have you also included pricing flexibility? When you talked about the range that is a pricing flexibility?

5100             MR. TAYLOR:  That's a pricing flexibility and the promotions could include some pricing flexibility in them too, presumably.  I mean, part of the promotion thing could be bundling or it could be something that is within the price caps for local optional services or something of that sort.

5101             COMMISSIONER CRAM:   And Professor Bauer, when we were talking about numerators and denominators would you in the numerator of the market share test ‑‑ you said it was ILEC local access, I think ‑‑ would you also include ILEC‑substituted wireless, a primary line wireless ‑‑ ILEC primary line wireless?

5102             DR. BAUER:  So let me clarify that I see the scenario right, correctly.

5103             So we have a customer who has unsubscribed an ILEC's fixed line and moved to an ILEC's wireless line?

5104             COMMISSIONER CRAM:  Correct.

5105             DR. BAUER:  Right. I think, to follow our logic, and for the purposes of forbearing in the fixed line market, this customer would not be counted in the numerator.

5106             COMMISSIONER CRAM:  Okay.

5107             DR. BAUER:  Now, this is, if I may add one caveat here?  This is assuming that the present market structure remains in place.

5108             Now, we hear a lot about fixed mobile convergence.  So if fixed mobile convergence would actually happen so that these two markets became more integrated and sold under one pricing package then that response would obviously not hold any more because then these two ‑‑

5109             COMMISSIONER CRAM:  There would be the ‑‑

5110             DR. BAUER:  ‑‑ are integrated into just one market.

5111             COMMISSIONER CRAM:  Yes, the same market.

5112             Thank you very much.

5113             Thank you, Mr. Chair.

5114             THE CHAIRPERSON:  Thank you.

5115             Commissioner Noël.

5116             COMMISSIONER NOEL:  I will address the question to the panel and you decide between yourselves who wants to answer.

5117             Given the criteria that you have established in your presentation for forbearance, i.e. three facilities‑based competitors in a given LIR market shares of 70 percent or less for the ILEC, at least 5 percent for each of the other facilities‑based competitors, the high sunken costs associated with the building of those facilities and the total population of Canada which is roughly one‑tenth of the U.S. population, do you expect true competition that would trigger forbearance will ever be available in more rural or remote areas of this country?

5118             DR. BAUER:  Well, I can give it a try.

5119             What we have to keep in mind is the reason why, for example, we currently state that in our evidence and our submissions that, for example, wireless is not considered in the same market, is not based on the fact that wireless in principle could not be a substitute but it is based on the economic decision of competitors in those markets to price wireless in a way that doesn't make it a close substitute.

5120             So for example, if wireless services were to be priced differently, it is easily possible ‑‑ it would easily be possible that the existing wireless service providers in fact become competitors to the fixed line service providers.

5121             So we are not necessarily requiring in this test that somebody comes into the market with a new network built from scratch.  That would probably be very difficult to achieve but those networks, in fact, are in place.

5122             Our analysis argues that the reason why these should not be currently considered as close substitutes is not necessarily based on the concept per se but really on the whole set of criteria that we have to look at the functionality, the pricing and so forth.

5123             So if you take this comment in mind perhaps the likelihood of having three carriers, actually, is not that remote.

5124             MR. TAYLOR:  I would just add that if you look at a lot of the remote areas that there may not be even two competitors.

5125             COMMISSIONER NOEL:  That's where I was going to go because cable‑based competition is available in small pockets but will not stretch to the more ‑‑ or less densely‑populated areas.

5126             Thank you.

5127             THE CHAIRPERSON:  Well, picking up on that, did you ‑‑ you mentioned here in your statement on page 6 today, Professor, that it could also be expected that competition will be relatively homogenous in these areas, et cetera and there should not be wild swings in market share and so on.

5128             You may not be the person to answer this.  I don't know your familiarity with the Canadian scene but one of the arguments ‑‑ I can direct you to paragraph 90 of The Companies' argument is that that's precisely their point.  They say that there is no uniformity of competitive conditions across LIRs.

5129             Were you aware of that?  Have you read that and do you have a comment on it?  Does anyone on the panel?  And do you agree with it or not, and if you agree with it do you still support LIRs?

5130             DR. BAUER:  Let me try to ‑‑ I mean, as you know, I am less familiar with the specific institutional details of the Canadian structure of LIRs than my partners here on the panel, but let me try to give you a conceptual answer and try to express myself clearly.

5131             The choice of the geographic market is really influenced by, on the one hand, our conceptual analysis as to how competition unfolds, but also by an administrative argument that it is what is practical.  So there is really a trade-off on the one hand between having more geographic markets that cause higher costs if we have to make a forbearance analysis for a large number of the smaller markets, but they have the advantage ‑‑ the competitive conditions are more homogenous and, on the other hand, the choice of the larger area whereby we, in a sense, make a mistake because competitive competitions are not fully homogenous across those areas.

5132             In balancing those two aspects we came to the conclusion that those LIRs probably balance those two considerations.  Yes, there is competitions not fully homogenous across these areas but that is a deliberate mistake taken into account that we believe is smaller than going to much smaller areas or we would have to go through this forbearance analysis many, many times over and perhaps very strong swings might happen and might be visible in terms of the competitive situation.

5133             So you have really a patchwork of some areas that are forborne and others that are not forborne.

5134             That is the set of considerations underlying the choice.

5135             THE CHAIRPERSON:  Thank you. That was clear.

5136             Have you had an opportunity to look at the competition commissioner's evidence?

5137             DR. BAUER:  Yes.

5138             THE CHAIRPERSON:  And in particular the, as she referred to it, the "amoeba approach" to the geographic area?  Have you got any comments on that?

5139             DR. BAUER:  If you don't mind, I will pass it on.

5140             MR. TAYLOR:  The short answer is we did not have an opportunity to look at the amoeba because all of the copies of the commissioner's document went very quickly last night.

5141             But I would say that, as Johannes has said, that it is a practical approach is what we are ‑‑

5142             THE CHAIRPERSON:  No, I understood that but if you could perhaps by your ‑‑ which would likely be Friday, your next round ‑‑

5143             MR. TAYLOR:  Right.

5144             THE CHAIRPERSON:  ‑‑ have a look at it and address it that would be appreciated.

5145             MR. TAYLOR:  Okay.

5146             THE CHAIRPERSON:  Thank you.

5147             COMMISSIONER LANGFORD:  I will volunteer my amoeba for the cause.  You can pick it up here after.

5148             THE CHAIRPERSON:  I think he will be able to get an independent ‑‑ if you can't you can contact the Commission.

5149             Commissioner French.

5150             COMMISSIONER FRENCH:  Mr. Chairman, most of what I have wanted to discuss has been covered, but I want to say two things and they may or may not call for a response.

5151             The first is that this is the most thorough presentation we have had.  It is the most complete and has made the best faith effort to attack the diverse dimensions of the problem.  I think I speak for my colleagues, we are very grateful for it and we appreciate it.

5152             MR. JANIGAN:  Thank you, Commissioner.

5153             COMMISSIONER FRENCH:  The policy prescriptions are going to be stimulating and probably give rise to some lively debates.  We have a difficulty as a consequence of the strong imperative that you perceive to protect vulnerable customers that it is kind of hard to imagine how under this scenario there will be any forbearance for about as far as we can see into the future.  I say that for at least two reasons.

5154             The first is unfortunately the LIRs, though intended to be homogeneous are not.  You know, 40 miles out of Halifax you are still in the same LIR but you are hunting deer.  It is really not the way this country works alas.  I understand that this was a good faith attempt and I appreciate that, but it also relates to the size of the trigger parameters, doesn't it, because the bigger it is in principle the lower trigger parameters might be tolerable the smaller it is.  You have both there.  You have the LIR and you have some pretty demanding targets to meet. So on those grounds I don't think there is any danger of any forbearance any time soon.

5155             The second reason is it is almost impossible because of the structure of ownership in the business to imagine that we will get corporately independent third facilities-based suppliers of local channels to residences in this country. It is a highly desirable alternative that you put before us but with the greatest of respect I think it is imagining or hoping or wishing something that the Commission in its regrettably prosaic preoccupation with the here and now and the corporate interests at stake and the consumer interests at stake is unlikely to imagine or to benefit from.

5156             I leave you with that.  It is not intended as a criticism.  I repeat that this has been tremendously valuable, stimulating and above all thorough and informed by a good faith attempt.  I repeat that.  But I think we are going to have to wrestle with those practical aspects for the reasons that I have invoked. You may or may not want to comment.

5157             MR. JANIGAN:  Commissioner, yes, it strikes me that I think we should endeavour to address that in our reply argument in some fashion, in particular whether or not our model we have put forward can survive amendments that would contemplate a different kind of geographic area than the LIRs that we have chosen or the characterization of that third competitor as a facilities-based competitor and a transformation of that competitor into some other kind of independent kind of competitor.

5158             Those are the two issues that we may wish to wrestle with in an attempt to see if our model can survive amendments based on those two general areas.

5159             MR. BAUER:  If I may just add one sentence, with your permission please?

5160             Maybe we are slightly less pessimistic that it would be impossible to meet those criteria, in part because we do believe that competitive forces are unfolding, but it also needs to be said that what we were looking for is a safe test.  Perhaps the arguments that we cannot pass a safe test is not an argument against the test but it is an argument against the assumption that this is a competitive industry.

5161             Having said this, if there is a sense that this is how the future is going to look like, maybe a proposal along the lines made by the Competition Bureau that we do a more thorough analysis of different geographic markets and then come to an assessment as to whether despite the fact that a safe test is not being met you still could forbear, that probably would strike me as the second best approach.  It would be administratively more time consuming but it would probably be capable of balancing the need of the different stakeholders in meeting the goals as they are expressed in the Telecommunications Act.

5162             THE CHAIRPERSON:  Professor, work on your first best solution.

5163             COMMISSIONER FRENCH:  Thank you very much.

5164             Prof. Bauer, I know where you sit on the debate over the costs of regulation, but it is not a one-sided debate.  There is another view which the Commission has to, in all honesty, have some regard for and also it has to think about foregone consumer benefits which accrue to controls that a regulator puts in for good reasons but that he is never fully, or she is never fully, in a position ‑‑ the costs of which are never fully in a position to appreciate or evaluate.

5165             So I think it is a very fair response that you have made but I do think that the Consumer Groups' submission has not really dealt with that issue of the costs of regulation.  I don't think that is illegitimate at all, but it is simply the kind of counterpoint that I would put on the table to your concern.  It is a real question:  what kind of competition is workable?

5166             About six months ago I gave a speech and your colleague to your right was in the audience.  I said: what is workable oligopoly?  He got very upset.  He said:  what's this about oligopoly?  You are anticipating forbearance but now I see that three is enough.  So, Michael, we are not that far apart really. That's what it is about.  What is a workable, tolerable oligopoly?  We know in this world we are never going to have perfect competition.

5167             All that to say, from my point of view, a tremendously stimulating and valuable presentation, and much appreciated.

5168             THE CHAIRPERSON:  I think it is important to note that he doesn't show us all his speeches before he gives them.

5169             COMMISSIONER FRENCH:  But I showed you that one, Stuart.  I don't know why you say that.  You saw it.

5170             THE CHAIRPERSON:  Thank you.

5171             Counsel.

5172             MR. WILSON:  Thank you, Mr. Chairman.

5173             I am just going to have one question with respect to your ILEC-specific safeguards.  My colleague Ms Cruise will have one question with respect to the service market definition.

5174             With respect to the ILEC-specific safeguards, you have indicated or you have proposed that in a forborne market the ILECs should be required to continue to provide basic local telephone service on a standalone basis.  I am wondering if you can provide us some comments on why you see that as an obligation specific only to the ILECs rather than one that would be extended across all LECs?

