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TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TRANSCRIPTION DES AUDIENCES DEVANT
LE CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
Review of regulatory framework for Northwestel Inc. /
Examen du cadre de réglementation
applicable à Norouestel Inc.
HELD AT: TENUE À:
Convention Centre Centre des congrès
High Country Inn High Country Inn
4051 4th Avenue 4051, 4e rue
Whitehorse, Yukon Whitehorse (Yukon)
July 11, 2006 Le 11 juillet 2006
In order to meet the requirements of the Official Languages
Act, transcripts of proceedings before the Commission will be
bilingual as to their covers, the listing of the CRTC members
and staff attending the public hearings, and the Table of
However, the aforementioned publication is the recorded
verbatim transcript and, as such, is taped and transcribed in
either of the official languages, depending on the language
spoken by the participant at the public hearing.
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès‑verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Canadian Radio‑television and
Conseil de la radiodiffusion et des
Transcript / Transcription
Review of regulatory framework for Northwestel Inc. /
Examen du cadre de réglementation
applicable à Norouestel Inc.
BEFORE / DEVANT:
Richard French Chairperson / Président
Helen del Val Commissioner / Conseillère
Barbara Cram Commissioner / Conseillère
Andrée Noël Commissioner / Conseillère
Ronald Williams Commissioner / Conseiller
ALSO PRESENT / AUSSI PRÉSENTS:
Madeleine Bisson Secretary / Secrétaire
Peter McCallum/ Legal Counsel /
Leanne Bennett Conseillers juridiques
HELD AT: TENUE À:
Convention Centre Centre des congrès
High Country Inn High Country Inn
4051 4th Avenue 4051, 4e rue
Whitehorse, Yukon Whitehorse (Yukon)
July 11, 2006 Le 11 juillet 2006
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
PREVIOUSLY AFFIRMED: SCOTT ROBERTS 284 / 2007
AFFIRMED: RAY HAMELIN
PREVIOUSLY AFFIRMED: MURIEL CHALIFOUX
AFFIRMED: JODY WOODLAND
Examination by Northwestel 284 / 2009
Examination by Consumers Groups 285 / 2021
Examination by UCG 345 / 2472
Examination by Government of Yukon 413 / 2962
Examination by the Commission 480 / 3443
EXHIBITS / PIÈCES JUSTICATIVES
PAGE / PARA
TELUS-2 Globe and Mail article - 277 / 1956
identified as No. 8
TELUS-3 Yukon Statistical Review 2004 278 / 1957
Annual Report - identified as
TELUS-4 2006 NWT Socio-Economic Scan - 278 / 1958
identified as No. 21
CRTC-1 Document entitled "Questions 280 / 1976
from CRTC Staff re Costing"
CRTC-2 Document entitled "Questions 280 / 1976
from CRTC Staff re Depreciation"
PIAC-3 Northwestel Actual/Forecast 287 / 2041
Operating Revenues and NCF Funding
PIAC-4 Estimate of Northwestel fixed and 298 / 2126
common costs recovered through 25%
PIAC-5 Fixed structures - Based on 301 / 2154
NWTel(CRTC) 10APR06-1601 -
TELUS-5 Document entitled "Proposed Switch 476 / 3419
NWTEL-3 Operating Expenses 2001-2005 479 / 3440
(Requested by UCG)
Monday, July 10, 2006 / le 10 juillet 2006
"Krauss" s/b "Kraus"
"NorthwesTel" s/b "Northwestel"
22 16 "Raychuck" s/b "rate shock"
24 23 "Northwestel" s/b "Northwest"
30 24 "Articom" s/b "Ardicom"
113 4 "Going‑in, period" s/b "going‑in period"
114 24 "MS CHALIFOUX:" s/b deleted
128 22 "MR. WALKER:" s/b "MR. ROBERTS: "
143 16 "MR. RONDEAU:" s/b "THE CHAIRPERSON: "
164 16 "MS CHALIFOUX:" s/b "MS KRAUS: "
165 1 "MS CHALIFOUX:" s/b "MS KRAUS: "
182 16 "$0.37" s/b "$0.0037"
183 25 "brand NSI" s/b "BRAND and NSI"
184 3 "brand" s/b "BRAND"
188 19 "MR. CHALIFOUX:" s/b "MR. WALKER: "
189 5 "MS KRAUSS:" s/b "MS CHALIFOUX: "
189 19 "MS KRAUSS:" s/b "MS CHALIFOUX: "
191 3 "MS KRAUSS:" s/b "MS CHALIFOUX: "
192 10 "programs" s/b "forbearance"
210 23 "Dakuakada" s/b "Dakwakada"
211 5 "Self‑service" s/b "Cell service"
215 22 "Sabie" s/b "Sabia"
223 7 "MR. WALKER:" s/b "MR. RYAN: "
223 16 "MR. RYAN: " s/b "MR. WALKER: "
223 17 "MR. WALKER:" s/b "MR. RYAN: "
224 24 "MR. WALKER:" s/b "MR. RYAN: "
225 21 "MR. WALKER:" s/b "MR. RYAN: "
225 24 "MR. RYAN: " s/b "MR. WALKER: "
226 6 "MR. WALKER:" s/b "MR. RYAN: "
241 14 "the average" s/b "de‑averaged"
245 10 "appointed" s/b "a point of"
263 2 "that is charged" s/b deleted
266 10 "MR. WALKER:" s/b "MR. ROBERTS: "
269 3 "self‑service" s/b "cell service"
269 4 "self‑service" s/b "cell service"
269 6 "self‑service" s/b "cell service"
132 4 "wireline NAS rates" s/b
"wireline NAS penetration rates"
132 10 "that is just one service" s/b
"that this just one service"
229 4 "draw net fund" s/b
"draw on the National Contribution Fund"
Whitehorse, Yukon / Whitehorse (Yukon)
‑‑‑ Upon resuming on Tuesday, July 11, 2006
at 0900 / L'audience reprend le mardi
11 juillet septembre 2006 à 0900
1950 THE CHAIRPERSON: Order, please. A l'ordre, s'il vous plaît.
1951 Ladies and gentlemen, this morning I'm informed that vital questions of a preliminary nature have to be discussed by a wide diversity of parties, including Telus, Northwestel and the CRTC.
1952 Madame la secrétaire...?
1953 THE SECRETARY: Yes. It is regarding the exhibits.
1954 For the record, the opening statements for each participant were numbered as Exhibit No. 1 for that party.
1955 Also, Telus exhibits as at the cross‑examination period were numbered as follows:
1956 Document No. 8, identified No. 8 by Telus, is an ad in the Globe and Mail article. It is numbered Exhibit No. 2.
EXHIBIT TELUS-2: Globe & Mail article, identified as No. 8
1957 THE SECRETARY: Exhibit No. 3 will be the document referred as Document No. 20, Yukon Statistical Review 2004 Annual Report.
EXHIBIT TELUS-3: Yukon Statistical Review 2004 Annual Report - Identified as No. 20
1958 THE SECRETARY: Exhibit No. 4, document referred as Document No. 21, 2006 NWT Socioeconomic Scan.
EXHIBIT TELUS-4: 2006 NWT Socio-Economic Scan - identified as No. 21
1959 THE SECRETARY: That's it.
1960 THE CHAIRPERSON: That's it. Very exciting.
1961 Northwestel, I understand you have something preliminary?
1962 MR. ROGERS: Just a very minor point, Mr. Chairman.
1963 I have indicated to the Commission counsel that we have gone through the transcript from yesterday and relatively minor and uncontentious errors appear, as is quite common in the transcript. What we propose to do is consolidate all of that and provide the Commission, the court reporters and all parties in the room a hard copy or a soft copy of those changes and they can review them. We will do that later today.
1964 THE CHAIRPERSON: Thank you, Mr. Rogers.
1966 UNIDENTIFIED SPEAKER: No thank you, Mr. Chairman.
1967 THE CHAIRPERSON: No preliminaries from Telus?
1968 Thank you.
1969 Mr. McCallum...?
1970 MR. McCALLUM: Yes, thank you, Mr. Chair.
1971 Yesterday we passed informally to Northwestel two proposed CRTC exhibits. The Secretary now has a number of copies of these proposed exhibits which she will make available and distribute.
1972 We have attempted to determine if Northwestel can respond to the proposed staff interrogatories.
1973 There are two sets. One is entitled "Questions From CRTC Staff Re Costing" and the second is called "Questions From CRTC Staff Re Depreciation".
1974 I am informed that Northwestel is able to respond to all of the questions in the two documents, one the costing document and the second one the depreciation document, by the 21st of July 2006, with one exception. That is Question No. 7 on the costing document, but which time they have undertaken to get back by the 28th of July, which is the following Friday.
1975 So if acceptable to all, I would propose that these be introduced as exhibits in the record. I might propose that the costing document be Exhibit No. 1 and the depreciation document be Exhibit No. 2.
1976 Thank you, Mr. Chairman.
EXHIBIT CRTC-1: Document entitled "Questions from CRTC Staff re Costing"
EXHIBIT CRTC‑2: Document entitled "Questions from CRTC Staff re Depreciation"
1977 MR. RYAN: Mr. Chairman, I would like to speak to that issue, if I may.
1978 THE CHAIRPERSON: Yes, Mr. Ryan.
1979 MR. RYAN: If my recollection is correct ‑‑ and I'm sorry, I don't have the document in front of me to verify it ‑‑ I think final argument is due on the 21st of July.
1980 I am anticipating that the questions to be raised by the Commission are of some importance or they wouldn't raising them at all. It would be, I think, appropriate if we had a chance to look at those responses before we were asked to file final argument.
1981 THE CHAIRPERSON: Mr. McCallum?
1982 MR. McCALLUM: Would you have any idea how long you might need ‑‑ it being recognized, of course, that some of the answers might be provided in confidence. So what you may see is an abridged version of some of them.
1983 I would also note that some of them refer to documents where confidentiality has been claimed already by various parties.
1984 Could you give an estimate of what you might require and perhaps after that Mr. Rogers could give his comments.
1985 MR. RYAN: I wouldn't be looking for anything other than an opportunity to have some idea of what the questions and answers are. I appreciate at this stage many of the questions posed might lead to answers that are confidential.
1986 Of course, that in itself raises the issue of whether confidentiality is appropriately claimed.
1987 I would have thought that something in the order of 72 hours would be perfectly adequate for us to review and either raise any issues we have about confidentiality with the Commission, in which case some ad hoc solution might be found, or we could incorporate, as we see fit, the information that has been provided into our final argument, or to at least take it into account before filing our final argument.
1988 It is possible Mr. Rogers might be able to accelerate the delivery of these answers by 72 hours in order to permit us to stick with the original schedule for final argument.
1989 MR. ROGERS: Mr. Chairman, one thing that might affect this is that Mr. Ryan hasn't actually seen the interrogatories yet.
1990 THE CHAIRPERSON: Indeed. And I'm not sure. Has he seen them now? No.
1991 MR. ROGERS: So he is hardly in a position to know how much it might affect his argument.
1992 THE CHAIRPERSON: Exactly.
1993 MR. ROGERS: And further to Mr. McCallum's comment, certainly from what I have seen, many of the interrogatories posed relate to matters which have already been examined on previously in prior rounds by the Commissions, and responses to certain of those interrogatories were filed in confidence and that confidentiality was not challenged.
1994 So perhaps Mr. Ryan may be given an opportunity to review the interrogatories and we might revisit the issue of timing at lunch time.
1995 THE CHAIRPERSON: I agree.
1996 Is that satisfactory, Mr. Ryan?
1997 MR. RYAN: Perfectly satisfactory, Mr. Chairman.
1998 THE CHAIRPERSON: I don't think there are any other preliminary matters.
1999 Madame la Secrétaire. En anglais bien sûr.
2000 THE SECRETARY: Thank you, Mr. Chairman.
2001 We would like to invite now the Finance Panel from Northwestel.
2002 MR. ROGERS: Mr. Chairman, I will briefly introduce the panel before they are sworn. Then they can be sworn and we will do the direct.
2003 This is the Finance Panel of Northwestel. The Chair of this panel is Mr. Ray Hamelin, CFO of the Company.
2004 With him is Muriel Chalifoux, who was on the prior panel, AVP Carrier and Regulatory; Mr. Scott Roberts, Director of Regulatory Framework; and Jody Woodland, Senior Business Analyst.
2005 Providing back‑up to the panel in the row behind them is Sheldon Schmidt, Senior Financial Analyst; Norm Eady, Manager of Fixed Assets; and Kate Warner, Business Analyst.
2006 The panel is ready to be affirmed.
2007 THE SECRETARY: Thank you.
PREVIOUSLY AFFIRMED: SCOTT ROBERTS
AFFIRMED: RAY HAMELIN
PREVIOUSLY AFFIRMED: MURIEL CHALIFOUX
AFFIRMED: JODY WOODLAND
2008 THE SECRETARY: Thank you very much.
EXAMINATION / INTERROGATOIRE
2009 MR. ROGERS: Mr. Hamelin, was the finance evidence and associated interrogatories therewith prepared by you or under your direction?
2010 MR. HAMELIN: It was, yes.
2011 MR. ROGERS: Do you have any corrections or additions to make to that evidence at this time?
2012 MR. HAMELIN: No, I do not.
2013 MR. ROGERS: To your information and belief, is that evidence accurate and true?
2014 MR. HAMELIN: Yes, it is.
2015 MR. ROGERS: Thank you.
2016 The panel is available.
2017 THE CHAIRPERSON: Thank you, Mr. Rogers.
2018 Madam Secretary.
2019 THE SECRETARY: Thank you, Mr. Chairman.
2020 The first party for cross‑examination is the Consumer Groups.
EXAMINATION / INTERROGATOIRE
2021 MS LOTT: Good morning, Mr. Chairman, members of the panel, and good morning to you.
2022 My name is Sue Lott. I am legal counsel for the Consumer Groups, and that represents today the Consumers' Association of Canada and the National Anti‑Poverty Organization.
2023 To my right is Andrew Briggs, who is a consultant and is working with us, as well, and who will help me through this again today.
2024 I wonder if you could tell me what rate of return Northwestel is proposing to use to establish your going‑in rates.
2025 MR. HAMELIN: It will be 10.5 percent.
2026 MS LOTT: What is the basis for the use of 10.5 percent in setting the going‑in rates?
2027 MR. HAMELIN: We thought it would be appropriate to view this proposal as a package and to continue on with the unique regulatory framework that we have currently to assess, for going‑in rates, what the ROR should be, and 10.5 percent was deemed appropriate by management.
2028 MS LOTT: Could you undertake to provide the current yield on Government of Canada long‑term bonds?
2029 MR. HAMELIN: Yes, we could. Could you give me a moment, please?
2030 MR. HAMELIN: I believe it is 5.25 percent.
2031 MS LOTT: My understanding is that that was the forecast long‑term bond rate provided by your expert. What I am looking for in my question is the current yield on Government of Canada bonds.
2032 MR. HAMELIN: Do you have an idea of the maturity you are looking for ‑‑ 10 years, 20 years?
2033 MS LOTT: Thirty years.
2034 MS LOTT: If you would like to take that on as an undertaking, that would be fine.
2035 MR. HAMELIN: It changes every day. We would have to go and check.
2036 MS LOTT: So you will undertake to find that for me, the current yield on Government of Canada long‑term bonds for 30 years?
2037 MR. HAMELIN: Absolutely, we will find that for you.
2038 MS LOTT: Thank you.
2039 I would like to move now to some questions related to the National Contribution Fund. For that, we have prepared an exhibit, and that exhibit is entitled, "Table 2: Northwestel Actual/Forecast Operating Revenues and NCF Funding for 2002‑2007."
2040 I think that has been provided.
2041 THE SECRETARY: That is Exhibit No. 3.
EXHIBIT PIAC‑3: Northwestel Actual/Forecast Operating Revenues and NCF Funding for 2002‑2007
2042 MS LOTT: Exhibit No. 3. Thank you.
2043 Do you have that in front of you?
2044 MR. HAMELIN: No, I don't.
2045 MS LOTT: It was provided to your counsel.
2046 MR. HAMELIN: Is it entitled Northwestel Actual Forecast Operating Revenues?
2047 MS LOTT: And NCF funding for...
2048 MR. HAMELIN: Right. I have it now, thanks.
2049 MS LOTT: You have that now. Thank you. Okay.
2050 This is an exhibit that is similar to the table 1 that we used yesterday in front of the marketing panel where we were looking at the revenue forecast, but we have now summarized some of these lines and added on funding from the national contribution fund, as you can see from the table, those are lines 20 down.
