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

 

 

 

 

 

 

 

              TRANSCRIPT OF PROCEEDINGS BEFORE

             THE CANADIAN RADIO‑TELEVISION AND

               TELECOMMUNICATIONS COMMISSION

 

 

 

 

             TRANSCRIPTION DES AUDIENCES DEVANT

              LE CONSEIL DE LA RADIODIFFUSION

           ET DES TÉLÉCOMMUNICATIONS CANADIENNES

 

 

                          SUBJECT:

 

 

 

Review of price cap framework /

Examen du cadre de plafonnement des prix

 

 

 

 

 

 

 

 

 

 

 

 

 

HELD AT:                              TENUE À:

 

Conference Centre                     Centre de conférences

Outaouais Room                        Salle Outaouais

140 Promenade du Portage              140, Promenade du Portage

Gatineau, Quebec                      Gatineau (Québec)

 

October 12, 2006                      Le 12 octobre 2006

 


 

 

 

 

Transcripts

 

In order to meet the requirements of the Official Languages

Act, transcripts of proceedings before the Commission will be

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

and staff attending the public hearings, and the Table of

Contents.

 

However, the aforementioned publication is the recorded

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

either of the official languages, depending on the language

spoken by the participant at the public hearing.

 

 

 

 

Transcription

 

Afin de rencontrer les exigences de la Loi sur les langues

officielles, les procès‑verbaux pour le Conseil seront

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

membres et du personnel du CRTC participant à l'audience

publique ainsi que la table des matières.

 

Toutefois, la publication susmentionnée est un compte rendu

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

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

officielles, compte tenu de la langue utilisée par le

participant à l'audience publique.


               Canadian Radio‑television and

               Telecommunications Commission

 

            Conseil de la radiodiffusion et des

               télécommunications canadiennes

 

 

                 Transcript / Transcription

 

 

 

 

              Review of price cap framework /

          Examen du cadre de plafonnement des prix

 

 

 

 

 

BEFORE / DEVANT:

 

Richard French                    Chairperson / Président

Helen del Val                     Commissioner / Conseillère

Elizabeth Duncan                  Commissioner / Conseillère

Andrée Noël                       Commissioner / Conseillère

Stuart Langford                   Commissioner / Conseiller

 

 

 

 

ALSO PRESENT / AUSSI PRÉSENTS:

 

Marielle Giroux-Girard            Secretary / Secrétaire

Bob Noakes                        Staff Team Leader /

Chef d'équipe du personnel

Stephen Millington                Legal Counsel /

Rachelle Frenette                 Conseillers juridiques

 

 

 

 

HELD AT:                          TENUE À:

 

Conference Centre                 Centre de conférences

Outaouais Room                    Salle Outaouais

140 Promenade du Portage          140, Promenade du Portage

Gatineau, Quebec                  Gatineau (Québec)

 

October 12, 2006                  Le 12 octobre 2006

 


                           - iv -

 

           TABLE DES MATIÈRES / TABLE OF CONTENTS

 

 

                                                 PAGE / PARA

 

PREVIOUSLY AFFIRMED:  JANET YALE                  577 / 3903

PREVIOUSLY AFFIRMED:  WILLIE GRIEVE

PREVIOUSLY AFFIRMED:  STEPHEN SCHMIDT

PREVIOUSLY AFFIRMED:  PAUL HANSEN

 

Cross-examination by the City of Calgary          577 / 3907

Questions by the Commission                       619 / 4160

 

 

 

AFFIRMED:  MARC BEAULIEU                          653 / 4384

AFFIRMED:  ROBERT TASKER

AFFIRMED:  MARK KOLESAR

AFFIRMED:  DAVE McMAHON

PREVIOUSLY AFFIRMED:  PAUL HANSEN

 

Examination-in-chief by Telus                     653 / 4385

Questions by the Commission                       655 / 4405

 

 

AFFIRMED:  JEFFREY BERNSTEIN                      696 / 4642

AFFIRMED:  DENNIS WEISMAN

 

Examination-in-chief by Telus                     696 / 4643

Cross-examination by The Consumers Groups         697 / 4658

Questions by the Commission                       749 / 5015

 

 

AFFIRMED:  BERNIE LEFEBVRE                        778 / 5185

AFFIRMED:  TERESA GRIFFIN‑MUIR

AFFIRMED:  KELVIN SHEPHERD

 

Examination-in-chief by MTS Allstream             778 / 5186

Cross-examination by The Companies                780 / 5205

 


                           - v -

 

               EXHIBITS / PIÈCES JUSTICATIVES

 

 

No.                                              PAGE / PARA

 

COMPANIES‑2   Response to Consumer Groups        651 / 4370

Undertaking-1 requesting

information on Dr. Roycroft's

analysis associated with DSL

service

 

BCOAPO-1      Excerpt - CRTC Telecommunications  651 / 4372

Monitoring Report - July 2006

 

Consumer      Response to interrogatory from     858 / 5731

Groups-1      The Companies to (ARC et al)

26 June 01-201 & 203 with

attachment (20 pages)

 

COMPANIES-3   Pages 3 & 4 of the MTS Annual      858 / 5734

Report 2005

 

COMPANIES-4   News clippings of articles         859 / 5735

related to Primus Canada and

MTS Allstream

 

COMPANIES-5   Excerpt of Primus Telecom. News    859 / 5736

release dated 12 June 2006

 

COMPANIES-6   Interrogatory Response             859 / 5737

Primus (CRTC) 1 Sept. 06-7

 

COMPANIES-7   MTS Allstream Quarterly Report 2 - 859 / 5738

page 1

 

 


                           - vi -

 

                 UNDERTAKINGS / ENGAGEMENTS

 

 

No.                                              PAGE / PARA

 

CRTC-7        TELUS (Policy) to provide          639 / 4299

information regarding availability

of high‑speed internet service in

TELUS serving territory

 

Companies-1   MTS Allstream to provide The       788 / 5254

number of wire centres collocated

outside Manitoba.

 

Companies-2   MTS Allstream to, through          792 / 5286

collocation or the companies' own

facilities, provide, based on NAS,

the total addressable market, i.e.

the number of businesses the company

has access to.


                  Gatineau, Quebec / Gatineau, Québec

‑‑‑ Upon resuming on Thursday, October 12, 2006

    at 0857 / L'audience reprend le jeudi

    12 octobre 2006 à 0857

3892             LE PRÉSIDENT:  À l'ordre, s'il vous plaît.

3893             Madame le secrétaire, vous avez des announces à faire?

3894             LA SECRÉTAIRE:  Bonjour.  Good morning, everyone.

3895             Just to let you know that the CRTC Exhibit Nos. 2 and 3 that were filed yesterday in confidential version are now available in the abridged version.  You can find some copies on the distribution table.

3896             Further, the Commissionaire of this building asked me to pass on this message:  He is missing the translation device No. 7.  It was not returned yesterday, so if you have it...

3897             That's all for now.

3898             Mr. Chairman, we will proceed with the City of Calgary for cross‑examination.

3899             Counsel Inlow...?

‑‑‑ Pause


3900             MR. RYAN:  Mr. Chairman, before the cross‑examination commences, I understand that the panel is in a position to respond to an undertaking that they gave yesterday.

3901             THE CHAIRPERSON:  Please proceed and we will swear the representative of the City of Calgary afterwards.

3902             MR. RYAN:  Thank you, Mr. Chairman.

3903             Yesterday afternoon BCOAPO et al asked TELUS to give an undertaking to provide the percentage of TELUS exchanges in Alberta and B.C. that would pass TELUS' competitive presence test.  This undertaking appears at transcript Volume 2, paragraph 3349.

3904             In response to that undertaking, in Alberta 13 out of 337 exchanges, or 3.9 percent of the exchanges, would pass TELUS' competitive presence test.  In British Columbia 7 out of 302 exchanges, or 2.3 percent of the exchanges, would pass the test.

3905             We would note additionally, if you are interested in the graphical representation of this we do have maps showing it.  They appear in the record at Interrogatory Response TELUS(CRTC) 29 September 2202 is the response.  It is an attachment, so you can also see it in graphical terms.

3906             Thanks.


PREVIOUSLY AFFIRMED:  JANET YALE

PREVIOUSLY AFFIRMED:  WILLIE GRIEVE

PREVIOUSLY AFFIRMED:  STEPHEN SCHMIDT

PREVIOUSLY AFFIRMED:  PAUL HANSEN

3907             THE SECRETARY:  Thank you.

3908             Mr. Inlow, you may proceed.

3909             MR. INLOW:  Thank you, Mr. Chair.

3910             My name is Brand Inlow.  I am assisted by Mr. Matwichuk here in cross‑examination.

CROSS‑EXAMINATION / CONTRE‑INTERROGATOIRE

3911             MR. INLOW:  Let me just start with a few questions about the state of competition as you have outlined it in your comments as you start with the proposition that competition has increased significantly for business and residential services.  I think it's fair to say that on the business side you are indicating that it is primarily the growth in high‑speed internet that is the form of competition in that arena.

3912             Is that fair to say?

3913             MR. GRIEVE:  You know, we are going to run into the same marketing problem.  Perhaps Mr. Hansen can help you, but there is certainly high‑speed internet competition.


3914             MR. HANSEN:  Yes, I think there are three key elements or three key forces that are causing the increased level of competition.

3915             One is going to be the increased presence of wireless substitution.  We sort of talked a little bit about that yesterday in terms of how quickly that has been going recently.

3916             Two is the expansion of high‑speed internet and how readily available it is and the different access in independent VoIP options that are out there for consumers today.

3917             Third, and most importantly, is the introduction by all the cable companies of local residential service on their cable backbone, their VoIP.

3918             MR. INLOW:  Picking up on that, you indicate that Shaw has approximately 160,000 customers for local exchange service.

3919             MR. HANSEN:  Correct.  I believe in Shaw's Q2 results they indicated that they had 168,000 clients at that time.

3920             MR. INLOW:  Now, it is somewhat difficult to translate that number in terms of effect, so can you give me an approximation of what percentage that is of the total local residential exchange market, the $160,000 number?


3921             MR. HANSEN:  Sir, I certainly can do that, but I think it is also important to understand it is not the absolute number that is important right now, it is the rate of change, it is the exponential growth that we are seeing within the industry, because you have to remember that Shaw only entered the market, I believe it was in February of 2005.  So the rate at which they have gained their market share has been incredible.

3922             MR. INLOW:  That may well be, but I'm trying to figure out whether they have 1 percent of the market or 20 percent of the market and giving me a number of customers gives the Commission no idea of what that is.

3923             MR. HANSEN:  I apologize, certainly.

3924             To answer the second part of your question, ballpark and not an exact percentage, it is probably in the area of about 5 percent.

3925             MR. GRIEVE:  But of course, Mr. Inlow, you know it is completely irrelevant to talk on a provincial basis about market shares and draw any conclusions about market power from that.


3926             MR. INLOW:  Further in your evidence you indicate that there is wireless ‑‑ and I don't want to get into a debate as to whether it is competition or substitution, but you are indicating that it runs from 6 to 7 percent of the market in terms of being a full wireline substitution for residential service.

3927             Is that correct?

3928             MR. HANSEN:  Just a minute.  I'm just getting the exact numbers, so just one second.

‑‑‑ Pause

3929             MR. HANSEN:  Correct.

3930             THE CHAIRPERSON:  Say again?  Wireless substitution is 6 to 7 percent?  I think that is what Mr. Inlow said.

3931             Is that what you said, Mr. Inlow?

3932             MR. INLOW:  Yes.

3933             THE CHAIRPERSON:  And you are saying that is correct?

3934             MR. HANSEN:  Yes, the numbers I'm quoting are 7.1 percent in British Columbia and 5.8 percent of households in Alberta.

3935             THE CHAIRPERSON:  Thank you.

3936             MR. INLOW:  Would it be fair to say with respect to that portion of the market that some of that may he affiliated mobility carriers of the ILEC?

3937             MR. HANSEN:  Yes, that would be fair to say.

3938             MR. INLOW:  All right.


3939             Now, you indicated, I believe in paragraph 6 of your comments ‑‑ I'm just trying to understand the language here ‑‑ that cable telephony access independent VoIP and wireless are the main sources of competition.  The words that were used are "main sources".

3940             When you use that terminology, are you saying that in terms of market share or are you trying to put forward some other concept of what "main source of competition" means?

3941             MR. HANSEN:  No, it is in terms of market share.

3942             MR. INLOW:  Then, in paragraph 5 I believe, when you go to the issue of bundled offerings from internet providers, you indicate that is where your feeling ‑‑ and again this is a quote I believe ‑‑ "the greatest competitive pressure".

3943             When you use that phrase, I take it you don't mean market share.  Would it be fair if I were to infer that what you meant by that is that is pressure on your margins rather than pressure on your market share?


3944             MR. HANSEN:  No.  Again, I think it is going to be pressure on market share.  Again, with heightened competition there is also going to be pressure on the rates that we provide the services to clients, because with competition typically prices get more aggressive.  So it's twofold.

3945             MR. INLOW:  So you are saying I'm reading more into the use of two different terminologies there than you intended, in terms of you are saying one is a main source of competition and one is a source of competitive pressure?

3946             MR. HANSEN:  I'm not sure if you are reading more.  I think there are two elements in terms of the level of competition that we are feeling.

3947             Yes, absolutely the key element is going to be the increased competition we are seeing in terms of loss of local lines.

3948             Then, second, heightened level of competition.

3949             So absolutely there are more aggressive rates in the market as well, so we are losing ‑‑ it is causing us to lose more clients

3950             MR. INLOW:  While we are on that subject, in terms of your price cap proposal, these internet providers that are providing bundled services, do you consider those to be facilities‑based CLECs for the purposes of your regime?


3951             MR. GRIEVE:  You mean for the purposes of the competitive presence test?

3952             MR. INLOW:  Competitive presence test, yes.

3953             MR. GRIEVE:  No, Mr. Inlow.  Our competitive presence test calls for the presence of an ILEC, a full facilities‑based carrier such as a cable company ‑‑ it could be something else.  Bell refers to fixed wireless, but another full facilities‑based carrier ‑‑ and an unaffiliated wireless carrier all present in the exchange.

3954             So a high‑speed internet service provider, unless they are fully facilities‑based themselves ‑‑ most of them are not, but if they were a full facilities‑based provider of internet service ‑‑ of full facilities‑based broadband provider of internet access service, then that is not something the test contemplates, but it would certainly be something that you would contemplate when looking at forbearance down the road in terms of market share loss under the Commission's test.


3955             MR. INLOW:  All right.  Just to pursue that, because you may not have understood my question, what I was asking is:  You gave the example of Shaw providing bundles of voice internet and television, and I'm saying if primarily a cable carrier offers that bundle for the competitive presence test, do you consider that to be the presence of a facilities‑based CLEC?

3956             MR. GRIEVE:  Yes, because they are providing voice.

3957             MR. INLOW:  All right.  Thank you.

3958             Now, in terms of competitive pressure from what were originally cable carriers, is TELUS bundling services in response to that competition in terms of services other than voice?

3959             MR. HANSEN:  We are bundling voice services with some features.

3960             MR. INLOW:  Do I need to ask what "some features" might mean?

3961             MR. HANSEN:  Certainly.  well, I apologize if I have ‑‑ people have a choice  of six features or three features.  We have a 3‑feature bundle and a 6‑feature bundle.

3962             MR. INLOW:  But these bundles you are talking about, these are all voice complementary bundles rather than television or internet?

3963             MR. HANSEN:  Correct.

3964             MR. INLOW:  Is there anything in the price cap régime that hinders TELUS from being able to provide bundles the same way Shaw is providing bundles?


3965             MR. HANSEN:  Yes.

3966             MR. GRIEVE:  Yes, there is, Mr. Inlow, but it is not part of the price cap régime and it is out of scope for this proceeding for us to be dealing with the bundling rules and the imputation test rules.

3967             But just generally to be helpful for you, when we bundle a tariffed service with a non‑tariffed service, for example, primary exchange service or one of our features, optional local services with high speed Internet, what we have to do is pass an imputation test that includes the tariffed rates for the tariffed services, for the local service, and then we have to perform a Phase 2 study for the Internet service.

3968             We find when we do that, it is very burdensome to go through that whole exercise.  We don't do Phase 2 costs normally for the services that aren't regulated, so we find that we can't meet those bundled prices that competitors might be offering just because the price floors have been kept high for the purpose of making it easier for competitors to compete.


3969             MR. INLOW:  You referred to a number of specific situations and manifestations of competition.  You also in your comments adopt a statement from the Telecommunications Review Panel Report, and I can quote that.

3970             It says:

"Competition in the Canadian telecommunications market now has evolved to the point where regulation should be the exception rather than the rule."

3971             Is it fair to say that that is a statement that you adopted in your evidence and your comments as an indicator of the state of competition rather than you did the analysis and the market numbers and all that kind of research that would be required ordinarily to come to that type of conclusion?

3972             MR. GRIEVE:  Well, we adopted it and I think you asked us in interrogatories whether we had done studies on very many of the statements that we had made.

3973             We adopted it.  And let me explain that it is not inconsistent with what we have adopted in the past.


3974             We start with the proposition that regulation should apply to essential services offered on a monopoly basis.  So that means that you start with the presumption that nothing should be regulated unless it is an essential service offered on a monopoly basis.

3975             Now we have a situation where competition is arising all around us for all different kinds of services, and whether or not people are actually offering primary exchange service, all of the other services that we are competing on exert pressure on us in the marketplace because of our reputation, our brand, the possibility of incenting entry, by doing things that are unpopular in those other services, or by giving the competitors an opportunity.

3976             So we are incented all over the place to be as creative and as productive as we can be in responding to competition everywhere.

3977             I think that the task for the Commission now is to look at what are those things that are left that are essential and offered on a monopoly basis.

3978             MR. INLOW:  Thank you.

3979             Is it fair to say that, in your view, one of the principles of the price cap régimes to this point has been to protect consumers from the exercise of market power?

3980             MR. GRIEVE:  Yes.


3981             MR. INLOW:  If I understand TELUS' position, you are indicating in the third price cap that you are looking for a régime, and I think your phraseology was more or less that "will allow a seamless transition to market forces".

3982             Is that correct?

3983             MR. GRIEVE:  Yes.

3984             MR. INLOW:  In saying that, are you abandoning the previous principle about protecting consumers from market forces?  Or does that also continue into the next régime?

3985             MR. GRIEVE:  We are not abandoning that principle, Mr. Inlow.  What we are saying is that competition is all around us, more than it has been in the past.  We are no longer in the situation we were five years ago when you and I were sitting here, where we had basically two competitors left, being almost driven out of the market by the first price cap régime.

3986             So we are sitting here now with cable entry, with high speed exploding all around us, with wireless becoming more and more substitute, and it is time for us to get on with the job and be allowed to start to fix the unhealthy rate structure that we have, sort of the product of a hundred years of rate changes.


3987             It is time to get on with that in a way that allows market forces to respond even in places where we don't yet have people entered in that market.  If we respond in a certain way, then we will incent entry.  And if the Commission responds in a certain way, it can incent entry as well by lowering unbundled prices, and things like that.

3988             We see competition all around us.  We see people who are not fledglings any more, people with lots of money to invest and people who are actively investing, and we are just saying it is time to give us an opportunity to respond and to have the flexibility to respond in the marketplace to the emerging state of competition.

3989             MR. INLOW:  As another statement with respect to sort of the state and nature of competition, if I understand your comments, they are basically that the competition that has materialized is really not coming from CLECs whose primary business is residential local exchange.