5175             MR. TAYLOR:  That is a very good question.  This was part of our, how should I put it, bowing to pragmatism.  You could propose that everybody do it, but the reality is that a number of the competitors who were out there already in the market are only offering bundled services.  We looked at that and said, if we were to require everybody to do standalone, this would be additional regulation.  Is it required in order to protect consumers?  We don't think so.  The consumers who only want standalone service are likely to be ‑‑ well, they are already with the ILEC and are more likely, frankly, to stay with the ILEC because most of the competitive offerings out there are of the sort that are going to higher end consumers.

5176             So it was a trade‑off.  Certainly, if the Commission wanted to decide to be competitively neutral, it had to require everybody, I mean we are not going to cry.  We didn't think that it would be reasonable to demand that the way we see the market unfolding right now.

5177             MR. WILSON:  Thank you.

5178             Ms Cruise.

5179             MS CRUISE:  Good afternoon.  I have a brief clarification question with respect to the product market.  At paragraph 41 of your September 15 written argument you state:

                      "It will be inappropriate to include a service bundle in the same market as a standalone local exchange service, that is, a local exchange service that is only available as part of a bundle would be in a separate market."  (As read)

5180             In your oral submissions today you did not include this point and I am just wondering, as a point of clarification, if your position has changed. If it has not changed, can you just flesh this out a little bit for us, especially with regard to how it would affect market share?

5181             MR. BAUER:  The position has not changed.  It was made of time economy and staying within the constraints of our presentation.

5182             This is a very complex issue.  Let me try to identify some key points.

5183             The reason why we proposed the bundles not be included per se in the market is that it makes a lot of economic sense to look at bundled products as competing with other bundled products but not necessarily standalone products.  For purposes of comparative analysis, it would probably make sense to look at the bundles offered by the cable companies with regard to the bundles offered by the telephone companies, but it is more difficult to make a strong point that the bundle including let's say, entertainment and broadband Internet access plus voice is a strong competitor to a standalone voice service.  It is the main reason why we argued that the market for bundles is really different.

5184             For purposes of determining market shares, let's say a customer who used to be a standalone voice customer of an ILEC decides to buy voice service from a cable company in a bundle, for the purposes of determining market share this clearly is a loss of a customer of the ILEC.  In that sense, one has to differentiate between whether the bundle in general terms is in the same market as a standalone service from the individual decision of the consumer, from the revealed preference of a consumer to buy voice in a bundle.

5185             Our proposal is for purpose of the determination of market shares. Customers who buy services in a bundle from somebody else, they are not customers of the ILEC any more but that the two markets have such different characteristics that we will be hard‑pressed to follow the logic and consider those as being part of the same market for close substitutes.

5186             In fact, bundling is really a way of taking care of heterogeneous consumer preferences.  That is really what bundles are about and the fact that the preferences are heterogeneous is probably a very strong argument that you cannot easily compare between standalone markets and bundled markets.

5187             MS CRUISE:  Thank you.

5188             MR. TAYLOR:  There appears to be still some uncertainty I am getting from the way counsel are looking. This will all become clear when we give you our undertaking on Friday with respect to the calculation, because that ultimately is where the rubber hits the road, how do you do the calculation. That will be clear in that context.

5189             MS CRUISE:  I think that will be very helpful.  Thank you.

5190             THE CHAIRPERSON:  Just to complete the thought, what I hear you doing in a number of areas is almost saying that the market definition, product market definition, is a theoretical exercise.  What you are really trying to come up with, and I think helpfully, is rules of the road to guide us over the next period into forbearance so what the calculations are become the relevant matter, whatever the economic ‑‑ because your market definition and your calculations are not a coincident.

5191             For example, you say VoIP isn't part of your marketing that you counted in the calculation, leaving aside that it is facilities-based, as we understand it. In regard to wireless, you don't consider wireless part of the market, unlike the ILECs, yet you include wireless substitution as part of that.  So when we look at bundles, I guess are you saying the same thing, that even though an ILEC customer receives his connection or his access line in a bundle, they are not the same market, bundles are not part of the same market, but you would include the fact that he is a subscriber, that he has an access line, whether in a bundle or a standalone, as part of your calculation as you would a loss to a bundled offering by a competitor?

5192             Have I got that right?

5193             MR. BAUER:  That is correct?  Maybe the simplest way to express it is that from the observation that somebody buys a Rolls Royce rather than a Honda.  We cannot conclude that for all customers a Rolls Royce is a substitute, a close substitute, for a Honda, but for Honda, if the one customer is gone, you know, it does matter.

5194             THE CHAIRPERSON:  Thank you.

5195             Thank you very much, gentlemen.  That concludes our questioning.

5196             Madame la sécretaire.

5197             LA SÉCRETAIRE:  Merci, Monsieur le Président.

5198             We will be moving on with Panel No. 13, the Canadian Cable Telecommunications Association.

PRESENTATION / PRÉSENTATION

5199             MR. HENNESSY:  My notes say "good morning", Mr. Chairman, so let me just adjust that.

5200             Good afternoon, Mr. Chair, Commissioners.  My name is Michael Hennessy, President of the Canadian Cable Telecommunications Association.  With me today, on my right are:  Colin Lachance, our Director, Telecom Regulatory Affairs; and Andrew Briggs, a consultant for CCTA; Suzanne Blackwell, CCTA's VP Telecommunications and Economics and team leader and brains behind the operation -- please direct any tough questions to Suzanne; Dean Shaikh, our Counsel, Regulatory Law; and also with us are Drs. David Gillen and Thomas Ross, in reverse order, who are here to speak to their paper that we filed with our initial evidence including to the comments of the Competition Bureau last night.  In fact, they are ready to go in terms of the invitation of the bureau so we hope we get a chance to respond to that.

5201             We appear before you on behalf of our 78 member cable companies across Canada, some of whom are already entering the local exchange market and many others who are still considering whether to enter.  This hearing is of critical importance to our members because the Commission's framework for forbearance will signal whether sustainable competition will replace regulation as a means of ensuring competitive prices and product choices.

5202             Your decision also sends a signal to potential competitors as to the investment risks of entry and expansion.

5203             In this respect, the interests of consumers and potential entrants are aligned. The benefits of a competitive market, including lower prices for all, not just a few consumers, will not occur without dynamic and sustained competition.  This in turn will not occur if the ILECs are prematurely deregulated or permitted to target in an anti‑competitive fashion.

5204             In our remarks today, we will focus on three key points.

5205             First, the record clearly demonstrates that there is not a single market in Canada for residential local services that would meet the statutory criteria for forbearance.  Under section 34 of the Telecom Act, the Commission must consider whether forbearance could undermine competition.  While markets are still evolving toward sustainable competition, regulation remains essential today if there is to be a chance for deregulation tomorrow.

5206             Our second key point is the geographic market for the purposes of forbearance should be defined as a minimum as the local interconnection region or LIR.  Defining the market on this basis provides the appropriate practical and conceptual framework for assessing market power.  The assessment of market power in turn relies on measures of market share and entry barriers.

5207             In our view, the ILECs will continue to exercise market power until at least 30 per cent of the residences in the market are no longer served by the ILEC, competition is thriving and the significant to barriers to entry are removed.

5208             Third, premature forbearance on the basis of narrowly defined markets such as an exchange or artificially low market share thresholds would provide the ILECs with the opportunity to predatory price.  The ILECs have such a dominant position in the market that they could specifically target the few lines that the competitors have been able to attract effectively nipping that competition in the bud.

5209             The Commission's overall approach must be to minimize the likelihood of premature forbearance.  There is too much at stake to count on getting it right the next time.  For our members there is no next time.

5210             Any framework for local forbearance must meet the requirements of section 34 of the Telecommunications Act, specifically section 34(3) which states that the Commission shall not forbear or to do so would be likely to impair unduly the establishment or continuance of a competitive market for that service of class of service.  In other words, Parliament has stated in the strongest terms that it is not enough for there to be competition in a market.  The Commission must find that there is no threat to the sustainability of competition before exercising its discretion to forbear from regulation.

5211             In our submission, the record of this proceeding is not sufficient to enable the Commission to forbear in any market in Canada at this time.  By any measure, the ILECs continue to exercise significant market power in all markets, from Saskatchewan, where the ILEC controls 100 per cent share of the local exchange service, to Nova Scotia where more than 85 per cent of the lines are still ILEC provided five years after entry.

5212             Let me now turn to the definition of relevant market.

5213             We need to be sure that the definition provides a reliable foundation on which to build the analysis of the ILECs' market power.  There are two main components of that definition, product market and geographic market.

5214             First, the product market.  Where services are close substitutes they are considered to be in the same relevant market.  We know with only one exception, all parties agree that residential and business local exchange services are separate in distinct markets.  In this proceeding, we have limited our comments to the residential market.  That is the core market for our members.

5215             We submit there are two relevant markets for the purpose of this proceeding, residential and business local exchange services and in each case include both traditional circuit switch local exchange services and local Voice over Internet Protocol services.

5216             Wireless services, on the other hand, are not substitutes for local exchange services and should not be included in the market definition.

5217             Determining the appropriate geographic market is of critical importance. The smaller the market, the less costly and the more rational it becomes for the incumbent to engage in predatory pricing.  We submit that the relevant geographic market should be defined at a minimum as the local interconnection regions, or LIRs, in each ILEC's operating territory.

5218             The concept of LIR was established by the Commission in decision 2004-46 to improve the efficiency and lower the costs of interconnection between CLECs and ILECs.  The Commission found that an LIR reflected a community of interest.  In our view, this characteristic is equally applicable to determining the appropriate geographic market for the purposes of forbearance.

5219             By definition, the LIR describes the geographic region over which a CLEC can supply service once it interconnects.  This is precisely the area from which a competitive response could be launched.  It follows then that the LIR would be the most sensible and appropriate market area in which to measure the state of competition and determine whether the market is ready to be forborne.  Aggregation of LIRs may be appropriate in the Atlantic provinces because of their smaller size and the fact that similar competitive conditions in market outcomes are likely to develop province-wide.

5220             Defining the geographic market as the LIR has administrative advantages as well. There are about 180 LIRs in the operating territory of the major ILECs.  There are nearly 2,800 exchanges.  It would vastly simplify the application of forbearance criteria as well as markedly reduce opportunities for predation to conduct assessments of market share and competitive conditions on the basis of LIRs rather than individual exchanges.

5221             Targeted pricing.  One of the greatest risks of narrow forbearance is the opportunity that it provides to limit competitive entry and expansion.  In a narrowly forborne market ILECs will have greater ability to deter     competitive entry and eliminate new entrants by engaging in targeted pricing.

5222             Absorbing a short term revenue loss in a narrowly defined forborne market is a rational strategy if it assists the ILECs in preserving their dominant market position across other geographic product markets.

5223             Granting forbearance on a very narrow and limited basis would provide the ILEC with the opportunity to effectively target consumers within that area at great risk to competitors but at very little risk to itself. Protecting market share is eminently rational if it can be done at a low cost.

5224             When a service provider holds significant market power, it is generally accepted that regulation remains appropriate.  While the current conditions in the residential local exchange services market do not support forbearance at this time, the Commission has specifically requested parties to comment on the criteria that could be used to evaluate whether to forbear in the future.

5225             In our submission, the appropriate criteria for forbearance should rely on a two-part test implying both quantitative and qualitative elements.

5226             The first part of the test would be a finding that at a minimum a 30 per cent share of the relevant geographic market is no longer served by the ILEC. This is not a high threshold, certainly not when compared to the shares in other markets that the Commission has forborne or in the tests employed internationally.  The market share test would serve as a necessary but not sufficient basis for forbearance.  It acts as an eligibility criteria for proceeding to the second part of the test.

5227             The second part of the test would rely on more qualitative elements.  The competitive alternatives exist in the relevant geographic market on a pervasive and sustained basis.  The intent of this part of the test is to evaluate the sustainability of competition by measures such as the number and type of competitors operating the ILEC territory and evidence of rivalries behaviour.