2051 MR. HAMELIN: Yes, I see that.
2052 MS LOTT: You see that. Okay.
2053 So if we look at lines 22 to 23, these are showing proposed funding, if we go over to column J, proposed funding in 2007 from the national contribution fund, and line 21, as you can see, provides the level of funding, that's entitled supplemental funding from the prior years before 2007.
2054 Do you follow the table?
2055 MR. HAMELIN: Yes, I do.
2056 MS LOTT: Okay. So, in total, if we look across over the yearly periods there we can see that the level of the national contribution funding is proposed to rise from approximately 10 million per annum to about over 43 million and that's ‑‑ I'm looking at line 24, column J, starting in 2007.
2057 You see where I'm looking?
2058 MR. HAMELIN: Yes, I see that.
2059 MS LOTT: Okay. And at line 26 we have the NCF funding to increase from approximately 6 percent of Northwestel's total revenue requirement to 27 percent in 2007.
2060 And you see that, again line 26 ‑‑
2061 MR. HAMELIN: Yes, I see that.
2062 MS LOTT: ‑‑ columns H and J?
2063 So my question would be: How is this level of funding expected to change over time and by what magnitude?
2064 MR. HAMELIN: In the future you mean?
2065 MS LOTT: Yes.
2066 MR. ROBERTS: Is this with regard to the period of the price cap ‑‑ the price cap period, the four‑year price cap period?
2067 MS LOTT: Sure, that would be fine.
2068 MR. HAMELIN: I don't think it's going to change much because what we are talking about in 2007 is a cost‑based subsidy.
2069 In fact, of the three different elements of the subsidy that we are talking about, the SIP program subsidy we believe is ‑‑ I believe it's been suggested that it remains constant, as does the toll connect subsidy ‑‑ and we can talk more about that.
2070 The only one that would vary in the cost‑based subsidy would be the Res PES element of the total subsidy. I believe the suggestion is that it be based on the NAS count as per down south every year.
2071 The other element that you see, recovery of DRD, that's simply due to a change in methodology to be consistent with the telcos down south. That would be filed on an annual basis and I believe that it's ‑‑ it hovers above the 3 million mark in both 2007, 2008 and then it drops significantly in 2009 and 10.
2072 MS LOTT: Well, you have made reference to the cost‑based subsidy as indicated in the table here of 39.4 million for 2007.
2073 Can you just confirm for me again what you were just saying, what this consists of?
2074 MR. HAMELIN: There are three main elements to this subsidy. One is the SIP portion of the subsidy, which is $11.4 million. I should add that $5.4 million of SIP is also included in the Res PES subsidy. So in effect, if you just take that piece, add it together, almost $17 million is due to the SIP program that we commenced in 2001.
2075 You know, just for the record, just to make things clear on this, this is the carrying costs of the SIP program, $85 million was spent. Now, for us, that is worth at least two years' worth of the total capital expenditure of this company or third of its net asset base. We mentioned yesterday that would be about $3 billion I think for Telus. I think any which way you count it it is a big number for us.
2076 Seventeen million dollars out of the $39 million cost‑based subsidy is 40 percent of new carrying costs that this company is incurring since 2001. I just wanted to make that point clear. This has all things to do with connecting, providing basic service of objectives to a very difficult market.
2077 The second element toll connect is $10.8 million. That has to do with connecting the local switches to the toll switches and Mr. Woodland can talk at length about that in detail, if need be. The Res PES study of $17.2 million, which includes the $5.4 million of SIP due to access that I mentioned, that is exactly the same methodology as down south.
2078 So what we are talking about are two exceptions to down south, is the toll connect piece and the SIP piece, SIP being $17 million of it since 2001.
2079 MS LOTT: Okay, thank you for that. My question flowing from that though is isn't the National Contribution Fund intended to be used to subsidize local service in high‑cost serving areas?
2080 MR. HAMELIN: That is certainly ‑‑ in principle, yes.
2081 MR. ROBERTS: I might add that that is one element of it. Currently, Northwestel has supplemental funding from the National Contribution Fund and that would represent not only the portion that you identified, but I guess a broader non‑specific subsidy. Other companies have also had I guess a broader application of funds from the National Contribution Fund. And I would note in passing here that the Commission's powers with regard to I guess having a Contribution Fund are set out in 46.5 of the Act and it doesn't refer specifically to local service and high‑cost serving areas, but rather to meeting the basic service objective, which I would suggest ‑‑
2082 MS LOTT: Well, that was going to be my question, yes, wasn't the ‑‑
2083 MR. HAMELIN: ‑‑ which I would suggest is broader.
2084 MS LOTT: ‑‑ wasn't the supplemental funding implemented to assist you in meeting your basic service objectives?
2085 MR. ROBERTS: Basic service, yes, which I would add, under 99.16, includes access to toll services amongst other things.
2086 MS LOTT: Just one minute please.
2087 MR. ROBERTS: In fact, if it is of assistance, at paragraph 24 of Telecom Decision 99.16, the elements of basic service objective are set out. Would you like me to share or..?
2088 MS LOTT: That is fine, thank you. I will just be a minute, thank you.
2089 I would like to know whether the CRTC permitted the small ILECs to recover any shortfall in toll interconnection revenues in Decision 2005‑3.
2090 MR. ROBERTS: I am sorry, could you please repeat it?
2091 MS LOTT: Did the CRTC permit the small ILECs to recover any shortfall in the toll interconnection revenues in Decision 2005‑3?
2092 MR. ROBERTS: I am not aware of them doing so, no.
2093 MS CHALIFOUX: I think though, just to be clear, the nature of Northwestel's toll connect facilities are quite unique and the Commission has even recognized that we may not be able to recover those facilities via traditional means and in fact assign those costs to our monopoly access category from a Phase 3 perspective.
2094 But again, just to be clear, we have got ‑‑ toll connect in the case of Northwestel consists of thousands of kilometres of microwave, 42 satellite‑based communities. Again, this is to serve a population base of 110,000 people. So there really is no comparison when you are talking toll connect facilities to SILECs.
2095 You cannot compare Northwestel to ILECs. We have quite a unique high‑cost network and the Commission has recognized the challenges that Northwestel faces in trying to recover that network through traditional means.
2096 MR. ROBERTS: In fact, again in 99‑16, Telecom Decision CRTC 99‑16, at paragraph 62 they specifically recognize that Northwestel may not have the means to achieve the basic service objective under similar terms and conditions to other southern telcos and they further at paragraph 68 provided for the treatment of toll connecting facilities, i.e. facilities between our class 4s and class 5s as monopoly access under Phase 3.
2097 To put this into context, treatment as monopoly access under the traditional regime, the historic regime, meant that it was eligible for subsidy.
2098 MS LOTT: Well, just for the record, I will read you the extract from that decision, paragraph 92. It states:
"The Commission notes that the NCF was established to subsidize local service in high‑cost serving areas and considers that it should not be used to subsidize any shortfall in the toll interconnection revenues of the small ILECs." (As read)
2099 MR. ROBERTS: Again, I would reiterate that in 99‑16 the Commission provided for unique treatment of Northwestel's circumstances addressing our specific challenge with regard to toll connecting trunks. So I would suggest that that would apply to the other telcos in Canada but consistent with paragraph 62 of Telecom Decision CRTC 99‑16 it would not apply to Northwestel.
2100 MS LOTT: Okay.
2101 MR. HAMELIN: Just the distance we are talking about for these interconnections, I think the figure we have is over 7,000 kilometres. It is twice the distance between Ottawa and Victoria, both back and forth. So I don't think there is any ILEC that would come even close to this kind of concept and geography and density and so on.
2102 MS LOTT: Okay, thank you for that.
2103 I wanted to move on to look at the issue of mark‑up, the level of mark‑up included in the proposed subsidy calculation.
2104 My understanding here is that the ‑‑ I have prepared an exhibit here which is called the "Estimate of Northwestel fixed and common costs" ‑‑ that should be the second exhibit in the package that was given to you. As I said, it is entitled "Estimate of Northwestel fixed and common costs recovered through 25 percent mark‑up."
2105 MR. HAMELIN: I have it.
2106 MS LOTT: Do you have that in front of you?
2107 MR. HAMELIN: I do.
2108 MS LOTT: Okay. So my understanding is that the subsidy calculations, as you have said here, include a mark‑up of 25 percent on costs. The CRTC typically permits 15 percent for other ILECs.
2109 So what we have done here on this table is that we estimated the total fixed and common costs for Northwestel based on a 25 percent mark‑up using its total revenues as follows. So you can see there that we have started with the 2006 total forecast operating revenues of $154 million and we have added to that. In the second line, we have divided by 1 plus the 25 percent mark‑up, which is 1.25.
2110 And then in the third line we have achieved the 2006 total, excluding the mark‑up, which is $123 million.
2111 Are you following my ...?
2112 MR. HAMELIN: Well, I see what you have done, yes.
2113 MS LOTT: Okay.
2114 MS LOTT: So the fourth line being the estimate of the fixed and common costs, that would be line "D", being $30,808,000, which is implied in your total revenues.
2115 MS LOTT: Are you in agreement with my math?
2116 MR. WOODLAND: Your math is correct.
2117 MS LOTT: Okay. Thank you.
2118 MS LOTT: So is this ‑‑
2119 MR. HAMELIN: If you could just give us a moment, please?
2120 MS LOTT: Sure.
2121 COMMISSIONER CRAM: Excuse me, I just needed to clarify something, Ms Lott.
2122 MS LOTT: Yes.
2123 COMMISSIONER CRAM: Is this a separate exhibit?
2124 MS LOTT: This is ‑‑
2125 COMMISSIONER CRAM: I know I have the document in front of me, but I just need to know for the record whether it is Consumers Groups Exhibit 4 or part of page 2 of Consumers Groups Exhibit 3.
2126 MS LOTT: My apologies, it should be a separate exhibit, Exhibit 4.
EXHIBIT PIAC-4: Estimate of Nothwestel fixed and common costs recovered through 25% mark‑up
2127 THE SECRETARY: It is noted as Exhibit No. 4.
2128 COMMISSIONER CRAM: Thank you.
2129 Just for the record so we have the same thing.
2130 MS LOTT: Yes, to clarify. Absolutely, yes.
2131 We stapled them together just for ease of distribution.
2132 I will give you a minute there before I ask my question.
2133 MS LOTT: Mr. Chairman, I just wanted to apologize for the delay here. We did hand out copies of these exhibits yesterday to counsel for Northwestel, but something might have happened in translation.
2134 THE CHAIRPERSON: Well, that suggests to me that you don't need to apologize, Ms Lott.
2135 MR. HAMELIN: So you have a question?
2136 MS LOTT: Yes, I do. I just wanted to make sure you were ready for me to go. Okay.
2137 My question is: Is this the total level of fixed and common costs?
2138 MS CHALIFOUX: I'm sorry, which number are you referring to? The top there? The total...?
2139 MS LOTT: The $30.8 million.
2140 MS CHALIFOUX: Well, if you use sort of the hypothesis that generally all rates times a 25 percent mark‑up equals your revenue, then that is the ballpark of what is required.
2141 MS LOTT: Just to confirm what you have said there, that is the total level. You are confirming that that is the total level of fixed and common costs?
2142 MS CHALIFOUX: If you are looking for a proxy, that could be deemed to be a proxy.
2143 MS LOTT: I would like to move to the bottom part of the exhibit that you have in front of you. That bottom half is entitled "Northwestel Identifiable Fixed and Common Costs".
2144 So it is the same table, just the bottom half of it.
2145 You are seeing where I am fixing there? Okay.
2146 So a second area of fixed and common costs...
2147 Just to explain what we have here, in Northwestel the interrogatory response to CRTC‑310, Attachment 10, identifies common operating and administration expenses of $9.5 million. That is what we have listed here in the Common Operating Expenses line and the Common Administrative Expenses line and the Total Common Costs line of $9.4 million.
2148 Do you follow my reference there?
2149 MS CHALIFOUX: Yes, I am following along.
2150 MS LOTT: So the second area of fixed and common costs is the fixed structures which were identified in CRTC‑1601, Attachment 2, and reproduced here in another exhibit, which I will ask you to pull out, which is the third exhibit that we have prepared here.
2151 That is entitled "Fixed Structures Based on Northwestel CRTC‑1601, Attachment 2".
2152 Do you see that in the next ‑‑ it should be the next one behind the ‑‑
2153 THE CHAIRPERSON: We will call it Exhibit 5.
2154 MS LOTT: Thank you.
EXHIBIT PIAC‑5: Fixed structures - Based on NWTel(CRTC)10Apr06-1601- Attachment 2
2155 MS CHALIFOUX: Yes, we have that one here.
2156 MS LOTT: If we could focus on that one right now, I wonder if you could tell me what services make use of these assets that are listed.
2157 MS CHALIFOUX: The nature of these investments, if you look here as an example, generating plants ‑‑ perhaps I could step back to give you an illustration.
2158 Northwestel has 137 microwave radio stations. So for each of these 137 microwave stations there would be a tower foundation. Many of these sites need to be self‑generated power so you would have a generating plant on site.
2159 Fifty‑two sites have no road access and need to be maintained and fuelled by helicopters, so you would see a helicopter pad.
2160 Actually, for an illustration, if you look at our opening argument we provided a picture of one of our microwave sites, Fraser, B.C., and you can see quite clearly there a lot of what we are talking about here.
2161 You can see a tower. You can see a helicopter pad. So these are microwave stations.
2162 Many services use these. Many services ride on a microwave itself, but there is a large fixed component.
2163 So when you are looking at service‑specific costing, causal costing ‑‑ and Mr. Woodland can elaborate here ‑‑ you look at costs that going forward vary with demand; so demand for data, demand for toll.
2164 But because these fixed costs do not vary ‑‑ they are by nature fixed ‑‑ it is the mark‑up component that you apply on top of your Phase 2 costing which provides a suitable recovery towards these costs.
2165 MR. WOODLAND: I can expand on Ms Chalifoux's answer by noting that, for instance, duct systems are used by any services that ride on outside plant. So that would include the connection end of data circuits. It would include local service.
2166 Batteries are used, effectively, by every service that the company offers. Batteries are part of the power system in any one of our facilities, whether it is a microwave site or a central office.
2167 Generating plants would primarily be used by services that make use of the transport network, because most of our generating plant investment is there, although a substantial amount is also embodied in standby generation, and that can be at central offices as well.
2168 Inverters and converters are similar to batteries.
2169 Permanent buildings would tend to be central offices. Semi‑permanent buildings would tend to be buildings used for the transport network. So any service, whether it is IP, internet, data circuits, toll, that make use of the transport network would make use of those assets.
2170 Access roads and site clearance, again, are primarily involved with the transport network.
2171 Towers are primarily involved with the transport network, and services making use of that.
2172 Air conditioning and heating systems would apply to all buildings and, therefore, to all services.
2173 That should be sufficient.
2174 MS LOTT: Thank you.
2175 What is the total 2006 depreciation expense for these assets?
2176 I have a figure, but I wanted to confirm that I am correct with $4.464 million.
2177 MS CHALIFOUX: Yes, subject to check, but if you have that from our interrogatories, that would be the total depreciation accrual related to those assets.
2178 MR. WOODLAND: I would like to point out that these are very specific lines in the investment record that are considered part of fixed structures and considered part of fixed and common costs, but it is not a good way to look at the total of fixed and common costs related to investment that Northwestel has made. There is a big difference between recording an investment as part of the investment record aligned against a certain asset, and then the way it is treated in doing Phase 2 calculations to determine a Phase 2 cost going forward.
2179 So there are significant portions of the investment in all of the different asset classes that would be considered fixed.
2180 An example would be the central processing portion of the DMS‑100. In a few years we will have to upgrade that, at a cost of more than $2 million, and we will be upgrading that because the manufacturer no longer supports the version we have.
2181 The version of the central processing unit that we have already exceeds our needs. It has capacity far in excess of what we will ever put through it.
2182 The new server, at greater than $2 million, will exceed that by even more.
2183 I want to be very clear that the list you have provided here in your exhibit is far and away from being a complete list of fixed and common assets.
2184 MS LOTT: Let me remind you that I am taking your interrogatory response. This is your list.
2185 I wanted to confirm, as you have indicated, and we have produced it, that the fixed structures as a percentage of total represent 14 percent of total depreciation accruals versus 22 percent of total plan and service.
