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Toutefois, la publication susmentionnée est un compte rendu textuel des délibérations et, en tant que tel, est transcrite dans l'une ou l'autre des deux langues officielles, compte tenu de la langue utilisée par le participant à l'audience.

 

 

 

 

 

 

 

              TRANSCRIPT OF PROCEEDINGS BEFORE

             THE CANADIAN RADIO‑TELEVISION AND

               TELECOMMUNICATIONS COMMISSION

 

 

 

 

             TRANSCRIPTION DES AUDIENCES DEVANT

              LE CONSEIL DE LA RADIODIFFUSION

           ET DES TÉLÉCOMMUNICATIONS CANADIENNES

 

 

                          SUBJECT:

 

 

 

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 12, 2006                         Le 12 juillet 2006

 


 

 

 

 

Transcripts

 

In order to meet the requirements of the Official Languages

Act, transcripts of proceedings before the Commission will be

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

and staff attending the public hearings, and the Table of

Contents.

 

However, the aforementioned publication is the recorded

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

either of the official languages, depending on the language

spoken by the participant at the public hearing.

 

 

 

 

Transcription

 

Afin de rencontrer les exigences de la Loi sur les langues

officielles, les procès‑verbaux pour le Conseil seront

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

membres et du personnel du CRTC participant à l'audience

publique ainsi que la table des matières.

 

Toutefois, la publication susmentionnée est un compte rendu

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

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

officielles, compte tenu de la langue utilisée par le

participant à l'audience publique.


               Canadian Radio‑television and

               Telecommunications Commission

 

            Conseil de la radiodiffusion et des

               télécommunications canadiennes

 

 

                 Transcript / Transcription

 

 

 

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 12, 2006                         Le 12 juillet 2006

 


           TABLE DES MATIÈRES / TABLE OF CONTENTS

 

 

                                                 PAGE / PARA

 

AFFIRMED:  PAUL FLAHERTY                          536 / 3883

PREVIOUSLY AFFIRMED:  RAY HAMELIN

PREVIOUSLY AFFIRMED:  MARK WALKER

PREVIOUSLY AFFIRMED:  SCOTT ROBERTS

AFFIRMED:  RAY WELLS

 

Examination by Northwestel                        537 / 3891

 

Examination by Consumers Groups                   537 / 3900

 

Examination by UCG                                555 / 4019

 

Examination by Government of Yukon                586 / 4210

 

Examination by Telus                              648 / 4544

 

Examination by the Commission                     663 / 4661

 

 

AFFIRMED:  JAMES H. PRATT                         727 / 5102

AFFIRMED:  TERRY HAYDEN

 

Examination by Northwestel                        728 / 5110

 

Examination by Telus                              739 / 5168

 

Examination by the Commission                     739 / 5175

 

 

AFFIRMED:  WILLIE GRIEVE                          746 / 5218

AFFIRMED:  STEPHEN SCHMIDT

 

Examination by Telus                              746 / 5219

 

Examination by Northwestel                        748 / 5244

 

Examination by UCG                                815 / 5619

 

Examination by the Commission                     832 / 5744

 


               EXHIBITS / PIÈCES JUSTICATIVES

 

 

                                                 PAGE / PARA

 

TELUS-6      Speaking points from the             663 / 4656

Honourable Maxime Bernier,

Minister of Industry Canada,

for the 2006 Canadian Telecom

Summit

 

NWTEL‑4      Document entitled "Telus Tariff      814 / 5616

CRTC 1000‑5, Item 30, Exchanges"

 

NWTEL‑5      Document entitled "Telecom Public    814 / 5616

Notice CRTC 99‑21, Northwestel Inc.

Implementation of Toll Competition

and Review of Regulatory Framework,

Quality of Service and Related

Matters, Telus Final Argument,

June 26, 2000"

 


                           ERRATA

 

     Tuesday, July 11, 2006 / le mardi 11 juillet 2006

 

                          Volume 2

 

 

Page  Line

 

301     1     "CRTC-310"      s/b  "CRTC-301"

308     8     "in"            s/b  "and"

308     9     "innocents"     s/b  "investments"

312     16     "75"            s/b  "75,000"

351     3     "13.01"         s/b  "1301"

370     19     "some"          s/b  "same"

400     17     "GAP"           s/b  "GAAP"

412     23     ".08 cents      s/b  "0.8 cents

414     7     "CRTC's 16.01"  s/b  "CRTC-1601"

421     5     "0.0265 cents"  s/b  "2.65 cents"

421     5     "0.027 cents"   s/b  "2.7 cents"

421     11     "0.10 cents"    s/b  "10 cents"

421     19     "0.03 cents"    s/b  "3 cents"

421     20     "0.03 cents"    s/b  "3 cents"

456     14     "13.01"         s/b  "1301"

456     18     "13.01"         s/b  "1301"

461     2     "26.02"         s/b  "2602"

461     5     "0.0415 cents"  s/b  "4.15 cents"

461     7     "0.0415 cents"  s/b  "4.15 cents"

484     24     "do"            s/b  "to"

491     4     "Annex X"       s/b  "NXX"

491     7     "Annex X"       s/b  "NXX"

498     20     "26.02"         s/b  "2602"

 


               Whitehorse, Yukon / Whitehorse (Yukon)

‑‑‑ Upon resuming on Wednesday, July 12, 2006

    at 0900 / L'audience reprend le mercredi

    12 juillet 2006 à 0900

3872             THE CHAIRPERSON:  Order, please.  A l'ordre, s'il vous plaît.

3873             Madame la secrétaire...?

3874             THE SECRETARY:  Should we start with our first panel or should we ask for preliminary matters?

3875             THE CHAIRPERSON:  Are there any preliminary matters?

3876             Seeing none, you may proceed, Madam Secretary.

3877             THE SECRETARY:  We are calling the first panel for this morning, the Policy Panel from Northwestel.

3878             Please come forward.

‑‑‑ Pause

3879             THE CHAIRPERSON:  Please proceed with your direct, counsel?

3880             MR. ROGERS:  Mr. Chairman, I will briefly introduce the panel and then they can be affirmed.


3881             This panel consists of:  Chaired by Mr. Paul Flaherty, President of the company; Mark Walker, VP Customer Solutions; Ray Hamelin as Chief Financial Officer; Ray Wells, VP Corporate; and Scott Roberts, Director Regulatory Framework.  The panel is supported by Muriel Chalifoux, AVP Carrier and Regulatory; Dallas Yeulett; Sheldon Schmidt, Senior Financial Analyst; and Mark Wesolowski, Manager, Consumer Services.

3882             The panel is ready to be affirmed.

3883             THE SECRETARY:  Could you please first stand up for the affirmation?

AFFIRMED:  PAUL FLAHERTY

PREVIOUSLY AFFIRMED:  RAY HAMELIN

PREVIOUSLY AFFIRMED:  MARK WALKER

PREVIOUSLY AFFIRMED:  SCOTT ROBERTS

AFFIRMED:  RAY WELLS

3884             THE SECRETARY:  Please state your name for the record.

3885             MR. FLAHERTY:  Paul Flaherty.

3886             MR. HAMELIN:  Ray Hamelin.

3887             MR. WALKER:  Mark Walker.

3888             MR. ROBERTS:  Scott Roberts.

3889             MR. WELLS:  Ray Wells.

3890             THE SECRETARY:  Thank you, sir.

EXAMINATION / INTERROGATOIRE


3891             MR. ROGERS:  Mr. Flaherty, was the Policy Panel evidence and the associated interrogatories prepared by you or under your direction?

3892             MR. FLAHERTY:  Yes, it was.

3893             MR. ROGERS:  Do you have any corrections or additions to that evidence at this time?

3894             MR. FLAHERTY:  No, I don't.

3895             MR. ROGERS:  To your information and belief, is the evidence accurate and true?

3896             MR. FLAHERTY:  Yes, it is.

3897             MR. ROGERS:  Thank you.

3898             The Panel is ready.

3899             THE SECRETARY:  The first panel for cross‑examination will be the Consumers Groups, PIAC.

‑‑‑ Pause

EXAMINATION / INTERROGATOIRE

3900             MS LOTT:  Good morning, Mr. Chairman and fellow Commissions, and good morning to you, Panel.


3901             I'm sorry to reintroduce myself again.  There might have been some of you on the Panel that I haven't done that, so I will do that before I begin.  My name is Sue Lott and I am counsel for the Consumers Groups.  That consists of the Consumers Association of Canada as well as the National Anti‑Poverty Organization.

3902             With me today, and the last couple of days, has been Mr. Andrew Briggs who is a consultant who has been working with us as well.

3903             So if I could begin, I would like to start with just a few questions about local competition issues.

3904             As I understand it, Northwestel is not proposing that local competition be permitted at this time.  When a competitor company makes a serious request to enter on a facilities basis, then a proceeding should be held to consider permitting local service competition in the North.

3905             Am I correct that that is your proposal in this proceeding?

3906             MR. FLAHERTY:  A slight variation to that.

3907             We have said in our evidence that we are prepared to have resale of services now.  So we are prepared to do that now.  It is the facilities‑base component of it that we feel is more complex and needs further discussion and further understanding.

3908             MS LOTT:  Thank you.  That was going to be my second part, is to confirm that you were proposing to permit resale of services.


3909             MR. FLAHERTY:  That is correct.

3910             MS LOTT:  Doesn't the Northwestel proposal put it at a significant advantage since it will know very well much in advance that a competitor is considering entering?

3911             MR. FLAHERTY:  I think the challenge here is the complexity involved with this.  we have obviously network elements that have to be modified.  We have operating systems that have to be modified as well.  So it is quite complex.

3912             I think as Mr. Roberts said the other day, there are some 130 rulings the Commission has made in the time since local competition has been evolved.  So it is not something that is overly straightforward.  I think it is something that needs to be carefully considered.

3913             Back in the 1990s when long distance competition was contemplated in northern Canada, Sprint had applied to do so and the Commission, I think justifiably so, felt that it was important to really understand the broad issues here and really approach this in a way to ensure sustainability, to ensure that a company like Northwestel can continue to meet its obligations as a full service provider and a provider of last resort.


3914             MS LOTT:  You are familiar, though, with the approach that has been adopted by the CRTC in a recent decision regarding the SILECs.

3915             I am wondering why it wouldn't be appropriate to follow that approach.

3916             MR. FLAHERTY:  I think as you have heard maybe in the last couple of days the SILECs are fundamentally different than Northwestel.  In many cases they don't have long distance services; they are provided by other companies.  So the complexity of their operations is quite a bit different.

3917             The size of their operations is quite a bit different as well.  Northwestel, as we have heard several times, has 40 percent of the land mass of Canada that we are serving, .4 percent of the population.  There is no SILEC in southern Canada anywhere close to any of those geographical challenges.

3918             We have satellite services provided in over half of our communities.  No SILEC in southern Canada has any of that complication as well.

3919             So I think it is all of these factors: long, thin routes we have talked about; 80 percent of our communities with less than 500 lines in them.


3920             All of those elements suggest to me at least that we have to be very careful on how we approach this subject.

‑‑‑ Pause

3921             MS LOTT:  I wanted to go back to an interrogatory response to the Government of Northwest Territories that you made.  It was GNWT‑502.

3922             I don't know if you feel you need to pull that up.

3923             It was in response to a question regarding introduction of local competition.

3924             MR. FLAHERTY:  I have it.

3925             MS LOTT:  My understanding is that in your response to that interrogatory you indicated you don't have detailed information on costs to implement the major components that are associated with local competition.

3926             Am I correct in characterizing your response?

3927             MR. FLAHERTY:  That is correct.  Some of the additional challenges that we have within our operating territory is, given our unique nature and given our very high costs, we have had to approach technology different than other companies in the South.


3928             Many of the companies in the South will adopt one technology and apply it throughout our operating territory.  In the switching side alone we have at least three different types of technologies that we deploy.  We have Nortel DMS‑100 technology here in Whitehorse.  We have GDT‑5 technology in the switches in Yellowknife and in Fort Nelson.  We have a whole bunch of Redcom switches as well.

3929             So that adds to the complexity as well of what we have here.

3930             CCS‑7 is another requirement in order to have this.

3931             In the proceeding that we had in the year 2000 the Commission asked us about equal access in all of the communities.  After we came back with the price tag, I believe, if I remember, it was $40 million to put CCS‑7 into all the communities in the North.

3932             That was just for CCS‑7.  That wasn't for local competition.

3933             So clearly what we are talking about here is very, very significant at the end of the day.

3934             MS LOTT:  Are there other cost components you have just identified there that you can give me a high level estimate of what those costs would be?


3935             MR. FLAHERTY:  It is very preliminary at this point in time.  We have been talking with Télébec to understand their situation.  As I said, their situation is nowhere near the same as ours.

3936             They spent over $7 million implementing local competition.  We have been trying to get a very preliminary ballpark number, and our thought is it could be upwards of $6 million just to do the equal access centres alone.

3937             So I wouldn't say that is a definitive number.  It is something that we are still trying to evaluate and understand.

3938             As I said, the Commission asked the question about DMS‑250 technology, and we don't have DMS‑250 technology in our operating territory.  We only have one DMS‑100, so that would only apply to Whitehorse.

3939             In the communities with GDD‑5 switches, we don't exactly know how we would even do it.  We understand that Telus has done some work here, but we have been unable to get any information on exactly how they have done it.

3940             So there is lots of complexity in how we would actually go about doing this.


3941             MR. WALKER:  One point that I might add is that when Mr. Flaherty talked about equal access centres, I would remind you that we have just four equal access centres out of 96 switches or 96 communities.

3942             MS LOTT:  Thank you.

3943             I want to move to another area, which is the issue of earnings sharing and the self‑correcting mechanism.

3944             My understanding is that Northwestel has proposed that it should have the ability to trigger a review of the proposed framework during the four years of the implementation of the price cap plan, and I understand that in your response to CRTC‑107 you indicated a number of unique factors that you detailed in your evidence that could significantly impact on your ability to advance these objectives and/or have a reasonable opportunity to earn a fair return on your investment.

3945             I also want to pull up your response to our interrogatory, which would be PIAC‑9, where you also indicated that there is a greater risk on Northwestel from moving from the rate of return regulation to the price regulation.  I think, in your words, you said that it would be far more abrupt for you than that of other telephone companies.


3946             Given these two responses, how are ratepayers protected from over‑earnings ‑‑ the possibility of over‑earnings by the company?

3947             MR. ROBERTS:  I'm sorry, could you repeat the last sentence, please?

3948             MS LOTT:  How would ratepayers be protected from over‑earnings by the company, given the uncertainties you have outlined in those two responses about what might transpire over the four years of the price regulation?

3949             MR. ROBERTS:  In addition to the considerations at a high level that I explained to Commissioner Cram yesterday with regard to the constraints on our upside under the proposed regulations, I would note that the items that have been identified, again, work in the negative direction as opposed to the positive direction.

3950             Our concern is that, if anything, we won't be able to make a reasonable return, let alone and excessive return.

3951             In addition to the items enunciated in our response to CRTC‑107, I would suggest that our rate restructuring also has not gone far enough, and we are deeply concerned about sustainability.

3952             Again, that would be a further negative factor that we would suggest is at play.


3953             MR. FLAHERTY:  The other thing I might add is, when you look at our particular situation, half a point on ROE is worth about 2 percentage points on expense.

3954             If you think of the suggestion of a 22 percent return, we would have to drop our operating expense phenomenally to be able to do that, and that is not practical in our operating territory, given all of the unique circumstances we face.

3955             MR. HAMELIN:  In absolute terms what that means is, about $1.5 million, on a pre‑tax basis, is worth half a percent on the ROE.  So 2 percent of expenses would represent that.

3956             MS LOTT:  Could I ask what would happen if you did earn a return on your investment that was above the targeted return?

3957             Have you proposed any form of sharing mechanism?

3958             MR. FLAHERTY:  No, we have not, nor have we proposed anything, should we not achieve that level, that the Commission would top us up either.

3959             MS LOTT:  Wouldn't it be appropriate to share any excess earnings with the ratepayers?

3960             For example, you could have earnings in excess of 50 basis points, the allowed range, be shared 50:50 between the ratepayers and the company.


3961             MR. FLAHERTY:  I think that we are looking at a framework ‑‑ part of the reason we are in this proceeding is to look at having regulations similar to that of the South, to not be marginalized by the form of regulation that we've previously had.

3962             Clearly trying to implement something like that puts us in a different perspective than what's done elsewhere in the country, and I think we'd have to think carefully about that.

3963             The other thing I think is we'd have to look at it being symmetrical.  I don't think we would ask that it just goes one way.

3964             So, the question would be, if we looked at it going one way, if we are over earning, fine, are we going to go the other way and make it symmetrical?

3965             MR. HAMELIN:  If I may add to that, what that would mean is essentially you'd be back to almost rate of return regulation if you're starting to share based on profits and so on.

3966             The idea is to streamline the regulatory effort.

3967             MS LOTT:  Okay, thank you.


3968             I just wanted to move on to one final area, just a couple of questions having to do with quality of service.

3969             Now, if I understand correctly, you have not proposed any changes to your quality of service reporting requirements when it moves to price caps; am I correct about that?

3970             MR. FLAHERTY:  That's correct.  You may also be aware that we actually have more stringent reporting requirements than other telcos, we actually report on a community level basis.

3971             We actually have an additional category called out‑of‑service remote as well that we have to provide in our remote operating regions as well.

3972             MS LOTT:  Okay, thank you.

3973             I'm also aware that in Decision 2002‑34 the Commission did implement a retail rate adjustment plan when the quality of service standards aren't met.

3974             I'm just wondering, why shouldn't a plan similar to that be applicable ‑‑ if it's a applicable to the large ILECs, be applicable to Northwestel as well?

3975             MR. FLAHERTY:  Well, I think the first point I would make is Northwestel's very proud of the excellent service results that we have.


3976             If you've seen the results over the past five years, you'll know that we've done extremely well.

3977             We do have a challenge from time to time meeting the out‑of‑service remote one, largely related to things like weather but, even then, you know, we've been within a point of meeting that.  So, I think we've done extremely well.

3978             I think the big motivator is we understand very full well that if we don't do a good job of this penalties are a very likely reality.

3979             So, simply the notion that those penalties may ultimately be applied is lots of incentive, let me assure you.

3980             MS LOTT:  But isn't it ‑‑

3981             MR. WELLS:  If I could just add ‑‑

3982             MS LOTT:  ‑‑ isn't it true that that was applied to the ILECs even though they had not experienced any drop in quality of service?

3983             MR. FLAHERTY:  I can't really comment on what their situation was at that time.

3984             MR. ROBERTS:  However, if I could just also add a little bit regarding the uniqueness of the north.


3985             We have a very small base of customers, particularly in a number of our communities and, again, we do community level reporting, so a very ‑‑ you know, isolated incident, one or two missed appointments can dramatically swing the indicator for a given community.

3986             So, the notion of I guess penalties when there's actually a good reason, an unavoidable reason in many cases for missing a given appointment, should not trigger a penalty in our view, rather that the current system provides for specific review of the circumstances behind missing an indicator and the provision of action plans on the part of the company.

3987             And in that way we can actually come up with an effective responsive way to deal with the issue at hand, instead of having some sort of arbitrary thing, that given the small base, isn't really representative of a true problem.

3988             MS LOTT:  Well, you've characterized quality of service one way.  I think it could also be characterized ‑‑ is it not true, that these are really mechanisms that provide incentives to maintain an appropriate level of service and that the mechanisms don't penalize you if you're not ‑‑ if you're meeting the quality of service objectives?


3989             MR. WELLS:  Maybe just a point I can make if I could back up to a comment you made earlier about the fact that the penalties were not imposed on the ILECs ‑‑ or the penalty wasn't imposed on the ILECs before there were any problems.

3990             In fact there had been problems with the ILECs and because of that the Commission decided to impose potential penalties.

3991             And to pick up on Mr. Flaherty's point, I don't know, given the situation that we've had a very good record with quality of service, it would make any sense at this point to put a regulatory regime in place for no reason.

3992             MR. ROBERTS:  And, further, I'd suggest that I guess the intent is to provide corrective action here.

3993             And, in our case, again, if we have a weather incident, for instance, that causes a few isolated appointment misses and that swings the indicator below an acceptable level, it's not really representative of a situation that needs to be corrected.


3994             Northwestel is, in fact, doing everything it can.  When there is an issue we explain the details, we explain the action plan, if appropriate, and we act on that and the Commission follows up.  The current system works very well.

3995             MS LOTT: But just to clarify about some of the aspects of that decision, 2002‑34, my understanding was that it was applicable to SaskTel even though SaskTel had not been even part of the first price cap regime.  So I think that is clear that it actually was applicable to one of the large ILECs even though you couldn't say that it had experience any sort of substandard quality of service.

3996             MR. ROBERTS: Regardless, we are different because of our small base and because of the fact that we do community‑level reporting today.

3997             MS LOTT: But just to be clear about how the quality of service, the mechanism, works.  My understanding is that the mechanisms don't penalize you if you're meeting the quality of service objectives.  Is that correct?

3998             MR. FLAHERTY: That is correct.  I guess, just to maybe try and bring our final point on this, is we believe we have done an excellent job.  The Commission has recognized it in decision ‑‑ I can't remember ‑‑ in one of our supplementary funding decisions, recognized the job that we had done on quality of service and we don't see a reason that should need to be implemented.


3999             MS LOTT: I guess my concern from the perspective of consumers is that if there are no competitive alternatives for local service with Northwestel, because you are proposing a local competition at this time, what recourse would consumers have.  And my suggestion would be that they would really have no recourse to a competitive alternative if the quality of service falls below standard, and I think that is the issue for consumers.

4000             MR. FLAHERTY: I think the reality of our situation is back to the make‑up of our operating territory.  You know, we have two what we would call large communities what everyone else in the country would call very small communities and then we have many many very very small communities.

4001             The reality is that the competitive situation there for basic local telephone service on the residential side may not be that great.  We understand that obligation and we are committed to providing that quality of service in those communities.  So the Commission always has the opportunity to step in and order anything at any point in time.


4002             So we are saying we have shown a good track record of providing quality of service, we are indicating we are prepared to maintain that track record going forward.  If at any point in time we don't do that, then that is the time that the Commission could step in and apply those, if required, at that point in time.

4003             MR. WALKER: One thing we did ‑‑ just to ‑‑

4004             THE CHAIRPERSON: Could I just ask the panel please not to make a succession of editorial comments.  The questions are fairly specific and it breaks up the rhythm of the question, the questioner's program.  It is really not required to keep the piling on.  Just make your points, make them quickly, make them explicit and sign off please.

4005             MS LOTT: Thank you.  I just have one last question.

4006             If the Commission was going to implement a retail quality of service adjustment plan for NorTel are there any modifications to the system that you would suggest would be necessary?

4007             MR. FLAHERTY: We haven't proposed any modification.

4008             MS LOTT: Okay, thank you.  Those are my questions, Mr. Chairman, thank you.

4009             THE CHAIRPERSON: Thank you, Ms Lott.  Mr. Briggs.


4010             Madame la secrétaire.

4011             THE SECRETARY: Thank you, Mr. Chairman.

4012             The next party to cross‑examine is UCG.

4013             THE CHAIRPERSON: I think Mr. Rondeau is here.  I am told he is here, but he is not physically immediately available.

4014             THE SECRETARY: Should we go with the next one?

4015             THE CHAIRPERSON: We will just wait a minute or two and see if he emerges from a likely place, as he has.

4016             THE SECRETARY: Here he comes.

4017             THE CHAIRPERSON: He has done it once, he can do it twice, he is always ready.  Mr. Rondeau, you are up.

4018             Please take to heart my earlier comments in responding to Mr. Rondeau.

EXAMINATION / INTERROGATOIRE

4019             MR. RONDEAU: Good morning, ladies and gentlemen the Commission and also the new panel today.  My name is Roger Rondeau.  I am the head of the Utilities Consumers Group and also their representative at these hearings.


4020             I guess before I get into the new regulatory regime I would like to go back and ask a few questions that we were directed from yesterday's panel to ask of you, mainly on your restructuring of rates.

4021             Now yesterday I spoke of an article that we had from one of the newspapers here.  I don't have to go through that again, it's on record.

4022             I would like to ask this panel why you did not do any type of demographics to ensure that the vulnerable people in our society, the low‑ and set‑income people, will not be so negatively affected or impacted by this rate increase that they will not be able to have a telephone in their house.

4023             MR. FLAHERTY:  I think, as was answered on the other panels, the approach that we took was looking at comparability to other telephone companies.

4024             One thing I would say, within the telecom industry, as one of the commissioners pointed out, we do have bill management tools that are in place.  Northwestel has those as well.

4025             Beyond that there hasn't been a lot of precedent for doing special and separate things.


4026             Generally on the social side of the ledger, that has fallen more to governments, both territorial and federal governments.

4027             MR. RONDEAU:  Have you had any complaints about these bill management tools that you have, people who are on low incomes, again, or social assistance not being able to come up with the up‑front monies that you are asking for?

4028             MR. FLAHERTY:  I am not aware of any such complaints, Mr. Rondeau.

4029             MR. RONDEAU:  I can tell you this is the major complaint that we get from the consumer these days.  Your quality of service has been excellent ‑‑ I must give you credit where credit is due ‑‑ but we have complaints from people and it is usually people who simply cannot afford to get a telephone in their house because of these types of conditions that you set.

4030             MR. FLAHERTY:  As I say, I am sorry, I am not aware of any such complaints.

4031             MR. RONDEAU:  Now you state that your proposal for rate restructuring is to get similar rates to other areas of Canada.  Are you aware of any decisions by the CRTC that cap local rates in other jurisdictions in the $20 to $30 range?

4032             MR. ROBERTS:  I am not aware of a hard cap at that level.  I think you may be misinterpreting one of the decisions.


4033             MR. RONDEAU:  Are you aware that in the southern jurisdictions the larger telcos were directed to return some of their excess or deferral monies back to the consumer so that their rates, their actual local rates were lowered?

4034             THE CHAIRPERSON:  Mr. Rondeau, I think we are a little off course here, respectfully.  The deferral account issue is just not relevant to anything that is before the Commission at the moment.

4035             I don't want to inhibit you in this proceeding from asking the questions that you want to ask but may I just caution you that it is very important that you focus on the constituency that you have here, the problems that you have learned about that relate to that, because the intricacies of national telecommunications policy are beyond the scope of the hearing and I don't think that you will find the line of questioning premised on the deferral account decision fertile or useful or fruitful in relation to Northwestel.

4036             MR. RONDEAU:  I understand that, Mr. Chair, but what I am trying to get at is if we are going to have rates that are comparable to the rest of Canada we have to know these types of things, otherwise, there is an unfairness.


4037             THE CHAIRPERSON:  Would you take it from me that this particular issue, to the best of my knowledge, is not relevant to the proceeding that is before us?

4038             I'm looking at the staff to see whether they are agreeing with me on this.

4039             I'm only interested in ensuring you spend your time here as profitability as possible, Mr. Rondeau.

4040             MR. RONDEAU:  Thank you, Mr. Chair.

‑‑‑ Pause

4041             MR. McCALLUM:  I think it may be relevant to discuss benefits for consumers, but the issue of deferral account has not been proposed by Northwestel, so deferral account per se is not really within the scope.

4042             Benefits to consumers, by whatever mechanism might be possible, would be within the scope, in our view.


4043             THE CHAIRPERSON:  Mr. Rondeau, if you want to persist in dealing with the deferral account I don't want to stop you from doing so.  I'm simply advising you that since there is no deferral account in Northwestel the possible uses of a deferral account with a southern ILEC is irrelevant to Northwestel because they don't have a deferral account.

4044             MR. RONDEAU:  I understand that.  I just want them to recognize that rates were lowered in southern jurisdictions.

4045             THE CHAIRPERSON:  Well, rates were not lowered by the deferral account in that sense.  There was ‑‑

4046             COMMISSIONER WILLIAMS:  Let's hear him, Mr. Chairman.

4047             THE CHAIRPERSON:  Please go ahead, Mr. Rondeau.

4048             MR. RONDEAU:  Well, as I stated, I just would like the Panel to recognize this and to state a yes or no whether they are aware.

4049             I will not go any further with this, Mr. Chair.

4050             MR. FLAHERTY:  To be quite honest, Mr. Rondeau, we aren't aware of the intricacies of the deferral account.  Because we haven't proposed it we haven't spend a lot of time trying to understand it either.  So unfortunately we are not aware of all those intricacies.


4051             I do read what I see in the media and I know there was a proposal, but I'm not sure whether the Commission actually agreed with rebating it or whether the funds were used for something else, so unfortunately I'm not in a position to comment on it.

4052             MR. RONDEAU:  I guess another reason I'm asking this, Commissioners, is in all your wisdom you may decide not to go with this proposal that Northwestel has offered and we may still be left with the present regime.

4053             Panel, would you please now look at UCG‑122 and 122 revised?

‑‑‑ Pause

4054             MR. RONDEAU:  Now, what is in front of you panel ‑‑ I gather you have that ‑‑ one is the statistics on a number of employees since 1994 and the other is the amount of monies allocated to non‑management salaries and management salaries.

4055             Now, I have taken the liberty to do some averages, which you guys like to do so much, and what I have come up with is the average non‑management wage is approximately $83,000 per year, plus your perks of course.  The average non‑management wage is $38,000 per year.

4056             Would you say these estimates are reasonably accurate?

4057             MR. FLAHERTY:  Subject to check.


4058             MR. RONDEAU:  Would you say these wages are also fairly comparable to the government sector?

4059             MR. FLAHERTY:  In setting our wages we actually do comparisons both with northern employers as well as within the industry as well.  It depends on the individual positions that we are trying to fill.

4060             If we are trying to fill some positions that perhaps are a little less skilled from a technical perspective, we may look at comparisons more in the local market.  If we are looking at some specialty skills within the telecom industry we would look more nationally.

4061             So that's how we go about setting our compensation policies, is by doing benchmarks, as I say, depending on the specific market that we are hiring from.

4062             MR. RONDEAU:  You have to compete, in other words, with other employers?

4063             MR. FLAHERTY:  That's correct.

4064             MR. RONDEAU:  Yes.  So your major opponent here would be the government, and I am speaking of Yukon.


4065             MR. FLAHERTY:  As I say, it depends on the position.  If it were what I might term ‑‑ I have to be careful of my language here ‑‑ what I might term a less skilled position, for example maybe a clerical position that is more in supply within the North, then we may indeed be competing with the government.

4066             If we are looking for someone with some telecom experience, say an engineering individual, no, we wouldn't be competing with the government.  We would be competing perhaps with other telecom carriers in the country.

4067             MR. RONDEAU:  Understandable.  What I am trying to get at is would you say your wages are comparable to the government's?

4068             MR. FLAHERTY:  As I indicated earlier, we go through an extensive benchmarking process looking at each job individually, and we compare it against the market in which we have to compete.

4069             If again we are looking perhaps at the clerical level, yes, we would benchmark against the government.  We would benchmark against the city.  We would benchmark against any other major employers that might be in the community.


4070             If we were looking at say a technical person again, no, we wouldn't be benchmarking against the government.  We would be benchmarking against other telecom carriers.

4071             MR. RONDEAU:  Fair enough.  So we have four government bureaucracies basically in the Yukon.  We have the feds, the territorial government, First Nations and municipal.

4072             Would you agree with that?

4073             MR. FLAHERTY:  I don't know about the word "bureaucracies", but I would agree we have the four different levels of government.

4074             MR. RONDEAU:  Thank you.  That might be a better way to present it.

4075             Would you say that between Northwestel ‑‑ again I am speaking specifically of the Yukon here.  I am not going through your areas in the Northwest Territories and Iqaluit.  I don't have the statistics nor the knowledge to do that.

4076             Would you say that between Northwestel and the various governments that I have mentioned, you are the major employee section in the Yukon at this time?

4077             MR. FLAHERTY:  I would suggest all of those groups together would obviously be the largest.  In terms of private sector employees, yes, we would be the largest in the Yukon.


4078             MR. RONDEAU:  Would you also agree that wages in the other sectors of our economy, for example tourism, fast foods, recreation, seasonal, mining and construction workers, are at a lower wage scale than what the government and Northwestel are making?

4079             MR. FLAHERTY:  Difficult to say.  I don't have a lot of research in those other areas.  I could maybe just comment on mining.

4080             Again, you didn't want to talk about the other jurisdictions, but I think the other jurisdictions do have an impact on our jurisdiction.

4081             I know in mining, given all the work that is happening in Fort McMurray, wages have gone up dramatically in the mining sector.  So there might be an exception in mining.

4082             MR. RONDEAU:  That may be true, but mining is seasonal here.  We don't have any major mines, with the exception of one, and it is actually in the Northwest Territories.  I know we have workers there.

4083             But most of the workers here are seasonal ‑‑ would you agree with that ‑‑ in both the mining and construction?


4084             MR. FLAHERTY:  Quite a bit of it.  As you may be aware, last year there was $55 million worth of exploration in the Yukon, so I think there are large expectations that that will change here; that very shortly we will start to see more active mines.

4085             I believe there is one, as you say, operating now and there are at least half a dozen that are scheduled to open within the next year or so.

4086             MR. RONDEAU:  Thank you.

4087             Now I am going to get to where I am going on this.

4088             So we have an affluent workforce here, the government and Northwestel, who have very good earnings.  They are earning good wages, in other words.  And we have another section, which is approximately half of the society, that are lower income earners.

4089             If you take the two together, what I am getting at is I believe the numbers are skewed in the Yukon when you take averages for wages.  Because we have a smaller workforce here, if you have a larger proportion of the workforce that is making higher wages, or half of the workforce, it will be much more skewed than if you took the rest of the areas in Canada where you have a larger workforce.

4090             Would you agree with that rationale?


4091             MR. FLAHERTY:  I understand where you are going, but I think that Mr. Walker made a very good point.  Actually, I can relate to it on a personal note.

4092             He indicated that you need to consider students, for example.  I happen to have three students, all who work for summer employment.  They file income taxes.  They would have very low incomes in that sense.  But, again, they are living in my home with myself and my wife.  So that would be different.

4093             Mr. Walker used the other example of working spouses, as well, who may be in a part‑time job.

4094             Again, I think we would have to look at this much more carefully to understand it in greater detail.

4095             MR. RONDEAU:  Yes.  That is why I wish you would have done demographics.

4096             That is all for that area.  Thank you.  I will move on to the new regime that you are proposing.

4097             My first question on this is, why are you proposing to go directly to a price cap regulation rather than going into the interim splitting of the rate base, as was done in other jurisdictions?


4098             MR. ROBERTS:  Our proposal has, as one of its guiding principles, to try and limit the extent to which Northwestel is marginalized from a regulatory perspective.  We are trying to align ourselves with frameworks in other jurisdictions in Canada, to the extent possible, while still recognizing our unique challenges.