5228             Some parties have proposed a 5 per cent market share threshold as the test for forbearance, pointing to the Commission's rule with respect to rate deregulation in the broadcast distribution or BDU market.  These parties have sought to adopt one aspect. These parties have sought to adopt one aspect of a test from a different market that is regulated under entirely separate legislation.

5229             It is important to note that at the time the Commission introduced competition in the BDU market, more than 23 per cent of households that could subscribe to cable television service did not.  In effect, a quarter of the market had not yet selected any supplier and did not need to be won from the cable company.

5230             Moreover, DTH companies from the first day they launched could supply any and every household in the country.  The competitor had no need to make contact with or interconnect with a cable company.

5231             By comparison, competitors in the local exchange market must interconnect with the incumbents.  Even where they have their own facilities, competitors still depend on the ILEC to connect to the public switch network.  This remains a barrier to entry and expansion that has to be overcome by each entrant on a market-by-market basis.

5232             Consideration should also be given as to whether other barriers to entry remain. As CCTA and others have demonstrated, there are a number of challenges that competitors continue to face in obtaining access to the necessary facilities to interconnect and to compete in the local exchange services market.  Until these challenges have been overcome, it would be premature to grant forbearance.

5233             Some parties have argued that barriers to entry are low citing evidence of competitors that have launched services in some markets.  The claim that the mere presence of a competitor is sufficient ignores the realities that these competitors continue to spend substantial resources in an attempt to overcome significant barriers.

5234             As many competitors participating in this proceeding have shown, there remains substantial difficulties and delay in gaining access to facilities necessary to compete.  This is particularly true for facilities-based competitors offering full primary line replacement services.

5235             The operating panels of the member companies following CCTA will provide their actual marketed experience in confronting these challenges.

5236             Let's look at Alliant's application.

5237             Applying the framework and criteria we have proposed, we submit that the Alliant application for forbearance does not meet the requirements of section 34 of the act.  The evidence indicates that the share of the residential local exchange market not served by Alliant is still well below 20 per cent in each of the relevant geographic markets.

5238             As the Commission stated in a ruling earlier this month, competition only exists within a portion of Alliant's operating territory, and even within that portion Alliant Telecom still retains a substantial majority of the customers.

5239             Clearly, to forbear in the relevant markets in Alliant's territory would threaten the sustainability of competition.  As such, there is no statutory authority under which the Commission could refrain from regulating Alliant's local services at this time.

5240             Let me now turn to our third key point, which is substantial risks of premature forbearance.

5241             CCTA strongly recommends that the Commission not rely on the ability to revoke forbearance as a means to offset the risk of premature forbearance.  It is critical that forbearance not be granted prematurely in the first instance.

5242             Re-establish and regulation over a previously forborne market would come too late to avoid the damage this would cause to the development of competitive markets.  The list of potential facilities‑based competitors has become too short to assume further entry if this forbearance regime fails.  There is no phoenix to rise from the ashes of the cable industry.

5243             A transitional regime is really another form of premature forbearance and totally unnecessary in light of the current state of competition.  CCTA submits that the current regulatory framework has been established to provide the ILECs with sufficient flexibility to meet competition while providing the necessary safeguards to permit competition to develop.  The rapid approval of the Bell digital voice tariff is proof the ILECs have flexibility.

5244             As the Commission noted in its submission to the Telecom Policy Review Panel, many of the regulations that currently govern ILEC delivery of local exchange service, most notably those associated with the winback rules are a measured response to repeated instances of anti-competitive ILEC activity that continue, continue, to threaten to undermine emerging competition.

5245             CCTA submits there is no policy justification for removal of these safeguards in advance of a finding in support of forbearance.  The implementation of a transitional regime would only serve to maintain the ILECs' market power and to slow down the development of sustainable competition further lengthening the timeframe until forbearance can be warranted.

5246             To conclude, our three points are really as follows:

5247             First, under section 34 of the Telecom Act the Commission has a statutory duty not to forbear where to do so would unduly impair the establishment or continuance of a competitive market.  Second, when competition is only beginning to become established, the most rational strategy for the ILECs is to engage in targeted pricing to protect their market share and the greater the ability to target the more rational that behaviour becomes.

5248             Third, forbearance based on geographic markets that are too small or market shares that are too low, or adopting a transitional regime, will increase the ILECs' incentives to predate and that in turn will impair the establishment or continuance of competitive markets.

5249             It has been eight years since competition was introduced.  Overall, competition has still not been established.

5250             We think there are two choices in this proceeding:  one, assume competition using economic theory; or, two, wait until competition is firmly established based on the facts and then forbear.

5251             We submit that only the second choice meets the Commission's statutory obligation under section 34(3) of the act.

5252             Thank you.  The panel is ready for your questions.

5253             THE CHAIRPERSON:  Thank you very much, Mr. Hennessy and members of the panel.  As I have said to others, we have read your material and your briefs so the questions will not be for purposes of getting you to reproduce that but merely to seek clarification on your positions and to address arguments that others have made.

5254             My first question has to do with your definition of product market.  It is laid out very clearly in your submission as it is today.  You exclude wireless mobile in your market definition.

5255             A number of parties have however included it for purposes of calculating market share and that is one of the tests that you have put in albeit at a higher threshold.  I am wondering why you wouldn't include substituted wireless customers, i.e. those who don't have wireline communications, in that calculation?

5256             MR. HENNESSY:  No. 1, we don't think wireless is a substitute at this time.

5257             No. 2, I will let Suzanne talk to this, our market share formula actually does include any type of substitution.

5258             THE CHAIRPERSON:  You are saying that it would include those substitutions or connections via wireless?

5259             MRS. BLACKWELL:  If I could just add to what Michael was saying.

5260             Because our definition of market share is based on the percentage of households in the relevant geographic market that are not served by the ILEC, any household that has left the ILEC to use solely wireless would in fact be contributed toward that 30 per cent.

5261             THE CHAIRPERSON:  Okay. I follow it now.  By use of the criterion of households, a household that is no longer part of the ILECs you would count as in the market share column for competitors without knowing the exact names of service.  Is that correct?

5262             MRS. BLACKWELL:  That's right.  If a household is no longer taking wireline local exchange service as the Commission has defined it, which we also think should include Voice over IP, if that household is not getting a local exchange service from the ILEC, it then counts toward that 30 per cent figure.

5263             THE CHAIRPERSON:  Right. This is for residential of course.

5264             MRS. BLACKWELL:  That's correct.

5265             THE CHAIRPERSON:  Okay. If that household has no wireline or VoIP, no wireline circuit switch, shall we say, or hybrid or VoIP service, then you would immediately put that household in the competitors' column.

5266             MRS. BLACKWELL:  That's correct.

5267             THE CHAIRPERSON:  Thank you. That clears that up.

5268             Turning to the geographic market, I am looking at paragraph 33 of your argument of September 15, which is at page 7.  You can read the whole paragraph, but the sentences that I welcome your comments on are the last two where you say:

                      "If the Commission adopted an approach that defined the smallest geographic area across which the ILECs theoretically no longer possess market power, the outcome would not reflect the fact that ILECs retain market power in adjacent markets.  Unlike in merger analysis, in this proceeding the ability of the incumbent to leverage market power from contiguous geographic markets and to deter and prevent entry and expansion to non‑forborne markets is a significant concern."  (As read)

5269             Would you elaborate on that?

5270             MR. SHAIKH:  This is simply to point out that in merger analysis and in a forbearance proceeding there are different considerations that would determine the framework.  If you are going to examine a merger, you would define all the appropriate relevant geographic markets where the merged entity would exercise market power.  As a result, you wouldn't have to worry about whether the merged entity was exercising market power or had market power outside of that properly defined relevant market.

5271             Even though in this case because of regulation there is some constraint on the ability of the ILECs to exercise market power outside of the properly defined relevant market, it is still the case that because ILECs possess so much market power outside of what might be the relevant market, the incentives are different and there will be the possibility of engaging some of the practices we have suggested because their incentive in that relevant market once defined is to preserve the market share the exists outside of the properly defined relevant geographic market.

5272             THE CHAIRPERSON:  Right. But as you have just said, they are regulated in that market.  We have had these arguments where the shoe has been on the other foot, as you are no doubt aware ‑‑

5273             MR. SHAIKH:  Right.

5274             THE CHAIRPERSON:  -- and have always come back to the position of let's look at the area that we have to focus on.  I'm not sure what you mean by leveraging.  As you say, there is regulation in those adjacent markets so activities that would run afoul of the regulatory rules would presumably be complained of and caught under the regulatory regime.  I guess if you could focus in on when you say "the ability of the incumbent to leverage market power from contiguous ‑‑" can you be a bit more specific on that?

5275             MR. SHAIKH:  It goes specifically to the question of whether targeted pricing and anti‑competitive pricing becomes rational.  In the case of a merger analysis, you wouldn't worry necessarily about whether because there is market power outside of the market it is a rational strategy. But because they have so much market power outside of the market, that is going to help -- not only is it going to be the smart, rational thing to predate in that market but it is going to help them.

5276             THE CHAIRPERSON:  I guess to just follow that up, are you simply saying that they have deep pockets and that anybody with deep pockets could do the same thing in the forborne market or are you saying something more than that?

5277             MR. HENNESSY:  Maybe I am going to pass this over to Tom and David if you would like to explore a little whether it is rational to engage in anti‑competitive targeted pricing in the forborne market from the market power that you possess in the regulated sector.

5278             THE CHAIRPERSON:  It's that latter part.

5279             MR. HENNESSY:  It's that latter part.  It's not that you are doing something inappropriate under the regulatory rules. It is that the market power you have in the areas where there is no competition is so significant and the relevant market when you are just starting out as a competitor is so small that it is tremendously rational to engage in anti‑competitive or targeted pricing in the smaller area in order to protect or delay any erosion of your market share overall.

5280             Maybe if I could ask ‑‑

5281             THE CHAIRPERSON:  Are you meeting the objection that basically says it wouldn't be profitable for an ILEC to predate because that would be revenues forgone and where would they make them up and you are saying ‑‑

5282             MR. HENNESSY:  Yes. I mean the problem with the classical test, and I should really kick it over to the classical economist, the problem with the classical test is it ignores the fact that if you look at the telephone companies they have somewhere in the neighbourhood of $4 billion plus IBITDA that is coming from the 97 per cent share of the market that they have nationally.  So for every sort of step of the way that you can slow down entry, it's not just an issue of I'm going to lower my prices here and I have to recover them later, it is the fact that you are protecting this huge chunk of revenue.

5283             So every per cent of that $4 billion of IBITDA you can convince somebody not to go after is significantly more than any money you have to spend to target at a very small area.  Not only is it the question, it is totally wrong I think to use economic theory to say it is irrational, it is probably the most rational thing you can do.

5284             Let me ask one of our economists if they can ‑‑

5285             MR. SHAIKH:  Part of it is that traditional predation strategy relies on recoupment from within the market in which you predate it.  This part of the analysis suggests that recoupment from within the market in which you predated is not necessary for the predation strategy to be rational and successful.

5286             THE CHAIRPERSON:  I understand that and I will give you an opportunity to comment, but I could be a profitable competitor in Hong Kong and I zero in on the Toronto exchange and finance that by whatever profits I have there, it would be the same analysis.  I don't understand why contiguity is relevant here.

5287             MR. SHAIKH:  The fact that the markets are contiguous is not necessarily relevant.

5288             THE CHAIRPERSON:  Okay. That was really the issue.

5289             MR. SHAIKH:  Right.

5290             THE CHAIRPERSON:  It is essentially a financing argument, isn't it?  I mean it is deep pockets, from whatever other business.  It needn't even be the same business in another country.  You are basically saying that it's ‑‑ to say it again, is it more than deep pockets?

