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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 13, 2006 Le 13 juillet 2006
In order to meet the requirements of the Official Languages
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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.
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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 13, 2006 Le 13 juillet 2006
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
Argument by Consumers Groups 847 / 5832
Argument by Government of Yukon 873 / 5951
Argument by Telus 892 / 6036
Argument by Northwestel 912 / 6131
EXHIBITS / PIÈCES JUSTICATIVES
PAGE / PARA
NWTEL‑6 Northwestel's median savings to 841 / 5794
residential customers as a result
of introducing new toll plans
NWTEL‑7 Northwestel's current yield on 841 / 5796
30‑year Government of Canada Bonds
NWTEL‑8 Northwestel's revenue for basic 841 / 5798
exchange and optional services per
NAS that is equivalent to data for
NWTEL‑9 Northwestel's average revenue per 842 / 5800
NAS based on proposed rates that is
equivalent to the data for the South
NWTEL‑10 Northwestel's confirmation whether 842 / 5802
or not the class 4 or 5 switches
have DMS‑250 IXE functionality and,
if so, where it exists
NWTEL‑11 Northwestel's description of what 843 / 5804
elements are included in
Northwestel's $31 million fixed and
common costs and not included in
NWTEL‑12 Northwestel's response to the 843 / 5808
question of how much of a change in
investment in 2006‑2007 between
2004‑2006 views of those years is
due to investment by Northwestel
NWTEL‑13 Northwestel's details on the 844 / 5810
(Confid.) reduction and settlement in CAT
revenues referenced on Northwestel's
evidence, Appendix 6, page 5
NWTEL‑14 Northwestel's response to 845 / 5813
Interrogatory 603: Provide an
example of the derivation of the per
NAS unit costs for power
EXHIBITS / PIÈCES JUSTICATIVES
PAGE / PARA
NWTEL‑15 Document providing verification of 845 / 5815
weighting factor applied to outside
NWTEL‑16 Document with detailed calculations 845 / 5817
used to derive the DRD amortization
for 2009 and 2010, including
electronic spreadsheets with formulas
Wednesday, July 12, 2006 / le mercredi 12 juillet 2006
541 25 "our" s/b "their"
536 6 "Dallas s/b "Dallas Yeulett, Manager
Yeulett;" Regulatory Affairs;"
549 11 "of" s/b "of this,"
553 4 "you are" s/b "you aren't"
568 10 "an" s/b "and"
599 22 "$9,000" s/b "$9,000 per NAS"
605 14 "siting" s/b "citing"
614 22 "MR. FLAHERTY:" s/b "THE CHAIRPERSON:"
623 21 "on her" s/b "out there"
649 7 "day" s/b "say"
653 4 "quarters" s/b "time zones"
678 7 "rates" s/b "toll"
678 22 "that" s/b "this"
685 14 "of sort" s/b DELETED
722 20 "MR. ROBERTS:" s/b "MR. HAMELIN:"
799 16 "market" s/b "bargain"
799 18 "market" s/b "bargain"
812 9 "MR. GRIEVE:" s/b "MR. ROGERS:"
812 11 "MR. ROGERS:" s/b "MR. GRIEVE:"
812 14 "MR. GRIEVE:" s/b "MR. ROGERS:"
Whitehorse, Yukon / Whitehorse (Yukon)
‑‑‑ Upon resuming on Thursday, July 13, 2006
at 1400 / L'audience reprend le jeudi
13 juillet 2006 à 1400
5785 THE CHAIRPERSON: Order, please. A l'ordre, s'il vous plaît.
5786 I'm told that our colleagues from Northwestel have responded with a number of undertakings and I wonder if I could ask Mr. McCallum to itemize these undertakings, read them into the record and raise any other issues which may arise.
5787 MR. McCALLUM: Thank you, Mr. Chair.
5788 First of all, I just want to say for the record that in terms of the deadline for final comments from intervenors, I inadvertently said that it was the 28th yesterday and of course it's not, it's the 21st. That date has not changed. I apologize for the slight error.
5789 In terms of exhibits, we have received a number of responses to the undertakings. I thought for the record I would just quickly say which ones have come in and people can number them as they wish.
5790 My understanding is that Northwestel is providing a copy to parties as we speak right now.
5791 Is that correct, Mr. Rogers?
5792 MR. ROGERS: That's correct.
5793 MR. McCALLUM: For the record, Northwestel has provided the median savings to residential customers as a result of introducing new toll plans proposed.
5794 That has been listed as Northwestel Exhibit No. 6.
EXHIBIT NWTEL‑6: Northwestel's median savings to residential customers as a result of introducing new toll plans proposed
5795 MR. McCALLUM: It has provided a current yield on 30‑year Government of Canada Bonds.
5796 This is Exhibit Northwestel No. 7.
EXHIBIT NWTEL‑7: Northwestel's current yield on 30‑year Government of Canada Bonds
5797 MR. McCALLUM: It has provided revenue for basic exchange and optional services per NAS that is equivalent to data for the South.
5798 This has been received as Exhibit No. 8.
EXHIBIT NWTEL‑8: Northwestel's revenue for basic exchange and optional services per NAS that is equivalent to data for the South
5799 MR. McCALLUM: They provided average revenue per NAS based on proposed rates that is equivalent to the data for the South.
5800 This has been received as Exhibit No. 9.
EXHIBIT NWTEL‑9: Northwestel's average revenue per NAS based on proposed rates that is equivalent to the data for the South
5801 MR. McCALLUM: They have confirmed whether or not the class 4 or 5 switches have DMS‑250 IXE functionality and, if so, where it exists.
5802 This has been received as Exhibit No. 10.
EXHIBIT NWTEL‑10: Northwestel's confirmation whether or not the class 4 or 5 switches have DMS‑250 IXE functionality and, if so, where it exists
5803 MR. McCALLUM: They have provided a description of what elements are included in Northwestel's $31 million fixed and common costs and not included in PIAC's calculations.
5804 This has been received as Exhibit No. 11.
EXHIBIT NWTEL‑11: Northwestel's description of what elements are included in Northwestel's $31 million fixed and common costs and not included in PIAC's calculations
5805 MR. McCALLUM: These are coming for the Panel in just a couple of minutes, Mr. Chair.
5806 THE CHAIRPERSON: Thank you.
5807 MR. McCALLUM: They have provided a response to the question of how much of a change in investment in 2006‑2007 between 2004‑2006 views of those years is due to investment by Northwestel affiliates.
5808 This has been received as Northwestel Exhibit No. 12.
EXHIBIT NWTEL‑12: Northwestel's response to the question of how much of a change in investment in 2006‑2007 between 2004‑2006 views of those years is due to investment by Northwestel affiliates.
5809 MR. McCALLUM: They provided details on the reduction and settlement in CAT revenues referenced on Northwestel's evidence, Appendix 6, page 5.
5810 This has been received as Northwestel Exhibit No. 13.
EXHIBIT NWTEL‑13 (Confidential): Northwestel's details on the reduction and settlement in CAT revenues referenced on Northwestel's evidence, Appendix 6, page 5
5811 MR. McCALLUM: For the record, it appears that this one has been filed in confidence and I understand that there are a certain number of requests for confidentiality that have been made by Northwestel in I think three of the undertaking responses. I am also informed that Northwestel has provided abridged version for the public file and also for the parties.
5812 Northwestel has responded with reference to Interrogatory 603: Provide an example of the derivation of the per NAS unit costs for power.
5813 This has been received as Exhibit No. 14.
EXHIBIT NWTEL‑14: Northwestel's response to Interrogatory 603: Provide an example of the derivation of the per NAS unit costs for power
5814 MR. McCALLUM: They provided a verification of the weighting factor applied to outside plant equipment.
5815 This has been received as Exhibit No. 15.
EXHIBIT NWTEL‑15: Document providing verification of weighting factor applied to outside plant equipment
5816 MR. McCALLUM: They have provided detailed calculations that were used to derive the DRD amortization for 2009 and 2010, including electronic spreadsheets with formulas.
5817 This is Northwestel Exhibit 16.
EXHIBIT NWTEL‑16: Document with detailed calculations used to derive the DRD amortization for 2009 and 2010, including electronic spreadsheets with formulas
5818 MR. McCALLUM: And according to the list that we have, they have a number of undertakings yet to provide. The written undertakings were read into the record. They have to come in on either the 19th, the 21st or the 28th.
5819 They will provide a sensitivity analysis on rate restructuring by the 19th, which is next Wednesday.
5820 Mr. Chair, we were just speaking informally and it may be that there is one undertaking that Northwestel may have by inadvertence not answered, but we intend to check that shortly and report back in due course.
5821 THE CHAIRPERSON: Thank you, Mr. McCallum.
5822 Are there any other matters of a preliminary nature that any party wishes to raise at this point?
5823 Mr. Rogers.
5824 MR. ROGERS: Mr. Chairman, just briefly to note for the Commission, Commission staff and the parties in the room, as is customary, we reviewed the transcript and there are relatively minor transcript corrections and so on.
5825 We have provided that directly to the transcript people, as well as the Commission Secretary. If anyone is interested in seeing what we have provided, they can just ask us.
5826 THE CHAIRPERSON: Thank you, Mr. Rogers.
5827 I would just remind the Secretary to make sure it is the abridged versions and not the confidential versions of the undertakings that are distributed in the room.
5828 Madame la Secrétaire.
5829 LA SECRÉTAIRE: Merci, Mr. Chairman.
5830 The first party for the oral final argument is the Consumer Groups, by PIAC.
5831 Ms Lott, please.
ARGUMENT / PLAIDOIRIE
5832 MS LOTT: Good afternoon, Mr. Chairman and Commissioners.
5833 I am pleased to deliver the oral final argument of the Consumer Groups, representing The Consumer Association of Canada and the National Anti‑Poverty Organization.
5834 The Consumer Groups' interest in this proceeding is with the impact of Northwestel's proposal on the residential ratepayers, both here in the North as well as those in the rest of Canada.
5835 I am going to briefly focus my remarks on the areas of most concern to the Consumer Groups. We will be providing, as well, a written final argument to expand on these issues.
5836 While Northwestel has proposed to move to a price cap framework, the Consumer Groups have a number of concerns with Northwestel's proposed plan for implementation. The movement to price regulation, a form of incentive‑based regulation, is generally accepted as a superior form of economic regulation to rate base rate of return regulation since it provides the telephone company with more pricing flexibility and the incentives to become more efficient.