4099             It is important to note that we are the last telephone company in Canada that is currently rate of return regulated, and we are trying to address that an align to a greater extent.

4100             MR. RONDEAU:  I agree very much that we are very unique up here, in many other different ways, as well.  For this reason, do you not think we should be regulated in a unique way than other jurisdictions in Canada?

4101             In other words, this price cap regulation has to be done in a different way than it is down South.

4102             MR. FLAHERTY:  We would agree with that.  Our proposals would indicate that we have tried to reflect where we think it needs to deviate, shall we say, from down South.

4103             MR. RONDEAU:  Would initiating a split rate base regulation at this time negatively impact any ratepayer group?


4104             MR. ROBERTS:  I would suggest, Mr. Rondeau, that the focus of consumer and ratepayer groups is on the rate levels, and that through either a rate of return mechanism or a price cap mechanism, rates would continue to be reasonable, and that would be the focus of these groups.

4105             The difference is that, under rate of return, it is believed that if you monitor the company's revenues and the company doesn't make too much, then, obviously, they aren't charging too much.

4106             Conversely, under price caps, the incremental changes to a reasonable rate or it is kept at reasonable levels, again, keeping rates, in total, reasonable.

4107             In either case, consumers are protected.

4108             MR. HAMELIN:  I would add, Mr. Rondeau, that under a split rate base, if you are looking for lower rates, a split rate base would not necessarily guarantee that.  You would probably end up with a different split rate base than down South.  It would be a modified split rate base, similar to us having a modified price cap.

4109             Just think within the utility segment of a split rate base.


4110             In our case, for example, we have the toll connect charges ‑‑ or toll connect investment as part of the regulatory ‑‑ the local access piece currently.  So, right away, there is an instant modification.

4111             Then, under Phase 3, when you think of the competitive segments, these would have to be revisited in light of the northern realities.

4112             As I was explaining the other day, things like terminals, for example, may or may not be competitive up here.  They're competitive certainly in Whitehorse, but when you go to Grise Fiord or elsewhere in the small communities, you don't have the Future Shops there available for them.

4113             So, again, you'd end up with a modified type of regulation, whether it's a split rates base or price caps.

4114             MR. RONDEAU:  Okay, thank you.

4115             Now, it's my understanding that this price cap regulation is mainly put in place to make companies more efficient, more effective and also to lower the regulation stress for the companies and, I presume, to bring in more competition; is that correct?


4116             MR. ROBERTS:  I would suggest that the Commission tries to encourage competition in a number of ways.

4117             MR. RONDEAU:  Okay.  One of the ways that I see that this proposal is trying to encourage competition is by lowering the CAT rate; is that correct?

4118             MR. FLAHERTY:  That's correct.  I'm not sure if price caps in and of itself is designed to encourage competition; it's, as you say, some of the underlying elements, things like the CAT rate.  So, you're quite right.

4119             MR. RONDEAU:  So, would you object to an interim period of time where we simply lower the CAT rate, isolate this, see how much it would actually cost to the new national program and leave the rates as they are now, leave your regulatory regime as it is now and see what this does, see if it brings in competition and see how much it costs?

4120             MR. FLAHERTY:  But I think, as Mr. Roberts indicated, you know, part of the purpose behind price caps is to move to a more modern form of regulation, to move to one that's less intensive.


4121             Today we go through an annual proceeding every year, it takes a lot of our time, obviously yourself and other intervenors and then the Commission's time as well.  I'm not sure that's the most efficient use of everyone's time.  It does add to costs at the end of the day.

4122             So, I think we're talking about two slightly different issues.  One is the form of regulation, the second is, what should we be doing with the carrier access tariff.

4123             We happen to be addressing both of these at the same time.  I think one of the areas that is affected by price caps is the need to try and weed out as many of the implicit subsidies as possible as we move into that regime.

4124             So, the purpose behind price caps, I would argue, is really moving to a more modern form of  regulation as we go forward, one where the company is incented but the consumers are protected as well.

4125             MR. RONDEAU:  I fully understand that but, again, you know, you use the circumstances were unique here, regulation has to be looked at a bit differently as well.

4126             I will move on, nonetheless.

4127             Now, if this price cap regime is implemented, how will you protect ‑‑ how will consumers be protected from future price increases?


4128             MR. FLAHERTY:  That's really designed by the baskets, the price cap baskets that we've got in place.

4129             So, Mr. Roberts can tell you the details of the measures that we have for the baskets, but there is a constraint on how prices will be able to change within that price cap period.

4130             Services like long distance that may be forborne if we're successful, as we've requested, it's more the competitive market that will regulate those prices.

4131             MR. RONDEAU:  Yes, thank you.

4132             And what are the constraints exactly?  What happens if we don't have competition and all of a sudden you decide you're going to raise the rates?

4133             MR. FLAHERTY:  As I say, on the local side the services are regulated by basket, each basket has a price constraint which Mr. Roberts can elaborate on.

4134             On the long‑distance side, as I said at my opening statement, 32 percent of all the long‑distance minutes carried today are carried by competitors, not Northwestel.

4135             MR. RONDEAU:  Okay.


4136             MR. ROBERTS:  Specifically with regard to the residential basket, residential access services that is, there would be a constraint of what we refer to as I minus X, that is inflation less a productivity factor.

4137             MR. RONDEAU: Now, in CRTC‑1403, which I mentioned yesterday, you speak of ‑‑ and I was told to direct it back to you ‑‑ one of the Commissioners asked about this as well yesterday.  You are asking for the discretion for an increase to a maximum of $1.00 per year.  Now my suggestion, if you have this discretion, this is not really price capping or offering the consumer any type of stability.

4138             MR. FLAHERTY: The nature of price caps is really to address how prices change over time.  And it is through the rules around the various services that prices are able to change.  So as Mr. Roberts indicated, in the basket including residential access service the proposal is to use inflation minus productivity.

4139             In this particular service the proposal is to limit any changes to a maximum of $1.00.  So there is a cap there, it is not indiscriminate, it could not be changed more than $1.00 per year.

4140             MR. RONDEAU: But if you nickel and dime us every year like this, as I said, we don't have any stability.  What is the purpose of this price capping.


4141             MR. ROBERTS: I guess I would suggest trying to take your perspective for a moment.  I think it might be reasonable that the number of people that can't afford the incremental price would choose not to take the feature any more.  Northwestel's aware of this and therefore we are very cognizant of the fact that we can't keep raising the rate up by $1.00 a year over year over year.  In fact, we are constrained to a very high degree in this regard.

4142             MR. WELLS: Mr. Rondeau, I think it is also important you made the comment about no competition.  There has been a lot of dialogue over the last few days about wireless competition in the territory.  And the other constraint we have that we have to think about is we, as we do potentially adjust our rates, is the substitution impact of wireless, 77 percent of our territory, of our customers are going to have access to wireless.


4143             And I already know for a fact that people are selecting a wireless cell phone over a landline phone.  So if we continue to increase rates, for example, in these sort of services that you can also get on wireless, at some point consumers are going to say I am going to move to a wireless solution.  So it is important to note that this market isn't a "monopoly" market.

4144             COMMISSIONER NOËL: Just to make a point clear, we are talking about optional services here, i.e. voicemail or etcetera so, you know, it doesn't affect the basic rate for the basic service.

4145             MR. RONDEAU: Thank you.  I understand that, but thank you for the clarification.

4146             How will your consumers be protected?  I know that the interveners ahead of me asked a similar question.  How will customers be protected from deterioration in our quality of service with this new type of regime?

4147             MR. FLAHERTY: As I indicated earlier, and you acknowledged as well, we have a very good track record for quality of service.  We understand very fully that if we don't maintain that obligation that will be imposed upon us.  So as I say, that is our incentive.  Make no mistake about it, we treat that very seriously.

4148             MR. RONDEAU: Okay, thank you.  From what I have seen in this proposal there is no mechanism that you are, besides the quality of service that you already have, there is no other mechanism that you are proposing to be used to ensure that this takes place?

4149             MR. FLAHERTY: That is correct.


4150             MR. RONDEAU: Now, you speak of one of the reasons for going into this new regime as well as rid internal cross‑subsidies.  Can you enlighten us a bit on these internal cross‑subsidies?

4151             MR. FLAHERTY:  As was discussed in some of the panels yesterday, for example, in the Carrier Access Tariff there is a significant amount of implicit subsidies, subsidies that are ‑‑ other services are priced higher, much, much higher than what they might cost.  So for example, the Carrier Access Tariff would be one case where that exists.

4152             Another would be private line.  Mr. Roberts, I think, gave an example yesterday of the difference in pricing from a circuit from Whitehorse to Fort St. John versus Telus or versus another carrier's charge from Fort St. John to Edmonton.

4153             So it is in those services that there are quite large implicit subsidies.

4154             If you go back to prior to the current framework that we have, much of the north was being subsidized on long distance services but what was happening over time is northerners were finding ways to bypass those services and that is a real risk that we have to look at.


4155             So unless we address these implicit subsidies, the very strong likelihood is that you will see bypass of our services making the burden required for the remaining small communities where we are the provider of last resort much, much greater.  So we are really trying to ensure that we don't do that, that we don't end up having to charge huge rates in small remote rural areas where they don't have the advantage of competition.

4156             MR. ROBERTS:  I would just like to elaborate a little further.  You mentioned internal cross‑subsidies.  I would suggest that a lot of these subsidies are better characterized as external.  They are embedded in rates that are charged to other carriers today on a usage basis implicitly.

4157             What our proposal tries to achieve is making these explicit and putting them in a ‑‑ positioning them in such a way that the carriers cannot bypass payment of this subsidy by choosing to adopt new technologies, for instance, and instead ensures that a fair burden is distributed.

4158             MR. RONDEAU:  Will this proposal entirely rid these cross‑subsidies?


4159             MR. FLAHERTY:  No, unfortunately not.  There is not enough room, shall we say, in our restructuring to be able to eliminate them completely.  So there will, unfortunately, be some that remain but it is all that we could really justify in this proceeding.

4160             MR. RONDEAU:  Okay, thank you.

4161             The rest of my questioning ‑‑ I would presume you have the Telecommunications Act that you can access?

4162             MR. ROBERTS:  Yes, we do.

4163             MR. RONDEAU:  The first section I would like you to look at is section 27.  I can read that out, it is very short.  It says:

"Every rate charged by a Canadian carrier for a telecommunications service shall be just and reasonable."  (As read)

4164             My question is:  Can you say that Northwestel follows this practice in all areas of their jurisdiction?

4165             MR. ROBERTS:  Yes.

4166             MR. RONDEAU:  My next question is on section 27, number 6(b), and it reads:


"Notwithstanding subsections 1 and 2 a Canadian carrier may provide telecommunications services at no charge or at a reduced rate..."  (As read)

4167             And then it says (a).  What I am concentrating on is (b):

"with the approval of the Commission to any charitable organization or disadvantaged person or other person."  (As read)

4168             My question on this is:  Northwestel could easily set up two rate schedules under the Act for those customers not being able to afford the rates that are being charged, very easily set this up; is that correct?

4169             MR. ROBERTS:  An example of how this is implemented elsewhere in Canada and indeed with Northwestel's message relay service which provides for discounts to people with, for instance, hearing impairments.

4170             MR. RONDEAU:  Now you already have a type of service where you block long distance.

4171             Is that correct?

4172             MR. FLAHERTY:  That's right.


4173             We refer to that as toll denial.  So if customers feel that long distance charges are difficult for them to manage, there is no charge to subscribe to that service.

4174             MR. RONDEAU:  Do you see a problem with charging a lower rate for people who have toll denial in their homes?

4175             MR. FLAHERTY:  Well, the reasons that people have toll denial I believe could be quite varied.  For example, in the Eastern Arctic the nature of their society has a very open‑door policy so you may have many different people coming into their homes.  For that reason they implement things like toll denial.

4176             So I don't think we could make a blanket statement that just because someone has implemented toll denial that somehow they can't afford it.  They may be doing it for different reasons.

4177             MR. ROBERTS:  In fact, that would open the door to, I guess, some clever people choosing to take toll denial, enjoy the lower rate, and then use prepaid cards for long distance service.

4178             MR. RONDEAU:  Yes, I understand that this may happen.

4179             How difficult would it be to have some type of contract made with individuals who are at the lower income?  In other words, some kind of burden of proof to show that they are having problems?


4180             MR. FLAHERTY:  I think again, as I was saying earlier, a lot of what has been done in the telecom industry around this particular subject has been around bill management tools.

4181             In terms of social assistance, that has generally fallen to governments, whether it be territorial or federal governments.  I haven't seen the most recent piece, but I know in the past the Yukon government, for example, part of their payment relative to social assistance includes the cost of the phone bill.  I don't know whether they would increase that cost associated with this, so I think we would have to be very careful that we weren't somehow double compensating, the government on one hand was providing social assistance meant to in part cover that and somehow we were reducing our rates and also trying to cover the same thing.

4182             MR. RONDEAU:  Understandable.

4183             Just to comment on those on social assistance, as I read yesterday these rates haven't increased in the last seven years and yet inflation has increased, so I think any type of increase in telephone affects their bottom line.

4184             I will move on and it is my second last question to you.


4185             Section 33 of the Act, (a) and (b), and it reads:

"Where a Canadian carrier provides basic telecommunications services and, in the opinion of the Commission

(a) an activity of affiliate of the carrier is integral to the provision of the service by the carrier; and

(b) the Commission's other powers under this Act are not sufficient for the purposes of ensuring that the rates charged by the carrier for telecommunications services are just and reasonable

the Commission may, for that purpose, treat some or all the earnings of the affiliate from the activity as if they were the earnings from the carrier."  (As read)


4186             My question I guess is:  the way I read this is that all of your mother corporations are responsible to ensure that we have equal and equitable access to the telecommunications.

4187             MR. FLAHERTY:  I'm sorry, you are suggested that BCE has a responsibility to the ratepayers in Northern Canada?

4188             Is that ‑‑

4189             MR. RONDEAU:  That's how I'm reading this, yes.

4190             MR. FLAHERTY:  I don't interpret the Act to state that.

4191             I think it is more around in the actual provision of the service, if there was some element that an affiliate was providing to that provision of basic telephone service.

4192             BCE does not provide us with anything to that extent.

4193             Mr. Hamelin talked about financing.  We do all of our own financing.  BCE does not provide any of that financing.

4194             In terms of infrastructure, we have built all of our own infrastructure.  We don't use any BCE infrastructure.


4195             We do interconnect only to have traffic flow to other parts of the country, but we don't depend on BCE to assist us with telephone service in northern Canada.

4196             MR. RONDEAU:  Did not you rely on BCE or Bell Canada to buy this telecommunications system from CN?

4197             MR. FLAHERTY:  BCE made an investment, if that is what you mean.  They invested in the equity; that's true.

4198             Northwestel is the legal entity that is responsible under the Act for this operating territory, not BCE.

4199             MR. RONDEAU:  Thank you.

4200             My last question to the administration while you are in front of the Commission.  I would like you to make a commitment that you will be and continue to be the service provider of last resort for us Northerners.

4201             MR. FLAHERTY:  We very much understand that as our obligation, and through the proposals that we have made in this proceeding we are very much trying to make sure we have a framework that ensures that continues unincumbered, shall we say.  But we understand very clearly that is our obligation.

4202             MR. RONDEAU:  Thank you.

4203             THE CHAIRPERSON:  Thank you, Mr. Rondeau.


4204             Madame la Secrétaire.

4205             THE SECRETARY:  Thank you, Mr. Chairman.

4206             The next party to cross‑examine is the Government of Yukon.

4207             THE CHAIRPERSON:  Good morning, Mr. Pratt.

4208             With your indulgence, somewhere around 10:30 we will take a break.

4209             MR. PRATT:  That is fine, Mr. Chairman; thank you.

EXAMINATION / INTERROGATOIRE

4210             MR. PRATT:  Mr. Rose was called away to deal with some other matters.  Since I won't have his protection here, I wonder if you could just take it easy on me, panel.

4211             Could you start first by looking at your response to Yukon Government 1.  This was the question that asked you to detail how your proposal mapped to the framework objectives that you set out in your evidence.


4212             I am looking at the second page for reasonably comparable prices, and I would like to ask whether in your view the goal and your approach to achieving the goal through your proposal would contemplate a two‑tier rate structure where some of your customers would pay more for the same service in your operating territory.

4213             MR. FLAHERTY:  As you are well aware, we have not proposed a two rate system.  I think Northerners have come to enjoy a single rate system across the North.  So I think we would obviously run into some challenges from our customer base in terms of their view of something like that.

4214             The other thing we would have to think carefully of is how would we define the two‑tiered rate structure?  We could end up with a situation where we all realize that the smaller remote communities are the higher cost ones, but I think ‑‑ people may or may not be aware ‑‑ those are also the less affluent communities in the North.  So the practicality of somehow charging a higher rate to the small remote communities, given their costs are higher, might actually go against, as Mr. Rondeau would say, their affordability.

4215             So I think that would be problematic.

4216             MR. PRATT:  Mr. Flaherty, from the company's perspective are there any good reasons why you would want to or not want to engage in a two‑tiered rate structure?


4217             MR. FLAHERTY:  From a company perspective, we would have to think about the customer impacts that I have just mentioned.  On the other hand, we would have to think about the competitive impacts.

4218             If, for example, local competition at some point in the future happened within Whitehorse and Yellowknife, our two largest communities, we from a company's perspective would want to be able to have our rate structure be more reflective of our costs.

4219             Very much in a competitive world, that could be a strong reality, that we would have to have rates more reflective of cost.

4220             But, as I said, the other side of that are the implications on the smaller, more remote communities, those communities where, in fact, there may be less ability to afford higher prices.

4221             MR. PRATT:  I wondered if you would also consider the implications of the section 7 objectives in the Telecommunications Act.

4222             MR. ROBERTS:  Specifically, within the Act, we would say that, clearly, section 7(b) is relevant to this point.


4223             Just to make the record complete:  "...to render reliable and affordable telecommunications services of high quality, accessible to Canadians in both urban and rural areas, in all regions of Canada."

4224             I would also suggest that 7(h) is particularly relevant, and that is to respond to the economic and social requirements of users of telecommunications services.

4225             MR. PRATT:  Mr. Roberts, in that context, is a two‑tier rate structure a good idea or a bad idea from the company's perspective?

4226             MR. ROBERTS:  A bad idea.

4227             MR. PRATT:  Could you look a little further in the same interrogatory response, under the heading "Northern‑Based Full‑Service Provider", on page 3 of 6.

4228             One of the advantages, I think, that was cited there for being a northern‑based service supplier is that there is specific experience, or the company has specific experience in this market.

4229             I wonder if you could elaborate on how that is beneficial, and particularly how this proposal helps to achieve that aim.

4230             MR. WALKER:  Maybe I could start, and others may want to add their comments.


4231             Some of the things that we understand of our environment, and understand of the unique operating area, include ‑‑ for example, I think I mentioned the other day that we produce a telephone directory in Inuktitut for the people of Nunavut.

4232             In addition to that, we also provide Inuktitut‑speaking Call Centre representatives for the people in the North who want to speak in their language.

4233             In addition to that, and what I was trying to mention earlier, we also have undertaken a program called Community Technician Program in the far North.  This is where we employ part‑time technicians to help provide a high level of service in those very, very small communities.

4234             These are some of the uniquenesses that, I think, we understand and we try to accommodate for all of our operating area.

4235             MR. FLAHERTY:  I think there is a variety of things, too.  From a technology perspective, we have had to be particularly innovative.

4236             In the opening statement that I sent out, on the back, there is a picture of a microwave at Fraser, and you can see two structures there, a structure that is in a fibreglass cocoon.  That cocoon is actually designed to vibrate when the wind blows to shake the snow and ice off it.


4237             That is one way, from a technology perspective, we have had to be innovative.

4238             Another example would be in power generation.  I think you heard some statistics about the number of microwave sites that we have to generate our power in, as well.  In those areas we are using solar power ‑‑ in northern B.C., where it is workable.  In other areas we are using something called "cycle charge", where the generators run long enough to recharge the batteries, and when the batteries are fully charged they turn the generators off.  That is another innovation.

4239             We have actually won a couple of awards, one from the Government of the Northwest Territories and one recognized internationally, for some of the things we have done in the energy field.

4240             Also, from a service perspective, we implemented frame relay over satellite services in ‑‑ I think it was 1997.  That was the first time it had been done in North America.

4241             I think, by having a better understanding of the North, we have adapted both technology and services to try and recognize those unique needs in northern Canada.


4242             MR. PRATT:  Thank you.  That is helpful, especially the explanation of that photograph.  It looked to me like a giant martini shaker, so I am glad to understand it.

‑‑‑ Laughter / Rires

4243             MR. PRATT:  Also at the bottom of page 3 you've got a statement that says:

"Services are position..."  (As read)

4244             I think it's meant to say 'positioned',

"...in a manner to maximize accessibility."  (As read)

4245             I wonder if you could expand on that and perhaps give some examples of where you think that has been the case and, furthermore, how this proposal will foster your ability to do that?

4246             MR. ROBERTS:  One way in which we try to maximize I guess accessibility is through, again, message relay service, these kind of things.

4247             MR. WELLS:  Maybe an illustration that comes to mind that I could share, and this sort of ties back a little bit to your earlier point, Mr. Pratt.


4248             In 2000 I know on record we did put a paper that was developed by someone in the western seaboard of the U.S. about effective diffusion of technology and how it was much more than just about throwing money at a problem and putting technology to solve a problem.

4249             It went on to clearly talk about how important it was to have local service providers that truly understood the market, truly understood the unique needs of that marketplace.

4250             So, some things that come to mind here are the partnerships, for example.

4251             One way that we've been able to bring advanced services throughout northern Canada is working with governments as anchor tenants.

4252             So, for example, where a government like the Government of the Northwest Territories would want to put in an advanced communications network, we would be unable to put that network in without them being an anchor tenant, so by working with local governments we've been able to provide services, advanced services to some of the very small businesses that you would find, for example, in the more remote areas by piggy‑backing, if you will, on the investment.

4253             So, there's a lot of examples of partnership that I think would help bring services ‑‑ that have helped bring services throughout the north.


4254             MR. ROBERTS:  Some other examples that come to mind are providing directories in Inuktitut, for instance, in the eastern Arctic, making Inuktitut CSRs available to our customers, and I guess bill presentation considerations that allow people that are, for instance, sight‑impaired to better understand their bills.

4255             And also this whole notion of the one rate, again, in more broad terms, trying to facilitate access to those in the smaller communities where costs are extremely high.

4256             MR. PRATT:  Well, there's one more example, that having been involved in this jurisdiction for some time myself has always seemed to be a great example of your adaptation, and maybe with your indulgence, Mr. Chairman, I'd ask you to just briefly describe the directory art cover program which the Commission may or may not be aware of.

4257             MR. FLAHERTY:  Thank you.  Each year we hold a directory contest that has local artists from across northern Canada submit art that we then have artists, previous winners for example, help choose, and by doing that we help support the arts community.


4258             I think we have something like a $1,500 award that we provide to the artist, and so it helps the artist to continue and get some of their work socialized.

4259             So, each year we do publish three different directories and Mr. Walker is just handing me...

4260             So, for example, on these directories the theme ‑‑ the Arctic ‑‑ or the Canada Winter Games is coming to Whitehorse in 2007, so we asked the artist to use that theme.

4261             So, this happens to be the Yukon phone book that's here.  This is the one that's used in the Nunavut Territory.  So, you can see some of the artwork that's there.

4262             Now, you've got me on a roll, Mr. Pratt, so if you don't mind.


4263             Another thing that we do is Christmas cards.  The corporation, like many other corporations, does send out Christmas cards to individuals.  So, what we've done with the local schools across northern Canada is that we have a contest and it's the elementary schools who are the ones who provide the input and we have, I believe it's a $500 award.  Some of it goes towards the student, a smaller portion of it, I think it is put in a bursary for them for future years.  The rest goes to the art program within the community as well.

4264             A third area that we do relative to the north is around our recycling of our directories.  In both Yellowknife and Whitehorse we have programs with the local schools and we incent them, shall we say, to go out and collect those old books and bring them back and we recycle them.  So in doing so we award the students or the classes, shall we say, with money.  That is an incentive.  So we have structured it in a way to make it not too competitive, but I believe it is $500.00, $750.00 and maybe $1,000.00, subject to check, that we would give depending on the number of directories they collect per student.

4265             So in the last few years we have substantially increased that number.  Again, subject to check, I am going to say I think it is something like 30,000 directories we have recovered and avoided going into a landfill site.  So thank you for sort of jogging my memory, but those are some of the examples of some of the things that we are doing within the north, that being a northern provider enables us do as well.


4266             MR. PRATT: And more of the benefits of competition.  That is what I wanted to ask you about next.  Under the same IR response, under the heading of Choice Between Competitive Alternatives, the company says that, "In general, competition results in price pressure and that will help further address economic and affordability concerns."

4267             Presumably more choice in competition or more competitive choices makes this effect stronger.  Would you agree with that?

4268             MR. FLAHERTY: Sorry, makes which effect stronger?

4269             MR. PRATT: The effects of addressing the economic and affordability considerations stronger, the more competition there is the less concern the Commission, for instance, needs to have with respect to affordability and economic considerations.


4270             MR. FLAHERTY: Normally you would say that would be the case.  I think one specific concern that we would highlight and was mentioned yesterday is the impact of the BRAND program and the NSI program.  In those particular programs there is 56 communities that will actually have subsidized duplicate infrastructure.  And you might say well that is not a bad thing.  Well, the problem is everyone of those communities are uneconomic communities, they are not covering their own weight today.  So now to have duplicate infrastructure you are going to share or what little revenue exists in those communities is now going to have to be split between those two types of infrastructure.

4271             Unfortunately, in that situation, that is a real problem and that could ultimately affect, in the long‑term, affordability concerns for all.  You know, if you think about that duplicate infrastructure, someone has to pay to maintain both those duplicate systems.

4272             MR. PRATT: Sure, but just in general terms, all other things being equal, more choices are better than fewer choices from the point of view of this affect of ensuring that there is some safeguard on issues of affordability?

4273             MR. FLAHERTY: I would agree.  Particularly in the larger centres, very much so.

4274             MR. PRATT: Thank you.  Could I ask you then to look at your response to YG‑2?  Specifically at page 5 under the heading Fully Considered Government Intervention.  I guess this ties back to a question that I directed to the first panel, the marketing panel, with respect to the BRAND program and the implications for the 56 communities.  And I think Mr. Roberts suggested that I bring that question back later.


4275             I would like to get back to your response in YG‑2, but ask you to begin by first summarizing what you think the implications are for the company's ability to meet service objectives in the future and also on the impacts of customers as a result of the duplicate infrastructures you mention, Mr. Flaherty, and particularly the BRAND program and things of that nature.

4276             MR. FLAHERTY:  I think it goes to the underlying point of why it is so important to restructure some of our pricing today.  With a 7‑cent CAT people are very much incented to bypass our network.  Northerners have shown that propensity to bypass.

4277             When our rates were quite high prior to 2001, elaborate callback schemes were used.  Even before prepaid cards were allowed in the north, northerners were using those.  So northerners are naturally inclined, as other consumers I am sure, to look for alternatives.

4278             Having this duplicate network, as I said earlier, duplicates the cost.  I used the example of Arctic Bay in my opening statement, $9,000 worth of investment.


4279             If I look in the Northwest Territories at where BRAND is being put in, many of those communities have just been connected with a $10 million SIP investment through microwave technology.  The duplication of that infrastructure, to my way of thinking, doesn't make economic sense.

4280             Why would we not use the money that we invested as a group ‑‑ you know, the Commission and the company made a conscious decision to improve services there.  As I said, in that specific case, $10 million was put in place for one microwave system.  A second microwave system now went up to Inuvik, another $10 million.

4281             So we have invested SIP dollars very recently, within the last four years, and to have another network come along and duplicate, use an alternate form of satellite transport, not even the infrastructure that we have just put in place, those are very large concerns.  Where will that lead at the end of the day?  Who is going to be able to pay for that and sustain it?


4282             The Telecom Policy Panel was here in Whitehorse and the proponents of those networks, although the requirements were that they put forward sustainable business plans, they more or less admitted that they are not sustainable.  They are looking for more funding.  So the nature of what they have put in place, they are recognizing, requires even more to go forward.

4283             So I am very concerned that we now have two parallel networks, both of which are going to be requiring subsidy in the long term.

4284             MR. PRATT:  How does that tie into ‑‑ I am suggesting, and you can agree or disagree with me ‑‑ the solution that you have described in your response to YG‑2, a fully considered government intervention?

4285             MR. FLAHERTY:  Well I think, unfortunately, what is done is done.  What we need to do is make sure that we have something that sustains us.  As Commissioner Cram indicated and I mentioned to Mr. Rondeau, we have an obligation to be the service provider of last resort.  So we need to make sure that we have a framework that is in place that will continue to allow us to support those very small communities.

4286             It is highly unlikely that every single customer will go to a competing network and we will be able to shut that network down.  So what that effectively will do though is raise our cost per customer.


4287             So it is very important that when we evaluate pricing of services that we are not inadvertently forcing people into these parallel networks and therefore leaving the burden on a much smaller subscriber base at the end of the day, exacerbating the problem that we are trying to address.

4288             MR. WELLS:  Just a specific example, Mr. Pratt, that might help.  There is promoted on the Quiniq website from Nunavut ‑‑ this is the organization that got the BRAND funding and INAC funding ‑‑ that they were going to be offering VoIP services throughout Nunavut by the end of the year.

4289             So the contribution that is now coming into Northwestel in the form of people paying for long distance and local access, because they are providing as well local access, will be diminished.  Yet, we are still the provider of last resort, so we are still going to have to be there serving the market that is left.  So you can just see the requirement for finding other sources of contribution for that is going to go through the roof.

4290             MR. PRATT:  Well, Mr. Flaherty, were there any discussions by any of these other networks about accepting some portion of the carrier of last resort obligation?

4291             MR. FLAHERTY:  No, there has been no discussions on that whatsoever.


4292             MR. PRATT:  I would like to just probe a little bit further here on the second‑last paragraph.  You are talking about an opportunity to gain efficiencies from leveraging existing infrastructure.

4293             How do you see that happening, particularly with respect to the proposal you have put forward?  What is going to help us to take advantage of the existing infrastructure?

4294             MR. FLAHERTY:  I think what we are really referring to there is more broadly that we need to think more collectively, government leaders, regulators, providers, on how in future we approach situations like this.

4295             As you would be aware, Mr. Pratt, Northwestel worked with the Government of the Yukon to put high‑speed internet into every community in the Yukon.  The difference in that case, though, is we made use of existing infrastructure.  We didn't duplicate anything.

4296             People might ask about was there competitive choice.  In fact, the government requested that part of that program allow competition in the local communities.  So we actually are obligated to resell that service in the community.


4297             So it hasn't diminished the ability of competition, but it has been more rational in that it has allowed us to use common transport infrastructure, not duplicative transport infrastructure.

4298             Unfortunately, the process that Industry Canada embarked on for the Northwest Territories and Nunavut is they actually required bids and competing bids.  There was no discussion.

4299             I had several meetings with Michael Binder trying to encourage him to make use of existing infrastructure and his view was "We will have a bidding process and may the best man win".  Well, I think that unfortunately was very narrow in its thinking in that we do have duplicate infrastructure in extremely high‑cost areas.

4300             So really what we are talking about here is more as we look to the future, if we are going to evaluate programs, particularly in our operating territory, let's make sure we do it in a well thought out way that minimizes the overall costs and the ongoing revenues that will be need to support it.

4301             MR. PRATT:  Mr. Chairman, by my watch it is pretty close to 10:30.


4302             THE CHAIRPERSON:  You are absolutely right, Mr. Pratt.  We thank you for noting it and we will reconvene at quarter to 11:00.

4303             MR. PRATT:  Thank you.

4304             THE CHAIRPERSON:  Thank you.

‑‑‑ Upon recessing at 1033 / Suspension à 1033

‑‑‑ Upon resuming at 1047 / Reprise à 1047

4305             THE CHAIRPERSON:  Mr. Pratt.

4306             MR. PRATT:  Thank you, Mr. Chairman.

4307             I would like to ask you a question related to your response to YG‑3.

4308             At the top of page 3 you have indicated one of the benefits or the benefits associated with your proposed framework enhances choice between competitive alternative siting, reduced carrier costs and permitting resale of local services.

4309             What else could the company have done to improve the choice of competitive alternatives for business and residential customers in the North?

‑‑‑ Pause


4310             MR. FLAHERTY:  Mr. Pratt, as was discussed yesterday, there are a number of other forms of competition that exist in the North today.  For example, wireless services are being rolled out throughout the Yukon as we speak now.  Those are alternate forms of communications services for individuals.

4311             So that is one area.

4312             Yesterday a conversation was taking place with regard to wireless tariffs.  As we pointed out, the tariffs that we have in place are substantially higher than in southern Canada.  There may be an opportunity through that tariff reduction to again encourage more to occur on the cellular side.

4313             Overnight I had the opportunity to go and look on the Ice Wireless website and the number of communities that they are going into.  So this isn't a case of simply affecting one carrier or another.  This is something that would incent all carriers on the wireless side to be able to offer more competitive services.

4314             So on the transport side, which most of the carriers we would hope would use the facilities, our proposals do look at reducing transport rates.  So that is something that is common and would be beneficial to all carriers as well.

4315             I think we have tried to put forward a proposal that hits the main elements that carriers need to be concerned with:  transport, termination, and, in the case of the wireless service providers, their access to the local PSTN.


4316             MR. PRATT:  I understand the need to balance those things, but I wondered if there was anything else that the company considered but discarded, or wished you could do.

4317             I know that we talked earlier about wishing you could reduce some of those competitive rates more than you are doing.

4318             MR. FLAHERTY:  One concern would be, for example, on consumer toll.  That is one example.

4319             Today, our proposal has us very similar to the southern ILECs; however, it is still quite a bit higher than what you would find in some of the other alternative LD carriers.

4320             For example, in northern Canada today, Manitoba Telephone Services offers a pre‑paid card that is 2.5 cents a minute.  We are not proposing consumer toll rates anywhere close to 2.5 cents a minute.

4321             That is an area in which, given opportunity and room, we would have liked to have done more.

4322             Digital private line services is another example.


4323             We cited the example of a circuit from Whitehorse to Fort St. John of $18,000 a month.  Down South, from Fort St. John to Edmonton, it would be probably more like $1,200 a month.

4324             That is another area in which we are substantially different.  And, clearly, those costs aren't that significantly different.  They are different, but not to that degree.