5291             MR. ROSS:  It could be, Mr. Chairman. I mean I have lots that I could say about predatory pricing and perhaps your questions will extract that from me. I don't need to go into it if you don't need it, but ‑‑

5292             THE CHAIRPERSON:  Certainly don't go into it if it doesn't respond to the question.

5293             MR. ROSS:  What responds to the question is that deep pockets could certainly be part of the story but another could be just a reputation for aggressive pricing or aggressive behaviour such that potential entrants into still forborne markets might be ‑‑ because they have observed this behaviour in other markets ‑‑ might be chilled in their interest in moving into forborne markets knowing what could be ahead of them with eventual forbearance.

5294             THE CHAIRPERSON:  Right. But again, that could be the case no matter what the sources of the financing of the predation ‑‑

5295             MR. ROSS:  That one could be. Absolutely.

5296             THE CHAIRPERSON:  It's the same thing.  If you have less than two, you move out of your market to the next one and we will hit you the same way.  But again, it isn't contiguity and it isn't ILEC‑specific.

5297             MR. ROSS:  Absolutely.

5298             THE CHAIRPERSON:  Okay.

5299             While I have you, let me turn to your submission.  I am looking here at the point about geographic markets again. You say at paragraph 131 of your submission that:

                      "In the United States the FCC has taken the reasonable view that geographic markets should be defined according to which sets of consumers face identical or very similar competitive conditions.  Put simply, if two consumers face the same set of suppliers offering the same set of products at identical prices, then these consumers are likely in the same market."  (As read)

5300             You have probably heard in the course of this proceeding and it is on the record that one of the defects alleged about the choice of the LIR is that situation doesn't obtain there.  I wonder what your comments would be on that.

5301             MR. ROSS:  Sure.  I am very happy to speak about this.

5302             You have heard I don't think really probably any disagreement amongst the economists who addressed you that in some sense when we are thinking about the relevant market here we would start with sort of the basic call between one person and another and think about that as, in some theoretical sense at least, a possible relevant market because you don't go somewhere else to make the call, but we know that is not practical so we have got to aggregate up.  Now the question is: how far do we aggregate?  All the differences are about, well, maybe this works better than this.

5303             A lot of the difficulties I take it with some of the proposals turn on kind of administrative complexities and things that we are not expert in.  You are and the other people here are, we will let you worry about that.  But the general principle is that if you are going to add people together or add areas together if they are facing very similar demand and supply characteristics, demand and cost characteristics, then you would expect that even though in some theoretical sense they are all different they are going to be similarly affected.

5304             So putting together makes some sense from a tractability point of view.

5305             I do take your point that with many of the definitions that have been proposed you will not have homogeneous conditions across an exchange even or an LIR, and then the question becomes you are dealing in kind of a second best.

5306             To the extent that the CCTA has proposed LIRs, we really didn't comment on a specific.  We talked about principles more than coming up with a specific preferred option. But looking at the LIR, for example, to the extent that you think that once in the LIR competitors can quite easily service any part of that LIR if the technical difficulties of that are quite small and if similarly competitors in an LIR feel very reluctant for marketing reasons to differentiate their pricing very much within an LIR, then an LIR might be a reasonable approach.

5307             THE CHAIRPERSON:  Right. The ifs are big, particularly if you look at the map of Nova Scotia.

5308             MR. ROSS:  That is one of the reasons why I am hoping you are not going to ask me what I think about LIRs because we haven't really ‑‑ we know how different they are now.  We know from sitting in on these proceedings and hearing how different the LIRs are.  Before offering a view as to whether LIRs in every part of the country capture what we describe as what we would like, we talk about maybe local calling areas as capturing it or communities, you know, the cities, of getting the flavour of what we have in mind, to the extent that LIRs are a tolerable expression of that we need to study them more ourselves.

5309             In some parts of the country maybe they will be great, in others less so and something different.

5310             THE CHAIRPERSON:  So one size may not fit all is what you are saying ‑‑

5311             MR. ROSS:  I think that is very possible.

5312             THE CHAIRPERSON:  Okay. I wonder whether it may be you, Mr. Hennessy, or whomever you delegate, but in the company's argument ‑‑ I think we have covered this point so unless you want to add something to it I would like to ‑‑ they attempt, at pages 25 and 26, to refute your defence of the LIR.  The comments that I was going to ask you to make were on paragraph 92 where they suggest that your point 3 and point 4 are mutually exclusive.  You may want to get that.

5313             Point 3 is:

                      "An LIR closely approximates the geographic boundaries that are likely to provide the basis for geographic price discrimination of local service."  (As read)

5314             Point 4 is:

                      "An LIR represents a geographic market that is large enough to prevent targeted pricing."  (As read)

5315             Their point is that those two points are mutually exclusive.  You can read the paragraph and comment on it.

5316             MR. SHAIKH:  Our approach is based on an LIR that becomes competitive.  In a competitive market, in a competitive LIR, geographic price discrimination will be unlikely.  If an entrant achieves sufficient scale, and we have suggested 30 per cent, that is the point at which predatory pricing is not going to be as rational a strategy or as likely.  Geographic price discrimination when an entrant has 30 per cent becomes actually kind of costly.  For reasons pointed out I believe by the Bell expert Mr. McFetridge, for a number of reasons it is not going to be cost effective and you are not going to do billing and advertising and promotions on a very local basis within a competitive LIR.

5317             On the other hand, if an entrant hasn't achieved sufficient scale, then targeting becomes very cost effective.  If they haven't got to a real good scale, if they haven't got the 30 per cent, or forbearance occurs on a very narrow basis such as the exchange, then targeting becomes a very rational strategy, very easy and not very costly.

5318             THE CHAIRPERSON:  They allege that your fourth point is an irrelevant consideration for purposes of establishing the relevant geographic market.  Do you have a comment on that?

5319             MR. HENNESSY:  An LIR represents a geographic market that is large enough to prevent targeted pricing. In terms of the pure competition test of developing all the criteria first without reference to practicality, yes, but one of the benefits when you then look at an LIR is that it is large enough, as was pointed out, that the ability to supply throughout the region that you have interconnected into allows you to respond to changes in pricing in such a way that you are able to discipline predatory pricing because the area becomes large enough to make it irrational assuming, as Dean says, that you have hit a certain amount of market share.

5320             In terms of the steps that you take to develop the test, I think you could argue that in terms of the practicality the LIR is one of the best approaches you can use.  I think we will stand by point 4 very strongly.  It is probably one of the main points we stand by, point 4.

5321             THE CHAIRPERSON:  All right. But as a practical matter you are saying rather than ‑‑

5322             MR. HENNESSY:  Absolutely. Absolutely.  At the end of the day probably the most critical issue for the cable companies in this proceeding is the concern that premature forbearance or a market definition too small will lead to anti‑competitive targeting.

5323             MRS. BLACKWELL:  Mr. Chairman, if I could just add to that briefly.

5324             I think overall the Commission's objectives under the Telecom Act are national in scope so you should be mindful I think in developing your framework that the framework you develop will in fact produce competitive outcomes that eventually will give you a nationally competitive market and not just pockets of competition.  That is why I think we brought this as well into play.

5325             MR. HENNESSY:  Actually, I guess that is a very good point in terms of the difference between having the Competition Bureau as the final referee and the CRTC.  As we said, under 34(3), the Commission has to be concerned about the continuance and establishment of competition.  I would say point 4 hits that bang on.

5326             THE CHAIRPERSON:  I think I have your point on that.

5327             On the point about substitutability and so on‑‑ I think it is Dr. Ross, is it?

5328             MR. ROSS:  Yes, Mr. Chairman.

5329             THE CHAIRPERSON:  You said that if the costs allowed for the expansion within the ILEC, there is no question that an LIR offers a single point of interconnection but what it doesn't offer is widespread deployment of the network in there.  Have you any sense, you or Mr. Hennessy or Ms Blackwell, on the magnitudes of costs that we are speaking of in order to offer the relatively easy service that you suggest might be possible to provide?

5330             MR. HENNESSY:  Maybe, Suzanne, do you want to go after that?  Could you, if you wouldn't mind, Mr. Chair, give just a little more detail on the question?

5331             THE CHAIRPERSON:  I guess it is that in an LIR you have exchanges and you have cable service. The point was made, and the Shaw people will be here tomorrow and we can ask them specifically, but the point was made that Shaw has started off in an exchange where it offers cable service. I think the argument is that while you do have a single point of interconnection and while you may not need local loops in the area because you are offering presumably service on your own network, you still need to deploy that network out to LIRs.  I suppose the answer across the country is, as Dr. Ross suggested, that the LIRs may vary tremendously in that regard so the extent of build required to truly serve and offer roughly equivalent supply conditions ‑‑

5332             MR. HENNESSY:  Yes. We would never want to leave you with the impression you plug into the LIR and it is game over.  If you happen to be a VoIP provider you still don't have IP to IP interconnection.  You still need 911 agreements with all the municipalities and the exchanges.  You still need trunking between the exchanges. There are the portability issues, access to support structures.  We set it out in our argument, but there are numerous barriers to entry that still exist, even within that kind of area.

5333             What I think is attractive about the LIR is that it has, as the Commission determined, made the first step of interconnection less costly and more efficient, but it is only the first step.

5334             THE CHAIRPERSON:  Thank you.

5335             I am going to ask you to comment on the Telus proposal.  I assume that you are familiar with it in regard to defining the geographic market.  Do you have comments on it?

5336             MRS. BLACKWELL:  Mr. Chair, I am sorry to interrupt your line of questioning.  We will be happy to provide you with our thoughts on the Telus approach.  I just wanted to perhaps re-emphasize an aspect about why we have approached the LIR as a relevant geographic market.  It is to keep in mind that this is the definition phase is to provide you with that conceptual approach that you can then uniformly take across the country as competition develops. It is important that definition happen in a way that, and I am going to get a lot flack from my panel members here because I might just ease into the analogy role, but this is about saying: what could competition look like; where could we see competition; how could it unfold?

5337             The second part when you do your market power analysis is about are we seeing competition unfolding that way.  That is part of the market share.  But you have to know where your frame of reference is going to be going in. This actually provides perhaps a useful segue into the Telus approach, which is they are, if you will, almost making the actual analysis of where you have market entry the driver for the market definition and not the other way in that ‑‑

5338             THE CHAIRPERSON:  In other words, they are not asking where could you have competition, they are saying where do you have competition.

5339             MRS. BLACKWELL:  We don't disagree that is part of the market power analysis, but the issue then becomes, particularly in this early stage of competition rolling out in many parts of the country, is that is almost a shifting sand, if you will, of where is competition today as opposed to yesterday, as opposed to two months. I'm sure that our member panels that will be appearing before you tomorrow will get into this, but they can demonstrate to you how quickly that has evolved.

5340             So the difficulty of saying I want you to look at the market share numbers in this geographic footprint of this particular competitor as it stands today is that it is not the same information you are going to have tomorrow or two months down the road.  So it creates a difficulty in terms of actually having a conceptual frame for assessing the market power of the ILEC.

5341             THE CHAIRPERSON:  Thank you. I think the Telus representatives have undertaken to come back and try and solve aggressively some of those issues, so thank you.

5342             MR. HENNESSY:  I guess the other point on the Telus test is, we discussed it last night amongst the member companies and everybody in the room had a slightly different idea of what it meant and what it applied.  In terms of what Suzanne says, developing objective criteria, I found this bright-line test was so bright I was kind of blinded by the logic of it and unable to see it.

5343             I don't know how you would ever actually apply that test.  At the end of the day, we recognized that applying an objective test across Canada, you are going to have to use some of your other tools in the 94-19 test to adjust things to particular circumstances, but this test sort of has no rational basis.  It has nothing concrete that we can grab onto.  Of the many tests I have seen before us, I would put that one as it didn't make it into the final round.  It is up to you of course.

--- Laughter / Rires

5344             THE CHAIRPERSON:  Duly noted.

5345             You will have an opportunity to comment now or in the next phase in detail on it.  I guess we are only going to hear, because of the order of presentation, about the clarification subsequently, but I take note of what you have said.