5837 However, these benefits will only be realized if price regulation is appropriately implemented.
5838 With respect to the issue of proposed going‑in rates by Northwestel, one of Northwestel's stated objectives if that residents of the North should pay reasonably comparable prices to those elsewhere in Canada. The Consumer Groups agree with this objective. Canadians living in rural and remote areas should enjoy reasonably comparable service at reasonably comparable rates to that enjoyed by those Canadians living in urban areas.
5839 The Consumer Groups submit that this objective is consistent with the objectives of the Telecommunications Act.
5840 However, the Consumer Groups disagree with Northwestel's assessment of reasonably comparable prices. In addition, Northwestel's application of the reasonably comparable standard is inconsistent.
5841 With regard to its long distance rate, Northwestel trumpets that customers already enjoy some of the lowest rates in Canada, yet when it comes to local residential rates, a market where there is no competition, Northwestel applies a different standard.
5842 As part of its framework proposal, Northwestel is seeking approval to increase local residential rates by $2.00 per month and to be permitted to raise rates annually by the rate of inflation.
5843 As graphically illustrated in the Consumer Groups' Exhibit No. 2, which was the bar chart, Northwestel's proposed rates are not reasonably comparable to prices paid by other residential customers in the rest of Canada. They are significantly higher.
5844 Indeed, Northwestel's residential rates are currently at the high end of rates in Canada. Permitting Northwestel to further increase rates would result in a growing gap between the rates that northerners pay in comparison to those in the rest of Canada.
5845 While much has been made in this proceeding about the higher average incomes in the North, the cost of living is also similarly higher. While some may argue that the price of telephone service should also be higher in the North, the Consumer Groups submit that this is already the case with Northwestel's current rates.
5846 Northwestel agrees that local phone service is an essential service, yet Northwestel has not undertaken any assessment of the impact of its proposed rate increases on the affordability of service.
5847 Taken together, the Consumer Groups submit that local residential rates should not be increased any further.
5848 The only tangible benefit for residential ratepayers in Northwestel's proposed rate changes is a modest adjustment to average toll rates through the proposed introduction of a new toll savings plan.
5849 Northwestel indicated that, on average, the savings would amount to 40 cents per month per residential customer. However, these savings will not be experienced by most customers.
5850 In response to an undertaking requested by the Consumer Groups, Northwestel identified that the median impact from its proposed toll rate changes is, in fact, zero dollars. This means that at least half of all local residential ratepayers will see the full $2 increase in local rates, with no incremental savings from long distance.
5851 With respect to the issue of productivity, a fundamental component of price regulation is setting the price constraints or level of price changes that are permitted each year for a given basket of services. This constraint is intended to reflect the level of price changes that would be expected to occur in a competitive market where the regulated service provider has no market power.
5852 This constraint is also applied in establishing the annual total subsidy requirement for the purposes of determining the level of high cost serving area funding from the National Contribution Fund.
5853 The level of permitted price changes is typically governed by a constraint consisting of the rate of inflation minus the target productivity factor, or an X factor.
5854 Northwestel has proposed a target productivity of zero percent and filed an estimate of its productivity performance over the 1998 to 2006 period of minus 3.2 percent, meaning that its costs have increased by 3.2 percent per year, excluding the impact of inflation.
5855 These productivity factors imply that Northwestel has not and does not expect to achieve annual productivity gains.
5856 The Consumer Groups submit that the proposed target productivity level is inappropriate. By way of comparison, the productivity target was established at 4.5 percent for the major ILECs when price regulation was introduced.
5857 The Commission applied a productivity target of 3.5 percent on Télébec and QuebecTel when these companies moved to price regulation.
5858 The Consumer Groups provided a more appropriate estimate of Northwestel's productivity estimate for the period of 1998 to 2006 of 0.7 percent. That estimate isolates the impact of Northwestel's Service Improvement Plan program to derive an estimate of how the cost of non‑SIP residential service changed over time.
5859 In addition, as discussed during cross‑examination with the Northwestel panel, using Phase 2 cost estimates for residential service to estimate productivity does not capture the positive impacts on the company's productivity arising from economies of scope. This is the provision of additional services, such as high‑speed internet service, using the same local loop used to provide residential local service.
5860 This shortcoming understates the company's productivity, in our view.
5861 The Consumer Groups also submit that it would be appropriate to apply a consumer dividend or stretch factor to the determination of the target productivity factor for Northwestel. The stretch factor is intended to provide a dividend to consumers resulting from the streamlining of regulation, and increased incentives to Northwestel to be more efficient.
5862 In Decision 97‑9, the Commission applied a stretch factor of 1 percent.
5863 The Consumer Groups submit that, based on the above, a target productivity in the range of 2 to 2.5 percent would be appropriate for Northwestel.
5864 With respect to earnings sharing, the Consumer Groups submit that the sharing of risks under Northwestel's proposed plan is asymmetrical.
5865 Northwestel would have the ability to trigger a review of the proposed framework during the four years of the plan if, in its view, it was impaired in its ability to advance its proposed objectives and/or to continue to have reasonable opportunity to earn a fair return on its investment.
5866 However, there is no comparable protection to ratepayers from over earnings by Northwestel. Indeed, ratepayers could not identify Northwestel's earnings level as this information would no longer be reported by Northwestel to the Commission. Only Northwestel itself would have access to this information.
5867 The Consumer Group submit that a more balanced approach to protect ratepayers from over earnings would be to equally share any excess earnings over 50 bases points of the allowable range between Northwestel and ratepayers.
5868 This mechanism would still incent Northwestel to be more efficient and profitable since it would keep a portion of the excess earnings, while at the same time providing ratepayers with a degree of protection from excessive earnings.
5869 With respect to quality of service, the Consumer Group submit that it would be appropriate to apply the Commission's retail rate adjustment plan to Northwestel. It would not be appropriate to wait until quality of service problems arise before implementing one of the tools the Commission has developed to ensure that telephone companies have the incentive to provide high quality service.
5870 This would effectively be, as they say, closing the barn door after the horse has bolted.
The quality of service results of other ILECs under price cap we think provide ample evidence of what can occur.
5871 Furthermore, if Northwestel is successful in meeting the Commission quality of service standards, no rebate payments would be applicable. The plan acts as a measure to further encourage Northwestel to maintain its level of service to its customers.
5872 Now, with respect to the national contribution fund, Northwestel has proposed to dramatically increase the level of funding it receives from the national contribution fund from six per cent to over 25 per cent, or $43‑million of its total revenues for the year 2007.
5873 The Consumer Group have concerns with the proposed expansion of funding which would be paid for by ratepayers across Canada. The national contribution fund was established to fund the provision of residential local service in high cost serving areas. The expansion of the funding to cover items such as toll connect facilities, non‑access related SIP expenditures and appreciation reserve deficiencies represents a significant departure from the purpose of the fund. These items are not just related to the provision of residential local service.
5874 The Consumer Group submit that the national contribution fund should only be available to support the provision of residential service in high cost serving areas.
5875 Furthermore, funding should not be expanded unless Northwestel demonstrates that it has exhausted its traditional funding sources.
5876 As an associated issue, the Consumer Group submit that the level of mark‑up incorporated in the subsidy requirement should be set at a level required to permit Northwestel to recover its fixed and common costs.
5877 The Commission should ensure that Northwestel has justified a different level of mark‑up from that used by the Commission for other telephone companies.
5878 Finally, regarding local competition, the Consumer Group disagree with Northwestel's proposal regarding the introduction of local competition in its territory. Northwestel's proposed approach would result in further delay and discourage entrants from pursuing opening up of the local market.
5879 The Commission established an approach for the smaller ILECs that should be adopted in Northwestel's case. A bona fide request from a potential competitor would trigger the necessary steps to implement the requirements on a timely basis.
5880 The Consumer Group agree with the position expressed by others that competitive entries should be efficient and that the rates paid for competitive service should not be priced below cost.
5881 Furthermore, the costs associated with implementing local competition should not be borne by Northwestel ratepayers.
5882 These approaches would ensure that northerners would receive the benefits that arise from competitive entry.
5883 Mr. Chairman, that concludes my argument and I would just like to make a submission about a cost award.
5884 The Consumer Group would like to apply for an award of costs in this proceeding. We submit that we represent an important constituency of Northwestel and of other telephone companies' customers who would be affected by the proposals of Northwestel in this proceeding.
5885 We submit that we have participated in a responsible manner and have contributed to a better understanding of the issues through our participation in the proceeding and at this hearing and, therefore, we are requesting an award of our costs.
5886 Thank you. Those are my final comments.
5887 THE CHAIRPERSON: Thank you, Ms Lott. We note your information about costs and we appreciate your participation in this hearing.
5888 MS LOTT: Thank you.
5889 THE SECRETARY: Mr. Chairman, the next party to provide their final arguments is the Government of Northwest Territories.
5890 MS MALJAN: Good afternoon, Mr. Chairman and commissioners. My name is Linda Maljan and I work with the Office of the Chief Information Officer with the Government of Northwest Territories. I am representing Mr. Mike Aumond, our Deputy Minister of Public Works & Services, who couldn't be back here today in Whitehorse to make this presentation on our behalf.
5891 We appreciate this opportunity to participate in this public hearing and we will be filing our government's final written argument on July 21.
5892 The presentations by those participating in this hearing and those who made informal statements by video conference, along with the cross‑examination of the various panels, have been very informative and have assisted in clarifying many points made on the documents filed since this public notice was first initiated in January of this year.
5893 For the Government of the Northwest Territories the current proceeding is of critical importance. The unique circumstances of northern Canada make northerners particularly reliant on the provision of telecommunication services at the same time that it renders service provision a particular challenge. Historically, the quality and availability of telecommunication services in the north has lagged far below southern standards while prices have generally been much higher.
5894 Over the past 15 years the CRTC has taken important steps to reduce the gap in service quality, price and availability between northern and southern Canada. And while a gap still remains, on balance the CRTC has been quite successful. In some cases, such as the recently completed five‑year service improvement plan and the provision of annual supplemental funding, Northwestel has been a willing partner in this progress.
5895 In other cases involving quality of service issues and extension of service to NWT communities in the mid‑1990s Northwestel has only acted when forced to by regulatory intervention, and then has done so grudgingly and reluctantly. In developing its recommendations in the current proceeding the GNWT has sought to balance the desire to move to a more efficient and streamlined regulatory process with the recognition that differences in the northern situation will continue to require regulatory approaches that differ from those adopted in the south.
5896 A critical consequence of these differences is and will continue to be that market forces will be less able than in southern Canada to ensure achievement of the underlying goal set out in Section 7 of the Telecommunications Act of providing universally available high quality basic and advanced services at affordable prices.