4325             MR. PRATT:  In your response to CRTC‑101, you were asked to describe the objectives of your proposed regulatory framework.  You indicated that, in the company's view, there are some benefits to moving to price caps.

4326             It occurred to me to ask you whether the emphasis was on "some" or on "benefits", but what I am more interested in is whether there are any downsides, or what detriments the company saw in developing this plan, particularly from the customer's point of view.

4327             MR. FLAHERTY:  Maybe I will start first with the company's view.

4328             There is a significant potential downside in this, in that we are basically going to open ourselves up to a much greater degree of competition, on the long distance side in particular.


4329             Bringing the Carrier Access Tariff ‑‑ or eliminating that and replacing it with a switch connect cost of .8 cents, in my view ‑‑ there is no question about it, it is going to encourage more equal access competition in northern Canada.

4330             So the competitive environment will be significantly greater than what existed before.

4331             As Mr. Hamelin said, in the current framework we have a deferral account on the long distance side.  Essentially, the company has been held whole, or kept neutral, shall we say, in a calendar year.  That disappears as we go into this new framework.

4332             The specific area that I can see much more aggressive competitive activity in will be consumer toll.

4333             As I said, a challenge that we are having to deal with, and are prepared to deal with, is that our rates, in fact, will likely be quite a bit higher still on the consumer toll side than what southern carriers are currently offering in other parts of the country.

4334             Even on the business side, I might add, our rates, even after making the proposed reductions that we have, will be fully 25 percent higher than in southern Canada.


4335             You might say to yourself, maybe business has to contribute a little bit more.  We actually have another unique situation in southern Canada:  businesses generally pay less than residential rates.  That is not the case in northern Canada, it is just the opposite.  Business is paying a substantial premium versus the residential market.

4336             So another area where we will continue to be exposed after implementing our plans is being 25 percent higher.

4337             One of the things we have seen with the Manitoba Tel calling card ‑‑ or pre‑paid card ‑‑ is a perfect example of that.  Many of these carriers are using national pricing in what they do, they are not using specific, local, northern pricing.

4338             You might look at that and say that they are losing money, but, obviously, they must have made some decision that, to try and offer differentiated rates, it is too complex for them, so they continue to do that.


4339             MR. PRATT:  In your response to CRTC‑102, you again continue on the theme of the objectives of your framework, and in that response you did some mapping of your objectives with some of the national policy objectives and I wanted to just carry this further where, under the heading at page 3 of 10, the heading is "Provide Companies with Incentives to be More Efficient and Innovative".

4340             If I understand your answer correctly there you're suggesting that the importance of being efficient and innovative as an objective needs to be qualified by the inequalities of the north.

4341             Is that a fair characterization?

4342             MR. FLAHERTY:  Absolutely.  And I can share with you one very brief example.

4343             Last summer at a place called Bear Rock ‑‑ Bear Rock is a microwave facility north of Norman Wells ‑‑ we had a windstorm go through, more or less hurricane‑type winds.

4344             To make a long story short, it's not road accessible that particular location.

4345             We incurred $100,000 simply to repair that facility.  We had to charter crews from Whitehorse, pay for a specific plane to fly all the way up to that particular site, hampered by darkness.  So, the outage was something like 17 hours and $100,000 later before we got going.


4346             So, as Mr. Roberts said, yes, other parts of the country have climatic issues to deal with, a little bit different.  In southern Canada, in all likelihood, that would have been a fibre buried in the ground.  If somebody had cut it with a back hoe, they'd have a crew there and likely repaired within a few hours, not hundreds of thousands of dollars of cost involved.

4347             MR. PRATT:  And this helps with my next question which was under the next bullet point about the relative importance of ensuring continued access to reliable and affordable services.

4348             I think what you're suggesting is that that's more of a factor for Northwestel than it would be if your environmental circumstances were different.

4349             MR. FLAHERTY:  Exactly.  You know, if you'd like another example, Sanikiluaq, a little island in the southern part of Hudson Bay, it's in Northwestel's operating territory, quite a bit below the rest of our operating territory.  A power plant in the community burned down.

4350             We had generators there which would only last 12 hours.  Again, charter a plane from Yellowknife, $50,000 later we were able to keep the service running, didn't miss a beat, but very expensive, very costly to maintain.

4351             MR. PRATT:  And the next bullet down then, reasonable opportunity to earn a return.


4352             My characterization there is that this is more of an issue for Northwestel and consequently for the north because of the need to attract additional investment.  Is that fair?

4353             MR. FLAHERTY:  Well, I think Mr. Hamelin illustrated the example of the service improvement program, you know, $85‑million of totally uneconomic investment.

4354             So, clearly when we enter into these programs, it's really important that both sides sort of understand the regulatory bargain involved in doing that.

4355             You know, it's not something we can take lightly.  We are the ones having to go to the street and assure the investment groups that they can expect a return on that money in the long term.

4356             MR. PRATT:  In your view, Mr. Flaherty, is there sufficient ability to attract investment presently in order to establish the kind of network infrastructure that's going to be needed for advanced services?

4357             MR. FLAHERTY:  Obviously I think that's an important element that needs to be considered in the deliberations of the Commission.


4358             You know, the framework that we've been in, definitely as Mr. Hamelin said, he raised I think it was $40‑million through that five‑year period and the investors were comfortable that they saw a solid, stable environment in which they could make their decisions on.

4359             So, clearly the outcome of this proceeding will have a big impact on our ability to, again, assure these people that they have some certainty of obviously return in the long run.

4360             MR. HAMELIN:  Just to be more precise, the full investment was 85‑million, I just happened to go to the debt community to raise 35‑million, to be again precise, in terms of long‑term bonds during that period.

4361             THE CHAIRPERSON:  Just on that subject, if I may, Mr. Pratt, just for my curiosity.

4362             MR. PRATT:  Sure.

4363             THE CHAIRPERSON:  You were borrowing against the overall performance of Northwestel, not against specific assurances in relation to SIP?

4364             MR. HAMELIN:  That's exactly right.

4365             MR. FLAHERTY:  And, of course, doing that the investors are looking at all of the elements, including the regulatory framework.


4366             So, they're trying to understand the position of Northwestel, as you say, not for a specific project, but overall.

4367             MR. HAMELIN:  That's right.  When you go to the market, you know, before they lend you the moneys they want to ‑‑ in our case we don't have to publish a full‑fledged prospectus on a pro forma basis because of the nature of our, you know, we are that small, if you will.

4368             In the private market, when you do approach them, there is some due diligence that occurs.  I am present at that meeting, when I do get called in is their lawyers, the external auditors whoever they might be on their side, of course their CFO and officers of the company, and then I get grilled with all the questions as to what is the prognosis for Northwestel, both in the immediate term and in the long run, particularly for the length of time, if you will, that they are lending us the money.  These two particular bonds, one was for 20 years and one was for 10 years.

4369             MR. PRATT: Thank you, Mr. Chairman.  I sense an impending power shortage here so I have asked for a little bit of help from Northwestel.  That should be an incentive to keep the pace up though.


4370             Back then to your response to CRTC‑102 and the next objective was to reduce the regulatory burden.  The way I understand your response there, in a relative sense, that it is less important for the company to reduce a regulatory burden because of the continued need to address issues of subsidy and continuing to meet the obligation to serve.  Is that fair?

4371             MR. FLAHERTY: I think that is fair.

4372             MR. PRATT: Your proposal is for a price cap term of four years.  And I think in the response to CRTC‑107 you suggested that the company could come back and initiate an application during that period for review, if necessary?

4373             MR. FLAHERTY: That is correct.  As you are well aware and I think others are aware, there are some rather large impending projects planned, particularly the MacKenzie Valley Pipeline.  I will use the example of the outage that we had in Bear Rock north of Norman Wells.  We had to charter a plane and it is either a plane or a helicopter.  And current expectation is, when that pipeline comes in, prices are likely to go through the roof.  In some cases you may not even be able to get access to certain equipment.


4374             So again, that is speculation at this point in time.  A project of that size has not been done in North America, so we will have to see and once we have a better understanding of that we may indeed have to come back and seek some understanding from the Commission.

4375             MR. PRATT: I guess what I am wondering is why you wouldn't be prepared to accept a reciprocal opportunity by customers or the Commission to ask for a review if circumstances were changed during that period of time?

4376             MR. FLAHERTY: Can you give me an idea of what kind of circumstances you are thinking of or..?

4377             MR. PRATT: Speculating, I think our consumer friends might suggest if there was an outrageously successful performance by the company.

4378             MR. FLAHERTY: I think as we tried to illustrate earlier the likelihood of that is extremely remote.  You know, as I said, half a point on ROE is 2 percent of our operating expense.  So again, I haven't done the math yet, but if you extrapolate, you know, an upwards of 30 or 40 percent of our operating expense would have to be cut in order to get to something like what someone suggested Telus achieved.  So I don't see how that is at all possible or likely in this four‑year period.


4379             MR. PRATT: Then there is a minimal risk to offer the opportunity for someone else to ask for a review?

4380             MR. FLAHERTY: I would gather that at any point in time in any framework the Commission can always be approached about any subject.

4381             MR. PRATT: Fair enough.

4382             In CRTC‑109 you were looking at the reporting requirements to the Commission.  I just wonder, given the relative importance of continued regulation, and I mentioned just a few minutes ago that from the company's perspective continued regulation is probably beneficial in many ways, whether you would consider it prudent to limit the amount of information that the Commission has available.  And particularly, what the downside would be of continuing the existing reporting requirements.

4383             MR. FLAHERTY:  I think, as I understand, one of the benefits of price cap regulation is trying to streamline the process, not just on our side but also on the Commission's side as well as the intervenors as well.


4384             So what we try to do ‑‑ we are practical ‑‑ is try to take elements of the southern framework that we think can equally apply and in our view these are the same types of requirements that exist in southern Canada and we would see ourselves modelling ourselves after that as well.

4385             MR. ROBERTS:  We also have to be mindful of the fact that there comes a point when you effectively have rate of return regulation again in the background and you have just layered over top of that some arbitrary or incremental ‑‑ I guess is a better word ‑‑ pricing constraints.

4386             So to a certain extent we have to be either in price caps or out and for all the reasons suggested in our evidence we have put together a price caps proposal.

4387             MR. FLAHERTY:  Just to build on that point, and Mr. Rondeau was sort of offering similar thoughts, I think that is a decision that needs to be made.  We are either in rate of return or we are in price caps.  If there is so much concern about that, rather than putting all of these additional constraints around a price cap model maybe we need to continue to stay where we are on rate of return.

4388             MR. PRATT:  Well, Mr. Roberts, I think there are plenty of reporting requirements that are somewhere in between rate of return and price caps.


4389             Certainly, you will have a reduced burden from the tariff perspective in price caps, that will streamline things, but what about construction program review?  Some of those items listed the costing depreciation.  Is there any reason why those reporting requirements couldn't be continued?

4390             MR. ROBERTS:  Again, I would suggest that they relate directly to a revenue requirement focus and that is not the focus of a price cap regime.

4391             MR. PRATT:  Fair enough.

4392             Could I ask you to look at your response to CRTC 209?  This relates to the company's view of whether there would be a new SIP required.

4393             I wonder if you could just in general terms describe to me the company's rationale behind the elements that are identified in this response as being desirable in a new SIP Program.

4394             MR. FLAHERTY:  I think, not unlike the previous SIP Program, the Commission recognized in Decision 99‑16 that Northwestel has a very high‑cost serving area different from all of the other telephone companies in the country.  They recognized that the toll facilities in particular were going to be in need of upgrade.


4395             That was an example of a totally uneconomic investment.  In other words there wasn't sufficient revenues generated from the subscriber base to help to pay for that kind of a step function in replacement.

4396             So the nature of the projects that we have put into this particular SIP piece, which Mr. Wells can talk about, fall in that same category.  These are projects that ultimately will need to be done.  We could choose to wait till they fail.  That might be an option.  Our suggestion is that is not a prudent option, that we should be trying to take steps to address them sooner rather than later.

4397             So it is really this whole uneconomic nature of these particular projects, the magnitude of them, that we propose that.

4398             MR. PRATT:  And presumably these are investments that you wouldn't expect to be made by anyone else, by new entrants for instance?

4399             MR. FLAHERTY:  That is right.  Generally most of what you would find in here would be common elements of the network that would be used potentially by new entrants as well.  In the case of the microwave systems, that would be the transport system that hopefully we would have rates as we have proposed that would encourage competitors to use that same common infrastructure.


4400             Of course, as I said earlier, that is what makes most sense in northern Canada rather than duplicating infrastructure.  Switches as well.  Again, that is something that would be common to it in that point as well.

4401             MR. PRATT:  So is within the realm of possibility that there could be a cooperative approach to these kinds of investments?

4402             MR. FLAHERTY:  Cooperative in sort of what sense?

4403             MR. PRATT:  Where new entrants, for instance, might identify some of their requirements and, in hypothetical terms, even participate in the investment?

4404             MR. FLAHERTY:  I think we would have to collectively look carefully in terms of responsibility.

4405             Part of these systems ‑‑ not part.  All of these systems contribute to our ability to be their service provider of last resort, so it's very important that we aren't caught in a situation where one party thinks we should upgrade it and the other party doesn't but we have the obligation.

4406             So somehow in some of these areas joint ownership becomes a bit of a problem.


4407             In terms of meeting sort of technical requirements, assuming that they are within reason, I think discussions along that line could easily occur.

4408             MR. WELLS:  I think it's important to note that the vast majority of the locations that we are talking about making investments here are very small and remote communities.  So to the point of this being, again, a continuation of uneconomic investment and the likelihood of potential "competitive partner" to want to share in uneconomic investment doesn't really ring true with me.

4409             MR. FLAHERTY:  I think the other thing to recognize is most of the projects that we put in place here don't generate any revenue.  The revenue wouldn't change as a result of providing these upgrades.  So I think that is ‑‑

4410             MR. PRATT:  Right.  It would be the new services that create the potential for revenue rather than the infrastructure investment.

4411             MR. FLAHERTY:  To the degree that there could be new services.  For example, there are a few communities on her that already have high‑speed internet for example, so one would have to start stretching your mind a little bit further into the future as to what those new services might be and what demand there might be for them.


4412             MR. PRATT:  Just picking up on Mr. Wells response, while competitors may not be particularly interested in uneconomic investments, there may be other entities that would find rational other than a business rationale.  I think somebody mentioned the four levels of bureaucracy ‑‑ which I can say since Mr. Rose is not sitting here ‑‑ the four levels of government, do you see potential there for a cooperative approach to investment?

4413             MR. FLAHERTY:  I would say most definitely.  I guess the Yukon government in our view has been very progressive in that sense.  If you look at what we have done with the Connect Yukon project, the Yukon is the most connected region in all of Canada from a broadband perspective.  The Yukon government has put forward the whole idea of bringing cellular service to the communities.

4414             Something I might just try to clear up a little bit, it was the Yukon government that issued an RFP that results in latitude wireless existing.  Without that RFP latitude wireless did not exist.  So it was simply in response to it.


4415             The government submitted a request, it went to Telus, Rogers, Bell, ICE Wireless and ourselves.  ICE Wireless and ourselves were the only two who bid.

4416             The other thing I would highlight is that that is a subsidized network.  The Yukon government is providing a subsidy for that network as it goes forward.

4417             So some notion that somehow we are building a duplicate network and we are just building it to rob Peter, shall we say, or take monies from Northwestel, I totally reject that concept.  This entire thing was done in response to an RFP.

4418             One other requirement that the Yukon government put in the RFP is that the successful bidder had to offer free long distance service in the Yukon.

4419             So whether Northwestel had won it or whether someone else had won it, free long distance service was a requirement of that RFP.

4420             So again, some notion that we just made a financial decision to go and invest in cellular service and through that process we are just going to offer free long distance, this is all in response to the very detailed requirements of the Yukon government.

4421             With that comes a new form of regulation, I might add, in that the Yukon government, being a payor, will regulate this service.


4422             MR HAMELIN:  Just to clarify, the subsidy that was suggested in the RFP comes about because we are addressing really only these 8,000 people we are talking about, but in 17 communities.  That is 17 towers that are going to have to be built to serve 8,000 people.

‑‑‑ Pause

4423             MR. PRATT:  Thanks.  The next question that I have is in relation to generally the quality of service measures that was discussed earlier this morning.

4424             Given that we are experiencing and will continue to experience change in the telecommunications environment in the North, the market technology and under your proposal the regulation, I wonder if it isn't also reasonable to consider that the quality of service measures may need to be adjusted to meet those new realities in some kind of way.

4425             You were asked a question this morning about the penalty regime that the Commission has established in other jurisdictions.

4426             I wonder, given the company's successful performance in quality of service, what the downside would be of accepting some form of financial penalty or incentive system.


4427             MR. FLAHERTY:  I think I would choose to look at it the other way:  What is the upside for being a good performer?

4428             We have done an excellent job.  The Commission has recognized it.  And our view is these things are often put in place in response to issues.

4429             As I say, we have done a very good job and don't see the need for that to be put in place.  It doesn't mean it can't be addressed at a later time if required.

4430             So I would turn it around and say:  What is the benefit at this point in time?  We are doing the job we are asked.  We are recognized and commended for it, et cetera.

4431             MR. PRATT:  Well, if that was a non‑rhetorical question, it sounds to me like the reason would be that there are customers there who think that would be a good idea.

4432             Along the same lines, I wonder if you would consider, as we move towards a more competitive environment but not a fully competitive environment because of the nature and realities of the North, whether customer satisfaction measures may not be helpful to the Commission in helping to monitor the progress towards achieving some of the policy goals under the Act.


4433             MR. FLAHERTY:  The company does on its own look at customer satisfaction measures.  I would suggest that these policy objectives apply all across the country, and those aren't employed elsewhere within the country.

4434             So I would question why specifically they may need to be included in the Yukon or in the Northwest Territories and Nunavut, for example.  We are very sensitive to that and that is something we are incented to do, particularly as more competitive alternatives become available as well.

4435             MR. PRATT:  It would just seem plausible, to me at least, that in the unlikelihood of the same facilities‑based competition existing in the North as it exists in the South, that it might be helpful, at least in the transition, to provide more of those customer satisfaction measures perhaps to the Commission or at least be prepared to use that as a tool to help substitute for the situation where a competitive alternative might exist.

4436             MR. FLAHERTY:  I think the only thing I might differ with in terms of your analysis of the situation is the notion of competition.


4437             As the Commission has recognized through several decisions, there is a lot of competition.  We are now at a market share level on long distance that is equivalent to where the other ILECs in the South were after a similar amount of time.  It just happens to be a different form of competition.

4438             I would question the notion that somehow we have less competition.  From our perspective, we have the same amount of competition, therefore why not the same types of quality of service measures that exist in southern Canada.

4439             MR. PRATT:  I understand it but I think you would agree that there is a significant distinction, or a significant difference at least, with respect to facilities‑based competition.

4440             MR. FLAHERTY:  I would suggest obviously there is a difference in the form, but the result is still the same: that people are choosing an alternative provider.

4441             MR. PRATT:  Fair enough.

4442             Could you please turn to your response to CRTC‑501.

4443             This was the question that the Commission asked, whether local competition should be permitted and in the company's view what form it might take.


4444             I think we have established so far in the proceeding that, from the company's perspective, resale competition is permitted.  You have conceded that there are situations where Voice over IP may provide a substitute.

4445             Mr. Wells has talked about wireless as a substitute.

4446             Under those circumstances, why would you object to a direction or a determination by the Commission simply saying that the local market is open to competition?

4447             MR. FLAHERTY:  Mr. Roberts can correct me if I am wrong, but your first premise about resale, I think we have proposed that it be available.  I am not exactly sure that it is available today, but we have proposed that it be available.

4448             Just as the Commission took care in looking at long distance competition and the impacts it would have on the North, I think, equally, we need to have the same kind of due diligence done on this.


4449             As I said earlier, we have only done preliminary work in trying to understand this very complex subject.  We have different technology, unlike others.  We have at least three different types of switch technology that we use, even in the larger centres of our territory.  Some of the solutions as to, actually, how you would go about even offering facilities‑based competition ‑‑ I am not sure we would even know the answer to that to cost it out.

4450             If you look across our broad operating territory, as I mentioned earlier, with the CCS‑7, which would be a requirement, in the year 2000 we estimated that it would be a $40 million project.  The Commission, I think in its wisdom, recognized that that was not a good use of moneys, and at that time we agreed that we would only do it in those four communities.

4451             Even if we narrow the scope down to the four, one of them is a satellite‑based community.  There are lots of challenges trying to be able to offer the kinds of services that would be required, or even the systems that would be required to provide local competition in that satellite community.

4452             So bringing it down to the three, of the three, even there we have two different types of technology.  The Nortel product, as I said before, we don't have the technology in place, so that would be an incremental investment that would have to be made.

4453             The GGD‑5s ‑‑ I am not sure how that would work.


4454             But, more importantly, we have to then change our operating systems within the company.  We have billing systems, assignment systems, Call Centre management systems, repair systems ‑‑ all of those have to be changed for the realities of local competition.

4455             Again, we haven't done the detailed work, because it is months and months of work to be able to figure out what are the costs of those.

4456             I think all we are suggesting is that we are encouraging the Commission to take the same kind of due diligence that was done before we entered the long distance market.  Let's do that same due diligence here.

4457             Another factor that I think we should consider is that we have two ‑‑ again, what I used earlier ‑‑ relatively large communities, in our sense, Whitehorse and Yellowknife, and then we have many, many small communities.  What are the spillover effects on those other communities?

4458             I don't think we have enough knowledge to be able to make that decision with a complete understanding.


4459             Given the fragile nature of the northern market, I think it is really important that we understand that, so we don't end up in a situation where something then gets, shall we say, terribly broken as a result.

4460             MR. WELLS:  Mr. Pratt, if my recollection serves me well, I also think that the Yukon government has been on record in the past as suggesting that it is important that whatever changes happen in the regulatory world be well understood.

4461             I think, around the whole discussion on VoIP, there was a point made about that.  Fine, we are not against it, but let's understand what that means to all of the North, not just to a few major centres.

4462             I may be wrong in my recollection, but I think that has been the position of the Yukon government.

4463             As well ‑‑ and Mr. Rondeau raised this this morning ‑‑ we are talking about leap‑frogging some regulatory processes here, if you will.  We are moving into a regime that brings some risk with it, and to layer on another element ‑‑ another new element ‑‑ on top of these changes at the same time, I think, would not be prudent.


4464             I think it would be prudent for us to examine this in more detail, in a proceeding where all interested parties would have an opportunity to bring forward their positions.

4465             MR. FLAHERTY:  I think, too, to go back to your earlier point about local competition, we are not opposed to local competition.  As I said, we are quite prepared for resale.  We understand the wireless side.  We are going to see competition in there ‑‑ wireless versus wireline.

4466             It is particularly the facilities base.  We are saying, hey, this is a complex subject and we need to really understand this carefully ‑‑ all of the implications, not just the cost of putting it in one spot.  What are the implications on the rest of the North and on the rest of the customers?

4467             MR. ROBERTS:  If I could elaborate a bit on how we are different from others, including the small ILECs, the complexity of our systems is driven by the fact that we are a full service provider, unlike a number of the small ILECs and, further, it's also driven by the fact that it supports 96 communities.

4468             So, even if you only I guess focus on the smaller sub‑set of communities, that the back office systems and the costs associated with modifying them will be reflective of the larger nature of the systems and their complexity.


4469             In addition, we have a very small population base over which to recover these small costs, and even when we talk about large centres, the comparative I guess positioning in a ranking of largeness nationally would mean that we have extremely small communities throughout our territory, including Whitehorse and Yellowknife.

4470             MR. PRATT:  Well, and that's useful to understand the impacts on the company on the prospects of local competition.

4471             I think, Mr. Wells, the Yukon Government has also been relatively consistent, at least to my recollection, in supporting the concept of local competition as being beneficial for people in the north and people in the Yukon.

4472             And, Mr. Flaherty, I guess the confusion for me exists in the characterization of competition on the long‑distance side as being, it exists even though there may not be facilities based competition, but on the local side when we talk about ‑‑ when I ask you about competition, you assume that it's facilities based competition, and certainly granted that there are costs and implications to the company for implementing, you know, a full menu, local access competition situation.


4473             It just seems to me that given the realities that there are competitive and substitute alternatives here already, why it would be necessary to take the position that there should be no local competition?

4474             MR. FLAHERTY:  But, as I said, that's not our position.  Our position is we do support local competition.  In the long‑distance market it has evolved differently than the south.  We've talked about resale, we've talked about wireless.

4475             You know, time will tell, even in southern Canada, whether the form of wire line local competition will be the future.  It may not, it may be wireless competition.

4476             You know, I think in some of the reports we've seen up to 17 percent of consumers have indicated within the next year or so they see themselves going to a wireless device alone.

4477             So, we may be ‑‑ you know, the fact that we're only now talking about this subject may actually take us to a point where wire line local competition becomes less and less relevant.

4478             So, should we be going and spending lots of money?  Is there anyone interested?  Is there anyone willing to pay that money required to do it?


4479             Those are all the questions I think we're asking about facilities based competition.

4480             But, please don't misunderstand, we're not suggesting competition shouldn't occur, resale is the option we have.  There are these other technologies that we spoke of as well.

4481             MR. PRATT:  Exactly.  With respect to the prospect of resale competition, I don't believe there's anything in this proposal that would specifically address the competitor services or pricing for essential services that resale competitors might use to enter the market.

4482             Is that something that you're planning to address in the future?

4483             MR. FLAHERTY:  Most definitely.  If the Commission were to agree with us that resale should occur, we obviously would ‑‑ the next step would be to file the tariffs that we would associate with that.

4484             MR. PRATT:  One moment, Mr. Chairman, please.


4485             Could I ask you to look at your response to CRTC‑14.05.  In this question the Commission asked if there should be economic studies or if you file economic studies in circumstances where certain benchmarks might be exceeded or trigger a question.  And I think your response there said that you would accept that on a case by case basis, is that fair to say?

4486             MR. FLAHERTY: Yes.  I think the challenge here is we collectively have to look at what is the cost of getting into the detail for a specific product or service.  In some cases we have that information or we can get that information fairly easily.  In other cases it is not something easily done.  We need to weigh out what is the challenge with having to find those costs.

4487             As you have indicated in the answer, the Commission has historically accepted benchmarks with others, accepted a bit of a premium to those benchmarks for Northwestel.  So all we are suggesting is that we need to look at the individual circumstances around the different products or services that we are filing tariffs for.

4488             MR. PRATT: So you would accept a requirement or a provision whereby this option was open, if the Commission deemed it necessary?

4489             MR. FLAHERTY: Sorry, the option of looking at comparable tariffs elsewhere, is that what you are thinking?


4490             MR. PRATT: Right, and to file a study, if required.  I am thinking along the lines of what might be an additional consumer safeguard.

4491             MR. FLAHERTY: I think we would have to look again at what is the service, what are the costs involved with it, you know.  Again, telcos all across this country, and not in all cases, have filed cost studies with their individual tariffs.  So what is the materiality of the service in terms of users, what are the impacts from a revenue perspective on the company.  I think there is a variety of considerations versus saying at all costs we are going to go to a cost study.

4492             MR. PRATT: Thanks.  In your response to CRTC‑1502 this question related to the appropriateness of establishing a local competition framework.  And I think in this response you indicated that the company's view is that, in that event, full costs attributable to competitive entry should be recovered from the new entrants or service providers?  That would be at page 2.

4493             MR. FLAHERTY: That is correct.


4494             MR. PRATT: I wonder in the recognition that the underlying facilities have been supported by subsidy, particularly in the case of the high‑cost serving area subsidies in the SIP programs, whether that would have any impact on your position as to the cost recovery for new entrants?

4495             MR. FLAHERTY: Basically, the costs that we are talking about are the incremental costs that would be associated with a facilities‑based competition.  Any underlying services that had already been implemented would not be, of course, we wouldn't add that additional burden on.  We would use just tariff rates for anything that is there.  So no, we wouldn't charge people capital costs for existing infrastructure from that perspective.

4496             But if there was incremental capital required that is causal specifically to this, that is the cost we are talking about.

4497             MR. PRATT: Thank you.  This next question is in relation to your response to Government of Northwest Territories, 102, and it also relates to the discussion we were having a few moments ago about quality of service and the reporting requirements as well.

4498             In this response it seems to me you are saying that it is not necessary to continue with construction program reviews under the modified price cap program.


4499             MR. FLAHERTY: Of course, I think one of the premises behind the construction program reviews has to go with the form of regulation.  Under a return on equity form of regulation of course I think the Commission needs to monitor the program to make sure that what is being added to the equity base is appropriate and there is direct tie to that form of regulation.  In a price cap's frame work, again, the equity of the company is irrelevant at that point, so that tie is no longer there.

4500             MR. PRATT: But this question also addresses what is the safeguard for the company under‑investing.  And if I understand your response there, the suggestion is that the quality of service measures are the safeguard that we should look to?

4501             MR. FLAHERTY:  Very much so.  If you think about it, if at the end of the day the customers are satisfied with the quality of service that exists, I am not sure if anyone would be disadvantaged in that case.

4502             MR. PRATT:  Mr. Flaherty, what about the SIP investments or SIP‑funded investments, would you say that they should have the same treatment or is there a different character because of the nature of the program that might suggest a higher degree of examination or reporting?


4503             MR. FLAHERTY:  Maybe you can just clarify in terms of ‑‑ I am not sure exactly what you are thinking.  The money has been invested, the facilities are in the ground ‑‑

4504             MR. PRATT:  I am thinking about a future SIP.

4505             MR. FLAHERTY:  Oh, a future SIP!  Sorry.  Yes, we would agree that a future SIP, if such was approved, that it would really be appropriate for the Commission to monitor the implementation of that SIP.  So we don't have any disagreement with that.

4506             MR. PRATT:  Okay.  And I guess the concern I have with respect to looking at just quality of service as a safeguard for under‑investing outside of SIP is that there is a fairly long investment and construction cycle so that if we had a problem that was flagged by a quality of service result and that indicated to the Commission or to the public that there may be an issue of under‑investment, it may be sometime before that situation got rectified, wouldn't you say?

4507             MR. FLAHERTY:  It could be.  I think at the end of the day that is why we are proactive in what we do.  We need to be planning into the future.  You see before you a proposal for a second SIP.  A lot of that is that sort of pre‑planning, if you like, for that type of circumstance that you are describing.


4508             MR. WELLS:  Just to add to that, I think the point about track record ‑‑ I mean you do have to look at the track record.  Even under today where the program is reviewed it is Northwestel that brings forward the drivers.  These aren't brought forward by anyone else.  We are the ones that look at our demand and look at other issues.  So I think the fact that we have got a good track record here is important.

4509             MR. PRATT:  Exactly.  We appreciate the track record and I guess the rationale behind my questions is that we also share your concern about the future, that things are changing and the ability of the company to continue meeting those standards may be challenged in the future, and that is really why, from the Yukon Government's perspective, it is important that some thinking be applied to the kinds of measures that might address these public interest issues but also at the same time help the company.


4510             MR. FLAHERTY:  There is also an economic incentive that I think we need to think about as well.  Given the very remote communities' large distances that you have heard about so much over the last couple of days, if we under‑invest there is a very, very strong likelihood that we will have to pay for it on the expense side of the house.

4511             If we aren't being proactive and we aren't maintaining the switches, the cost of us having to go out on an emergency basis and replace an entire switch with a chartered aircraft is going to be substantial.

4512             So just by the nature of our operating territory there is a fair bit of economic incentive to make sure that we have got a plan in place that is going to minimize the repairs and the visits to these very high‑cost remote communities.

4513             MR. PRATT:  I just have one more question, Mr. Chairman.  I will attempt to try to tie up what seemed to maybe be a loose end this morning.

4514             Mr. Rondeau had attempted to ask some questions relating to the deferral accounts in the south and my understanding, Mr. Flaherty ‑‑ and please correct me if your understanding is different ‑‑ is that the effect of those accounts for southern companies was to provide an additional safeguard for consumers as those companies begin to enter the price cap regime; is that correct?

4515             MR. FLAHERTY:  Unfortunately, I am not knowledgeable enough on that deferral mechanism to be able to comment, I am sorry.


4516             MR. PRATT:  Okay.  Let me ask you then:  Were there any other safeguards or methods that the company considered to provide some safety net or backstop for consumers in those kinds of circumstances?

4517             MR. FLAHERTY:  In the circumstances of?

4518             MR. PRATT:  That Mr. Rondeau was concerned about, of potential over‑earning or extraordinary performance by the company.

4519             MR. FLAHERTY:  As I was saying, the likelihood of that, given the size of our operation, the number of people within our operating territory, the impact that we would have to see, it's just implausible to me that that could even occur to the kind of degree that was talked about earlier.

4520             Whether we were at 10.5 percent and it worked out to be 11.5 percent, sure, that kind of a thing could happen, but the notion that somehow we could be at 10.5 percent to 22 percent, I'm sorry, but I just don't see how that could happen.

4521             MR. PRATT:  Fair enough, thank you.

4522             Thank you, Mr. Chairman, those are all my questions.

4523             THE CHAIRPERSON:  Thank you, Mr. Pratt.


4524             Madame la secrétaire...?

4525             THE SECRETARY:  Thank you, Mr. Chairman.

4526             MR. FLAHERTY:  Mr. Chairman, maybe could I just introduce a point here?

4527             THE CHAIRPERSON:  Please do.

4528             MR. FLAHERTY:  Sorry.

4529             Last night you posed to the company to reconsider productivity, and we did go back last night and give a fair bit of thought to this particular subject.

4530             Recognizing that we do have limited information, the company is prepared to go and spend ‑‑ as you indicate, it will take us likely several months ‑‑ to use the information that we have and try to provide the Commission with more detail.

4531             As I said, it will be several months.  We will do the best that we can, we are committed to doing that, and I will ensure that it's done.

4532             In addition, I would like to assure the Commission that we will put in place mechanisms to establish a string of this information going into the future.  We will start to, on an annual basis, develop the kinds of information that the Commission is requiring to help us in the future.


4533             Unfortunately, that won't help us in the immediate term, but in the immediate term we will go back and do the best we can to provide information that will provide more series of data for the Commission.

4534             THE CHAIRPERSON:  Thank you, Mr. Flaherty.

4535             As you will be aware, the Commission will have to consider the implications of its current less than satisfactory state of information about your productivity in its decision.  The decision will obviously antedate your further report, but there might be provisions in the decision that might contemplate the possibility of that report changing some variable in the decision.

4536             I don't know because I haven't discussed it.  Staff hasn't completed its analysis of the evidence and I haven't discussed it with my colleagues.

4537             We will leave it there and we appreciate your response and I hope you understand the nature of my response.