2186 Am I correct that that is what you produced in your response?
2187 MS CHALIFOUX: Yes, that appears to be correct.
2188 Many of these ‑‑ just the nature of these fixed structures is such that they do have lengthy lives.
2189 However, to go back to the point that Mr. Woodland made, yes, this is our list, but this list, to be clear, was to be illustrative of fixed structural costs.
2190 We also noted in our response to the interrogatory that there is also this fixed common investment, which Mr. Woodland was referring to, the nature of the CPU upgrade that he was referring to.
2191 Again, those aren't as easily identifiable at an asset code level. It was difficult to illustrate them; whereas the fixed structure cost ‑‑ clearly one can look at that and say, "Aha, that is, in essence, 100 percent fixed."
2192 Again, it was meant to illustrate a portion, and, more importantly, to illustrate the relative significance of that portion.
2193 MS LOTT: Thank you for that.
2194 I want to take us back, then, to the exhibit, the estimates of the Northwestel fixed and common costs, at the bottom half of that exhibit.
2195 If we combine that figure that you have confirmed there of the fixed structures depreciation expense of 4.5 million with the common expenses added up ‑‑ total common costs of 9.5 million, we have reached a total there of the total fixed structures and common costs of approximately 14 million.
2196 Do you follow what I have put in the bottom half of the table there?
2197 MS CHALIFOUX: Right. And that would be, again, a representation of only a component of the costs.
2198 Take the fixed structure, the nature of the investment is such that, you know, you also have to recover your normal financing costs, your normal carrying costs.
2199 There's interest expense, you know, a return in the taxes paid on that return, all the innocents, the carrying costs of that investment need to be recovered.
2200 So the mark‑up is intended to contribute towards all of those components not just the depreciation. And then on top of that, again, you have got these common elements that Mr. Woodland provided some good examples of.
2201 So, I mean, this is only a partial analysis and this is one of the challenges that Northwestel has. I mean, it's very difficult to go and provide a detailed qualitative analysis that sums magically to 25 percent.
2202 But, again, our main point there is that costs are significant and particularly relative to the ILECs and the small independent companies we are very unique.
2203 Just the example we were talking about previously, the extent of our microwave stations. no other company has that degree of inter‑toll facilities ‑‑ or inter‑network facilities, I should say, intra‑network facilities. Satellite, no other company has the degree of satellite that we have. There's just a number of examples that clearly indicate relative to others the need for a higher mark‑up.
2204 MR. WOODLAND: So this is just to be clear, the bottom half of your exhibit falls short of the representation of the total fixed and common costs of the company by the operating amounts that Ms Chalifoux identified with relation to the fixed structures, so it's missing interest costs, return and taxation on those and then, as well, is missing depreciation on the other asset classes that I mentioned and all of the operating, administrative expenses and interest and income tax and return that's associated with those assets as well.
2205 MS LOTT: I'm just wondering, based on what you said, if you could build that back up and add in those elements that you have just identified so that we can see what those are.
2206 MR. HAMELIN: Just as a comment, I don't believe that down south a 15 percent mark‑up was proven company‑by‑company in the sense of reconciling phase 2 studies with phase 3 embedded costs, originally started a long ‑‑ several ‑‑ I don't know exactly how long ago, but certainly a long time ago.
2207 It used to be 25 percent was the accepted norm, then further decisions came along whereby 15 percent became the norm.
2208 All we are suggesting is in the case of Northwestel, because we differ so significantly from not just the ILECs ‑‑ certainly all the ILECs down south, that 25 percent still would be required relative to those down south.
2209 THE CHAIRPERSON: Thank you, Mr. Hamelin, but you were asked another question.
2210 Do you think you could respond to the other question?
2211 MR. HAMELIN: I'm sorry, can you repeat the question?
2212 MS LOTT: Well, because one of your panellists has indicated what would make up the difference, added in to make up that estimate of 31 million in fixed and common costs and you have started to indicate what some of those would be, I'm just wondering if you could fill that in for us item by item and undertake to let us see what that would be.
2213 MR. WOODLAND: Not within the time frame of this hearing certainly. The entire costing department of Northwestel is sitting here in this chair and I have already committed the next few weeks to some interrogs.
2214 MS CHALIFOUX: I think again too, just to go back to some of the fundamentals of the costing, I mean, we don't have detailed service‑specific costing for all our services.
2215 So, you know, to do a detailed analysis one would need to go and say okay let us do phase 2 studies for all of our services and then let us see the residual, the fixed component that needs to be recovered.
2216 So this is to what Ray was alluding to, you know, many of the ILECs could possibly put some quantitative analysis for one service on the record, but certainly not for all of their services and nor could Northwestel undertake to do the same thing.
2217 MS LOTT: Well I guess my question would be that because you are asking for a 25 percent mark‑up on costs shouldn't the onus be on you to be able to specifically justify to us why that mark‑up should be there?
2218 MS CHALIFOUX: What we are trying to do is trying to clearly illustrate, if nothing else, the uniqueness and the relative merits of a higher mark‑up for Northwestel.
2219 MR. HAMELIN: I don't think that there is one SILEC that comes even close compared to Northwestel, particularly after Northwestel having spent a SIP program of the magnitude we are talking about, which just added to the cost base significantly. And there is virtually no chance of, particularly on that aspect of the investment, of getting any scale gains whatsoever.
2220 MR. WOODLAND: Just as an example of one fixed cost item. Northwestel has 570 diesel fuel tanks compared to 700 in the Bell consolidated trust, which is basically Bell's operations in Central and Eastern Canada outside Montreal, Toronto and Ottawa. For our 75 NAS then, we have one fuel tank for every 133 of them. The consolidated trust has one fuel tank for every 4,857 NAS, so that is a ratio of 36 times as many.
2221 THE CHAIRPERSON: I do think this point has been made. I would add, that what we are trying to get at here, as I understand Ms Lott, is the justification for raising the proportion of your revenue received from the National Contribution Fund from 6 percent to 27 percent in a one‑year step function. That too doesn't exist in the south.
2222 So now we are in a unique situation and we are asking really can you help us to understand why the figures that have been put forward by the consumer group are inadequate. And you have explained them in very general terms. I think what we are not looking for is a series of cost studies, we are looking for a more detailed and black and white explanation of what the inadequacies of this particular calculation in Exhibit 4 really are in your minds.
2223 Is it possible that you could provide us that in writing in a fairly short time period?
2224 MS CHALIFOUX: Well we could certainly ‑‑ just to actually clarify Exhibit 4 is the one with the calculations there of $13 million, is that..?
2225 MS LOTT: That is correct.
2226 MS CHALIFOUX: Okay.
2227 THE CHAIRPERSON: What items would have to be added in writing ‑‑ and you don't even have to put figures on them, if necessary.
2228 MS CHALIFOUX: Yes, we can certainly put figures to some and then others we would just note that these are the elements ‑‑
2229 THE CHAIRPERSON: I think that is fair, Ms Chalifoux. We are asking for a good faith attempt to try to explain in black and white why these ‑‑
2230 MS CHALIFOUX: ‑‑ to reconcile.
2231 THE CHAIRPERSON: ‑‑ why this data is inadequate.
2232 MS CHALIFOUX: Sure.
2233 MS LOTT: Absolutely, thank you.
2234 Okay, you are asking to recover a 25 percent mark‑up on residential costs through the National Contribution Fund. I am interested in knowing whether all other Northwestel services are making this level of recovery to its fixed common cost.
2235 MR. HAMELIN: I don't have in front of me all the costing studies by services, but certainly some services contribute more than others and..
2236 MS LOTT: Okay, I wonder if we could then maybe go through some of the services and I wanted to go back to a table that I provided actually yesterday to the marketing group, but I have also provided it for your convenience and it was identified as Exhibit 1 yesterday again in this group of exhibits that you would have been given. Do you have that in front of you? It says, Table 1, Northwestel Actual Forecast Operating Revenues for 2002 to 2007.
2237 MR. HAMELIN: Yes, I do.
2238 MS LOTT: Okay, so if I could go through that. I am interested in knowing here what services offered by Northwestel have rates that provide a mark‑up of at least 25 percent. For example, line 2 and 3, the business primary exchange ‑‑ sorry, line 2?
2239 MR. WOODLAND: Well clearly, residential does not in that we are seeking subsidy for the gap between its revenue and costs.
2240 MS LOTT: But the business primary exchange?
2241 MR. WOODLAND: We answered that in an interrog, less than 25 percent but it does require a mark‑up.
2242 MS LOTT: Okay.
2243 MR. ROBERTS: And I would add that the associated toll that those customers also take contributes a significant mark‑up, so if you look at the broader picture.
2244 MS LOTT: Okay.
2245 MR. WOODLAND: I think the point is really that on aggregate the services that provide revenue aside from the subsidies in our proposal, on aggregate they will be recovering 25 percent over costs.
2246 MS LOTT: Have you done cost studies for those?
2247 MR. WOODLAND: No, we have indicated that already.
2248 MR. ROBERTS: If I could maybe illustrate some other services as well. I think particularly relevant to this proceeding is that the CAT rate we are proposing now is cost‑based, switch connect rates to replace the CAT that is currently in force.
2249 The proposed switch connect rate, again, is cost‑based with a 25 percent mark‑up and that yields a rate of .825 cents per minute. The current rate is 7 cents and that rate represents a significant source of mark‑up of implicit contribution and, of course, we are maintaining, as reiterated throughout this proceeding, that this is not sustainable at this extreme level of contribution subsidy of mark‑up.
2250 Similarly, I would point to private wire services. Private wire services also taken by business are currently at a rate that equates to approximately $18,000 per month per T1 per DS1 from Whitehorse to Fort St. John, for instance.
2251 A comparable rate in a forborne market, presumably a cost‑based rate then, would be approximately $1,100 to $1,200, for instance, given specific quotes we have had from different parties from Fort St. John to Edmonton.
2252 So again, you can see the magnitude of mark‑up on these services and this is really at the heart of why we are proposing the rate restructuring that we are, because we are concerned about the sustainability of these very high mark‑ups going forward. They are making a disproportionate contribution to the costs here and again, in our view, they are just not sustainable.
2253 MR. HAMELIN: So what we are saying is in the end the proposal that we are presenting will be bringing down ‑‑ eliminating a lot ‑‑ to a great degree, I should say, the implicit subsidies. But in the end we feel we are not going far enough. There are still some implicit subsidies that will exist even after the rate proposals that we are proposing. The example you just got is quite a substantial one.
2254 MS LOTT: Okay. Just so that I can be quite specific here about services though, line 16, the total terminal, does that have rates that provide a mark‑up of at least 25 percent?
2255 MR. WOODLAND: We don't know that.
2256 MS LOTT: Okay. And how about line 18, which is the total "Other"?
2257 MR. WOODLAND: Again, not having performed Phase II studies on all the services, I can't answer that either.
2258 MS LOTT: Okay.
2259 MR. HAMELIN: I can say that under Phase III things like competitive terminals are still somewhat not compensatory and this comes as no real big surprise when you think of the nature of our territory.
2260 You will not find a Radio Shack or a Circuit City, or a McDonald's for that matter, when you are talking to most of our communities that we are serving. And so in the end we are the end provider of terminals, for example, and I wouldn't expect that you would see a compensatory 25 percent mark‑up.
2261 MS LOTT: Okay, thank you for that.
2262 I wanted to move on to a last area that I want to look at with you this morning and that is some questions around productivity.
2263 MS LOTT: So my understanding is that Northwestel is proposing to be able to increase its primary exchange residential rates by inflation for price cap purposes and its costs by inflation for the high‑cost serving area subsidy calculation purposes since it is proposing a productivity offset or an "X" factor of 0 percent.
2264 Am I correct about that? That's what you are proposing?
2265 MR. HAMELIN: That's correct.
2266 MS LOTT: Does this mean that there is no annual productivity improvement?
2267 MR. ROBERTS: On a net basis we are suggesting that we would have a significant challenge in trying to gain a positive productivity on a net basis, given the challenges illustrated historically by costs.
2268 MS LOTT: So the answer is yes?
2269 MR. ROBERTS: I believe so, yes.
2270 MS LOTT: All right.
2271 MS LOTT: So if I can just confirm here that while you have filed productivity estimates of negative productivity ‑‑ I understand that that was ‑2.9 percent per annum ‑‑ you are now proposing a productivity offset of 0 percent.
2272 That's correct?
2273 MR. HAMELIN: That's correct.
2274 MR. WOODLAND: Well, if I may, just to be clear, we didn't file an estimate of ‑2.9 percent with regards to forward‑looking productivity estimates. That was simply the result of a calculation based on the last eight years worth of data that we have, which represents two points of data, 1998 and 2006.
2275 MR. ROBERTS: Going forward and arriving at our 0 percent "X" factor that's proposed, we relied on three basic factors for determining this as a reasonable proposal, reasonable and balanced.
2276 The first is the significant challenge that we have in making net productivity gains. I would suggest that the year‑over‑year study, what is it, 1998 versus 2006, for Res PES demonstrates the challenge in broad terms with regard to containing costs.
2277 In addition, while we have had some, I guess, success in achieving productivity in specific areas we are also trying to deal with a number of items that go up. So it's a balancing act.
2278 We also have extremely low density on a comparative basis to other carriers which exacerbates our ability to benefit from economies of scale.
2279 In fact, we also have a very small base of operations. This small base results in individual events, perhaps like a damaged dish, a damaged tower, having significant impacts on our overall productivity.
2280 To differentiate again from other carriers, if you look at a circumstance that we had ‑‑
2281 MS LOTT: I will just remind you here, I didn't ask you why. I'm just asking you to confirm some of these numbers for me and just to make sure that I have total understanding here of your evidence.
2282 Am I correct that you have also updated that negative productivity estimate from your initial filings to correct for an error and the result is now a negative 3.2 percent per year?
2283 Am I correct about that?
2284 MR. WOODLAND: Yes.
2285 MS LOTT: Okay. Thank you.
2286 Now, by contrast the current productivity offset for the large ILECs as well as for Québec Tel and Télébec is 3.5 percent, which is significantly greater than your estimate or your proposed productivity offset.
2287 MR. HAMELIN: They didn't have to invest a third of their balance sheet to try and provide basic service objectives. That is one point.
2288 The second point is our systems have no scale essentially to allocate the costs as significantly as down south. So those two elements have caused a real distortion in productivity between 1998 and 2005.
2289 MS LOTT: Thank you.
2290 Just one moment.
2291 MS LOTT: Am I correct here as well that that estimate is based on only two data points for residential Phase 2 costs providing service, 1998 versus 2006?
2292 Am I correct?
2293 MR. WOODLAND: That is correct.
2294 MS LOTT: How many data points does Northwestel use in deriving its productivity estimate?
2295 You indicated 1998 and 2006.
2296 MR. WOODLAND: Again, I will just reiterate that that is not an estimate of future productivity likelihoods. It is simply a calculation of the past eight years, the actual productivity over those past eight years.
2297 MR. ROBERTS: And if you would like me to elaborate as to how we came up with our forward looking productivity estimate, I would ‑‑
2298 MS LOTT: That is not in my list of questions.
2299 My question following that is: Doesn't that lack of data points limit the validity of the estimate?
2300 I believe you have indicated that in an interrogatory response to Telus.
2301 MR. WOODLAND: And I point out once again that that is not our estimate of future productivity factor. It is simply a calculation of the historical and is used primarily as an indication and an illustration of the cost challenges that Northwestel has faced, not necessarily those that we will face going forward.
2302 MS LOTT: Yes, we are interested in the historical.
2303 THE CHAIRPERSON: Wait a minute. The question was not that. The question was: Do you or do you not have confidence in the value of that study as an indicator for your future forecast?
2304 Did you or did you not concede that there might be problems with that study?
2305 That was the purpose of the question.
2306 MR. WOODLAND: If that was the purpose of the question, it wasn't clear.
2307 In that sense then, I would agree that the absence of additional data points makes it difficult to determine essentially the slope of the curve of Res PES costs over the period and in particular the slope of the curve close to the present day in terms of it being an indication of what the productivity factor might be in the future.
2308 The absence of intervening data points makes it hard to understand whether the curve went up and it is coming down now or was flat and then rose very quickly near the end and is still continuing to rise. Absolutely that is a problem with only having two data points.
2309 I will point out though that two data points, given that they are fairly far apart, that does smooth some of the possibly intervening spikes in costs in terms of what did actually happen over that eight‑year period.