5897 We recognize that for the north to maintain pace with more populated urban areas it would be very expensive to try to maintain reasonably close to progress made elsewhere. Therefore, funds for costly things such as infrastructure must be spent wisely and effectively. We also realize it would be unreasonable and impractical to rely exclusively on regulation to force our service providers to maintain pace with our compatriots to the south.
5898 In addition to strengthening market forces through permitting expanded competition, northern Canada will continue to rely on both regulatory intervention and national subsidy funding to maintain gains made to date and to make further improvements that will enable the NWT to keep pace with the provinces as the definition of basic services evolves.
5899 Our written final argument will provide a detailed analysis of the issues at play in this proceed and will develop the underlying rationales for each of the specific recommendations we wish to make. Today, I would simply like to layout what those recommendations are.
5900 First, let me start with our general position on the move to price cap regulation for Northwestel. While the GNWT believes that the unique circumstances of Northwestel must be reflected in the design of a regulatory regime, it also believes a price cap regime will provide fundamental benefits as compared to the traditional rate of return regulation. The GNWT accordingly recommends that a customized version of price cap regulation be applied to Northwestel. We don't see any need to move to a new regime via some transitional approach and believe that to not now move to a form of price cap regulation would be to the disadvantage of all stakeholders.
5901 With respect to the issue of regulation of long‑distance rates, the GNWT believes that competition in this market is still significantly limited and that if forbearance of long‑distance service is to be entertained then tighter constraints should be imposed on changes to the basic rate schedule for long‑distance services. Accordingly, we recommend that in addition to constraints proposed by Northwestel:
5902 (1) increases should not be permitted to any of the individual rates on the basic long distance rate schedule;
5903 (2) that during the price cap period no decreases should be permitted in the time of day discounts to the schedule; and
5904 (3) the going in level of rates under long distance basic rate schedule should be reduced.
5905 Turning to other price cap issues, the GNWT recommends that no increases be permitted to any of Northwestel's local rates during the price cap period. Northwestel's business and residential local rates are at or close to the highest rates in Canada and we thus think that following the model adopted by the CRTC for the ILECs in southern Canada no further rate increases should be allowed.
5906 We also recommend that a price constraint be applied to both business and residential calling features and that the pricing constraint provides that every year the monthly rate for a service may increase by up to $1 but in no event may be permitted to exceed the highest rate approved by the CRTC to another phone company.
5907 Concerning Northwestel's proposal to eliminate the current annual construction program review, we strongly oppose such a move. We are extremely concerned that with limited facilities‑based competition some form of construction program review is essential to ensure that adequate investment levels are being maintained.
5908 Relying on quality of service monitoring, as suggested by Northwestel, to determine if adequate investments are being made would only detect problems well after it wasn't possible to correct them. Unlike Northwestel, we simply do not believe that a move to price cap regulation and retention of the annual CPR at least until such a time as it no longer serves a purpose are in any way mutually exclusive options.
5909 Our last recommendation specifically dealing with price cap proposal is that interested parties should be permitted to apply to the Commission for a review of the price cap regime prior to its end and with the proviso that such requests should only be granted where there are compelling reasons to do so.
5910 Turning now to Northwestel's proposal regarding the Carrier Access Tariff and the recovery of toll connect trunk costs, we strongly endorse both the proposal to lower the existing CAT charge so as to recover only equal access in switching and aggregation costs and to replace the existing implicit subsidy mechanism for toll connect trunks with an explicit subsidy from the National Contribution Fund.
5911 We think this proposal will serve to reduce incentives for an economic bypass, provide some incentive for expanded equal access competition and replace an implicit subsidy currently buried in the CAT settlement rate with an explicit subsidy with all the benefits that entails.
5912 With regard to Northwestel's proposal for restructuring rates, we have several concerns.
5913 First, in light of the current high level of Northwestel's local residential rates, GNWT recommends that their proposal to increase these rates be denied and that as recommended earlier such rates be frozen for the duration of the price cap period, as is the case for the independent telcos in the south whose rates, it should be noted, are considerably below those of Northwestel.
5914 Second, as there are very limited prospects for competition in this market and as Northwestel's rates are currently at the upper end of the rates charged by major southern telcos, the GNWT recommends that Northwestel's proposal to increase business local rates be denied.
5915 Third, the GNWT recommends that in light of the proposed lowering of CAT charges and of the limited competitive alternatives available to many northern long distance users, prior to introducing the new price cap model the CRTC should, in addition to approving Northwestel's proposed new calling plans, direct Northwestel to make significant reductions to the basic toll schedule for the benefit of both business and residential customers.
5916 With respect to local competition it is the GNWT's view that while only limited facilities‑based local competition in Northwestel's operation area is likely to occur, Northwestel should not be allowed to use the regulatory process to further delay or deter the possibility for such competitive entry, thus denying northerners the benefits of local competition that are being accorded to all other Canadians.
5917 Local competition in Northwestel's territory should immediately be approved on the same basis as in Telecom Decision CRTC 2006‑14 regarding SILECs.
5918 Regarding Northwestel's proposed service improvement plan, the GNWT considers that all of Northwestel's proposed SIP projects at a minimum are justified by the need to ensure ongoing service provision to a number of communities in the north and recommends that the new SIP program be approved.
5919 The GNWT also recommends that Northwestel be required to file annual status reports on the new SIP together with an assessment of what if any other projects should be considered for inclusion in this or future SIPs so as to ensure the achievement of basic service objective on an ongoing basis in all areas of the North.
5920 With regard to service quality, the GNWT recommends that a service quality rate rebate and adjustment mechanism be implemented for Northwestel at the same time it is made subject to a price cap regulatory framework. Such a mechanism should cover all aspects of services provided to both its retail and wholesale customers.
5921 The GNWT also believes that the CRTC may be able to play an important role in moving forward the currently stalled prospects for 9‑1‑1 service in the Northwest Territories.
5922 Some of the difficulties that have been experienced in moving forward in this issue were raised by several parties, including the Mayor of Yellowknife, the President of the NWT Chamber of Commerce and Northwestel.
5923 To help make progress on this important issue, the GNWT recommends that Northwestel be directed to undertake, in consultation with territorial governments and other involved groups, and file with the Commission within 180 days, a study of the feasibility of extending 9‑1‑1 service throughout its serving territory.
5924 The study should determine:
5925 (a) what changes would be needed to Northwestel's infrastructure to do this;
5926 (b) any other obstacles to providing the service;
5927 (c) the timeframe within which the service could be provided; and
5928 (d) the costs of providing the service.
5929 Our final set of recommendations concerns the issue of subsidy mechanisms that underlie so much of the discussion in this proceeding. While none of the current Panel of Commissioners was involved in that proceeding, we are sure you are very familiar with the Commission's high‑cost proceeding and the resulting Decision 99‑16.
5930 In that decision, the Commission found that Northwestel faced a unique set of circumstances and that its requirement for National Subsidy Funding was potentially wider than was the case for other telcos.
5931 While at first blush it now appears that Northwestel is looking for a further expansion of subsidy funding, this is not in fact the case. The residential, local service subsidy it is seeking is essentially the same subsidy that is made available to all Canadian telcos. The only issue that arises there is, thus, not whether Northwestel should receive the subsidy but whether it has appropriately calculated the required subsidy amounts.
5932 The second component of Northwestel's subsidy proposal is the toll connect subsidy. While this might appear to be a new subsidy, as explained by the company, it is in fact just a different and better way of collecting an existing subsidy. Failure to collect these subsidies through national funding would place the entire burden of doing so on the larger already burdened communities in Northwestel's serving area or require that Northwestel's remote communities pay higher rates than do other communities.
5933 We don't consider either of these options to be acceptable and don't believe the Commission would either.
5934 The last subsidy amount is in respect to the costs associated with Northwestel's past SIP and the new SIP Northwestel proposes.
5935 By definition, these expenditures are uneconomic and require a subsidy. Again, we believe these subsidies should be funded on a national basis and note that this very expectation underlies the implicit regulatory bargain that was made when Northwestel was directed to make these expenditures.
5936 Accordingly, GNWT recommends the CRTC approve the basic residential local service subsidy, toll connecting facility subsidy, and SIP subsidy as proposed by Northwestel, subject only to any adjustments to cost estimates made by the Commission.
5937 In the GNWT's view, failure to approve the proposed subsidies would result in the quality and availability of northern telecommunications falling even further below southern standards and it would be inconsistent with the Commission's finding in Decision 99‑16 and the related proceedings.
5938 One final point we would like to raise is that several times during this hearing Northwestel expressed concern about the duplicate facilities established in the Northwest Territories and Nunavut as a result of federal government initiatives.
5939 The federal programs, their impact on the marketplace notwithstanding, were created to address a vacuum, a large gap in the services and technical capabilities that existed across the more remote reaches of the North. The GNWT discussed these programs at length internally, including carefully considering sustainability issues, but decided to participate in these programs because our territory badly needed the services that would result from project completion.
5940 GNWT feels that Northwestel had an equal opportunity to win the contracts awarded by Industry Canada but they did not, even though they may have had some advantage in having some infrastructure already in place.
5941 We were somewhat surprised that after not winning the contract Northwestel did not in any way appear to try to develop and market solutions or seek partnerships with the GNWT or try to capture market share that could eventually fall to the competition.
5942 These federal programs moved forward very slowly and are still doing so and it appeared that there may be reasonable opportunity for the company to take advantage of their position as an incumbent service provider.
5943 In closing, I would like to thank you, Mr. Chairman, Commissioners and CRTC staff for your efforts in conducting this proceeding, including both this oral proceeding and the evidentiary and interrogatory processes that preceded it.
5944 Let me close by saying that the GNWT values Northwestel's ongoing health. A viable northern company is important to us. They contribute a lot to the Northwest Territories and to individual communities. We recognize the challenges placed on them in being the provider of last resort.
5945 Following the submission of final argument, we will be keenly awaiting your decision and wish you all the best in your deliberations.
5946 Thank you.
5947 THE CHAIRPERSON: Thank you very much, Ms Maljan.
5948 Madame la Secrétaire.
5949 THE SECRETARY: Thank you, Mr. Chairman.
5950 We will now ask Mr. Pratt from the Yukon Government to come forward.
ARGUMENT / PLAIDOIRIE
5951 MR. PRATT: Thank you, Madam Secretary.
5952 Mr. Chairman, Members of the Commission, it is my privilege to present to you the oral argument of the Yukon Government in this proceeding.
5953 I should perhaps begin by offering thanks and appreciation to the staff, the reporters and of course the Commission for being here in Whitehorse for this hearing. It is a bit of a two‑edged sword. It would have been nice to have had you here for another week, but we certainly appreciate, in my case very much so appreciate, that we have been able to conclude in the first week.