4538             MR. FLAHERTY:  I do, Mr. Chairman.  Thank you.


4539             THE SECRETARY:  Thank you, Mr. Chairman.

4540             The next party to cross‑examine Northwestel will be Telus.

4541             Mr. Ryan, please...?

‑‑‑ Pause

4542             MR. RYAN:  Thank you, Mr. Chairman.

4543             I will be joined again for the purpose of this cross‑examination by Mr. Schmidt.

EXAMINATION / INTERROGATOIRE

4544             MR. RYAN:  Good morning, gentlemen.

4545             Mr. Flaherty, if you are successful in persuading the Commission to embrace your proposal, considerably less of your revenue will come from payments received from customers and interconnecting carriers and considerably more will come from explicit subsidies paid out of the National Contribution Fund.

4546             Are we together on that?

4547             MR. FLAHERTY:  That's correct.

4548             MR. RYAN:  I indicated in my opening statement, and I think it is evidence on the record, that the proportion of your income which will come from explicit subsidies will rise to 25 percent?

4549             MR. FLAHERTY:  That's about right.


4550             MR. RYAN:  And it would be fair to say that is a 300 percent increase from the level of subsidy you are currently receiving?

4551             MR. FLAHERTY:  On an explicit basis.

4552             MR. RYAN:  Yes.

4553             MR. FLAHERTY:  Of course there is a number of implicit subsidies that are within the company now.

4554             MR. RYAN:  As I day, if you are successful in persuading the Commission to embrace this proposal, would you agree with me that you will have eliminated a great deal of the business risk that you currently face?

4555             MR. FLAHERTY:  I guess on one hand we will have hopefully eliminated the potential to bypass these highly uneconomic facilities in northern Canada, and I think that is a good thing for all northerners and the Commission in that we are avoiding causing significant problems down the road in providing service to the smaller more remote areas.

4556             I think that is sort of the key thing that I think we are trying to avoid.

4557             At the end of the day we have long, long routes that we talked about.  Users of those routes are going to have to pay a contribution.


4558             Recently we just did a study on the VoIP traffic that is using our network.  About 3 percent of all of the long distance minutes two weeks ago was going over VoIP; 80 percent of it were customers using Skype.

4559             If that continues at the growth rate ‑‑ and by the way, that has grown three times in the last six months.  So the volume has grown.

4560             If that continues at that level for the year 2006, $1 million will have been avoided in CAT payments.

4561             So again CAT includes a portion of it that is a contribution to sustaining the local network.  That is not something that is sustainable in the long term.  And we only expect that it will grow.

4562             MR HAMELIN:  Just to add, to show our vulnerability, our top 50 customers are responsible for currently 53 percent of our business total revenue.  That is a very small vulnerable base to deal with.

4563             MR. RYAN:  My question went to whether by adopting this proposal, if the Commission should choose to adopt it, they will have significantly reduced the business risk that you face in the market versus the situation where they don't adopt your proposal.


4564             MR. FLAHERTY:  So we talked about the part and the impact that it has on consumers.  The other piece, though, with our proposal to go to a .8 cent switch connect rate, that will undoubtedly introduce more competition in the northern market.

4565             More competition I wouldn't suggest reduces business risk by any stretch of the imagination.

4566             MR HAMELIN:  I would like to add that if you look at PIAC‑1, at Ms McShane's evidence, the business risk has increased significantly since year 2000 and is partly responsible for her suggestion to suggest a total return for the company of 11.75 percent.

4567             MR. RYAN:  Mr. Flaherty and Mr. Hamelin, will your business risk be reduced as a result of the adoption of the proposal that you put before the Commission or not?

4568             I understand that there are factors out there that may occur one way or the other, and I understand what Ms McShane has said based on the evidence that was before her when she wrote her evidence.  But could you address specifically the question I put to you.

4569             MR. FLAHERTY:  I would suggest that the business risk in northern Canada is greater going forward.


4570             MR. RYAN:   Greater going forward with the proposal or without the proposal?

4571             MR. FLAHERTY:  With the proposal.

4572             Today, just to give you an example ‑‑

4573             MR. RYAN:  That's fine.  I do have your answer on that then.

4574             Would you agree that amongst the ‑‑ we have spoken many times about unique circumstances in the North.  Would you agree with me that the situation of a commercial enterprise having 25 percent of its revenues underwritten by an explicit subsidy would itself be a unique situation in the commercial world of Canada?

4575             MR HAMELIN:  Not for the price ‑‑ not for establishing comparable prices and comparable services.

4576             At those prices, without a subsidy there is no business, period.

4577             MR. RYAN:  Mr. Hamelin, can you provide me with an example of an enterprise in Canada, a commercial enterprise in Canada, that receives 25 percent of its revenues in the form of an explicit subsidy from a contribution fund ‑‑

4578             MR HAMELIN:  Mr. Ryan, I think you are biasing the situation here.  Our whole market ‑‑


4579             MR. RYAN:  I'm sorry, I'm which?

4580             MR. HAMELIN:  ‑‑ you can have in two sittings at the Big O or the SkyDome in Toronto.  It is spread over three‑quarters time zones.  You would not find banks, you would not find McDonald's, you don't find Canadian Tires.  And when it comes to Old Crow, Arviat or communities of the kind, forget the 25 percent.  Nobody would show up.

4581             MR. RYAN:  Was that a yes or a no to my question?

4582             Would you find a commercial enterprise in the North or in the south of Canada that would have 25 percent of its revenues guaranteed by an explicit subsidy from a public source of funds?

4583             MR HAMELIN:  They don't have that kind of obligations that we have.

4584             MR. FLAHERTY:  I think again you might be confusing a little bit.  Today Northwestel has that kind of subsidy.  As I said, we can go back to pre‑2000 and all of Northwestel ‑‑

4585             MR. RYAN:  Excuse me.  Did I misunderstand your previous evidence, Mr. Flaherty?


4586             I thought we agreed that the subsidy that you are currently receiving is proposed to go up 300 percent.  That was the premise of this line of questions.

4587             MR. FLAHERTY:  The explicit subsidy.

4588             MR. RYAN:   Yes, the explicit subsidy.

4589             MR. FLAHERTY:  As long as we are clear that it is explicit.  There is a whole implicit side to this, as well.

4590             MR. RYAN:  My very first question, Mr. Flaherty ‑‑ and I think you agreed with me quite clearly ‑‑ was that, under your proposal, you would receive considerably less of your income from payments from customers and interconnecting carriers, and would receive considerably more from an explicit subsidy.

4591             That is what we are talking about.

4592             MR. FLAHERTY:  Explicit subsidy.

4593             MR. RYAN:  Yes.

4594             If your proposal goes forward, would you be of the view that conditions would be ripe for the consideration of converting Northwestel, or part of its business, into some sort of income trust?

4595             MR. FLAHERTY:  No, I wouldn't agree with that.


4596             The big challenge that we have is our capital, which we were talking about earlier.  Income trusts, generally, are vehicles whereby ‑‑ the Capital Intensity Index that people in the industry talk about is probably in the neighbourhood of 15, 16 percent.

4597             Northwestel's Capital Intensity Index, given the wide geography we serve, is probably more in the mid‑twenties, or thereabouts.

4598             It is not something that suits well to an income trust.

4599             MR. RYAN:  Would you agree with me, if there was a change in that circumstance and you or your parent company decided that it would be appropriate to consider that sort of vehicle, that it would be a circumstance that would be a sufficient change, and of sufficient importance, that the Commission should consider reopening the question of how you are regulated, or, at least, the rate of return on equity implied by your rates that are approved by the Commission?

4600             MR. FLAHERTY:  If you are implying that if somehow we were amalgamated into, for example, the Aliant income trust, that would make sense, if we were going to go to one common set of regulations.

4601             If all that was taking place was that the company itself was being a separate independent trust, I am not so sure.  All you have done is changed the owner, you haven't changed the structure.


4602             MR. RYAN:  You wouldn't regard that as a change of sufficient importance to trigger a review by the Commission of the way it regulates the company?

4603             MR. FLAHERTY:  Not necessarily.

4604             MR. RYAN:  Let me ask you, then, have there been any discussions along the lines of creating such an income trust involving Northwestel?

4605             MR. FLAHERTY:  Are you talking, for example, with the Aliant trust?

4606             Is that what you are thinking?

4607             MR. RYAN:  I am talking in the most broad sense.

4608             MR. FLAHERTY:  We have had discussions on it, and we have come to the conclusion I just said.

4609             So, at this time, there are no plans to make it into an income trust.

4610             MR. RYAN:  I would ask you to go next to paragraph 72 of your evidence, please.

4611             This is a subject that you and I touched on, Mr. Walker, during my cross‑examination of you and your fellow members of the Marketing Panel, so I will direct the question, initially, to you.


4612             These are the proposed objectives going forward for the company in the manner in which it is regulated.

4613             At the second bullet ‑‑ and this is something that has been alluded to many times, not just during the cross‑examination of your panel, but in other testimony.

4614             The second objective is that the residents of the North should pay reasonably comparable prices to those elsewhere in Canada.

4615             Are you with me?

4616             MR. WALKER:  That's correct.

4617             MR. RYAN:  Mr. Walker, do you have a copy of the transcript of my cross‑examination of you on the first day of the proceeding available to you?

4618             MR. WALKER:  I haven't.

4619             MR. RYAN:  I have made some provision for that state of affairs.

4620             Do the commissioners have that available?

4621             THE CHAIRPERSON:  We do.

‑‑‑ Pause


4622             MR. RYAN:  I don't know if the pagination on those pages, gentlemen, matches the ultimate version of the transcript that might be available to you and your counsel, but I want to refer to line 1399 of the transcript which appears on the second page.

4623             But just to give some context, my question to you, Mr. Walker, began at line 1397, and we talked about the national contribution fund and you answered the particular question I posed to you.

4624             And then at line 1399 you said:

"Minister Bernier, not long ago I read a speech where he wants to see all Canadians have access to similar services at similar rates.  I think he mentioned that at the telecommunications forum in Ottawa not long ago.  That is what we are trying to put forward and we think we have that balance."  (As read)

4625             Now, I did obtain since then a copy of a transcript of a speech by Minister Bernier that took place in June in Toronto.

4626             Did you receive a copy of that through your counsel?

4627             MR. WALKER:  Yes.


4628             MR. RYAN:  Could you turn to ‑‑ and is this possibly the speech that you were referring to in response to my question to you on Monday?

4629             MR. WALKER:  Yes, it was.

4630             MR. RYAN:  Could we go to the third page, and I flagged the particular passage there from the Minister's speech.

4631             And just to read it for your benefit and the benefit of the record, the Minister said:

"In particular, for Canadians living in remote areas of the country where there is limited choice, our government will be there to ensure universal access to telecommunication services at  a reasonable price."  (As read)

4632             Are you with me?

4633             Now, is that possibly the remark by the Minister that you had in mind that you were recalling on Monday when you responded to my question?

4634             MR. WALKER:  Yes, it was.

4635             MR. RYAN:  Now, what you ‑‑ the way you represented what the Minister said, and I appreciate you didn't have a transcript in front of you and it was under the particular circumstances of a spontaneous exchange between us, but what you said was, the Minister said:


"All Canadians shall have access to similar services at similar rates."  (As read)

4636             Now, that particular construction of what the Minister said would, of course, be somewhat in line with what you said in paragraph 72 of your evidence.

4637             But what the Minister actually talked about was reasonable prices, not similar prices, and particularly not similar prices at similar ‑‑ sorry, similar services at similar rates.

4638             Would you agree with me that there's a distinct difference between what you recollected the Minister had said and what the document from the Toronto speech indicates he actually said?

4639             MR. WALKER:  There is a word difference, similar versus reasonable.

4640             When I was ‑‑ when I was saying similar, I am really referring to reasonably similar.  That's been our premise all along, that we've tried to develop rates that are reasonably similar for reasonably similar services as to those in southern Canada, other Canadians.


4641             MR. RYAN:  I understand that's your position before the Commission and that's what you told us in paragraph 72, but what the Minister said was reasonable prices.

4642             He didn't say similar prices, he didn't say reasonably similar prices, he didn't address the question of north/south differentials at all; did he?

4643             MR. WELLS:  Maybe I could just point out there's a paragraph 2 below this.  Just having seen this for the first time, we haven't had the opportunity to go through it, but it does say:

"Regulation of some form of government support will continue to be essential to ensure that these consumers and businesses have access to affordable world‑class communications infrastructure."  (As read)

4644             And I guess the question of what's affordable ‑‑

4645             MR. RYAN:  Yes.  Well ‑‑

4646             MR. WELLS:  And I would look at the southern market and say that the rates that are driven in a competitive market and delivered to services down there are a good benchmark for affordability.


4647             MR. RYAN:  Well, we're rather limited in what we can say in this proceeding about affordability because you haven't put any evidence about affordability forward.  I think that was established very early on, but thank you for that just the same.

4648             To come back to you, Mr. Walker, the question of similarity.  You'll agree with me that that's not a matter that the Commission ‑‑ the Minister addressed?

4649             MR. WELLS:  I think we're prepared to concede the point and to close on this item, counsel.

4650             MR. RYAN: Excuse me, I will ask Mr. Walker the question.

4651             MR. WALKER: Yes.

4652             MR. RYAN: Thank you.  I don't have any further questions then, Mr. Chairman.  Thank you, gentlemen.

4653             THE CHAIRPERSON: Thank you, Mr. Ryan.

4654             THE SECRETARY: Mr. Chairman, could I just number the exhibit that Telus provided us?

4655             THE CHAIRPERSON: I am sure that that will be regarded as important by many people.  Please go ahead.


4656             THE SECRETARY: Okay.  It is called Speaking Points from the Honourable Maxime Bernier, Minister of Industry Canada, for the 2006 Canadian Telecom Summit.  It is Exhibit Telus No. 6.

EXHIBIT TELUS‑6:  Speaking points from the Honourable Maxime Bernier, Minister of Industry Canada, for the 2006 Canadian Telecom Summit

4657             MR. RYAN: Thank you.

4658             THE CHAIRPERSON:  Now, Madam Secretary, you are going to invite colleagues to proceed with the staff and panel questions for the policy panel, am I correct?

4659             THE SECRETARY: Yes, Mr. Chairman.

4660             THE CHAIRPERSON: Thank you.

EXAMINATION / INTERROGATOIRE

4661             MS BENNETT:  Thank you.  I do have a question in relation to the operation of your proposed basket constraint for the residential access services basket.  So could I ask you first of all to turn to paragraph 96 of your evidence?  That is the paragraph where you have proposed to apply to that basket a constraint of inflation, I minus productivity X, when I minus X is greater than zero.  Do you have that?

4662             MR. FLAHERTY: Yes, I have that.


4663             MS BENNETT: Thank you.  Now, if you could turn to paragraph 121 of your evidence, which is where you have proposed that the productivity offset be set at zero.

4664             MR. FLAHERTY: That is correct.

4665             MS BENNETT: Okay.  So if I understand this correctly, under that proposal the company would be able to increase rates in that basket on average by the rate of inflation each year, that is correct?

4666             MR. FLAHERTY: That is correct.

4667             MS BENNETT: Okay.  Now, please refer to your response to interrogatory CRTC 2609.

4668             MR. FLAHERTY: I have it.

4669             MS. BENNETT: Okay, thank you.  Now, in Parts A and B of that response you are proposing that the productivity offset of zero be applied to the costs for the primary exchange residential services in the calculation of the subsidy?

4670             MR. ROBERTS: That is correct.

4671             MS BENNETT: And so that means that the company would be able to increase their primary exchange service costs by inflation every year as well?

4672             MR. ROBERTS: Or decrease by deflation I would suppose, yes.


4673             MS BENNETT: Okay.  So my understanding of this proposal is that because, for the residential primary exchange service, the costs are higher than the rates what this would mean is that with the application of the I minus X formula in calculating the subsidy the subsidy would go up every year.  Is that correct?

4674             MR. ROBERTS: That is correct.

4675             MS BENNETT: So as you are probably aware, in relation to the larger ILECs, the recent trend for the subsidy requirement has been for it to decrease.  Would you agree with that?

4676             MR. ROBERTS: Yes.

4677             MS BENNETT: So if we could just explore a couple of alternatives for reducing Northwestel's reliance on the National Contribution Fund over time one possibility would be to establish a basket constraint that allowed the flexibility to increase rates up to a fixed amount, say just as an example $2.00 a year, and then to apply that increase to the calculation of the subsidy requirement, whether or not the company actually took that increase.  Wouldn't that alternative bring Northwestel more into line with the broader trend towards reducing the reliance on the subsidy over time?


4678             MR. ROBERTS: I would suggest that costs where they are real and quantities where they are real, resulting in unit costs that are real, should not be I guess disregarded in the mechanism.  And at the same time, that market realities issues such as affordability, issues such as total bill be considered by the Commission as well.  So just an arbitrary requirement to have the dependence on subsidy reduced over time should not override other considerations.

4679             And in this regard I would note, particularly with regard to residential service, we had an undertaking yesterday to do a calculation of local service revenue on a residential basis per line.  And our proposed rates are, on average, 18 percent above the 2004 national average for local service.

4680             Now for purposes of comparison, we had to include the recurring, the optional and the non‑recurring because that was the nature of the comparative data source.

4681             THE CHAIRPERSON:  Was it non‑weighted national average?

4682             MR. ROBERTS:  It was just the national average per the CRTC report of October 2005.

4683             THE CHAIRPERSON:  And that reports a national average on a weighted or unweighted ‑‑ I know I should know this, Mr. Roberts.


4684             MR. ROBERTS:  Actually what we did was we took from two tables the ILEC revenue from local services and divided by the number of lines ‑‑

4685             THE CHAIRPERSON:  So it is weighted.

‑‑‑ Pause

4686             MS BENNETT:  And you will be providing those calculations?

4687             MR. ROBERTS:  Yes, with our other undertakings of today.

4688             MS BENNETT:  Okay.  Well as an other possibility then, what about capping local residential rates and the contribution requirement at going‑in levels?

4689             MR. ROBERTS:  Again, the potential for inflation to increase our costs in particular should be recognized.  The costs are real, they are not imaginary and they need to be reflected.

4690             MS BENNETT:  Just a moment, please, Mr. Chair.

‑‑‑ Pause

4691             MS BENNETT:  Thank you, those are all my questions.

4692             THE CHAIRPERSON:  No other staff questions?

4693             MS BENNETT:  No.

4694             THE CHAIRPERSON:  Thank you.


4695             Mr. Williams.

4696             COMMISSIONER WILLIAMS:  Thank you, Mr. Chair.  I just have a few questions.  I will try and work our way through.

4697             On day one Mr. Stewart of the NWT Chamber of Commerce expressed some of his frustration with the level of service compared to that enjoyed by southern Canadians.  Specifically he talked about the lack of BlackBerry service.

4698             Does Northwestel have plans to implement the necessary technological changes so that BlackBerry type service can work in the Northwestel territory, and if so, when and would it be at prices comparable to those enjoyed by users in the south?

4699             MR. FLAHERTY:  Northwestel doesn't really ‑‑ in terms of the existing technology that we deploy there is nothing that we need to do to allow that to occur.  So it is really a decision by the wireless providers as to whether they do that.


4700             In the contract that the Yukon Government issued they specifically requested that BlackBerry service or I should say data service, of which a BlackBerry is one form, be provided in the 17 communities in the Yukon.  So there is a contractual obligation for Latitude Wireless to provide that before the end of this year in those communities.

4701             I have seen a press release that Bell issued that suggested that data services would be available in Yellowknife and Whitehorse this year but again I don't have any further knowledge than that.  But I have seen a press release stating that.

4702             COMMISSIONER WILLIAMS:  Okay, thank you.

4703             Have any of your other customers been frustrated by the slower rate of technological improvements in the Northwestel market?  I guess I would be looking at the more remote parts of your marketplace as opposed to larger centres.

4704             MR. FLAHERTY:  There have been ‑‑ particularly in the Northwest Territories there have been a number of aboriginal communities or territories with largely aboriginal people living within it that have expressed concern about the lack of call management services, particularly call display.

4705             As you may or may not be aware, in those communities they have a fairly significant problem with abusive calling, people calling and saying inappropriate things to other people, threats and things of that nature.  This was a similar problem in the eastern Arctic.


4706             In our service improvement program in 2000 we proposed to provide call management services to all of the operating territory.  The Commission, justifiably so, looked at the cost of doing that.  We subsequently came back a second time and the Commission expanded the program a little bit.

4707             In the end though there are still a number of communities in the Northwest Territories that do not have access to call display.  So that would be one area that I am sure if we talked to some folks in the small remote communities in the Northwest Territories in particular that would be an issue they would raise.

4708             COMMISSIONER WILLIAMS:  Mr. Flaherty, why would you think some northerners, particularly in the smaller communities, have found it necessary to pressure governments to invest in alternative or duplicate infrastructure and particularly in the NWT and Nunavut, as you have described through the BRAND initiative.

4709             Why have they felt it necessary to spend some of their political capital on that type of request?


4710             MR. FLAHERTY:  Basically in those communities they were looking for access to broadband networks.

4711             We have broadband into those communities, but more for the governments.  So in 1997 we put a frame relay network I spoke of earlier into many of the communities in the Northwest Territories and in Nunavut.  The technology at the time, the technology even today, to put high‑speed internet into those same communities is expensive relative to the community.  So it is actually not ‑‑ there is no business case to do it.  So it was going to take some form of subsidy to do it and essentially that was the brand component of the program.

4712             The piece that I think causes us the bigger concern ‑‑ that is a concern because we are even duplicating network there, but the bigger concern is the transport network, where national satellite infrastructure funding has been used.

4713             As I said, in the Northwest Territories is a very good example.  We put a new digital microwave system right up the MacKenzie Valley and that network is being totally bypassed by the National Satellite Initiative funding.


4714             So I think I understand very clearly the request, the request was:  We would like to have high‑speed internet.  I understand the need to subsidize that, but what I am uncomfortable with ‑‑ and I think is causing us collectively with the problem ‑‑ is now we have duplicate transport infrastructure into uneconomic communities.

4715             COMMISSIONER WILLIAMS:  And your infrastructure is capable of high‑speed broadband deployment as well?

4716             MR. FLAHERTY:  That's correct.

4717             COMMISSIONER WILLIAMS:  In all of those communities?

4718             MR. FLAHERTY:  Well, we would have to ‑‑ just like our competitor, we would have had to add equipment into the community, but the transport facilities were capable of providing the transport component of it.

4719             COMMISSIONER WILLIAMS:  Does Northwestel believe that due to the remote nature of the North that state‑of‑the‑art communication networks are critical to improve quality of life in the North?  And is broadband access perhaps even more important to northerners than Canadians living in some of the larger centres in Canada?

4720             I'm just interested in your company's opinions in that area.


4721             MR. FLAHERTY:  I would agree with both.

4722             If you think about the health network for example ‑‑ let's pick the Nunavut Territory, that is the one I'm most familiar with ‑‑ in Nunavut Territory there are 26 communities in all of Nunavut.  There is one hospital in Iqaluit.  So we have implemented a videoconferencing platform that connects every nursing station in every community in Nunavut to the hospital.

4723             So what is happening now is the Nunavut government is able to avoid sending patients to Iqaluit to the hospital.  In other cases, where it wouldn't have been deemed appropriate to transport them, people are now getting health care where they wouldn't have gotten any health care before.

4724             So I think that is a real concrete example of how technology has made a difference in those communities.

4725             In terms of broadband, there are opportunities for local entrepreneurs to start to sell their products.  I know in Pangnirtung for example some of the artwork that is being developed there is being offered for sale in London, England, in New York, and I'm sure that internet broadband technology is helping to do that.


4726             So I would agree with you.

4727             COMMISSIONER WILLIAMS:  Moving for a minute to the RFP from the Yukon government, you mentioned earlier today that free long distance Yukon‑wide was a feature as a part of this request.  How does the existing CAT rate affect companies ‑‑ how does it affect Northwestel and how does it affect companies other than Northwestel ‑‑ in providing this part of the RFP?

4728             MR. FLAHERTY:  Actually, the CAT rate is bundled into the wireless service provider tariff that we spoke of today, so to the degree that that tariff has changed, that is where the change occurs.  So we actually have bundled it all into ‑‑

4729             COMMISSIONER WILLIAMS:  So it's a level playing field then.  I guess that's what I'm getting at.

4730             MR. FLAHERTY:  That's right.

4731             COMMISSIONER WILLIAMS:  Thank you.

4732             MR. FLAHERTY:  Any wireless provider would have to apply for that same tariff to get access to the local switch.

4733             COMMISSIONER WILLIAMS:  All right.


4734             Staying with the CAT rate just for one question longer, would you agree that the current CAT rate imposed on the company by the CRTC in 2000‑746 has proven to be somewhat of a barrier to competition?

4735             MR. FLAHERTY:  It's perhaps a barrier to facilities‑based competition.  As I have said several times ‑‑

4736             COMMISSIONER WILLIAMS:  The resale.

4737             MR. FLAHERTY:  ‑‑ the fact that we have lost 32 percent market share suggests that it's not a barrier to competition, but I would suggest it is a barrier to facilities‑based competition.

4738             I think as the Commission has recognized in some of its decisions, the form of competition that is occurring in northern Canada is different from the south, but appropriate.

4739             I think with that caveat, it is really facilities‑based competition that it has probably been more of a barrier to than competition in total.

4740             COMMISSIONER WILLIAMS:  Okay.  Let's talk about competition now.

4741             What is your best estimate of the percentage of total revenue available from your territory that Northwestel currently loses to competition?


4742             Do you have an idea of the total market size and what percentage the competitor share is, in broad terms?  An estimate is fine.

4743             MR. FLAHERTY:  To be perfectly honest, I would be simply guessing to say.

4744             I can talk to you a little bit more about the types of competition.

4745             If you look at it on a service basis, there is LD competition available.  There is internet‑based competition available.  There is PBX competition, PBX terminal equipment.  There is data services competition available.

4746             If you look at it on a technology basis, we have cellular.  We have broadband wireless.

4747             The Commissioner was asking about Inukshuk and we can talk about that a little bit later.

4748             We have cable.  We have voice over IP.  We have satellite.

4749             I think you highlighted, for example, the diamond mines where people are just bypassing.


4750             From a competitor's point of view, we have, as we talked about before, Bell Cellular.  We have Telus, New North Networks.  We have Ice Wireless, WHTV, SSI Micro, Quiniq, Falcon Communications, Skype, Primus, Vonage, RAMTel satellite provider, C‑COM satellite provider.  Barrett also is reselling the KA service that Telesat has as well.

4751             And then we have the PBX suppliers, which it would be quite a long list.

4752             So there is quite a broad range of competitive options and a broad range of suppliers, depending on the individual technology.

4753             COMMISSIONER WILLIAMS:  And you don't have an inkling for the percentage of revenue that they might be taking out of the marketplace today.

4754             MR. FLAHERTY:  No.  Unfortunately, I don't.

4755             COMMISSIONER WILLIAMS:  Would you say it was a large amount or a small amount compared to the total marketplace?

‑‑‑ Pause

4756             MR. FLAHERTY:  Mr. Roberts is reminding me that on toll alone, it is 32 percent market share on the toll market.  And Mr. Hamelin was talking about what percentage toll has been of our ‑‑ like if you go back three years, four years, what would toll have been?

4757             Would it have been 40 percent of our revenue base?

4758             MR HAMELIN:  It is about a third today, at $43 million.


4759             I say toll, CAT and settlement.  Of course, settlements did increase significantly from a decade ago to where we are today simply because of the new regime we got into in 2001.  We collapsed our toll rates.

4760             We used to be 80 percent dependent on toll rates.  Effectively, Northwestel, when I first came in in 1993, I viewed it essentially as a toll carrier more than a local carrier simply because of the revenue base.

4761             And you can see that in our annual report.  There is a neat little graph there that shows how the mix dramatically changed.  As soon as 2001 came in, you can see the big spike from toll dropping, and today local is roughly the same.

4762             You know, settlements grew exponentially.  When I think of those prepaid cards, when we lose a minute we do get the settlement correspondingly.  So financially, it is not as much of a burden in that sense because of the mechanism that was provided by the Commission.

4763             MR. ROBERTS:  I would add that that is under our current framework as opposed to our proposal.

4764             MR. HAMELIN:  Yes, that's right.


4765             COMMISSIONER WILLIAMS:  Thank you.  That has helped me understand the nature and extent of your competition in your territory a bit more.

4766             If a reduced amount was provided from the National Contribution Fund, as some are suggesting, what would be the effect on your pricing structure, level of service, return to your shareholders on a going forward basis?

4767             I guess what I am looking for is:  How important is this amount from the National Contribution Fund for both your company and your customers?

4768             MR. FLAHERTY:  I think the key piece that we are looking at in the proposal is sustainability.  I mentioned this through the VoIP proceeding that was held in Ottawa, that as technology is evolving to IP‑based, today we have a per‑minute mechanism, largely on the CAT, for example.  If we don't address that, we are simply going to see money sifted away from contributing to the underlying infrastructure.  So, in the long term, how will the infrastructure actually be supported?


4769             If I take an absolute worst case example where every toll minute today became a VoIP minute, we would essentially wipe out all of that toll revenue and its contribution to local networks today.

4770             That is not sustainable in the long term.

4771             And that is ‑‑ 100 percent is probably not a realistic number, but it is a significant percentage, particularly if groups like Skype ‑‑ who knows what they will do beyond the end of the year, but if they continue to offer free long distance service, many people will be incented to bypass this network.

4772             As I said during the VoIP proceeding, one of the significant challenges that we are trying to overcome is:  How do we make up for that lost contribution?  Is there a way of, shall we say, having VoIP providers pay for it?

4773             We couldn't come up with an easy mechanism to do that, so what we have put forward is what we think is the best solution ‑‑ try and take away the arbitrage opportunity so that people aren't incented to go and do that kind of bypass, so that they can continue to contribute to the underlying infrastructure that is needed to support the services in the North.

4774             COMMISSIONER WILLIAMS:  My last area of questioning is on the people who work for you.


4775             What percentage of your employees are what one might call lifetime northerners?

‑‑‑ Pause

4776             COMMISSIONER WILLIAMS:  I will keep going.

4777             Other than Ms Chalifoux and Mr. Walker, have you recruited long‑term northerners for your senior management team?

4778             MR. FLAHERTY:  That is something we are working through.

4779             Mr. Wells, while maybe he wasn't born in the Yukon, I think he would view himself as long term.  He has been here for 30 years.

4780             COMMISSIONER WILLIAMS:  Yes, I was going to say that Mr. Wells and Mr. Hamelin are certainly, I guess, sourdoughs, in your local vernacular.

‑‑‑ Laughter / Rires

4781             MR. FLAHERTY:  One of the things that we are trying, to sort of come around to your question, is that we have developed a scholarship program to specifically try and attract more youth from northern Canada.


4782             We are now offering ten scholarships across the North, four of which are aimed at the aboriginal community in particular.

4783             We also understand that, as the North is evolving, aboriginal people are playing a much more important role.

4784             I think that Mr. Rondeau talked about four levels of government.  To some in the South that may be a bit foreign, but the aboriginal governments are equal governments to the territorial government, and both sides see it that way.

4785             So the aboriginal people are playing a very important role, and our goal is to try and recruit a lot more of those people as we go forward.

4786             We attend job fairs throughout the North, and try to educate people more.  Hopefully, we will catch some of their interest.

4787             We also look at scholarships to support them.


4788             Mr. Walker is involved in an initiative in Inuvik which is called YELS ‑‑ Youth Employment Learning Skills.  It is something that, initially, the oil and gas industry started in that area.  It is really aimed at helping youth, some of whom may not be able to go on to higher levels of education, find ways to train and get skills, and hopefully be able to support us in our needs as we go forward.

4789             COMMISSIONER WILLIAMS:  Are there lifelong residents of Nunavut, or even the NWT, employed in the senior management of Northwestel, given the percentage of revenue that comes from that area?

4790             MR. FLAHERTY:  I don't have the exact demographics, unfortunately, but we definitely have people within there.  Our goal is to have more and more people come up through the senior ranks as time progresses.

4791             I know that we have people ‑‑ in Iqaluit, for example, the gal who runs our Call Centre is Inuit, and she is from the Iqaluit area.  She brings a lot of knowledge.  She actually acts as our company spokesperson with the local media there.

4792             As Mr. Walker indicated, in Iqaluit we offer Call Centre services in Inuktitut.  She speaks fluent Inuktitut, as well, so she is very capable.


4793             We were audited by the federal government.  As you would know, obviously, we are regulated not just in the sense of telecom by the federal government, but also in many other areas, and we recently had an audit around employment equity, and we have put a very detailed plan in place on how we will continue to enhance the presence of northerners, particularly aboriginal northerners, in our business as we go forward.

4794             COMMISSIONER WILLIAMS:  In Nunavut, specifically, are there special challenges to recruiting people?

4795             You mentioned several times that you are, you know, providing business services in Inuktitut, and so I would imagine you would need, you know, many people that could speak that language.

4796             Are there any special or unique challenges to finding and recruiting these people?

4797             MR. FLAHERTY:  There are challenges in Nunavut.  We're competing with the government there, as Mr. Rondeau indicated here, in the Yukon.

4798             Unfortunately the territorial government there probably only has a 60 percent fill rate, in other words a 40 percent vacancy rate, so there's lots of demand for people within the community.

4799             Of course the government there being ‑‑ originating from an Aboriginal government, their goal is to attract Aboriginal youth as well.  So, definitely there is lots of, shall we say, competition for skills in that area.

4800             COMMISSIONER WILLIAMS:  Mr. Walker, did you have something you wished to add?


4801             MR. WALKER:  I was just going to ‑‑ I could add one other point.

4802             Recently we have hired a long‑term northerner into a position we call Director of Aboriginal Relations and the whole reason for having that person in that position is to help us understand the communities and look for and be able to hire more northern folks into the positions that we have.

4803             This person brings a fair bit of expertise in that area, knows the north extremely well from their travelling throughout the communities in the north.

4804             MR. FLAHERTY:  While we're on that topic of sort of Aboriginal people and the importance that they play, you just triggered a thought relative back to the Yukon Government RFP.

4805             For that cellular service project, one of the requirements as well was partnership of Aboriginal peoples and, in fact, Latitude Wireless is 30 percent owned by the Dakwakada Development Corporation which is part of the Champagne Aishihik First Nation.

4806             So, again, that's the different environment that we're finding ourselves in in northern Canada.


4807             These type of business ventures are very much starting to involve more of the Aboriginal peoples and likewise we, as a company, are looking to recruit more of these individuals as well.