2310 If those two data points had been two years apart and were that far apart, well, I wouldn't put very much reliance at all on the slope of the line. But given the distance apart that they were and the fact that they both performed to the best of our abilities following Phase 2 principles, as advised by our consultant, Leon Shufeld, we have every confidence in the individual numbers in both of those studies and what they represent in terms of the change in cost over that period of eight years.
2311 MR. ROBERTS: In addition, I would suggest that those numbers are very instructive with regard to illustrating how different we are from other telephone companies. I would suggest that no other telephone company would have a profile between two data points on their curve over such a long period as we have.
2312 So again it's I believe very illustrative of how different we are and how unique our circumstances are.
2313 MS LOTT: Does the 1998 cost estimate include the costs associated with Northwestel's recent service improvement plan program?
2314 MR. WOODLAND: No, it does not.
2315 MS LOTT: It doesn't; okay.
2316 MR. WOODLAND: That program started in 2001 and completed in 2005.
2317 MS LOTT: So it's in the 2006 numbers. Am I correct?
2318 MR. WOODLAND: That is correct.
2319 MS LOTT: Just one moment, please.
2320 MS LOTT: My understanding, as well, is that there were a number of other adjustments that were made to the 1998 data for changes in income tax, interest rates, asset life changes, and the variable common cost factor.
2321 Am I correct about that?
2322 MR. WOODLAND: Yes.
2323 MS LOTT: In response to an interrogatory from the Consumer Groups, PIAC‑04(G) ‑‑ and I am looking at the bottom of page 3 of 4, going over to the top of page 4 of 4.
2324 Do you want to pull that out?
2325 MR. WOODLAND: I have it.
2326 MS LOTT: You have indicated there that the marginal cost data provided by Bell in the price cap proceeding, which led to Decision 2002‑34, included normalization‑like adjustments to assure cost data comparability over time.
2327 I note that you have a footnote referencing an interrogatory ‑‑ CRTC of the 16th of March 2001, 105, the price caps.
2328 Do you see that footnote reference you made?
2329 MR. WOODLAND: Yes.
2330 MS LOTT: In that interrogatory response, CRTC‑105, did Bell make any adjustments to its cost estimates over time for the items I have mentioned ‑‑ the income tax rates, the changes in interest rates, the changes in variable common cost factors, and the changes in asset lives?
2331 MS LOTT: If you are not able to answer the question right away, not having the response in front of you, you could undertake it.
2332 The supposition I would make to you is that the answer is no, but we could make that subject to check.
2333 MR. WOODLAND: Subject to check, I will accept that.
2334 I think we should be clear that the normalization adjustments were made to try to put the results of the two studies on an equal footing and take out of the calculation the effects of factors that affect productivity that are not necessarily reproducible going forward.
2335 If you remove that and recalculate, we still end up with negative productivity over that period.
2336 It was really just for illustrative purposes. It highlights the extent of the cost changes for us over that period of time.
2337 But even without the normalization, we would still have negative productivity over that period.
2338 MS LOTT: Thank you.
2339 Just a moment, please.
2340 MS LOTT: Now I would like to take what we have been talking about and establish what the productivity estimate would be, excluding the adjustments that were made by Northwestel to the 1998 data, excluding the SIP, and using currently approved asset lives.
2341 As you see, we have another exhibit for you here. I hope you have it. It is called, "Productivity Offset for Northwestel".
2342 MR. WOODLAND: I have it.
2343 MS LOTT: I don't know what exhibit number we are at, but I will leave that to the Commission.
2344 THE CHAIRPERSON: Are we at 6, Madam Secretary?
2345 THE SECRETARY: Yes, it is Exhibit No. 6.
2346 THE CHAIRPERSON: Thank you.
2347 MS LOTT: If we could look at this exhibit, what we have done here is shown Northwestel's productivity estimate, and the Consumer Groups have done an alternative derivation of a productivity estimate.
2348 We wanted to provide a comparison of Northwestel's estimate of productivity with that using unadjusted 1998 costs and 2006 costs, excluding the SIP and using current asset lives, and an inflation estimate, as you can see here, that we have put at 2.3 percent.
2349 I will now take you through this.
2350 MR. WOODLAND: If it will speed things up, I have reviewed the calculation and the mechanics of it are fine.
2351 MS LOTT: You are following my math on that?
2352 MR. WOODLAND: Yes.
2353 MS LOTT: Okay.
2354 MR. ROBERTS: If I may reiterate, that it's not our estimate of forward looking productivity.
2355 MS LOTT: Okay. So if I could just confirm that you would certainly agree to the alternate calculation that we have made here, the productivity estimate of ‑‑ yours of being ‑3.2 percent and the one we have derived at of 0.7 percent?
2356 MR. WOODLAND: Oh, I agree to the accuracy of the calculations, I don't necessarily agree with the assumptions ‑‑
2357 MS LOTT: Right.
2358 MR. WOODLAND: ‑‑ embedded in the notes.
2359 MS LOTT: Yes, thank you. Okay.
2360 MR. WOODLAND: In fact, I will note that I did my own calculation where if retaining normalization in the calculation I would come up with a productivity offset of ‑0.7.
2361 I have in my own notes an example of doing ‑‑ without normalization, or sorry, leaving SIP in with no normalization I would get a productivity factor of ‑1.8.
2362 So, I mean, there are different ways to package these things and I think the key is that if some other mechanism for calculating or forward estimate is used, that estimate can only legitimately be applied to the costs that were actually included in that calculation.
2363 I mean, I really don't think it makes sense to take SIP access costs out of residential PES ‑‑ there are many reasons for that and we'll probably get into at another point ‑‑ but if they were taken out, then the productivity factor could not be applied to those SIP, those NAS, I mean, it could only be applied to the NAS that were left behind.
2364 MS LOTT: Yes. I will just state that we'll leave that for argument that we will submit in due course of this hearing.
2365 So in estimating the level of productivity, Northwestel has used the incremental cost of residential service instead of a full total factor productivity study for the company as a whole.
2366 Am I correct about that?
2367 MR. HAMELIN: Absolutely.
2368 MS LOTT: Why was a total factor productivity study not conducted?
2369 MR. HAMELIN: Well, we just applied the same methodology that was used down south in calculating the Res PES productivity.
2370 When it comes to total productivity for the company, this differs very significantly. I mean, today what we have been using under the current regime is something that includes inflation, it includes load as a proxy, mostly being the growth in NAS, and the growth in NAS virtually is kind of nil these days, has been for several years ‑‑ in fact, we are projecting a decline next year ‑‑ minus 2 percent.
2371 Now, having said that, if I showed you the ‑‑ you know, the level of operating expenses from I would say five, six years in a row consecutively, you would see that expenses have been contained ‑‑ regardless of how you calculate the productivity, expenses have been contained to a growth of just about 1 percent max per year.
2372 I believe I have figures from 19 ‑‑ just a moment, please.
2373 For example, our operating expenses in 2001 were $72.9 million, the end of 2005 they are $75.9 million. That's merely a $3 million increase over four years.
2374 We are still at $78 million in 2007.
2375 THE CHAIRPERSON: Mr. Hamelin, do we already have that data?
2376 MR. HAMELIN: No ‑‑
2377 THE CHAIRPERSON: The longitudinal expense series?
2378 MR. HAMELIN: No, you ‑‑
2379 THE CHAIRPERSON: Perhaps, would it be reasonable if you could provide the data over the period in question?
2380 MR. HAMELIN: We have it very handy right now.
2381 THE CHAIRPERSON: Thank you.
2382 MR. HAMELIN: So my point is, on the total company basis you can see that expenses were constrained and contained very lately.
2383 Anyone else wants to...
2384 MR. WOODLAND: But specific to that total factor productivity methodology, Northwestel doesn't have the data required to do that. There is significant historical data I think over a 10‑year period and particular data, datum, data items are required in order to properly conduct that that aren't available in terms of being specific to Northwestel.
2385 I think there are a number of capital input factors, various national economic factors that aren't available and specific to Northwestel's environment as opposed to Canada as a whole.
2386 MR. HAMELIN: I hope I didn't confuse matters. I was talking about the productivity calculations under the current regime that we are in as opposed to maybe you are talking total factor productivity, that my colleagues talking..
2387 MS LOTT: That is right. Do you consider that the productivity estimate that you arrived at in the response to CRTC‑104 be revised to be representative of what would have been derived using a total factor productivity study for the company as a whole?
2388 MR. WOODLAND: Sorry, could you clarify?
2389 MS. LOTT: The productivity estimates that you produced in your response to the interrog from CRTC‑104 be revised, do you consider that that estimate is representative of what would have been derived had you been using a total factor productivity study for the company as a whole?
2390 MR. WOODLAND: Not having conducted that total factor productivity I really don't know. I mean, keep in mind that our recommended productivity factor is zero, not the result of that calculation. Whether or not a total factor productivity calculation would have come up with zero, I really can't say.
2391 MR. HAMELIN: One thing is for sure though, the costs that have been incurred, particularly since 2001, they are there to stay, they are part of our base right now.
2392 MS LOTT: Okay, thank you for that.
2393 Isn't it the case that offering additional services which share the existing inputs will result in an increase in productivity growth? Would you agree with that?
2394 MR. WOODLAND: Could you be more specific please?
2395 MS LOTT: Well, I guess the context I am looking at is trying to understand what economies of scope are and that those occur when a company is offering multiple services, experiences, but you have declined total average costs because of the number of services offered increases.
2396 MR. WOODLAND: In general that is true, to the extent that the investment can be used for other services. With respect to most of the investment that is in place for residential PES, as an example, that is less the case certainly than say transport investment.
2397 MS CHALIFOUX: And just to clarify as well, I mean the other side of the equation is obviously the corresponding combined output from those services, so again there you have to take that into consideration.
2398 MS LOTT: Maybe I will use a concrete example here. Do you offer high‑speed internet services, DSL services?
2399 MR. WOODLAND: Yes, we do.
2400 MS LOTT: And do both the local voice service and the DSL service make use of the same local loop?
2401 MR. WOODLAND: Yes, that is correct.
2402 MS LOTT: So the local loop would be the shared input in providing both the local voice and the DSL, is that correct?
2403 MR. WOODLAND: In a technical sense, yes. In a costing sense and in a rating sense and in a tariff sense, no. In the tariff sense the residential PES service pays for the loop and now what that does is it says that ADSL only has to be rated or costed without taking into account the loop and that is standard practice everywhere.
2404 MR. ROBERTS: In addition, I would note that quantity is a factor in determining the productivity leveraged and there is a significant impact in the other direction with regard to this and future productivity expectations.
2405 Again, I reiterate the market disruptions associated with the very broad Industry Canada initiatives of BRAND and NSI, they are effectively duplicating our local distribution and transport networks throughout the Northwest Territories, 31 of 33 communities, and 25 of 26 communities in Nunavut. Therefore, we can expect that with a competitive network, with essentially the competitor having a heavily subsidized cost of entry, that there will be significant displacement of services from our network.
2406 And so going forward in four years, if we were to calculate the unit costs of things like Res PES, given the fixed costs that are involved and the high proportion of fixed costs, we could actually see a large per unit cost increase.
2407 So again, you are quite right in pointing out that the leverage of the asset is a factor in determining productivity but I would suggest that given the unique circumstances we face, particularly with regard to these government programs in the vast majority of our communities, it may in fact cut the other way.
2408 MR. WOODLAND: I will just add to that that ‑‑
2409 THE CHAIRPERSON: No, please. The original question was a very simple factual question.
2410 MS LOTT: Yes, I am just asking if you would confirm whether the offering of both the local voice service and the DSL service is an example of an economy of scope.
2411 MR. WOODLAND: Well, I hope that I made clear that I didn't think it was an economy of scope or an economy of scale.
2412 THE CHAIRPERSON: You did, indeed.
2413 Could I just ask the panel? We do appreciate the attempt to paint the total picture for us. It is important that the Commission understand it and we are listening attentively to what you say but you will have other opportunities to make many of the points that you are making.
2414 When a simple, straightforward question is asked, it is appropriate, with reference to that specific question, to try to clarify and assist all of us in understanding the import of it and the implications.
2415 The broader question, I would ask you to exercise some judgment as to whether this is the right moment to introduce the other themes. We have read your evidence. You are going to have final argument. There is a policy panel coming. So please try to help the consumer groups to move through their agenda without unduly loading down the response each time.
2416 And I repeat, it is important that we understand this but we have all made a good faith attempt to listen and to read and we do understand the points you are making but you are going to have other opportunities to makes these points.
2417 MS LOTT: Thank you, Mr. Chairman.
2418 I am now wanting to just confirm what we had gone through previously in my example of using the DSL service and the local voice service.
2419 My understanding is that you had agreed with me that that is an example of a shared input and that you would then agree with me that that is an example of ‑‑ the offering of both those services is an example of economy of scope.
2420 MR. WOODLAND: No, I guess I wasn't clear. I did not agree that that was a shared input. The loop cost is an input only to the cost of residential voice service, is not an input to cost of ADSL.
2421 MS LOTT: If I could just clarify. My question is really just technical. Do both the local voice service and the DSL service make use of the same local loop?
2422 MR. WOODLAND: Yes.
2423 MS LOTT: I am just asking this in a technical sense.
2424 MR. WOODLAND: Yes.
2425 MS LOTT: So it is a shared input in providing both the local voice and the DSL?
2426 MR. WOODLAND: That would depend on what you mean by shared input then, I guess. I take shared input to mean an input to the cost and I would have to disagree.
2427 THE CHAIRPERSON: Look, this is an argument about the economics of telecom, which is the framework within which you are getting a response, and perfectly legitimately so, and the broader economics of a shared asset.
2428 In the context of the broader economics of a shared asset, I daresay that it is a shared input but for purposes of the conventions of telecom costing and pricing ‑‑
2429 MR. WOODLAND: Yes.
2430 THE CHAIRPERSON: ‑‑ and I think this is Mr. Woodland's point ‑‑ it is not a shared asset. The cost of the local loop is recovered or not recovered, as the case may be, within the framework of local telephone service. I think that is the point. Am I correct?
2431 MR. WOODLAND: Absolutely.
2432 THE CHAIRPERSON: So it is not that the panel doesn't want to give an honest answer, it is simply that it is answering in the framework of this curious world of the conventions of telecommunications.
2433 MS LOTT: Okay, thank you.
2434 I am just wondering, how have these types of scope economies in offering multiple services using the same input ‑‑ how have they been reflected in Northwestel's productivity estimate from your response to CRTC 104(b) revised?
2435 MR. WOODLAND: Well, I guess I would say that they haven't ‑‑
2436 MS LOTT: They haven't.
2437 MR. WOODLAND: ‑‑ in that calculation.
2438 MS LOTT: Could you just confirm that?
2439 MR. WOODLAND: Yes.
2440 MS LOTT: Okay, that is all I wanted.
2441 Doesn't the lack of inclusion of these types of scope economy productivity improvements in Northwestel's estimation of productivity represent a shortcoming of Northwestel's methodology?
2442 MR. WOODLAND: It is not our methodology.
2443 MS LOTT: Isn't it the case that under Northwestel's ‑‑ the methodology that all the productivity gains associated with these types of economies of scope accrue to the company since they are not reflected in the target productivity offset?
2444 MR. WOODLAND: Shall I answer this from the telecom perspective or the broadly economic perspective?
2445 THE CHAIRPERSON: Mr. Woodland, anything you can say to help us in respect of either would be good and you should label them as such when you respond.
2446 MR. WOODLAND: In the telecom view, no, because things are very specifically allocated to specific products which are then required or expected to recover those costs.
2447 MS LOTT: All right. Thank you.
2448 I'm going to move on one last area here, just a couple of questions. I wanted to talk about the inclusion of a stretch factor or a consumer productivity dividend.
2449 My question is: Have you proposed to include a stretch factor in deriving your proposed productivity offset?
2450 MR. HAMELIN: Just going to zero merely already we are assuming that it is already included in there.
2451 MS LOTT: So that would be no?
2452 MR. ROBERTS: Again, if you, as you seem to insist, take the service‑specific marginal costing approach, the delta between the result of that study and zero could be taken as a stretch. However, again, the 0 percent that we have proposed going forward is based on a number of factors that you don't seem to want to explore here but that nonetheless would include balance including a form of stretch.
2453 MS LOTT: Just one moment.
2454 MS LOTT: I'm sorry, it's late in the morning for me and I'm really not clear of whether you are saying that ‑‑ I guess my question again is: Have you proposed to include a stretch factor in deriving your proposes productivity offset?