5954 The purpose of the hearing from our perspective ‑‑ and I think it is clear to everyone ‑‑ is that we are here to review Northwestel's regulatory framework for the future and to assess the proposal for modified price caps.
5955 It is not without context, this proposal, because it was contemplated by the Commission as far back as the decision in 2000 that after several years of reviewing the progress of the modified rate of return regulation and the introduction of long distance competition that the framework for Northwestel be reviewed.
5956 As a consequence, those parties who have been participants in the series of proceedings ‑‑ and by my count there were at least ten decisions between then and now that dealt with Northwestel and various aspects of its regulatory framework. Those parties are really quite familiar with the adaptations that have been made by the Commission to meet the unique environmental and economic circumstances that we experience in the North.
5957 Obviously the key decisions conditioning these adaptations go back to the 99‑16 decision on high cost serving areas, and of course the decision 2000‑746.
5958 In those various decisions issues such as long distance competition, local competition, capital programs, including the SIP or various manifestations of the SIP, quality of service, the revenue deferral account and disposition of funds have all surfaced, resurfaced and been looked at again, the message being that many of these issues are familiar and well established.
5959 The Yukon Government's point in bringing this up is that there is a context that gives us important guidance in assessing the company's current proposal. Namely, the basic service obligation is clear, and it has been assessed, affirmed and reaffirmed.
5960 The high cost serving area subsidy has well served the purpose and has in various decisions, either implicitly or explicitly, been affirmed. The principle of comparability, services and prices has been reviewed and repeated throughout the series of decisions.
5961 Furthermore, we would suggest that it is consistent with the evolved framework that competition will be allowed where competition is feasible, and those are determinations that the Commission has invested some time and effort in reaching conclusions on.
5962 There is, though, the larger context that stems from the Telecommunications Act policy goals that were activated by the Commission in 99‑16 and in fact have been reinforced by application of other government programs like the investments in northern infrastructure, which of course have had some mixed reviews.
5963 But in looking at the overall context the Commission has taken a responsibility under the umbrella of the Act to achieve some of those objectives through regulatory initiatives and indeed the regulatory framework for Northwestel, addressing the application of those principles and goals in the North.
5964 So when a question comes up, as it did in this hearing, as to why others should pay, or conversely why Northerners shouldn't perhaps pay more, it is important to understand the context.
5965 The Telecommunications Act uses those terms, to render affordable and reliable telecommunications services of a high quality, which are accessible to Canadians in both urban and rural areas in all regions of Canada.
5966 We don't think this needs to be interpreted. If your costs are higher, you really need to prove that you need the help. That is what the principle says.
5967 Indeed, if costs were the only consideration in determining the appropriateness of telecommunications services, populations would tend to gravitate to low‑cost areas, and that is certainly not consistent with the objectives of the Act.
5968 Before I move on, I would note that there may be some valid and other important justifications for the national policy goals and the interpretation that we would put on those policy goals in developing a regulatory approach for Northwestel.
5969 First, we would suggest that there is value to all of Canada in providing support for the development of the North, particularly in telecommunications, but more broadly than that.
5970 Sovereignty is obviously one, but the opportunity for growth is another. If telecommunications can be used as an enabler to enhance growth and development in the North, then there are more opportunities for the subsidy to be winnowed away.
5971 Secondly, as Mr. Hayden alluded to yesterday, there are many First Nations people, particularly in the Yukon, but throughout the North, who have made this area their home for thousands rather than hundreds of years, and it is important that the national policies take that into account in incorporating measures for participation and inclusion.
5972 The rationale for the Yukon government's participation in this process was outlined by Ms Bucklay in her opening statement, as were the principles that we believe the Commission should take into account in reaching its decision.
5973 The regulatory framework should give the means for growth in telecommunications facilities and services that will result in net benefits for the Yukon.
5974 The framework should allow the continuation of Northwestel as a viable northern‑based provider.
5975 The services available in the Yukon should offer enough flexibility and availability, innovation and pricing, so that Yukoners can have comparable opportunities to those available to other Canadians.
5976 Telecommunications users in the Yukon should have sufficient protection for prices, value and quality of the services they require.
5977 Fifthly, the regulatory framework must enable the investment and growth necessary to ensure that Yukoners continue to have access to advanced telecom services.
5978 We believe that the approach for telecom development in the North, and, consequently, for the regulatory framework, is not to simply wait for the Godot of market forces to arrive and deliver those benefits of choice and innovation. It is neither to splash out investment in programs that create infrastructures in the hope that market forces will come. Rather, we would support a more measured and co‑ordinated approach, where competition is introduced where it is sustainable, and to build on the successful adaptation of regulatory principles, which we would suggest has been the case so far in the Commission's track record with Northwestel, and continue to have those adaptations meet the realities of the northern environment.
5979 Looking at Northwestel's case itself, the company begins by outlining the principles which it believes should be adopted. We think they are helpful and largely consistent with those that the Yukon government has put forward in other proceedings.
5980 One key provision that has attracted considerable interest in this hearing is the issue of comparability and, really, what that means. What words should we use? Northwestel says "reasonably comparable". The Yukon government has always said that comparable services and comparable prices should be the standard. Others have used other words.
5981 In our submission, the only meaningful test is to look at what the benefits are to customers in the North and compare those benefits to those available to Canadians in the South. How do the prices compare?
5982 If the actions and regulatory measures that are implemented are to accord with policy goals, northern Canadians should, at the very least, not be left at a disadvantage.
5983 In fact, it might be argued, and we have certainly taken the position in the past, that telecom services are even more important in the north because of the realities of distance, density and the level of development.
5984 So, we would strongly urge that the Commission maintain its interpretation and approach that supported the extension of service through the SIP programs and the introductions of the beginnings of competitive choice and the beginnings of access to advanced services.
5985 Northwestel's proposal is a modified price cap framework. The Yukon Government appreciates the merits of moving the price caps from the point of view of the potential benefits for customers as well as for the improved efficiency for the company and the Commission.
5986 The Yukon Government would note, however, that there is a need to modify the implementation of price cap regulation in order to adapt to the realities of the north, meaning that some aspects of regulation that are typically assumed to go along with the introduction price cap need to be assessed and considered as to whether they should be included or excluded.
5987 What we would suggest for the guideline in implementing or examining this test of implementation of price caps is to look at, what is the protection for ratepayers and how can we increase choice and innovation for customers.
5988 In our view, the basket structure seems more or less to address the needs to protect ratepayers. We believe, however, that it is important that the Commission continue to look at the regulation and monitoring of competitor services in order to achieve some of the objectives for competitive entry where that's possible.
5989 With respect to productivity, I think it's important to note that during the history of the modified rate base regulation the Commission did find it necessary to adopt specific measures to track and encourage Northwestel's productivity performance, that's the TIP calculations, and the adjustments that were made in various proceedings there.
5990 We believe that the question of how productivity will be incented in Northwestel's proposal remains an open question.
5991 Since it's not anticipated that there will be massive or hugely significant competitive entry, there may not be the assurance or reassurance that those productivity gains will be driven by market forces. Consequently, it will fall to the price cap mechanism to address that.
5992 We'd also note that the existing regulatory framework has utilized the revenue deferral account in a number of cases to return subsidy funds when forecasts were exceeded.
5993 Northwestel has not proposed such a mechanism in this case but, in our view, that underlines the need to look at some mechanism that would address productivity.
5994 With respect to the four‑year term for the price cap, it seems reasonable enough to us, but the area of concern that was noted during the proceedings is that, aside from the exogenous factor adjustment, the formula would only be reviewed in an asymmetric fashion under Northwestel's proposal.
5995 Although the witnesses did acknowledge that the Commission has an overriding discretion to review the formula if necessary, it will be our suggestion that there be a provision for re‑entering the issue of the formula and that it should be ‑‑ re‑examining the issue of the formula and that it should be reciprocal.
5996 Northwestel's case shows very clearly the dramatic impact of the implicit subsidy on the company, its prices, including the cap and, consequently, the effect on customers and users in the Yukon.
5997 The existing situation is really a necessary relic of the transition from rate of return to the environment that we're in now, but it's known to be untenable and has been acknowledged in a number of proceedings. The Commission did, in a previous decision, specifically note that the cap was impeding the introduction of ‑‑the high level of the cap was impeding competition but, under the circumstances, felt it prudent not to make adjustments at that time.
5998 In our view, something does need to be done, it doesn't need to be done now. It is somewhat analogous to Northwestel's rate structure having been put up on a cliff and it needs to drop.
5999 If the market forces were allowed to send them into free fall, we think that would be much more damaging than if measures are taken such as are proposed here. So, we would support the proposed cap reductions.
6000 With respect to the inclusion of the toll connect costs in the subsidy, while it may be offensive to those who are in favour of symmetry, it is a really very stark example of a northern reality. The distances are enormous, the settlements are extremely small and this cost will not go away, as the witnesses have indicated to you.
6001 We think that Northwestel has shown that there would be significant impacts on the company and on customers if those costs are not included in the subsidy. In fact, in our view, that reinforces the Commission's wisdom in the original 2000‑746 Decision of including those costs.
6002 Similarly, with respect to the mark‑up the need is clear, Northwestel is looking at a 25 per cent mark‑up and there is nothing, in our view, to suggest a better number, but would note that for pricing of specific services there may be a need, particularly in the case of competitor services to look at a different approach and, certainly for those purposes, we would not necessarily treat 25 per cent as sacrosanct.
6003 On the rate proposals themselves, Northwestel has indicated the relative comparability of the local rates with the increases and, although they are at the high end, they are certainly within the range of comparability. We are concerned, however, with respect to issues of affordability and would strongly urge the Commission to have the company investigate Bill Management Tools or other measures that might be made available to assist those who genuinely have affordability problems.
6004 The toll rate proposals will indeed give benefits to customers. Although, we do have some concern that, with respect to some of the prices, I believe the witnesses indicated that some rates could go up and some could go down. Certainly that is a market phenomenon, but in the transition to more open or complete competition, that does pose a potential concern for groups or specific customers who don't have competitive alternatives. Certainly the private line and access rate reductions are beneficial and we would agree with Northwestel's position that they do need to come down further.
6005 With respect to the capital program there is a critical need, in our view, for continued investment in the north in telecommunications. We believe that there has been value in the ongoing Construction Program Review by the Commission, particularly with respect to the Service Improvement Programs.