5346             Have you had a chance to look at the Commissioner of Competition's amoeba? Do you have any comments on that?

5347             MR. HENNESSY:  Yes. I guess any test that is called the amoeba test ‑‑

5348             THE CHAIRPERSON:  It's catchy.

5349             MR. HENNESSY:  The problem is, and it is just a slight procedural thing, I don't think it is a huge problem, but as you know under the Commission's procedures the oral remarks don't form part of the formal record and so to the extent the exhibits disappeared, they are gone and to the extent we want to talk about the amoeba test, I checked with all our people, none of us actually have the picture.  I know what an amoeba looks like but I am not sure that is totally helpful.  It sort of sounds like a reverse Telus test, but it is kind of hard to comment on something that I haven't seen.  So if we could request that maybe the director actually filed an electronic version on the record so we could ‑‑

5350             THE CHAIRPERSON:  We will communicate with the Commissioner and ensure ‑‑

5351             MR. HENNESSY:  I would appreciate that.

5352             THE CHAIRPERSON:  Because a number of parties have raised that very same problem.

5353             MR. HENNESSY:  Sorry, the Commissioner.

5354             THE CHAIRPERSON:  They only brought a limited number of copies, but I would welcome your comments.

5355             MR. HENNESSY:  I mean if you would like to sort of lay it out a bit I would be happy to try to answer your question.

5356             THE CHAIRPERSON:  Why don't we save that, to save the time of the hearing, to actually have you review it. It is attached to the oral remarks of the Commissioner from yesterday.  I think there was some questioning on it that you might want to also see if the transcripts are available.

5357             MR. HENNESSY:  Thank you.

5358             COMMISSIONER NOËL:  Just for your information, I have a French version of the amoeba here.

5359             MRS. BLACKWELL:  The colour helps.  Thank you.

5360             THE CHAIRPERSON:  I guess one question that emerges, Dr. Ross mentioned it and we have had this with a number of other parties, is what your views might be on, assuming we choose to adopt criteria and define geographic markets, we may well have to define them differently in different parts of the country.  Obviously, the more variations you have the more you are simply looking at particular situations.  The fewer ones you have the more you are likely to not take account fully of every last consideration in every territory.  That is another balance that we have to do in an effort to both provide guidance to the industry on the one hand and fulfil the obligations of section 34 on the other.

5361             Do you have any comments on the use of different geographic market tests?

5362             MR. HENNESSY:  Yes. I will be quick.  Then to the extent you want more detail I will give it to the person who actually has more knowledge on the subject.

5363             The reason that we like LIR as a starting point is that if you look at the way LIRs were set up, they were in many respects reflections of community interest, of census area, census metropolitan areas, census aggregation areas. Therefore, they begin to make sense from a community of interest, but they also make sense from the fact that when you interconnect in there you have an ability to supply any point within the region once you have also overcome the other technical barriers to entry. So as a starting point, the fact that there is that community of interest, the fact that it is defined by the area that you can actually interconnect into provides, both from a consumer perspective and a competitor perspective an overlap that I think is a good starting point to apply to most regions, areas and communities across the country.

5364             If you would like more on that, I am sure Suzanne could ‑‑

5365             MRS. BLACKWELL:  I think that covers most of the ground.  The only thing I would add is that in reviewing again some of the thoughts, at least as expressed in Decision 2004-46, there seemed to be in my mind a thinking about how can we encourage competitors to spread out their serving area beyond just exchange-by-exchange, a recognition of the costs, the capital investments that a CLEC would have to make in order to make that interconnection.

5366             We have pointed to some of the experiences of our members, and I am sure that they would be happy to take you through it, as to the difficulty that they have run into in overcoming that initial boundary of having interconnection. I mean even going back to Decision 97-A, the Commission recognized that the costs of establishing interconnection could in fact in itself constitute a significant barrier to entry.  I think the fact that you have an LIR which provides ‑‑ going forward toward the future, you should see more CLECs taking advantage of that and rolling out their market and their competitive area to encompass those areas.  I think that will give you more widespread competition.  I think that would help support the Commission's objectives in the act.

5367             THE CHAIRPERSON:  Okay. Thank you for that.

5368             Let me ask you a question or two about the transition.  You have heard from the group that preceded you, a multi-stage forbearance.  If one reads section 34 of the act one sees that the Commission in its response to determinations regarding market conditions can be to refrain in whole or in part from some or all of the duties or powers in a variety of sections.  The act contemplates a variety of responses, it seems to me, to factual conditions of competition in respect of services and classes of services.  So far the one group that has addressed that issue and tried to provide for different levels of forbearance is the group before you.

5369             Your approach has simply been no transitional measures are recommended or even appropriate.  It is basically a flash cut from the current regime into the other regime and then everything is forborne, I assume, whereas nothing before that.  I am just wether in your view that is in the spirit of the section.

5370             MR. HENNESSY:  Let me quickly address the key points and then hand it over to Colin.

5371             I think a transition is very dangerous and I think particularly the removal of the win‑back restriction, sort of as you start to move down in terms of ILEC market share, is a huge problem because I don't believe ‑‑ let's say that a 5 per cent, 10 per cent, you said, okay, win-back restrictions are gone, we still rely on the telephone companies for every customer we sign up.

5372             Now the kind of predatory behaviour, anti‑competitive behaviour we are talking about is perfect.  Customer-by-customer you can attack the market and the idea that you would ever have a transition to anywhere if you had ‑‑ took our 30 per cent test, you would never get there because the whole point of the test is to create enough of a beachhead in the market to ensure that competition is working, that it is not just the first 5 per cent of people that are incredibly price sensitive and ready to switch back and forth at a moment's notice, because that kind of churn won't create any kind of sustainable thing.

5373             I don't think there is any evidence that:  one, the telephone companies; a tremendous risk of predatory behaviour; and, already a number of transitional actions that the Commission has taken over the last year, particularly in terms of things like the Bell digital voice tariff, which I assume any other company could walk in and do a similar thing. They already have, if you want more of a generalized rate‑banded win-back regime.

5374             Colin, is there anything you would like to add on that?

5375             MR. LACHANCE:  Thank you, Michael.

5376             Chairman Dalfen, you spoke about the spirit of section 34.  There are three things I would like to comment on. The first is the decision two weeks ago, Decision 2005-53, denying the interim, the request for interim relief in the win-back and promotion rules by Alliant.  The Commission itself invoked the spirit of the win-back rules in denying that, expressing concern about the impact on Alliant's operating territory writ large rather than on the 32 exchanges that were the subject of the application.  There is already some recognition in that decision that the spirit of section 34 requires caution and would order against a transitional regime.

5377             The second aspect ‑‑

5378             THE CHAIRPERSON:  I'm not sure we can infer that from the decision.  It is what it is.

5379             MR. LACHANCE:  It is what it is, but I think the words are instructive.  The Commission considered the balance of convenience.  In considering the balance of convenience, it did give consideration to the ‑‑ actually, I will just use the exact words rather than paraphrasing:

                      "The Commission indicated that it had established the local win‑back rules in order to promote sustainable facilities‑based competition, enforce that rule in the face of violations and extended the time period during which the rule applies based on evidence that three months was not sufficient.  These actions were taken to encourage the development of facilities‑based competition." (As read)

5380             That is paragraph 78.

5381             Then further down at paragraph 82 the Commission notes:

                      "The Commission considers that the degree of harm that could be caused directly to competitors and indirectly to sustainable facilities-based competition in Alliant Telecom's operating territory outweighs any economic harm that may be caused to Alliant Telecom during the course of the present proceeding."  (As read)

5382             The reference to "operating  territory" we take as an indication that the Commission is concerned about competition throughout not only a single ILEC's operating territory but all ILECs' operating territory.

5383             THE CHAIRPERSON:  Thank you for sharing that.

--- Laughter / Rires

5384             THE CHAIRPERSON:  I mean that was an interim decision applying criteria that ‑‑

5385             MR. HENNESSY:  I think two hints are probably enough.

5386             MR. LACHANCE:  I agree.

5387             THE CHAIRPERSON:  Thank you. Okay.  I think I have your answer on that.

--- Laughter / Rires

5388             MR. LACHANCE:  The third point is that Chairman Dalfen had mentioned that the consumer groups appeared to be the first ones suggesting a transitional regime.  It is worth noting that MTS Allstream also proposed a transitional regime but they refrained from asking for relief from the win‑back rules.  As a competitor, they recognized that it is the most damaging of the types of ILEC potentially anti‑competitive activities that they would be concerned about.

5389             THE CHAIRPERSON:  You should have added of course that in the case of cable it lasted after you were rated forborne.

5390             MR. LACHANCE:  Absolutely.

5391             THE CHAIRPERSON:  So it wasn't removed first ‑‑

5392             MR. HENNESSY:  Seven years.

5393             MR. LACHANCE:  And counting.

5394             THE CHAIRPERSON:  But notwithstanding the details of the transition, I guess I was asking you more about the concept ‑‑

5395             MR. HENNESSY:  Yes. Our bottom line is no transition.

5396             THE CHAIRPERSON:  You are basically saying your bottom line is no transition.

5397             MR. HENNESSY:  That's our bright‑line test.

5398             THE CHAIRPERSON:  Right.

5399             In terms of data gathering, Ms Blackwell clarified for me that what you are really looking at is ILEC market loss in a sense and then assuming commensurate competitor gain measured by that loss.  Is that a correct way of putting it?

5400             MRS. BLACKWELL:  We start with the premise that almost every household has a connection to the public switch telephone network.  It is that first and fundamental connection that provides the ILEC the basis for potential exercise and market power.  So what we are looking for is when that ILEC no longer has that is providing that service to that household, so it ties back to the assessment of market power.  It is particularly germane to the residential market where I think ‑‑

5401             THE CHAIRPERSON:  Would that not understate though competitor alternatives.  For example, in the case of a household that switched, could they not have switched to a competitor's VoIP service and to a wireless service as well?  Then you would have in effect two connections replacing one.  You wouldn't count that in the way you are doing it?

5402             MRS. BLACKWELL:  The addressible market is the household.  I mean to the extent that the Commission would see wireless and the Voice over IP as coinciding, as both being necessary to serve that household, that is one possibility you could reach.  The reality though is that what we are looking for is does the ILEC control the service to that household.  There may very well be some households who will decide to have wireless and another local service.  We see that already today.  That is why we believe that for the most part they are still acting as complements in the marketplace.

5403             THE CHAIRPERSON:  I know that household is the way you are measured as an industry, but of course you don't want all of the features in that forbearance to apply here, for example, the threshold.

5404             MR. HENNESSY:  Actually, if we could have an immediate flash cut to 100 per cent interconnection, an ability to serve every household at once and none of the barriers to entry in terms of portability, a good start but, no, even then I wouldn't trade for the 5 per cent.  But as I said that was a broadcast world type thing where we didn't start with 100 per cent of the households and we didn't ‑‑ you know, that the satellite guys never had to interconnect or depend on the incumbent to compete.  Those are I think just so critically different elements that they can't be overlooked.

5405             THE CHAIRPERSON:  Going to household, I am wondering whether in this environment where the general way of counting market share tends to be across ‑‑ the OECB World, for example, I am sure you are familiar with their reports ‑‑ lines is what they tend to count, and lines which unless you correct me I am taking connections to be equivalent to as put forward by a number of parties in this proceeding, why wouldn't we carry on with that method of counting a competitor in market share?

5406             MRS. BLACKWELL:  Certainly, we have described lines as possibly a second-best approach.  I think I have already described to you what we think are the conceptual benefits of going with households as the unit of demand, if you will, for connectivity to the PSTN, that source that you might use to make that 911 call, if you will.  If you go with lines then you are moving into the realm ‑‑ you are going to have to count every telecom service provider in the local market's lines, you are going to have to make sure that you know, for example, not only how many lines does Vonage have but which relevant market are you assigning them.