2455 MR. ROBERTS: Again I would suggest that the 0 percent does include a stretch factor in a balanced approach.
2456 If you again insist on using your methodology, the service‑specific marginal cost, you could imply a specific stretch factor, but we would suggest that it's something that is not specifically quantified in our proposal but is embedded in the 0 percent and the challenge that we have, the magnitude of the stretch, is broadly illustrated by the service‑specific marginal cost studies.
2457 MS LOTT: Isn't it true that Northwestel will experience gains from regulatory streamlining and incentives to be more productive under your proposed framework?
2458 MR. ROBERTS: The incentives will exist, as will the challenges that we can underscore in great detail if you would like us to elaborate.
2459 MS LOTT: No, that's fine. Thank you.
2460 Those are my questions, Mr. Chairman. Thank you.
2461 THE CHAIRPERSON: Thank you, Mr. Wylie and Ms Lott. We appreciate it.
2462 Thank you, panel.
2463 We will take a break. All the members of the panel are pleading with me to ensure that there will be a break.
2464 MS LOTT: That's Mr. Briggs, Andrew Briggs.
2465 THE CHAIRPERSON: Briggs, I'm sorry. I know I'm going to get it right one day.
2466 We will rise and we will reconvene at 10 minutes to 11:00.
2467 Thank you.
‑‑‑ Upon recessing at 1033 / Suspension à 1033
‑‑‑ Upon resuming at 1052 / Reprise à 1052
2468 THE CHAIRPERSON: Order, please. A l'ordre, s'il vous plaît.
2469 Madame la Secrétaire.
2470 THE SECRETARY: Merci, Mr. Chairman.
2471 We will call now on Mr. Rondeau from UCG.
EXAMINATION / INTERROGATOIRE
2472 MR. RONDEAU: Good morning, ladies and gentlemen. My name is Roger Rondeau. I am President of the Utilities Consumers Group and the representative on their behalf.
2473 Before I move on to other areas of finance, panel, I would like to pursue a little bit more in depth the issue of affordability that I spoke of yesterday that we left off with.
2474 It would seem that the direction of one of the intervenors and one of the Commission Members implied that rates should even go higher. I think it is very important that we get this into a bit better perspective for the Commission.
2475 Yesterday we left off with a debate about tax filer in low categories and it was mentioned by one of the panel that these can be offset by students. I think it was a relevant point.
2476 What I would like you to do now is look at UCG evidence, Exhibit C.
2477 THE CHAIRPERSON: Sorry, Madame la Secrétaire. What is it, Exhibit 1, UCG?
2478 THE SECRETARY: Yes, UCG Exhibit No. 1.
2479 THE CHAIRPERSON: Thank you.
2480 MR. RONDEAU: Mr. Chair, it is not the ‑‑
2481 THE CHAIRPERSON: You are talking about your previous exhibit.
2482 MR. RONDEAU: Exactly, yes.
2483 THE CHAIRPERSON: I'm sorry.
2484 MR. RONDEAU: It is an article in one of the newspapers in Whitehorse.
2485 MR. HAMELIN: We have it.
2486 MR. RONDEAU: I have gleaned some of the important issues that I consider the Commission should be aware of from this article, and then I will ask you a few questions.
2487 This article was put in by the Anti‑Poverty Association in the Yukon. They have taken into account that most of the people that are using the food banks have changed substantially in the last number of years. It used to be mostly men, people with disabilities or alcohol problems. Now these banks are being frequented more increasingly by women, the elderly, family, single parents with children basically and the working poor.
2488 When the soup kitchen started at Sacred Heart, approximately ten years ago, it served 30 to 40 people. Now it is serving more than double, anywhere from 85 to 100.
2489 It is the same with the Mary House's emergency food bank.
2490 The Salvation Army emergency food bank, which can be frequented only every five weeks, experienced over 2,000 drops in the last year.
2491 Also, social assistance rates in the Yukon have not increased in 15 years, yet the cost of living has crept up by somewhere in the neighbourhood of 2 percent per year. By the third week of the month, many of the recipients are out of money.
2492 Do you have any comments on this particular article that you would like to bring forward?
2493 MR. ROBERTS: With respect, I would suggest that the Policy Panel may be a better forum for this. The Finance Panel is a little more focused on numbers and such.
2494 Again, with respect, perhaps you could raise that question when the Policy Panel is up.
2495 MR. RONDEAU: That is fine. I will continue, because I think that some of the questions I have are more related to you.
2496 Are Northwestel customers not already paying the higher end of local charges, even with the increase proposed?
2497 MR. HAMELIN: They are at the higher end.
2498 MR. RONDEAU: Would you agree that Northwestel customers should be protected under the statutes of Canada ‑‑ in other words, the Telecommunications Act, specifically section 7?
2499 MR. HAMELIN: Yes.
2500 MR. RONDEAU: Are you aware of the decision by the CRTC in 2002 which capped local resident phone services in southern jurisdictions at the then current rate, which was in the $20 to $30 range?
2501 THE CHAIRPERSON: Mr. Rondeau, apart from my reservations about the accuracy of the premise of your question, I would ask you to try to focus on specific aspects with which the Financial Panel can help us.
2502 I do appreciate your concerns with broad welfare issues, but this is really not the panel to address those questions to.
2503 If you have specific questions that relate to the financial performance of the company, its productivity performance, the relationship between its proposals and its historical experience with respect to issues like pricing and costing and depreciation, then this is the right place. But the broader questions of general welfare ‑‑ it is probably a bit unfair to pose those questions to this panel, who have not prepared themselves to respond to those kinds of questions.
2504 MR. RONDEAU: I only have a few more questions. I will skip this and let the Policy Panel handle these questions.
2505 THE CHAIRPERSON: I think that is appropriate.
2506 You will, of course, be very welcome to pose those questions at that time.
2507 MR. RONDEAU: I will move on to the productivity level.
2508 The response to CRTC‑1301. I gather you would like to see this, so that you have it in context.
2509 MR. HAMELIN: Just a moment, please.
2510 MR. HAMELIN: We have the interrog right now.
2511 MR. RONDEAU: Okay. This is in respect to the going in rates for your level of expenses productivity gains using the TIP for the 2007 forecasts, and I read your statements to the Commission says:
"Current framework must be applied as a whole in order to ensure that the balance of interest is not undermined and that the determinations with regard to the reasonableness of rates are valid." (As read)
2512 Could you explain this a bit more for us, please?
2513 MR. HAMELIN: I'm sorry, could you tell me where you are reading from?
2514 THE CHAIRPERSON: Page number, Mr. Rondeau? What page and paragraph number?
2515 MR. RONDEAU: It's a seven‑page response with ‑‑ I'm sorry, maybe I can come back to this a bit later on. I don't have it ‑‑ 13.01.
2516 THE CHAIRPERSON: I think we found in paragraph 3 of page 4.
2517 MR. RONDEAU: Page 4 of 7, yes, that's correct.
2518 THE CHAIRPERSON: Why don't you just re‑read it just to refresh our memory and then we will all be on the same page, Mr. Rondeau, and then you can ask your question.
2519 MR. RONDEAU: Your statement read:
"Current framework must be applied as a whole in order to ensure that the balance of interest is not undermined and that the determinations with regard to the reasonableness of rates are valid." (As read)
2520 THE CHAIRPERSON: And your question is...?
2521 MR. RONDEAU: My question is to explain this, first of all.
2522 THE CHAIRPERSON: Please explain it, rephrase it, rationalize it, help us to understand it.
2523 MR. RONDEAU: Thank you.
2524 MR. ROBERTS: Fair enough. What we are referring to here specifically is the unique nature of Northwestel's transition from our current framework which is one of a kind and separate and apart from any other telecommunications carrier in Canada and to going directly to price caps.
2525 The other companies had, amongst other things, the rate bases split into utility segments and non‑utility I guess, and the focus was on a sub‑set, just a part of their business in examining things like the rate of return, et cetera.
2526 So in Northwestel's case we haven't gone through that process in our transition, we are left with a much more aggressive, much more dramatic transition to price caps.
2527 And we are saying that in order to do this a fair way, you have to take our current framework as a whole and not borrow from the methodology of transitioning the other companies in part and keep other aspects of ours in the mix as well.
2528 So you are mixing two different systems if you don't take all of the elements of our current framework into play, and we are suggesting that that's not appropriate and wouldn't be in the benefit of northerners.
2529 MR. RONDEAU: Okay, I understand, thank you.
2530 Could you give me your definition of reasonableness of rates taken from that statement as well?
2531 MR. ROBERTS: The Telecommunications Act requires that rates be reasonable as deemed by the Commission in weighing all the factors.
2532 MR. RONDEAU: Thank you. Using the TIP methodology, your results are that you have a productivity factor of zero.
2533 My question is how do you expect to become more efficient and cost effective with a TIP of zero ‑‑ this is the major premise or principle of a price cap regime, so how do you expect to become...
2534 MR. ROBERTS: If I may, the TIP methodology is our ‑‑ relates to our current productivity requirement, that's total implied productivity.
2535 I believe what you are referring to is an "x" factor of zero going forward in a price cap regime.
2536 With regard to that, we are acknowledging certainly that there will be isolated opportunities to gain specific gains. However, we are suggesting that that on a net basis, globally across the company, there is a significant challenge and indeed a greater challenge than with other telephone companies in achieving net productivity gains again across the base.
2537 MR. HAMELIN: I would like to add, Mr. Rondeau, that what you are referring to here in this particular interrogatory, the TIP factor of 2 percent has been included in the forecast of 2007. But this is TIP methodology I was trying to distinguish. It is the one that we are using today under our current framework as opposed to the productivity offset that is included in price caps for regulating baskets of services. This is very different concepts in terms of productivity.
2538 MR. ROBERTS: So just to add a little further clarity. When we are testing the reasonableness of the rates, given a revenue forecast and given a return of 10.5 percent, we are using the TIP methodology to test the reasonableness of the rates. Going forward under price caps we would be suggesting that an X factor of zero be employed going forward.
2539 MR. HAMELIN: Just to be clear, the TIP that we are talking about here relates to expenses, it is 2 percent productivity on the expense envelope that is and has been measured on a yearly basis under the current regime by the CRTC and, in fact, made public on the record on a yearly review basis process, that everybody gets to see it and analyze.
2540 So it is very clear that is related to the total expense envelope based on inflation, plus growth, growth being modelled mostly, primarily, by growth and NAS and somewhat with adjustment for ADSL, but essentially it relates to expenses. While the X productivity that we are talking, the price cap, is to govern the pricing of baskets of goods.
2541 MR. RONDEAU: Okay. Could you please look at CRTC 1403. Specifically, what I want you to look at is that you state in here that the companies should have discretion to increase rates of up to a maximum of $1.00 per year.
2542 MR. ROBERTS: That is correct.
2543 MR. RONDEAU: I guess my question is if you have the discretion to raise rates every year, is this really price capping?
2544 MR. ROBERTS: Well, there is a couple of important things here. I would suggest, first, that the dollar would represent a cap. But this also is just the allowable flexibility to change rates. It doesn't necessarily reflect the ability to do so or the desirability, the benefit of doing so. Northwestel's very cognizant of the limits on which it can grow its revenue associated with this service, whether through price increase or through demand increase.
2545 So again, it doesn't mean that that would be the fact. Certainly, after four years it wouldn't make sense to raise rates $4.00. We acknowledge that that would not be something that would be supported by the market. So again, this is with regard to flexibility and it doesn't necessarily mean that that is going to happen.
2546 MR. RONDEAU: Well, I guess my question is why do you need this particular discretion?
2547 MR. ROBERTS: I would suggest that any company would try and maintain the maximum amount of discretion in pricing to the market. Markets dictate prices by and large and we are trying to adopt a framework that is going to have greater reliance on market forces consistent with the trend in the south and the recommendations of the Telecom Policy Review. So we are, again, trying to keep the discretion, the flexibility, but at the same time we are very cognizant of the limits in raising these rates.
2548 MR. RONDEAU: Okay. The intervener before asked questions on the 25 percent mark‑up and I believe the first part of my question here has been answered, which was to give a rationale and you have done your job at that. So I will ask a few questions.
2549 Is the 25 percent mark‑up on all company costs?
2550 MR. HAMELIN: The mark‑up would be there to try and contribute to fixed and common costs. When you are studying something on a Phase II basis, that is a service, right?
2551 MR. WOODLAND: We have specifically applied a 25 percent mark‑up in the calculation of our various subsidy amounts and, as I mentioned previously, in aggregate on the rated products. In other words, the sources of revenue that we have that are not subsidy, in aggregate there would be a 25 percent mark‑up on those, though not necessarily a 25 percent mark‑up on each specific product. So overall, yes. The answer is yes.
2552 MR. RONDEAU: So specifically, the 25 percent mark‑up is added to the NAS costs?
2553 MR. WOODLAND: It is in a calculation of that particular subsidy, yes.
2554 MR. RONDEAU: Now when you do your financial statements, are not your operating costs the true hard costs that you undergo?
2555 MR. HAMELIN: They are the ones that are audited every year by Deloitte.
2556 MR. RONDEAU: Is this mark‑up already added into these costs?
2557 MR. WOODLAND: I am sorry, do you mean is there a mark‑up included in the costs as recorded in the financial statements?
2558 MR. RONDEAU: Correct.
2559 MR. WOODLAND: No.
2560 MS CHALIFOUX: But just to be clear, I mean embedded in your financial ‑‑ your annual financial operating expenses would be elements related to ‑‑ in which the 25 percent mark‑up is intended to recover.
2561 So as we went through this morning with Ms Lott as an example, the depreciation, the annual depreciation, the annual carrying costs associated with fixed structures would be embedded in our financial statements as well as our annual overhead type costs.
2562 MR. RONDEAU: I will move on to cost of service. Could you quickly rationalize for us how you have come up with a figure in your 2006 residential NAS rate being $57.42?
2563 MR. WOODLAND: I am not sure ‑‑ could the Chairman give me some guidance on how expansive to be when answering this?
2564 THE CHAIRPERSON: I think you want to try, Mr. Woodland, to give Mr. Rondeau the kind of general purpose answer in two paragraphs or less that might illuminate him as to what the process is because I know it is a very elaborate and complex one and we don't go into details but I think you are well positioned to provide him with a synthesis thereof.
2565 MR. WOODLAND: Okay. We applied Phase II costing principles to determine the cost of that service and essentially what we look at is what are the pieces of capital investment that are required to provide the service, both in terms of the service in general and those that are specific to demand. Examples of demand‑specific would be line cards in the switch and the actual loops to the house in order to provide that service.
2566 We also look at operating expenses in the same sense, those that are required by the service, things like the billing costs or the customer management costs in the call centres, and then costs that are specific to demand as well.
2567 And then those are all looked at in a perspective incremental basis, and by perspective what we mean is costs as if we had to build the facilities today using today's costs. Incremental says we try to look at it primarily in the sense of what is required to add that one extra customer. There are some exceptions to the incremental approach but I don't think we should go into that at this point.
2568 Then we look at demand over the period that the price cap regime is expected to apply to and add up all those cost pieces over that period, do discounted cash flow analysis on that to determine the present worth of the annual costs and the annual equivalent costs, divide those by the number of NAS that are affected and determine the individual NAS costs.
2569 MR. RONDEAU: Okay. Thank you.
2570 Would you now look at PIAC‑07, specifically page 3?
2571 MR. WOODLAND: I have it.
2572 MR. RONDEAU: Specifically paragraph No. 2 where it starts "The Company".
2573 MR. WOODLAND: Oh, okay. Do you have the revised version? On mine that paragraph I think is paragraph 3 but, in any case, go ahead.
2574 MR. RONDEAU: It states:
"The Company also notes that the SIP programmers represents a much larger portion of the total investment than is the case for any southern company. The SIP program represents about 29% of Northwestel's net assets. SIP assets on its own is over 9% of the net assets." (As read)
2575 MR. WOODLAND: Yes.
2576 MR. RONDEAU: My question is: If you would remove the SIP from the NAS, what would the rates be?
2577 MR. WOODLAND: What would the cost be?
2578 MR. RONDEAU: Yes.
2579 MR. WOODLAND: I believe we answered that in the attachment to that particular interrogatory and the costs of residential PES would be $448.42 per month.