6006 Northwestel did agree that the Service Improvement Programs would still continue to be reviewed. It would be our proposal that the Construction Program also be subject to an ongoing review by the Commission simply because the quality of service measures that are the backstop in the event that underinvestment occurs are simply not going to be sufficient in the event that there is an issue with investment because of the long construction and investment cycles.
6007 With respect to local competition, Northwestel's position initially is that there should be no local competition unless there is a formal and detailed review of the terms. In the testimony this week it was conceded that the company's not opposed to local competition in principle, so the position is a little bit yes and a little bit no. There clearly is evidence that local substitution alternatives exist by wireless or Voice over IP.
6008 In our view, there should be no reason why the Commission should not authorize local competition without the involvement of a further detailed proceeding. Certainly, the question of costs for equal access and the issue of a full‑blown facilities‑based competition and all that goes with that, including local number portability are big, needy, high‑cost issues and those would need to be addressed separately. We certainly don't see the existence of those issues as being a barrier to authorizing local competition.
6009 With respect to toll competition I have already mentioned there has been a considerably history of review up to this point.
6010 We are somewhat concerned about the forbearance proposal, however. Northwestel has indicated and has demonstrated that there is market share loss certainly in one sector, in the prepaid card sector, but there is really no significant evidence of choices outside of that, so that from a customer point of view we would be concerned that a customer whose choice was not to take a prepaid card really has nowhere else to go and in the event of forbearance has no recourse of the event of concerns about price levels.
6011 With respect to the proposed service improvement plan it will come as no surprise that the Yukon Government is very supportive of continued investment in the infrastructure. We believe that is critical and we think it is absolutely vital to our economy and to our society for there to be an opportunity to keep up with technical advances. We don't need to be ‑‑ we certainly don't want to be left behind.
6012 Historically the service improvement plan has been very effective. It is a good solution and we recommend that Northwestel's proposal be adopted and indeed would look forward to further extensions of the service improvement plan if Northwestel proposes them.
6013 Regarding the quality of service measures, as I indicated, they are perhaps a thin backstop in the event of under‑investment of capital, absent an ongoing construction program review.
6014 As an alternative or perhaps as an enhancement, we would suggest that the Commission consider including something like customer satisfaction measures as an interim step to meeting ‑‑ to turning over this responsibility to market forces.
6015 Certainly, as we move from one pole to another, from monopoly to competition, there is a number of stopping places along the way and in order to ensure that or at least have the ability to monitor how well things are going, it may be helpful to have those kinds of measures as well and I believe the company has indicated that they do collect data long those lines.
6016 With respect to the need for infrastructure it has been very clear, I would suggest, from the Yukon Government's participation that we are highly concerned about the development of infrastructure to enable access and ongoing access particularly to health and education services but more broadly to the wide range of choice available to customers.
6017 It is clear that in many parts of the north that investment in a single infrastructure is uneconomic and double the investment for duplicate infrastructures is potentially very damaging.
6018 That is why we have suggested in our submission that there may be room for a vehicle such as a regional coordination committee to have inputs from local users, from interest groups, maintain close contacts with companies and the various levels of government in each jurisdiction, and to incorporate the various arms and elements of the federal government's interest in the north to come up with solutions that would be efficient and effective in meeting those needs.
6019 In our view the ultimate evolution of competition in the north is more likely to be sustainable if the target is smaller in nature, particularly at the application and service level. Consequently the infrastructure becomes much more important and the idea of commonality and a common approach to designing and managing or perhaps operating that infrastructure becomes more important.
6020 So then to sum up, the Yukon Government's recommendations would be that the Commission adopt the price cap proposal with some of the specific adaptations as we have described.
6021 We submit that the price cap formula is acceptable, but it may be necessary to address the issues of productivity and incentives.
6022 The rate restructuring proposals of Northwestel are necessary and, in our view, acceptable, specifically the CAT reductions and the reductions to private line and access rates for competitor services.
6023 We do, as noted, have a concern with the impact of local rate increases and would strongly recommend the company be asked to take measures to address those issues.
6024 With respect to the subsidy calculation, the Yukon Government recommends that because the benefits to the North and the people of the North far outweigh the cost of the subsidy, that the proposal of Northwestel be accepted.
6025 With respect to the capital program, we recommend that the construction program review be maintained and that the SIP proposal be adopted.
6026 The reporting requirements with respect to construction program and the annual financial reporting we believe are useful tools for the Commission and would recommend that the company be required to maintain those filing requirements.
6027 Finally, we would recommend that the Commission give consideration to the solutions such as we have proposed under the Regional Coordination Committee to address the need for managing the development of an infrastructure in the North that will be adapted particular to the needs of each region looking to ensure that advance services continue to be available to all northern homes and businesses.
6028 Thank you for your time and attention.
6029 THE CHAIRPERSON: Thank you very much, Mr. Pratt and the Government of the Yukon.
6030 I have been reminded that we are probably more or less at the mid point of our afternoon and I have been reminded that that means we should take a break.
6031 So we will see one another again at 3:15, please.
‑‑‑ Upon recessing at 1503 / Suspension à 1503
‑‑‑ Upon resuming at 1517 / Reprise à 1517
6032 THE CHAIRPERSON: Order, please.
6033 Madame la Secrétaire.
6034 THE SECRETARY: Thank you, Mr. Chairman.
6035 The next party is Telus.
ARGUMENT / PLAIDOIRIE
6036 MR. RYAN: Thank you, Mr. Chairman.
6037 May I begin by saying, Mr. Chairman, that we have found, for our part at least, the public hearing that you have conducted in conjunction with this proceeding to be extremely useful, and we think it has made a major contribution to our understanding of the issues. We hope it has allowed us to put forward suggestions to the Commission that will be more helpful.
6038 The task of ensuring that Canadians in the North have access to affordable, reasonably priced modern telecommunications services raises complex issues, as we have seen, and achievement of that task undoubtedly requires the support of parties outside of the North.
6039 As I indicated in our opening statement, Telus is glad to do its part in assisting in the achievement of the goal, and we ask only that the Commission assure itself that Northwestel is also doing its part.
6040 Whatever the Commission decides, we are sure it will be setting important precedents for how the National Contribution Fund should be used.
6041 Mr. Chairman, in our opening statement we expressed concerns about the uses to which Northwestel has proposed to put funds in the National Contribution Fund, and we indicated our view that some of the proposed uses don't qualify under the principles that up to now have covered the use of those funds. We expressed the view that some of the proposed uses aren't consistent with Commission policy.
6042 We also made the point that we think price caps are a superior form of regulation, and we expressed our support in principle for the use of price caps and Northwestel's transition to a price cap regime.
6043 We also noted that there were problems with each of the three steps that we think need to be undertaken as a part of the transition to price caps.
6044 Those three steps, of course, were that there should be a determination of the revenue requirement, that there should be a structuring of rates and subsidies, and that there should be a plan for the regulation of price changes over time.
6045 I want to address now, if I may, each of those three points.
6046 First, with respect to the determination of the revenue requirement, in our respectful submission, Northwestel has attempted to leapfrog the conventional requirement for a full revenue requirement review. The information filed by Northwestel is not sufficient for a full evaluation of its revenue requirement, there is a need for better information, and the company has an obligation to come forward with that information.
6047 It is our proposal in relation to this issue that Northwestel should be required to file more detailed support for its revenue requirement before any increase in its revenue requirement is permitted.
6048 I will pass immediately to the second of the three points. The evidence in this case indicates that Northwestel is proposing, in effect, to replace $28 million in revenues that it currently derives from charges levied on customers and payments received from interconnecting carriers, and replace that $28 million with about $39 million in explicit subsidy, to be drawn from the National Contribution Fund.
6049 That explicit subsidy, to our amazement, amounts to in the order of 25 percent of the company's total revenues in any given year.
6050 Mr. Hamelin was asked in cross‑examination to provide an example of any other commercial enterprise in Canada that receives a subsidy of that order, and he was unable to name one.
6051 Right there, Mr. Chairman, should be a warning flag to the Commission that there is something not quite right about the Northwestel proposal.
6052 The company's request is driven, in large part, by its stated objective that northern rates should be reasonably comparable to southern rates. That idea has an initial and superficial appeal perhaps, but it doesn't make the costs that are associated with the provision of services in the North simply go away. That issue of cost still needs to be addressed.
6053 The objective of northern rates being reasonably comparable to southern rates is certainly not one that is part of current Canadian public policy. It is not an objective that is mandated by section 7 of the Telecommunications Act, and it is not contemplated, in our submission, by section 46.5 of the Act, which is the provision that governs the National Contribution Fund.
6054 Let me remind you, if I may, what section 46.5 provides. It says that the Commission may require any telecommunications service provider to contribute, subject to any conditions that the Commission may set, to a fund to support continuing access by Canadians to basic telecommunications services.
6055 Whatever the words "access by Canadians to basic telecommunications services" mean, it is unlikely that what Parliament had in mind, in our submission, was that residential subscribers in Alberta or British Columbia or Ontario or Quebec or Atlantic Canada, who pay into this fund, should underwrite the cost of toll connecting trunks or high‑speed network access facilities or private lines used by Bell Mobility or other carriers, or even by TELUS. That, in our submission, is simply not what the fund is about.
6056 Indeed, the minister, when he was recently speaking on the subject of universal access, did not endorse the concept that northern rates should be reasonably comparable to southern rates, as was suggested at one point in this proceeding. I will remind you of what he said in the speech, as reproduced in Telus Exhibit No. 5. He said:
"Canadians living in remote areas of the country where there is limited choice, the Government would ensure universal access to telecommunication services at a reasonable price for those Canadians."
6057 Nor have previous Commission decisions endorsed the idea that northern rates should be reasonably comparable to southern rates.
6058 In Commission Decision 2000‑746, what you said was:
"The Commission agrees with the objective of maximizing all revenue sources before depending on supplemental funding." (As read)
6059 This, in our respectful submission, Northwestel has plainly failed to do and the idea, which I'll come to shortly, that some facilities should be zero rated or certain rates should be lowered and the revenues associated with those facilities and services should be sacrificed and replaced by money from the national contribution fund, is simply inconsistent with Decision 2000‑746 and the reasoning behind it.
6060 The Commission also spoke to the issue of the use of supplementary funding in Decision 99‑16, and you'll recall that in that decision, which was referred to you in testimony yesterday, what the Commission said was:
"To be eligible for any supplementary funding, Northwestel will have to demonstrate that it cannot meet the basic service objective using the traditional funding mechanisms relied upon by companies in southern Canada." (As read)
6061 Again, in our respectful submission, Northwestel has failed to offer you such a demonstration.
6062 Let me turn then to the subject of local rates and Northwestel's specific proposal.
6063 Northwestel has, of course, proposed a $2 increase in local residential rates and a $5 increase in local business rates but, in our submission, the company has not given adequate attention to either affordability or reasonableness.