5407             You need to know for the wireless, if you wanted to count that, is it the ILEC wireless, is it actually a substitute wireless?  There has been some interrogatory responses where we have set out some of the concerns we have of the proposed approach to that.  You actually have the joy of tracking down all those local service providers and making sure they report on the frequency you want and report accurately on the same basis.

5408             I think you can get to pretty much the same place by going with the household approach and you would I believe simplify the measurement of it.

5409             THE CHAIRPERSON:  Thank you. That is clear.

5410             Should we decide though to go with lines, you are not suggesting that cable operators would be among those from who it would be difficult to extract the data, are you?

5411             MRS. BLACKWELL:  The cable companies that already participate in your telecom monitoring process are reporting information on a basis that I believe the Commission is finding acceptable to date.  I think we have discussed in some interrogatory responses the potential to increase the administrative burden as you increase the frequency and increase the geographic refinements and microlevels that you want to measure.

5412             For example, as we have sort of alluded to with Telus, as you are evolving the footprint of where that telephony service is offered, whether it is a cable company or a wireless CLEC, you are going to have to continually make sure that you have the right measure of those lines for that footprint on whatever frequency you think you need to have in order to keep on top of the development and the state of competition.

5413             THE CHAIRPERSON:  Right. Should the Commission wish to go ‑‑ and I appreciate what you are saying and I appreciate this might in some ways add to regulatory burden, but on the other hand, provide us with updated information that would allow us to be closer to what is actually going on now in any market, if we were to request that reporting be done on a quarterly basis.  What would be your reaction to that from the cable industry's point of view?

5414             MS BLACKWELL:  Depending on what your geographic market level of disaggregation that you want, quarterly may be quite doable.

5415             I think one of the things people to is that publicly‑traded companies obviously report some information quarterly.  I think some of the cable companies have indicated they will be releasing their local lines quarterly.

5416             It will be on their total operating territory.  I don't think you are going to start seeing it broken down by serving area.

5417             But the other aspect is that we have some cable companies who do not report on a calendar year, so you are going to have to have some analysis to track it back.

5418             Just if I might mention, in the IXPL market, not that we want that test either, but that is tracked on a biannual basis, so...

5419             THE CHAIRPERSON:  Right.

5420             MS BLACKWELL:  So that seems to be sufficient for that basis.

5421             THE CHAIRPERSON:  Right. Have you got any sense now of how many of your members have announced plans to offer local telephony or are already doing so?

5422             MS BLACKWELL:  Well, we have the companies that are appearing before you later.

5423             THE CHAIRPERSON:  Right.

5424             MS BLACKWELL:  Those are the ‑‑ there is also Mountain Cable.

5425             THE CHAIRPERSON:  Right.

5426             MS BLACKWELL:  There are some small cable companies that have launched a telephony product and I believe that is subject of a part 7 application for before you and there is a list in that application of some of the companies.  Some of them are CCTA members, some of them are not.

5427             THE CHAIRPERSON:  Thank you very much.  Those are my questions for now.

5428             MR. HENNESSY:  Mr. Chair, could I just ‑‑ one clarification on your thing.  It is very quick.

5429             Just to be clear, if we were counting lines we would, you know, very clearly, as we have taken the position, we do not consider wireless to be a substitute and therefore would not consider that it should be part of the count.

5430             THE CHAIRPERSON:  So even if indeed that was the only connection to a household?

5431             MR. HENNESSY:  Well, the only way that you would be able to, I think, determine if it was the only connection to the household is to go back to our model that, you know, demonstrates when the telephone company no longer serves the household.  You automatically get the wireless there.

5432             But if you count lines, then suddenly we are talking, you know, 15 million cell phones and the whole math, you know, falls apart.

5433             THE CHAIRPERSON:  I see what you are saying.  You are saying basically that the wireless providers cannot tell you whether they have gotten customers who have substituted or not.

5434             MS BLACKWELL:  That is my understanding for the record.

5435             THE CHAIRPERSON:  Yes, okay. Well that is a fair point.  We'll take that up later.

5436             MR. HENNESSY:  And I think the 2.7 percent number actually came from the Stats Can and is extrapolated from household.

5437             THE CHAIRPERSON:  Right. Well, I think a number of parties have recommended that we use alternatives sources ‑‑ supplementary sources of information as well, the objective being to get an accurate reflection of what is going on in the marketplace and if the reporting doesn't do it to perhaps use other sources.

5438             I do not know whether you have any comments on that.  Surveys was one and other sources of data was another.

5439             Do you, Ms Blackwell, have any comment?

5440             MS BLACKWELL:  Well, the interesting thing again comes back on certainly Stats Canada does it survey. It does it, I think ‑‑ used to do it twice a year.  It is going to once a year.

5441             THE CHAIRPERSON:  Right.

5442             MS BLACKWELL:  But that is households surveys, 40,000 households are included in that, and the difficulty with that is it ‑‑ I mean, it might very well give you overall trends on a national and provincial basis, but trying to drill down into individual cities, particularly into some of the smaller cities, you run into what we call error measurements, problems of actually being able to say, well, so it is 4 percent wireless‑only households, but it has got an error margin of plus or minus 2 percent, so, you know, you are not sure how instructive that is.

5443             THE CHAIRPERSON:  I take your point.  Thank you.

5444             Commissioner Langford?

5445             COMMISSIONER LANGFORD:  Thank you, Mr. Chairman.  It is a long day and I will try to be brief.  I do not have many questions.

5446             Just picking up on that household cell phone ongoing discussion, Ms Blackwell, you indicated earlier, I think you said, please correct me obviously if I have it wrong, that households that no longer were taking wireline in any form, traditional or VoIP, i.e., had gone totally over to wireless, you thought could be put into the competitors' column for establishing marketing shares; is that right?

5447             MS BLACKWELL:  That would be the result of our measurement.  You would have in that competitor column as well competitors, voice over IP, you would have leased loop competitor households ‑‑

5448             COMMISSIONER LANGFORD:  No, but I just want to do wireless.

5449             MS BLACKWELL:  Okay.

5450             COMMISSIONER LANGFORD:  What about the wireless customers who were still ILEC customers, Bell Mobility, say?

5451             MS BLACKWELL:  Well, ideally, I should think as the Competition Bureau itself has recognized on that, that the ILEC would still have ‑‑ control that household in that respect.

5452             I don't believe that there is enough accurate information from them as to be able to say this wireless customer I have is a residential customer who has nothing else from me in terms of PSTN connectivity except for this wireless phone, so in all ‑‑ in a perfect world, yes, you would do that analysis.  I think in a practical sense, particularly given where we are in wireless‑only households, that it is a nice‑to‑have, but we are not going to have to ‑‑ be able to have it.

5453             MR. HENNESSY:  In a real sense, too, what happens when you only ‑‑ when you count the households that no longer take wireline service from the ILEC is that it does not matter who supplies the wireless service, to the extent that that is the substitution and not some other reason, so Bell Mobility ‑‑

5454             COMMISSIONER LANGFORD:  Why do you say that?

5455             MR. HENNESSY:  Well, because you cannot ‑‑ I don't think practically you can count it and what we are saying ‑‑ what we have always defined the market on is the wireline market.

5456             So if somebody gives up phone service for economic reasons, chooses a different VoIP provider or goes to a wireless service, affiliated or not, the house is no longer connected on a wireline basis and you do not count that households.

5457             COMMISSIONER LANGFORD:  But you are saying if they are on wireless to put them into the competitor's side.

5458             MR. HENNESSY:  That's right.  Even if it is Bell Mobility.

5459             COMMISSIONER LANGFORD:  Generally‑‑

5460             MR. HENNESSY:  You are just basically saying that ‑‑ we are talking about the product market is the wireline market; so, therefore, if the telephone companies no longer serve 30 percent of the wireline market in terms of households, then you proceed to stage 2 of your forbearance test.

5461             COMMISSIONER LANGFORD:  I mean, that is just reductio ad absurdum, but if they'd all gone to wireless, so that, in fact ‑‑

5462             MR. HENNESSY:  I guess if 30 percent of them all went to wireless then we might have to come back here and redefine the test, because we are still saying wireless is not a substitute. We are just saying let's say we are wrong, and 3, 4 percent go wireless I don't think it is fair to challenge the customer.

5463             But I see my whole team is sort of being very antsy here, so that may mean that I've totally said the wrong thing.

5464             COMMISSIONER LANGFORD:  Well, you are generous, let me put it to you that way.

‑‑‑ Laughter

5465             COMMISSIONER LANGFORD:  I mean, if 3 or 4 percent went and the test were 5 percent, I would suggest you had been overly generous this afternoon, but I leave it with you.  I have your answer.

5466             MS BLACKWELL:  Commissioner Langford, just one little, little point ‑‑

5467             THE CHAIRPERSON:  What he meant to say was ...

‑‑‑ Laughter

5468             MS BLACKWELL:  If I could just clarify.

5469             COMMISSIONER LANGFORD:  Absolutely.

5470             MS BLACKWELL:  Our 30 percent test, I just want people to keep in mind, is not the bright‑line test, throw the switch, out you go.

5471             I think to the extent that your part of the test where we say let's look at the number, the type of competitors serving that market, if you were to find, as you suggest, it is 30 percent, it is all wireless and it is all, you know, the ILECs' wireless service, that might be a very significant consideration.

5472             COMMISSIONER LANGFORD:  You think we might look at that?

5473             MS BLACKWELL:  I think it should be worthwhile.

5474             COMMISSIONER LANGFORD:  Okay. We will.

‑‑‑ Laughter

5475             COMMISSIONER LANGFORD:  Thank you for that.

5476             I wanted to ask you about the geographic footprint plan of Telus's, the notion that the competitor footprint is what we should use and you do not like that plan, I know that, but I am interested in one aspect of it and it may be that I should direct this question to Rogers tomorrow, but as you folks are close, I thought you might have some views on it.

5477             What I would like to know is whether you know whether Rogers' telephone business and the CallNet telephone business they have purchased, so their VoIP telephone business ‑‑

‑‑‑ Cell phone rings

5478             COMMISSIONER LANGFORD:  And that one over there ‑‑ we may be getting the answer here ‑‑

‑‑‑ Laughter

5479             COMMISSIONER LANGFORD:  "It is a quart of skimmy and two pounds of round ground.  Okay.  And where are you?  I am dressed and ready to go."

‑‑‑ Laughter

5480             COMMISSIONER LANGFORD:  I will try to be quick.

5481             If, for example, Rogers ‑‑ because they have become a kind of unique beast now.  They have got this VoIP business that they are rolling out and they have purchased CallNet, which is a traditional CLEC approach to competing, so how would you, if we tried to make the Telus, just for sake of academics here, we are trying to make the Telus footprint argument work, how would we make it work with a beast like that?  Or would it be impossible?

5482             Would there be, for example ‑‑ it would be easy to trace the cable part of it, but then if it somehow interconnects with the traditional CLEC part of it, which may be connecting in LIRs and, you know, intense ways in some LIRs or some part of them, but not in others.

5483             I just wonder whether you could giving me any guidance or whether I should wait and speak with Mr. Engelhart, always a doubtful proposition, but ...

5484             MS BLACKWELL:  Well, I am sure that Mr. Engelhart and his panel of colleagues will be happy to add to anything I might suggest here, but I don't think it is necessarily specific to the Rogers/CallNet situation.

5485             If the definition is you have to be a full facilities‑based CLEC and you have to be full facilities‑based CLEC as in you are not leasing loops, then I am not sure that you don't end up with pockets, whether it is CallNet or another ‑‑ I don't know, not to suggest FCI Broadband, I am not as familiar with their plan, but there may be with any primarily facilities‑based CLEC areas that they are going to run into, whether it is an office tower or in the residential case a condominium complex, where you are not going to be able to get access to that building using your own facilities, so you are going to be back to using leased loops or leaving it aside.