3990             They are sort of fading into the background so to speak, and it is really the cable providers, the bundled services, mobility, that type of thing, that is the competition.


3991             MR. GRIEVE:  Yes, I think it is interesting that competition has arisen in a way that was probably not ‑‑ competition has arisen because of technological change, and the model of loop resale has proven around the world to be difficult, especially for fledgling companies.

3992             So I would say yes, it is new technologies and different sources of competition; but it is competition nonetheless.

3993             MR. INLOW:  Moving on more generally to your proposal for the design of the price cap, can you agree just as a fundamental proposition that what is being proposed in your comments still constitutes a form of price cap?

3994             MR. GRIEVE:  Yes, it is a form of price regulation.

3995             MR. INLOW:  And so long as there is regulation, can you agree that the Commission has an obligation under section 27 of the Act to make sure that rates are just and reasonable?

3996             MR. GRIEVE:  Yes.

3997             MR. INLOW:  You have indicated in I believe paragraph 24 of your comments ‑‑ and I am trying to understand whether this is sort of the fundamental proposition, if I can put it that way ‑‑ where it says that economic regulation should be replaced by market forces as and when sufficient competition develops.


3998             In that context, I want to look at the term "sufficient" and understand whether what you mean by that is sufficient is a level of competition which gives customers the benefit of competitive pressure in prices or whether it means something else to you.

3999             MR. GRIEVE:  I think it's hard to find signposts along the road where you can say okay, at this point you relax this regulation; at this point you relax this regulation.  It is really hard to micro‑manage markets your way through.

4000             Generally speaking, yes, there would be pressure on us.  There would be competitive pressures put on us, not only from the services that are regulated, such as primary exchange service, not only from people entering in those markets or for those services, but also by the fact that we are one company that has a brand, has a reputation and has customers in other lines of business in which we have significant competition all around those services.

4001             So as competition and competitive market forces for us become more intense all around us and they are arising in those services, regulation can be relaxed because you can rely on the market to start to set levels of rates in the kinds of things that customers want and allow us to respond to that.


4002             MR. INLOW:  To be fair, I wasn't asking you to identify when there was sufficient competition, I am more trying to be clear about what that term means, because, for example, we often hear the theory that in a competitive market competitors sort of drive prices toward long‑run incremental costs.

4003             When you say that economic regulation can be replaced by market forces when there is sufficient competition, are you, in effect, making the statement that says:  Sufficient competition means that there is enough competition to drive prices toward long‑run incremental costs?

4004             MR. GRIEVE:  I would say that generally, in a competitive market, prices reflect the underlying long‑run incremental costs, and in some cases they are forced down in an industry with very, very high fixed costs.  Sometimes they are forced down below long‑run incremental costs, closer to marginal costs, depending on the type of competition you get.

4005             I would say, generally, that those are the outcomes you would get.


4006             MR. INLOW:  I appreciate that in your comments you are not proposing an explicit X factor, but would you agree with me that the X factor is probably the most critical quantitative parameter in the price cap formula?

4007             MR. GRIEVE:  Probably, yes.  It probably has the biggest potential impact on the financial health of a company, if that is where you are going.

4008             MR. INLOW:  Is it fair to say that that criticality comes from the fact that if the factor is too high it jeopardizes the financial viability of the companies in the business?

4009             If it is too low, theoretically, consumers aren't getting the full benefit of productivity gains that would be seen in a truly competitive market.

4010             MR. GRIEVE:  The beauty of having opened the market to competition, Mr. Inlow, is that, if the X factor is too low by some measure, it is self‑correcting through entry in competitive markets.

4011             If it is too high, it will stifle entry and kill entrants.

4012             MR. INLOW:  Let's assume hypothetically that you were wanting to forecast an X factor for the coming price cap regime to assist the Commission, should they choose to go that route.  Your company would then, at that point, be essentially engaged in a forecasting exercise.  Correct?


4013             MR. GRIEVE:  We didn't engage in a forecasting exercise.

4014             MR. INLOW:  No, but I am asking you, is this how you would go about it?

4015             MR. GRIEVE:  I think you would have to talk to Dr. Bernstein about how to do X factors.

4016             MR. INLOW:  While we are moving to that subject, TELUS has adopted the 12 principles that were developed by Dr. Weisman as a framework for the new price cap regime ‑‑ and in saying the new price cap regime, I am referring to the one that TELUS is putting forward that represents the transition from price cap regime to a competitive market.  Correct?

4017             That is the context for putting forward his 12 principles?

4018             MR. GRIEVE:  Yes.

4019             MR. INLOW:  Do you also agree with the principle that he puts forward that the superior incentive property of a price cap regime is that the regulated firm retains the entirety of its efficiency improvements, and therefore has the ideal incentive to strive for maximum efficiency?


4020             MR. GRIEVE:  Yes, and I think you will also find, when you talk to Dr. Weisman about this, that you have this all occurring in a market that is becoming more competitive.

4021             You have to recall, of course, that price cap regulation was not developed as a form of regulating markets in transition to competition; price cap regulation was developed as a form of regulation of natural monopoly utility companies that was better than rate of return.

4022             MR. INLOW:  Let's talk about that rate of return world for a moment.  I want to seek a confirmation that your vision and your comments about a price cap regime is moving away from rate of return, and that one of the propositions involved is the severing of costs and earnings.

4023             In that respect, would you agree with me that under a price cap regime, where there is a productivity factor, if the firm is getting the full benefit of earnings by beating the productivity factor, so to speak, they should bear the full risk if they don't?

4024             MR. GRIEVE:  Absolutely.


4025             MR. INLOW:  I believe that there was an exchange yesterday with Ms Yale and Mr. Janigan in which she said that, in a world of rate of return regulations it is your actual costs plus the opportunity to earn a reasonable return on your investments, and the purpose of price cap regulation is to sever that direct link.

4026             Is that a good summary of what you were saying?

4027             MS YALE:  Yes.

4028             MR. INLOW:  I am trying to reconcile that with at least two of the principles that Mr. Weisman puts forward.  Principle No. 5 says that economic regulation should not serve to preclude the regulated firm from a fair opportunity to recover its not imprudently incurred costs.

4029             That sounds like rate of return regulation to me, and I am trying to understand why that is part of the framework you are putting forward.

4030             MR. GRIEVE:  One of the dangers that we have said ‑‑ and you pointed it out earlier ‑‑ is that the regulator could say:  We are going to put a 10 percent X factor on here because of ‑‑ whatever.  Not related to productivity, just put it on.

4031             If we find ourselves in a situation like that, we would obviously find a way to R&V it.

‑‑‑ Laughter / Rires

4032             MR. INLOW:  You could always file the application.

4033             MR. GRIEVE:  Yes.


4034             I think you should talk to Dr. Weisman about this, but one of our concerns has obviously been that the Commission has set Phase 2 costs for competitor services too low, we think, by a substantial amount, thereby making it difficult for us to recover the costs of those services.

4035             Of course, under the Commission's current price cap plan for retail services, its price caps for competitor services ‑‑ Category 1 competitor services ‑‑ it is long‑run incremental cost plus a mark‑up.

4036             MR. INLOW:  But I am trying to understand why that isn't tantamount to saying that if you can beat the productivity factor, you want 100 percent of the gain from that, and if you don't, you want downside protection.

4037             That's what it sounds like to me, to be fair.

4038             MS YALE:  I don't agree with that at all.  This is about a reasonable opportunity.


4039             The principles may stay the same, even though the form of regulation differs.  I think you will have to talk to Dr. Weisman about how he would interpret that in the context of price regulation, but the principle of a reasonable opportunity, as Mr. Grieve has pointed out ‑‑ a price cap is designed for a monopoly environment.  It is the form of regulation that changes, where you still have to give a reasonable opportunity to recover your costs and not be punitive to the company and, in turn, to the shareholders.

4040             So I don't think it is about a guarantee on the downside.  I made it clear yesterday that we are not seeking downside guarantees for bad bets, if you will, in term of things that drive our costs upward.

4041             MR. INLOW:  But let's assume that in this environment a CLEC enters the market.  Are they going to have that same kind of protection?

4042             MR. GRIEVE:  Actually, if the Commission set the X factor so high as to drive them out of the market, they absolutely have no protection either.  That's the danger.  CLECS don't have ‑‑ have that protection, but their rates are not regulated, Mr. Inlow.

4043             MR. INLOW:  They are not regulated, but your proposition in your comments is to the effect that we are entering an era where the hand of competition is in fact doing that.


4044             So, you can say that the CLECS rates aren't regulated, but the reality is that Telus and other ILECS are the dominant force in the market and surely you are not saying that the CLEC is then free to go an then set whatever price they want.

4045             MS. YALE:  Well, the entrants aren't regulated big.  I mean, we don't tell them how to set their prices.  I am not really sure what your question is.

4046             MR. INLOW:  Well, my question is that ‑‑ and you've disagreed with this proposition, but the economic principle we were talking about, about fair opportunity to recover, in the event that the productivity factor is set too high, if a CLEC enters the market and at a price point that's similar to what the ILEC is charging, they don't have that same economic protection; do they?

4047             They can't say: oh! well, it turns out our costs are higher than we thought, so we need some parachute at the bottom end to make sure that we don't bear the full risk.


4048             MS. YALE:  Well, you have a lot of hypotheticals in your scenario.  First of all, the CLEC doesn't have to enter, they are not under an obligation to serve.  They pick and choose where to enter, they pick and choose their prices.  So, I completely disagree with your assertions about their so‑called need for protection as far as ours.

4049             We don't have protection on the down‑side risk any more than ‑‑ a price regulation as I have said several times now is about severing the link between prices and costs and what it means is that our bets in the market place, our bets in terms of the financial structure we choose don't involve guarantees.

4050             If we do better than what is permitted under the price cap formula, the shareholders benefit, if we do worse, they bear the risk.  There is no guarantee.  I fundamentally disagree with you.

4051             MR. INLOW:  Well ‑‑ and Ms Yale, I am not ‑‑ I am not disagreeing with what you were saying.

4052             The difficulty I am having with it is saying that you say that, that it's completely severed and yet, you are adopting a principle.

4053             Telus is adopting a principle that says that one of the principles should be that you have a fair opportunity to recover your costs.  It's reconciling those things that I can't do.


4054             MS. YALE:  Well, there is a difference between the word "opportunity" and the word "guarantee".  I have tried to explain that difference to you and I would suggest that you speak to doctor Wiseman who will confirm that there is a difference between the word "opportunity" and the word "guarantee".

4055             MR. INLOW:  Well, it isn't a question of what doctor Wiseman thinks it means.  It's a question of what the company thinks it means in the context of the price cap regime it's putting forward.

4056             MS. YALE:  And I have explained to you how we interpret it.  It's an opportunity, not a guarantee.

4057             In other words, if we don't make good business decision and there is a down‑side risk, we are not protected.  We are not guaranteed the ability to recover our costs.  We are given an opportunity to do that, not a guarantee.

4058             And our proposal is consistent with that approach.  It is not a guaranteed return.

4059             MR. INLOW:  But, nevertheless, you haven't severed the connection completely, you haven't.  If I am understanding this, you haven't said there is a complete severing of costs and earnings.

4060             There is some contingency and I think what you've said earlier was, for example, where you think the Commission has set too high a productivity offset where you should have some protection, you shouldn't bear 100 per cent of the risk.


4061             MS. YALE:  And we have not said that.  I am not sure how you see our proposal is saying that.  It does not provide any down‑side risk protection.

4062             MR. INLOW:  All right.

‑‑‑ Pause / Pause

4063             MR. INLOW:  And I don't want to renew this discussion again, but I take it with respect to ‑‑ well, you can anticipate that with respect to principle number 10 as well of those 12 principles where it says:

                      "Price cab structure and related pricing rules should allow for the efficient recovery of joint and common costs and promote competitive parity."

4064             I have the same issue with respect to how that's appropriate in a price cap regime where you are saying there is a complete severing of your earnings from your cost of doing business.

4065             MR. GRIEVE:  Well, Mr. Inlow, I have said before that ‑‑ well, first of all, yes, okay ‑‑  I've said before that we have a hybrid structure here and we're talking about long running incremental costs

when we talk about the underlying competitor services.

It's a course that affects the whole market.


4066             So, one of our concerns that we have stated repeatedly, I think, for a number of years is that we believe that those underlying essential facilities and the essential facilities rates are too low and it's not helping the marketplace.  And in the marketplace, that means that all sorts of companies are having trouble recovering their costs and staying in business.

4067             I think that the problem that we have and the issue we have is we don't think a regulation should step in and intentionally try to create a situation that drives everything down so low that competitors are driven out of the market and they can observe in the market what's going on.  They observed it in the first price cap regime.

4068             By the way, that regime was run that it had a very bad effect on competitors and they observed in the price cap regime that competition started to emerge.  And I think they will observe in this third price cap regime that competition will flourish.

4069             It would not flourish if the Commission started setting X factors very high.


4070             MR. INLOW:  Okay.  Well, let me go on to your competitive presence tests and see if I'm clear about how you're trying to set that framework.  And again, I'm going to come back to sort of what fundamental proposition is and then what it looks like in a regulatory sense.

4071             In paragraph 15 of your comments, you say that market forces should be the prime factor in determining how prices changes and we've talked earlier about, you know, how competitive markets act in terms of driving prices, that type of thing.

4072             Would it be fair to say that that's the fundamental sort of economic proposition behind your competitive presence test as those have to be there in the marketplace?

4073             MR. GRIEVE:  Yes.  Now, just to make sure I understand the question.

4074             MR. INLOW:  And you can rephrase that if you want.

4075             MR. GRIEVE:  No, I just want to understand, I want to make sure that I understand what your point was.

4076             The competitive presence test says that there has to be at least one wire line facility ‑‑

4077             MR. INLOW:  Yes, and I don't want to look at sort of the mechanics of the test at this point.


4078             MR. GRIEVE:  No, no, I understand, in one wireless carrier.  We are saying that when you have that presence in the marketplace, then as soon as that presence or is in that exchange, that that very presence creates competitive pressure on us.

4079             In fact, the Commissioner of Competition said at the ‑‑ in the final argument for the local forbearance proceeding that it's the presence of competition more than the market shares of competitors that have the greatest effect on ‑‑ or put, exert the greatest competitive pressure on a firm.

4080             So, what we are saying is that when we get that competition, those competitors entering in that exchange, that that's what puts competitive pressure on us and helps to control pricing and that's why we are asking for, you know, for the flexibility, more flexibility.

4081             MR. INLOW:  I am not sure that the quote you gave from the Competition Tribunal said that the greatest competitive pressure comes from their mere presence

4082             MR. GRIEVE:  Okay, I can find the quote.  You may be right.

4083             MR. INLOW:  It's in an interrogatory response to the City of Calgary.  Somehow number 12 sticks in my head.


4084             COMMISSIONER LANGFORD:  It is in Interrogatory Response Telus(Calgary)08‑Aug‑2006‑12.  I don't think I am that far off, Mr. Inlow.

"Therefore, the mere presence of the competitor has a larger impact on the ILEC behaviour than its actual market share."  (As read)

4085             MR. INLOW:  Would it be fair to say, then, that your competitive presence test, as you have outlined, then, is more of a mechanical and observable condition that in effect makes it easier to regulate and presumably makes it easier for the company to understand when there is a competitive presence, rather than going to the Commission and saying, we think there is enough competition in the market so that consumers are protected from the exercise of market force.

4086             MR. SCHMIDT:  It is a biteline task which makes it easier for everyone, and especially the adjudicator, to recognize when there is a sufficient set of facts to warrant some incremental relaxation of regulation.


4087             MR. INLOW:  Would you anticipate this working in the sense that if you could establish the presence of a facilities‑based CLEC and a non‑affiliated wireless competitor, that basically at that point you know you are out of price cap in that area.  Correct?

4088             MR. SCHMIDT:  We would apply to the Commission for a declaration that our test had been passed.

4089             MR. INLOW:  But your proposal is simply that you would be able to satisfy the Commission of those two factors, not get into a discussion with the Commission about whether there was in fact enough competition to discipline market prices?

4090             MR. SCHMIDT:  That is correct.  This is forbearance analysis and that is not what we are contemplating here.

4091             MR. INLOW:  So, if we were to take a hypothetical situation where there was the presence of CLEC, and we will go with the Bell test and say they have one customer, and there is a non‑affiliated wireless competitor, but the ILEC's affiliate had 99 percent of that market, you would still say the competitive presence test is met?

4092             MR. SCHMIDT:  Ninety‑nine percent of that market, are you referring to the exchange in question?  Are you speaking on the terms of our test?


4093             MR. INLOW:  I am speaking in terms of your test and saying in a particular exchange or other area, that there was the presence of a CLEC, facilities‑based CLEC but hypothetically we will say, as the discussion was the other day with Bell, of saying let's assume they have only one customer.

4094             MR. SCHMIDT:  Provided the elements of our test are met that the wireline CLEC is there, that the unaffiliated carrier is there and that they are offering service, yes, our test would be satisfied.

4095             MR. INLOW:  In your view, in that situation, there could be no discussion about realistically whether that admittedly very extreme scenario would in fact discipline market prices at all?

4096             MR. SCHMIDT:  There would be no sense in having a bright line test if the adjudicator doesn't agree that there is some sort of facts that can concretely be relied upon to trigger this relaxation.  I would add, in any event, the scenario is very unlikely, and the Commission has in fact recognized this in the local forbearance decision at paragraph 148, where they say, look, in our experience, when a LEC enters an exchange, it provides service throughout that exchange.


4097             In theory, the problem you highlight could happen; in practice we think it is unlikely.  Shaw enters cities and towns and provides service throughout those cities and towns.

4098             MR. INLOW:  Let's assume that situation did occur and you met the test and then a year later the CLEC exits the market, what would you see happening at that point, if the CLEC failed or was purchased or merged or whatever it might be, and you no longer met the test?

4099             MR. GRIEVE:  I would expect in a situation like that that we no longer meet the competitive presence test, it is a bright line test, if there is no longer that situation, then we would put all those services back into the other basket.

4100             MR. INLOW:  Would you put them back into the basket as if price cap had never come off?

4101             MR. GRIEVE:  No, I think you would have to put them back in at the rates existing at that moment.

4102             MR. INLOW:  And in that situation ‑‑ and again this is just for sort of our own clarity, perhaps ‑‑ would the ILEC continue to have the obligation to serve in all areas?


4103             MR. GRIEVE:  The Commission has ruled on numerous occasions that the ILEC continues to have the obligation to serve, including in forborne markets under the forbearance decision.

4104             MR. INLOW:  Now, I wanted to move on to the issue of bundles.  I am hoping these questions aren't technical enough to need the full marketing panel, but if they are, you can tell me that.

4105             I am looking at the phraseology where it says ‑‑ and this is sort of the first entry in your chart about residential service baskets ‑‑ it says that prices are capped in such a way that they will not, on average, increase.  I am trying to understand what "on average" means, and I think I may have heard an answer yesterday, but I wasn't clear.

4106             Let's put the case of saying if you had an exchange of, you know, just hypothetically speaking, 200 customers and you decreased the price by 5 percent in that exchange, does that mean that you could increase the price by 5 percent in another exchange that hypothetically had half a million customers?

4107             MR. GRIEVE:  No, no.

4108             MR. INLOW:  Or is there some other constraint that is operating here that isn't ‑‑

4109             MR. GRIEVE:  Let me explain how price caps work.  Let's use the 200 customer.  I always find it easier with 100, but we will go with 200.