6064 In cross‑examination the witnesses for Northwestel indicated on several occasions that they conducted no affordability study and they also indicated that they had not analyzed the potential for rate increases of a different order, either up or down as part of their preparation of this application.
6065 We understand, Mr. Chairman, that costs in this jurisdiction are higher and that's a factor you will want to take into account in any determination you make on the subject of local rates, but it is also the case that incomes are higher.
6066 And I remind you that we filed as Telus Exhibits 3 and 4 some information on average incomes in the Yukon and the Northwest Territories that showed there was a significant gap between incomes in those two territories and average incomes in the rest of Canada with the former being considerably higher.
6067 Notwithstanding these misgivings we have about parts of the Northwestel proposal for local rates, we do think that it is a safe minimum step for you to approve a residential rate increase of $2, but we also think you should direct Northwestel to conduct an affordability study and file it with the Commission, so that going forward the company and the Commission have better information on the limits of affordability in the territory served by Northwestel.
6068 This would help you in getting an appropriate idea of the upper level that the residential rates could rise to.
6069 So, I submit that it would be appropriate to approve the proposed rate increase of $5 for basic local service ‑‑ sorry, local business service.
6070 Next, if I can turn to the subject of toll connect. This is a particularly puzzling part of Northwestel's proposal. They propose to abandon the current CAT and at least part of the current settlements and replace those with a switch connect rate.
6071 One of the oddities of the switch connect rate as put forward by Northwestel is that it includes no cost for the toll connect facilities. Effectively, Northwestel is proposing that these be zero‑rated.
6072 The revenue impact of adopting this part of the Northwestel proposal is in the order of $18.4 million. That is, in effect, about $25 million worth of CAT revenue and settlement revenue would be sacrificed in return for about $7 million of switch connect revenue, leaving the balance of $18.4 million that I have just mentioned. We think this proposal is fundamentally misguided.
6073 It is said to be motivated by concerns about bypass of Northwestel's network. Well, Mr. Chairman, this charge would clearly eliminate any danger of bypass in that respect. If you are going to give away the facility for free, it is a pretty safe bet that nobody else will build one in competition with you. But we think that is an overreaction to the threat of any competition that there may be.
6074 It always seemed to us that there must be something more to this proposal than concerns about bypass and it emerged in cross‑examination that, at least in part, the proposal that Northwestel has put forward was the product of pressure from what was referred to as a major customer. Well, nobody asked who that major customer was and I am merely conjecturing when I suggest it might be Bell Mobility. But whoever it was, the answer that Northwestel gave to that customer should have just been, no, no thank you. We can't zero rate facilities for toll connect and draw the funds from the National Contribution Fund to replace them.
6075 The bypass idea of course is premised on the notion that there is a prospect of real competition for Northwestel in its territory. But the competition claims of Northwestel have always seemed to us to be exaggerated. It became clear during the course of this proceeding that Northwestel is most often just competing against itself and other members of the Bell Canada family, Bell Mobility or the new venture that Northwestel is a 70 per cent owner of called Latitude Wireless or potentially the so‑called mining organization that was referred to in the ad from the Globe & Mail that seems to suggest that Northwestel would be establishing a reseller of combined packages of terrestrial and wireless services.
6076 All of these parties are welcome in the north as service providers but, given the close interrelationship between them, it is something of an exaggeration to look on them as real competitors for Northwestel.
6077 Other times of course competitors that do exist are simply reselling Northwestel service or using Northwestel facilities. So there is no real prospect of facilities‑based competition at present, other than what is potentially offered by BRAND and that is a unique issue that should be dealt with in quite a different way in our submission.
6078 So whatever the case is, we doubt very much that there is any need for urgency on this point by Northwestel and the Commission has time to sort out issues related to competition in the north and needn't feel compelled to rapidly approve this proposal for revision of the toll connect arrangements and the substitution of the switch connect charge.
6079 Our proposal is that the costs of toll connect should be included in the switch connect so that it is a true cost‑based rate. The interrogatories from the Commission to the company indicate that a charge of 4.15 cents would cover all of the associated costs of switch connect, including toll connect and we think that is the charge that this Commission should approve.
6080 If Northwestel chooses to charge less than 4.15 cents, then that should be a decision, the consequences of which the company and its shareholders bear themselves. There should be on right to draw on the Contribution Fund for any difference between the 4.15 cents in the switch connect charge that the company chooses to implement.
6081 Let me next say something briefly about the other proposed rates changes. These are detailed, of course ‑‑ and other parties have already referred to these today ‑‑ they are detailed in Appendix 5 of the company's evidence, the table that appears at the back of the evidence.
6082 Very significant decreases in private line and wireless service provider network access charges are proposed. These, again, seem to be the product of pressure from a major customer. They don't seem to be designed with any other objective in mind. There is no evidence that those rates, which are substantially lower than the current rates, would be compensatory and Mr. Woodland said in his testimony that an economic evaluation study had been conducted for only one of these products.
6083 Our proposal, Mr. Chairman, is that proposed reduction in these rates must be cost‑justified and we recommend that if the company wishes to proceed with these proposed rate reductions that they should be required to file a Phase II cost study to substantiate the reasonableness and the "compensatoriness" of the proposed charges.
6084 Again, if Northwestel chooses to lower rates below those levels, they should have no right to draw from the National Contribution Fund to make up the discrepancy. Those funds, I repeat, are not there to subsidize Bell Mobility or Latitude Wireless or even Telus. They are there for the benefit of subscribers, not for carriers and competitors or major customers of the company.
6085 Another issue that arises is the need to consider the current balance between Northwestel's wholesale and retail prices.
6086 Northwestel has proposed lowering significantly the wholesale prices that I have referred to. We do have a concern that the lowering of these wholesale prices will simply lead to a reduction in retail prices.
6087 Such reductions will do nothing to alleviate Northwestel's competitive problems and it will lead to a reduction of both in the end wholesale and retail revenues, increasing the economic pressure on the company.
6088 Again, whatever steps the company chooses to take in this regard, the National Contribution Fund should not be available to them to make up any differential.
6089 The third of the three steps that we suggest need to be undertaken by the Commission as part of any transition to price caps by Northwestel relates to the regulation of prices over time and how that will be achieved.
6090 Northwestel has proposed what is referred to as a modified price cap proposal and the important word in that phrase, Mr. Chairman, seems to be the word "modified."
6091 The proposal put forward by Northwestel does not comport with what is usually understood as a price cap regime. In particular there is considerable asymmetry between what we would call the upside and the downside risk to the company.
6092 The company has proposed that they have multiple escape paths from the regime if events don't turn out the way it is presently contemplated, which is an idea that is largely antithetical to the idea of a price cap regime.
6093 We will elaborate on our concerns about the company's proposal in that regard in our written argument but let me give you in the meantime a summary of what our proposal for the company should be in respect of its price cap regime.
6094 First of all, Mr. Chairman, we do not support a delay in introducing price caps. We think that would probably be counterproductive.
6095 Secondly, we propose that contribution per line should be included in the residential services basket and that is also a point we will elaborate on in final argument.
6096 Third, we propose that the residential services basket be governed by an X factor of X equals I pending the determination of a new X that would be the outcome of the new effort that the company has undertaken to make to develop more data points for the establishment of a proper X factor. But, as we say, in the meantime X should be set at equal to I.
6097 Fourth, we propose that residential local service rates should be allowed to rise on average by the rate of inflation, which indeed is implicit in the X equals I, and there should be a consequent reduction in contribution per line.
6098 Mr. Chairman, together with the document I had passed up to you as part of my written materials you will find a chart at the end that looks like this, which is an attempt to simply reproduce in the simplest possible terms what our proposal is for residential local rates.
6099 I will just take a minute to explain that.
6100 The top line, it's labelled "X equals I", is essentially the cost of providing residential local rates. It's Phase 2 plus 25 percent.
6101 The sloping line that you see beneath that is local rates. They start at present at a certain level and they should be allowed to rise over time with the rate of inflation. As that happens, assuming costs remain constant, contribution will naturally shrink over time.
6102 When a new X is determined for the company as a result of this new effort the company has undertaken to make, when the new X is determined the cost line at the top may slope up or down, depending on the new X factor.
6103 That is, in a nutshell, our proposal for local residential rates. We think this would address the contribution issue because it would make provision for contribution falling over time in all likelihood and it would ‑‑ in the short term at least local rates would be allowed to rise only by the rate of inflation, and all of this would be subject, of course, to the findings of the affordability study that we have recommended the company be directed to undertake.
6104 The fifth point in connection with the price cap proposal, there should be another retail services basket which would include local business service and X should be set equal to I for that basket as well, again pending the determination of a new X. Of course, there would also be the possibility of rate element constraints being posed on the company in conjunction with that basket.
6105 Finally, in this section of our oral argument, we suggest that there should be a wholesale services basket and the rates for services in that basket be frozen pending the determination of a new X.
6106 I will turn, then, to the final part of my submission, which is entitled "What should the Commission do?" This is essentially a recap of what I have already said, Mr. Chairman.
6107 We say first of all that there should be no increase in Northwestel's revenue requirement without fuller evidentiary support.
6108 We should say that there should be no rate or contribution changes, with three exceptions:
6109 Residential rates should be allowed to increase by $2.00; business rates by $5.00; and the CAT rate should be set at 4.15 cents.
6110 The Commission should order Northwestel to submit affordability data to assist the Commission in determining the affordable reasonable level of rates, and hence the support required from the National Contribution Fund going forward.
6111 On an interim basis, X should be set equal to I for local residential services and other retail services and there should have been interim freezing of wholesale rates.
6112 There should be the submission of a reliable productivity that is X factor study.
6113 You will see my last point on this page was, there should be forbearance for Telus retail toll service.
6114 It is certainly a good idea, Mr. Chairman, but not one that we intended to put forward as part of our case today.
6115 We will address the subject of Northwestel retail toll service forbearance in our final argument.
6116 Mr. Chairman, we came here today, in short, because we were concerned that the National Contribution Fund would be used by Northwestel to top up its revenue requirement. We are confident that the proposals we are making will ensure that the fund is used only for purposes for which it was originally intended.
6117 We conclude where we began. We say that in order to accomplish the Commission objectives, support from outside the North will certainly be required. We say that Telus is glad to do its part, and we want to see Northwestel also do its part.