2580 MR. RONDEAU: Is this using ‑‑
2581 MR. WOODLAND: I'm sorry, I would just like to make one small clarification.
2582 That $48.42 was also calculated using the currently approved service lives, not the proposed ones.
2583 THE CHAIRPERSON I'm still confused, Mr. Woodland.
2584 Could you go through it again, because I didn't get it, just slowly with the details?
2585 MR. WOODLAND: I'm sorry. This particular interrogatory from PIAC asked us to recalculate the RES PES costs without the SIP access lines included,. and also to use the currently approved service lives for access, not the proposed ones, you know, where five of them are being modified, in particular the cable asset being reduced to 20 years from 26.
2586 So the effect of the two things was to take out the cost chunk that is related to SIP access lines and to remove the slight cost increase of impact of the change in service lives that we have proposed. So the net effect was to take the costs from the $57.42 that we have submitted down to this $48.42.
2587 THE CHAIRPERSON Thank you very much.
2588 Excuse me, Mr. Rondeau. We are still a little confused. We want to ask another question on this subject. Excuse us for interrupting you.
2589 MR. RONDEAU: That's fine. That helps me understand as well.
2590 COMMISSIONER CRAM: The difference between the $57 and the $48 is what is the $5.4 million that Mr. Hamelin was talking about in terms of the subsidy.
2591 Is that correct?
2592 MR. WOODLAND: Well, they are associated. You have to go through the calculations of, you know, the difference between rate and cost impacted by the features revenue. You also have to take a long ‑‑ if you are going to take SIP out of the RES PES you have to take along the operating costs and expenses as well. Right? So that gets you the net change in subsidy of $5.4 million. So it's not a direct ‑‑ I just want to be clear that, you know, the amount that this average cost change is not the thing that we would have to look at in determining the shifting around of those subsidy amounts.
2593 COMMISSIONER CRAM: And multiply by the NAS?
2594 MR. WOODLAND: Correct.
2595 COMMISSIONER CRAM: All right. Thank you.
2596 MR. RONDEAU: My next question: When you were cross‑examined by the Consumers Groups in front of me it was noticed that the isolation of the SIP costs would be questioned ‑‑ and that's what I'm doing now ‑‑ to tell us why you would not isolate the capital costs of SIP?
2597 MR. WOODLAND: Well, I guess at the end of the day it's an arbitrary decision. If SIP access costs were to be taken out of RES PES we would propose that they be added to the SIP carrying cost subsidy.
2598 There are two key reasons in my mind for not doing that.
2599 The first is, simply from an administrative perspective, the continuing separate tracking of NAS, whether they are SIP or whether they are non‑SIP NAS, over time would become more and more difficult and more and more of a burden to manage, both for the company and for the Commission and interested parties.
2600 The other reason is that in our view the addition of SIP NAS really truly represents a change in the average cost of our NAS. We don't manage SIP NAS any differently going forward. We dispatch technicians in exactly the same fashion.
2601 Everything that we do about taking care of them and ultimately replacing those investments is exactly the same.
2602 So from our perspective, it makes a lot more sense to roll them in.
2603 Yes, we recognize the bump in costs that that has caused.
2604 I will point out that, from my understanding, Bell does manage all of its NAS as a pool essentially. So all SIP NAS are considered to be just part of the overall NAS pool.
2605 I don't know that they go to the extent that we have in terms of trying to incorporate SIP‑specific costs into that assessment. But at the same time, they don't have anywhere near the materiality of that cost impact.
2606 MR. HAMELIN: Mr. Rondeau, I would like to add just for clarity, that bump in costs that we are talking about, $28 million of the SIP program has been associated to the access and NAS and 2,800 lines have either been upgraded, if you will, from an underserved perspective or really added to our NAS base.
2607 That is $10,000 of investment per NAS due to that piece of the SIP program.
2608 Overall, our total investment per NAS, our gross investment is the $7,500, as you see in our evidence, which is at least almost three times, on average, just about anybody else's NAS investment in the country.
2609 Anyway, I just wanted to make that point clear. We have added to our cost base $10,000 NAS costs.
2610 MR. RONDEAU: I understand that; thank you.
2611 Do you not have to isolate SIP to get your supplementary funding in order?
2612 MR. HAMELIN: Today the regime ‑‑ and this is a concept I was trying to clarify earlier this morning.
2613 Under the current regime the SIP carrying costs are obviously in our actuals that you referred to just a moment ago, and those costs do not disappear.
2614 Under the current regime, some folks may think that the supplementary funding is there to finance the SIP program. Well, this is not the case.
2615 The SIP program, let me tell you $85 million, I had to go ‑‑ we, the company, had to go to the market and raise some bonds, if you will, to meet this excess capital program, if you will, over this last five‑six years. Twice in fact I went to the bond market and raised $20 million for 20 years one year and $15 million for ten years another year.
2616 Let me assure you that when you are raising these funds, I get grilled for several hours from those that are investing with us as to will they ever see these monies 20 years later.
2617 To be frank, I cannot hide the SIP program from them. I tell them it is totally uneconomic, but not to worry, there is this regulatory bargain that comes into play.
2618 Suffice to say that they have confidence and we go ahead and raise those funds. It is an important piece that I just want you to understand.
2619 MR. RONDEAU: Yes. Thank you.
2620 Were any of these SIP capital costs directly for the Whitehorse or Yellowknife area?
2621 MR. HAMELIN: Actually, they served multiple places.
2622 Could you give me a second? We do have some details on this.
2623 MR. RONDEAU: Yes.
2624 MR. WOODLAND: The answer is yes. There are a number of NAS in the Whitehorse and Yellowknife areas that were served by SIP.
2625 MR. RONDEAU: Thank you.
2626 MR. WOODLAND: I don't have the specific numbers at hand.
2627 MR. HAMELIN: And Ray Wells will be in a much better position to answer that in the Policy also.
2628 MR. RONDEAU: Thank you.
2629 You mention in your proposal some new SIP programs. My question is, are these all absolutely necessary, or are they now what I would call cream?
2630 MR. HAMELIN: No, they are absolutely necessary.
2631 Again, Mr. Wells would be in a much better position to add to this, but suffice it to say that it would be a lesser level of the current SIP program, which was extremely beneficial to the North, and which allowed us to be able to bring broad service objectives into play.
2632 There are still 22 switches that would need upgrade that I do know about. We just have a little bit further to go, if you will.
2633 Again, the program can be much better explained by Mr. Wells.
2634 Again, it is mostly for basic services. All of it, actually, is for basic service objectives, which, by the way, are somewhat curtailed. When you think of CMS features, for example, they are not available ubiquitously across all of our territory, simply because of the nature of the cost associated with each switch.
2635 When you consider the density of switches per NAS, I think we are probably one of the highest switches per NAS in the country, and in North America.
2636 MR. RONDEAU: In the same area, in cost of service, you mentioned that there is a cost to a new billing and customer care system. My question is, would this not be considered part of your productivity factor?
2637 Why was this added on to your cost of service?
2638 MR. WOODLAND: I am not sure that I understand. Could you help me understand the distinction you are seeking between being part of productivity or being part of the cost of service?
2639 MR. RONDEAU: I am asking if this should not be in the productivity area. That is what I am asking.
2640 In your savings.
2641 MR. WOODLAND: I will try to be a bit more broad in answering the question.
2642 As a company with 70‑some‑odd thousand NAS customers and 100,000 residents to serve, and 96 communities, like any telco, we rely on large systems to manage our business. Those systems are required to maintain customer information, to perform billing functions, to collect data from switches, and rate toll calls, and all kinds of things like that, and they are quite properly, in my view, considered to be a part of the cost of providing those services.
2643 MR. RONDEAU: The last part for cost of service is, yesterday, and a bit more today, we spoke of your NAS lines basically being flat in the last number of years.
2644 Is that correct?
2645 MR. HAMELIN: Yes, that is correct.
2646 There is some common phenomenon down South too. A lot of it could be attributed to cellular services and displacement from ADSL services.
2647 MR. RONDEAU: Do you not have an increase in second and third lines being installed in the more affluent family homes?
2648 MR. HAMELIN: It is exactly the reverse. The more ADSL that becomes available, the more displacement you get, particularly from second lines.
2649 I am thinking of those that only have access to dial‑up internet, as we call it. As soon as ADSL or something of the kind becomes available, they can save on the second line in order to pay partly for the ADSL service.
2650 MR. WOODLAND: Just to be clear, as well, adding a second line to a home doesn't change the unit cost of that second line. Because of the very nature of Phase 2 costing, we have determined what the incremental costs are per line, so the second line would double the cost, effectively.
2651 MR. RONDEAU: Getting into a bit more of the financials, I guess the best thing would be to have you have UCG‑11 in front of you, which are financial statements.
2652 You will also need the exhibit that was handed out this morning, but there are other areas. UCG 1.1 is the financial statement and also PAC 18.
2653 THE SECRETARY: The exhibit that Mr. Rondeau is talking about is ‑‑ I just distributed it this morning, it's UCG Exhibit No. 1.
2654 MR. RONDEAU: It's a page ‑‑
2655 THE SECRETARY: It's called ‑‑ I'm sorry. It's called from Northwestel Yearly Financial Statements in million of dollars.
2656 MR. HAMELIN: I have that.
2657 COMMISSIONER CRAM: And the other document you were referring to is an interrog?
2658 MR. RONDEAU: They are both in the interrogatories, both UCG 1.1 and PAC 18, and they are both financial statements. One is 2004, one's 2005.
2659 MR. HAMELIN: I have them, Mr. Rondeau.
2660 MR. RONDEAU: Thank you. If we just look at the new exhibit given to you this morning, this is long‑range numbers that I've taken out of the financial statements.
2661 Now, it shows in this form that you've had a very healthy increase in your revenues yearly. Is that correct?
2662 MR. HAMELIN: I'm just unclear. We're talking the years 1991 to 2007, this document?
2663 MR. RONDEAU: Yes.
2664 MR. HAMELIN: And you're talking the revenue line?
2665 MR. RONDEAU: Yes.
2666 MR. HAMELIN: It appears to be, just looking at this, and I only got it just this morning, that what we have here are consolidated results.
2667 Now, from 1991 to 1995 you'd see telco results only; 1996 we purchased cable TV in Yellowknife; 1997 we spun off NMI as a subsidiary.
2668 So, 1998, 1999, 2000, 2001, 2002 would be consolidated results that will incorporate mobility and cable.
2669 In 2003 you revert back to only cable and telco because we sold Mobility on January 1, 2003 and, therefore, onwards, 2004, 2005, '06 and '07 you'd have just telco and cable.
2670 Now, to help you put this in perspective, cable TV ‑‑ and we do have ‑‑ we have operations, as was mentioned, in Yellowknife, we have one in Fort Nelson and we also have one in ‑‑ pardon me, Norman Wells we said yesterday, but we also have one in Fort Nelson, a small operation there.
2671 I guess it was discarded in Mr. Walker's comments simply because I guess Telus was suggesting that, you know, competition in northern B.C., them being present wouldn't count.
2672 But, in any event, what I'm saying here is you've got consolidated results for cable and telco, and cable in totality represents something like three per cent of the revenue that's buried here.
2673 So, the lion's share of these results really are telco, one might say. So, I just wanted to make sure we were clear as to what the nature of these...
2674 As you see it in terms of profits too ‑‑ I'm sorry, my colleague is trying to say something to me here.
2675 2006 and 2007 are telco, but the whole document though deserves some clarity.
2676 In 2002 you can see that the profits are showing at 18‑million, which is the highest it's peaking there but that's because, again, that was the last year you had mobility buried in these data. Afterwards you revert back to just cable and telco.
2677 MR. RONDEAU: I understand that all these things happened.
2678 MR. HAMELIN: I'm sorry, one point of clarify, Mr. Rondeau.
2679 My colleagues are correct in saying that 2006 and 2007 are Telco only from the data that is presented here, but previous material is all ‑‑
2680 MR. RONDEAU: Yes, one of the reasons why I presented this is that I realize you would say this. I guess my question is how can the regulator get a hold on all of this when you have had all these transitions in your financials through the number of years? These numbers are all skewed.
2681 MR. HAMELIN: No, these ‑‑
2682 THE CHAIRPERSON: Well just a minute, Mr. Hamelin. Mr. Rondeau, these numbers are the product of accounting conventions and these accounting conventions have to be observed by anyone who operates in the way that Northwestel operates. And it is perfectly legitimate for you to ask questions to understand them, but I don't think that you can ask the panel to justify them in someway, because all they are doing is reporting according to generally accepted accounting principles.
2683 MR. RONDEAU: Fair enough, Mr. Chair.
2684 I guess what I would like you to concentrate on is the net income, what I would like to focus on. This is your profits, is that correct?
2685 MR. HAMELIN: That is correct.
2686 MR. RONDEAU: The return for your investors?
2687 MR. HAMELIN: The net income does belong to the shareholder and it is yielding on a Telco basis as we see there in 2006, 10.9 per cent on a forecasted basis and 10.5 on a forecasted basis also for 2007, although the two regimes would differ significantly, here one being ROR and the other one being price caps.
2688 MR. RONDEAU: Do you consider this to be a fair and reasonable return for your investors?
2689 MR. HAMELIN: Well, I think it is a very reasonable approach that we are proposing for 2007. In the case of 2006, frankly I am not sure how you got 10.9 per cent ROE because our budget is normally at the mid point of the allowed range, which is 10 and a half.
2690 But what is noticeable, very noticeable between 2005, 2006, 2007, as you can see we are not proposing changes in profits here. Really, the essence of this proposal has to do with sustainability, has to do with rate restructuring, displacing implicit subsidies today and making them explicit.
2691 You know, when we think of the rate of return system that we have today, if I go back five, six years ago when it was decided, nobody was picking at specifics, if you will, of the whole regime. It is a whole package, a comprehensive package. It would be very easy as a finance person to say well I don't want to do SIP, but I will keep the rate increase of $5.00 that you have on business and $3.00 on RES.
2692 No, no, we have accepted the whole package plus the commitment, the commitment that we were entrusted of spending over $85 million. In fact, the original budget was maybe within slightly less than that. But suffice it to say, it was a very good forecast of what our capital program might be over five, six years. We lived within it, we delivered, we reported the NAS, you name it, everything was there and we committed to that package.
2693 Today, what we are saying is we are proposing a package and there is a variety of packages that could be presented. You know, you can tweak on depreciation here and you can tweak on CAT here and you can tweak.. At the end of the day what we present is a cost base on cost‑based principles a subsidy, and these costs are not going to go away, they are there today, they are buried in our actuals.
2694 All we are saying is retweak the rates in such a way that, you know, we have a package here that we can go forward with and presumably you have a sustainable, a much more streamlined regulatory framework that everyone would benefit from and without exaggerating, you know, where we are at today. The profits are the same. It is very key for you to understand this. All we are talking about really is a reflection of the mix in revenue.
2695 MR. RONDEAU: I understand.
2696 Let us look a little bit more specifically at the operating expenses. You stated that 2005, 2006, 2007 are simply the telcos; is that correct?
2697 MR. HAMELIN: 2006 ‑‑ subject to check ‑‑ just hold on a second, this shouldn't take long.
2698 MR. RONDEAU: Five, six ‑‑ '05, '06 and '07.
2699 MR. HAMELIN: 2005 and '06 are telcos. Yes, that is what I am being told.
2700 MR. RONDEAU: Okay. Can you please look at UCG‑13 where you explain cost moderations in our IR? Now ‑‑
2701 MR. HAMELIN: Just a moment, please.
2702 MR. RONDEAU: You may not necessarily need these in front of you. My question is, these techniques that you have stated in this IR to moderate your costs, should not these techniques reduce your operating costs? I see an increase in those three years in your operating costs. If you are implementing cost moderations, I would assume in most businesses it lowers.
2703 MR. ROBERTS: These are individual productivity gains in isolation. One has to consider the net productivity gain, I guess is the way you describe it, and there were other items where costs went up and they more than offset, I would suggest, the gains that were identified here.
2704 So it is not that Northwestel is saying there are no productivity gains to be had on an isolated specific project‑by‑project basis but rather that our challenge is achieving material net productivity gains.
2705 MS CHALIFOUX: And just sort of to be clear, Mr. Rondeau, operating expenses are, yes, impacted by productivity gains but also just by general price increases in the market, in the industry, goods that we buy as well as by demand drivers. As you are ‑‑ for instance, demand for certain services grows as does the cost needed to maintain and provide those services grow as well. So a number of drivers impact the level of operating expenses.
2706 MR. ROBERTS: If I could give you maybe a specific example of how gains would be undermined. Given our small base and given the high‑cost nature, the unique nature of our territory, we have instances like the replacement of a dish.