‑‑‑ Laughter / Rires

4110             MR. GRIEVE:  Let's use the 200 customer example.  In the basket across exchanges, assuming that now we are talking about areas that do not pass the competitive presence test, because in those baskets the revenues come out of the residential service baskets.  So now you are left with the others.  Okay?

4111             MR. INLOW:  Right.

4112             MR. GRIEVE:  In that basket as a whole, if you had 200 customers and you lowered the rate by 5 percent for 100 of them, then you would figure out how much revenue that represented, and then you could raise the other rates to make that revenue equal in that basket using a fixed set of weights for each of the services from the previous year.

4113             MR. INLOW:  Okay, because I thought I had heard Ms Yale yesterday say something about revenue neutrality, but it wasn't quite in that same context.

4114             MR. GRIEVE:  Yes, but that is what it means.  The way the price cap basket works is that it is done on a fixed set of weights from the previous year, so you put all the services on it.  If Mr. Macary were here, he would be listening very intently to see if I get this wrong.


4115             But it is a fixed set of weights per service, so so many services multiplied by the rate, another set multiplied by the rate that goes into the basket, then you set the rate for the ‑‑ then you take that and you apply whatever formula you have.

4116             So in our case, you know, the formula would be no change on average in the next year, and so then in the following year every time you make a change to a rate you have to demonstrate that you are not above what the average would be based on the weights from the previous year.  So it's revenue neutral.

4117             MR. INLOW:  So where you say in your chart that prices are capped so that prices for services in the residential basket were not on average increased, you are really almost saying that revenue will not increase on average.

4118             MR. GRIEVE:  It's the same.  It's the same thing.

4119             MR. INLOW:  All right.

4120             Now, the other thing I wanted to be clear on, again coming back to this chart, is that you talk about prices of services will not increase, and then you say:


"Price increases are subject to an individual rate element constraint."

4121             I'm trying to understand what that specific term means, "individual rate element".

4122             Is that different than the cost of a service?

4123             MR. GRIEVE:  Yes.  It's an individual rate element constraint to say you have 100 customers ‑‑ no, I'm kidding.

4124             Let's say you have a rate that is $10, and these are all in these baskets primary exchange services, so let's use a sort of realistic rate of $25.  So you would be able to raise rates where you thought you could by $1.25 for that customer.  Then you would have to find somewhere else to get $1.25 if you were going to make that up, or you would have to lower something else $1.25.

4125             MR. INLOW:  I was going to say, I think you are getting this twice here in your hypothetical.

4126             MR. GRIEVE:  Yes.  You would have to lower something else $1.25 in order for that to work out, assuming the weights are the same.  It gets a little complex, but that is generally the idea.


4127             The rate element constraint just says ‑‑ you see, it's different than saying on average rates can't change but there is no up or down constraint, because then you could raise some by huge amounts and then lower others by huge amounts.  So what we have done is we have put this upward constraint on individual prices and then that sort of affects the rest of the formula on the way, sort of a backward effect on it.

‑‑‑ Pause

4128             MR. GRIEVE:  Of course, Mr. Inlow, just to complete the thought, there is a $5.00 upward limit ‑‑ a 5 percent upward limit.  Of course, on the down side there is the imputation test and that is what defines the sort of ‑‑

4129             MR. INLOW:  The floor.

4130             MR. GRIEVE:  Yes, the range that we are allowed to operate in.

4131             MR. INLOW:  All right.

‑‑‑ Pause


4132             MR. INLOW:  I don't want to pursue this final issue at length, but I had a great deal of difficulty following the discussion with Mr. Janigan yesterday about what was in the bundle and what was not in the bundle and the issue about if I took basic service and then took call waiting or something, whether that took me out of the basket or kept me in the basket in terms of uncapped.

4133             Appreciating your remark about coming out of price cap isn't a disease, but I think most people would at least like to know whether they are contracting it.

‑‑‑ Laughter / Rires

‑‑‑ Pause

4134             MR. GRIEVE:  All right.  We just wanted to make sure that we give you an answer sort of step‑by‑step here.

4135             I think the way the questioning started yesterday, the way I recall it, is that Mr. Janigan seemed to suggest that if a customer had primary exchange service and took one optional service that that would somehow automatically become a bundle and come out of the cap.  Mr. Schmidt said no, that is not the rule and there seemed to be sort of some to‑ing and fro‑ing around that.

4136             But it is not a bundle just because a customer takes two services.  The two services have to be ‑‑ the price that you get for the two of them together has to be dependent on your taking the two together and it has to be lower than the sum of the two standalone prices.


4137             MR. INLOW:  Then the two tariff prices basically?

4138             MR. GRIEVE:  Yes, the two standalone tariff prices.

4139             MR. INLOW:  All right.

4140             MR. GRIEVE:  All right?

4141             Under our proposal, when that happens the price of that bundle, so whatever our price is for, say, primary exchange service and voicemail, that price for that bundle, those revenues would come out of the price cap basket.  Okay?

4142             Now, when we went a little further I said if you left bundles in there and we had bundled prices and we lowered those bundles prices in the price cap, that would give us what Mr. Janigan referred to as head room.  In other words, we would be below our limit, our service basket limit, SBL, under the price cap, which is this measure I was explaining before.

4143             We would be under that and we have to stay at or under that throughout the price cap period.  Most of the time we are under it because you are sort of moving around like this.


4144             So if we took a bunch of bundles and they were in the price cap and we lowered them, that would give us an opportunity to raise other services in the price cap, like primary exchange service rates.  If you take all the bundles out because they are subject to competition, why else would you do them but for that purpose, to get customers to take these groups of services.  You are competing really with your own standalone prices so you are trying to get customers to take more of these services.

4145             Then if you take them out and we have to start lowering them over here, it doesn't give us any more head room under the price cap to be raising prices in order to keep the average price of bundles and primary exchange service the same.

4146             MR. INLOW:  All right.  Well, let me ask you this question to follow that, then, because I also work for a level of government, I understand how communications can be a difficult issue sometime.

4147             How would you propose to explain that to customers who may be offered what you were saying your bundle of one additional service at a slightly lesser price than the two tariffs added together?  How would you communicate effectively with those customers to say there is an implication here with respect to price cap if you get a $0.50 break by taking these two services together?


4148             MR. GRIEVE:  You know, Mr. Inlow, if you can find customers who are really interested in that, I would like to interview them for my department.

‑‑‑ Laughter / Rires

4149             MR. GRIEVE:  I think what customers are interested in is what their price is.  These services will still be tariffed.  Okay?

4150             MR. INLOW:  My experience on that, Mr. Grieve, is they only become interested when they later understand what has happened.

4151             MR. GRIEVE:  Well, you know, in this particular case the service would come out if it's a bundle.  It's out of the price cap.  It is still tariff regulated.

4152             If we were to raise the price of that bundle so that all of a sudden it is above the sum of the primary exchange service rate and the standalone rate, that is kind of self‑defeating, and it's not a bundle any more anyway under the Commission's rules.

4153             So I think your problem is self‑correcting and it is not like they all of a sudden become untariffed, because they are not untariffed, they are still tariffed.

4154             MR. INLOW:  That's all I have.

4155             Thank you, Mr. Chair.  Those are my questions.


4156             THE CHAIRPERSON:  Thank you, Mr. Inlow and Mr. Matwichuk.

4157             Madame la secrétaire...?

4158             THE SECRETARY:  Thank you, Mr. Chairman.

4159             Commission counsel have no questions for the TELUS Policy panel.  Thank you.

4160             THE CHAIRPERSON:  Some of us may have questions then.

4161             THE SECRETARY:  I'm sorry.

4162             THE CHAIRPERSON:  Commissioner Langford...?

4163             COMMISSIONER LANGFORD:  Thank you, Mr. Chairman.

4164             If this is better for the marketing panel then you can tell me.  The line between the policy and marketing is starting to get a little blurred.  That's not to say I'm not learning stuff, but I don't want to push you into answering questions you may feel the other panel is more comfortable with.

4165             I am trying to figure out what it is all going to look like down the line if we accept this proposal of yours.


4166             I think it is important for us to try to figure this out, obviously, because customers are going to be stuck with this and that will be the regulatory bargain.  If we haven't looked into the future correctly and there is some huge unexpected result, then, as unusual as it may seem, people may criticize the CRTC.

4167             That has never happened before and we certainly don't want it to happen now.

‑‑‑ Laughter / Rires

4168             COMMISSIONER LANGFORD:  I am trying to get a sense of where the overall direction of all of your pieces, all of your elements together, are going and what consumers will be facing in the future.

4169             The kind of thing that confuses me a little is I am actually trying to figure out whether this is an attempt to raise prices or lower prices.  That is where I would like to start.

4170             Do you want to raise prices so you can maximize your earnings, which is certainly a legitimate commercial goal?  Or do you want to be freer overall to lower prices so that you can take on the competition and win?

4171             I guess I will start with that general question.


4172             Specifically, I am sort of looking at uncapping seems to give you the ability to raise prices.  With de‑averaging you can go either way: you can raise some, you can lower others.  No X factor, again probably a better guarantee that prices will stay higher ‑‑ maybe not exaggeratedly higher, but higher.  They won't drop lower.  You won't be forced to lower them.

4173             So what is the plan here?

4174             Are you, overall, looking for a way to raise prices or to lower them?

4175             MS YALE:  It is sort of a multi‑part answer.

4176             I would say where there is competition, we want to be able to lower our prices, to make our best offers to customers, both on a stand‑alone basis and have more flexibility with respect to our bundles.  And this is still short of forbearance.

4177             So we approach this in terms of:  Where are market forces operating?

4178             We have talked a lot about our objectives, which are to focus on where are market forces operating in a way that you can be comfortable that competition is going to be sufficient to protect the interests of users but allowing us to have more flexibility to respond to competition.


4179             At the end of the day, consumers aren't getting necessarily their best offers from our competitors, any more than they are getting their best offers from us because of the restrictions under which we operate in the current price cap framework.

4180             What we have said is where there is meaningful competition in exchanges, there should be greater flexibility to respond to competitive pressures.  That's why we have proposed to have more flexibility there.

4181             The uncapping flows from the notion that there is competition.  It is not about the ability to raise prices.  It's that the Commission doesn't need to put the limit on prices; competition will.  We won't be able to increase prices and make those price increases stick, because the competition will take those customers away from us.

4182             It's a competitive market.  Consumers are well aware of what those choices are and will switch.  They will switch, as they are prepared to do.

4183             Where there is competition, we believe that capping isn't necessary because competition will protect consumers.  We want the flexibility to move our prices downwards and to make our best offer to customers.


4184             Having said that, we have recognized that it is prior to forbearance, so we have put that 5 percent rate element constraint in place as a safeguard where competition is met, where the competitive presence test is met, as well as where it isn't.

4185             Where the competitive presence test is not yet met, we believe our proposal provides a more stringent consumer safeguard than a traditional I‑X formula, for the reasons we discussed yesterday, because if, as we believe, X is less than I, then there would be nominal price increases or average price increases where the competitive presence test is met, whereas we have proposed instead that rates, on average, are frozen, as well as the 5 percent rate increase constraint, and so on.

4186             So at a high level ‑‑ I can stop there.

4187             COMMISSIONER LANGFORD:  We have gotten it wrong before, as incredible as that may seem.

4188             I am thinking of the world of cable television versus satellite‑provided television, where we put in a test to forbear ‑‑ to carry that word into the broadcasting world ‑‑ and the test, as you know, is kind of 5 percent actual entry, 30 percent possible entry, or whatever.  And prices just kept going up.


4189             It was a duopoly situation.  There are some variations in where we are on the telecom side.  We expected prices to go down.  They didn't go down; they went up.  And they continue to go up.

4190             Some of that can be attributed to more features being added, more programming being added, but not all of it.  Some of it is straight profit.

4191             Profit is not a bad thing, but our expectation was that there would be a competitive battle and prices, at least in some areas, would go down.  It didn't happen.

4192             Looking forward, what can we expect?

4193             And you must have blue‑skied a little like this.

4194             What can we expect for consumers facing your two different major propositions here: the competitive presence world and the no‑competitive presence world?

4195             MS YALE:  Well, a couple of things.

4196             First of all, as you know, with cable rates it was only ever the basic rate that was regulated, not the prices of the tiers and therefore the price that most customers actually pay.


4197             COMMISSIONER LANGFORD:  But it is the basic rates that have gone up.

4198             MS YALE:  The basic rates.  But we are not asking for forbearance or complete deregulation. Let's put that aside because, to us, this is well short of forbearance.

4199             There are some significant safeguards that remain in place prior to forbearance that deal with, we believe, the concerns that you have raised, both at the rate element level, the 5 percent safeguard that you have described, and in the context of de‑averaging:  as you and Mr. Grieve discussed yesterday, the safeguard for the consumer who is on the other side of the mountain and down the road.

4200             COMMISSIONER LANGFORD:  I don't know how safe that safeguard is unless we find out some way that you can contact them.  But I will leave that to your creative powers.

4201             MS YALE:  To your question, we did focus on that issue:  What about the consumer safeguards where the competitive presence test is met?


4202             It is not a complete uncapped, no rate element constraints and no safeguards.  So it is uncapping but individual rate element constraints of 5 percent, coupled with that safeguard for the pockets of exchanges, if you will, or customers where the competition may not be present.

4203             Those are two significant safeguards that provide, in our view, meaningful consumer protection in this interim step to complete deregulation where there is some competition but not sufficient competition to warrant total deregulation.

4204             COMMISSIONER LANGFORD:  I thank you for that and I think I understand it.  But it doesn't quite answer my question.  Perhaps you don't have one.

4205             What I was wondering is in your sessions leading up to the preparation of this package, very creative package, did you give some thought to where Mr. or Ms Average Customer might be in either one of these scenarios?

4206             I am talking residential.  We don't have to go through the whole gamut of bundles and business.

4207             Taking just your residential customer in your competitive presence exchange and another residential customer in a price capped exchange, if I can call it that, where will they be in two years, three years?

4208             MS YALE:  Certainly where there isn't competition, because the competitive presence test is not satisfied, rates, on average, are frozen.


4209             I am not sure what there is left to say.

4210             COMMISSIONER LANGFORD:  They might see their PES up 5 percent, or something like that ‑‑

4211             MS YALE:  Not everybody, because, of course, any rate changes have to be done on a revenue neutral basis.

4212             So it is not and shouldn't be read as 5 percent a year for everybody where a competitive presence test is not met.  That is just not possible.

4213             It is only where rates go down that it creates any headroom for some rates to go up, and where the competitive presence test isn't met, there aren't competitive pressures that are driving those rates.

4214             What we may want to do is some harmonization, if you will.  As Mr. Grieve has pointed out, there are some rate disparities.  So, with the possibility of de‑averaging, you could see that there may be some desire to move rates into a more harmonized regime where the competitive presence test isn't met.

4215             For those customers not much is going to change, frankly, until competition has materialized in a meaningful way, because of the stringent safeguards we have proposed.


4216             Where there is competition, some of that is a function of the decisions of the entrants.  If you look at the strategies of cable companies entering the markets, they have quite different strategies and price points that they have adopted in their decisions about how to enter and what packages they are offering to consumers.

4217             Wireless substitution is becoming an increasing presence.  If you look at the StatsCan report, it is almost doubling each year, in terms of the number of households that are choosing to go wireless only, and it is an intensely competitive market in terms of the proliferation of rate plans that are out there.

4218             That is the thing about competition, it is hard to predict.

4219             COMMISSIONER LANGFORD:  But try on the wireline customer, the TELUS wireline customer, in one of your competitive presence exchanges.

4220             I think you have clearly explained where you see the future on the other customer, but on the one that will be in a competitive presence exchange, have you looked to the future for that person?


4221             MR. HANSEN:  Commissioner Langford, the approach we are going to take from a marketing perspective is that we have to be competitive.  Because the switching costs are so low, we need to be competitive.

4222             We want to be able to present the offers in a similar fashion to how our competitors have to simplify it.

4223             One of the big things we want to be able to do in the competitive markets is to leverage the most economical means of communicating with those clients, so to be able to do mass communication, be it TV or radio or print.  And because TV, radio and print cross multiple bands, multiple exchanges, we want the ability to be able to present a consistent offer across the reach of the communication vehicle that we use, because clients that see the communication or hear the communication will be demanding the offers that they have heard of and will want access to them.

4224             COMMISSIONER LANGFORD:  It sounds like an argument against the need for de‑averaging, but we could deal with that with the marketing panel later.

4225             MS YALE:  If I could stop you right there ‑‑

4226             COMMISSIONER LANGFORD:  Absolutely.


4227             MS YALE:  As I mentioned before, one of the problems we have is that the rates aren't harmonized, and we can't harmonize them without permission to de‑average.

4228             They are not uniform, so de‑averaging would allow us, actually, to achieve the very harmonization that is being discussed here, which we can't do because of the rule against de‑averaging.

4229             COMMISSIONER LANGFORD:  I see.  So with de‑averaging ‑‑

4230             MS YALE:  Or against further de‑averaging.

4231             Rates are not averaged today.

4232             COMMISSIONER LANGFORD:  But with de‑averaging, we could have a perfectly average world.

4233             MS YALE:  You never know.

4234             COMMISSIONER LANGFORD:  It's like Monty Python or something.  But I see your point.

4235             Again, I am sorry to beat this to death, but you are the policy people.  We can get into the intricacies of marketing later, and how you will do it.  This is my last chance with you folks.


4236             Ms Smith, now a TELUS customer, is living in a competitive presence exchange.  If Ms Smith remains a TELUS customer for the next three years, under your proposition ‑‑ we adopt your proposition as given ‑‑ what will her world look like price‑wise?

4237             She is a wireline subscriber, by the way.

4238             MS YALE:  As I say, I can turn it over to my colleague to talk about that, but as we have discussed, there are certain things we can't do today in terms of ‑‑ look at the Shaw offer.  Take that as an example.  There is no installation charge.  You get all of your features, as well as your local calling, as well as flat‑rated LD calling for a single bundled price.

4239             Can't do that today.

4240             COMMISSIONER LANGFORD:  And your new system will allow you to duplicate that offer?

4241             MS YALE:  Yes.

4242             COMMISSIONER LANGFORD:  And that might be what she would be facing then, what she could expect in three years' time?

4243             MS YALE:  Among other choices, one of the things we are trying to do is to have the flexibility to match the way in which our competitors offer service.


4244             Not all of the changes are price cap related, but the ones that relate to the limits that are associated with price caps are the ones that we have asked for flexibility on here, such as the de‑averaging to allow the harmonization, the ability to take the bundles out of the price cap regime and so on.

4245             So a number of the barriers we are talking about flow from the restrictions associated with the current price cap regime.

4246             MR. GRIEVE:  Commissioner Langford, not all of them do, because, in order for us to respond, the bundling rules are still in place, and they place quite high floors on bundles which kind of create a price umbrella, including the installation charges.

4247             COMMISSIONER LANGFORD:  From your experience in the deregulation of long distance ‑‑ you were all there for that, some in different positions than others, so you bring a breadth of experience to this question ‑‑ how many customers just don't seem to move, no matter what?

4248             What is the kind of ‑‑ I think the term people use is "customer inertia".  Is there a base of customers that you can always rely on, even though they see ads:  "Call anywhere free after six."  "Call for 5 cents."  "Call for 7 cents."