5486             If you're marketing properly, you know, you are not going to leave it aside.

5487             COMMISSIONER LANGFORD:  Is that ever going to be true of a straight VoIP cable carried product?

5488             MR. HENNESSY:  I think what Ms Blackwell was saying in terms of your question is, yes, it would be impossible.  With respect to the Telus test it would clearly under those circumstances fall apart.

5489             COMMISSIONER LANGFORD:  Okay. It is interesting you are so clear on that point, but thank you.

5490             I wanted to ask you about what I think I see as your preoccupation sort of with predatory pricing possibilities, prices dropping through the floor possibilities, and yet I don't hear anything about the possibilities of prices going up and I wonder why that is, because in one clear case of forbearance that I can think of, i.e., in the cable industry, price for basic service has gone nowhere but up after forbearance and I wonder if you could tell me why you do not think prices might go up in the phone business?

5491             MR. HENNESSY:  Well, you know, I think as I said, I think it is an apples and oranges comparison.

5492             The principle reason that prices go up in cable is because the Commission keeps adding must‑carry services and setting basic wholesale rates that continue to be higher or, you know, 10 percent increase for 918 services across the board.

5493             So you have to look ‑‑ the biggest cost to a cable company comes from its wholesale fees it pays to the programmers in the Canadian broadcasting system, you have to carry most licenced broadcasters, the Commission influences the price to a significant degree, and, you know, when you add in our take, it goes up.

5494             If the Commission said, for instance, that you didn't have to carry as many services or offer as many services to a customer, then it is quite possible that the customer would have more flexibility and a lower bill.

5495             COMMISSIONER LANGFORD:  So you are telling me that all the price increases ‑‑

5496             MR. HENNESSY:  Not all of it.

5497             COMMISSIONER LANGFORD:  Ah.

5498             MR. HENNESSY:  No.

5499             COMMISSIONER LANGFORD:  So then there is still ‑‑ our predilection for forcing you to bring fine cultural products to Canadians aside ‑‑

5500             MR. HENNESSY:  Which is ‑‑

5501             COMMISSIONER LANGFORD:  ‑‑ there has been some rise in prices that come from cable companies' headquarters, rather than from Rue Promenade, where we hold court.

5502             MS BLACKWELL:  I think perhaps we go back to what I thought was the understanding ‑‑ my understanding of your question, and we can go back to the broadcast cable rate issue, but you can ‑‑ whether you want to define in the Commission sense and turn this into a proceeding are we concerned about basic cable rates, and that could be an interesting one ‑‑

5503             COMMISSIONER LANGFORD:  No, I don't want to turn it into that.  I just used that as an example of a forborne situation where prices have gone up and I wonder why you have spoken so eloquently about the fears of prices going down, but have not mentioned that possibility at all.

5504             MR. HENNESSY:  Well, I think one of the things that you want to think about in the telecom world, everybody keeps saying that the costs are going down, the costs of supplying services, so I guess to the extent that you are targeting competitive areas and do not pass on any of the cost savings to consumers ‑‑ by the way, which is part of what you attempt to do anyways is the price cap proceeding ‑‑ then it is not just an issue of prices going up, right?

5505             The other thing is that ‑‑ you follow me?  I mean ‑‑

5506             COMMISSIONER LANGFORD:  No, I don't.  I would like you to do that again.

5507             MR. HENNESSY:  Okay. For every unit ‑‑ you know, if your unit cost goes down and your price stays the same, then that is kind of the same as raising your prices if your unit cost stayed the same, if you follow me ‑‑ and if you do not, that is because I am not a economist ‑‑ but I think there is a lot of ‑‑ you know, obviously the reason ‑‑ and the other reason, of course, is you have price caps.  But the reason you have price caps is because of that very thing.

5508             COMMISSIONER LANGFORD:  But I guess what I'm asking you is something much simpler than that.

5509             Why shouldn't we be afraid in a forborne situation where likely, unless the world changes ‑‑ and it could ‑‑ but likely looking at what we have today, we will have duopolies in many markets, why shouldn't we be afraid that for some reason prices will go up rather than go down?

5510             MR. HENNESSY:  Well, I think that, you know, as Chris Taylor and the consumer panel suggested, you do have to worry about that kind of thing.

5511             It is not our principal concern, because we are not, you know, as worried about that classical "they are going to raise some prices here to hammer us there" because, as we pointed out, the real concern is that as long as they can target us early on they do not have to recoup that if they protect their market share, which is, you know, generating four billion dollars in EBITDA. That is the real incentive.

5512             But it is not something, you know, it is quite clear, as the consumer panel said today, it is something the Commission should be concerned about. It is not our number one concern.

5513             But I know Tom wants to comment on that and dig me out of this hole here.

5514             MR. ROSS:  Commissioner Langford, I am happy to address that.

5515             David and I in our report did address the issue of what are the different kinds of anticompetitive outcomes possible through forbearance and we did spend quite a bit of time talking about predation that would lead to, you know, restoration of monopoly or preservation of substantial market power in the hands of the incumbents, but we did talk about as well the duopoly problem.

5516             I mean, we are competition economists and no competition economist can be too excited about duopoly.  That does not get our competitor ‑‑ thinking of fiery competitive markets.

5517             But we spent some time thinking about it and you heard the Competition Bureau did as well and so we have ‑‑ we considered the factors present in this market, such that the nature of the rivalry between these particular firms right now, the asymmetry in their sizes, the ‑‑ many factors, and the Competition Bureau went through some of them as well, which led us to some confidence that, you know, collusive or co‑operative behaviour was probably not the major concern.

5518             That is not to say that it is no concern.  You know, as I say, two competition economists can't really look you straight in the eye and say, "Duopoly, no problem," especially given that there could be, you know, significant barriers to entry to a third facilities‑based kind of service.

5519             One of the other things that gave us some comfort, though, is the fact that there are all these alternatives technologies kind of trying to jump in, which will, you know, we could be dealing with fixed wireless at some point and we have got, of course, the new generation of VoIP, so all of these things I think also helped us come to the conclusion that sort of collusion and high prices as a result of forbearance were much less likely a concern.

5520             COMMISSIONER LANGFORD:  Well, thank you very much.

5521             I am glad you used the word "collusion," because I never would have, of course.

5522             I've just one last quick question.  I understand that you are very much against any kind of a transitional system and you have been very clear on winbacks and what they mean.

5523             There was one other aspect to the sort of complaints, if I can put it that way, or the problems that the ILECs said they were confronting and that was just in the sense of products they could offer.

5524             So winbacks aside, promotions aside and that sort of thing, they felt handicapped, a number of them, Aliant, Telus, and some of the others, because they felt they couldn't offer the same products as the cable companies.  They could not in fact bundle local service with anything else.

5525             In your mind, would that be some sort of a transitional relief we could offer at some sort of point along the line for them so that they could at least be selling the same product you're selling?

5526             MR. HENNESSEY:  I don't think there is any restriction on the telephone companies being able to bundle. My understanding of the Commission's decision earlier this year is that they clarified that bundling was okay as long as the local element passed the imputation test.

5527             Now ‑‑ so for a company like Bell it's not a problem. For other companies, they're now rolling out DSL.  In fact, if you look at the situation in Manitoba, you know, the telephone company is in ‑‑ in Winnipeg is doing quite brilliantly, much better than we had ever hoped.

5528             COMMISSIONER LANGFORD:  Well, they're bundling forborne products, but I don't think any of them are bundling local service and forborne.

5529             MR. HENNESSEY:  Well, yes, if you look at the Bell digital voice tariff, there is ‑‑ you know, it's certainly a bundle.  It's not some those elements you're talking about, but it is a discounted bundle service you just approved on an interim basis a couple of weeks ago.

5530             But there's nothing to prohibit them from doing that and there's certainly incredible flexibility to offer discounts to the extent they want to and have the flexibility to.  The point is, they don't want to.  No telephone company wants to offer a whole bunch of consumers a discount that is going to cut into the revenues and the EBITDA and the dividends and everything else.

5531             Let me give you the classic example because it goes to appeal we've been fighting in cabinet.  The Saskatchewan government is very angry at the Commission because the Commission supposedly didn't give them enough flexibility in the VoIP decision to compete. Now, here is a telephone company that's owned by the government, so it doesn't have to pay taxes.  It has a hundred percent of the market.

5532             Look at a map of Vonage, Vonage's North American map on the website. There's a big hole in Saskatchewan. Here's a supposedly ‑‑ you know, a no barriers to entry VoIP guy, it can't get into Saskatchewan, 100 percent.  But obviously not enough and what's ‑‑ so what's the problem?  SaskTel owns Navigata outside of the province, so they have the technology.  They're owned by the government, they don't pay taxes.  They could give every consumer in the province or every consumer in a rate band a VoIP alternative.  The Commission, given the evidence on the Bell proceeding would approve that on an interim basis quite quickly.

5533             They have the technology to do it and they'd have a head start over everybody but why would they do that?  Why would they cut into, you know, what goes into general revenues if they don't have to as long as the barriers to entry are so significant that nobody's going to come in.  So the idea that this is all about helping consumers from the perspective of the ILECs, I think it will take the Bell digital voice tariff.

5534             If you go to the launch of the service and listen to the new president talk to the investment community, he says we're not going to promote this, you know.  This is merely a win back tool in terms of a service because it's banded.  It's a legitimate opportunity to put an offer out in the market as long as they don't use it illegally.

5535             But they don't promote it.  They don't want to promote it.  They want to target it because it makes sense.  The more you can target, the more you slow down entry and then you don't have to worry about giving discounts to all the customers and you're better off. That's the story, it's totally rational and we see it every day in the market.

5536             And the best example right, the most competitive province we're looking at is Nova Scotia where across the province Aliant has a 16.5 percent share of the market with, you know, super discounts from day one.  16.5 percent after five years.

5537             What does that say about barriers to entry?  It says they're still incredibly substantial.  So, you know, I'm sorry, when I hear the telephone companies say they don't have any flexibility, given the price gap ‑‑ you know, I'm going on.

5538             COMMISSIONER LANGFORD:  I've got to stop you now Mr. Hennessey because the Chairman's got to go shopping. Thank you very much.  Those are my questions.

5539             THE CHAIRPERSON:  Thank you. I think you meant EastLink.  You said Aliant.  Commissioner Cram.

5540             COMMISSIONER CRAM:  I just have one question and it's the circumstances under which you would amalgamate LIR's or not.  And I think your argument was the size of the LIR's in Nova Scotia and the fact of competitive conditions and market outcomes likely to develop province wide.  I need help on this because what do you mean about competitive conditions and market outcomes likely to develop province wide? Is it that ‑‑

5541             MR. HENNESSEY:  Let me ‑‑ Suzanne Blackwell can basically explain to you how telephone service has been marketed by the ILECs traditionally in Aliant territory. And then I'd like to get back to a point about the whole scale of the operation there.

5542             MS. BLACKWELL:  I think just ‑‑ the interrogatory reference that went through that was the response CCTA CRTC 211.  When you look at actually how EastLink is rolling out, they do have their cable plant and they are actually going to be launching telephony in the remainder of the LIR's, if they haven't to date.  I believe they discussed that both on the public record and probably in more detail in some of the other responses they filed in confidence.  So I think the Commission can look at the circumstances there as well.  But our sense is that when you look at the Province of Nova Scotia, the scale for an operator like EastLink really does recommend, again, those LIR's.

5543             We have not found that kind of circumstance so far going across the rest of the country, but we are quite concerned about that one in particular and we do go through those reasons in that interrogatory response.

5544             MR. HENNESSEY:  If you look at the province of Nova Scotia, I believe EastLink's subscriber count is just a little over 200,000, 205,000.  That's cable subscribers.  The Aliant territory, because, again, if you're looking at the ability to use EBITDA free cash flow to compete is in total, Suzanne, 800 ‑‑

5545             MS. BLACKWELL:  The residential line count is about 850,000.

5546             MR. HENNESSEY:  Okay. If you just think about the telephone business and rolling things out on a facilities basis, it's still a scale business.  And Aliant's estimates are in Nova Scotia now that EastLink has somewhere approaching 70,000 subscribers.