4808             COMMISSIONER WILLIAMS:  Thank you very much, Mr. Flaherty, panel.

4809             Those are my questions in this area, Mr. Chair.

4810             THE CHAIRPERSON:  Thank you, Commissioner Williams.

4811             Commissioner del Val.

‑‑‑ Pause

4812             THE CHAIRPERSON:  Just for the sake of folks who may be planning their schedules, probably what we will try to do is wind up this panel in the next 15 minutes to half an hour and we will have an appropriate set‑back for the moment at which we re‑convene.

4813             COMMISSIONER del VAL:  Thank you.

4814             Mr. Hamelin, I think this morning when you were responding to Mr. Rondeau's questions you mentioned a modified split rate base for Northwestel.


4815             I'm just wondering, at this point in time do you have any thoughts on what specific modifications you would make to a split rate base regime, if that were to be considered a temporary measure or...

4816             MR. HAMELIN:  Certainly not to the detail that we've gone into our proposal after giving it much thought for price caps.

4817             We did think a little bit.  There was an interrogatory in fact to that effect and we decided that, you know, there was no point in going through a lengthy process, a lengthy...

4818             So, I just mentioned that it seemed to me that whether we go price caps or rate base ‑‑ a split rate base, in either case it would be a modified rate base.

4819             And even now today the rate of return is a modified rate of return unique to Northwestel with all the caveats and rules and regulations that go into it, things like the deferral account for, you know, toll CAT and so on.

4820             It goes on and on.  I mean, it's just the nature of the market is so unique, you know, we're asking comparable rates, comparable services in a market that is just impossible, so...

4821             COMMISSIONER del VAL:  I just wanted to make sure that you had nothing to add ‑‑

4822             MR. HAMELIN:  No.


4823             COMMISSIONER del VAL:  ‑‑ beyond what has been provided in the interrogatories?

4824             MR. HAMELIN:  No, I don't.

4825             MR. FLAHERTY:  Maybe just a quick comment.

4826             One thing that I think we would have to look at carefully is the definitions that are used in the southern model.  For example, the terms utility and competitive segments were defined.

4827             As Mr. Hamelin was indicating earlier, the notion of competitive facilities in our territory could be very different than that in the southern territory and even within the territory could be very different.

4828             In other words, you might have something that might be considered competitive in Whitehorse but not competitive in 80 percent of our communities.

4829             So, I think we would just caution that we'd have to look carefully and stay away from just terminology that's used in the south and say what's appropriate to be in a utility segment or a competitive segment.

4830             COMMISSIONER del VAL:  Thank you.  Just one more unrelated question.


4831             In Whitehorse I know that you said equal access is available and there is an equal access provider.  Who is it?  Can you tell us that or..?

4832             MR. FLAHERTY: I would think we should probably avoid making it public.

4833             COMMISSIONER del VAL: Oh, sorry.

4834             MR. FLAHERTY: We can give it privately if you like, and there are in fact two.

4835             COMMISSIONER del VAL: Okay, thank you.

4836             MR. FLAHERTY: Would you like us to give it to you privately or..?

4837             THE CHAIRPERSON: I don't think it is essential.  It was a matter of curiosity?

4838             COMMISSIONER del VAL: Yes, but there is at least one?

4839             MR. ROBERTS: There are in fact two and they are both ‑‑

4840             COMMISSIONER del VAL: Okay, great.

4841             MR. ROBERTS: ‑‑ on the record.

4842             COMMISSIONER del VAL: Yes, thank you.  Thank you, those are my questions.  Mr. Chair, thank you.

4843             THE CHAIRPERSON: Thank you, Commissioner del Val.


4844             Commissioner Cram.

4845             COMMISSIONER CRAM: And don't hold out for 15 minutes, because it might be longer, Mr. Chair.

4846             I do want to be very clear with you that when I ask questions a lot of is just to explore the issues and it doesn't necessarily reflect my position on things at all.

4847             This concept of reasonably comparable is interesting to me because in the south ‑‑ and section 70 even talks about reliance on market factors ‑‑ in the south we are going to cost‑based.  I mean, we go closer and closer to cost‑based.  But reasonably comparable, I don't know where we are justified in saying that or requiring that in the legislation.

4848             Are you going to go back to affordability, Mr. Roberts?  Is that what you are going to do?


4849             MR. ROBERTS: No, I was going to I guess suggest that you are correct, in that the legislation provides for reasonable.  And the consideration of a number of factors, I mean there is affordability, there is also economic and social development embodied in the Act.  So there is a number of factors that have to be weighed and, you know, I would suggest that having a view to southern rates is an important factor as well.

4850             COMMISSIONER CRAM: And I guess I found it interesting that you have been talking a lot about affordability and, it has been noted by other people, you haven't done any work on it.  And I was particularly taken, Mr. Flaherty, when you said that the Yukon includes a certain amount in their social assistance for people to get a phone.  And yet at the same time Mr. Rondeau says that social assistance has not increased in the last 15 years.  What happened with the big rebalancing in the late 1990s?  Did the Yukon increase their assistance rates?

4851             MR. FLAHERTY: If I recall from the proceeding that we had in 2000, in fact, the social assistance payments specifically had a line in there for the then rate, the $29.33.  So I can't comment on how that has changed since the year 2001, but in that year.  So it had been obviously modified up until that point in time and whether the government would modify it again, I can't answer that.

4852             COMMISSIONER CRAM: You haven't looked into that?

4853             MR. FLAHERTY: No, I haven't asked that question.


4854             COMMISSIONER CRAM: Nor have you looked into the situation in the NWT or in any of your other territories?

4855             MR. FLAHERTY: No.

4856             COMMISSIONER CRAM: You then talked about, with Mr. Rondeau, about other affordability issues and you talked about the BMTs.  How are people informed about that?

4857             MR. FLAHERTY: You are referring to Bill Management Tools?

4858             COMMISSIONER CRAM: Yes BMTs, yes Bill Management Tools, sorry.

4859             MR. FLAHERTY: Again, subject to check, I don't know if Mr. Walker remembers but I believe periodically we do put bill inserts in our bills and provide that information.  I just don't know the frequency with which we do it.

4860             When people call in and express concerns the call centre representatives are empowered to implement those measures on the phone.


4861             COMMISSIONER CRAM: And when you say you are unaware, and it seems the whole panel is unaware of any complaints about affordability, it appears that that issue didn't even cross your radar screen when you were preparing for this.  I mean, you knew affordability was an issue, but you have not even looked into whether there are concerns with your CSRs?

4862             MR. FLAHERTY: Well, I think the term was asked do we have complaints and I receive the copies of complaints and I have not received any.  Ms Chalifoux did say that though that in exit surveys of customers I think it was 20 in 2005 that cited a reason for their disconnection was affordability.

4863             COMMISSIONER CRAM:  Yes.  And you don't mind saying here to Mr. Rondeau that anybody he hears of who is complaining, Mr. Rondeau can give your office number and you will resolve it?

4864             MR. FLAHERTY:  When you say resolve it, I will apply the bill management tools ‑‑

4865             COMMISSIONER CRAM:  To the best of your ability, yes.

4866             MR. FLAHERTY:  ‑‑ that are available to us.  Yes.

4867             COMMISSIONER CRAM:  And you will give Mr. Rondeau your phone number, your direct line?

4868             MR. FLAHERTY:  I can do that.


4869             COMMISSIONER CRAM:  And I guess I am fascinated that when we are talking about residential prices you have not taken the proactive stance that many in the south do of meeting with the UCG every once in a while, say every three months.

4870             MR. FLAHERTY:  Well, I can't comment on every three months but Mr. Hamelin has met with Mr. Rondeau probably at least twice a year ‑‑

4871             COMMISSIONER CRAM:  Okay.

4872             MR. FLAHERTY:  ‑‑ for the last several years.  So we do do that actually.

4873             COMMISSIONER CRAM:  Great, that is excellent, because it seems to me in a lot of ways you can avert a lot of problems.

4874             Now I confess, as the Chair has mentioned before, to some lack of confidence in your numbers.  It seems you don't really know the actual costs of all the services except for one, the productivity numbers are less than a hundred percent and so you have given yourselves two escape clauses.

4875             One is the exogenous factor, the northern exogenous factor ‑‑ and I don't remember the wording.  I am willing to think about it but I am having a problem with a floodgate issue.  You will recall in the oil sands last week, two weeks ago, Shell announced that their costs had gone up by a factor of 50 percent.


4876             So if we gave you that exception on the exogenous side, how do we then not say to Telus, you can't do it when they have got that kind of inflationary overruns which obviously would mean that their costs in Fort McMurray and Grande Prairie would also go up the same amount?

4877             MR. FLAHERTY:  I think maybe scale has a lot to do with it, relative magnitude.  So you have Telus operating within all of Alberta and clearly, Fort McMurray, as we would all read in the papers, is quite a hotbed of activity.  Telus also operates nationally in terms of the services that they provide across the country.

4878             Northwestel ‑‑ I was looking curiously at some of the information on the SILECs.  All of the population that we have is smaller than Thunder Bay Tel.  All of Thunder Bay Tel's population is in 384 square kilometres.  We are in 3.9 million square kilometres.

4879             So I would argue that we are in a different situation, that the impact of that on a small operation like us is much different than the impact of Fort McMurray on Telus.


4880             COMMISSIONER CRAM:  Okay, give me a number.  I mean we have got Whistler coming up.  The Olympics in Montreal, you couldn't find a workman for love nor money.  I mean you have to give me something so there isn't a floodgate.  Material is not going to work for me.  It has got to be an impact that will not open the doors.  You can think about it.

4881             MR. FLAHERTY:  Yes.

4882             COMMISSIONER CRAM:  I am only saying that because if I ‑‑ and it is not that I don't like Telus, Mr. Grieve, but I just don't see how we can change ‑‑ how we can add something here without there being impacts down the line and Telus comes to mind because of both Whistler and the oil sands.

4883             Your second escape route is CRTC‑107.  I look at that ‑‑ have you got that ‑‑ particularly at item (c) where:

"...costing data in support of cost‑based subsidies is demonstrated to be materially inaccurate."  (As read)

4884             Well, you don't know what it is anyway, so you can come back to us anytime.

4885             And second, material change in circumstances.  What is material?


4886             Third, in the judgment of the company the framework proves flawed to the point where the company is denied a reasonable opportunity to earn a fair return.  This is clearly I guess in your eyes.

4887             So my question is:  If your ROE is under 10 percent, when would a review not be triggered?

‑‑‑ Pause

4888             MR. FLAHERTY:  I think what we are suggesting here is that we are not suggesting to be isolated from competitive impacts, we are suggesting to be isolated from input costs shall we say.

4889             The MacKenzie Valley Pipeline for example, they are talking about adding something like 7,000 to 10,000 people to build that pipeline.  That is almost 10 percent of the population of northern Canada.  While I understand that Fort McMurray is growing, I'm not sure that it's 10 percent of Alberta ‑‑

4890             COMMISSIONER CRAM:  Yes, but isn't that your exogenous factor?

4891             MR. FLAHERTY:  Sorry, yes.

4892             COMMISSIONER CRAM:  I'm talking about review now.

4893             MR. FLAHERTY:  All right.

4894             COMMISSIONER CRAM:  And I'm saying when, what circumstances would happen when your ROE was under 10 percent that would not trigger a review?


4895             MR. ROBERTS:  I guess, first of all, I don't know that we would be focusing on ROE.  It's more of our ability to continue to provide for I guess a balanced satisfaction of the regulatory bargain.  So reasonable return.

4896             COMMISSIONER CRAM:  Well, that would only really happen when your ROE goes down.  Right?  Because you are talking about financial sustainability and so that would only happen when your ROE went down.

4897             MR. ROBERTS:  An example that might trigger it is if in fact we did lose 95 percent of lines in a number of small communities where BRAND and NSI have gone in with a government‑funded network and we are left holding the bag.

4898             As you can imagine, that would be a pre ‑‑ it would have an extreme impact on the bottom line.

4899             I guess I would suggest that if we go back to history and the way ROE regulation has worked for other companies there was judgment exercised in the relative merits of going forward with a review of the basis rates, a Part 3 application for a general increase in rates.


4900             The companies were aware that there is a high standard to be met.  They have to determine that they can justify internally the resources that are going to meet that high standard, so that is going to limit the likelihood of it happening on a marginal basis.  Again, the Commission holds a high standard as well.  So you have to look at the unique circumstances.

4901             COMMISSIONER CRAM:  Mr. Roberts, this is very interesting but I'm a numbers person.  I need something to hang my hat on and I have to say 107 doesn't help me one bit.

4902             So you have to provide me a basis for us saying there should be a review after two years based on the answer to my question:  If your ROE is under 10 percent when would a review not be triggered?  Give me something where I can say the world has blown up on you or this is just a normal business risk under price cap.

4903             Because price cap means you are free to fill your boots, as previous Vice‑Chair Colville used to say, but you are also assuming the risks.

4904             So what confidence level do we then say this is an extraordinary risk and one that Northwestel surely should be entitled to a review?

4905             MR. ROBERTS:  Well, again I think that it requires an assessment of all the circumstances.  We will certainly exercise discretion for our part in determining ‑‑


4906             COMMISSIONER CRAM:  Give me a materiality.  Give me a percentage materiality.  That's what I want you to think about basically.

4907             MR. FLAHERTY:  But I don't think ‑‑ like you talked about under 10 percent, but then you said "under what conditions".

4908             COMMISSIONER CRAM:  Yes.

4909             MR. FLAHERTY:  That' not a number.  I think we would have to talk about the kinds of reasons why that would occur more than a number.

4910             COMMISSIONER CRAM:  Why it would not occur.  Why it would not trigger a review.

4911             MR. FLAHERTY:  Why it would not occur, sure.

4912             COMMISSIONER CRAM:  Yes.

4913             MR. FLAHERTY:  So I don't know how we would mathematically say, you know, "Under 10 percent it wouldn't happen if this percent" ‑‑ you see what I'm getting at?

4914             COMMISSIONER CRAM:  Yes.

4915             MR. FLAHERTY:  It has to be a bit more qualitative.

4916             At the end of the day it's an application.  The Commission still has all the discretion in the world to say "We don't agree with the application".


4917             COMMISSIONER CRAM:  Yes.

4918             MR. FLAHERTY:  Can I just go back?  You implied for some reason that we haven't given you the costs.

4919             In the Res PES studies we have given many details of costs.  We have actually gone through four rounds of interrogatories.

4920             COMMISSIONER CRAM:  And I will quote what you said to Mr. Ryan.  You have to be careful with me because I take notes the whole time.

4921             You said to Mr. Ryan in the last panel ‑‑ it was right at the end of his last question to you where there was the issue of compensatory and non‑compensatory.

4922             I think it was...

4923             I can get back to you on that and we can go over that again once we get the transcript, if you want.

4924             MR. FLAHERTY:  I think from your perspective, clearly on the productivity piece we stand by the numbers we provided.  But as the Chairman pointed out, there is not a sufficient number of them.  He would like to see more data points there.


4925             COMMISSIONER CRAM:  And on the costing we have two data points.  One could be a trough; one could be a spike.

4926             MR. FLAHERTY:  That is for the productivity calculation.  That is what I was just referring to.

4927             COMMISSIONER CRAM:  That was the costing.

4928             MR HAMELIN:  Just on that point, though, a trough or a spike, the thing is having I think eight years delta between them, that softens the impact of any spike or trough ‑‑ not totally, but it does soften it significantly compared to one year to the next.

4929             If you had only two data points split just one year apart, then the uncertainty would be much larger.

4930             COMMISSIONER CRAM:  Yes.

4931             The last point of Mr. Ryan yesterday was you did one cost study and no more to demonstrate whether prices were compensatory or not.  And the answer was yes.

4932             I am looking at this and I am suggesting to you that there may be less than 100 percent comfort with these items.


4933             You have two escape hatches, and there are no escape hatches on the other side.  You are saying that the glass is 50 percent empty and I am saying with price cap, given our previous experience, that the glass is 50 percent full.

4934             My reaction is there should be some transition to give us both, or maybe me, a better, higher comfort level.

4935             I am looking at split rate base, which you say would be difficult to implement.  I am looking at maybe structural separation, which is what I think ‑‑ not others on this panel ‑‑ that the Yukon government proposed in its third‑last bullet:

"the development of a common telecommunications infrastructure which is most efficiently and effectively accomplished through a co‑operative approach."

4936             Or, alternatively, I am looking at splitting the risk.

4937             I am going to put to you, during the first modified price cap how would you feel if the Commission ordered that 50 percent of the increase in ROE above 10.5 percent achieved each and every year would be rebated to residential consumers?


4938             MR. FLAHERTY:  I guess I would ask the question:  Why don't we just stay with the framework we have today?

4939             If we are going to do all of that, why don't we just stay with rate of return?  You have the cap that you have talked about; 11 percent is what the cap is today.

4940             Rather than trying to give the illusion of being in price caps with all these caveats all around it, wouldn't it be simpler just to say let's continue with what we have?

4941             COMMISSIONER CRAM:  But, you see, you are still free to make money and to assume the risk, in the sense that you would only be getting 15 percent of the increased ROE that you would achieve.  But it would be a transition for you to next time.

4942             Then we can figure out what your productivity is based on real data points and we may have had a better idea of costing, so we can bring rates closer to cost.

4943             But at the same time you want escape rates, you know, escape doors, and we are giving an escape door to the other side.


4944             MR. FLAHERTY:  Well the escape door, it seems to me that if we were to earn above ‑‑ I think you used the number 10.5, we would rebate it to the customers.  That's an absolute.  So if we are going to do that, shouldn't we if we go below 10 then, it would be an absolute.

4945             Like shouldn't it be symmetrical?

4946             What we are proposing is an application ‑‑

4947             COMMISSIONER CRAM:  Well, don't you think the two escapes are equal?

4948             MR. FLAHERTY:  No, because this is an application, there is no certainty to anything in what we said.

4949             You would have to listen to our arguments and decide.  All I am saying is, if you want to make it certain on one side, can't we make it symmetrical?

4950             But what I come back to is, if, at the end of the day, people feel that what we have today is more of those safeguards, I am not opposed to that.

4951             The proceeding is about looking at the transition or the possibility of moving the price caps, and we have made a proposal to that effect.

4952             Likewise, the company is not so rigid as to say, okay, if it is judged that we should stay where we are with rate of return regulation, we wouldn't be opposed to that either.


4953             COMMISSIONER CRAM:  The issue of the government‑subsidized competition ‑‑ I forget the term you used.  Again it is sort of glass half empty/half full, in my mind.

4954             Number one, you said that they were applying for a subsidy, some of these various organizations.

4955             MR. FLAHERTY:  Just to be clear, as part of the BRAND initiative they were given national satellite infrastructure funding.

4956             Essentially, they were given capacity for free.  The government itself put a dollar amount to it.

4957             So they have transport capacity, over satellite, out of these communities for no cost.

4958             COMMISSIONER CRAM:  In perpetuity?

4959             MR. FLAHERTY:  I think the contracts they had to sign were for 10 years, and the government has been silent on what happens after the 10 years.

4960             I think the reason for the 10 years is that satellite lives, generally, around 10 to 12 years.

4961             That is a good question, what happens at the end of 10 years?


4962             COMMISSIONER CRAM:  So there is an opportunity that some of them may go bankrupt, and you could get that infrastructure.

4963             MR. FLAHERTY:  I don't need that infrastructure, it is duplicate infrastructure.

4964             COMMISSIONER CRAM:  The access to the home isn't.

4965             MR. FLAHERTY:  The access to the home isn't.  It is a broadband wireless infrastructure.

4966             But I guess, at the end of the day, who owns that infrastructure?  Who is going to give it to me?

4967             Do you know what I mean?

4968             It is for neither you nor I to say that someone is going to hand it to me.

4969             But the transport infrastructure ‑‑ on the ground, on the earth stations ‑‑ I think we have a picture in the attachment to my opening statement of Pangnirtung, so you will see the dish and you will see the building.  All that has been duplicated in every one of those communities.

4970             In some communities we have microwave facilities that go in there, which are less costly, if you actually had to pay for them, than satellite, but because there is this so‑called "free" NSI bandwidth, they use that instead.


4971             COMMISSIONER CRAM:  What about resale?  You could sell your phone and resell their internet.

4972             That is a business opportunity, because then you would be able to own the customer, wouldn't you, in these communities?

4973             MR. FLAHERTY:  Yes.

4974             But I guess the dilemma we are faced with is that we have duplicate infrastructure.  We have extra costs that have been injected into the system.

4975             Resale ‑‑ for sure I could offer the resale of their product or service.

4976             COMMISSIONER CRAM:  Yes, and you would keep the customer.

4977             MR. FLAHERTY:  Right.

4978             MR. ROBERTS:  In addition, the high‑speed infrastructure could be leveraged to replace the need for the phone line, so we wouldn't in fact retain the phone revenues on our network.

4979             Our network would be left with no revenue on it at all, and all of the costs.

4980             COMMISSIONER CRAM:  But your issue was to keep the usage up of the legacy.


4981             MR. ROBERTS:  That's it.  By reselling the high speed on that side, we might get a small resale margin, but there would be no use of our network.

4982             Customers, once they have a high‑speed connection, can go to anybody for their LD, for instance.

4983             COMMISSIONER CRAM:  How would you propose we deal with contribution?

4984             Contribution in the South is on a per‑sub basis, so NSI ‑‑ I don't know the names of the people there.

4985             Let's say that NSI is the person who got the contract in Iqaluit, and they are there, and they get the subs.  Down South, they would get the contribution subsidy for those subs.

4986             MR. FLAHERTY:  I think we would have to first understand.  I don't think ‑‑ and I could be wrong ‑‑ they have applied to be a competitive local exchange carrier, and I think you need to be a competitive local exchange carrier.

4987             They don't seem to have an interest in doing that.  They are providing broadband, and they are providing Voice over IP.


4988             This is sort of what I was describing a bit earlier.  I think the world is changing very quickly.  Our traditional thought on what a, say, local competitor was will be different as we move forward in the next two, three, four or five years.

4989             I think they are saying to themselves:  I don't need that.

4990             What do they need the money for?  If you think about what they have today, they've got 50 percent funding on the access network that they put in place and they've got a free transport network.

4991             COMMISSIONER CRAM:  Okay.

4992             MR. FLAHERTY:  So, they have a business model that presumably Industry Canada believes is suitable.

4993             But the dilemma is that we've got these two competing networks, and so if they do pull people from our network onto another it's going to leave the burden of the underlying infrastructure back with ourselves.

4994             COMMISSIONER CRAM:  Your NAS cost goes up, yes, I know.

4995             Okay.  But my question is, and I am a regulator, and we have a portable subsidy down south and so I don't care whether they need the subsidy or not.  I mean, the concept is that the subsidy goes with the sub.


4996             And, so, let's say NSI gets, you know, 20 customers.  Are you proposing then that you would still keep the same subsidy even though you don't have the customers?

4997             MR. FLAHERTY:  The subsidy that we have is our Res PES shortfall, if you like, and we look at the revenues that we get from the customers and we look at our costs and then we have a shortfall that comes from it.  If the costs don't change, the subsidy actually goes up.

4998             You know, one of the problems I think Mr. Hamelin ‑‑ I can't remember if he was the one that mentioned it ‑‑ because these communities are so small we're using the smallest increment of capacity that we can to serve these communities, so the problem that we have is that if all we have is less volume, our costs per unit goes up, not down.

4999             COMMISSIONER CRAM:  Yes, I know, your NAS cost goes up.

5000             MR. FLAHERTY:  Right.

5001             COMMISSIONER CRAM:  Okay.

5002             MR. FLAHERTY:  So ‑‑ and, as I said, I'm not aware of any discussion on their behalf to become a competitive local exchange carrier.

5003             COMMISSIONER CRAM:  Okay.


5004             MR. FLAHERTY:  They don't seem to be going down that path at all.

5005             MR. ROBERTS:  And just to add to that a little bit, the requirements to become a CLEC, a competitive local exchange carrier, in light of the small volumes in the smallest communities, given the fact that their business model is based on, you know, a heavy subsidization, I think that the back office systems required would be disproportionate to the benefits of any contribution, given the small number of customers that would be ‑‑ I guess would have a portable contribution associated with them.

5006             COMMISSIONER CRAM:  I am really just trying to address the philosophical issue of the nature of contribution being far different here as proposed by you than in the south which is a per sub basis.

5007             MR. FLAHERTY:  But, again, if they were to take on the obligations of being a competitive local exchange carrier, clearly we would not disagree with what you're saying.

5008             COMMISSIONER CRAM:  I wanted to talk about Q of S, and I hear you, you've got great Q of S, but I was there when we came around to price cap 2 and the problem was because we didn't impose penalties quality of service crashed down south.


5009             And so my question is, I don't see why we shouldn't do this as a preemptive measure.

5010             And you are going to say trust us and I am going to say, we trusted the ILECs in the first price cap round 2.

5011             So, can you advance that debate any further for me?

5012             MR. FLAHERTY:  Well, maybe again I will say the same thing, I'll say it only different and I'm sure that won't necessarily satisfy you, but the other piece that I tried to illustrate is the high cost of our territory.

5013             So, in other words, if I skimp on some investment in a certain area ‑‑

5014             COMMISSIONER CRAM:  Yes.

5015             MR. FLAHERTY:  ‑‑ and all that means is I have an imminent failure, my cost to fix that on an emergency basis is much higher, so I'm financially incented in our geographical territory because it's so vast and so distant.  That's why.

5016             COMMISSIONER CRAM:  Okay.  Thank you, thank you very much.

5017             And please don't take anything into the questions I asked.

5018             Thank you, Mr. Chair.

‑‑‑ Laughter / Rires


5019             THE CHAIRPERSON:  I have a couple of questions and I am going to get in huge trouble with some of my colleagues here if I don't ask them quickly and we get this over with fairly rapidly.

5020             Is there any evidence of VOIP being supplied over the BRAND satellite network?

5021             MR. FLAHERTY:  The dilemma that we have is we have no hooks into that network.  Like, in our network we can put measuring devices in and find that traffic.  We have none, but we could share with you, if you like, their website.

5022             They actually ‑‑ just to be clear, they're offering their own VOIP service in the fall, but I think we would be naive to think that some of their customers are not already using Skype on that network.

5023             THE CHAIRPERSON:  Yes.  I don't mean it peer‑to‑peer, I mean a classic ‑‑ a proper managed VOIP.  I mean, my understanding is technically they couldn't meet the required standards with a local wireless and a satellite system.  I may be completely wrong, but I...

5024             MR. FLAHERTY:  We can share with Commission Staff, if you like, what ‑‑ the information that we have on it.


5025             THE CHAIRPERSON:  Yes.  I don't think it is central.  In any event, you have made a convincing case that there is no incentive for them to become a CLEC.

5026             MR. FLAHERTY:  That's right.

5027             THE CHAIRPERSON:  Right.  So, as far as those issues are concerned, there is no issue.

5028             MR. ROBERTS: And I would add that there is specific funding from Indian and Northern Affairs to establish community champions for the adoption of Voice over IP in each of the Nunavut communities.

5029             THE CHAIRPERSON: Oh there is, oh.

5030             MR. FLAHERTY: So I think that, you know, and I don't know if the Commission can help at all, but it seems like this problem keeps exacerbating itself.  Like, you know, it is very strange for me to see ‑‑ it is one thing for BRAND and NSI to have done this, it is another thing for Indian and Northern Affairs to continue to perpetuate this as we go forward.  So to a degree the Commission can help in anyway or shape or form that would be appreciate.

5031             THE CHAIRPERSON: It is a small degree, Mr. Flaherty.


5032             One question though in an area where we do have some influence and responsibility.  Can you tell me in relation to these government‑subsidized market disruption activities what, beyond the forecast impact on demand for your services, is your proposal asking us to take into account with relation to these subsidized services?  I mean, is there any other aspect of your proposal which is premised on this government‑subsidized disruption or is it strictly the impact on demand for your services and the consequential financial implications?

5033             MR. FLAHERTY: I think the big thing that we need to think about is the implicit subsidies that exist and what would happen.  So basically, we need to bring our pricing down so that people are less incented to bypass this network.  I think that is the big thing that we are really looking to do at the end of the day.  Have these very high‑cost areas..

5034             You know, the other reality which is unfortunate is a lot of this is occurring in the highest‑cost areas.


5035             THE CHAIRPERSON: That is right.  So I have difficulty understanding why in answer to my question you talk about the need to avoid bypass, etcetera, etcetera, when it is totally on your account uneconomic bypass anyway it exists.  Your real bypass problems are not in Nunavut and not in the areas that are being served by BRAND, am I right?

5036             MR. FLAHERTY: Well, but the potential is that they will also occur there and just exacerbate the problem that we have there already.  It will make it even more uneconomic when the bypass occurs there

5037             THE CHAIRPERSON: Yes, I mean, I really do sympathize with the policy problem.  Unfortunately, that is not what we can deal with in our response to the proposal as far as I can tell, unless there is something in the proposal that I am not seeing.

5038             I am not saying you don't have a case and I am not saying that there is not a discussion that has to be had by the Government of Canada.  And I don't want to discourage you in any attempt you make to stimulate that discussion and if we could in a small way, because the history suggests it will be a very small way, we can contribute, we would be delighted to do so, okay.


5039             For the moment, I am trying to get at the following question.  Are you asking the Commission to respond to anything other than the impact on demand for your services consequent on the presence of that other network or networks?  Is there something else flowing out of your proposal as a result of the existence of those competitive networks which you are asking us to respond to?

5040             MR. ROBERTS: I would like to reiterate that it is the permanent subsidy that is the issue.  It is not so much in our rates, it is the reliance on subsidies on a permanent basis.  And you mentioned, you know, you were dismissive of the impact of these communities, but governments are a significant portion of our revenue, including toll revenue today, and the decentralized nature of the Nunavut Government in particular drives the amount of revenue associated.

5041             The Government of Nunavut is also a key, again, subsidy payer to this competitive network.  So one can draw some conclusions from that and the potential outlook for future revenue, so there is a direct tie.  So it is not even just our rates, it is the fact that our subsidy can be diverted, bypassed, etcetera.


5042             MR. FLAHERTY: I think your comment about demand is a fair comment.  You know, back to Mr. Roberts, what he was saying there, the top 50 LD customers we have, top 50, represent 54 percent of our revenue.  So to the degree that Mr. Roberts, what he was talking about there, if the governments, particularly in the Government of Nunavut, if they were all of a sudden to say okay we are going to take all of our corporate LD and data services off of Northwestel's network and put it on another network, huge impact on demand.

5043             THE CHAIRPERSON: Yes.  I mean, I understand Mr. Robert's point.  It is just that there is nothing unique about the fact that it is government subsidized.  It is simply a potential bypass threat or it is a potential competitive loss and some of all those competitive losses is informing your forecasts and your proposals to us and there is nothing about the ultimate source of that competitive threat as opposed to a competitive threat from a privately financed competitor that places an incremental obligation on the Commission in your proposal to respond.  Am I right or wrong?


5044             MR. ROBERTS:  The unique part is the reliance on a permanent contribution and the linkage to that in regards to lost toll.  In other jurisdictions, as you are aware, the permanent contribution regime was replaced with a revenue tax and so it is not just the revenue that would normally be associated with a cost‑based rate but it is also this subsidy that is diverted.  So it magnifies the potential impact in our case.

5045             THE CHAIRPERSON:  I think I understand and I appreciate your attempts to help me to understand.

5046             MR. FLAHERTY:  Well, there is a retail component which I think you have been exploring with us but there is also this contribution of component on the CAT.  So in the 7‑cent CAT today there is a contribution that is really towards local access type services, much of which is in these very small communities and that is forgone as well.

5047             So that is the piece that I think we are trying to illustrate that that is where our bigger challenge is.  If we don't uniquely address that and we simply get all this bypass, yes, you have lost a retail customer but more importantly you have lost the contribution to the local access services and really jeopardize the ability to be the service provider of last resort in those very remote and high‑cost communities.


5048             THE CHAIRPERSON:  Yes, all right.  But the loss of the CAT is no more or no less a function of the financial basis of the competitor who has taken the CAT away from you, who has bypassed the CAT ‑‑ forget it.  I phrased it badly and it is another attempt to get at the issue that I am not succeeding in getting at.

5049             Commissioner Noël has a question.

5050             COMMISSIONER NOËL:  Just to put things back into perspective.

5051             We have heard you talk about the 3.9 million square kilometres of your territory and according ‑‑ and I am not a figure person, contrary to some other commissioners, but it would amount to about 0.028 person per square kilometre; is that the correct number?

5052             MR. FLAHERTY:  We used a number of 1.9 lines per 100 square kilometres.

5053             COMMISSIONER NOËL:  And I come up with 1 person per 35.45 square kilometres.  Is that approximately ‑‑ so if we were dispersing your population among the territory, we would find 1 human body per 35.45 square kilometres compared to about 1 per 4 kilometres for Télébec, which is the next less populated territory for an ILEC in Canada.

5054             How much of that population is, again, concentrated in the major urban centres like Whitehorse, Yellowknife, Fort Nelson, Inuvik and Iqaluit?  I guess those are the most populous centres in the ‑‑


5055             MR. FLAHERTY:  Just bear with me, I will do this quickly.

5056             COMMISSIONER NOËL:  Yes, I am not in a hurry.  They are hungry.

‑‑‑ Laughter / Rires

5057             MR. WELLS:  Maybe just while they are doing the math, just quickly and ‑‑

5058             COMMISSIONER NOËL:  Which means that ‑‑ what I want to illustrate here is that this is a humongously vast territory with very, very few people.

5059             MR. WELLS:  This may help ‑‑ and I know, Commissioner Cram, you are very familiar with the sparsely populated province of Saskatchewan.

5060             You would have to take 6 and a half Saskatchewans, cut the population by 90 percent, spread them all through that territory, move it north of the 60th parallel, get rid of 85 percent, 90 percent of the roads, and that is the territory that we serve.

5061             MR. ROBERTS:  And bring down the thermometer too.

5062             MR. FLAHERTY:  So 56,000 people of 110,000 are in Whitehorse, Yellowknife, Fort Nelson.  So it is a little more than 50 percent.


5063             COMMISSIONER NOËL:  So the rest would be really disseminated across a huge and vast territory?

5064             MR. FLAHERTY:  That is correct.

5065             COMMISSIONER NOËL:  I just want to have a photo of what it looks like.  Thank you.

5066             MR. FLAHERTY:  When the proceeding is done and you have ruled, we could take you to see some of it.

‑‑‑ Laughter / Rires

5067             COMMISSIONER NOËL:  Well, in a previous life I worked in northern Quebec, which is not part of your territory but it is part of Télébec's territory actually and in LG‑2 it is very scarcely populated too.