4249             The ads just pour in day after day after day, even though ILEC rates, if my memory serves me right, were slow to respond to those sorts of pressures.

4250             How many customers ‑‑ what is the general wisdom of the kind of percentage of customers that, for some reason, are impervious to outside offers and stay no matter what?

4251             MS YALE:  We believe there is some public information on that in the monitoring report.

4252             COMMISSIONER LANGFORD:  Wouldn't you know, it's our own information.  Too much information.

4253             MR. GRIEVE:  I think the information that Mr. Hansen is looking for is the number of customers who are still on the currently regulated toll schedule.

4254             COMMISSIONER LANGFORD:  That would be, certainly, a base test, but there may be others who have taken advantage of TELUS offers that, in fact, aren't as good as other offers they could have gotten, but, for some reason, they stick with the provider they have always stuck with.

4255             MS YALE:  The problem is, how do you know whether customers are staying with you because they have chosen to stay with you or because they can't be bothered to switch?


4256             That is something that, unless you interviewed them, you wouldn't know.

4257             COMMISSIONER LANGFORD:  Yes, but they do seem to be less price sensitive than others.

4258             MS YALE:  There are always some who are more inclined to switch than others.  The fact of the matter is, it doesn't mean that competition isn't intense because, in fact, there is some point at which they could become dissatisfied.

4259             The offers are all out there, and they are free to switch if they choose to.

4260             I think that wireless substitution is an interesting case in point, where people, particularly younger people, who have not had home phones and have to choose for the first time whether to get a home phone and a wireless phone, one or the other, if not both, are increasingly making decisions not to take a telephone line, notwithstanding our obligation to serve.

4261             I think that the demographic factor is huge.  If you look at the huge increase in the wireless‑only households, particularly in B.C. and Alberta, you see a real change from a technology perspective in the way people are thinking about local telephone service.


4262             COMMISSIONER LANGFORD:  Perhaps I've beaten this to death.

4263             It would have seemed prudent to me that you would have done a kind of look into the future and have a pretty good idea.  As you say, you seem to have a pretty good idea of the profile of the customers not in a competitive presence exchange.  You seem a little more vague on the other one.

4264             I would have thought that if I were putting together a package like this ‑‑ it is not a criticism; it is just a statement of mild surprise.

4265             If I were putting together a formula for the next four years of my company's life, I would have thought that you would have had a better notion that even in general terms we are going to be lowering prices for these people overall.  We are going to be seeing less revenue overall from this area.

4266             MS YALE:  Absolutely.  That is why I started by saying what we expect is that where there is competition, prices are going to go down.  The particular form ‑‑ do people want stand‑alone service, do they want packages, do they want bundles, what features do they want, flat rated LD?  There will be a full toolkit and the whole point of competition is it's not one size fits all.  There is a variety of those.


4267             What the Policy Panel as opposed to the Marketing Panel can speak to is:  What are the regulatory barriers to making sure that that toolkit is as flexible as possible?

4268             So what I spoke to is the price cap or the price rule changes that are imbedded in our proposal that will give the marketing arm of our organization the flexibility they need to be able to respond to those competitive pressures as they evolve.

4269             COMMISSIONER LANGFORD:  I think I have milked this to death.  It will be interesting to hear from your Marketing Panel just how they will go about this on a day‑to‑day basis.  It does seem to me that more tools allow you to raise rates than to lower them in some ways.  So it will be kind of interesting to see how they are going to sell, using these different tools.

4270             I look forward to that.  Thank you very much.

4271             THE CHAIRPERSON:  Commissioner Duncan.

4272             COMMISSIONER DUNCAN:  I have a question for Mr. Schmidt following up on your clarification when we started out this morning on the percentages of exchanges that would pass the competitive presence test.


4273             MR. SCHMIDT:  Yes.

4274             COMMISSIONER DUNCAN:  I thought it would be more meaningful to me if I knew how that reflected in terms of population.

4275             THE CHAIRPERSON:  Do you mean population or do you mean subscribers?

4276             MS YALE:  We have information with respect to lines.

4277             COMMISSIONER DUNCAN:  Yes.

4278             MS YALE:  I can give you those numbers.  They are in an interrogatory response.  Hold on one second.

4279             MR. SCHMIDT:  In CRTC‑1202 we gave it on the basis of lines, and we said residential NAS.

4280             I think we said 58 percent of the residential NAS in Alberta would be uncapped.

4281             COMMISSIONER DUNCAN:  Yes, you did.  I remember that.  And thirty‑something ‑‑

4282             MR. SCHMIDT:  And 36 percent of the NAS in British Columbia.

4283             So there is a way of doing math and translating human beings per network line, and you can figure out what that means mapping it to population.

4284             COMMISSIONER DUNCAN:  Thank you.  I do remember that.


4285             From Mr. Hansen, what types of bundles do you currently offer in competition with Shaw's offerings?

4286             MR. HANSEN:  I believe today we have three feature bundles: a two‑feature bundle, a three‑feature bundle and a six‑feature bundle.

4287             COMMISSIONER DUNCAN:  Are these only telephone features you are talking about?  Are you offering Internet?

4288             MR. HANSEN:  Not contingent on local, no.

4289             COMMISSIONER DUNCAN:  Do you offer a bundle of Internet and local?  Like the cable companies' bundle is cable, phone and Internet.  I am just wondering what of that you are able to offer.

4290             MR. GRIEVE:  We don't offer those kinds of bundles because the bundling rules and the imputation test price floor don't allow us to offer bundles that are competitive with our competitor.

4291             They artificially keep the price high, which I might point out is one of the reasons that Canada is not performing as well as other countries in the world in the rate at which bundled services are coming down.


4292             COMMISSIONER DUNCAN:  So you are not able to sell the bundles as such.

4293             Let me ask it this way:  Are you offering Internet and television service in your areas?

4294             MR. HANSEN:  Yes, we are.

4295             COMMISSIONER DUNCAN:  Do you offer television in all of your licence areas?

4296             MR. HANSEN:  No, we don't, only in a very small ‑‑

4297             COMMISSIONER DUNCAN:  But Internet would be available everywhere.

4298             MR. HANSEN:  Not everywhere.

4299             COMMISSIONER DUNCAN:  It's not?  So what percentage of your territory would Internet be available in?

4300             MR. HANSEN:  I can absolutely share that with you.  I think we keep that information confidential in terms of where we offer our high speed Internet access in terms of percentage of households.

4301             We would be happy to share that with you in confidence.

4302             COMMISSIONER DUNCAN:  That would be great; thank you.


UNDERTAKING CRTC‑7:  TELUS (Policy) to provide information regarding availability of high‑speed internet service in TELUS serving territory

4303             COMMISSIONER DUNCAN:  In paragraph 68 of your submission you talk about services with frozen rate treatments.

4304             Just to go back on that other point, it is going to be very important to have all of those services available to meet the cable competition head on.

4305             I am sure you would agree with me.

4306             MS YALE:  Yes.

4307             COMMISSIONER DUNCAN:  With respect to paragraph 68, you are looking for permission so that you can average the rates for these services amongst your serving territories on a revenue‑neutral basis.

4308             I understand the revenue‑neutral aspect of it, but I am just wondering what agencies and what type of percentage increase would the worst case experience in this?

4309             Obviously, you want to standardize your rates for administrative purposes, I expect.

4310             MR. GRIEVE:  I think we would like to take an undertaking on that and go and do the calculation for you.  We could do it on a rate‑by‑rate basis for you.


4311             COMMISSIONER DUNCAN:  All right, that's fine.

4312             MR. GRIEVE:  These are services with frozen rate treatment are things like 911 and those kinds of services.

4313             COMMISSIONER DUNCAN:  Yes, I know that, but I want to know what the worst case is going to be, what those people are going to receive by way of an increase.

4314             MR. GRIEVE:  Sure, no problem.

4315             COMMISSIONER DUNCAN:  Thank you.

4316             THE CHAIRPERSON:  In conclusion, I would like to talk a bit again about the competitive presence test, in particular the role of wireless and non‑affiliated wireless in the competitive presence test.

4317             We don't want to talk about substitution particularly.  I know what you think about substitution and I am going to hear about it again very soon.  So that's fine.

4318             But I do want to understand why you added wireless.


4319             If 81 percent of the households across the country are passed by a cable company offering VoIP, which I believe to be the accurate figure, what is the role of the wireless in your presence test?

4320             MR. GRIEVE:  First of all, I think if you stepped back from our test, it would really be two alternate full facilities‑based providers, one of which is wireless.  So instead of writing the test that way, we said full facilities‑based wireline and a wireless.

4321             I think we would say that if you had two full facilities‑based, or three full facilities‑based wireline carriers, that would accomplish the same thing.

4322             Wireless, to us, places even at the level we have of substitution today in households that take wireless only ‑‑ and there is obviously other substitution going on that is hard to measure ‑‑ but that take wireless only.

4323             All of that kind of substitution sort of puts a price ceiling, the services that wireless carriers offer, puts a kind of price ceiling on what we can do.  If we raise our wireline rates to the point where people have to make a choice, what do I think of this wireline or wireless because the sum of the two is getting to the point where I'm not very happy, what are they going to do?  Are they going to drop wireless or are they going to drop wireline?


4324             If they drop wireline, we strand a loop in perpetuity, and we have all those other problems.  So there are all those kinds of constraints on us.

4325             We put wireless in there because it is relevant.  It is relevant to the way we price.

4326             THE CHAIRPERSON:  So it is conceivable in your mind that a wireless pricing scheme would place downward discipline on your price that the competing cable VoIP provider would not produce, would not apply.

4327             MR. GRIEVE:  I would say yes, but I would say that it is particularly important in those parts of the exchange that pass the competitive presence test where perhaps the cable company doesn't reach.

4328             The competitive presence test ‑‑

4329             THE CHAIRPERSON:  Then we are in an orphan customer scenario, not a competitive presence test.

4330             MR. GRIEVE:  Well, the competitive presence test applies in the exchange, because the Commission uses the exchange as the basis for the way it regulates just about everything.


4331             So when we have a cable company in an exchange, for the most part they enter the whole exchange.  But it could be that there are customers in that exchange that don't have both a wireline or cable company and don't have a cable company that offers them service or telephone service, but they would still have a wireless carrier ‑‑

4332             THE CHAIRPERSON:  But that customer is an orphan customer and has other protections under your proposed scheme?

4333             MS YALE:  Right, but there is no question that ‑‑ to your question, the direct answer is absolutely, it is a meaningful substitute for many customers and increasingly so, particularly those who need a wireless phone anyway, as to whether or not they keep both.

4334             THE CHAIRPERSON:  But we are not arguing about substitutability.  I am arguing about whether or not you can provide a clear rationale to the Commission why we would bother with a wireless presence in addition to the basic cable VOIP provider.


4335             One theory would be, for example, it might be something like three providers instead of two to a given household, that I could understand.  Another is your price discipline where, in theory, the wireless offering is going to be lower than the competing cable VOIP so there is a form of discipline there.

4336             But I am trying to understand why it would be efficient.

4337             I will ask you a different question.  Mr. Grieves said he didn't want to drive around and find the orphans and I understand that.  Has he ever participated in a drive test for a mobile company?  I mean, have you ever seen the results?

4338             MR. GRIEVE:  No, I haven't.

4339             THE CHAIRPERSON:  I suggest to you that if you really looked at it closely, so far based on what you have said, the combination of the rather modest role that the wireless provider could actually have in your test and the difficulty of realistically interpreting the ubiquity of wireless offering, even in highly dense areas, would mean that your test would be exceedingly difficult to apply relative to the incremental policy value that you are in fact suggesting it might have.

4340             I may be wrong about that.  I say it to you for what it is worth.  I offer you the opportunity to comment and explain to me why we need wireless in this test.


4341             MR. GRIEVE:  It is an additional protection.  For us we thought it would be a more conservative approach to put in the wireless option.  To us, it is actually not difficult to meet because wireless is pretty well everywhere ‑‑ it is certainly everywhere that cable is, and there are at least two, and in many cases three, wireless carriers, including ourselves in those areas.

4342             So, it is just a more conservative test.  Even if you took away the requirement for wireless, and you said a full facilities‑based carrier, the fact is without that second requirement of the test, it would be passed everywhere where we could pass it for the full facilities‑based carrier anyway.

4343             THE CHAIRPERSON:  I think that is what I just said, isn't it?

4344             MR. GRIEVE:  I think so.

 

4345             THE CHAIRPERSON:  One more time and it will be the last time.


4346             Is there anything unique that wireless adds to your competitive presence test?  I mean, is there anything that can't be done by the presence of a full facilities‑based provider, unless you want to make the argument that three suppliers is ipso facto better than two and we should always go for three suppliers, which is, I suppose, an argument of a general nature.  But what is unique that wireless really adds?  Is it just suspenders and a belt or is there something that can only be held up by suspenders?

4347             MS YALE:  We felt it was a more conservative test.  We think it adds some protection certainly because it is relevant for us in terms of how we think about pricing for the reason that for some households it is a substitute for local telephone service and is increasingly so.

4348             I guess it is your call as to whether or not you feel it adds anything meaningful.  From a practical perspective in the way we think about our offerings, it is real and meaningful.  As a safeguard for competitive presence test, that is obviously your call.

4349             We feel, just as we have said in the context of forbearance, that wireless substitution is real and meaningful; we believe it is a real and meaningful discipline on the competitive market for local telephone service, and so to ignore that didn't seem to make sense to us.

4350             THE CHAIRPERSON:  The orphan test, if I recall correctly ‑‑ and I may be wrong ‑‑ only applied when neither of the competitors was present.  Is that correct?


4351             MR. GRIEVE:  It applies when neither of them is present and there is no choice at all.  I think I explained it yesterday with the rancher on the other side of the hill.

4352             That would be a place they don't get cable, they don't get wireless, there is no loop reseller in that exchange, there is no choice at all for that customer.  They only have one choice, and that is where we would propose that that test be available.

4353             THE CHAIRPERSON:  Thank you.

4354             THE SECRETARY:  Thank you, Mr. Chairman.  Thank you very much, Telus policy panel.

4355             Maybe we should take a break.

4356             THE CHAIRPERSON:  Yes, absolutely.  I have just been forcibly reminded by my colleagues.  We will get together again at ten minutes to 11:00.

4357             THE SECRETARY:  We will get Telus marketing panel next on.

‑‑‑ Upon recessing at 1035 / Suspension à 1035

‑‑‑ Upon resuming at 1054 / Reprise à 1054

4358             THE CHAIRPERSON:  Order, please.

4359             Ladies and gentlemen, before we begin this next panel, in the interests of your logistical planning and with reference to our experience thus far, a few words about what we see in the future.


4360             We have released the room for Saturday.  We won't sit Saturday.  We are going to end this week's proceedings with The Competitors panel and then we will rise until Monday when PIAC's expert witness, Dr. Roycroft, will be with us.  We will continue that cross and any subsequent cross and then we will rise and try to give you something in the order of 24 hours, maybe a little less, maybe a little more, depending on when we finish in the course of the day, to prepare final argument.

4361             So all other things being equal, final argument on Wednesday or Thursday probably, with a couple of breaks in the process, depending on how long we go this week.

4362             Are there any questions?  Have I left anybody out?  Does anybody feel that this proceeding doesn't meet, not their personal schedules because we all have personal schedules, but doesn't meet their professional responsibilities and the CRTC's obligation to provide everyone with a fair opportunity?

4363             All right.

4364             MR. JANIGAN:  Mr. Chair, I am not addressing either of those two points, but there is another little wrinkle that is associated with scheduling.


4365             The House of Commons Standing Committee on Industry has scheduled hearings for next week on the proposed direction to the CRTC with respect to regulation of the Minister, which I believe is to take place on Thursday afternoon, which at least will involve me but may involve other participants in the process.

4366             It may well be possible to structure the time of argument to accommodate that, but it is another sort of event in the calendar that may be of significance in terms of scheduling argument.

4367             THE CHAIRPERSON:  I think that's a good point, Mr. Janigan.  Let me simply indicate a desire to accommodate your wish to participate, to be present at that other important event.

4368             Let's see how things work out, and let us know, please, as we plan.

4369             Madame la secrétaire, avez‑vous d'autres choses à partager avec l'auditoire?

4370             LA SECRÉTAIRE:  Oui, monsieur le Président.

4371             I will be right with you.

4372             Two exhibits were filed with me.


4373             The first is Exhibit No. 2 for The Companies:  Response to undertaking information requested by Consumer Groups: Transcript reference, Volume 2, 11 October 2006, paragraph 2119.

EXHIBIT COMPANIES‑2:  Response to Consumer Groups Undertaking‑1 requesting information on Dr. Roycroft's analysis associated with DSL service.

4374             THE SECRETARY:  Also filed by BCOAPO et al is Exhibit No. 1: The Status of Competition in Canadian Telecommunications Markets.

4375             They inform me that copies are available on the distribution table.

EXHIBIT BCOAPO‑1:  Excerpt ‑ CRTC Telecommunications Monitoring Report ‑ July 2006

4376             THE SECRETARY:  We will now proceed with the Marketing Panel.

4377             Mr. Ryan, please introduce your witnesses.

4378             MR. RYAN:  Thank you, madame la Secrétaire.


4379             Mr. Chairman, we have now before you the second of the three panels that we propose to call to respond to questions in relation to the evidence and interrogatory responses filed by TELUS in this proceeding.

4380             Sitting closest to the Panel is Mr. Dave McMahon.  Mr. McMahon is Vice‑President, Customer Care Partner Solutions, of the company.

4381             Sitting beside Mr. McMahon, of course, is Mr. Hansen whom you have already met.

4382             Sitting beside Mr. Hansen is Mr. Mark Kolesar.  Mr. Kolesar is Vice‑President, Economic Affairs, of the company.

4383             Sitting beside Mr. Kolesar is Mr. Robert Tasker, who is Vice‑President, Business Networks and Product Marketing, Business Solutions, for the company.

4384             Et assis à côté de M. Tasker est Marc Beaulieu.  M. Beaulieu est directeur, marketing et projets spéciaux pour Telus Québec.

4385             Mr. Chairman, the witnesses are available to answer questions generally in relation to marketing issues and in particular in relation to the specific interrogatory responses identified as their responsibility in the company's letter of October 5 to the Commission.

4386             Madame la Secrétaire, the witnesses that haven't already been sworn or affirmed are ready to be so sworn or affirmed.


4387             THE SECRETARY:  I would ask the witnesses to rise, please, except for Mr. Hansen.

AFFIRMED:  MARC BEAULIEU

AFFIRMED:  ROBERT TASKER

AFFIRMED:  MARK KOLESAR

AFFIRMED:  DAVE McMAHON

PREVIOUSLY AFFIRMED:  PAUL HANSEN

EXAMINATION‑IN‑CHIEF / INTERROGATOIRE‑EN‑CHEF

4388             MR. RYAN:  The gentlemen who were just sworn, I will ask each of you effectively two questions.

4389             I will ask you whether you are familiar with the interrogatory responses that I have just referred to as being specifically assigned to this panel for the purposes of this proceeding.

4390             I will ask you if the CV that you have each filed with the Commission, as part of the letter of October 5, is accurate.