5547             So if you think of that, even on a province wide basis, and they have to compete on a province wide basis and have the offer pretty homogeneous across that province, that is an incredibly small scale.  So you've got a family‑owned company, private money, competing against a BCE‑owned company that itself is spilling off down in Atlantic Canada a few hundred million dollars in free cash flow.  And that's a tough slide.  You know, to be able to hit a sustainable level to cover the investment that the family put into that business in a market where nobody else has really come in is a tremendous challenge.  And we just don't think that, you know, one LIR, given the small size of the province of Nova Scotia, is sufficient.

5548             COMMISSIONER CRAM:  So I get back to what I think I said the first day.  Should there be a minimum population, an LIR or a combination of LIR's with a minimum population of in order to sort of put some rules around when LIR's would be ‑‑ because really what you're talking about is this small population, not necessarily the size of the LIR, but ‑‑

5549             MR. HENNESSEY:  Yes, you have to ‑‑ in terms of the whole part 2 test when you're looking at things, you do have to, you know ‑‑ what is sort of a minimum number of population, I think to get to your point, that is going to lead to the continuance and establishment of a competitive market, 34.3 of the Act.

5550             COMMISSIONER CRAM:  And if I hear you, what you're saying is 200,000 or so.  But then that wouldn't get us to PEI.

5551             MR. HENNESSEY:  Well, the problem is that in terms of Nova Scotia it just doesn't really get any bigger.

5552             MS. BLACKWELL:  Perhaps just to ‑‑ perhaps the Commission will want to take a look at some of the more detailed evidence you have about ‑‑ I know, Commissioner Cram, you have been asking some questions about exchanges, how big are they, how many do you need.  This is not a novel concept.  We were ‑‑ in one of our interrogatory responses, CCTA CRTC 204, we pointed to some testimony that Dr. William Taylor provided on behalf of actually the incumbent SBC in Wisconsin, and I think that issue around scale is something that he said and I quote from it, "A rate or wire centre would be too small a serving area to enable competitors to achieve the proper scale of scope."

5553             So I think you are heading on the right track that whether or not a competitor could, if they expanded to the entire geographic market, have sufficient scale and scope.  I think what we were saying is in the province of Nova Scotia it makes more sense to aggregate across those four LIR's across that province.

5554             We have also outlined other reasons in terms of how we are seeing that market being priced, the Aliant prices are uniform, the bundles are uniform.  We looked at in terms of high speed internet, that's on a province wide pricing.  So there are a lot of things in that market where other buyers and sellers say, "I'm looking for a uniform price across the province, I'm looking for a uniform supply, and I'm sure that EastLink would be happy to talk to you a bit more about how they're rolling out and how they will be able to serve the major centres on that province.

5555             COMMISSIONER CRAM:  Thank you. Thank you, Mr. Chair.

5556             THE CHAIRPERSON:  Thank you. Commissioner French.

5557             COMMISSIONER FRENCH:  We are hearing two stories about predation and one story, I would venture to say, is the orthodox ‑‑ the orthodoxy in telecom economics represented by the ILECs economists who tell us that recoupment will be too difficult, and therefore predation is not a valid strategy.

5558             And we've heard another story which, in my opinion, and this doesn't have anything to do with its validity, is a minority opinion in industrial organization and competitive theory, that is the reputational argument, I fight you hard here, you never want to come near me again.

5559             You know, I was taught that that was a minority view, but that didn't mean it wasn't valid.  I guess I still want to give Doctors Ross and Gillen a last opportunity to provide me with any other kind of intellectual sustenance to sustain the credibility of a predatory threat.  And I'm not saying I don't believe the kind of argument that I've heard from the CCTA and some other parties, only that it doesn't appear to me to be sustained by any sort of rigorous economic theory that I can hold onto and get my teeth into.

5560             So I've heard from the Competition Bureau, who, frankly, went out of their way to tell us and the world that they didn't find the argument that the CCTA presented to meet their standards.  And they are, after all, a crown agency and don't have a dog in this fight or at least not a commercial dog in this fight.  So I'm asking you or giving you the opportunity please to say whatever else it is you think you want to say about this so we have it on the record and appreciate the illumination that will follow, I hope.

5561             MR. ROSS:  Well, thank you, Commissioner French.  I'm delighted to have this opportunity.  What I think some analysts in this case, in this matter might be missing, what seems to be a very important element that speaks to the feasibility and profitability of predatory tactics is the ability of firms, incumbent firms in these market to target their response.

5562             Now, you're quite right, predatory pricing theory has evolved over time. There was a time earlier in the 20th century when there was great suspicion of big business and there was a feeling that predation was happening all the time and the little guy never had a chance.  And then we kind of moved, theories kind of moved.  You probably don't want all this history.

5563             The thinking evolved, let me say that, it evolved quickly and we realized that predation is challenging as a strategy and the argument made quite often is predation is very expensive.  If you're going to lose a lot of money for a lot of time serving the market so that you can drive somebody out, how are you going to make that back?  You can treat that like an investment, but can you get a return on that investment?  And there are many conditions under which you really can't.

5564             So then the profession became very suspicious that predatory pricing was very important, despite the fact that business people were telling us, you know, it happens.  We said, well, but it doesn't happen in theory.  Well, it happened.  Well, eventually theory caught up and theories developed.  Deep pocket models, which suggest sometimes if you've got a competitor that is not as well financed it can be basically run to the wall and is unable to secure additional financing, can be run to the wall by a predator with deeper pockets.  We just call those deep pocket theories.  So those theories are in our theory book now.

5565             And we also have the kind of reputation theories that you have alluded to in which firms may be, in fact, willing to undertake a costly predatory action in one place at one time if it preserves profits somewhere else. Someone else doesn't enter against them in some other location.

5566             Now, what's, I think, significant in this particular situation ‑‑ first of all, I think both of these theories can find a plausible ‑‑ and we talk about this in our report, which if you've read our report, that's twice as many people as read the last paper I published.  When you ‑‑ I think ‑‑

5567             COMMISSIONER FRENCH:  I hope you got paid up front.

5568             MR. ROSS:  The deep pockets models might have some currency when you think particularly of some of the smaller cable companies competing against very large telephone companies.  That's kind of a direction I would look to see if they might be applicable in those circumstances, and the reputation models might apply ‑‑ and they can both apply, they're not mutually exclusive.  The reputation effects might be relevant in other circumstances.

5569             But what's really key here is that a lot of the general suspicion among industrial organization economists such as ourselves about predation, it was built on a foundation which we believe, well, when you predate you lower price to the whole market and that's really expensive.  Well, it would be.

5570             But if you can predate by targeting very selectively, targeting geographically or even finding the individual people that are trying to leave, so you don't offer lower prices to the whole market, yeah, that would be expensive and that is pretty unlikely.  But if you can target, then predation becomes a much less costly strategy and these theories have, I think, greater currency.

5571             Targeting is so important I'm going to actually ask David to speak to this.  Targeting has come up in other circumstances, specifically in airline predation cases.  David, why don't you explain.  David's a great expert in airline matters.

5572             MR. GILLEN:  Thanks. In the case of the airline industry, and recently in Canada, we have the Air Canada West Jet, Can Jet case, and in that case there was an actual targeting of a flight.  And you can do that in two ways.  One is that you actually bracket it.  So if West Jet went in with a noon flight, Air Canada would put a flight in before and a flight in after.

5573             But, in fact, what they actually did is they targeted specific passengers on that flight flying between specific OD's and those fares were set so that they would specifically target those passengers that would be vulnerable to Air Canada, and this is precisely the point that Tom is making. They didn't have to lower the fares to everybody, just the people who would be more likely to switch.

5574             And this is not unique to Canada.  This has also happened in a Lufthansa case in Europe and a Northwest Air case in the U.S. and an American Airlines case that was subsequently thrown out.  A KLM Easy Jet case, and then Quantas Virgin Blue.

5575             So the notion targeting we are seeing, in fact, happening in the real world and I think that the literature has to catch up with it.

5576             MR. ROSS:  If I could just jump in with one more point, and please just cut me off if it's more information than you wanted.

5577             One of the big issues that comes up is the recruitment issue.  You know, if you go through a period in which you're losing money or at least not making as much profit as you could have, will you be able to earn it back.  And quite often the argument is made, well, you'll only be able to make it back if you can raise price a lot higher afterwards.

5578             Well, in a case where you're starting from, your starting position is profitable for you, then recruitment ‑‑ you might be able to get sufficient recruitment by just going back to it.  You go through a predatory episode and then just go back because you'll have ‑‑ you'd rather have a whole of a profitable market than only a fraction of a profitable market.

5579             So there's not a sense that for recruitment to work ‑‑ I just want to stress ‑‑ the price is going to have to end up higher than it was before the entrant came in.  It's enough if you're currently profitable to just try to get back to that position and get them out.  As David said, we were saying, the targeting is key here and the targeting in these cases seems to me even more precise than what the airlines were able to do.

5580             COMMISSIONER FRENCH:  So we have a deep pockets capital markets, inefficient capital markets type theory, and we have a reputation/targeting type of theory, and these are the basis on which the case has to be made to sustain the kinds of controls that are present on the ILECs.

5581             MR. ROSS:  That's what economic theory has to contribute to this.

5582             COMMISSIONER FRENCH:  Thank you.

5583             THE CHAIRPERSON:  Commissioner Williams.

5584             COMMISSIONER WILLIAMS:  Just a quick one.  I want to go back to the post‑forbearance opportunity for rate increases that was brought up by the other end of the table earlier.

5585             Prior or before rate regulation cable TV, were there price increase restraints tied to CPI or cap X that may have produced a pent‑up appetite or need for rate increases once deregulation had taken place?  And if so, in your opinion is there also a pent‑up appetite brought upon by regulations such as price caps so that rate increases could be possible in a deregulated world for the ILECs, or is there enough margin in the falling costs argument to sustain their profitability needs?

5586             MS BLACKWELL:  It must be the lateness of the hour, Commissioner Williams.

5587             So what we are postulating is have the price cap ‑‑ has the price cap regime perhaps kept residential rates lower than what some people refer to as competitive levels so if you forbear could you ‑‑ is it the concern that prices would rise?  Is that the issue?

5588             COMMISSIONER WILLIAMS:  I am just wondering if that's a possible explanation as to why some of the cable rates rose in a post‑forbearance market and if there was a similar correlation in the telephone market?

5589             MR. HENNESSY:  It is certainly a possible explanation.  I think that that question would be best asked to some of the operating panels that actually ‑‑ there are people on the panels that were actually involved in the rate‑regulated environment and they are probably better to answer that question.

5590             COMMISSIONER WILLIAMS:  That's fair by me.  It is pretty late.

5591             THE CHAIRPERSON:  Thank you very much.  Those are our questions.

5592             We will adjourn now and resume at 9:30 tomorrow morning with the next panel. I take it that we are going to begin with Cogeco; is that correct?

5593             THE SECRETARY:  Yes, that's correct, with Cogeco.

5594             THE CHAIRPERSON:  Nous reprendrons demain matin à 9 h 30 avec la délégation de Cogeco.

‑‑‑ Whereupon the hearing adjourned at 1903, to resume

    on Thursday, September 29, 2005 at 0930 /

l'audience est ajournée à 1903, pour reprendre

    le jeudi 29 septembre 2005 à 0930

 

 

 

  

 

                      REPORTERS

 

 

 

 

 

____________________      ____________________

Richard Johansson            Fiona Potvin

 

 

 

 

____________________      ____________________

Jean Desaulniers          Sandy Kelloway

 

 

 

 

____________________

Shari Bakalar

 

 

     

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