6118 Thank you very much.
6119 THE CHAIRPERSON: Thank you, Mr. Ryan, Telus.
6120 A question from Mr. McCallum.
6121 MR. McCALLUM: Just a quick clarification, if I may.
6122 For the purpose of the record, you referred to the graphic that is at the back of your submission. We have not been making the final arguments exhibits expressly.
6123 In this case, if this is going to be included in your final written argument then there would be no need to make this an exhibit. I just wonder if you could clarify if that is going to be included in your written as well.
6124 MR. RYAN: We will see that it is included in our final written argument and that would address the procedural point.
6125 MR. McCALLUM: Then when the transcript is read, it is read with something that is the same as what you have just submitted today.
6126 MR. RYAN: All right.
6127 MR. McCALLUM: Thank you very much.
6128 THE CHAIRPERSON: Thank you.
6129 THE SECRETARY: We will hear the last party to provide oral final argument.
6130 Northwestel, please come forward.
ARGUMENT / PLAIDOIRIE
6131 MR. FLAHERTY: Mr. Chairman, Members of the Commission, as we bring this hearing to a close, I think all of us have developed a sense of the importance of the Commission's task in this proceeding.
6132 This hearing is about more than Northwestel. It is about the future of telecommunications services in the North. From the larger centres like Whitehorse all the way to Arctic Bay, to Old Crow, to Sanikiluaq, will the people of the North have access to most or all of the services that are available to Canadians in the South?
6133 If we can ensure that they will have access to those services, how can we ensure that the prices will be reasonable in the context of the North and in relation to prices in southern Canada?
6134 We take our role as the service provider of last resort very seriously. For us this means serving not only the major centres but all of the remote villages scattered across the Arctic tundra. You have seen our commitment in our quality of service results.
6135 As we go forward into a new regulatory regime, we are looking for a model that will permit us to continue to serve in that way and survive financially. In these remarks, I will be giving you an overview of some of the key points that in our view should be the focus of attention.
6136 To better understand the context in which Northwestel and other northern telecommunications service providers operate it is useful to consider some key characteristics of northern demand and usage of telecommunications services.
6137 Based on our experience as an operating company in the North, we can say that Northerners are in some ways the same and in other ways different from customers in the South. They are the same in that they seek similar modern telecommunications services to communicate with family, friends and for business purposes.
6138 At the same time they are very different in certain ways. Because most of the communities are isolated and distant from each other, as well as from large urban centres in the South, Northerners rely very heavily on telecommunications services to stay in touch with others in the North or in the South.
6139 They simply have no option. They have a greater dependency on telecommunications services for purposes such as health, education and commercial dealings.
6140 When faced with higher rates for service they desire or need, like all other Canadians, Northerners seek alternatives. Northerners have shown that they are unusually adept at seeking out and taking advantage of lower cost alternatives.
6141 For example, prior to the introduction of long distance competition in 2001, many Northerners used various forms of call back services to evade the high cost long distance rates of Northwestel.
6142 They also used prepaid cards to obtain rates even prior to the legal introduction of long distance competition.
6143 In my testimony yesterday, I spoke of the rapid growth of VoIP services in the North, mostly using Skype or Vonage, in order to obtain free, or nearly free, long distance services.
6144 None of this is at all surprising. Like all Canadians, northerners have needs for comparable services which they must meet. One way or another, they find means to obtain those services at the lowest possible rates.
6145 In this regard, they are the same as all Canadians: they want comparable services to those available to Canadians. To their credit, they have a proven track record of finding alternative means to obtain those services at prices comparable to those in the South.
6146 Frankly, we should expect nothing more and nothing less from northerners. If the northern telecommunications regulatory system does not provide them with comparable services at reasonably comparable rates, northerners simply cannot be forced to accept such a system, nor should we expect them to.
6147 Northwestel is concerned that some parties are attempting to leave the impression that competition in northern Canada is an illusion. It is far from an illusion. Customers enjoy significant choice today from multiple service providers offering products and services in many forms.
6148 We have spoken at length of toll competition in the North, which has resulted in competitors capturing 32 percent market share in a mere six‑year period.
6149 The primary form of competition, prepaid cards, is unique to the North, but it is a testament to the adaptability of northerners to find alternative solutions.
6150 Prepaid cards are offered by national providers at national rates as low as 2.5 cents a minute.
6151 In addition, technology‑based competition in the form of cellular and satellite solutions offer customers alternative means to local access, toll and features, solutions that erode Northwestel's NAS and toll revenues.
6152 On Monday, Mr. Stewart, a local Yellowknife businessman, noted in opening comments the use of a satellite solution from one of the three diamond mines in the Northwest Territories receiving dial tone from Vancouver.
6153 In fact, we can tell you that two of the three diamond mines have service from a southern‑based satellite provider other than Northwestel.
6154 The vast majority of oil and gas companies in northern British Columbia obtain their services from providers other than Northwestel.
6155 Many more of these alternate solutions will be deployed in the North with extensive mining and oil and gas operations expected in the near term.
6156 Cellular service is offered by five service providers in the North, who will offer service covering 77 percent of Northwestel's customer base.
6157 Two of the predominant carriers, Bell and TELUS, are locked in a national pitched battle for market share. Any spillover effects on the northern market are of no concern to either company.
6158 Service plans can include free long distance, or the same toll rates offered in southern Canada.
6159 In addition, there are many transient and seasonal resource workers in the oil and gas and mining industries, working throughout the North, who use cellular plans obtained in the South.
6160 There are 13 broadband ISPs in the North. This has become a highly competitive market, particularly in our largest centre, where the company has approximately 50 percent market share.
6161 There are 34 cable service providers in the North, serving over 80 percent of the NAS lines, and 33 of these providers are not affiliated with Northwestel.
6162 Many of these cable providers offer high‑speed internet today and have the capability of offering Voice over IP applications.
6163 IP technology is drastically changing the competitive landscape in the North. Voice over IP providers offer an enhanced value proposition to northern residents through distance‑insensitive rating.
6164 Of particular note is Skype offering free long distance.
6165 Currently, approximately 3 percent of Northwestel's toll minutes are being carried by VoIP providers, 80 percent of that by Skype. These numbers have grown by 300 percent in the last six months.
6166 There are, of course, a multitude of PBX equipment providers that now offer IP‑based solutions that, for example, interconnect branch offices with VPNs and completely bypass Northwestel's toll network.
6167 These solutions are particularly attractive to the customers that Northwestel is most dependent upon, as 50 of our largest customers account for over 60 percent of our toll business.
6168 One recent customer deployed equipment and estimated that it would have a payback period of only eight months on the equipment, based on the toll savings alone.
6169 Northwestel has spoken at length of the BRAND and NSI programs from Industry Canada that result in the availability of broad band and data services in 56 of the communities in the Northwest Territories and Nunavut.
6170 In addition, the Department of Indian & Northern Affairs is specifically funding and promoting the development of VOIP solutions through the north using subsidized community champions to push the adoption of VOIP.
6171 These government sponsored programs not only result in duplicate infrastructure serving remote communities, but also actively promote subsidized bypass of Northwestel's network and services, even in the most remote, uneconomic communities.
6172 The company highlights this situation for several reasons. Firstly, although the Commission is clearly not responsible for this situation, it is important that we all do what we can so that going forward government and regulatory policy is more closely coordinated to avoid such situations in the future.
6173 Secondly, and far more relevant to the case at hand, the creation of these duplicate networks will increase risk to the company going forward in terms of both additional competition, as well as the potential for stranded investment.
6174 Migration of customers to these government‑funded IP networks can be expected to drive up the unit cost of the service the Commission supervise most closely, residential primary exchange services, thus requiring greater subsidies in future price cap periods.
6175 With respect to the proposal put forward by the company in this proceeding, it is essential to note that no competitive losses associated with such alternative networks have been incorporated in the financial forecasts put forward.
6176 Thus, to be clear, there is no subsidy being requested in association with competitive losses to such networks.
6177 In addition, our price cap proposal does not provide any mechanism to support the company in the case of future customer losses to these competitors.
6178 Effectively, the company would be expected to bear the impacts of any such losses during the upcoming price cap period.
6179 Most parties agree that a subsidy is required in the north. Telus agrees with this principle, as we've just heard.
6180 Northwestel submits that it's not a question of whether a subsidy is needed, rather the issue is how large a subsidy and how to fund it.
6181 Northwestel notes that a significant portion of its current subsidy is funded on a per‑minute usage basis through the current high CAT and high transport rates. That method of subsidizing high cost areas has been abandoned in the south.
6182 Northwestel submits that the inclusion of a usage‑based subsidy in its current rates, such as the CAT and transport rates, encourages faster migration of traffic from the TDM Legacy Network to alternative networks and/or technologies, including IP.
6183 Traffic on these alternative networks do not contribute to the funding of Northwestel's remote and rural network.
6184 Northwestel's high dependence on a major subsidy stream tied to the usage of Legacy services on a per‑minute basis constitutes a unique risk.
6185 As you know, the subsidy requirement of other carriers is funded in its entirety through the revenue tax mechanism associated with the national contribution fund.
6186 This risk is of particular concern to Northwestel with regard to interconnecting carriers. Given the large volume of traffic associated with each of these individual carriers, there is potential for a sudden and significant impact in the event of a decision on their part to migrate their traffic to an IP network.
6187 The same is true for the small number of large customers who account for the majority of Northwestel's toll traffic. As you have heard, our 50 largest customers account for approximately 61 per cent of the toll traffic.
6188 With regard to toll connect facilities, simply put, these facilities are uneconomic. As Northwestel indicated in its testimony, our major centres have essentially zero costs associated with toll connect facilities because they essentially use a direct connect method.
6189 Nevertheless, these same major centres are required to bear the cost of this uneconomic facility.
6190 Clearly, Northwestel cannot absorb these significant costs in its rate base without totally undermining both the reasonableness and sustainability of rates.
6191 The current CAT is 60 times higher than the direct connect rate of southern ILECs and even the proposed lower switch connect rate remains seven times the comparable direct connect rates.
6192 Current business toll rates are an average 60 per cent above the prevailing Legacy Network business toll rates in southern Canada and the proposed rates remain 25 per cent higher.
6193 Currently, digital private line rates are approximately 15 times higher than rates on forborne roots in rural and of similar distance. The proposed rates remain approximately 14 times higher. Current wireless service provider interconnection rates are 12 times higher and the proposed rates remain twice as high. Finally, even the residential local services revenues, at the proposed rates, will be 18 per cent higher than the national averages.