4391             May I ask you first, Mr. McMahon, how you would answer both of those questions.

4392             MR. McMAHON:  I have read the interrogs and the CV is the right one; thank you.

4393             MR. RYAN:  And Mr. Kolesar?


4394             MR. KOLESAR:  I will answer yes to both.  I have read the interrogs and my CV is the correct one.

4395             MR. RYAN:  And Mr. Tasker?

4396             MR. TASKER:  Yes, I have read the interrogs and the CV is accurate.

4397             MR. RYAN:  And monsieur Beaulieu?

4398             M. BEAULIEU:  Oui, pour les deux.

4399             MR. RYAN:  Mr. Chairman, serving as back‑up, in addition to Ms Labatiuk and Mr. Quick, whom you have already met, we have Mr. Andy Brauer, who is sitting closest to me.  He is the Director of Business Exchange Marketing for the company.

4400             And sitting closest to you is Mr. Mark Murakami, who is Director of Strategy, Partner Solutions.

4401             The witnesses are available for cross‑examination, Mr. Chairman.

4402             THE CHAIRPERSON:  Thank you, Mr. Ryan.

4403             Madame la Secrétaire?

4404             THE SECRETARY:  I was notified that counsel for all the interested parties don't have any questions for your panel.

4405             I will pass on the question session to our Commissioners.

4406             Thank you.


4407             THE CHAIRPERSON:  Commissioner Langford.

4408             COMMISSIONER LANGFORD:  Thank you, Mr. Chairman.

4409             Well, thanks for coming.  I will try and make your trip worthwhile.

4410             If you were listening to our questions to the earlier panel ‑‑ and certainly Mr. Hansen was part of that earlier panel ‑‑ you know that some of us struggled a little more than others trying to find that line between day‑to‑day work in marketing and selling products and the kind of policies that underlie them.

4411             I think I have the focus right for your panel in that we are working here with the day‑to‑day strategizing and how to attract customers, how to sell products.

4412             I want to examine with you how some of the proposals in the TELUS comments might impact on what you are doing now and how you would develop strategies if you were given the tools that the company that employs you is asking for.


4413             I think perhaps the best place to start would be with the de‑averaging, because it seems to me to be the clearest break from the present system of averaging across entire rate bands.

4414             Can I just generally put that question to you and maybe we can then narrow the focus as I hear some of your earlier responses.

4415             What types of strategies do you see yourself developing in a world where the de‑averaging rule has been removed?

4416             MR. HANSEN:  Commissioner Langford, there is a couple of different ways that we see using the de‑averaging.

4417             First and foremost, in those markets where our competitors have rolled out their services, we want the ability to compete.

4418             What we find when the competitors do roll out, they tend to roll out in sort of marketing regions which are different than the geographic boundaries that we have around the different rate bands. So we want to be able to more effectively compete.

4419             Second, what we want to use de‑averaging for is going to be simplification of offers, just to ease the communication and to be able to communicate more effectively with our clients and to provide them with a simple view of the services that we offer to them.


4420             Today, because we have so many different price points for our local service, for example, it is very challenging to use mass communication to do that.

4421             COMMISSIONER LANGFORD:  We heard yesterday from the Bell marketing people, Mr. Collyer, I believe, but it might have been Mr. Rowe, that ideally ‑‑ and I hope I am characterizing his comments correctly ‑‑ ideally, they would like to move to an almost one‑on‑one marketing where every customer was targeted specifically.  That would be the ideal.

4422             I think they said the ideal was impossible to achieve but that would be the ultimate goal.

4423             Yet what I seem to be hearing from you is that you are looking at it in quite a different way; that you want to make broad offers to the entire market.

4424             MR. HANSEN:  I think it's twofold.


4425             One, we want to be able to simplify it so that ‑‑ for the most part, people are fairly consistent in how they want to use their telephony service.  There are not that many different iterations.  So in terms of what we present from a mass perspective, we want to have a simple offer that everyone can relate to.

4426             The other element ‑‑ and I do agree with Mr. Collyer that we want to allow people to customize so that they can get a service that best meets their particular needs.

4427             So there are two elements associated with that.

4428             One where you use the mass advertising to sort of create interest and a call to action for the consumer.  Then when we are in contact with them, when we have that one‑on‑one dialogue, we can look at I will say customizing their offer more.

4429             But we need to do sort of two different aspects to the communication.

4430             One is the mass communication to sort of create the interest and get them to call us, because it gets much more expensive if we have to go out and reach out to our clients on an individual basis because only a small percentage of the clients that we contact, if we do the reaching out to them, would actually be interested at the time we contact them in getting additional services.


4431             COMMISSIONER LANGFORD:  So if you put one of these mass advertising blitzes out ‑‑ and let's assume, unless you tell me you would never do something like this, that you have a full‑page ad in the Calgary Herald.  The shackles are off.  The handcuffs are off.  We will not be undersold.

4432             Is that the way you would do it?  Or would you market new prices and then make side deals or individual deals with people if they pushed you harder?

4433             MR. HANSEN:  I don't see us competing strictly on price because price is the easiest thing for our competitors to match.

4434             What I think we want to do is talk about the lifetime value of the clients and all the different services that we can offer that client to give them the best value, be that across all the different services that are available, local, wireless, high speed, TV, to be able to provide a total solution for them.

4435             COMMISSIONER LANGFORD:  I thought you said not very long ago, in response to my colleague Commissioner Duncan, that you weren't in a position in most of your territory to be offering that sort of bundle at this point.  You just weren't technologically ready.


4436             MR. HANSEN:  With TV in particular we are not technologically ready in the majority of our market.  That is true.  I apologize.  I was using it as a hypothetical example ‑‑

4437             COMMISSIONER LANGFORD:  I'm not trying to trip you up here.  I'm just trying to get an understanding.

4438             MR. HANSEN:  Yes.

4439             COMMISSIONER LANGFORD:  So what kind of bundle do you offer then?  Don't you have to rely more on price if you don't have as good a bundle?

4440             MR. HANSEN:  Sorry, I don't agree that we don't have as good a bundle.  We will have a different bundle.

4441             COMMISSIONER LANGFORD:  Okay.  I don't want to lower the high tone of this conversation, but let's go to the sort of car dealership.  Everyone for some reason seems to think, probably just to keep their minds together, that they have gotten the best deal over at the local Toyota dealership, or whatever.  And probably as human beings we need to do that, as I say, just for the sake of keeping our minds balanced and our souls at ease.

4442             But it seems inconceivable to me that everyone has gotten the best deal.

4443             So will it come down in a de‑averaged world to the same sort of ability to bargain that now exists in the automobile world?


4444             MR. HANSEN:  No, I don't see that being the case because there is so much choice and if clients feel like they are not being treated fairly, they always have a choice to go somewhere else.

4445             So I think it is always very important that we are consistent in how we treat our clients.  It doesn't mean that every client gets the same offer, because what is important to you may be different than what is important to me.  So it is important that the offer that we present to the client is what best meets their needs and not everyone's needs are going to be the same so the offers are going to be different because they value different things.

4446             COMMISSIONER LANGFORD:  Can you speculate on where the soft points will be, from your company's point of view?  Where savvy consumers or persuasive consumers may be able to work something of a deal for themselves under this new regime?

4447             MR. HANSEN:  Rather than describing it as a deal, I would describe it as flexibility.  So I want people to have the opportunity to customize the bundle of services that they choose to take with us.  I don't think it is a function of negotiating and sort of trying to strike a better deal.


4448             I think that would cause a lot of frustration because word would get out, "Hey, if you complain a lot to TELUS then they will give you this sweet deal".  That would be very frustrating.  I think most people would be very frustrated if they think it is only the squeaky wheel that gets the service.

4449             So if we did do that, eventually the word would get out, and then because there is so much choice people wouldn't stay with us.  There is no reason to stay with us if they feel like they are not being treated fairly.

4450             Because we are not just looking at the revenue that we get from them today, and because competition is in most of the markets today and is looming in a lot of the other markets where it isn't today, we can't take sort of a short‑term view and look at manipulating the clients in the short‑term to do that, because we have to look at the revenue stream that we get from that client over a lifetime.


4451             COMMISSIONER LANGFORD:  So if I read you correctly, price isn't going to be the battleground here, and special pricing certainly isn't going to be the battleground, because you don't want the word to get out that you treat people differently, so why do you need a full de‑averaging power?  Why couldn't you be happy or just as effective with something less, some changes in the bundling rules for example?

4452             Wouldn't that be enough?

4453             MR. TASKER:  Could I possible respond?

4454             COMMISSIONER LANGFORD:  I wish everyone would respond.

4455             MR. TASKER:  All right.

4456             COMMISSIONER LANGFORD:  You have all come such a long way, I want to see you all responding.

4457             MR. TASKER:  Exactly.  I know you are typically focusing your questions to the consumer side, but certainly the small business side and certainly the large business side, there are a number of factors that I think play into why we want and really need de‑averaging to be competitive.

4458             I would say that they range from the huge variability in customer interest and customer need in terms of the way they use our services.


4459             Things like vertical markets are very unique in the way they use our services and so we want to be able to ‑‑ and in many cases we are competing with a lot of very interesting new players such as the Microsofts and Googles and Yahoo!s now in terms of players that we didn't even envisage before to be part of our market.  They are coming up with offers, whether it is to the retail market segment for point of sale or whatever in technologies that we hadn't even thought about before.

4460             So the need for us to respond to those situations with unique market segments, in particular vertical market segments as an example, is one very important piece.

4461             The other component is, certainly we talked before, I think there was a lot of conversation about cost structures.  On the business side there are cost structure elements such as large buildings where costs are considerably different than strip malls and considerably different from other areas that we are definitely seeing competition where niche players are coming in and offering very attractive rates, so there is a cost issue there that we need to be able to respond to an offering in those markets.

4462             And just basically being responsive.  You know, so many of our customers are ‑‑ obviously there is a huge variability in terms of our customer base in terms of customers are much more price sensitive than others and others that are much more interested in the value that we are offering in terms of the enhanced feature set.


4463             You know, obviously customers have different needs, as consumers do, in terms of how much price is an impact on how much they want the business.

4464             So being responsive to those needs is extremely important as well.  That is where although we might ‑‑ we often do, even in small business, obviously in the small business market, offer ubiquitous value propositions, we are often very uniquely responsive to customers as they call in and work with us on their needs.

4465             So all those I think factor into the need for de‑averaging.

4466             COMMISSIONER LANGFORD:  But how much of that can't you do now?

4467             MR. TASKER:  Well, certainly on the responsive side, as an example, we don't have the ability to ‑‑ we would have to file unique rates for every single customer that wants something different.

4468             On the vertical market side, the example that I gave you, once again depending on how we are trying to package it, we would have to file unique propositions, which is quite cumbersome for us to do that.  Not only that, it might be discriminatory to the point that we wouldn't be allowed to do it.


4469             COMMISSIONER LANGFORD:  Perhaps we may have to bring back the policy panel, but you will still be filing tariffs under your proposition, would you not?

4470             MR. TASKER:  Oh, absolutely.  The point is, what we would like ‑‑ yes, good point.

4471             I guess I'm talking more generically across the market.  When we get forbearance in certain markets it will be certainly easier.  The competitive presence test is a step towards that, so it will allow us to be more responsive and more focused on certain segments, but no question there is a whole continuum here that we are dealing with.

4472             COMMISSIONER LANGFORD:  So if you are still filing tariffs and you still can't sell below cost, and at least on the residential side price ‑‑ at least in the way you are seeing the future now ‑‑ may not be the battleground, or you would prefer it not to be the battleground, why are you seeking these tools, particularly de‑averaging ‑‑ and we could look at the uncapping as well because they could go hand in glove ‑‑ why would you be seeking tools which seem to me ‑‑ and I'm not in marketing ‑‑ but seem to me to enable you to raise prices for some customers and lower them for others?

4473             Why would you seek those tools if that is not what you are going to do with them?


4474             MR. HANSEN:  Sorry, we are looking at raising some prices, lowering other prices.  It is a flexibility issue more than anything.

4475             What we want to do is have the ability, depending on what the market conditions are like, that we can respond to those market conditions and compete.

4476             COMMISSIONER LANGFORD:  So if Shaw lowers prices, you want to be able to lower prices?

4477             MR. HANSEN:  We want to be able to compete for our fair share of clients.

4478             Now, will we simply if they lower price we lower price?  Not necessarily.  We may adjust price, but we may also decide to increase value.  It is not just going to be one or the other.

4479             That's why I would go back to the earlier point that price is an important factor, absolutely.  Everyone agrees that price is an important factor and prices may change.  They won't necessarily always go up or always go down because we are sort of more focused on value.


4480             So absolutely I think you can be guaranteed with increased competition that the perceived value that clients get from their services will increase because we are all going to be fighting to best suit the needs of the clients to get our fair share of those clients.

4481             COMMISSIONER LANGFORD:  So value would be a variation in product selection, good service, that sort of thing?

4482             MR. HANSEN:  Agreed.  And I think what people perceive, it is as unique as individuals are and that is why we have to have as much flexibility as possible to be able to work along all those dimensions to give you the service that you value most.

4483             COMMISSIONER LANGFORD:  Do you study other markets to see what is going on?  For example, have you made analysis of the Montreal market and the approach that is being taken by Vidéotron there, which seems to me to be very different, as an outsider.

4484             As a person who simply spectates, it seems to be very different than the approach Shaw is taking.  It seems to be very much a price‑driven approach by Vidéotron to capturing customers.

4485             First of all, do you study these markets?  Are you aware of what is going on in those areas?


4486             MR. HANSEN:  Yes, we do look at the different markets.  I would have to refresh my memory to remember the exact details of what the Vidéotron offer is, but absolutely we do look at what competitors are doing across the country.

4487             COMMISSIONER LANGFORD:  But it is safe to say, would you agree, that the Vidéotron prices are well below what Shaw is offering in your markets?

4488             MR. HANSEN:  Yes, I believe so.

4489             COMMISSIONER LANGFORD:  If this were to happen, if we were to give TELUS the tools it is asking for now, and if Shaw were to duplicate Videotron prices, which I think ‑‑ I am sure Commissioner Noël knows better than me, but I think they are sometimes as low as $15 ‑‑

4490             Perhaps you could help me.

4491             COMMISSIONER NOËL:  It is $14.99.  I think some representatives of Videotron are here, but $14.99 is for the bare service.  There is no optional service.  You have to pay for the options on top.

4492             COMMISSIONER LANGFORD:  And then you can get some frills for around $19.

4493             There is another package, isn't there, somewhere in there?

4494             COMMISSIONER NOËL:  You would have to ask those people.

4495             There is another set of bundling if you have high‑speed internet and video and illico and‑‑


‑‑‑ Laughter / Rires

4496             COMMISSIONER NOËL:  You would have to ask them.

4497             COMMISSIONER LANGFORD:  Andrée and I may not need any of you.  We are just going to work this out here.

4498             We have an idea.  This is very much a price‑oriented strategy, or it appears to be ‑‑ and Videotron will correct me if I am wrong.  They are certainly capable of doing that.

4499             With the new tools that you would be given under this submission by TELUS, how would you respond to that?

4500             MR. HANSEN:  I think we would have to try a couple of different things.

4501             One thing it is going to depend on is how quickly we are losing clients.  We are always going to be focused on revenues, and we don't want to re‑rate our entire base unnecessarily, so we would have to see the impact that Videotron's offer is having on us.


4502             Would we just do a strict match?  I don't think so because ‑‑ I am not completely familiar, so please correct me if I am wrong, but I think with Videotron's offer, for example, you would probably have to take cable with them.  So in order to get the great rates on the telephone, you would have to be a cable subscriber.

4503             Not everyone is going to be a cable subscriber.  So we would have to consider what sort of elements we would want to have in place to get ‑‑ I will say a fair share of the wallet from that client across the different services we have.

4504             COMMISSIONER LANGFORD:  I am not trying to make you uncomfortable, but it seems to me, despite your attempt not to give different prices to different people, that you are almost going to be forced into it.

4505             The fact of the matter is, you will get some people who will want cable, and some people who won't.  You will get some people who want television with high‑speed, and some people who won't.  Some people will want options, some people won't.

4506             You are going to have to be, I would think, nimble enough to, if not match, at least appear to offer something of equal value or even more than equal value.

4507             Sooner or later, with these tools, won't you end up with the situation which you have told me you don't want, where word gets out that you can get a deal from ‑‑


4508             Even if the word is not accurate, won't you end up with the same problem?

4509             MR. HANSEN:  I would agree.  I don't think it is a large concern that clients will have if they get different services.

4510             I think people have the perception that, the more services I take, the better value I get for the individual elements.  The more services I take from a particular organization, the better value I get on the individual elements.

4511             I think that is fairly commonplace in today's market, and consumers will expect that.

4512             You could use the cable example.  With some of the cable competitors, if you take one or two services with them, you get ‑‑ it might be a 5 percent discount.  If you take three services with them, you get a 10 percent discount.  If you take four services with them, you get a 15 percent discount.

4513             They are offering that through mass communication, and I think that consumers are accepting of that.  If they commit a larger share of their discretionary spending to a particular organization, they get better value.


4514             COMMISSIONER LANGFORD:  And yet, as you said, in the end it is all about revenues, which is obviously a legitimate concern for a commercial operation such as yours.  But, then, don't you have to make it up on the other side?

4515             Once this process begins, even though you will fight a manful ‑‑ a personful?  It is hard to be politically correct sometimes ‑‑ battle to try to keep this on what you call value, rather than price, as prices begin to slip, because you have the power to do it, then we bring in the next piece, and that is the uncapping of prices.  So who is going to pay to keep revenues at least equal?

4516             MR. HANSEN:  We can never be offside with pricing across any of the services we offer, because consumers have so much choice across all of the services.

4517             Then, I would agree, there will be a small percentage of clients that don't have choice, and where we don't meet the competitiveness test, then we have the safety net of the price cap.  On average, their prices will not go up.

4518             The other consideration that we will have is if there are small segments of the population that are not sophisticated enough to look for the different choices.


4519             There are groups out there, and in this room today, that are trying to look after the interests of those clients, and it is my personal opinion that if it came across that TELUS was abusing this vulnerable set of the community, the damage that would do to the brand and the exodus of clients that are sophisticated enough to make other choices ‑‑ it wouldn't pay for us to do that type of activity.

4520             COMMISSIONER LANGFORD:  Do you want to check that note that your colleague has sent you, just in case he has told you to have a glass of hemlock or something like that?

‑‑‑ Laughter /  Rires

4521             MR. KOLESAR:  The note just refers to the fact that once we have actually lost a customer, there is no return guarantee.  It is very difficult to get them back, so various actions that we might take now, taking into account the long‑term value of that customer in the future, irrespective of what they are spending today, will have ramifications for us somewhere down the road.

4522             It is far cheaper to retain an existing customer than it is to try to either win a new customer or win them back.


4523             I think my colleagues here would all agree that we would really take that into account, the long‑term value of the customer and the fact that it is far cheaper for us to keep our churn down and retain the customers we have than to take actions in the market for a short‑term gain that might ultimately cause those customers to go.

4524             COMMISSIONER LANGFORD:  That sounds like you are not going to raise prices, which will put a song on the lips of all your customers, but what do you need the uncapping power for then?

4525             MR. TASKER:  I think it is important to note that we definitely would like to raise some prices.  I don't think we should be misleading about that at all.

4526             I think there are certain areas of our market where we would like to raise prices.

4527             We have the restrictions that we are talking about.  I think on the business side it is 10 percent, and on the consumer side it is 5 percent.

4528             There will definitely be areas in which we will want to raise prices.

4529             COMMISSIONER LANGFORD:  Without causing panic, could you give me a few concrete examples on both sides ‑‑ both the business side and the residential side ‑‑ of where you might be wanting to raise prices?