5068             Thank you very much.

5069             THE CHAIRPERSON:  Thank you, Commissioner Noël.

5070             Commissioner Williams...?

5071             COMMISSIONER WILLIAMS:  Just a couple of quick ones, I'm mindful of everybody's sustenance needs.


5072             If you had to look at Nunavut, Northwest Territories and the Yukon, which of those territories is the largest contributor to your revenue and what approximate percentage would come from the leader?

5073             MR. FLAHERTY:  I would suggest, subject to check, that it would be the Northwest Territories.

5074             It's a little bit complicated because of course you have settlement revenues that are not easily attributed, but I would suggest it's the Northwest Territories probably first.

5075             Northern B.C. is not insignificant.  I know we tended to dismiss that rather rapidly there yesterday, but there is still a significant amount of revenue that comes.

5076             If I had to rank them in order, and just going from sort of a high‑level guess if you like, I would say, Northwest Territories, Yukon, in all likelihood Northern B.C. and then maybe Nunavut.

5077             COMMISSIONER WILLIAMS:  Okay.

5078             MR. FLAHERTY:  Roughly that would be the order.


5079             COMMISSIONER WILLIAMS:  Has Northwestel given any consideration to relocating their headquarters to a more centralized location within their operating territory?  I guess that would be, for example, Yellowknife.  Given the current and future importance of diamond mines, pipelines, economic activity, most of it on the horizon appears to be in the Northwest Territories, it's probably cheaper to fly a plane from Yellowknife to Iqaluit than Whitehorse to Iqaluit, those types of considerations.

5080             Has any thought been given to that in an area of cost, from a costing point of view?

5081             MR. FLAHERTY:  No.  I would say no, although I have been asked quite a few times by government members of the Northwest Territories government, given the tax implications for them, but I would think you would need to think about that carefully.

5082             The cost of relocating the employees.  We have abut 250 to 300 employees here in Whitehorse.  The cost of relocating those employees there, if they would even relocate, would be one factor.

5083             The second factor is, given all the activity you spoke of, recruitment is very challenging in Yellowknife right now.  We are having a hard time actually backfilling positions because we are competing with the diamond mines and others.  So that is another factor.

5084             The cost of living in Yellowknife is substantially more as well so our compensation would have to be substantially more.


5085             So my guess, doing a very quick and dirty business case in my mind, I don't think there would be an economic justification to do something like that.

5086             The people who actually provide the service in the communities are in the communities, so what we would be really doing is moving more, shall I say head office or corporate functions, and for all the reasons I just said I can't see that it would be economically advantageous to do so for Northwestel.  it would only further exacerbate some of our costs that we already have.  So I don't see that as occurring.

5087             COMMISSIONER WILLIAMS:  Okay.  Thank you, Mr. Flaherty.

5088             That's my question.

5089             THE CHAIRPERSON:  Thank you, Commissioner Williams.

5090             Thank you, Panel.  We appreciate your time and energy and your attempts to answer the impenetrable questions that the Commissioners have thrown your way, first among them myself.

5091             I'm going to take 15 minutes off the lunch hour, so we will meet again at 2:30.

5092             Undertakings.  Excuse us, Panel, we just have to complete the undertakings.


5093             MR. McCALLUM:  I don't have any record of any undertakings made this morning, Mr. Chair.

5094             THE CHAIRPERSON:  No?  Good.

5095             Thank you very much.  2:30.

‑‑‑ Upon recessing at 1215 / Suspension à 1215

‑‑‑ Upon resuming at 1431 / Reprise à 1431

5096             THE CHAIRPERSON:  Order, please.  A l'ordre, s'il vous plaît.

5097             Madam la Secrétaire.

5098             LA SECRÉTAIRE:  Merci, Monsieur le Président.

5099             The next party to be cross‑examined is the Yukon Government, with Mr. James Pratt and Mr. Rose.  No?

5100             MR. PRATT:  It is Mr. Terry Hayden.

5101             THE SECRETARY:  Are you ready for the affirmations?

5102             MR. PRATT:  Yes.

AFFIRMED:  JAMES H. PRATT

AFFIRMED:  TERRY HAYDEN

5103             THE SECRETARY:  Thank you very much.

5104             MR. PRATT:  Mr. Chairman, in the absence of anyone else sitting at our table, I will briefly introduce myself.


5105             I have been a consultant to the Yukon Government in telecom policy issues since 1999.  Mr. Hayden is currently Assistant Deputy Minister and he has experience in the telecom sector, both the private sector and from the government side, since 1980.

5106             We have Mr. Rose behind us, whom you have already met, as our back‑up.  Thank you.

5107             THE CHAIRPERSON:  Thank you.

5108             THE SECRETARY:  The first panel to cross‑examine the Government of Yukon is Northwestel.

5109             Mr. Rogers.

EXAMINATION / INTERROGATOIRE

5110             MR. ROGERS:  Good afternoon, gentlemen.

5111             I think this will be relatively quick in terms of meeting time estimate or better.

5112             In any case, there is an item that came up very late this morning in the prior panel's discussion with the Commissioners, and it involved a reference to the evidence of the Yukon Government.

5113             I have to confess that we don't have the benefit of the transcripts, and I am somewhat confused by exactly what was said about the evidence of the Government of the Yukon in this proceeding.


5114             I thought I heard an indication that the Yukon Territory Government may be in favour of a structural separation of some kind in the telecom industry.  I confess that I don't recall that being part of your evidence, but it is your evidence and perhaps you could enlighten us on that point.

5115             MR. PRATT:  Mr. Rogers, I can say with all certainty that there is nothing in our evidence in this proceeding that speaks to structural separation.

5116             As far as I know, there is no position that the government has taken in recent memory anyway that would be attributable to structural separation of Northwestel or generally.

5117             MR. ROGERS:  Fine; thank you.

5118             Moving to another matter, there has been a lot of discussion in this proceeding, as you gentlemen are aware, regarding the proposed changes by Northwestel to rates of many kinds ‑‑ CAT rates, business rates, retail rates, wholesale rates, digital private line rates.  Let's look at one of them, the CAT rate, which has formed a considerable part of the discussion.


5119             As you know, the current CAT rate, as set by the Commission, is 7 cents.  Northwestel proposes to move that rate to a switch connect rate of .825

5120             There have been suggestions, and perhaps there will be more suggestions during the argument phase of the proceeding, that perhaps the .825 is too low and a higher number would be more appropriate.

5121             Let's start with the number of, say, 4 or 5 cents.  If the Commission hears evidence, or argument now, to the effect that 4 or 5 cents would be more appropriate ‑‑ and you speak from a public policy point of view for the Territory of the Yukon, and you are interested in the public interest of the Yukon ‑‑ can you give me a sense of how the government would react to such a measure?

5122             MR. PRATT:  I will begin, Mr. Rogers, and then Mr. Hayden can correct me, if necessary.

5123             From a principle standpoint ‑‑ and that is where, I believe, the government would look at things first.  Rather than to say, "Here is a policy directed at a specific rate level," we have taken the position in this proceeding and others that it is important to provide competitive choices for Yukon residents and businesses.


5124             Consequently, a measure that is more effective in generating more competitive choices would be our preference versus one that provides fewer or minimizes the number of competitive choices, by which I would be driven, I suppose, to conclude that, taken as a whole, it is relatively important to move the CAT rate to a level that encourages competitive entry to the maximum extent that might be feasible, or, as has been mentioned, I believe, by us as well as Northwestel, that is sustainable.

5125             Certainly, we would not be happy about competition that is not sustainable or ends up, in a way, damaging the market here, or reducing, ultimately, the number of choices to consumers.

5126             All things being equal, what we would like is a rate that enhances the competitive choice for our residents and businesses.

‑‑‑ Pause

5127             MR. ROGERS:  Do you want to add to that?

5128             MR. PRATT:  I don't think so.


5129             MR. ROGERS:  If I understand your response, what you are saying is that you want to see competition in all forms, and a 4 to 5‑cent CAT, if that were to be decided upon, or advocated, from your public point of view, would discourage entry and frustrate competition in the Yukon territory.

5130             That is your primary concern ‑‑ and thereby limit choice.

5131             MR. PRATT:  If I understand the alternatives, and the consequences of those alternatives, my understanding is that a 4 or 5‑cent CAT would be more likely to limit competitive choices, and would be less likely, on the other hand, to encourage or incent entry than would a CAT that is lower.

5132             The relative amounts I am not sure we are qualified to speak to.

5133             MR. ROGERS:  That's fine.  I will leave it at that.

5134             Gentlemen, you are undoubtedly aware that there has been considerable discussion over the last several days about the nature of the cost structure that applies in the service territory of Northwestel and, in particular, the very high cost of more remote communities scattered all across the territory.


5135             And then the other communities which are much larger, Whitehorse and Yellowknife being the two primary examples, and those two having somewhat different cost characteristics, perhaps very different cost characteristics from the more remote communities, which may lead some parties to advocate that there be a different approach ‑‑ a fundamentally different approach taken by the Commission between those two types of communities.

5136             One approach, or one band, if you like, to deal with Whitehorse and Yellowknife, perhaps Fort Nelson, and then a completely different approach, a separate band, separate costing, separate pricing for all the other communities.

5137             We don't have any formal proposals to that effect, but perhaps they will be made in the course of argument in this proceeding.

5138             Would the Government of the Yukon have any views as to the merits or lack of merits of that type of banded or two‑tiered structure?

5139             MR. HAYDEN:  We certainly have thoughts on a two‑banded approach.  We are of the opinion that we need to look at ubiquitous or equitable access for all Canadians.

5140             From our perspective, the Yukon Government, we want to have that translated to all residents in the Yukon.


5141             Particularly if you're inferring that those that are in higher cost areas pay a higher cost, there's significant problems with that approach.

5142             If service was provided strictly on the basis of what it cost to provide and the ability of those to pay for the service, those that actually need the service the most would be the last to receive it, if at all.

5143             When you take a look at the way the Yukon is distributed, we have the majority of our population in Whitehorse, our rural communities are scattered throughout.

5144             The populations in our rural communities are principally First Nations.  Certainly we want to ensure that access to all peoples, including the indigenous population of the Yukon who have been here for tens of thousands of years, are not impeded by a higher cost type of proposal.

5145             MR. ROGERS:  All right.  The last point I wanted to raise with you would be in regard to certain wireless services.

5146             And there were discussions at various points, including this morning, about some of the wireless ventures, for example here in the Yukon, Latitude Wireless, and there was some discussion of the background to that particular venture.  There are other wireless providers.


5147             You described and we have heard testimony as to how the wireless venture Latitude Wireless originated, the Yukon Government, of course, played a key role in that initiative.

5148             When you think about that type of initiative or others that might roll out across the northern territory, do you have any views as to the merits of the wholesale wireless rate decreases which are being proposed for wireless access and wireless service providers?

5149             There are significant reductions being proposed by Northwestel in this proceeding and there may well be those who say it's not necessary, leave the rates where they are, which is many times higher than southern Canada.

5150             Having just been involved in a wireless venture, or at least initiating one yourself, do you have any views on the merits of those proposed wholesale wireless rate reductions?


5151             MR. PRATT:  Mr. Rogers, I think from the Government's point of view, with respect to the rate issue at least, that we believe, and I think it's been clear from the material we've filed, we believe that if there's a future for telecom in the north at least, and likely elsewhere, is that there be an infrastructure layer and service and application layers built on top.

5152             And in our environment in the north where it is costly and perhaps prohibitively costly to construct the infrastructure, that it is important that there be a shared approach to creating or designing, building and managing the infrastructure.

5153             And consequently, in order to achieve the benefits of competition to the extent that they are possible in the north, that there needs to be access pricing to that network or that infrastructure in a way that enhances sustainable competition where that is possible.

5154             Specifically with respect to the wireless access rates, without pining again on the appropriate number, I do think it is fair to say that it would be consistent with our principles that the terms and prices of access to the infrastructure, including the wireless access, be set in a fashion as to encourage more entry and to enable ventures like Latitude to be successful in meeting the needs that have been identified in the Yukon.


5155             MR. ROGERS: So the beneficiaries, if the rates were to be approved, would be a venture like Latitude or ICE Wireless or any other wireless company that may want to enter?

5156             MR. PRATT: Well, I would hope that we wouldn't need to stop there.

5157             MR. ROGERS: All right.

5158             MR. PRATT: I guess, consistent with our vision for telecom development in the Yukon, we can see other ventures arising perhaps with government support, perhaps with Yukon Government support, perhaps with support of other governments.  Certainly, whatever combination of private investment finds these opportunities attractive, we would hope that the rates that Northwestel has now and applies for in the future would encourage those opportunities and that there be opportunities for Northwestel to continue partnering with the Yukon Government, other levels of government and other entities so that we can all achieve some of the benefits of choice and innovation and advance services everywhere throughout the Yukon.

5159             MR. ROGERS: In your response a moment ago to ‑‑ in your description of the Latitude Wireless project and how it came about and the implications for rates you used some words such as a shared or cooperative or partnership type approach.  And I don't want to hold you to the legal words, but that was roughly the way you were describing it.


5160             Would that project, such as Latitude, is one of the characteristics of that non‑duplication of infrastructure in rural communities?

5161             MR. HAYDEN: I would offer, on that particular project, that a way that the government issued and the RFP and acquired the services is not inconsistent with our overall philosophy is that the north needs to, and wherever possible, look for partners and organizations to come together to develop one common infrastructure for the benefit of everybody.  And in this case, we would say that that is the approach that we are looking for and that is the way that we look to, you know, try to accommodate all of it. If common infrastructure is the way to go, promote competition on the service access and application.

5162             MR. ROGERS: Fine.


5163             MR. PRATT: Sorry, Mr. Rogers, I did want to just quickly tack onto that that I think that is one of the reasons why, in our proposal, we have offered up the idea of a regional coordination committee so that there may be a mechanism that would assist in helping to have the various hands operate in a coordinated fashion so that the needs are identified and the various funding sources are targeted to those needs so that we don't end up with duplicate infrastructures.

5164             MR. ROGERS: Thank you, Mr. Chairman, those are all my questions.  Thank you, panel.

5165             THE CHAIRPERSON: Thank you, Mr. Rogers.

‑‑‑ Pause

5166             THE SECRETARY:  The next party to cross‑examine the Government of Yukon is Telus.

5167             Mr. Ryan, please.

EXAMINATION / INTERROGATOIRE

5168             MR. RYAN:  As I indicated to the secretary or to at least Commission staff, I don't have questions for this panel, Mr. Chairman.

5169             THE CHAIRPERSON:  Thank you.

5170             Are there any other parties wishing to question this panel before the CRTC?

5171             THE SECRETARY:  No, Mr. Chairman.

5172             THE CHAIRPERSON:  Any questions from the CRTC?

5173             MR. McCALLUM:  No, Mr. Chairman.

5174             THE CHAIRPERSON:  I suspect that my colleague Commissioner Cram would like to intervene.

EXAMINATION / INTERROGATOIRE

5175             COMMISSIONER CRAM:  Thank you.


5176             I wanted to sort of get a ‑‑ clearly you are concerned about the infrastructure and retaining the infrastructure because obviously, I mean it is needed.  But I needed to figure out your rationale in then doing an RFP that required free long distance in the Yukon, because to me what that may do is encourage substitution, which means you have then got the wireline offline and the prices therefore, per NAS assessed, of Northwestel are increased, leading to less sustainability of the infrastructure owner.

5177             So I guess I needed your rationale as to why ‑‑ I can understand why for the public interest you would want free long distance but the public interest would also, I would think, be trumped by wishing to retain the infrastructure.

5178             So could you give me an idea as to why you chose to do that?

5179             MR. PRATT:  Hum ‑‑

5180             COMMISSIONER CRAM:  You know, I am not going to interfere.

5181             MR. PRATT:  Yes.

5182             COMMISSIONER CRAM:  I just sort of was wondering your rationale.


5183             MR. PRATT:  Unfortunately, Commissioner Cram, I am unable to provide full satisfaction for that question.  None of us were directly involved in the terms of that RFP.  I could certainly look into it.

5184             I might offer though that my understanding was that it was not a ‑‑ the target market was not universal but perhaps a narrower ‑‑

5185             COMMISSIONER CRAM:  Seventeen communities.

5186             MR. PRATT:  ‑‑ segment of the market where the substitution issue may not have been a concern, because as you correctly identify, that would be a position of conflict for us in terms of trying to optimize the use of the infrastructure and also to, as we said before, work with Northwestel to try to find solutions that are efficient and enhance the options for the public.

5187             COMMISSIONER CRAM:  Yes, because I mean these are too the smaller communities where there is a population of ‑‑ 17 communities, 8,000.  But I think about a community of 500 and if half go off net because of free long distance offered on the cell phone ‑‑ immediately they are going to wonder why they are paying for their cell phone and their regular phone.  If half go off, then you have just raised the cost of that capital and access of the other 250.


5188             MR. PRATT:  Right.  I think your logic is unassailable.  What I don't know, and none of us unfortunately are able to solve it, whether free long distance meant free and certainly what long distance meant, whether that was within the Yukon Territory or to the rest of the world or exactly what the terms were.  Had we those facts, it might become more clear.

5189             COMMISSIONER CRAM:  Yes.

5190             My second question was about ‑‑ and you talked about it again, Mr. Pratt ‑‑ shared approach to infrastructure and managing it.

5191             In my mind when I look at that, that doesn't mean that one party owns the infrastructure and leases it to other parties.  It means that the infrastructure is by itself and that jointly people around it share the infrastructure and manage it, in other words, a joint ownership kind of a thing, which then of course leads me to structural separation because the capital is not owned by the incumbent player.

5192             Can you explain to me more what you mean about shared approach to the infrastructure and managing it?

5193             It's the managing it that I'm asking about.


‑‑‑ Pause

5194             MR. PRATT:  I think, Commissioner Cram, not to maybe chop those words too finely, what I had in mind was a range of possibilities where ownership is not primarily the issue but there is a recognition that whoever owns the infrastructure that it have common access characteristics, meaning the services that might ride on it and the rates that are charged for it.

5195             So "manage" may have been a little bit of a stretch.

5196             I don't know whether Mr. Hayden has anything to add to that.

5197             MR. HAYDEN:  I would add that when we are looking at the particular project we would evaluate, as Mr. Pratt identified, a variety of call it business propositions that would fall within the continuum, and based on that particular initiative and negotiating and I guess realizing in terms of what the alternatives are, come to settle on an area that would be best suited for suppliers who are able to provide and consumers who want to consume.


5198             In the example that I provide where we have done it in the past, where we partnered with a telephone company to enhance the network, the infrastructure so that it could carry a substantial higher rate of speed for data and internet services, we settle where the ownership would ultimately transfer to the telephone company because they were in the best interest to leverage what they already had in place and were in the best position to continue to manage it.

5199             There may be other circumstances where we fall a little either side of that particular model.

5200             COMMISSIONER CRAM:  Thank you.

5201             Thank you, Mr. Chair.

5202             THE CHAIRPERSON:  Yes, I think that the word actually, for what you are describing, Mr. Pratt, is the public network in effect.  You have used a series of euphemisms which might be subject to different interpretations, but what you mean is a public network with existing tariffs that a variety of users can access and use under some kind of a predictable regime and not somebody's private or semi‑private asset that they can manipulate or discriminate in the use thereof.


5203             MR. PRATT:  I think that's a fair starting point.  What we imagine, and what we think may be the next phase of evolution, is perhaps something with less of the utility‑type characteristic that went along with that term of the public network, so that there may be pieces of infrastructure perhaps that the Yukon government funded or continued to own that might be leased to the telephone company on terms that would allow access by others and vice versa in ways analogous to the latitude project that you have heard so much about already.

5204             THE CHAIRPERSON:  Thank you.

5205             I don't think ‑‑ that concludes then?

5206             Thank you very much, Mr. Pratt, Mr. Hayden, Mr. Rose.

5207             THE SECRETARY:  The next party to be cross‑examined is Telus.

‑‑‑ Pause

5208             THE SECRETARY:  The first party to cross‑examination Telus is Northwestel.

5209             LE PRÉSIDENT:  Je vous rappelle qu'il faut assermenter ‑‑

5210             LA SECRÉTAIRE:  Assermenter, c'est vrai.

‑‑‑ Pause

5211             THE SECRETARY:  Mr. Grieve, I presume that you are the one who will make the affirmation?

5212             MR. GRIEVE:  There will be two of us.

5213             THE SECRETARY:  And Mr. Schmidt.


5214             MR. RYAN:  I'm just catching up with everybody here, Mr. Chairman.

5215             You have in front of you Mr. Willie Grieve, who is Vice‑President, Telecom Policy and Regulatory Affairs, Telus Communications Company.

5216             Sitting to his left, you have already met Stephen Schmidt.  Stephen Schmidt is the Director, Regulatory Policy and Senior Regulatory Legal Counsel, Telus Communications Company.

5217             They are ready to be affirmed, Madam Secretary.

5218             THE SECRETARY:  Thank you very much.

AFFIRMED:  WILLIE GRIEVE

AFFIRMED:  STEPHEN SCHMIDT

EXAMINATION / INTERROGATOIRE

5219             MR. RYAN:  Mr. Grieve, do you have before you a copy of a document entitled "Comments of Telus Communications Company", dated 5 June 2006?

5220             MR. GRIEVE:  I do.

5221             MR. RYAN:  Was that document prepared by you or under your direction?

5222             MR. GRIEVE:  Yes.

5223             MR. RYAN:  Mr. Schmidt, do you have a copy of that same document in front of you?

5224             MR. SCHMIDT:  I do.


5225             MR. RYAN:  Did you participate in the preparation of that document?

5226             MR. SCHMIDT:  I did.

5227             MR. RYAN:  Mr. Schmidt, to your knowledge and belief, are the statements of fact in that document true?

5228             MR. SCHMIDT:  Yes.

5229             MR. RYAN:  And Mr. Grieve, the same question.

5230             MR. GRIEVE:  Yes.

5231             MR. RYAN:  Mr. Grieve, does the document accurately present the position of Telus Communications Company?

5232             MR. GRIEVE:  Yes.

5233             MR. RYAN:  Mr. Schmidt?

5234             MR. SCHMIDT:  Yes.

5235             MR. RYAN:  The witnesses are available for cross‑examination, Mr. Chairman.

5236             THE SECRETARY:  The first panel to cross‑examine Telus will be Northwestel.

5237             THE CHAIRPERSON:  Mr. Rogers, Madame Chalifoux, we will probably try to break around 3:30‑3:45.  But not to worry, take your time.  We will just insert something at that point.

5238             MR. ROGERS:  Right.


5239             THE CHAIRPERSON:  It is not a deadline for you or anything like that.

5240             MR. ROGERS:  We will be under four hours.

5241             THE CHAIRPERSON:  We are very relieved to hear that.

‑‑‑ Laughter / Rires

5242             MR. GRIEVE:  It is unusual for you, Mr. Rogers.

5243             MR. ROGERS:  Yes.

‑‑‑ Laughter / Rires

EXAMINATION / INTERROGATOIRE

5244             MR. ROGERS:  Mr. Grieve and Mr. Schmidt, I couldn't help but noticing that just today you decided to double the depth and capability of the Telus panel.  I am not sure what to make of that; perhaps nothing.

5245             But notwithstanding the formidable array of forces that Telus has put in front of this proceeding to address the issues, we are prepared to proceed, and I am sure you are.


5246             Before I do that, I notice in reading your CV, Mr. Grieve, that you have certainly modestly omitted another area of expertise.  I believe it is true ‑‑ and you can tell me if I am wrong ‑‑ that you are also a leader and authority in amateur lacrosse, if I am not mistaken.  And that is, I am sure in modesty, left off your CV.

5247             Am I correct?

5248             MR. GRIEVE:  Yes.  And I left off other things I chose to leave off.

5249             MR. ROGERS:  Mr. Grieve, I thought that as fascinating as these details are, if you had a choice between us proceeding as planned with a lengthy discussion of telecom regulatory matters or a discussion of amateur lacrosse, which would you prefer?

5250             MR. GRIEVE:  It will not surprise you, Mr. Rogers, to learn that I would prefer to discuss telecom.

5251             MR. ROGERS:  Really.  You may be one of the few in the room.  I think the room might vote against you.

5252             In any case, we have work to do and we will get on to it.

5253             Gentlemen, I would ask you to refer to Telus evidence, Part 5.

5254             I will give you a moment to turn it up.


5255             I am not going to go through that Part 5 in detail other than to characterize it or describe it as in that section Telus is describing the process that should be followed, in its view, the first step of which is the setting of the revenue requirement.

5256             Is that a fair characterization?

5257             MR. GRIEVE:  Yes.

5258             MR. ROGERS:  Telus describes the process followed in the proceeding that led to 2000‑746, which set the current framework, and then it describes the annual reviews conducted by the Commission since the year 2000.  You refer to that in paragraph 36.

5259             Telus, from what we can tell by looking at the record, was registered as an interested party in those annual reviews.

5260             Am I correct?

5261             MR. GRIEVE:  Yes, that's right.

5262             MR. ROGERS:  We have checked that on the website.

5263             In paragraph 37 of this section, Telus states:  "Telus has two concerns with this approach."  It is describing a general approach going on, and it sets out what those two concerns are.


5264             First it says:  "The base numbers are not tested each year, and the annual forecasts were not made public."

5265             And Telus concludes that what needs to be done, if I understand it, is a proper review of the revenue requirement in order to ‑‑ and I am quoting ‑‑ "test the overall reasonableness of Northwestel's revenue requirement proposal."

5266             I have characterized your position fairly?

5267             MR. GRIEVE:  Yes.

5268             MR. ROGERS:  The Public Notice in this proceeding, 2006‑1, was issued in January, and I am wondering, at what point in the process did Telus come to the conclusion that the Commission had essentially dropped the ball in terms of the process and was proceeding, essentially, in an inadequate manner with this entire proceeding?

5269             MR. GRIEVE:  I am not sure that I would characterize it as the Commission dropping the ball.

5270             I know that what happened during the supplemental funding proceedings was that, as it says here, each year the Commission looked at what the forecast was for the following year, and these were all confidential.


5271             So we looked at what the Commission had asked and what Northwestel had filed and what Northwestel had answered, and we said, "Gee, there doesn't seem to be" ‑‑ this was fairly late in the process ‑‑ "There doesn't seem to be a lot of information on here about labour rate comparisons to labour rates generally in the North, how you set your labour rates, and other major expenditures that we would expect in a revenue requirement proceeding.

5272             That was why we raised this concern.

5273             The Commission has, since then, started to ask them more questions about revenue requirement, but I am not sure they had anything to do with our evidence, because they were filed, actually, the day after, and I don't think the Commission had a chance to read it.

5274             MR. ROGERS:  I thought I heard you say that it was fairly late in the process that you came to that conclusion.

5275             MR. GRIEVE:  That's right.

5276             MR. ROGERS:  I guess that might explain, then, why you would not have indicated earlier to the Commission, say, shortly after the Public Notice was issued, that the process was not adequate and that there were more steps required.


5277             MR. GRIEVE:  I don't think it was right after the Public Notice was issued.  I think, at first reading of Northwestel's evidence, we asked some interrogatories, and there had been some interrogatories asked by the Commission in the first round.

5278             But then, later on, as we got looking at it closer and closer, we started to have some concerns about the overall revenue requirement.

5279             MR. ROGERS:  You started to have concerns.

5280             If we go back to the annual supplemental funding reviews that were conducted from 2001 to 2005, in which Telus registered and commented, I take it that during those five years it was not apparent to you that there was something wrong with the process.

5281             We don't have any record that you indicated that you felt that that process of sup funding review was inadequate.

5282             MR. GRIEVE:  No.  I think that there was a revenue requirement in 2006, so the supplemental funding was a temporary measure along the way.  So we were looking at ‑‑


5283             I'm sorry, there was a 2001 revenue requirement, so along the way the Commission was looking at annual changes.

5284             There wasn't a full revenue requirement in each one of those years.

5285             MR. ROGERS:  In your evidence, then, on June 5, of this proceeding, would be the first time that we learn there is a problem with the process, as far as Telus is concerned.

5286             MR. GRIEVE:  I don't think we had a problem with the supplemental funding processes along the way, although we did ask in one of our interrogatories that we get to see the forecasts and the actuals compared to forecasts along the way.  We were told that that wasn't made public by the Commission during the supplemental funding proceedings, so we dropped it at that point.

5287             MR. ROGERS:  All right.  I'll drop it as well.

5288             I'd like to move on to a discussion of primary exchange service rates.  In this proceeding, Telus asked Northwestel, it was interrogatory Northwestel/Telus 10 April, No. 5.  I'll give you a moment to turn it up.

5289             Do you have that, Mr. Grieve?

5290             MR. GRIEVE:  Yes, I do.


5291             MR. ROGERS:  And in that interrogatory Telus asked Northwestel if the business primary exchange service rates, PES rates proposed by Northwestel were set to cover phase 2 costs plus 25 per cent mark‑up.

5292             And after the disclosure round a further response was provided by Northwestel.  The ultimate answer given my Northwestel was that the rates were set at phase 2 plus some mark‑up less than 25 per cent.

5293             Do you recall that?

5294             MR. GRIEVE:  Yes, I do.

5295             MR. ROGERS:  So, we have proposed business rates covering phase 2 costs plus a mark‑up not disclosed.

5296             I'd ask you to turn now to paragraph 66 of your evidence and you may want to look over paragraph 66.

5297             MR. GRIEVE:  Yes.

5298             MR. ROGERS:  But essentially if we look at the first two sentences it says:


"Should Northwestel choose not to raise its business rates to cover its phase 2 costs plus 25 per cent mark‑up, such a decision would be the product of a business marketing strategy of Northwestel, therefore, any resulting foregone revenues that result from this strategy should not be funded from the NCF."  (As read)

5299             So, I'm focusing on the words ‑‑ the last words, 'foregone revenues should not be funded from the NCF'.

5300             Is it Telus' view that the proposed rates at phase 2 plus something would be subsidized or are subsidized from the NCF?

5301             MR. GRIEVE:  Our understanding ‑‑ our understanding from Northwestel's testimony here is that the only subsidy amounts are the three that you've listed in your evidence and that even if Northwestel changed its business rates up or down, it wouldn't have any effect on the NCF on its basic business rates.

5302             And if that's the case, then we don't have a problem with that.

5303             MR. ROGERS:  So, one thing I think you would agree with is you're not suggesting that these rates at phase 2 plus something are non‑compensatory?


5304             MR. GRIEVE:  No, that's right, but in terms of ‑‑ our issue was that when we were looking through the evidence and when we looked at the Northwestel case at the beginning, it looked like what we were getting was a massive reduction of rates and a massive increase in contribution.

5305             So, each time we looked at a rate we said, is it compensatory, is it compensatory?  And, of course, there were a few that had cost studies to them.

5306             Now as we look through the evidence more closely we do see some rate reductions that give us concerns, but this particular business one now no longer really concerns us if Northwestel wants to stay at the rates it's at.

5307             MR. ROGERS:  All right.  So, I take it then that you have no objection to offering it to the Commission with regard to the proposed rate?

5308             MR. GRIEVE:  I'm sorry?

5309             MR. ROGERS:  You have no ‑‑ given what you understand now about that rate, you do not object to the rate?

5310             MR. GRIEVE:  That's right.

5311             MR. ROGERS:  So, you're not for any other reason, apart from NCF funding, you're not for any other reason proposing that that rate should go up?

5312             MR. GRIEVE:  No.


5313             MR. ROGERS:  All right.

5314             MR. GRIEVE:  I mean, I agree.

5315             MR. ROGERS:  All right.  Excellent.  All right, we'll leave that subject then.

5316             I'd like to move on then to a discussion of residential ‑‑ certain residential primary exchange rates.

5317             And I understand, I think it's correct, that Telus serves at least some territory in the northern half of B.C.; correct?

5318             MR. GRIEVE:  Yes.

5319             MR. ROGERS:  And would you ‑‑ without being specific as to any location, would you expect that there are many areas or parts of your service territory in northern B.C. which are likely to be high‑cost serving areas?

5320             MR. GRIEVE: Yes.

5321             MR. ROGERS: And is it fair to say that Telus is generally of the view that rates, I am thinking now residential rates, in high‑cost serving areas should move closer towards costs?  If the costs are high the Commission should, over time, move them to costs?

5322             MR. GRIEVE: Yes, that is right.

5323             MR. ROGERS: As a general rule?


5324             MR. GRIEVE: As a general rule, yes.

5325             MR. ROGERS: Would you be familiar with the Telus community of Atlin in northern B.C.?  And just for those in the room that are not, I will mention that it is a community right up close to the Yukon border in the province of British Columbia served by Telus, but totally surrounded by the service territory of Northwestel.  It is an anomaly and an island.  Is that a fair characterization?

5326             MR. GRIEVE: It is an anomaly.  I am not sure it is on an island.

5327             MR. ROGERS: No, but figuratively speaking, it is an island for Telus.

5328             I would ask you to refer to the tariff pages that we provided to you earlier from your counsel.  I trust you have those.

5329             MR. GRIEVE: Yes, I have it.  Yes, I have it.

5330             MR. ROGERS: And these, like all tariff pages, are really enlightening and we have read them and our interpretation of those tariff pages, if we are reading them correctly, is that Telus charges currently in Atlin, I am looking at the residence rate, $22.70 a month.  Is that correct?


5331             MR. GRIEVE: That is my reading of this tariff, yes.

5332             MR. ROGERS: And the surrounding area immediately adjacent, the communities around Atlin of course are served by Northwestel and Northwestel's current monthly charge in those surrounding communities is, we know from a matter of tariff, it is $29.33, which is over $6.00 higher than the rate that Telus charges in Atlin.  And Northwestel is proposing another $2.00 rate increase, as you know, which would put the Northwestel rate to be $31.33.

5333             MR. GRIEVE: Right.

5334             MR. ROGERS: I understand in this proceeding that, from reading your evidence, that Northwestel's $2.00 on local, you have given some thought to that and perhaps it is consistent with the principle that we talked about earlier.  Your broad view, and I invite you to comment, is that the $2.00 is not enough, it should go higher.  Is that a fair statement of your evidence?


5335             MR. GRIEVE: No.  What we have said in our evidence is that we think that rates should be moved closer to cost.  We agree there is an affordability limit and Minister Bernier also referred to a reasonableness limit to the rates as well.  Our concern here is that Northwestel hasn't presented any evidence on affordability.  It has adopted a whatever the rates are in the south ballpark, that is what the rates should be in the north and that is the principle concern we have with this.

5336             MR. ROGERS: I might suggest, Mr. Grieve, that your evidence is pretty consistent that you would like to see residence rates moved closer to cost.  There is another statement essentially to that effect at the end of paragraph 62 of your evidence, and you said the same thing yourself, it should move closer to cost.