2707 We had a 9‑metre dish in one of our remote communities essentially blown over by a very extreme storm. We had to charter a 737 to fly in a new dish. So as you can imagine, the costs associated with doing something like that in a community which is already not contributing positively to the base can dramatically undermine things.
2708 Another company that is faced with that kind of challenge could just take one of their trucks and move the dish in and it wouldn't necessarily be as big a dish either due to the latitude.
2709 So we have these specific high‑cost instances that can undermine our gains and given the vast distances that we have in our territory, our exposure to things like these climactic events is much higher. So this will happen more often for Northwestel than a comparable SILEC for instance.
2710 MR. RONDEAU: Okay. The next concern we have is the area of depreciation, the write‑offs. This chart in front of you shows that depreciation costs have almost tripled since 1991. Can you give us the reasons?
2711 MR. HAMELIN: They are filed every year. Every year we file with the Commission a depreciation study with our expert Dr. Aly Elfar. These are submitted every year and they are sometimes accepted and sometimes not.
2712 MS CHALIFOUX: Just to elaborate, the depreciation accruals are driven by obviously the nature and the degree of our investment base, as well as the asset lives that Mr. Hamelin was alluding to there.
2713 MR. RONDEAU: Could you now look at UCG‑11, specifically page 14? It's the interest payments made on your various loans.
2714 MR. HAMELIN: What page, I'm sorry?
2715 MR. RONDEAU: Page 14.
2716 MR. HAMELIN: I have it. It's our schedule of long‑term bond?
2717 MR. RONDEAU: Yes. Now, when you take loans like this, you only make payments on the interest, is that correct not on the principal?
2718 MR. HAMELIN: That's correct.
2719 These are unsecured debentures. You pay interest on them, generally on a semi‑annual basis, some quarterly, and a balloon payment at the end for the total principal at maturity.
2720 MR. RONDEAU: At maturity you pay the total amount. Okay.
2721 Is there a reason why this is done this way?
2722 MR. HAMELIN: The company has been able to raise these bonds in this fashion on the market. By the way, we are the sole ‑‑ we raise our funds individually, i.e. ‑‑ I wouldn't say individually, but what I'm saying is there is no help from anyone in this. We raise our funds under our own merits.
2723 Some of these funds, they are not guaranteed because the performance of the company to date has been such that we were able to sustain this capability of raising funds, which is very important when you consider the level of the capital program that we have. So the income record that you just provided us on the previous page shows stability and provides confidence to the investment community and this is what we have in front of us. We were able to raise all these funds.
2724 Now, all of these, by the way, are mostly held by insurance companies, just out of interest.
2725 MR. RONDEAU: There is a portion in here also on American loans.
2726 Why are their interest rates so much higher?
2727 MR. HAMELIN: This has to do with the purchase of the company. This company was purchased by BCE on December 1, 1988 and it was purchased from ‑‑ it was a subsidiary of CN. In fact, the company was incorporated I believe in '79. I guess CN was in financial difficulty and decided to sell the corporation and BCE was successful in purchasing it.
2728 As part of the purchase, these U.S. bonds ‑‑ which I gather CN had operations not just in Canada but also in the U.S. ‑‑ were part of the balance sheet of the company that was being sold. So it was not a matter of negotiations or anything, it was just there. It's what is. This is buyer beware, it is what you are buying, it is these U.S. bonds.
2729 Now, I should mention, as part of ‑‑ well, I will stop there. These are the bonds at the time of the purchase.
2730 MR. RONDEAU: Thank you.
2731 Please look at page 17 of this same document where you talk about ‑‑ where it states:
"Lease operating and capital to invest in direct ownership." (As read)
2732 Is it cheaper to lease operating and capital than to invest in direct ownership is my question?
2733 MR. HAMELIN: Are you talking capital leases?
2734 MR. RONDEAU: Yes.
2735 MR. HAMELIN: Capital leases are simply an accounting entry here that suggests that given the nature of the lease that you are getting into, rather than it being an operating lease, it is classified as a capital lease. And it is one of three conditions.
2736 To make it simple, just imagine when you are renting a car for a couple of days. You are leasing a car for a couple of days. It is an expense.
2737 But if you are leasing a car for six, seven years, you are more than perhaps 75 percent of the life of the car; or if there is a bargain option at the end of the lease; or as a third thing is if 90 percent in terms of present value of the current market value of the car, it would be classified as a capital lease.
2738 What it means is instead of you going and buying it outright, you have found another banker, which is the lessor, and you have to enter in an agreement. It is a long‑term payment program as opposed to you borrowing at the bank and being able to buy it cash and registering it in your books as a capital. It is just a different banker.
2739 MR. RONDEAU: So depending on the time, it would be cheaper to invest in direct ownership if it was for a long term.
2740 Is that what you are stating?
2741 MR. HAMELIN: There are various reasons why one enters into leases. It could be obsolescence, for example. You could buy computer equipment that you don't want to be ‑‑ you may enter in a capital lease but you don't want to be tied in terms of ownership.
2742 There are different reasons or rationale as to why you get into capital leases.
2743 MR. ROBERTS: To make it very clear, going back to that rental car example, if you only need a car for one day it doesn't make sense to buy it. It is no more effective.
2744 MR. RONDEAU: Yes, I understand that.
2745 Who are these leases from, the majority of them?
2746 MR. HAMELIN: Are you talking operating or capital? I mean, we do lease ‑‑ just a second. Maybe I can get some clarification.
2747 THE CHAIRPERSON Mr. Rondeau, what are you trying to get at here?
2748 MR. RONDEAU: I'm trying to find out if these leases are from affiliates specifically.
2749 THE CHAIRPERSON: That is a clear question.
2750 MR. HAMELIN: For example, we lease vehicles, our fleet. Most of our vehicles are on a lease basis with Ford Motor Company.
2751 MR. RONDEAU: There are none of these, in other words, with your affiliates, with your mother corporation.
2752 MR. HAMELIN: We are not renting from our mother ‑‑ we are a self‑sustaining company. And if we did, it would be at tariff rates and market rates.
2753 I'm not sure where...
2754 MR. RONDEAU: That's fine.
2755 THE CHAIRPERSON: Mr. Hamelin, it is clear what he wanted. He wants to know whether any of your capital or operating leases, or any significant capital or operating leases are with any affiliates of your parent company.
2756 I think you have answered and you have said no.
2757 MR. HAMELIN: Well, we do have a long‑term contract let's say with Telesat in terms of transponders. They are kind of a sister company.
2758 But I can assure you they are at tariff rates.
2759 MR. RONDEAU: On page 19 of this same document, in an IR to UCG you responded that there were no loans to affiliates at this present time.
2760 My question is: Did you have loans prior to your affiliates?
2761 MR. HAMELIN: We did. I think you are referring here to 17(h). Is that it?
2762 And that would be very easily explainable.
2763 MR. RONDEAU: The one for $21 million?
2764 MR. HAMELIN: Yes. What that was had to do with a transfer price, a transfer of Part 6 taxes related to preferred shares with Bell Canada.
2765 To make a long story short, it is taking advantage of tax arbitrage. If you have a subsidiary that is paying a higher level rate of tax than yourself, given that there are withholding taxes on preferred shares, BCE was able to pass on to us an arrangement in such a way that, on a net basis ‑‑ on a net‑net basis ‑‑ BCE paid less taxes.
2766 But, in the end, for us to do that, they had to loan us moneys, and it was at a zero rate, and it all gets cleaned up in the wash as part of the review each year. When we do the ROE calculations we have to show the Commission exactly what is in the base, what has been added, and what has been subtracted. This was a temporary loan to make that happen.
2767 There is virtually no impact on the performance of the regulated telco basis of Northwestel in doing this, but it does give an advantage of a couple of points.
2768 MR. RONDEAU: I'm sorry, did you say it was at zero percent interest?
2769 MR. HAMELIN: It may have been tweaked at 2 or 3 percent.
2770 It was 3.5 percent.
2771 MR. RONDEAU: That was my question. Thank you.
2772 MR. HAMELIN: That was to make sure, though, that it was to offset any interest being charged by Revenue Canada to us and/or received by us, in such a way that it would net out totally to zero from an operating point of view and ROE calculation.
2773 It was marginal. It was just to take care of the interest payments on the receipt of funds from Revenue Canada, when they are sending things with interest. We didn't want to calculate interest that was received on behalf of our parent on a tax return, so we imputed ourselves an interest rate of 3.5 to make sure it came out to zero.
2774 MR. RONDEAU: Could you go to page 2 of the same document, "Consolidated Statement of Contributed Surplus".
2775 It says that in 2004 this was $56 million. I have no idea what this contributed surplus means.
2776 What I want to ask you is, how does this affect the bottom line of the company?
2777 MR. HAMELIN: No, it does not impact. It is removed from the ROE calculation.
2778 In a nutshell, to explain this, when BCE purchased this company on December 1, 1988, CN, given that it was previously in a very difficult financial situation and was a Crown corporation, paid taxes on a consolidated basis.
2779 What that means is that you are not looking at your individual subsidiaries as legal persons, as we do here under Northwestel ‑‑ BCE is not a Crown corporation.
2780 What that meant is, because CN was in a loss position, it did not have to use the depreciation for tax purposes to shelter income. Therefore, all of its assets that were being depreciated, not just from an accounting point of view but unused from a tax perspective, built up a reserve, an unused asset, an intangible asset, which became, in essence, part of the valuation of BCE purchasing Northwestel as a corporation.
2781 In the end, what you are getting is, effectively, a tax break in a given year, once BCE bought it, because it was able to shelter total income from previous unused tax sheltering that it purchased from CN.
2782 So it called this "contributed surplus".
2783 Essentially, it is part of, if you will, an equity base that you will be able to realize over time, on a gradual basis, following tax rules.
2784 I am not sure if that makes it clear for you.
2785 Instead of paying the taxman, you issue a special dividend to BCE. In fact, you see that in all of our statements. You see the regular dividend and you see the special dividend. That special dividend is simply the realization of unused capital sheltering for depreciation purposes by the previous owner.
2786 MR. RONDEAU: Thank you. Could you please turn to Northwestel 300 tab, page 1, the appendix.
2787 And what it is that I'm going to ask ‑‑
2788 COMMISSIONER CRAM: I'm sorry...
2789 MR. RONDEAU: But you may not necessarily need it in front of you.
2790 What I'm going to ask you is ‑‑
2791 COMMISSIONER CRAM: Mr. Rondeau, please, could you tell me, you said Northwestel 300?
2792 MR. RONDEAU: Yes, tab 300.
2793 COMMISSIONER CRAM: So, is that in their evidence?
2794 MR. RONDEAU: That's in the first RORs.
2795 COMMISSIONER CRAM: Like, the interrogatory is from whom to Northwestel?
2796 MR. RONDEAU: I'm sorry, I'm not absolutely sure. Maybe we don't need this.
2797 COMMISSIONER CRAM: Okay.
2798 MR. RONDEAU: What I'm requesting is ‑‑ I think I have it in front of me here ‑‑ attachment 1.
2799 MR. WOODLAND: Could that be CRTC 300?
2800 MR. RONDEAU: I think it possibly is.
2801 MR. WOODLAND: Or do they start at 301? There's no such thing, okay.
2802 MR. RONDEAU: What I'm after is that the revenues ‑‑ your revenues forecasted are to drop by $22‑million approximately in 2007. Is that correct?
2803 MR. HAMELIN: It's more like 27, I think.
2804 MR. WOODLAND: Are you talking about 301?
2805 THE CHAIRPERSON: Mr. Rondeau I think is interested in talking about what looks precipitously to the naive observer as a dramatic reduction in your revenues.
2806 You're going to explain that it is something a little different than that. I think that is what you are looking for?
2807 MR. RONDEAU: Yes.
2808 THE CHAIRPERSON: Is that it, Mr. Rondeau?
2809 MR. RONDEAU: That's ‑‑
2810 MR. WOODLAND: CRTC 301 seems to show that.
2811 THE CHAIRPERSON: Okay. Let's ‑‑ but I don't think Mr. Rondeau has it. So, Mr. Rondeau, why don't you just focus on the substance of what you are trying to discover from the panel.
2812 You can even express it in the most general possible terms and we will work down to the specifics if necessary.
2813 MR. RONDEAU: CRTC 301.
2814 THE CHAIRPERSON: Okay, great.
2815 MR. RONDEAU: The specifics for this, I just want to get a handle on ‑‑ or a brief explanation from the panel on why this dramatic drop, be it 22‑million or 27‑million.
2816 MS CHALIFOUX: Sure. I mean, the dramatic drop in revenues in 2007 are primarily to do with our rate proposal, our proposals to remove some of those implicit subsidies in areas like the carrier access tariff rate, proposing to decrease from 7‑cents to .825‑cents, so it's probably the largest example of that.
2817 MR. RONDEAU: Solely the CAT rate or any other areas?
2818 THE CHAIRPERSON: You have evidence where you lay out in detail all the puts and takes.
2819 Would it just be possible for you to find that evidence and refer Mr. Rondeau to it, maybe even give him a copy so that he can eyeball it and then if he has questions on that he could ask them, because he is in fact ‑‑ we are, in fact, going over ground that has been well covered in the existing documentation for the proceeding.
2820 MR. RONDEAU: Thank you. That would be fine.
2821 THE CHAIRPERSON: Do we have it at hand, something we can just put in front of Mr. Rondeau here?
2822 MR. WOODLAND: Yes, we do. They're just digging it out.
2823 THE CHAIRPERSON: Terrific, thank you.
2824 You can wait, Mr. Rondeau. They are going to give it to you and then you can ask questions ‑‑ you can look at it and you can ask questions on it.
2825 MR. RONDEAU: Fine.
2826 THE CHAIRPERSON: I think it is going to be a matter of a minute here, so let's hang on.
2827 MR. ROBERTS: And while they do that, I just reiterate that it represents a move from an implicit to an explicit subsidy, so we're just making the current hidden subsidies more visible with this change.
2828 THE CHAIRPERSON: While we are waiting, Mr. Roberts, what if we explain the different payees to these two ‑‑ as between these two sources of revenue.
2829 Let's just take the $27‑million. Under the hypothesis ‑‑ just to make it clear to everybody, under the hypothesis, under the current situation the 27‑million is made by interconnecting carriers.
2830 The $27‑million is contributed by people paying the CAT, the carrier access tariff and that is interconnecting southern carriers?
2831 MR. ROBERTS: A significant portion of the $27 million, yes.
2832 THE CHAIRPERSON: Where would the rest be?
2833 MR. ROBERTS: We have proposed rate changes to other rates, including digital private lines, so there are retail customers ‑‑
2834 THE CHAIRPERSON: In the $27 million?
2835 MR. ROBERTS: I believe so.
2836 THE CHAIRPERSON: I was just asking you about the CAT adjustment and not about the other ‑‑
2837 MR. ROBERTS: Yes, you are correct.
2838 THE CHAIRPERSON: Okay. Let us just assume for the moment that that $27 million is going to be absorbed in the National Contribution Fund, so instead of inter‑connectors who is going to pay?
2839 MR. ROBERTS: The inter‑connectors and other telecommunications companies in Canada.
2840 THE CHAIRPERSON: Yes, but there will be a different distribution of burdens under the National Contribution Fund than under the inter‑connectors, although they will be substantially the same basic population, that is what you would argue?
2841 MR. ROBERTS: I would agree with that. Although, the important thing too to note here is that it is possible to bypass the current usage‑based mechanism and there is huge incentives to do so versus not being able to bypass the contribution tax.
2842 MR. HAMELIN: Of course, the reduction in the settlements here, the carriers' fees, goes to offset those that are contributing to the..
2843 THE CHAIRPERSON: Yes, I understood. I just wanted to.. This is an editorial exchange, I want to be sure I understand and give you a chance to make sure we all are on the same page here. Now, are we ready to give a document to..?
2844 MR. RONDEAU: I think what we have is sufficient, Mr. Chair.
2845 THE CHAIRPERSON: All right please go ahead, Mr. Rondeau.
2846 MR. RONDEAU: I am satisfied with what I have.
2847 Could you please look at Northwestel CRTC 301, Attachment 1?
2848 MR. HAMELIN: I have it.
2849 MR. RONDEAU: Specifically, Mr. Hamelin, pension expense. My question is, if you look at the attachment, is could you please explain the doubling of the pensioning expense 2004, 2005 and then again in 2006?