4530             MR. TASKER:  Certainly some of the examples that were given before on the business side, and there are products that we are trying to deter customers from continuing ‑‑ end of life products.  Certainly that was one of the great examples.  We are not doing enough there, quite frankly, and we want to be able to do more.

4531             COMMISSIONER LANGFORD:  We had this discussion with your colleagues on the Bell side, and I am not entirely sure I understand it.

4532             I understand why you would want to do it, and I understand the problems of aging technology, but we have systems available now for withdrawing dated technologies and for transferring customers over, and we have tests for that, and we have applications that can be made.  Even our worst detractors seem to acknowledge that we are moving things a little more quickly through the labyrinth.

4533             Do you really need uncapping for that?

4534             MR. TASKER:  It is not so much the uncapping as ‑‑ yes, it is the uncapping and de‑averaging, in terms of those baskets.


4535             When it comes down to dealing with a lot of these customers, they are very resistant to change, and our costs are going up considerably.  It is kind of the situation where, okay, if you want to stay three or four years longer, then I want to be able to recoup my ever‑increasing costs.  As my economies of scale go down, and the technology is manufacturer‑discontinued ‑‑ that extra cost for training people and bringing people back off that don't know the technology.

4536             There is a whole list of things like that which happen.

4537             The reality is, you are dealing on a customer basis, and these customers are typically very resistant to change.

4538             COMMISSIONER LANGFORD:  I understand that, and that is a good point, but do you not risk using up all of your flexibility if you start focusing on these really resilient, really determined customers who want to stay with their crank telephone or whatever they have and pushing the price and pushing the price and pushing the price, trying to send them a message, pushing it up, don't you then use up all your leeway so that you run out of room for other products?

4539             MR. TASKER:  It is certainly a factor.  I mean, the fact is there are other products within those baskets which are very competitive.


4540             I will give you an example.  On the business side, our PRI service, our ISTN, trunk access service is enormously competitive in terms of the amount of choice that the customers have out there.  We are being forced to bring those prices down in order to respond to that.

4541             It might seem like you want to do the reverse in terms of your more active products in the market to raise the price, but the reality is that that is also where the competition is.  So, we are seeing we have to reduce prices there.

4542             The best place for us to raise the prices where quite frankly we don't mind our customers leaving is on those older products.  That is what we have been doing a fair amount of in that basket.

4543             COMMISSIONER LANGFORD:  So you get some built‑in flexibility by the competitive pressures on the customers you are trying to retain?

4544             MR. TASKER:  That is part of it.  Not as much as we would like, but certainly we get some.

4545             COMMISSIONER LANGFORD:  Not as much flexibility or not as much competition?

‑‑‑ Laughter / Rires


4546             MR. TASKER:  We can certainly use less competition, but that is the reality of the world that is ever increasing.

4547             COMMISSIONER LANGFORD:  We certainly hope not.

4548             To get back to the residential side, and I don't want to beat this to death just for the sake of creating warmth in the room, but is it possible that you could use something less than full deaveraging if price isn't really what you want and something less than a completely uncapped situation?

4549             I think you can understand, because all of us are consumers as well as regulators and marketers and everything else, I think you can understand where I am coming from in the sense of trying to balance consumer needs or consumer fears or at least meet consumer fears.  It doesn't seem to me to be prudent to give away a power that you won't fully use.

4550             I mean, in your day‑to‑day marketing now is it really deaveraging that you need, or is it just some specific tools that would make your ability to plan and market easier and more effective?


4551             MR. HANSEN:  No, I think we need deaveraging.  I can use an example of where deaveraging may come into play across competitive as well as non‑competitive markets just as an example to show how we might use it.

4552             You mentioned earlier with the Calgary Herald, for example, it's a great vehicle from a mass communication perspective to reach out to clients.  Now, the challenge with Calgary Herald and the distribution of where that paper goes, it crosses, I believe, four different bands and multiple exchanges.  Some of those exchanges are in competitive areas and some are not.

4553             If we wanted to do on offer in that paper, whoever got that paper, consumers are going to call in demanding to have access to that offer.  Today under the current guidelines that we have in place, we can't use that as a vehicle and if we did use that as a vehicle, we couldn't offer it to every person that was on the distribution list for the Calgary Herald.

4554             COMMISSIONER LANGFORD:  I must have missed something there.  How would deaveraging help you?

4555             MR. HANSEN:  For example, today ‑‑ and I was just going to my binder a second ago ‑‑ if you look at the local rates that we charge across the distribution of the Calgary Herald, we charge multiple rates to consumers.


4556             So one way we might use it would be to simplify our rate structure so that we could have a single price point in those competitive markets.

4557             COMMISSIONER LANGFORD:  So to in effect just restructure your present band structure as necessary, your pricing band structure.  Is that what you are saying?  In other words to homogenize it, to have one band in a way?  I am not saying it is a bad thing but I am trying to understand it.

4558             MR. KOLESAR:  If I can try and provide some clarification maybe by being a bit more specific.

4559             The problem with bands is it is really a legacy regulatory construct that doesn't actually map very well to where what we might call a marketing community of interest might be.  So, going back to your Calgary Herald example, basically the Calgary Herald readership, if you looked at a map of the Calgary region, would include Calgary itself, places like Cochrane, Bragg Creek, Turner Valley, Airdrie, these kinds of bedroom communities that are all really part of that marketing community of interest.


4560             If we wanted to mass market an offer that picked up that community of interest, because these customers in that region or that cluster probably all have pretty much the same expectation, if they see the ad, they go, look, why can't I get that, just because I am in Bragg Creek today, if we wanted to file a tariff for Bragg Creek which is in band F ‑‑ actually, Bragg Creek is in band F ‑‑ provided we didn't bump into the imputation test in terms of how we were to price that entire offer for that entire market, we might actually want to have an offer for the entire Calgary region that we wouldn't be able to do because we would have to reprice all of band F in order to provide that offer to people in Bragg Creek who have an expectation, well, gee, I should be able to get it because I saw the Calgary Herald.

4561             In the absence of being able to deaverage within a band, I actually can't come up with a Bragg Creek specific offer that matches the offer in the whole Calgary region without being able to deaverage my prices within band F.

4562             So, in the absence of being able to do it, I simply can't go there.

4563             COMMISSIONER LANGFORD:  So would there be a price in this ad, the new rate for whatever this bundle is X?


4564             MR. KOLESAR:  I am assuming there would be one.  I mean, this is a hypothetical example, and I don't know what the price point might be, but there may be an offer that we may want to put out there and we wouldn't be able to give it to people in Bragg Creek.

4565             COMMISSIONER LANGFORD:  That makes sense.  We are dealing with a kind of bird's eye view of this thing rather than a banding view.

4566             But, Mr. Hansen ‑‑ yes, Mr. Hansen ‑‑ sorry, the signs moved and I thought, my God, I've got the wrong name, but that's all right ‑‑ you have better signs than Bell, by the way.  I just want to give you a point for signs, good signs.

4567             MR. KOLESAR:  We actually have lots of things that are way better than Bell.

4568             COMMISSIONER LANGFORD:  I'm not going to go there.

‑‑‑ Laughter / Rires

4569             COMMISSIONER LANGFORD:  Speaking only of signs, good signs.

4570             Now, The Consumer Groups have the nicest ties, but we will get into all of that later.


4571             So, everybody is good at something.  That is the way it should be.  Mr. Hansen, you were saying that ‑‑ I am kind of paraphrasing you ‑‑ you wouldn't want your company to be in a position where people were kind of feeling left out and feeling annoyed because they couldn't get the same deal that other people can get.  How do you stop the domino effect?  Once you do this, once you make an offer that hits bands B, C, D, you know, right to F, right to Bragg Creek, how do you stop the domino effect of people saying, well, if they can have it in Bragg Creek, I want to have it in Fort McMurray, for goodness sake?  How do you stop that?

4572             MR. HANSEN:  I think consumers are accepting of that, and I could potentially use an example in some of our forborne services.

4573             For example, on the wireless side, we have different offers in Vancouver and Toronto and Montreal, for example, to respond to competitive conditions in those specific markets relative to the rate plans that we offer in the surrounding areas.  We haven't had a backlash from clients around that.

4574             I think people understand that there are different conditions, different value propositions available in different markets.


4575             COMMISSIONER LANGFORD:  But I suspect that the lines of communication, the direct lines of communications between consumers in Vancouver and Montreal are not as finely tuned as those between, you know, Alberta towns.

4576             MR. HANSEN:   So I apologize.  I probably didn't give ‑‑

4577             COMMISSIONER LANGFORD:  You don't have to apologize.  I am just trying to figure out where this will ‑‑

4578             MR. HANSEN:  So, the offer that's in Vancouver proper ‑‑

4579             COMMISSIONER LANGFORD:  Right.

4580             MR. HANSEN: ‑‑ certainly in the greater Vancouver area, is different.  It's only available to people in the greater Vancouver area.  It won't be available to the smaller towns in the rest of British Columbia.

4581             It is an urban offer as opposed to ‑‑ to compete against some of our urban competitors and it's not an offer that's available to everyone in British Columbia.

4582             COMMISSIONER LANGFORD:  So, do you advertise now the way Air Canada does where you have a kind of a list of cities and different prices?  Halifax to Vancouver is, I don't know, $400.00 special, but Halifax to Toronto is $200.00 and Halifax to Montreal is what ‑‑


4583             Is that the way you do it now and is that the way you would continue to do it under deaveraging system?

4584             MR. HANSEN:  No, and I should ‑‑ in terms of the different vehicles that we use, they're going to be varied, like we are not always going to use the same approach to communicate.

4585             We try to keep the offers as simple as possible.  That offer might be a bit overwhelming to a consumer if we just give them too much choice and too many stipulations and we're trying to be reasonably targeted.

4586             We can't always do mass communication, but, you know, there are vehicles that we could use in the Vancouver example that are focused in Vancouver, in that territory.  You know, if we do billboard edge, if we do some of the smaller radio stations that don't have as strong a signal, we could ‑‑ you know, there is different vehicles we could use.

4587             COMMISSIONER LANGFORD:  Posters on telephone poles.

4588             MR. HANSEN:  Absolutely.


4589             COMMISSIONER LANGFORD:  Do you do one ‑‑ do you plan to do, I should say, and what you do now is not really as much interest because you are doing it and you are doing it within the rules, would you plan in a deaveraged world to do one on one calling, telemarketing?

4590             MR. HANSEN:  Yes, telemarketing is always going to be an element of what we do.  The challenge with telemarketing is that it's a fairly expensive endeavour, you know.

4591             For example, if you only make one sale for every ten people that you contact and you can only, you know, contact five people an hour, so if it takes you two hours of call centres time to get one sale, it can be an expensive way to try and get people to take a service.

4592             So, we have to be pretty sure with the people we go after, that they are going to be accepting of that service.  It's an element of what we do, but it's by no means the only way we would reach out to clients.

4593             COMMISSIONER LANGFORD:  And assuming you follow the win‑back rules, which I know you will, would you not logically target lost clients in such a scheme?


4594             MR. HANSEN:  You know, we have campaigns to reach ‑‑ to go after clients that we've lost, but what we do with all of our campaigns as we prioritize them, where we are going to get the most bang for our box, so we have to figure out, you know, we're going to do ‑‑ are we going to be better off trying to get people to take our high speed?  Are we going to get more revenue from a campaign to do that?  Should we focus more resources on that?  Do we focus on our TV entry or do we do win‑back?

4595             So, it will be a trade‑of in terms of how much we invest and how big the different campaigns are going to be.

4596             COMMISSIONER LANGFORD:  And on another issue, the issue of Mr. Grieve's lost farmer on the other side of the hill or rancher I guess they're called out there, on the other side of the creek, and I am referring to the relief offered in paragraph 47, I think, of your comments.  Yes.

4597             Mr. Grieve didn't seem to think you could do this and I am not questioning his knowledge of Telus, but I think you folks would probably be in a position to tell me absolutely whether you can or not.

4598             Can you actually find out  which one ‑‑ which people would be affected and might require the sort of relief offered in paragraph 47?

4599             MR. HANSEN:  Sorry; just a minute while I read the paragraph for a second.


4600             COMMISSIONER LANGFORD:  Sure.

‑‑‑ Pause / Pause

4601             MR. HANSEN:  No, I can't think of a way that we would be able to tell, because a lot of these services are competitors services and we don't know the ‑‑ who is going to our competitors and what specific competitors that they've gone with.

4602             COMMISSIONER LANGFORD:  But I thought paragraph 47 was designed to offer some relief to those few isolated folks or maybe there are a lot of them, who find themselves in a competitive exchange, if I can call it that, a competitive presence exchange, to use the Telus term, but who, in fact, don't have the luxury of competition, that for some reason they can't get wireless and there is no cable running by their door so they can't go to Vonage, they can't go to Shaw and they can't get Bell Mobility if they're the sort of people who don't like Bunny rabbits on billboards or something.

4603             So, can you identify those people?  They are your customers.

4604             MR. HANSEN:  Certainly.  I think in that instance, if we would ‑‑ a sort of marketing 101, we would ‑‑ you know, the client is always right.


4605             If the client tells us that they don't have access to those services, then we would agree with the client and we would provide them with the alternative which was, you know, the rates associated with the closest exchange or ‑‑ I'm probably getting the wording incorrect, but with the safety valve that we have in place.

4606             COMMISSIONER LANGFORD:  But what I'm asking is whether you can go ‑‑ and Mr. Grieve didn't think you could and perhaps he is right, but I just want to check this ‑‑ whether you could go the next step and actually not leave the onus of notifying Telus on the client, the lost client on the other side of the hill.

4607             But is there some way you could identify that client and call them and say: look, there is a whole new set of rules out there, unfortunately you can't take advantage of them so we're going to give you a special deal and you get guaranteed that, you know, a capped price the same as your neighbours in the next exchange are paying.

4608             Is there some way you can identify those clients and get proactive, to use that dreadful word, and make sure they know that there is this protection available to them?


4609             MR. HANSEN:  No, I don't believe there is.

4610             MR. McMAHON:  I mean, the reason we can't, Commissioner, is we don't know where the competitive reach ends, due to their access options.

4611             COMMISSIONER LANGFORD:  So, really that's the problem.  You just don't know where a cable or how far they've put out their cable network.

4612             MR. McMAHON:  Right.  In the definition of customer, you know, ten years ago, they might have, you know, had their services from us, we still wouldn't know where they were in terms of loop plant or anything.  They got a bill from us so we would know.  If we stopped sending them a bill because they changed to another customer, another carrier, we wouldn't know.

4613             THE CHAIRMAN:  Not, but really, it doesn't have anything to do with people who have left you, okay.  It's about your current customer base.  If they've left you, by definition they have a competitive alternative and they are not covered by your offer provision.


4614             The issue that Mr. Langford is trying to get to you and I think probably we have the answer, which is you don't know, is what would it take for you to say there is competitive presence in these seven exchanges, could you identify the 193 people who, in practice in those seven exchanges, did not have in your proposal either a wireless or a cable offering and, therefore, we're entitled to certain protections that those in the competitive presence who generally have competitive options, would not need to be entitled to because of the theory that market would protect them

4615             And the answer is: you don't really know, but it's not because the customers have left you.

4616             MR. KOLESAR:  I think the answer is that we don't really know because we don't know the exact footprint of where our competition is and so, this safeguard was designed that if you've got little pockets that they don't reach, then those people will be protected, but we don't necessarily know where those pockets are.

4617             THE CHAIRMAN:  And in that framework, let me suggest to you that you want to think very seriously about how you can apply the wireless only competitive option to those places because in places, you're just going to have a tremendously difficult time in claiming that wireless is in practice present in one of those places when the customer may very well tell you that it's not.


4618             You would just, in that case, on his proactive basis, say: you're right, fine, here is the protection.  But this does raise again the issue of the value of the wireless provision as a genuine competitive alternative which, I submit, would be rather difficult to administer, but I may be wrong.

4619             COMMISSIONER LANGFORD:  I think those are my questions.  I am very grateful for your assistance, my lady and gentlemen.  There may be other questions now that we have started the ball rolling, but those are my questions.

4620             Thank you, Mr. Chair.

4621             THE CHAIRMAN:  Madame Noël.

4622             CONSEILLÈRE NOËL:  Une petite question pour monsieur Beaulieu.  Monsieur Grieve se plaignait que je ne lui avais pas posé de question au sujet de Telus Québec.

4623             J'aimerais juste savoir, monsieur Beaulieu, dans le territoire traditionnel de Telus Québec, et je parle de service résidentiel ici, le principal concurrent que vous avez, est‑ce que c'est Vidéotron?

4624             M. BEAULIEU:  À ce moment‑ci, le principal concurrent est COGECO.

4625             CONSEILLÈRE NOËL:  Je vous remercie.


4626             LE PRÉSIDENT:  Je ne sais pas si ça a valu le voyage, mais on est content de votre présence.

4627             I don't think we have anything else, but I would like to join my colleagues and thank the panel.  We know you've come a long way, it is appreciated and we take very seriously the points that you've made and wouldn't want you to feel that in any way it has been in vain.  So, than, you very much.

4628             The suggestion is that we break until 1330 when we will proceed, I think, with the expert panel for Telus.  Am I right?  The expert panel for Telus at 1330?

4629             THE SECRETARY:  That's correct.

4630             THE CHAIRMAN:  Thank you very much.

‑‑‑ Upon recessing at 1151 / Suspension à 1151

‑‑‑ Upon resuming at 1333 / Reprise à 1333

4631             THE CHAIRPERSON:  Order, please.  A l'ordre, s'il vous plaît.

4632             Madam la secrétaire...?

4633             LA SECRÉTAIRE:  Merci, monsieur le Président.

4634             We will now proceed with the panel of TELUS, with Dr. Weisman and Dr. Bernstein.

4635             I will call on the examination table counsel Lawford and Janigan on behalf of Consumer Groups.


4636             MR. RYAN:  Yes.  And I will proceed to identify the witnesses and ask that they be sworn.

4637             THE CHAIRPERSON:  Please do, Mr. Ryan.

4638             THE SECRETARY:  Thank you, Mr. Ryan.

4639             MR. RYAN:  Mr. Chairman, you have before you Dr. Dennis Weisman and Dr. Jeffrey Bernstein.  Dr. Weisman is sitting closest to you and Dr. Bernstein beside him, both of whom have testified previously before this Commission.

4640             Dr. Weisman, as you will know well at this point in the proceeding, is the author of the paper entitled "Principles of Price Cap Regulation for the Canadian Telecommunications Industry", which is filed as Appendix A to TELUS' comments of July 10.

4641             He is also the author of a number of specific interrogatory responses that are identified in our letter to the Commission, dated October 5.

4642             Dr. Bernstein is the author of the response to CRTC‑1101, Attachment 1, as well as the responses to CRTC‑2103 and 2105.

4643             Dr. Bernstein and Dr. Weisman's CVs are attached to the letter of October 5 that has been filed with the Commission.


4644             Madame la secrétaire, les témoins sont prêts pour être examinés?

4645             THE SECRETARY:  Gentlemen, could you please stand up.

AFFIRMED:  JEFFREY BERNSTEIN

AFFIRMED:  DENNIS WEISMAN

EXAMINATION‑IN‑CHIEF / INTERROGATOIRE‑EN‑CHEF

4646             MR. RYAN:  Dr. Weisman, do you confirm that you are indeed the author of Appendix A to the TELUS comments that I have just identified?

