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TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TRANSCRIPTION DES AUDIENCES DEVANT
LE CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
Review of regulatory framework for Northwestel Inc. /
Examen du cadre de réglementation
applicable à Norouestel Inc.
HELD AT: TENUE À:
Convention Centre Centre des congrès
High Country Inn High Country Inn
4051 4th Avenue 4051, 4e rue
Whitehorse, Yukon Whitehorse (Yukon)
July 12, 2006 Le 12 juillet 2006
In order to meet the requirements of the Official Languages
Act, transcripts of proceedings before the Commission will be
bilingual as to their covers, the listing of the CRTC members
and staff attending the public hearings, and the Table of
However, the aforementioned publication is the recorded
verbatim transcript and, as such, is taped and transcribed in
either of the official languages, depending on the language
spoken by the participant at the public hearing.
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès‑verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Canadian Radio‑television and
Conseil de la radiodiffusion et des
Transcript / Transcription
Review of regulatory framework for Northwestel Inc. /
Examen du cadre de réglementation
applicable à Norouestel Inc.
BEFORE / DEVANT:
Richard French Chairperson / Président
Helen del Val Commissioner / Conseillère
Barbara Cram Commissioner / Conseillère
Andrée Noël Commissioner / Conseillère
Ronald Williams Commissioner / Conseiller
ALSO PRESENT / AUSSI PRÉSENTS:
Madeleine Bisson Secretary / Secrétaire
Peter McCallum/ Legal Counsel /
Leanne Bennett Conseillers juridiques
HELD AT: TENUE À:
Convention Centre Centre des congrès
High Country Inn High Country Inn
4051 4th Avenue 4051, 4e rue
Whitehorse, Yukon Whitehorse (Yukon)
July 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
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"
Tuesday, July 11, 2006 / le mardi 11 juillet 2006
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.
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.
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.
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.
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?
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?
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.
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.
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...?
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.
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.
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.
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?
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?
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.
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.