6194 To not subsidize these facilities seriously puts in jeopardy the entire toll connect network. Given that investments had been made, this must clearly constitute a breach of regulatory bargain. In the final analysis the jeopardy to the funding of Northwestel's subsidy requirement puts at risk Northwestel's ability to meet its obligation as a provider of last resort throughout all of the north.
6195 Over the course of this hearing we have heard several parties reiterate the importance of ensuring Northwestel has a regulatory framework which enables it to continue acting as a provider of last resort. In its opening statement YTG listed as one element of their five statements of principle that regulatory framework should enable the continuation of Northwestel as a viable northern‑based telecommunications provider.
6196 There have been a number of references in this proceeding to the issue of affordability. The issue is certainly a relevant issue for the Commission. How should the Commission reach a conclusion concerning affordability? While there is no absolute measure of affordability, there are a number of factors that the Commission normally considers in this context. No one factor is determinative. Among these of course, evidence regarding drop‑off and/or penetration rates.
6197 We keep track of drop off and the reasons people provided for dropping off. By this one measure, there is no evidence that warrants any concern. Last year we had only 20 customers who mentioned affordability as the reason to terminate service.
6198 Penetration rates also do not show any statistically significant decline. Apart from the overall decline occurring in all telephone companies as subscribers replace wire line phones with wireless and/or Voice over IP.
6199 There are other factors relevant to affordability which the Commission often considers, though no one factor is conclusive. For example, the Commission will often consider rates already approved for the same or similar services offered by other incumbent companies. This approach is very commonly followed by the Commission when assessing proposed rates of the small incumbent telephone companies. These small companies frequently do not have statistical data on affordability within their territory, thus the Commission has regard to the rates already approved for similar services in neighbouring telephone companies.
6200 The magnitude of the gap between rates and costs is another relevant factor. The Commission has been gradually moving residential primary exchange service rates closer to cost. The larger the gap or shortfall the more the Commission appears to be interested in taking steps to narrow the gap.
6201 The percentage increase sought is another factor. The Commission seems willing to accept price cap formulas which permit an increase up to 5 per cent in a year. Such an increase does not appear to cause the Commission great concern about affordability even when, as in our case, there is no demographic analysis available of the customer base.
6202 Finally, although all of the foregoing factors are relevant to assess affordability, in the final analysis there is no precise formula or equation to quantify the affordability of a rate. Ultimately, affordability is a matter of judgment to be exercised by the Commission based on all the facts and circumstances of each case.
6203 It has been suggested that the quality of service penalties and rebates might be necessary as one element of any price cap framework for Northwestel. This is suggested notwithstanding the widespread recognition by all parties and the Commission that Northwestel's quality of service has been and continues to be high.
6204 In our view, the rebate penalty mechanism is a solution in search of a problem. There is no such problem now and it would be a fundamental error for the Commission to assume in advance that there necessarily will be such a problem. Each company must be regulated as a separate entity in light of its own circumstances.
6205 Furthermore, Northwestel would suggest that the imposition of such a penalty mechanism in the absence of any demonstrated need would be contrary to both the letter and the spirit of the proposed policy direction to the CRTC and the Telecom Policy Review report. In both of these documents the clear recommendation is that the CRTC should intervene and regulate only where there is a demonstrated need and even then only to the minimum extent necessary.
6206 Thus to assume a quality of service problem exists where there is no evidence and then to impose regulation is contrary, in our view, to the spirit and direction of the directive proposed by the Minister.
6207 Nevertheless I can assure you, Mr. Chairman, that if Northwestel's quality of service were to deteriorate consistently below the standards prescribed by the Commission, absent an awfully good explanation and justification, we fully recognize that the Commission would need to act.
6208 There has been considerable discussion over the past four days concerning the topic of subsidization, and rightfully so since in one form or another subsidization is unavoidable. It is central to the business reality of telecommunications in the north both today and in the future.
6209 The reality today is that Northwestel's actual current subsidy requirements is in excess of $40 million. Under the present regulatory framework we receive about $10 million in supplemental funding from the National Contribution Fund and the remaining shortfall is covered by cross‑subsidization from very high‑price services charged to the company's customers and interconnecting carriers.
6210 Aside from being fundamentally inconsistent with price cap regulatory principles, internal cross‑subsidies are simply unsustainable in light of alternative networks and the emergence of IP‑based technologies.
6211 Under the proposal being put forward some $30 million of this implicit subsidization will be made explicit.
6212 To break out the elements of the subsidy requirement, $11 million alone is attributed to the ongoing cost associated with the service improvement program that was rolled out over the past five years to further the basic service objective in largely uneconomic regions.
6213 Approximately $17 million of this subsidy is due to residential primary exchange services following exactly the same approach and methodology employed by southern telcos under price caps.
6214 The residential PES cost study underscores the high cost of that service in particular and the high cost of Northwestel's operating area in general.
6215 The implementation of key system investments essential to the efficient operation of a small telecommunications company like Northwestel has added a large increment to those costs.
6216 The addition of 2,800 NAS under the service improvement program at 10 times our average per NAS investment cost increased the overall average cost of residential primary exchange service significantly.
6217 Eleven million of the subsidy required relates to toll connect and is an essential component to ensure the viability of the long thin transport routes and the extensive toll satellite network that provides basic connectivity to the rural and remote communities in Northwestel's operating area.
6218 Seventy‑one per cent of the toll connect facility costs are incurred by the 42 small communities served by satellite. This illustrates the extreme difficulties Northwestel faces in trying to balance the competing principles of cost‑based rating and the provision of reasonably comparable services and rates.
6219 This reallocation of subsidy from implicit to explicit will in no way provide a windfall benefit to Northwestel. It will create an environment significantly more transparent and competitor‑friendly.
6220 Other than the proposed local rate increase for residential customers there is no linkage between the subsidy requirement and Northwestel's proposed rate structure. There should be no mistaking the fact that the subsidy proposed is truly cost‑based.
6221 Northwestel notes that there appears to be a concern regarding the adequacy of our costing. Leading up to and over the course of this proceeding Northwestel has put significant effort into its Phase II cost studies.
6222 These studies support the calculation of residential primary exchange service costs, rates and the resultant subsidy, toll connection facility costs and the resultant proposed subsidy, switch connect facility costs and the resultant rate proposed as a replacement for the current bundled CAT rate, the imputation test for toll service and toll‑free service, and finally consideration of an appropriate productivity or X factor.
6223 The studies were all performed in accordance with standard Phase II costing principles, as guided and assisted by Mr. Leon Schufelt, an independent expert well known to the Commission.
6224 No party challenged the validity of either the input data or the methodologies used. The issue is not one of quality nor of accuracy but rather it pertains only to the lack of additional data points specific to the productivity study.
6225 We recognize that there are insufficient data points to clearly determine the productivity factor. However, the increase in cost between the two years studied illustrates the high‑cost nature of Northwestel's environment and the challenges faced in reducing costs in residential PES and any other services with a high proportion of fixed costs.
6226 Northwestel has proposed to permit resale of local access services in its territory as an immediate means to extend the benefits of local competition to customers in the North. Resale of Northwestel's retail services will allow competitors to incorporate local service in a value‑added bundle for customers, extending to customers the benefits of competitive innovations in value‑added services.
6227 Resale of Northwestel's retail services will also allow national competitors to serve their national customers in the North.
6228 Cellular telephone service also provides another form of choice to both residential customers and small businesses in the North.
6229 The attractiveness of cellular telephone service as an alternative to local service in the North has recently increased due to aggressive pricing for both airtime and long distance rates. The CRTC 2005 Decima survey indicated that a full 15 percent of residential customers surveyed would consider replacing their local wireline service with wireless service.
6230 With regard to the issue of facilities‑based competition, Northwestel notes that it has proposed a roadmap to move forward on this issue similar to the model employed for the introduction of long distance competition in the North.
6231 I won't go into the details here, but in response to Interrogatories CRTC‑1501, 1502 and 1503, we describe the practical engineering impediments we face to implement the Commission's model for competitive local exchange carriers. Solutions to these impediments must be developed, costs understood and the implications on the broader telecom model in the North understood to determine the feasibility of proceeding with facilities‑based competition.
6232 Finally, I note that to date no competitive local exchange carrier has approached the company seeking local network interconnection.
6233 Northwestel is quite concerned by some suggestions relating to the retention of substantively most of the regulatory requirements associated with its current regime.
6234 In Telecom Decision CRTC 2002‑43 the Commission concluded that any form of earnings regulation would negate the regulatory streamlining benefits inherent in price cap regulation since most of the details related to the current reporting requirements would have to be maintained. The Commission found that the disadvantages of such an approach outweigh its benefits.
6235 Northwestel submits that if some form of earnings‑based regulation is to be retained in the North, then its current regulatory framework should be retained rather than a mix of price caps and earnings regulation.
6236 In any event, regardless of the ultimate form of regulation, material changes in the operating environment in the North requires restructuring of Northwestel's rates to address the unsustainability of continued funding of the company's subsidy requirement through usage‑based and permanent levies on legacy services.
6237 In conclusion, Mr. Chairman and Members of the Panel, we thank you and your staff for your time and attention.
6238 You have an important and difficult task in this case. Your decision will affect the whole of the North and its effect will be felt for many years. We will of course be addressing further matters in the written argument next week.
6239 We, and all parties from the North, have been pleased to participate in this proceeding and express our views directly to the Commission in the region in which we live and work. We wish you well in your deliberations.
6240 Thank you.
6241 THE CHAIRPERSON: Thank you very much, Mr. Flaherty and Northwestel.
6242 I think, Madame la Secrétaire, that brings our proceedings to a close?
6243 THE SECRETARY: That's it for today.
6244 THE CHAIRPERSON: The Commission would like to thank all of the participants in this hearing. We appreciate your investment of time, energy and wisdom in helping the Commission to come to an appropriately balance conclusion or set of conclusions. The conduct of the hearing throughout on your part has been exemplary and we appreciate that as well.
6245 I would like, on behalf of my colleagues at the front of the room, to thank our staff for the hard work and the smooth operation of the hearing. I know that it represents rather more effort than is immediately obvious to those of you who simply see them during the hearing because most of their work is before, after and around the hearing. They have done a very fine job.
6246 I would like to say on behalf of my colleagues, it has been a pleasure for us to be here in Whitehorse and to appreciate firsthand some small fraction of the organizational and technical and financial challenges that Northwestel has to face, thus far with conspicuous success.
6247 So thank you very much.
‑‑‑ Whereupon the hearing concluded at 1615 /
L'audience se termine à 1615
Kristin Johansson Richard Johansson
Jean Desaulniers Fiona Potvin
Sue Villeneuve Beverley Dillabough