4647             DR. WEISMAN:  I am.

4648             MR. RYAN:  And to the specific interrogatory responses referred to in the letter of October 5?

4649             DR. WEISMAN:  I am.

4650             MR. RYAN:  Can you confirm that these documents accurately present your views?

4651             DR. WEISMAN:  Yes.

4652             MR. RYAN:  Dr. Bernstein, the same questions for you.

4653             You are the author of the interrogatory responses that I have just referred to in my introduction?

4654             DR. BERNSTEIN:  Yes.

4655             MR. RYAN:  Do these interrogatory responses accurately present your views?


4656             DR. BERNSTEIN:  Yes, they do.

4657             MR. RYAN:  Mr. Chairman, you have before you, as part of the back‑up panel, Mr. Reirson, who has already been identified as support.  But you also have a new face, Mr. Roger Neame, who is an Economic Decision Support Manager at TELUS.

4658             The witnesses are now available for cross‑examination, Mr. Chairman.

4659             THE CHAIRPERSON:  Thank you, Mr. Ryan.

4660             Mr. Janigan.

CROSS‑EXAMINATION / CONTRE‑INTERROGATOIRE

4661             MR. JANIGAN:  Thank you.

4662             Good afternoon, Dr. Weisman; good afternoon, Dr. Bernstein.

4663             DR. WEISMAN:  Good afternoon.

4664             DR. BERNSTEIN:  Good afternoon.

4665             MR. JANIGAN:  I would like to first deal with your approach to the production of this paper that is Appendix A to the TELUS evidence.  In particular, I want to deal with paragraph 16 on page 8.

4666             Do you have that before you?

4667             DR. WEISMAN:  I do, Mr. Janigan.

4668             MR. JANIGAN:  It notes that:


"An overarching consideration in crafting a price cap régime for the Canadian telecommunications industry is that it be designed and implemented in a manner consistent with the public policy guidelines for the telecommunications sector.  In light of this important consideration, I highlight the rational connection between the principles and recommendations of the Telecommunications Policy Review Panel, inclusive of the proposed revisions to section 8 of the Telecommunications Act throughout the statement."

(As read)

4669             I take it from that that, in your opinion, your report lines up with the principles and recommendations of the Telecommunications Policy Review Panel.

4670             DR. WEISMAN:  Well, the principles stand independent of the report.  But I did note consistency between my principles and the report at various footnotes throughout the document.


4671             MR. JANIGAN:  In particular, you would have noticed that the Telecommunications Policy Review Panel recommends a host of statutory reform changes which would be necessary to implement the principles contained in the report.

4672             Do you recall that?

4673             DR. WEISMAN:  I believe so.

4674             MR. JANIGAN:  In making your recommendations in the report, did you make those recommendations on the basis of those statutory reforms being implemented, or did you make them as the situation exists now?

4675             DR. WEISMAN:  As I indicated before, the principles stand independently of the report.

4676             What I did was draft the principles and then in the footnotes primarily show consistency between those principles in the report.

4677             So I didn't read the report and then write the principles, if that is what you are suggesting.

4678             MR. JANIGAN:  What I want to get at is this.  You say your principles line up with the report.  The report requires a set of statutory reforms in order to implement the principles.


4679             If your report and the principles line up, I guess I want to know what statutory reforms are necessary to implement your view of price caps.

4680             THE CHAIRPERSON:  Mr. Janigan, how can we expect an economic expert from Kansas to give us testimony on the requirements for the Canadian Parliament to change their laws and regulations?

4681             Is that a useful question?

4682             MR. JANIGAN:  Well, I don't think it goes necessarily to what the requirements of the Canadian Parliament might be.  But if those principles don't line up with the way in which the Act exists at the present time, then I wonder what the utility of the report is.

4683             THE CHAIRPERSON:  I think it is incumbent on you to make the substantive argument about the specific principles that have been advocated that don't line up with the Act.

4684             MR. JANIGAN:  All right; thank you.

4685             In particular, Dr. Weisman, section 27 of the Telecommunications Act dealing with the provisions for just and reasonable rates, did you assume that those provisions still exist?

4686             DR. WEISMAN:  I did not make any assumption about just and reasonable rates.


4687             MR. JANIGAN:  Did you design your report on price caps to meet that standard of just and reasonable rates?

4688             DR. WEISMAN:  I don't know that my report is inconsistent with that, but it was not a prime consideration when I addressed those issues in designing or coming up with the principles.

4689             MR. JANIGAN:  As well, did you address or have in mind the principles associated with unjust discrimination that are contained in the Canadian Telecommunications Act?

4690             DR. WEISMAN:  I was aware of those, but it was not a prime consideration in drafting the principles.

4691             MR. JANIGAN:  In paragraph 53 of your evidence you discuss the superiority of the price cap régime.

4692             DR. WEISMAN:  That is correct.

4693             MR. JANIGAN:  I take it your statement here that "PCR is a superior form of monopoly regulation independent of whether the market subject to regulatory oversight is currently or potentially competitive" is applicable to this proceeding.

4694             DR. WEISMAN:  Yes, I think it is a quite general statement.


4695             MR. JANIGAN:  And PCR, for example, is not just applicable to circumstances where you have a complete or almost complete monopoly.  It also applies in circumstances where there is emerging competition.

4696             DR. WEISMAN:  Well, it was originally conceived as a superior form of monopoly regulation, but it happens to have properties that are better in dealing with markets in transition to competition than say traditional rate of return regulation.

4697             MR. JANIGAN:  All right.

4698             In your materials you defined a number of principles, 12 to be exact, I believe, that you suggested should be the key economic principles for the design of the future price cap in this proceeding.

4699             DR. WEISMAN:  My hope was that they would serve to inform in a useful manner the design of price caps, yes.

4700             MR. JANIGAN:  As I understand, you were a participant and closely scrutinized the proceedings and decisions in the previous price cap proceedings of the CRTC.

4701             Am I correct on that?

4702             DR. WEISMAN:  Well, I was a witness in both price caps one and two; that is correct.


4703             MR. JANIGAN:  I wonder if you could tell us which one of these principles or the elements of these principles introduced matters or issues that were not previously addressed by the CRTC in the formation of the first and second price caps.

4704             DR. WEISMAN:  These principles are based on the same general body of economic knowledge, updated for more recent developments, as similar principles or similar economic issues that were filed in price caps one and two.

4705             Given the change in the competitive landscape and emerging competitive market forces and a deference for those market forces, some of those principles would not have been applicable in price caps one and two.  But nonetheless, they would still be based on the same general body of economic knowledge.

4706             MR. JANIGAN:  Can you highlight anything that is in the nature of a change or an amendment to the principles that would have been applied by the Commission in the construction of the first and second price cap?


4707             DR. WEISMAN:  Yes.  Of the 12 principles, I would say that principle 4, principles 7 and 8, principle 9 and likely principle 12 would be particularly applicable to this price cap régime; not that the others wouldn't in the first and second price cap régimes.

4708             MR. JANIGAN:  Principle 4 indicates that in a hybrid regulated competitive market structure, the traditional function of monopoly regulation emulating a competitive market outcome should be subordinate to one for allowing the natural development of market forces.

4709             Can you tell me what that means in terms of the effect of the price cap that you designed according to this principle upon the various stakeholders?

4710             DR. WEISMAN:  We recognize that competition, competitive market forces, provide a better source of discipline than does regulation where those market forces are capable of providing the requisite level of discipline.

4711             So when we had reason to believe that those market forces are present and capable of providing that discipline, we would not want to design a price cap plan that works at cross purposes with the natural development of market forces.

4712             MR. JANIGAN:  That logically leads me into the discussion of the issue of market power and in relation to market forces in the design of a price cap.


4713             You have helpfully provided us with a definition of market power, which I think is contained in Calgary Interrogatory 17.

4714             It is indicated in your answer that market power is generally defined as the ability of a firm to profitably raise price above competitive levels for more than a transitory period of time.  In other words, any firm can raise its price above competitive levels but only a firm with market power can do so profitably.

4715             I take it with this definition of market power, you have not conducted a market‑by‑market analysis of market power in Canada in the various Canadian telecommunications markets.

4716             DR. WEISMAN:  I have not.

4717             MR. JANIGAN:  Given your knowledge of the telecommunications industry, if you had conducted a market‑by‑market analysis of market power in the Canadian telecommunications markets, would you expect to find market power to be identical across all markets?

4718             DR. WEISMAN:  I would not necessarily have that expectation.

4719             MR. JANIGAN:  It is possible that competition may have undermined market power in some markets but not in others?


4720             DR. WEISMAN:  Yes.

4721             MR. JANIGAN:  Are you familiar with Telecom Decision 2006‑16, Dr. Weisman?  That is the forbearance decision.

4722             DR. WEISMAN:  Yes, I am.

4723             MR. JANIGAN:  If we turn up your response to Consumer interrog No. 32, in part (a) you indicate that:

"I consider the Commission's Forbearance decision, forbearance from the regulation of retail local exchange service, Telecom Decision 2006‑15, as a regulatory plan that is not necessarily inconsistent with letting go of selected aspects of economic regulation as it is currently applied to the ILECs in Canada."

(As read)

4724             Not to be offensive, Dr. Weisman, but the term "not necessarily inconsistent" sounds a bit like White House speak there.  Can I say, by turning it around, that it is consistent?


4725             DR. WEISMAN:  Well, I didn't agree with the decision.

4726             MR. JANIGAN:  No.

4727             DR. WEISMAN:  Obviously, I supported a different point of view, and the Commission came out with an order that was not consistent with that.

4728             So I thought it was problematic but not necessarily, as I wrote, inconsistent with letting go at some point in time.

4729             MR. JANIGAN:  So it provided some measure of forbearance, but you disagreed with their test for forbearance.

4730             Is that right?

4731             DR. WEISMAN:  Yes.  I thought it was unduly onerous.

4732             MR. JANIGAN:  That test was, of course, to be applied in order to determine whether market power existed or not.

4733             MR. WEISMAN:  Well, that proceeding dealt with a bright line test with forbearance.  There are other ways of satisfying forbearance other than that test.

4734             MR. JANIGAN:  But in order to be forborne in that decision, an ILEC had to show that it no longer had market power according to the test?


4735             MR. WEISMAN:  I believe, to be precise, it could not have market power above residual levels.

4736             MR. JANIGAN:  And you disagree with that test for market power?

4737             MR. WEISMAN:  Yes.  The 25 percent market share test, particularly in regulated industries, is recognized by the courts and by the economics literature that market share is not a reliable indicator of market power under those conditions.  In fact, it is regulation itself that can be largely responsible for that high market share.

4738             In a number of jurisdictions, including other jurisdictions that practice a test similar to TELUS' competitive presence test, market share does not enter in whatsoever.

4739             MR. JANIGAN:  If you agreed with the Commission's decision on market power, you couldn't support the competitive presence test that TELUS has proposed?

4740             MR. WEISMAN:  I don't necessarily agree with that.


4741             MR. JANIGAN:  All right.  Well, assuming that you agreed, let's say with the Commission, that in the circumstances described by the Commission that TELUS possessed market power but that threshold was far above the threshold of the competitive presence test, therefore you could have circumstances where exchanges met the competitive presence test, but not the market power test, ergo you would have the TELUS possessing market power and at the same time being uncapped with respect to prices.

4742             That would not be a circumstance which would commend itself to you as an economist presumably.

4743             MR. WEISMAN:  Well, I think we are probably talking about this issue, but I believe that the competitive presence test under certain conditions would likely suggest that there is no market power.  To the extent that it does not particularly agree with the Commission's decision, you would reach a different conclusion depending on which test you used.

4744             MR. JANIGAN:  If you used the Commission's decision and used their definition of market power and you looked at the competitive presence test, that would be a circumstance of some worry to anyone who felt that way because you would be leaving effectively the incumbent in a market with uncapped rates and the ability to change prices in a way in which they could profitably do so without burdening their market share.


4745             MR. WEISMAN:  Well, there are a number of consumer safeguards built in even when there is uncapping and there is the 5 percent rate element constraint.

4746             MR. JANIGAN:  Yes.

4747             MR. WEISMAN:  But keep in mind, when that test is passed consumer have three choices.  It is a test that other jurisdictions have used not just for might light‑handed regulation but in fact for forbearance, and in fact TELUS is a multi‑market provider so if it were to consider raising prices for basic service it risks losing other services for which margins may be even higher.

4748             It is those circumstances under which I do not believe that it would necessarily have market power.

4749             MR. JANIGAN:  But if TELUS did have market power and they were left in an uncapped circumstance, such as the competitive presence test proposes, then they could profitably raise prices without having competitive pressure.  That is the definition of market power.


4750             MR. WEISMAN:  Well, by your assumption that TELUS has market power and if you lifted the cap presumably they could exercise that market power.

4751             MR. JANIGAN:  All right.

4752             So effectively in order to accept the TELUS position in this case, you would also have to accept the premise that the Commission's definition of market power in the forbearance decision was wrong?

4753             MR. WEISMAN:  No, I don't agree one follows from the other.

4754             MR. JANIGAN:  All right.  But we have just gone through the example that if we believe that the Commission's decision on market power was correct and we looked at the TELUS competitive presence test, then there would be a situation of some price peril for consumers in the circumstance of uncapping, because TELUS ‑‑ notwithstanding the provisions that you say about the 5 percent limit and all this sort of stuff ‑‑ could raise prices profitably without competitive pressure, competitive sanction?

4755             MR. WEISMAN:  Well, I don't know that it would choose to do that.  There is a competitive presence in the market, customers have three choices.

4756             MR. JANIGAN:  yes.


4757             MR. WEISMAN:  If you tell me by assertion, by assumption, they have market power, presumably they might look at doing that and I told you what would temper that decision, namely loss of other revenues from other services, et cetera.

4758             MR. JANIGAN:  But in theory, in any event, what we would have in this circumstance is that we either would have to believe the Commission's decision as to what constitutes market power, or we wuold have to believe that TELUS really does not have market power in the circumstance of competitive presence and therefore to that extent the Commission's forbearance decision is wrong?

4759             MR. WEISMAN:  Well, I believe what we are doing here is asking when are market forces sufficient to move to more ligh‑handed regulation.  It's not forbearance, it's more light‑handed regulation.  As I have indicated, there are other jurisdictions that if the ILEC passed this test would forebera completely, no upper constraint on Res PES at all.

4760             MR. JANIGAN:  But, Dr. Weisman, what we started off looking at is the forbearance decision essentially determined when or where an ILEC does not possess market power, and in a circumstance when it does not possess market power they would forecear.


4761             If we apply that decision to the TELUS competitiveness test, they applied all the tests, then we wuold say that there are many circumstances where TELUS could meet that test and still have market power.

4762             In thta circumstance ‑‑ and we are agreed that the possession of market power is not a circumstance which is desireable in regulation.  Your position is:  They won't have market power when the competitve presence is applied by TELUS and somebody else's position may be they would have market power by using the Commission's decision.

4763             You can't be both right in that circumstance.

4764             MR. WEISMAN:  Well, I think you are asking me if there can be legitimate differences of opinion regarding what constitutes market power and the conditions under which a firm has it or doesn't.

4765             I will agree with that statement.

4766             MR. JANIGAN:  We have to adhere to your definition of market power rather than the Commission's definition of market power in order to approve the competitive presence test?

4767             MR. WEISMAN:  No, I don't believe that to be true, because we are not asking for forbearance.  We are asking for more light‑handed regulation.


4768             MR. JANIGAN:  Well, let's say we have to adhere to your definition of market power not the Commission's in circumstances where we wish to allow the company the ability to raise prices and exercise market power within their individual exchanges?

4769             MR. WEISMAN:  I don't think I understand your question.

4770             MR. JANIGAN:  Well, we are going round and round the issue of ‑‑

4771             THE CHAIRPERSON:  We are indeed going round and round, Mr. Janigan.  So if you can advance the ball down the field, great, but I think that the difference of opinion is clear.

4772             MR. JANIGAN:  All right.

4773             Mr. Chair, I will push on.

‑‑‑ Pause

4774             MR. JANIGAN:  Dr. Weisman, you note on page 22, footnote 46, that the term "pure price cap regulation" is sometimes used to refer to price cap regimes in which there is no ex post facto:

"... ex post sharing of earnings with consumers.  Except where otherwise noted, the terms 'PCR' and 'pure PCR' are used interchangably."


4775             Does the current price cap plan for Canadian ILECs require any ex post sharing?

4776             MR. WEISMAN:  The current plan does not incorporate an earnings sharing regime and price caps in Canada has never incorporated earnings sharing.

4777             MR. JANIGAN:  In your opinion, then, is the current price cap plan for Canadian ILECs a high powered regulatory regime?

4778             MR. WEISMAN:  Generally that would be true if there were no earning sharing and the performance of the firm were not a basis for reevaluating the terms of the X factor.  To the extent that is true, it would be a pure price cap plan.

4779             MR. JANIGAN:  If a price cap plan which you considered high powered is combined with a forbearance mechanism which allows the lifting of pricing constraints where competition has become established, is the result an improvement over a high‑powered price cap regime alone?

4780             MR. WEISMAN:  You are asking whether forbearance is granted?


4781             MR. JANIGAN:  If you have a price cap plan which you consider high powered in your definition, does a high‑powered price cap plan that is combined with a forbearance mechanism result in an improvement over the high‑powered price cap plan?

4782             MR. WEISMAN:  You haven't given me enough information to answer the question.  The term "high powered" in a regulatory regime means that you are severing the relationship between the prices the firm can charge and the costs that it incurs.

4783             MR. JANIGAN:  Okay.  In this case I think we went through what the constituent elements of the Canadian price cap regime is for the ILECs.  I believe you agreed that it was a pure price cap regime and by its nature a high‑powered regime, did you not?

4784             MR. WEISMAN:  That is correct.

4785             MR. JANIGAN:  What I am asking is when you combine a high‑powered regime with the forbearance mechanism, do you have an improvement over the high‑powered price cap?

4786             MR. WEISMAN:  Improvement by what metric, Mr. Janigan?

4787             MR. JANIGAN:  By performance.

4788             MR. WEISMAN:  Whose performance?

4789             MR. JANIGAN:  The economic performance of the price cap in terms of meeting its objectives.

4790             MR. WEISMAN:  You haven't told me what those objectives are.


4791             MR. JANIGAN:  Let's take your principles that you have drawn up or that you have identified for the implementation of a price cap.  Is that an improvement in meeting those principles?

4792             MR. WEISMAN:  To the extent that you forbear and you are deferring to market forces and we believe in general when market forces provide the requisite level of market discipline, they are superior to regulation, it perhaps would be an improvement.  Other than that, I can't answer the question.

4793             MR. JANIGAN:  Okay.  On page 31 and on footnote 74, you note:

"It is instructive to conceive of the regulated firm as being subject to two constraints.  The first constraint is the one imposed by regulation, whether in the form of earnings regulation or price regulation.  The second constraint is the one imposed by market forces.  At any given point in time, it is likely only one of these constraints will be binding upon the regulated firm."  (As read)


4794             As I understand that statement, your comments are made with respect to time.  Is it also possible that a regulated firm could be subject to these constraints being separately binding across market segments, for example business or residential?

4795             MR. WEISMAN:  If your question goes to whether the price cap constraint would be possibly binding in one market and not in the other, that certainly would be possible.