5337             MR. GRIEVE: Right.

5338             MR. ROGERS: So if that is a policy that you, in general terms, support and $2.00 clearly not take this company, Northwestel, to costs there is a ‑‑

5339             MR. GRIEVE: But it would be closer.


5340             MR. ROGERS: ‑‑ it will take it closer, but there is a cost number which has been disclosed on the public record, the Phase 2 costing number for residence primary exchange service, which is $57.42.  So we have a long gap there between the current rate, just under $30.00, and $57.42.  This company has proposed $2.00 and you are saying, in principle, it ought to move closer.  So we know what the cost number is.  Do you have any suggestion to the Commission as to how much closer to cost the rate should be?

5341             MR. GRIEVE: Well, no.  Let me say first that we have also been consistent that we don't have any objection to having our customers in the rest of Canada contribute to making sure that rates are affordable and reasonable in the north for comparable levels of service; that is not our concern or it doesn't concern us or we don't object to that.  We are quite willing to go there, we have said that consistently.

5342             Our concern in this proceeding is that with a massive rise in contribution from a couple of different sources that we should really be looking at whether the rates should go up now.  You are proposing $2 and I don't think more than $2 at a time is something that should be considered.

5343             And my understanding is you are also proposing that rates go up by the rate of inflation every year thereafter or at least that you be permitted to raise them by the rate of inflation.


5344             Our concern here has been that there is no evidence on the record about what is affordable in this part of the world as compared to the rest of Canada and those are the kinds of things that Mr. Ryan was questioning about.

5345             Now what the ultimate rate should be, we don't know because the evidence is not on the record for that.

5346             I would like to point out one thing about Atlin though.

5347             In the province of British Columbia when the merger between Telus and BCTel occurred, BCTel was still saddled with the same rate structure that it had from the old days where smaller exchanges paid lower rates on the value of service proposition.

5348             In Alberta during the 1990s AGT had gone through the pain of changing its rates so that in the higher cost exchanges the rates were at least equal and you didn't get this sort of inversion factor.

5349             Under the current price cap model that we have been operating since 2002 ‑‑ and prior to that we were still getting used to the idea of the merger ‑‑ we haven't been able to raise those rates in the higher exchanges on a graduated basis because of the way the price cap for that high‑cost serving area basket works.  So we have been kind of stuck there.


5350             We could raise rates by 5 per cent but then we would have to lower them somewhere else in that high‑cost serving area basket by 5 per cent as well.  So we have been kind of stuck there, Mr. Rogers.

5351             MR. ROGERS:  Well, that is actually the reason why we raised Atlin because it seemed to be, apart from the anomalous geography, a virtually identical service territory to that served by Northwestel.  The same area, therefore one would think the same high‑cost issues would arise.

5352             And there is at the moment, for reasons you have described, already more than a $6.00 rate differential.  And of course residents in one community, or 15 or 20 kilometres down the road from the other, they would see, well, $22.70 in the Atlin served by Telus.  It is already $29.33 for Northwestel, proposed to go another $2.00.

5353             We hear a lot of evidence about it should go higher.  I take it that what you are saying is you would like to raise it in Atlin but for the Commission's rules under price caps you are stuck?


5354             MR. GRIEVE:  Well, I haven't talked to our marketing people about Atlin and what is going on in Atlin.  But in general what happened in AGT in Alberta was there was an inversion of prices over quite a long period of time and it was a painful period of time.  So we are not suggesting that there would be any rapid price changes, we are just not in a position to do it.

5355             Northwestel is quite familiar with the fact that you can't change prices by large amounts rapidly.  We heard testimony a couple of days ago about the difficulties in the late 90s and I could empathize certainly with that.

5356             MR. ROGERS:  And you in fact have come forward with your latest proposal for price caps just filed on Monday of this week and we have had a very brief opportunity to look at that.

5357             If I have read it correctly ‑‑ and I know you have read it far more than just once ‑‑ I have read that you would, if you get the approvals that you are looking for, be in a position to raise that type of rate, such as Atlin, 5 per cent per year; is that correct?

5358             MR. GRIEVE:  Yes, that would be the maximum under that proposal.

5359             MR. ROGERS:  So if I have done the math correctly, at 5 per cent per year, even if we go out four or five years you still wouldn't catch up to the current rate that Northwestel is charging in the surrounding territory?


5360             MR. GRIEVE:  Yes.  I will trust your math.

5361             MR. ROGERS:  Right.

5362             I would like to talk to you a little bit about another element which is ‑‑ you might call it a classic element of the Commission's current price cap system and that is the deemed contribution from line features and CMS and so on which are attributed to residence NAS.

5363             There has been some discussion that undoubtedly you have heard through the course of this proceeding as to the extent and availability of those features throughout Northwestel's territory.  I am sure you recall that.

5364             We have evidence which has come up at various times ‑‑ do you ‑‑

‑‑‑ Pause

5365             MR. ROGERS:  Shall we carry on?

5366             We have had evidence at various times in terms of the numbers of communities which have access to the full suite of CMS services.  We can go back and look at it, but I think you will recall that the evidence is that it is not universally available CMS ‑‑ for example I understand voicemail as a service is available in about 67 percent of the NAS.


5367             I am suggesting to you that that raises kind of an inherent problem for a company like Northwestel where large companies in the south have a much more universal availability of line features, all of their switches have been modernized and updated.

5368             Will you recall that I have given you the two decisions that the Commission looked at.  They are both cited there.  One is the last framework Decision 2000‑746 and a subsequent Decision 2003‑39.

5369             In both of those decisions the Commission was asked to consider a much wider roll‑out of CMS and optional line features for Northwestel.  What the Commission concluded in both of those cases was there simply wasn't a business case.  You could not make money if you rolled out the line features and optional features to the entire base.  Therefore, under a rate‑base rate‑of‑return model they deemed such an investment to be imprudent and essentially told Northwestel not to do it.

5370             So that is the background where we end up in the situation today with less than full coverage.

5371             You are with me so far?

5372             MR. GRIEVE:  Yes, I will take your word for it that's what the decisions say.


5373             MR. ROGERS:  So what I would like to do is get back to your area.  You have been down through two full price caps and now headed into a third.

5374             We are in a situation where it might well be suggested by some that the classic southern model be applied, in other words the line feature revenue, $5.00 per month, be deemed for every residential NAS.  That is a mechanism of course which is tried and true and long practised in the south.

5375             I would ask you to consider the dilemma or the anomaly of a situation where a company, this company Northwestel, actually doesn't have the functionality in the switches.  The services are not available because the functionality doesn't exist.

5376             So we would then be left with a prospect of the Commission deeming the functionality to be there and deeming the revenues from the non‑existent functionality to be there and deeming them to be received whether or not received.

5377             I would have thought, based on my prior readings of Telus' positions, that deeming non‑existent functionality and deeming non‑existent revenues is something that you probably disagree with as a matter of principle.


5378             MR. GRIEVE:  Yes, as a matter of principle.  And it wasn't until we got here that it became clear to us that there was such a small proportion of lines.  It was our impression that 95 percent of the lines had access to the full range of CMS features.  Now you are telling me that ‑‑

5379             MR. ROGERS:  Well, I don't want to actually debate with you the precise numbers because I'm not sure that you and I are the best ones to do that and the record will stand as to exactly what is where.

5380             Voicemail is apparently 67 percent, but the numbers vary enormously and there are some CMS features which are apparently available more widely.

5381             I'm simply asking you to address the point of principle, and I think what you are doing is you are agreeing with me that it is in principle improper to deem revenues from functionality which is not located ‑‑ in fact the Commission has expressly determined that it would be an imprudent investment to proceed and therefore Northwestel doesn't have it.

5382             MR. GRIEVE:  Well, there are two parts to your question.


5383             The first one is whether it is proper or improper to deem revenues that don't necessarily exist, and I would agree with you as a point of principle.  However, that is part of the Commission's regulatory model that they have applied and we have had to respond to that in order to do our best through bundling and other things to make it more attractive for more people to get those services.

5384             The second part was the capital expenditures which I was going to address before.

5385             Stephen...?

5386             MR. SCHMIDT:  The framework, as you know under 2007‑45, is aspirational in the sense this is what you should be able to reach in the $60‑a‑year contribution.  You should impute in the process.  It has no reference to actuals whether Mr. Grieve and I like it or not.

5387             But we do agree with you, where you are precluded from even aspiring because you haven't been allowed to install the functionality in question, that is a difficult situation.

5388             MR. ROGERS:  The test of reasonableness, I guess what you are saying, in the South is you can go ahead and do it or not.  The background here is that we actually have a Commission decision or two where they have looked at it and they have said this is a bad idea; you should not invest in this functionality.


5389             MR. SCHMIDT:  In the South they are saying try or try harder.

5390             MR. ROGERS:  I think we can leave that.

5391             I would ask you to turn, gentlemen, to Telus' evidence at paragraph 73.

5392             For the purposes of the record, I will read very briefly from that paragraph.  In this evidence of Telus, it says:

"Telus recognizes that in the past the Commission has created exceptions for Northwestel.  For example, in Decision 99‑16 the Commission allowed Northwestel to potentially recover the costs of meeting its basic service objective from the contribution fund if Northwestel could demonstrate that it could not recover such costs from traditional funding mechanisms used by other telephone companies."

5393             Having made that reference to 99‑16, I would like you to actually go to Decision 99‑16.


5394             MR. SCHMIDT:  Okay.

5395             MR. ROGERS:  I have given you a copy just for reference.  You should have it there.

5396             MR. SCHMIDT:  We do.

‑‑‑ Pause

5397             MR. ROGERS:  The specific section that I am referring to is paragraph 68 of the decision.  I will just read two sentences.

"The commission finds it appropriate in these circumstances that the company's switching and aggregation facilities be considered an extension of the local network.  Accordingly, the associated costs are to be assigned to the Monopoly Access category as opposed to the competitive toll category as is the case with other telephone companies."


5398             And the Commission goes on and basically reaches conclusions that arise from that finding: that switching and aggregation facilities should be considered part of local and therefore eligible for the type of funding or subsidy which is otherwise applicable to local in the rest of Canada.

5399             Based on what you have seen so far in this proceeding, would you characterize that as a ‑‑ what I was going to ask you is:  Would you characterize that conclusion of the Commission in that decision as erroneous or in some way misguided or in error?

5400             MR. GRIEVE:  Our view is that you should not take the local or the toll connect facilities and throw them 100 percent into the subsidy.

5401             I should make clear here, because it is not that clear in our evidence, that the contribution portion of the current CAT, we have no problem with that finding its way over into the National Contribution Fund.

5402             We had problems and have problems with the toll connect because our view, in looking at this and in looking at the Commission's decision here, is this is really supposed to be the moving of toll connect in recognition that that is needed in order to support basic residential service.

5403             Now we may have misread that.  So we look at that.  Okay, so you want residential customers to also get some help with toll.


5404             What we find, in looking at the recommendations of the tariff application of Northwestel, is that a whole bunch of other things are coming down, like access.  Despite Mr. Ryan's cross‑examination yesterday, we heard this morning that the wireless access prices were coming down, could come down because the toll connect was all of a sudden going entirely into the contribution fund.

5405             So I look at that I go maybe there is room here for a portion for residential.  But Northwestel says we can't do the allocation.

5406             Our view is that if you want efficient entry ‑‑ and Mr. Pratt said, "Oh, entry is good.  Entry is good."  Actually, entry is only good if it is efficient entry, and it is not efficient entry to subsidize the rates that competitors are going to get to enter the market, because it sends the wrong signals.

5407             So by taking the toll connect and throwing it over into monopoly local ‑‑ in other words, throwing it all into contribution and thereby lowering the cost base for competitors, and thereby allowing wireless competitors to lower their cost base, which then drives out your local services and competes with your local services ‑‑ seems to us a little perverse from an economic perspective.


5408             MR. SCHMIDT:  Mr. Roberts, we were additionally mindful, in the next paragraph, in the first sentence, at 69, of the Commission's exhortation that:  "For your client to be eligible for supplemental funding, Northwestel will have to demonstrate that it cannot meet the BSO using the traditional funding mechanisms relied on by companies in southern Canada."

5409             That sort of conditioned and informed our thinking, and we thought that a rate of zero for toll connect might be falling short of the standard set by paragraph 69.

5410             MR. ROGERS:  Right.  So you have some, shall I say, concerns about the language that appears in Decision 99‑16.

5411             You are, of course, familiar with the subsequent decision, in the year 2000, which established the current framework, and that framework created, essentially, a bundled CAT.  Even at the 7 cents there was consensus on the record that that rate was subsidized, and we had subsidization of the switching and aggregation portion, as well.


5412             So it appears that, whatever the Commission determined in 99‑16, they followed through with it in the 2000‑746 decision.  There is subsidy inherent there because the Commission decided that it was going to go ahead and do it.  It was the only way to have toll competition.

5413             MR. GRIEVE:  I'm sorry, you have lost me.

5414             My understanding of the CAT rate was that it had the costs of the local switches, the Class 5s ‑‑ you know, the switching costs required for toll ‑‑ the access tandem costs in the Class 4s, and then the subsequent costs in the 4s and 5s.  The toll connect link between the Class 4s and Class 5s was in there.  Those costs were all in there, as well as start‑up costs and other things like that, with mark‑up.  Then, on top of that was the contribution element.

5415             So I am surprised to hear that you think that all of those things were somehow subsidized when they were already given an extra boost for contribution to local.

5416             MR. ROGERS:  I am not sure that there is a great deal to be gained by us debating exactly what the history was.  We can all go back and read the record.


5417             I think, if you go back and read the record, you will find that the evidence is that if each of those elements were to be set at cost, and then the contribution added to the top of that, you would end up with a number higher than 7 cents, in excess of 10.

5418             So the Commission decided, notwithstanding that evidence, that 7 was fine.

5419             Northwestel, in that proceeding, had actually advocated 5 cents.

5420             MR. GRIEVE:  It is interesting, Mr. Rogers, because, on the record of this proceeding ‑‑ and I could find the interrogatory ‑‑ the Commission asked, if you took the contribution out of it and took the toll connect costs and put them back into your switch ‑‑

5421             What do you call your rate now?

5422             MR. ROGERS:  Switch connect rate?

5423             MR. GRIEVE:  Right.

5424             If you did that, what would the rate be?  The answer came back, and I think it was 4.15 cents, or .0415 dollars, or however it is written.

5425             So I assumed, looking at the numbers, that the contribution to local that was in there was about 3 cents.


5426             Now, you say that the decisions and the records speak for themselves, and maybe costs have changed considerably since then, but I think it is interesting that if you add the toll connect back in, without the subsidy, it is 4.15 cents.  That is what the interrogatory shows.

5427             MR. ROGERS:  It may well be that the record from that proceeding is somewhat confusing, but we are all, of course, working from the framework that the Commission established in that proceeding, and then moving forward.  So, naturally, it is a reference point from which we start, all of us.

5428             In that regard, we are talking about switching and aggregation charges, and what they should be set at, and, in the context of looking at Telus' evidence here and your comments, we've gone back to Telus' comments in that last proceeding which led to the year 2000 decision, that was public notice 99‑21.

5429             I provided you, through your counsel, a copy of Telus' final argument in the proceeding and I would ask you to turn that up.

5430             And the particular part that I'd like to focus on is in this paragraph, which is paragraph 37 of that proceeding ‑‑ of that comment.

5431             Telus made a proposal as to what it thought the switching and aggregation charges should be, and the sentence essentially says:

"The switching and aggregation charges should be separated out..."  (As read)


5432             That's out of the CAT.

"...and set at a level comparable to those of the south, perhaps a penny."  (As read)

5433             So, the proposal that Telus made back then was a penny for switching and aggregation sounded about right to them.

5434             Northwestel in this proceeding is proposing, for similar functionality, .825, which I would say is about a penny.

5435             We've ended up in this proceeding at a rate which you thought was a pretty good rate five years ago.

5436             MR. GRIEVE:  Well, you know, times change and one of the things that has become clear to us is how distortionary and bad for the industry and the economy it is to distort competition by providing inefficient prices for underlying elements and we have been fighting consistently since 1996 for that.

5437             So, this particular ‑‑ this particular position back in 2000, I'm grateful that the Commission didn't do it, because it would have sent the wrong price signals entirely to the market.


5438             I don't remember making that decision, frankly, at the time, Mr. Rogers, and I would be surprised if I would have made that decision being told that it was below cost.

5439             MR. ROGERS:  All right.  So, we'll leave that at that.

5440             THE CHAIRPERSON:  Mr. Rogers, is this a moment where we might take a break?

5441             MR. ROGERS:  Yes, certainly, Mr. Chairman.

5442             THE CHAIRPERSON:  Could we get together again at four o'clock, please.

5443             Thank you very much.

5444             Thank you, panel.

‑‑‑ Upon recessing at 1542 / Suspension à 1542

‑‑‑ Upon resuming at 1602 / Reprise à 1602

5445             THE CHAIRPERSON: I have just been advised of something which most of you must already know, to wit that we are greatly outperforming our proposed schedule.  It is likely, I think, that we will be finished this phase of the hearing today.  After a conversation with counsel for various parties, it has been proposed that we will take tomorrow morning off and hear final argument tomorrow starting at 2:00 p.m.

5446             Any issues or problems that that raises for any party?  Fine.


5447             Mr. Rogers, please.

5448             MR. ROGERS: Thank you, Mr. Chairman.

5449             Mr. Grieve and Mr. Schmidt, I would like to continue with a discussion which really flows from the discussion that we were just having prior to the break regarding SWAG facilities, whatever is covered by CAT, and I won't get back into that toll transport.  Let us just call them facilities.

5450             If in any decision of the Commission the Commission, in its wisdom, decides that certain facilities in high‑cost areas should be funded because those facilities are uneconomic and they are needed for the achievement for the basic service objective, should the rates for the services over those facilities be the same as the rates in non‑high‑cost serving areas?  I can repeat the question if you would like.  Should I?

5451             MR. GRIEVE: Yes, please.

5452             MR. ROGERS: If the Commission, in its wisdom, decides that certain facilities, we won't specify which, in high‑cost serving areas are to be funded because those facilities are uneconomic and they are needed to provide the basic service objective, in that scenario should the rates for services on those facilities be the same as the rates in the non‑high‑cost serving areas?


5453             MR. GRIEVE: I will make the assumption that the rates in the non‑high‑cost serving areas are already compensatory.

5454             MR. ROGERS: I am fine with that.

5455             MR. GRIEVE: Okay.  And so what you are saying is should they be no higher than they are in the high‑cost serving areas than they are in the non‑high‑cost serving areas and not specifying which particular facilities.  And I would say the answer to that is not necessarily.  I think there has to always be some consideration of affordability/reasonability of those rates to achieve the objectives in the Telecom Act.

5456             MR. ROGERS:  So you are saying ‑‑ I want to understand what you said ‑‑ they could be higher but not necessarily higher?

5457             MR. GRIEVE:  That is right.  It would depend on whether or not the Commission had made a determination that to have them higher than the rates in the non‑high‑cost serving areas would make them unaffordable or unreasonable by whatever policy standard the Commission chose to adopt there to achieve the Telecommunications Act objectives.


5458             MR. ROGERS:  So if I understand your answer, does it mean that the Commission's decision on that point should be driven solely by affordability considerations and not by relative cost considerations?

5459             MR. GRIEVE:  Well ‑‑

5460             MR. ROGERS:  Let's assume that the high‑cost serving area facilities that need to be funded are quite expensive ‑‑

5461             MR. GRIEVE:  Right.

5462             MR. ROGERS:  ‑‑ and if you were to set compensatory rates by any sort of test, the rates would be quite high ‑‑

5463             MR. GRIEVE:  Right.

5464             MR. ROGERS:  ‑‑ so the Commission decides we are going to fund certain facilities in order to ‑‑

5465             MR. GRIEVE:  Right.

5466             MR. ROGERS:  ‑‑ presumably lower the rates.  And my question to you is:  Given that they are funding those facilities, should the retail rates set by the Commission ‑‑ we are assuming we are talking about tariff services ‑‑ be set at the same rates for the same services in the non‑high‑cost areas?


5467             MR. GRIEVE:  My answer was not necessarily and I think there is an element here that we need to recall.  I think that the Commission if it decides to subsidize whatever facility or element that is, then it should be subsidizing it down to or only so much as is required to pass a test of affordability/reasonability, whatever the Commission thinks is the level that would satisfy the objectives in the Telecom Act.

5468             I think your question might have been if the Commission decided to subsidize it, should they subsidize it all the way down to the non‑high‑cost level and my answer is not necessarily, it depends on what the impact is.

5469             MR. ROGERS:  So would you be thinking ‑‑ in more practical terms of an example, are you thinking of residential primary exchange service where clearly certain facilities the Commission has determined are uneconomic, they require subsidy, they do subsidize those rates for those services but what I have taken is that you are not absolutely saying that the rates ought to be the same as in the lower‑cost areas where there is no subsidy?

5470             MR. GRIEVE:  Right.  We are dealing with a hypothetical, so I am not ‑‑ I just want to caution.  But in general, yes, that is right, it doesn't necessarily have to go down to whatever the rate is in the non‑high‑cost serving area.


5471             MR. ROGERS:  So when the Commission is struggling with these problems ‑‑ and they are probably more extreme in the north of Canada than anywhere else ‑‑ the Commission is going to see huge cost differences and determine that certain facilities are probably uneconomic and do merit some subsidy, and your advice to them is that the rates don't necessarily have to be identical.

5472             Is the only consideration affordability?  Is that the only determinant of what the rates should be?

5473             MR. GRIEVE:  Well, I think affordability is ‑‑ you know, the first thing you want to do is you don't want to raise the rate above an affordable level and affordability is usually measured on some basis of the dropoff rate or the penetration rate.

5474             Now, it could be that the Commission would want to say a certain rate may be affordable in the sense that people aren't going to drop off but there are some other things that we want to consider in there, there are some social equity things, and that is open to the Commission to do.


5475             Our issue in this proceeding has been that Northwestel has come forward and said all the rates should be equivalent to rates in the south and we are saying, well, the costs are a lot higher up here, we should see some evidence of affordability.

5476             And then of course the minister used the word "reasonability" and I think that is a reasonable way to go as well, to look at that.  But there is no evidence that we heard about that.

5477             MR. ROGERS:  Right.  I would accept your characterization that there are cost shortfall issues, questions of what to cover and then ultimately what rates should be set.

5478             The language that you have heard repeatedly from Northwestel in this and other proceedings is "reasonably comparable", which is not the same as identical.  So now we are into some fine‑tuning as to what is the difference between the same rate and a reasonably comparable rate.

5479             What I'm taking from your evidence and the answer you just gave me, that equal rate is not what you would propose.  Something higher, but you are not sure how much higher.

5480             MR. GRIEVE:  That's right, because we don't have any evidence on the record.


5481             Northwestel has proposed a $2.00 increase and Northwestel must obviously feel that a $2.00 rate increase is affordable and that it's reasonable, but we don't have any evidence from Northwestel taking into account all the different factors, some of which have been raised by Mr. Rondeau and some of which were raised by Mr. Ryan or presented to the Panel.

5482             We have heard the Northwestel Panels in this proceeding talk about a number of things that might be considered, including average revenue per line, which is something else you might want to take into account, but how to mix and match those and what all of those elements are we really don't know.  We just have Northwestel's proposal in front of us.

5483             MR. ROGERS:  In the price caps regime which Telus is living under now and the new one which has been proposed in your evidence this week, and of course the proceeding is ahead of us, you have proposals with regard to how residential services should be capped and the limitations on any price increases, including, if your proposals were accepted, 5 percent increases per year.  There are a lot of rules but let's start with that.


5484             Would it be your expectation that before proceeding with such price increases that Telus would also engage in an affordability study for each community and file that with the Commission when you propose to implement a change?

5485             Is affordability an essential element here that should be looked at in every price change?

5486             MR. GRIEVE:  I think when a company is coming and asking for a large contribution from customers from the South, that that company, as the Commission has said, has to do whatever it can to get revenues from traditional sources, one of which is the rates.

5487             For us, we believe that our 5 percent rate element constraint ‑‑ it's not 5 percent so we wouldn't be able to raise all of the rates by 5 percent, but a 5 percent rate element constraint is affordable because the Commission itself in the last price cap case said that the Commission would allow 5 percent rate element increases.  So in that particular case we wouldn't have to bring evidence.


5488             But if we were going to come into a proceeding and say we want to move a whole bunch of subsidy from the CAT over to subsidized residential services, as Northwestel has ‑‑ and Northwestel has used its actual costs which is a good thing ‑‑ then in a situation like that it seems to me that it is incumbent upon Northwestel to do some work to say, "This is the best we can do.  This is the most we think we can do for reasonability over a period of time."

5489             Now, if the Commission determines that $2.00 in the rate of inflation is a reasonable amount, is the best that Northwestel can do, then we will live with that, but we are just saying that Northwestel hasn't brought the evidence.

5490             MR. ROGERS:  What I think I heard you say is that, at least in the context of the Telus price caps proposal, a 5 percent rate increase on residential service wouldn't trigger a requirement for any affordability study.  That would be fine.

5491             The $2.00 price increase that is proposed by Northwestel in this proceeding works out to be about a 6 percent increase and I think what you are saying is, "Well, 6 percent and everything else that Northwestel is doing, that does trigger a need for a big affordability study.

5492             Is that right?


5493             MR. GRIEVE:  I think that there is a difference between the purpose ‑‑ there are two purposes to an affordability study that we have been talking about here.  One is to maximize in terms of what is reasonable for customers and affordable for customers in the North given their circumstances, and what is reasonable for other people in the South to pay.  Whereas in our case, in our price cap proposal we are proposing there will be no average price change and that certain rate elements could go up by five but we would have to lower others elsewhere.

5494             MR. ROGERS:  I think Mr. Schmidt has something to add.

5495             MR. SCHMIDT:  Yes.  Our urging of an affordability analysis is grounded in the fact and effect that we have said $2.00 is probably not good enough.  You have to go back and think about more in terms of deriving more from rates.  So it is not really a question of comparing our 5 percent and your 6 percent, although those 6 and 5 numbers are happy memories of early 1980s inflation control programs.

5496             MR. ROGERS:  Or bad memories.

5497             MR. GRIEVE:  We are also not suggesting, Mr. Rogers, that these be immediate because we know what it is like to try to change rate structures over time.  So this isn't a proposal by us to have Northwestel come in with massive rate increases.  We just think that there needs to be some evidence of where you can go along the way, and we don't see it.


5498             MR. ROGERS:  So there needs to be a further assessment on affordability.  You like rates to be closer to costs but you are not going to give a specific number at this point.

5499             I think what was also inherent in what you were saying is that the word "affordability" has to be in this context understood in two senses:  affordability for the residents of the North but also affordability, in your view, with the rest of Canada, those who pay into the fund.

5500             There is that aspect of affordability as well?

5501             MR. GRIEVE:  Yes.  A unique thing about this case is that you have, instead of a traditional public utility case where you have the utility and the customers, here you have the utility, the customers and a bunch of people seemingly only represented in the room by us as a party in the rest of the country.

5502             I think the Commission has to take that into account:  what is the proper balance here.

5503             This is what the Commission's job is.  They are well positioned to do it if they have the evidence in front of them that they need to consider.


5504             MR. ROGERS:  So the Commission's job on assessing affordability in the second sense, that is affordability of southern Canada carriers to pay, and ultimately it flows through to their subscriber base, the number that I understand ‑‑ if you take the math and Northwestel's $40 million, roughly, and divide it by the southern Canada NAS, I think it works out to 18 cents or something like that.

5505             The Commission is going to have to find a new framework or rubric by which it will assess what affordability means in that sense.  It is a different calculus than the assessment of affordability in the case of a residential subscriber in Whitehorse, a very different measure.

5506             MR. GRIEVE:  Yes.  I'm sorry, Mr. Rogers, you know when you are talking about affordability and reasonability of the rates, or reasonableness of the rates, I guess, charged in Northwestel's territory, it has to be done in the context of the environment here.

5507             Whatever is left over ends up being the amount that has to be paid by customers in the South.

5508             So the Commission's duty I think in this case is to ask itself, as it says in other places:  Do the best you can.  Give us some evidence on what the best you think you can do is for your customers and what is reasonably affordable for them.


5509             And then as we have said before, we are quite willing to pay what the Commission considers to be our fair share, or ask our customers to pay.

5510             MR. ROGERS:  Fine; thank you, Mr. Grieve.

5511             I have just one last point on this issue.

5512             My thinking about what your perspective might be on the issue ‑‑ and I pose the hypothetical question:  Assume a high cost serving area facilities of some kind are to be funded because the Commission believe they should be funded for public policy reasons, what then should be the rates for the services on those facilities in the high cost area?  Should they be the same rates as in the non‑high cost areas?

5513             One of the reasons I asked you not only is it appropriate to this case, because it goes to the very heart of the issues that we are talking about, but it came up in another case.

5514             I have provided you with a copy of another favourite decision, disposition of the funds in the deferral account, 2006‑9.

5515             And I can assure the Chairman we are not going into the deferral account.


5516             What I wanted to ask you about is that there is a line in there ‑‑ and I will turn you to paragraph 159, and I will just read that sentence.  No doubt you are quite familiar with the decision, because it is an important one for you and quite recent.

5517             The Commission here is characterizing the position that Telus took with respect to pricing, and it says:

"TCI submitted that the funds from its deferral account should be used to fund the uneconomic portion of the capital investment so that the rates for access to broadband services in HCSAs would be the same as the rates in non‑HCSAs."

5518             That was Telus' proposal:  make the rates the same for the broadband in the funded HCSA areas as in the non‑HCSA areas.

5519             I guess the first question I should ask you is, does that statement by the Commission mischaracterize or misrepresent the position that Telus took?


5520             MR. GRIEVE:  No, I think that is the position we took, because it is similar to the funding approaches that we have been asked to take in our SIP funding that came out of the deferral account as we were going along.

5521             In this particular case, of course, in the province of Alberta, that is what the Alberta government is attempting to do with SuperNet ‑‑ and I feel your pain.

5522             The other piece on this was that we needed to pick a number, so we picked a number.  Our competitors will be able to get access to the facilities, so that if they are equally efficient or more efficient than us, they will be able to compete.

5523             But the deferral account is not really a subsidy in the same sense.

5524             MR. ROGERS:  I appreciate that they come from different sources, but I think the Commission would take the view ‑‑ and, ultimately, they decide ‑‑ that these are funds which, ultimately, are under the discretion of the Commission to dedicate or allocate to a public purpose, which they did.

5525             And a number of proposals were made, including refunds to customers, as you know, and in the end the Commission decided that the best public interest allocation of these funds was to subsidize uneconomic broadband facilities in high‑cost areas.


5526             So I found it intriguing that Telus took the position that these are, by definition, high‑cost serving areas.  The facilities in question are uneconomic, and Telus took the position that, notwithstanding the economics, which are not good, the rates for the services running over those facilities ought to be the same as in the non‑high‑cost areas.

5527             I would have thought, given your general principles, which we talked about earlier in this discussion ‑‑ your general principles, at least with things like the primary exchange service, are that the rates in high‑cost serving areas should get up closer to cost.  They should be higher, but not so for broadband.

5528             MR. GRIEVE:  Of course, we are not required ‑‑ we don't have an obligation to provide high‑speed service.  We wouldn't provide high‑speed service in these areas but for the deferral account funding.

5529             And we know that, where high‑speed service is available, even today, at the current rates, it is not universally taken.  The penetration rates are not what they are for basic local service.


5530             All of these kinds of things go into ‑‑ if you are going to build out to a particular area and you are going to use a specific rate, you know that that's the rate that enough people, or a certain number of people will take it up at.

5531             That was the thinking behind this particular proposal.  If you think it is inconsistent ‑‑ it is a different kind of service.  We are not asking for money from ‑‑

5532             MR. ROGERS:  I would absolutely agree with you that it is a different kind of service, and I could explain why we were somewhat perplexed in thinking about this proceeding.

5533             This proceeding is, among other things, all about trying to figure out how will Northwestel finance, through a number of self‑financing and subsidy models, basic service ‑‑ the Basic Service Objective.  There have been a number of parties, including your company, proposing that rates for basic service, and a number of other services, should go higher, the North should pay more.

5534             That is a perfectly valid position.


5535             But, at the same time, we have this very recent proceeding in which Telus took a position.  Again we are dealing with high‑cost serving areas, but we are dealing with facilities which are not for basic service, but broadband, and, so far, broadband is not part of the Commission's Basic Service Objective.  It is great to have, but it is not part of the BSO.

5536             So you are quite okay with having uniform rates from non‑high‑cost to high‑cost areas for frivolous things like broadband, outside the Basic Service Objective, but when it comes to the Basic Service Objective, which the Commission would characterize as the real essential stuff, we need to have prices that are much higher.

5537             Have I misrepresented your position?

5538             Undoubtedly, I have.

5539             MR. GRIEVE:  Mr. Rogers, first of all, I am not sure that I would call high‑speed frivolous, and I am not sure that you would call it that either.

5540             I can assure you that when we looked at this particular opportunity, it seemed to us that, to give customers in rural areas the opportunity to experience high‑speed service and thereby improve its attractiveness, this was as much a marketing decision to do this, these particular rates than anything.

5541             Here we're talking about a decision which was partly a marketing decision, and I'm not denying that it is, on how do you minimize the amount of subsidy that you draw.


5542             And our concern with the evidence of Northwestel in this proceeding, as I said before, was we were concerned that we were confronted with something where all these price decreases and this massive subsidy increase and we really had to get in and understand it, and this is one of the parts of the decision that we looked at ‑‑ or of the evidence that we looked at was what to do with residential rates.

5543             MR. ROGERS:  Well, I think we'll leave it at that.  We were intrigued by the marketing decision, as you described it, and we'll leave it at that.

5544             Mr. Grieve, I want to raise now with some hesitation one of your favourite subjects, and you'll recognize ‑‑ in fact, you probably know exactly what this subject is ‑‑ the regulatory market.

5545             MR. GRIEVE:  Could be any ‑‑ okay.

5546             MR. ROGERS:  The regulatory market.

5547             MR. GRIEVE:  That one.

5548             MR. ROGERS:  And I notice a shudder going through the room, but ‑‑ and we'll have to bear in mind there is a limitation on the Commission's time here.

5549             MR. GRIEVE:  Yes, and their patience, I'm sure.


5550             MR. ROGERS:  And their patience.  But I'd like to start, it's been ‑‑ I think we're on common ground that Telus has argued a number of regulatory principles over many proceedings and one of those would be the proper application of the regulatory bargain.

5551             And in concise terms, as much as you can, can you give me at least a sketch of your understanding of what the regulatory bargain is?