2850 MR. HAMELIN: Yes. Well, this is a direct result of, you know, we are in a DB plan, that they call ‑‑
2851 MR. ROBERTS: Defined benefits.
2852 MR. HAMELIN: ‑‑ thank you, defined benefit plan. And what has happened in the assumptions from the actuaries, the primary driver is the reduction in interest rates. What is happening, it means that the promise made when you get into employment by the company is all calculated on, you know, the future, when you are going to retire and so on. And it bears in mind some assumptions about, you know, interest rates such that when you do retire you can buy an annuity at a given interest rate. Well, just imagine if interest rates collapse and become record lows like we have been experiencing recently, it takes a lot more capital now to buy annuities in order to retire.
2853 So what it means then, it translates that in order to meet your promise when you are in this kind of level of interest rates, at record lows, you have to invest more capital than you are accustomed to and you are recording an accrual of an earned day of pension, a future date for a days' work, at a higher rate because the expense is much higher simply because the interest rates are so low.
2854 MR. RONDEAU: In other words, because interest rates are so low, the investment in this pension program is not receiving the money that it once received, is that..?
2855 MR. HAMELIN: No, no. You have to distinguish between the actuarial assumption for return on asset, which is how your investments.. Like your RRSPs, you know, say you have imagined yourself earning a return of 7 per cent let us say, that is one thing. Whether you make 10 or make 3 during the years is a different matter, it is part of the experience, gain or loss.
2856 What I am talking about is the liability that the company has in order to fulfil its promise to its employees regarding pension. That piece of the obligation is computed using long‑term interest rates.
2857 MR. RONDEAU: Can I assume that you are having more of your staff that are retiring? Is this ‑‑
2858 MR. HAMELIN: No, it has no bearing on whether staff is retiring or not. It has a bearing on what the company is experiencing in recording the level of expense given the very nature of the environment today.
2859 MR. RONDEAU: I just have one more question on the finances area and I will move on to cost of equity, which won't take too long.
2860 My last question in the financial area is a general question. Large corporations like yourself, especially ones that are regulated under a rate of return, often use deferrals in various forms; is that correct?
2861 MR. HAMELIN: That is correct.
2862 MR. RONDEAU: And how would this affect your bottom line?
2863 MR. HAMELIN: Well, I mean this is just standard accounting practice. I am not sure which deferral you are talking about. For example, deferred tax credits is simply the difference between the accounting depreciation versus the tax depreciation times the tax rate.
2864 MR. RONDEAU: What I am referring to is if you ‑‑ you can tweak your deferrals to get your under or over ‑‑
2865 MR. HAMELIN: Well, if you are talking about return, accounting return, often deferrals are just nothings in terms of ‑‑ from an accounting point of view they are accounting entries but they are all governed by GAP principles and audited by Deloitte. I am not ‑‑ like cash is king in the real sense, in my world anyways.
2866 From a deferral accounting ‑‑ all you are doing is reflecting as best as possible what the performance of the corporation is, including matching principles between expenses and revenues and so on. You get to an accounting calculation, deriving an ROE calculation. It is accounting income over the equity base.
2867 MR. RONDEAU: Okay, fair enough. I will come back to that in my cost of equity questions a little ways down.
2868 Now when you are ‑‑ I will go right on to cost of equity. When you are getting your formula, risk premium is one of the major considerations you use in determining your ROE; is that correct?
2869 MR. HAMELIN: You are talking the level of allowed ROE as permitted by the Commission?
2870 MR. RONDEAU: Correct.
2871 MR. HAMELIN: Is that what you are trying to say?
2872 MR. RONDEAU: Yes.
2873 MR. HAMELIN: Risk premium ‑‑ I mean obviously there is a big difference between holding a bond ‑‑ and there are different kinds of bonds. A risk‑free bond would be ‑‑ I believe a question that was asked of me this morning ‑‑ would be a long‑term Government of Canada bond.
2874 And by the way, probably by after lunch we will probably have the latest and greatest when it comes to a third‑year bond.
2875 You have got industrial bonds that are more risky and so on.
2876 Bonds is one thing. Equity is another one. And there is a relationship to some degree between ‑‑ depending on the financial model that you do use for calculating equity, cost of equity.
2877 Cost of equity has a lot to do with the nature of the business that you are in. So you can say you want a premium, if you will, for taking on the riskiness of the investment in a business that you are going into.
2878 Ms McShane would have been in a better position to defend her evidence but essentially the way I understand it, the more risk you take, the more return you would like. That is only fair, at least from a financial concept.
2879 MR. RONDEAU: That makes sense, yes.
2880 MR. HAMELIN: But various businesses differ in risk‑taking, if you will, and that is the essence of Ms McShane's evidence. So yes ‑‑ so my ‑‑ I am not sure ‑‑
2881 MR. RONDEAU: That is fine.
2882 MR. HAMELIN: That is fine?
2883 MR. RONDEAU: You have answered my question fine, yes.
2884 My next question. Just above we spoke of deferring costs. Again, I will ask you specifically, does not the use of deferral accounts allow you to capture any over or under estimations in your toll revenue?
2885 MR. HAMELIN: It does in terms of CAT settlements and toll. That was part of ‑‑ again I come back to the regime that we are under and was proposed six years ago. Actually, it was introduced by the Commission.
2886 Because of the uncertainty that would occur relative to the forecasts of these revenues, we were collapsing rates from an abnormally very, very high level for residential. After doing all the rate rebalance you talked about to the max possible, we still had quite a gap in terms of toll rate.
2887 So what we did is propose a great decrease. At the time Dr. Taylor that we brought to the hearings testified that elasticity calculations on demand was simply impossible to predict given that it was not done on an incremental basis, it was like jumping off a cliff in terms of pricing.
2888 So in their wisdom the Commission decided to introduce a deferral mechanism in such a way that if the forecasts of toll settlement and CAT was ‑‑ and in fact it represents about a third of our revenue by the way, and it has been for just about the five, six year, pretty steady actually ‑‑ it would be either a top up would be provided to make the forecast happen or vice versa, if we exceeded the forecast ‑‑ which has happened in some years, in fact I think we are remitting a couple of million dollars to the fund based on if we overran that forecast.
2889 So what it did, it was a mechanism that provided some stability and good guidance in order to be able to offer comparable prices to the North. Comparable prices to the North would not exist without a subsidy, it's as simple as that. Similar comparable services is the huge SIP commitment now.
2890 So that deferral is there for that purpose, it guarantees the forecast.
2891 MR. ROBERTS: Just to elaborate a little bit, it has worked very well under the current regime, which is revenue‑focused. However, it is not part of our proposal going forward as we aren't proposing a rate‑of‑return regime and a revenue deferral arrangement such as we have today would not be entirely consistent with our proposal.
2892 MR. RONDEAU: Okay. What I was looking for was just the yes answer. I appreciate the explanation, but I was looking to find out if deferral accounts could be used to help you gain your toll revenues.
2893 My next question on this is: Would you not say that being allowed to use this particular mechanism reduces your risk?
2894 MR. HAMELIN: In the old regime it did, to some degree. It guaranteed one‑third of the revenue forecast ‑‑ as approved and reviewed by the Commission, by the way. It's not just a "gimme" here. Like what we would have is to submit every year our proposed forecast and it would be reviewed and available for everyone's review for that matter.
2895 MR. RONDEAU: But you are still looking at 10.5 percent. How would it be any different under the new regime?
2896 MR. HAMELIN: That's only for testing of the rate's purposes. We thought that going into the testing of the prices that this would be a reasonable extension of where we are at today, going in tomorrow, subject to check.
2897 I mean, we have the expert review and revisit the level of the cost of equity, if you will, but that's on a total company basis. We did not get the luxury of going through a split rate base mechanism, let alone test it and what have you. It would take quite a while.
2898 MS CHALIFOUX: Perhaps just to explain a little bit there, Mr. Rondeau, when the company was looking at what would be an appropriate ROE to use for testing going in rates, as Mr. Hamelin elaborated, we looked at many things in acknowledging that long‑term bond yields were decreasing. However, offset by changes in our business risk profile, as we elaborated yesterday, as an example we have a significant duplicate network now in the Northwest Territories and in Nunavut providing broadband services. That's one element we have as part of our proposal.
2899 We are proposing to significantly decrease the Carrier Access Tariff rate thereby having more equal access competition entering the market. We have cellular competition coming in, or has been here for a number of years and is growing.
2900 But perhaps again the most significant is the nature of IP that is impacting telcos across the country, and we are not immune to the impacts of IP.
2901 Just looking at some recent stats, we have had 3 percent of our traffic that we are measuring just from our own customers using voice over IP as an illustration.
2902 So again, we took into account a number of things and came up with a recommendation of 10.5 as a reasonable balance.
2903 MR. RONDEAU: I appreciate your explanations here, but what I am after is again the "yes" answer that using deferral accounts can offset the risk factor.
2904 THE CHAIRPERSON Mr. Rondeau, deferral accounts are not in the forward looking proposal.
2905 The thing that is before us today, the proposition doesn't feature deferral accounts. So I am not sure where you are going with this discussion of deferral accounts.
2906 Do you understand?
2907 MR. RONDEAU: Yes.
2908 THE CHAIRPERSON: The proposal that Northwestel has put forward does not include the continued use of deferral accounts.
2909 MR. RONDEAU: Thank you.
2910 MR. HAMELIN: If it may help, Mr. Rondeau, what my colleague here just mentioned about all the increased business risks since the year 2000, these considerations are all reflected in Ms McShane's evidence. She proposes a higher ROE. She is proposing 11.75.
2911 In the end, as a matter of judgment, this work was done in parallel to us elaborating and developing our proposal. We felt that it is a matter of judgment to look at this as a total package, and we decided to retain 10.5 percent.
2912 If people want us to try and revisit and increase to 11.75, I would be more than happy to.
2913 MR. RONDEAU: Yes, I'm sure.
2914 Maybe I am going off here on this as well. The funding mechanism that you plan on using as well, this will affect your allowable earnings. Is that correct?
2915 MR. HAMELIN: It will be part of ‑‑
2916 MR. RONDEAU: It will be giving you your allowable earnings.
2917 Does not this offset your risk as well?
2918 MR. HAMELIN: Well, partly. I mean, the subsidy we are talking about is cost based. These costs are not going to go away.
2919 You can increase your business rates to a hundred bucks if you want, or put them to zero. It is the same subsidy we are talking about. It is cost based. It has nothing to do with the rates. It is just a proposal to set us in a position to earn what we think is 10.5 percent. We feel that we are still exposed, that we haven't gone far enough by any stretch.
2920 But considering everything that is at play as a package, I think it makes sense.
2921 So in one month ‑‑
2922 MR. ROBERTS: If I may, for instance, we are very dependent right now on the CAT rate. It is approximately 60 times higher than a comparable direct connect rate in Bell Canada operating territory.
2923 So just for clarity, to terminate a call in Whitehorse, for instance, a carrier is paying this higher rate that is 60 times higher and the facilities that are associated with things like toll connect and that aren't even used.
2924 So a comparable rate is effectively the DC rate for our major centres.
2925 We are suggesting that because of the market changes that have happened since 2000 when the current regime was put in place, including things like technology, things like parallel networks, et cetera, we are concerned that we can no longer sustain this form of implicit subsidy, this 60 times rate going forward.
2926 So we need to make that explicit. It doesn't change the overall amount of revenue materially. It is just a matter of trying to come up with a way to do it on a sustained basis going forward.
2927 MR. RONDEAU: Thank you.
2928 I gather that there are no other regulated telcos to see what the average rate of return is.
2929 Are you aware of other regulated agencies ‑‑ the electrical utilities are what I am after ‑‑ what type of rate of return they have received in the last number of years?
2930 MR. HAMELIN: Different businesses call for different risks and different returns. I am sure that electricity is probably a lot less risky than telcos are, so they would probably be at a lesser level than telcos.
2931 MR. RONDEAU: Maybe I could have you intervene in the electrical rate hearings.
‑‑‑ Laughter / Rires
2932 MR. RONDEAU: From what I have researched, the rates being charged in the electrical utilities now are somewhere in the 9.5 to 10 percent range. Why should you be asking for more than they are?
2933 MR. HAMELIN: I think I have just explained that. It is the nature of the risk. It is as simple as that.
2934 The same way that your balance sheet would look different. You can go a lot more in debt if you are in a much more stable business. Most of these companies that you are talking about are probably at 20 or 30 percent equity, compared to a 55 level that exists primarily in the telco.
2935 As per Ms McShane's evidence, it is pretty predominant right now. Every telco is pretty much at that level.
2936 If you were in the reg business it would be different. You would probably be at 80 or 90 percent equity.
2937 MR. ROBERTS: A specific example of the difference is the rate of technology change. There is not as much rampant replacement of technology in the electrical sector versus the telecom sector.
2938 MR. RONDEAU: I have only one more question. There was one thing I forgot to add on, and it will go very quickly.
2939 I have a few questions on wholesale rates.
2940 Are they regulated?
2941 MS CHALIFOUX: Some are.
2942 MR. RONDEAU: Can you give us a little more information? Which ones ‑‑
2943 MS CHALIFOUX: Our Carrier Access Tariff Rate is a tariffed rate. It is a rate that we offer to wholesale competitors in the toll business.
2944 Is that what you were referring to?
2945 MR. RONDEAU: Specifically ‑‑ and I may be going off in the wrong area here ‑‑ broadband rates.
2946 MS CHALIFOUX: Our I‑gate service?
2947 MR. RONDEAU: Yes.
2948 MS CHALIFOUX: Internet services are forborne.
2949 MR. RONDEAU: Yes.
2950 MS CHALIFOUX: So the answer is no.
2951 MR. RONDEAU: What I am trying to get at is, how do you expect competition to roll in in these areas if these rates are not regulated?
2952 MR. HAMELIN: The rates have been brought down significantly. The CAT rate that we are proposing is .08 cents instead of 7 cents, so it should encourage equal access, which was discussed with the Marketing Panel yesterday.
2953 MS CHALIFOUX: I would also like to elaborate that, specific to your question, Mr. Rondeau, wholesale internet gateway rates are currently under review by the Commission in a separate Part VII proceeding and are specifically out of the scope of this proceeding.
2954 MR. RONDEAU: Thank you very much, panel.
2955 THE CHAIRPERSON: Thank you, Mr. Rondeau.
2956 We will see each other at two o'clock, please. Thank you very much.
‑‑‑ Upon recessing at 1230 / Suspension à 1230
‑‑‑ Upon resuming at 1400 / Reprise à 1400
2957 LE PRÉSIDENT: Madame La Secrétaire.
2958 LE SECRÉTAIRE: Merci.
2959 Thank you, Mr. Chairman.
2960 The next panel to cross‑examine the finance panel of Northwestel will be Telus ‑‑ I'm sorry, Government of Yukon.
2961 MR. PRATT: Thank you, Mr. Chairman. Jim Pratt and Steve Rose for the Government of Yukon.
EXAMINATION / INTERROGATOIRE
2962 MR. PRATT: Good afternoon, gentlemen and ladies.
2963 Let me apologize in advance for not giving you an opportunity to talk about productivity, but if we have some time left at the end you may want to do that.
2964 But I would like to ask just a couple of questions related to the mark‑up topic and ask you to turn your response to CRTC's 16.01, specifically page 2 of 4.
2965 This passage starting with:
"Northwestel's 137 microwave radio stations..." (As read)
2966 I found that to be a fairly succinct description of what was involved in common and fixed costs with some helpful examples, and I wanted to just ask you a couple of questions around this to make sure that my understanding is consistent with the facts.
2967 The second sentence there notes that 22 per cent of the plant and service is related to fixed structures that are not included in phase 2 cost studies.
2968 Now, I assume that's because those costs are not causally related to any specific services?
2969 MS CHALIFOUX: That's right, they're not causal to the service nor can they be defined as causal to demand.
2970 MR. PRATT: So, that when ‑‑ and the purpose really of marking up in order to recover that is for pricing; correct?
2971 MS CHALIFOUX: Yes, that's correct.
2972 MR. PRATT: So, for your pricing and for your ultimately total revenue requirement, if you allow me the archaic term, you need to mark up by a percentage in order to cover those costs?
2973 MS CHALIFOUX: That's correct.
2974 MR. PRATT: And you described earlier today how you came up with the 25 per cent. What happens if 25 per cent isn't enough?
2975 MS CHALIFOUX: Well, I mean, what happens is at the end of the day you find yourself with, in the case of a shortfall, an overall shortfall in the company, so then you would have to look to certain services to recover more than a 25 per cent mark‑up.