4796             MR. JANIGAN:  And that would also be potentially possible across geographic areas as well, I assume?

4797             MR. WEISMAN:  Yes, I believe that would be possible.

4798             MR. JANIGAN:  I wonder if I could turn to the issue of local discretionary services.  I believe in paragraphs 24 and 25 of your comments there is a discussion of discretionary services.  Is that correct?

4799             MR. WEISMAN:  That is correct.

4800             MR. JANIGAN:  As I understand your position, you do not believe there should be any economic regulation for discretionary services, and I assume what you mean by that are local optional services?


4801             MR. WEISMAN:  Yes.  Regulation should be restricted to essential services provided on a monopoly basis.

4802             MR. JANIGAN:  In your discussion you seem to reference, for example, the study that you did concerning Goobers, the peanut butter and jelly ‑‑ I assume that was your study.  I am sorry, am I mistaken?

4803             MR. WEISMAN:  It was not a study.  It was a classroom observation.

4804             MR. JANIGAN:  Okay.

‑‑‑ Laughter / Rires

4805             MR. JANIGAN:  Does it become a study when you get paid for it?

4806             MR. WEISMAN:  That's a good question.

‑‑‑ Laughter / Rires

4807             MR. JANIGAN:  But in that observation, there was a product, in this case Goobers, and there was also a market for peanut butter and for jelly.  You observed a number of things about it that in part informs your conclusion with respect to the discretionary services.

4808             In the example that you have given, however, all of those components were available separately at stand‑alone rates, I understand?


4809             MR. WEISMAN:  Well, in this example, you could buy the grape jelly and the peanut butter separately and provide the mixing function, if you wanted.

‑‑‑ Laughter / Rires

4810             MR. JANIGAN:  With local optional services, of course, you have to acquire the local primary exchange service in order to get the local optional service.

4811             MR. WEISMAN:  That is correct, and I believed I answered an interrogatory to you to that effect.

4812             MR. JANIGAN:  In that circumstance, particularly if you are living in a district which doesn't have a competitive presence, to use the Telus term, how are you protected against unwarranted increases in, for example, the cost of call display, for example, by the monopoly provider when you can't go out and purchase that service elsewhere?

4813             MR. WEISMAN:  By definition, discretionary services compete for the consumer's discretionary dollars, just like movie theatres and other forms of entertainment.


4814             I live in a relatively small college town.  We have one movie theatre.  That movie theatre competes with other forms of entertainment.  It is not regulated.

4815             MR. JANIGAN:  But is there some other substitute for call display on any of these local optional services that they can purchase in circumstances where there is no competition?

4816             MR. WEISMAN:  It would be up to the Commission to determine whether those were essential services.  Discretionary and optional, I think, are synonymous.  If you were going to follow the regulatory principle that you should only be regulating essential services provided on a monopoly basis, you wouldn't be regulating call display.

4817             MR. JANIGAN:  So, it is based on the view of how important those services are to the customer?  I mean, that is what it comes down to on the bottom line?

4818             MR. WEISMAN:  In some cases, for example, optional services, discretionary services are outside of regulation in many states in the U.S.  In some states you will find that they ruled on this because they were discretionary, and others because they were similar to the competitive offerings of cable companies.  So, it depends on the jurisdiction.


4819             MR. JANIGAN:  Would you describe this as a situation of tied selling, where you have to buy one product in order to get another?

4820             MR. WEISMAN:  I seem to recall this morning that Mr. Schmidt spoke to this issue of technical reason, why the functionality and the switch and providing RES/PES and these optional services had some ‑‑ there was some CRTC regulation that speaks to that.  I am not familiar with it, but I do remember him bringing it up.

4821             MR. JANIGAN:  But the practical aspects of the market that exists that we have described, is that more or less a situation of tied selling?

4822             MR. WEISMAN:  I don't believe so because my understanding is in this situation you physically cannot separate the optional services, discretionary services from the provision of RES/PES.  So, it is not a decision on the part of the firm.  It is a technological barrier.

4823             MR. JANIGAN:  Dr. Weisman, on page 10, footnote 14, you give a number of examples.  You indicate:


"There are a number of examples in which essential services are provided through competitive markets.  These include food, housing, transportation, education and, in some cases, medical care."  (As read)

4824             When you made this statement, were you thinking of the experience in the United States or the experience in Canada?

4825             MR. WEISMAN:  I am familiar that some of these services are provided on a competitive basis in Canada, and I believe all of these services are provided on a competitive basis in the U.S.

4826             MR. JANIGAN:  Is it your opinion that the market for medical care in the United States operates without government involvement?

4827             MR. RYAN:  Mr. Chairman, I am not sure that that is a useful question to be putting to this witness in the context of the issues that we are concerned with in this hearing.

4828             THE CHAIRPERSON:  Yes, Mr. Janigan, I confess to some sympathy with counsel's point.  Where are we going here?  Are we still on discretionary services and tied selling or are we on to something else?


4829             MR. JANIGAN:  No, we are on to something else.  We are dealing with an issue associated with competition and the regulation of essential services.  It is a collateral point and can possibly be made in argument, if you don't wish to explore it in cross‑examination.

4830             THE CHAIRPERSON:  I guess my thought is that we have an expert witness who comes prepared to address the specific arguments that he has made in writing and the interrogatories that he has answered on behalf of his client.  I think within the boundaries of that material, anything goes.

4831             But I do think that the generality of some of the questions is a little unfair.  It probably should have been posed, some of them, to the marketing panel, or to the more appropriate respondent.

4832             In any event, I would ask you to try to ensure that we collectively understand the purpose of going beyond the bounds of the document in front of us.

4833             MR. JANIGAN:  I don't think I was going beyond the bounds of the document.

4834             THE CHAIRPERSON:  Fair enough.  Just please help us to understand what the point is, that is all.


4835             MR. JANIGAN:  Okay.  Dr. Weisman, effectively, however, in each of these markets there is a considerable government role and considerable government regulations that deal with delivery of each of these products to the American public?  Not to belabour the point, but there are programs, for example, in the food market regarding the regulation of the production and sale of food products, the delivery of food stamps.  There is a whole variety of different and intersecting regulatory regimes that involve each of these essential services that are not delivered in what would ordinarily be described as a pure competitive market?

4836             MR. WEISMAN:  I didn't say they were provided in a pure competitive market, and I don't believe that my statement goes beyond economic regulation.

4837             So, when I go into a grocery store in the U.S., I don't see regulated prices.

4838             MR. JANIGAN:  I would like to have you take a look at Consumer Groups interrogatory 46D ‑‑ the response, I should say, to Consumer Groups interrogatory 46D.

4839             MR. WEISMAN:  Mr. Janigan, could you give me that number again, please?

4840             MR. JANIGAN:  Sure.  It is Consumer Groups interrogatory 46.

4841             MR. WEISMAN:  Okay.  And which part?


4842             MR. JANIGAN:  D.

4843             MR. WEISMAN:  Okay.

4844             MR. JANIGAN:  It is indicated:


"It is reasonable to believe that the ILECs cost function is not separable between retail and wholesale services.  Consequently, technology‑sharing obligations may serve to dampen but not necessarily eliminate the incentives for the regulated firm to innovate in order to discover efficiency improvements.  Its incentives to innovate are likely to be adversely affected.  As a result, it may not be possible to separate efficiency improvements for wholesale services from efficiency improvements for retail services.  In other words, technology‑sharing obligations hold out the prospect of dampening incentives for cross‑reduced innovation across the board."  (As read)

4845             In this section, you have indicated that ‑‑

4846             MR. WEISMAN:  What section are we talking about, the interrogatory?

4847             MR. JANIGAN:  Yes, in section D.  That in fact it may be difficult in the ILEC cost section to separate between retail and wholesale services.  Am I correct on that?

4848             MR. WEISMAN:  Yes.

4849             MR. JANIGAN:  If I could follow up with your response to Consumer Groups interrog 39.  In that response you provide an example regarding the pricing possibilities for inputs which are sold to competitors, are you not?

4850             MR. WEISMAN:  Yes.

4851             MR. JANIGAN:  Would you agree with me that your example indicates that if a regulator were to set prices for services sold to competitors at a price of zero, then there would be a lot of competition, but the competition that resulted would be an artificial competition?


4852             MR. WEISMAN:  My point is to the extent that those rates for competitor services were set below compensatory levels, I would say there would be an artificial level of competition, at least potentially.

4853             MR. JANIGAN:  While it is true that the regulator could set these competitor prices at zero, it is also possible for the regulator to set them at a non‑zero price, I assume?

4854             MR. WEISMAN:  Yes.

4855             MR. JANIGAN:  Is it possible that you could have an economically efficient price for services sold to competitors?

4856             MR. WEISMAN:  Is it possible you could have an economically efficient price?

4857             MR. JANIGAN:  Yes.

4858             MR. WEISMAN:  Yes.

4859             MR. JANIGAN:  Does an economically efficient price for services sold to competitors include the opportunity to compensate shareholders with a reasonable return on their investments?

4860             MR. WEISMAN:  If you are talking about a phase 2 cost study, there would be some return in that phase 2 cost study.  You might want to direct that to Mr. Bernstein, but I believe that would be the case.


4861             MR. JANIGAN:  Do you have anything to add on that, Dr. Bernstein?

4862             MR. BERNSTEIN:  No, I agree.

4863             MR. JANIGAN:  Dr. Weisman, in your opinion is it possible for rates for interconnection and unbundled network elements to be set at compensatory levels without the recovery of historical costs?

4864             MR. WEISMAN:  That is not an issue that I have looked at.

4865             MR. JANIGAN:  In your opinion, and once again this may not be an issue that you have looked at, do competitive markets always allow the ability to recover their historical costs?

4866             MR. WEISMAN:  In general, a competitive market is characterized by the absence of such guarantees.

4867             MR. JANIGAN:  Dr. Weisman, do you have an opinion as to whether or not the rates for interconnection and unbundled network elements in Canada are currently set at compensatory levels?

4868             MR. WEISMAN:  I have had many discussions with Mr. Grieve on this issue.

‑‑‑ Laughter / Rires


4869             MR. WEISMAN:  I certainly know his view and I have read the TPR.  As I indicated in telecom policy report, and as I indicated in my interrogatory responses, there is at least enough concern to justify a serious review.  I believe the TPR indicates that such a review is long overdue.

4870             MR. JANIGAN:  But you wouldn't advance an opinion other than there should be a review?

4871             MR. WEISMAN:  I have not looked at that issue closely.

4872             MR. JANIGAN:  Dr. Weisman, are you aware of the number of unbundled network elements that are sold by Telus or any Canadian ILEC?

4873             MR. WEISMAN:  No, I am not.

4874             MR. JANIGAN:  With respect to paragraph 12 of Appendix A, there you mention an ever‑increasing array of technological platforms in describing the multi‑front assault on incumbent providers.  In your opinion, from the point of view of incumbents, is this the source of competition which is of the most concern?

4875             MR. WEISMAN:  You said "a source" and this refers to a multi‑front assault.  So, which one do you mean?


4876             MR. JANIGAN:  For example, is the ever‑increasing array of technological platforms inclusive of competition from unbundled network elements in your view?

4877             MR. WEISMAN:  In some circles that would be characterized as a different platform, along with wireless and cable VOIP.

4878             MR. JANIGAN:  In principle 5 of your material, you indicate that:

"Economic regulation should not serve to preclude the regulated firm from a fair opportunity to recover its not imprudently incurred costs."  (As read)

4879             Now I assume that this means that economic regulation should allow the regulated firm a fair opportunity to recover its prudently incurred costs.

4880             DR. WEISMAN:  Fair opportunity to recover its not imprudently incurred costs.

4881             MR. JANIGAN:  Okay.  But is "not imprudent" and "prudent" not the same thing?

4882             DR. WEISMAN:  No, they are not.

4883             MR. JANIGAN:  Could you explain the difference?


4884             DR. WEISMAN:  Yes.  This actually derives from a conversation with Fred Kahn, who was reviewing one of my papers, and I had used the term, Mr. Janigan, "prudently incurred costs", and he reminded me, citing the page number in his book, that the firm has superior information than the regulator, and the burden of proof should rightfully be placed on the regulator for determining that there was some degree of imprudence, rather than on the firm for indicating that prudence was, in fact, characterizing their investment decisions.

4885             MR. JANIGAN:  Okay.  On page 25, at paragraph 58 ‑‑

4886             COMMISSIONER LANGFORD:  You don't have a tape recording of that conversation, do you, Dr. Weisman?

‑‑‑ Laughter / Rires

4887             COMMISSIONER LANGFORD:  I would really love to hear it.

4888             DR. WEISMAN:  I will be glad to give you his phone number.

4889             MR. JANIGAN:  You discuss price cap regulation and the potential for financial losses ‑‑

4890             DR. WEISMAN:  Excuse me, Mr. Janigan, what paragraph?

4891             MR. JANIGAN:  I'm sorry; page 25, paragraph 58.

4892             DR. WEISMAN:  I have it.  Thank you.


4893             MR. JANIGAN:  With regard to financial losses, you seem to indicate that these could arise due to vigorous competition.

4894             DR. WEISMAN:  Certainly that is possible.

4895             MR. JANIGAN:  You also indicate that these could arise due to excessively liberal competitive entry policies.

4896             DR. WEISMAN:  The excessively liberal competitive entry policies would likely give rise to excessive competition, which could lead to financial losses.

4897             MR. JANIGAN:  Could financial losses also arise due to mismanagement?

4898             DR. WEISMAN:  Yes.

4899             MR. JANIGAN:  Earlier we determined that there may, in theory at least, be an economically efficient interconnection and unbundled network elements price level.

4900             Do you remember that?

4901             DR. WEISMAN:  Yes.


4902             MR. JANIGAN:  Let's suppose for a moment that the prices are set at this level, and suppose that the firm is, in fact, inept and that mismanagement occurs.  Is it possible that the management of the regulated firm could blame its financial problems on the artifacts of the regulatory regime, such as the prices being set for the unbundled network elements, rather than accepting responsibility for its shortcomings?

4903             DR. WEISMAN:  I suppose that's possible.  The idea behind price cap regulation as a superior regulatory regime is to sever the link between the firm's costs and the actual prices that it can charge.

4904             So, as a general principle, the regulated firm would have no recourse to the regulator in the event of poor financial conditions, unless it could credibly be established that the regulator was somehow culpable in that reality.

4905             MR. JANIGAN:  Are you suggesting that the reasonable opportunity to recover not imprudently incurred costs would allow the pass‑through of the regulated firm's cost changes in the form of rate changes?

4906             DR. WEISMAN:  I am not making any statement to that effect.

4907             MR. JANIGAN:  Okay.


4908             DR. WEISMAN:  Mr. Janigan, this is an important point, and it came up this morning in cross with Mr. Inlow and Mr. Grieve.

4909             The reason this principle is in there is that, when price caps was first developed, we looked at it as primarily a retail phenomenon.  The wholesale part of it developed later.  What became clear ‑‑ and I talk about this in my statement ‑‑ is that, because we are severing the link between the regulated firm's costs and the prices it can charge, it can sometimes provide the regulators will full insurance against excessive entry.

4910             I will give you a case in point.

4911             In Texas, when the 1996 Telecom Act was being implemented at the state level, regulators in Texas actually looked at the level of competition in the market and observed that perhaps they should lower their equivalent of competitor service prices because competition was not materializing fast enough, and they noted on the record that if they did that Southwestern Bell had no recourse to come into the Commission because it was under price caps.

4912             Now, in my opinion, that constitutes bad faith regulation.  So that's where that comes from.

4913             MR. JANIGAN:  Is it your testimony here today that the scenario that you have described is the case for TELUS or any other Canadian ILEC?


4914             DR. WEISMAN:  That is not an issue that I have looked at with respect to the Canadian ILECs.  I am merely pointing out the possibility.

4915             MR. JANIGAN:  You indicate, regarding the separability of the cost function ‑‑ and we dealt with this earlier under Interrogatory 46(d) of the Consumer Groups ‑‑ that it is reasonable to believe that the ILEC's cost function is not separable between retail and wholesale services.

4916             If the cost function between an ILEC's retail and wholesale operations is not separable, as you claim, then isn't it also impossible to separate out the impact of wholesale and retail costs on the overall profitability of the firm?

4917             DR. WEISMAN:  You would have common costs, which would be the source of the lack of separability, and then you would have costs that would be attributable to each of the services individually.

4918             MR. JANIGAN:  What is the test that you propose in the circumstances that you described earlier that may exist in American jurisdictions, where the regulated firm has been precluded from a fair opportunity to recover its non‑imprudently incurred costs?


4919             What kind of test would we administer in order to determine that?

4920             DR. WEISMAN:  I don't know of any examples in the States, but I believe what could be shown, for example, is whether Phase 2 costs were compensatory.

4921             It is my understanding that those Phase 2 costs are supposed to reflect the actual costs of the firm, and not some ideally efficient level of costs.

4922             So that might be demonstrated.

4923             MR. JANIGAN:  Even with the difficulty in separating out retail and wholesale operations, could you still make that distinction?

4924             DR. WEISMAN:  Phase 2 costs are long‑run incremental costs, so you would be looking at the marginal impact.

4925             MR. JANIGAN:  I want to deal briefly with the price cap formula.  As I understand it, you are not proposing an X factor per se, but simply, where services are capped, rates, on average, wouldn't be allowed to increase.

4926             DR. WEISMAN:  There would be an implicit X factor that would essentially equal the rate of inflation, but no explicit X factor is being proposed.


4927             MR. JANIGAN:  I understand from the material that you have done some calculations of what an appropriate X factor might be ‑‑ I guess both you and Dr. Bernstein.

4928             DR. WEISMAN:  That would be Dr. Bernstein.

4929             MR. JANIGAN:  Dr. Bernstein, you have looked at residential primary exchange service and attempted a calculation of an appropriate X factor, which also takes into consideration the line loss factor, which we were advised of earlier in the Bell evidence.

4930             DR. BERNSTEIN:  That is generally correct.

4931             What we did was, we looked at the Phase 2 unit cost trend over time to get at a rate of change of Phase 2 costs, and then, using the marginal cost guideline that I developed in Price Caps 2, used that formula to get an X factor for res PES services.

4932             MR. JANIGAN:  As I understand it, you didn't look at or consider all of the outputs that may have been generated through the use of PES, but looked simply at the PES operation or function itself in determining that particular X factor.


4933             DR. BERNSTEIN:  We looked at all the causally related costs that determined the incremental cost in providing res PES services.

4934             MR. JANIGAN:  But in terms of the outputs that were facilitated by the use of PES, including things like DSL, for example, those kinds of outputs are not included in your analysis.

4935             Whether or not they should be is another question, but for the purpose of understanding your analysis, I assume that those kinds of outputs which are manifest in services that are not regulated under TELUS were not considered.

4936             DR. BERNSTEIN:  We divided the effects of unit cost changes into essentially four categories.

4937             The first category would be the effect of changes in input prices on incremental cost.

4938             The second category would be the effect of technological variables or technological change on Phase 2 costs.

4939             The third and fourth categories were unit cost changes due to volume effects, that is volume effects due to the cost drivers of Res PES themselves, essentially NAS or distribution occupancy, and other cost drivers that we didn't identify specifically.


4940             MR. JANIGAN:  But I take it the unit costs or the closed box, as it were, was the Res PES service.  We didn't go outside of that to look at, for example, the effect of Res PES on outputs in other aspects of the TELUS operation?

4941             DR. BERNSTEIN:  No we looked at all the costs related to Res PES, not going from Res PES to other services.

4942