5552             MR. GRIEVE:  Yes, and I'll make it as concise as possible.

5553             It's basically ‑‑ basically this, that where the government regulates the rates of a company, then the government has the responsibility to make sure that the company, through its rates for regulated services, has the opportunity, a reasonable opportunity to recover the costs for those regulated services.

5554             There is one twist in Canadian law, which is Decision 79‑11, that says that when you lose a customer as a result of competition, you're not to be compensated for business risk, or for business losses.


5555             MR. ROGERS:  So, what I'm taking from your answer ‑‑ and I'm sure there are many more avenues that can be pursued ‑‑ but if there is a company such as an incumbent telephone company most relevant to this industry which has an obligation to serve and which is required to provision and serve at rates which are set by regulation, there is a legal and regulatory bargain which requires the regulator to set conditions under which the operator facing such obligations has a reasonable opportunity to recover the investment with a return.

5556             MR. GRIEVE:  That's right.  I think it's important to say that the regulator should not force conditions under which there is no opportunity to recover the costs.

5557             And I have in mind ‑‑ and there was evidence in the last price cap case on this ‑‑ setting the wholesale rate so low that nobody would be able to make any money at the retail level if they had to build those facilities.

5558             And, so, that's why in this particular case I found it quite odd that Northwestel was proposing to lower things like the wireless access rates and those things that I would ‑‑ as an ILEC, I would say, well, don't lower those below their compensable cost because then if we lose that ‑‑ if we lose our customer, we're not indifferent in terms of whether we're offering the wholesale service or the retail service.


5559             But, you know, with those details, yes, the regulator should give you every opportunity to do it, but shouldn't guarantee you business success.

5560             MR. ROGERS:  All right.  I think we can take that and go forward with that.

5561             Continuing with the context of where we are today with incumbent telephone regulations, specifically ‑‑ well, there are lots of incumbents, some are on ‑‑ most are on price caps, there's one which is still on rate base rate of return; namely, Northwestel.

5562             And if an incumbent company is required by the regulator to invest in and operate facilities or services to meet certain social or policy objectives, basic service objective or something like that.

5563             Can I take from your comment that there is a requirement for the regulator to establish a mechanism which allows the incumbent, I will use the word allows, reasonably allows the incumbent to recover its capital and operating costs associated with such facilities?

5564             MR. GRIEVE: Yes, in general terms, yes.


5565             MR. ROGERS: And if you go back and consider we were speaking a while ago with regard to Decision 99‑16 of the Commission in which the Commission found that there were certain facilities, in that case toll transport and SWAG and so on, those types of facilities the Commission concluded probably couldn't be recovered through the normal rates and the traditional funding mechanism that otherwise had been developed for the south.

5566             You will recall that part of that decision, that was a conclusion reached by the Commission in 99‑16.  You are okay with that?

5567             MR. GRIEVE: Yes.

5568             MR. ROGERS: Then the Commission took that and if I could say operationalized it, rightly or wrongly, in 2000‑746 and put that into effect.  They struck certain rates to cover CAT and transport.  You may not agree with those, but the Commission went ahead and did that.  So we have sort of an operationalized ‑‑ I cannot say that word ‑‑ we put it into effect in that decision.  Do you agree with that?

5569             MR. GRIEVE: Yes.


5570             MR. ROGERS: If that continues to be the case, post rate‑based rate of return into price caps and the toll transport costs are not recoverable through rates or any of the traditional mechanisms that the Commission has devised through its southern model, do I take it that you would continue to agree with me that there needs to be some mechanism that the Commission devises to ensure that those facilities, which are essential to the basic service objective, be recovered?

5571             MR. GRIEVE: Yes, let me explain.  Our reading of that particular decision was that the toll connect subsidy or the toll connect adjustment was there for the purposes of the basic service objective for residential customers.  When it gets put into monopoly local we asked the question the other day did you include the business portion of the toll connect in your Phase 2 costs for business, which you hadn't done, and we discovered that the Phase 2 costs for toll connect, even though it is going to be recovered entirely through the subsidy fund, is in Phase 2 and the Phase 3 costs are a monopoly local category.


5572             So I was sitting wondering well how does this work?  You don't have split rate base so I wasn't sure how this would work.  So the Commission asked in interrogatory, it said well could you do an allocation between the business portion and now it turns out the wireless portion and other portions of toll connect and the residential, to which the company answered no.

5573             So the Commission now seems to have two choices.  One choice is to put it all in contribution, as you have said.  In which case, in our view, the Commission will not just be subsidizing basic service for residential customers, it will also be subsidizing basic service for, assuming that customers actually get the benefit of it, for business customers and wireless customers and anyone else who uses the toll connect.  So there seems to be sort of a black and white here for us and that was one of our concerns with that.

5574             So we think that by pricing something at zero you are actually not pricing it at a level that is compensatory and we think that it should be compensatory.


5575             MR. ROGERS: Okay.  I don't want to get into specific facilities at this point that will or will not be subsidized.  In the end, the Commission in this proceeding will decide what facilities merit subsidy and how that subsidy is to be derived.  Whether it is for the same facilities in the south as in the north, that is a decision for the Commission.  Whether it is toll transport and how they deal with it, the Commission has a wide discretion and we have just seen an example, the one that I cited, the disposition of the deferral account, the Commission has decided to dispose of certain funds to subsidize high‑cost serving area broadband.  So the Commission has basically got a blank slate as to what it can subsidize and so they will and they in fact set up a certain subsidy regime today which is currently operating to support the provision of services into the remote and high‑cost areas.

5576             The question I have to you is:  In that environment where such a regime is established, a new network comes in built on an entirely new platform which basically holds out the potential to bypass the existing network, does the Commission have any ‑‑ bearing in mind the regulatory obligation or the regulatory bargain discussion we had earlier, is it your view that the Commission has any continuing obligation to ensure that there is a mechanism that allows that underlying network that was built as a universal service network to continue to stay in place given that a new bypass network has now been constructed?


5577             MR. GRIEVE:  I understand this question really well because I have thought about it a lot and I am not sure I have all the answers here.  And it is a legal question as much as anything else, so it is kind of odd to be examined on legal questions.

5578             But from a policy perspective it seems to me that if someone comes in and builds a parallel network, whether with subsidies or not, that you should be able to go to your regulator and say we should be relieved of our obligation to serve.

5579             But I don't think that the regulator has the responsibility to say to you ‑‑ because this is now competitive loss even setting aside the fact that these networks are subsidized, and as I said, I understand that fully.  The Commission doesn't have an obligation to compensate you for competitive losses but it shouldn't do anything to exacerbate the problem and should try to put in place mechanisms or freedoms to allow you to respond as freely as possible.

5580             So in those kinds of communities, if you need to respond by having more pricing flexibility and things like that, those are the kinds of things that you should ask for.


5581             In terms of should you still have an obligation to serve to provide plain old telephone service using the Commission's quality of service indicators in an environment where someone has built a competing network, I would say there is a good opportunity for you to apply to the Commission to be relieved of that obligation to serve but I don't think there is an opportunity for you, unless you can turn me to another case that says that the Commission has an obligation to fund your competitive losses, whether to a subsidized network or not.

5582             I hope that was helpful.

5583             MR. ROGERS:  That is helpful and I think buried in that answer was an acknowledgement that the situation in terms of relative cost efficiencies is exacerbated when the new entrant network turns out to be largely or wholly subsidized by government.  You are then facing someone who is not competing on the basis of real costs but in effect artificially low costs, which makes the problem or at least exacerbates the problem.

5584             MR. GRIEVE:  That is right, it exacerbates your problem of cost recovery.  But a competitor ‑‑ I mean we have the same problem when a competitor enters in our market, whether subsidized or not, and that is not something we can go back to the Commission to ask for compensation but what we can ask for legitimately is the freedom to be given an opportunity to respond and to recover our costs where we can.


5585             MR. ROGERS:  If you and I were here, perhaps not ‑‑ well not in front of the CRTC but if you can imagine this discussion taking place where the two companies in question were completely unregulated in a, say, consumer products business or an industrial product line and a new technology had come along and that technology had radically lowered costs for whatever reason and the net result was that the older facility could not generate enough revenue by any means through its own services and charges off that facility to sustain itself, would you say that in principle what the private entrepreneur would do is essentially abandon the facility or try to sell it?  Would that be the economic decision to do?

5586             MR. GRIEVE:  I guess, yes.

5587             MR. ROGERS:  So that would be what a laissez‑faire capitalist would do if the facility has been essentially bypassed in an economic sense that has been overtaken by technology which has much lower costs for whatever reason.

5588             The dilemma that arises for someone with the obligation to serve is that at least in the context of telecom regulation we haven't yet seen any signs that the Commission is prepared to allow an incumbent to abandon facilities.


5589             Would you agree with that?  There has been no indication, at least that I am aware of, that the Commission is prepared to contemplate the withdrawal and abandonment.

5590             MR. GRIEVE:  I think that's right.  I can't think of one, although there is a situation in Richmond Hill where Bell was relieved of its obligation to serve in a subdivision or two because ‑‑ the Futureway subdivisions, I think they were relieved of their obligation to serve there which they otherwise would have had because Futureway, which I believe was the carrier affiliated with the developer, had moved in.

5591             MR. ROGERS:  Right.  I never thought of Richmond Hill as a remote and high‑cost serving area.

5592             MR. GRIEVE:  It's not, but you asked the obligation to serve.

5593             MR. ROGERS:  Yes.  One of the most privileged suburbs of Toronto.


5594             Let me just then say that we are now talking about a new technology which has in effect radically changed the underlying economics of serving these areas.  It turns out that the alternate technology in question happens to have been funded by somebody else, but leave that aside.

5595             We are of course speaking about IP networks, IP networks.  Your company of course is struggling with this very same issue, not in the same geography but struggling with the same issue.  What those networks are often thought of, at least initially, is, "Well, we are just going to put in high‑speed internet access and everybody can go web surfing and that's about it."  It's a sort of wonderful little thing for the community and a great thing too.  No one would have anything against it.

5596             But would you agree with me that once those facilities are in and high‑speed is into a reasonable proportion of the homes, we are not just looking at the provision of high‑speed internet access, we are looking at essentially the provision of a whole host of services which we would now call legacy services, in other words voice, long distance, line features, all of the things that were traditionally offered off the PSTN?

5597             MR. GRIEVE:  Absolutely.  And to the extent that the incumbent loses traffic on its network to that competition, fair or unfair, it's not the regulators responsibility to compensate the incumbent for that.


5598             Now, you may want to have discussions with governments that funded the network, but if they were a network, a brand new network built by an entrepreneur that wasn't subsidized in any way, that's a part of your business risk.  That is a part of your risk of doing business, but you need to have the flexibility to do the best you can to recover and to adapt.

5599             MR. GRIEVE:  You need the flexibility to adapt, which suggests regulatory change.

5600             MR. ROGERS:  Right.  I was talking about things like pricing flexibility, perhaps relief from the obligation to serve, those kinds of things.

5601             MR. GRIEVE:  I have sort of a last question on this point.  I think I know your answer.

5602             Would it be fair to say that. at least speaking on behalf of Telus, the prospects of having VoIP and related IP services running over broadband facilities provided by anybody as a competitive threat to the incumbent or legacy service, I take it that you would not describe that as mere possibility and exaggerated in terms of its effect?


5603             This is not simply wild exaggerations by the IP community?  This is something that is real and that you can see it happening and that it is inevitable?

5604             MR. GRIEVE:  It is real, we can see it happening.  It's inevitable.  We have actually seen drops in ‑‑ basic services is measured not by minutes, it is measured by lines.  So we have seen a drop in lines.  We have seen drops in long distance minutes because ‑‑ long distance minutes for fax machines because people don't use faxes that much any more.  Just as we saw increases in long distance minutes when fax machines came in, we now see the decreases in relative terms in long distance minutes.

5605             So all of those things are a big challenge.  They are a big challenge to every company in the industry, how to recover the costs of the facilities over which IP is being carried.

5606             MR. ROGERS:  Mr. Grieve and Mr. Schmidt, unless you would like to go back and talk about lacrosse, I think we are finished.

5607             MR. GRIEVE:  Could we do it somewhere else?

5608             MR. ROGERS:  Absolutely.

5609             MR. GRIEVE:  Thank you.

5610             MR. ROGERS:  Thank you.

5611             THE CHAIRPERSON:  Thank you, Mr. Rogers, Ms Chalifoux.


5612             THE SECRETARY:  Mr. Chairman, before introducing the next panel, I would like to register the two Northwestel exhibits that we have received.

5613             The first one is entitled "Telus Tariff CRTC 1000‑5, Item 30, Exchanges".  It is Exhibit No. 4.

5614             Exhibit No. 5 is "Telecom Public Notice CRTC 99‑21, Northwestel Inc. Implementation of Toll Competition and Review of Regulatory Framework, Quality of Service and Related Matters, Telus Final Argument, June 26, 2000".

5615             THE CHAIRPERSON:  And that is Exhibit No. 5.

5616             THE SECRETARY:  Yes.

EXHIBIT NWTEL‑4:  Document entitled "Telus Tariff CRTC 1000‑5, Item 30, Exchanges"


EXHIBIT NWTEL‑5:  Document entitled "Telecom Public Notice CRTC 99‑21, Northwestel Inc. Implementation of Toll Competition and Review of Regulatory Framework, Quality of Service and Related Matters, Telus Final Argument, June 26, 2000"

5617             THE CHAIRPERSON:  Who is next then?

5618             THE SECRETARY:  Our next panel is Mr. Rondeau from UCG.

EXAMINATION / INTERROGATOIRE

5619             MR. RONDEAU:  Mr. Chair, Commissioners, to the new panel, I would like to welcome you and all of your staff from Telus to Whitehorse.

5620             MR. GRIEVE:  Thank you very much.

5621             MR. RONDEAU:  I hope you have a good time while you are here and you get to see some of our beautiful country.

5622             MR. GRIEVE:  Thank you.

5623             MR. RONDEAU:  It was very interesting to hear some of your perspective in your intervention, especially on the technical cross that you presented.

5624             I realize that you are not the telco with the application or the proposal in front of the regulator here, so please bear with me if I overstep my boundaries in some of my cross to your panel.

5625             It would appear to me that Telus is implying very strongly that local rates, our rates in particular, should be raised even higher than what Northwestel is proposing.


5626             Is that correct?

5627             MR. GRIEVE:  What we have said is that we think that rates should always be moved closer to cost in order to reduce the dependence on subsidies.  We have said that we support the $2.00 increase and that we think that Northwestel has not done the work necessary for the Commission to know what the appropriate affordable/reasonable level would be.  There is not enough information for the Commission to make that determination.

5628             While we have said there should be staged increases, we don't know what those staged increases should be.  We are certainly mindful of the fact that any kinds of increases can't be done in one fell swoop.  They have to be done in gradual terms.

5629             MR. RONDEAU:  Fair enough.

5630             Maybe I can take you to some of your evidence, particularly IR No. 4, where I can simply give you the gist of it.

5631             You are asking Northwestel to forecast their net income and rate of return if they assume a further increase of $2.00 in residential rates and a $5.00 increase in business rates for the years 2008 to 2010.


5632             It would seem that this is a rather extreme version.  Would you not agree with that?

5633             MR. GRIEVE:  In interrogatories like this, Mr. Rondeau, it is not uncommon for us to ask interrogatories like this in order to get a sense of how much difference a dollar or two dollars or three dollars makes to the subsidy calculation.

5634             I think Northwestel refused to do this.

5635             But that is not a proposal of ours in the interrogatory.  We are simply asking for information from Northwestel so we can see what the impact is.  We call it a kind of sensitivity analysis.

5636             MR. RONDEAU:  Understandable.  You wouldn't entertain doing this to your own consumers, would you?

5637             MR. GRIEVE:  Well, indeed we have in the past, and we understand from this proceeding that Northwestel has gone through this kind of thing before and that it is quite painful.  And I know that it is quite painful.  That is why we are very sensitive to not only the amount that the rates end up being but the pace at which they get there.

5638             MR. RONDEAU:  You are talking about rate rebalancing, of course.


5639             MR. GRIEVE:  We call it rate restructuring, because there is not always a rebalancing.  Sometimes the balance on the other side has already happened, long before you get a chance to do the balance on this side.

5640             It is like what happened with toll.

5641             MR. RONDEAU:  Because, if you were entertaining such a thing as this, we certainly wouldn't want to see you as a competitor up here.

‑‑‑ Laughter / Rires

5642             MR. GRIEVE:  I will take that back to the ranch, so to speak, in Alberta.

5643             MR. RONDEAU:  In one of your IRs you requested Northwestel to give a package of services and costs for various things in their operating territory ‑‑

5644             MR. GRIEVE:  I remember, yes.

5645             MR. RONDEAU:  ‑‑ comparing them with Edmonton.

5646             From this, what I have gathered from hearing one of your statements made earlier ‑‑ you stated that since the costs are so high for all of these other products and services in the North, why shouldn't the cost for having a telephone in your house be more expensive.

5647             Am I correct?


5648             MR. GRIEVE:  We have said that one of the things that needed to be considered in an affordability examination ‑‑ there are a number of things to consider, and some of them are:  What is the general level of prices in the area that you are dealing with?  What is the general level of income, the average income level?  How much are people paying today?

5649             Northwestel talked about the average revenue per line.

5650             All of these different things go into an affordability study.

5651             We wanted to get on the record information about how the North is different in many ways, and one way it is different is that prices for a lot of things are different.

5652             Northwestel was putting forward the case that, automatically, because the price is a certain amount in the South, it should be the same price in the North, and we were just trying to demonstrate that in no other industry and with no other product is that necessarily the case.


5653             Does that mean that the prices in the North should move up to cover all of their costs, as these prices would?  That is not what the Canadian telecom policy says.

5654             Telus has said many times that we are willing to go to our customers to make a contribution in the North.  What we are asking for is a fair look at what would be affordable and reasonable for people to pay.

5655             That was one of the reasons we put this stuff in.

5656             MR. RONDEAU:  Fair enough.

5657             As a consumer, I see this another way around.  I see our costs being higher for all of these other things in the North, and we have a telecommunications principle, and we have universality as one of the principles, where everybody should have a telephone, or has the right, basically, to have a telephone in their home.

5658             This has been set by the Commission and by the government.  Would you agree with that?

5659             MR. GRIEVE:  Yes.

5660             MR. SCHMIDT:  Yes.

5661             They articulated the Basic Service Objective in Decision 99‑16.

5662             MR. RONDEAU:  Exactly.


5663             The last one that I am going to talk about is the presentation you put out at the start.  I don't have the number, but it is a Yukon Statistical Review that you brought forward, where you show average weekly earnings.

5664             You don't need the actual numbers.

5665             I am sure you heard the argument, or the discussion, with Northwestel about skewed numbers.  When you have a small workforce and you have half of your workforce that is earning a very good wage, would you agree that this would skew the numbers more so than in, let's say, the Canada‑wide average earnings that are set here?

5666             MR. GRIEVE:  I don't know that.  I don't know if it would, but I understand your point that averages have their meanings ‑‑ you know, your analogy about the half‑frozen/half‑melting guy.

5667             And I understand that full well, and I don't understand the demographics in the territories well enough, but there was a discussion a couple of days ago about the potential for what ‑‑ it actually wasn't a discussion, someone alluded to it in passing and I was surprised that someone hadn't picked up on it.


5668             If there is a specific issue like that, apart from territorial governments having, you know, support programs and things like that, which is something else that has to be taken into consideration, there's also the possibility that perhaps targeted subsidies, a form of targeted subsidies in a place like the northern territories would be something that would be ‑‑ that would be something for the Commission to look at.

5669             The Commission has resisted that before, but this might be the kind of area and you might want to do the work to see what kinds of opportunities there might be for that in order to address the clientele that you have to deal with.

5670             MR. RONDEAU:  And we also have basically four different economies in Northwestel's territory, we have three different territorial governments and then we have northern B.C., so we ‑‑ it's very difficult to say one thing about one area that fixes the whole area together.

5671             MR. GRIEVE:  Absolutely agree.

5672             MR. RONDEAU:  Okay.  Could you please look at the Consumers Group Exhibit No. 2.  It is the residential access rates comparisons.

5673             Do you have that?

5674             MR. GRIEVE:  We will in a moment.


5675             MR. RONDEAU:  Now, if I look at this graph and interpret it, right now we are ‑‑ we're sitting at the top end without ‑‑ even without this increase Northwestel is sitting at the top end, we have Télébec and SaskTel that would be a little bit before us ‑‑ a little bit more expensive, in other words right now.

5676             MR. GRIEVE:  Just give me a second to ‑‑ we're deciphering the exhibit.

5677             Sorry, where does it say that current Northwestel rates ‑‑

5678             MR. RONDEAU:  That's the line I believe where we're at now, and then with the increase ‑‑

5679             MR. GRIEVE:  We have the proposed ‑‑ we have two lines that are both proposed increases.  Are we looking at the same exhibit?

5680             MR. RONDEAU:  You may be correct, I may be interpreting this wrong.

5681             MR. GRIEVE:  Is this the one?

5682             MR. RONDEAU:  Okay.  Even with the proposed increase then we will be by far the highest in the land, according to this chart.

5683             MR. GRIEVE:  You would be the highest by far.


5684             MR. RONDEAU:  Now, when comparing Telus Alberta and Telus B.C., we're quite a bit higher.  Would you say that's a good analysis?

5685             MR. GRIEVE:  Yeah, $7, something like that.  It would be ‑‑ the new highest rate would be  around $7 higher.

5686             MR. RONDEAU:  Thank you.  Just as an offset, how does this Prince Rupert Tel keep their rates way down there?  Maybe we should be getting them up here.

‑‑‑ Laughter / Rires

5687             MR. GRIEVE:  I have no idea.  They are a municipal government, municipal telephone company.  They seem to do quite well in settlements.

5688             MR. RONDEAU:  Thank you.  Now, in my research for this particular intervention, I've come across stories, articles that there have been many consumer complaints with the southern telcos, who when they went into this new price capping regime, they offered many more option packages.

5689             But the consumers are complaining because they have never been informed properly on these packages.  Is that...?


5690             MR. GRIEVE: I don't think I have seen complaints about them not being informed.  There might be complaints about them having too many options, for some people.  You know, the reason that you put out, packages or bundles of options is to try to attract people to buy more of them.  So if they are complaining they don't understand them, that is real big problem that our marketing department has.

5691             But, you know, all of the services that we offer are offered and are available on a standalone basis.  And then if you want to bundle a number of options and features together then you can get a lower average price for each of them, lower that you would if you bought the whole group one at a time.  But I don't know that I have heard complaints about confusion or dissatisfaction with that.

5692             MR. RONDEAU: Do you have any type of formal ethics of conduct with your consumers or a consumer's bill of rights?


5693             MR. GRIEVE: We have in Alberta in 1993 we proposed a complete change to the terms of service that the Commission had had in place since the 1980s.  Those terms of service, and I wish I could remember now all the details, but I had the pleasure of drafting the original of these and we made them as plain language as we could keeping within the spirit of the law.  And in one place in those terms of service there is a placed that says, in that time, AGT's rights, AGT's responsibilities, the customer's rights and the customer's responsibilities.

5694             So when we did the merger with BC Tel we transposed that form of terms of service over to BC Tel and in that particular format of terms of service there is, in that sense, a consumer bill of rights.

5695             MR. RONDEAU: Thank you.

5696             Now, when you went into ‑‑

5697             MR. GRIEVE: Oh, just one other thing.

5698             MR. RONDEAU: Sorry.

5699             MR. GRIEVE: We also have a corporate ethics policy and we have a corporate ethics course that every employee has to take every year and it includes things about treatment of customers as well.

5700             MR. RONDEAU: Thank you.

5701             Now, when you proceeded with your price cap regime in your territory did you have any type of quality of service mechanism that was initiated?

5702             MR. GRIEVE: We had quality of service indicators that we had to file with the Commission on a regular basis.  In going back to the early 1990s for AGT in Alberta and for BC Tel into the 1980s I think it was, so there was quality of service reporting.  There wasn't a formal penalty mechanism, which is what I think you are asking about.


5703             MR. RONDEAU: That is what I am getting at, yes.

5704             MR. GRIEVE: And I know that there are many different versions of history on this, so I will give mine.  For Telus one of the issues that we ran into was the difficulties with the merger and I admit that quality fell off in certain areas during that period.  We have had many quality of service struggles along the way after the merger with technological change and massive down‑sizing and things like that, you know, through the years.

5705             Our retail quality of service indicators are now back above Commission levels, but we are still not satisfied, because we are now in a competitive market, especially in the residential market, so we have to improve our performance.

5706             MR. RONDEAU: That was my next question, was to ask you if your quality of service dropped drastically when this was initiated, this program?

5707             MR. GRIEVE: I don't think I would attribute the causality of it entire to price caps or even partially.  I think that we had a lot more things going on at Telus than price caps at that time.


5708             MR. RONDEAU: Did not your rate of return bounce sky high?

5709             MR. GRIEVE: Our rate of return, measured in regulatory terms, did but it had nothing to do with that and it had nothing to do with optional local services.  The record is very clear on this, that it had everything to do with the Commission freezing the contribution rate at 0.02 cents in 1998 and toll minutes went through the roof as prices decreased.  All of that extra contribution got attributed over to the utility segments and the rates of return for all of the ILECs on their utility segments went up.

5710             MR. RONDEAU: Thank you for enlightening me on that.

5711             Now, your last question to the Policy Panel of Northwestel you questioned Mr. Walker on how he interpreted the Minister's statement, comparable, reasonable.  Now, would you not say this is just a matter of semantics?

5712             MR. GRIEVE:  No, actually I don't think it is semantics at all to say there is a difference between saying reasonable, what reasonable rates are, and the same rates as ‑‑ I can't remember ‑‑ reasonably comparable rates or similar rates, I think, is what Northwestel has been saying.


5713             I think there needs to be an assessment of reasonableness, a part of which is affordability and a part of which is income levels and things like that.

5714             MR. McCALLUM:  And, Mr. Rondeau, I don't think the word "comparable" appears anywhere in our Act but the word "affordable" and "reasonable" certainly do.

5715             MR. RONDEAU:  Yes, but if you are going to have universality you need some type of a comparable program as well.  I won't argue this, it is not worth arguing.

5716             I will go on with asking you ‑‑ I am sure you are aware of section 7 of the Telecommunications Act, specifically (b) and (h).

5717             MR. GRIEVE:  I have heard of them.

5718             MR. RONDEAU:  Now, you consider the northern territories should be treated as an equal partner in the Confederation of Canada?

5719             MR. GRIEVE:  Absolutely, and ‑‑

5720             MR. RONDEAU:  Thank you.


5721             MR. GRIEVE:  ‑‑ and Telus has said many times in this proceeding and throughout the last number of years that we are willing to do our piece, to take on our responsibilities, our fair responsibilities through our customers to make sure that the northern territories have access to quality telecommunications services.  That is not the debate.

5722             Our only question in this proceeding is what is the level that the Commission believes it needs to subsidize to or to which level does the Commission need to subsidize to not make that subsidy more than it needs to be.  It has never been a question of us saying we didn't think that there should be ‑‑ that people in the north should have the right to comparable telephone services.

5723             MR. RONDEAU:  That is basically my next question, which was:  Would it include access to the information highway at affordable/reasonable/comparable rates with the rest of Canada?

5724             MR. GRIEVE:  Well, I think that for the purposes of the Commission, the Commission defines basic telecommunications services and the Commission's responsibility is to make sure the basic telecommunications services are affordable in all regions of the country.  So to that extent that is the Commission's responsibility and that is what we are dealing with here.


5725             If you are talking about broadband services, the federal and provincial and territorial governments to different degrees have already taken that on through completely different programs unrelated to this proceeding.

5726             MR. RONDEAU:  Thank you.

5727             Do you agree that there is a unique economic and social environment in the north?

5728             MR. GRIEVE:  Yes, I believe there is a unique social and economic environment in every single province in the country and in different regions of those provinces, all of which need to be considered in the CRTC's deliberations.

5729             MR. RONDEAU:  Including cultural and all the other good things we have here?

5730             MR. GRIEVE:  Including cultural, including income, including the cost to serve all of those things, yes.

5731             MR. RONDEAU:  My last question:  Do you agree that a subsidy mechanism is necessary to provide the people of the north what is enshrined in the statutes of our land?

5732             MR. GRIEVE:  Yes, I do.

5733             MR. SCHMIDT:  And it is there now in the Act.

5734             MR. GRIEVE:  And it is there now.


5735             MR. RONDEAU:  And do you argue that telecommunications is a very important principle to ensure that we have a sufficient population base in our north to ensure that we impose our sovereignty here?

5736             MR. GRIEVE:  That is way beyond my level of expertise.

5737             MR. RONDEAU:  Thank you.

5738             MR. GRIEVE:  Thank you.

5739             THE CHAIRPERSON:  Thank you, Mr. Rondeau.

5740             THE SECRETARY:  Mr. Chairman, we have no more parties who want to cross‑examine and I understand that staff have no questions for the Telus panel either.

5741             THE CHAIRPERSON:  Staff has no questions?

5742             THE SECRETARY:  No questions.

5743             THE CHAIRPERSON:  Commissioner Williams.

EXAMINATION / INTERROGATOIRE

5744             COMMISSIONER WILLIAMS:  Good afternoon, Mr. Grieve.  Why do you think that Telus is the only competitor or large telephone company that felt it necessary to travel to Whitehorse and appear as an intervener?


5745             MR. GRIEVE:  I think the short answer is, we are the only big unaffiliated payor into the contribution fund.

5746             COMMISSIONER WILLIAMS:  All right.

5747             What conditions would have to be in place to entice Telus to take a more competitive role in this marketplace?

5748             MR. GRIEVE:  You know, I don't know.

5749             COMMISSIONER WILLIAMS:  Are there any barriers to competition that you wish to identify that we might not be aware of?

5750             MR. GRIEVE:  No.  There may be barriers to entry, but those barriers are not barriers that the Commission is in a position to do anything about or should.

5751             I said before that I have heard people talk about ‑‑ including Northwestel ‑‑ how important it is to get competitors up here and I ask myself, "Why would you want to incent inefficient entry?"  Because if you are going to subsidize competitors so you have inefficient entry, then you are not doing anyone any favours at all.


5752             You might like choice, well, then you are going to have to pay for choice because it is going to be inefficient and the infrastructure company in the North that provides telephone service, Northwestel, is going to be displaced in that kind of an environment.

5753             So competition is great as long as it is efficient and as long as the companies that are entering are more efficient than the incumbent.

5754             If you want to have companies come in and enter on a services basis where they ride over the same infrastructure, that's another question you have to ask yourself, "Does it make any sense up here economically to build or provision another switch?"  We already talked about the small population base.  Are you going to put another small switch that has probably got to have extra capacity in a community that already has a small switch?

5755             So I think we really have to be careful about this, about counting competitors in order to determine whether something is competitive.  There are some markets, some places, where it only makes sense to have one carrier in the market and I would say that some of the pictures we saw at the front of Northwestel's submission on the first day would be some of those places.

5756             COMMISSIONER WILLIAMS:  Would that also carry through to the two or three or four larger centres that Northwestel serves?


5757             MR. GRIEVE:  I don't know, because we don't know what the costs are in these centres.  We know that the population is quite small, but also it is not just a question of population size, it is also a question of the amount of traffic generated.  And we have heard, I don't know how many times, there are four levels of government operating out of here.

5758             In Yellowknife, where my sister lives, I know that the diamond mining is exploding and there are big, big diamond mining companies in there benefitting from Northwestel's business rates.

5759             So I don't know if it's worth going into these places to compete on a broad basis, but I know that there are competitors who would be interested and we heard about some of them going in and perhaps serving an individual mine site or something like that, or branch offices of companies.

5760             Those are difficult things, but if the infrastructure is owned by Northwestel, or whoever the incumbent ILEC happens to be in a place like that, is made available to these competitors at prices that are competitive with ‑‑ represent, rather, the bypass cost for the competitors, then there is no reason why Northwestel shouldn't be able to get its fair share of that kind of business.


5761             COMMISSIONER WILLIAMS:  All right.  Thank you, Mr. Grieve.

5762             That's my question, Mr. Chair.

5763             THE CHAIRPERSON:  Thank you, Commissioner Williams.

5764             I guess it remains to thank the panel, Messrs Schmidt and Grieve and Rose.  Thank you very much.  We appreciate it.

5765             Ladies and gentlemen, unless any party wishes to raise any ‑‑

5766             I'm sorry, Mr. Rogers.

5767             MR. ROGERS:  Only, Mr. Chairman, to advise that we have responses to a number of undertakings and, as you will recall yesterday, there were quite a few that we promised for today.  I can provide those to the Hearing Secretary.  They can be entered.  I don't know whether you need to do that on transcript now or whether you want to do that tomorrow morning, we are indifferent, but we have the documents with us.

5768             THE CHAIRPERSON:  I think after we close you can deposit those with the Hearing Secretary, if that's reasonable.

5769             MR. RONDEAU:  Right.  Yes.

5770             THE CHAIRPERSON:  Any other issues of a procedural nature?


5771             Mr. Rondeau?

5772             MR. RONDEAU:  Yes, thank you, Mr. Chair.

5773             I will very likely not be here tomorrow so what I would like to do now is formally notify the Commission and Northwestel Tel that our organization will be applying for cost awards associated with the UCG intervention.  So I would like to perhaps get some type of general request from Northwestel or anyone else having objections to the principle of UCG applying for costs.

5774             THE CHAIRPERSON:  Mr. McCallum?

5775             MR. McCALLUM:  I think, Mr. Rondeau, we had an informal conversation about this and you stated that in your written submission, which is due I think the 28th of July ‑‑

5776             MR. RONDEAU:  Correct.

5777             MR. McCALLUM:  ‑‑ you would make the formal request at that point, and that the following week, August 4, Northwestel would have the opportunity to make its formal reply.

5778             You have now informed the Panel and the room that you will not be here for oral argument tomorrow but that your request will come in writing.


5779             I think that would be satisfactory for the Commission and I think for all the parties.

5780             MR. RONDEAU:  Thank you.

5781             THE CHAIRPERSON:  Thank you, Mr. Rondeau.

5782             Any other procedural issues?

5783             We will reconvene tomorrow afternoon at 2 o'clock for Final Argument.

5784             Thank you very much.

‑‑‑ Whereupon the hearing adjourned at 1716, to resume

    on Thursday, July 13, 2006 at 1400 / L'audience

    est ajournée à 1716, pour reprendre le jeudi

    13 juillet 2006 à 1400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REPORTERS

 

 

 

 

______________________            ______________________

Kristin Johansson                 Richard Johansson

 

 

 

______________________            ______________________

Jean Desaulniers             Fiona Potvin

 

 

 

______________________            ______________________

Sue Villeneuve               Beverley Dillabough

 

 

 

 

 

   

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