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Afin de rencontrer certaines des exigences de cette loi, les procès-verbaux du Conseil seront dorénavant bilingues en ce qui a trait à la page couverture, la liste des membres et du personnel du CRTC participant à l'audience et la table des matières.
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 16, 2006
Le 16 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 16, 2006
Le 16 octobre 2006
- iv -
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
AFFIRMED:
TREVOR ROYCROFT
1148 / 7825
Cross-examination by The Companies
1149 / 7837
Cross-examination by MTS Allstream
1318 / 9061
Cross-examination by BCOAPO
1341 / 9265
AFFIRMED:
GREG MATWICHUK
1373 / 9440
Examination-in-chief by The City of
Calgary 1373
/ 9440
Cross-examination by The Consumer Groups
1374 / 9450
- v -
EXHIBITS / PIÈCES JUSTICATIVES
No.
PAGE / PARA
CONSUMER Table 6 -
(corrected) of the
GROUPS‑2 summary of DSL
impact on
TFP Growth
1146 / 7800
CONSUMER Amended
p. 69 of the
GROUPS‑3 testimony of
Trevor R. Roycroft
on behalf of the Consumer
Groups 1146 /
7801
THE
Dr. Roycroft's recommendations
COMPANIES‑11 for calculating the x-factor
source: table 8 p. 58 of
Dr. Roycroft's testimony
1172 / 8015
THE
Dr. Roycroft's Rebuttal
COMPANIES‑12 Testimony before the Indiana
Utility Regulatory Commission
- Cause No. 42405, 13 January
2004 1179 / 8065
THE
The IPD Trend
COMPANIES‑13 Source: p. 27 of
Dr. Roycroft's testimony
1190 / 8156
THE
The IPD - Labour component 1206
/ 8280
COMPANIES‑14
MTS
International Journal of
ALLSTREAM‑4 Development Planning Literature
Vol. 16 Numbers 1 & 2
1319 / 9068
TELUS‑13 Decision dated
August 24, 2006
before the Public Utilities
Commission of the State of
California
1383 / 9514
TELUS‑14 Pages 90, 91 and
92 of
Telecom Decision CRTC‑2002‑34 1383 /
9514
TELUS‑15 Economic and
financial indicators
from the Economist dated
Sept. 16, 2006
1383 / 9514
- vi -
UNDERTAKINGS / ENGAGEMENTS
No.
PAGE / PARA
MTS
Dr. Roycroft to verify whether
ALLSTREAM‑1 the Average Impact of DSL on
TFP Growth (2000-2003) of
0.57% reflects an overall
weighted average over the
four‑year period or whether
it reflects an average
annual impact
1340 / 9255
THE
Dr. Roycroft is requested
COMPANIES‑3 to replace Dr. Roycroft's DSL
input data with the data
provided by The Companies in
The Companies' exhibit #2
(capital and expense) to
verify the results shown
in The Companies Exhibit #2 1381 /
9496
- vii -
ERRATA
Transcript: October 13, 2006
PAGE / PARA. DESCRIPTION
956 / 6460 "MR. LAWFORD:" should read
"MR. DANIELS:"
956 / 6462 "MR. LAWFORD:" should read
"MR. DANIELS:"
956 / 6464 "MR. LAWFORD:" should read
"MR. DANIELS:"
956 / 6466 "MR. LAWFORD:" should read
"MR. DANIELS:"
Transcript: October 16, 2006
The proper description for Undertaking No. The
Companies‑3 is found at page 1381, paragraph 9496:
"Dr. Roycroft is requested to replace Dr.
Roycroft's DSL input data with the data provided by The Companies in The
Companies' exhibit #2 (capital and expense) to verify the results shown in The
Companies Exhibit #2"
Gatineau, Quebec / Gatineau, Québec
‑‑‑ Upon resuming on Monday, October 16,
2006
at 0859 / L'audience reprend
le lundi
16 octobre 2006 à
0859
7773
LE PRÉSIDENT: À l'ordre,
s'il vous plaît.
7774
Madame la secrétaire...?
7775
THE SECRETARY: Good morning,
everybody.
7776
We will start the week with the witness on behalf of the Consumer Groups,
Dr. Roycroft.
7777
Mr. Janigan, if you want to present your witness.
7778
MR. JANIGAN: Thank you very
much, Madam Secretary.
7779
Mr. Chair, Dr. Roycroft is seated at the witness panel. Assisting him will, of course, be
Mr. Lawford.
7780
MR. JANIGAN: Dr. Roycroft,
are your qualifications correctly set out in the appendix to your testimony of
July 10, 2006?
7781
DR. ROYCROFT: Yes, they
are.
7782
MR. JANIGAN: With respect to
the evidence entitled "Testimony of Dr. Trevor R. Roycroft on behalf of Consumer
Groups, July 10, 2006", did you prepare this evidence and does this evidence
fairly reflect statements that are true to the best of your knowledge and
belief?
7783
DR. ROYCROFT: Yes, it
does.
7784
MR. JANIGAN: Did you also
prepare or review and supervise the preparation of the interrogatory responses
to your questions based on your evidence from other interested parties in this
proceeding?
7785
DR. ROYCROFT: Yes, those
questions specifically directed at my evidence.
7786
MR. JANIGAN: All
right.
7787
Are those true to the best of your knowledge and
belief?
7788
DR. ROYCROFT:
Yes.
7789
MR. JANIGAN: I understand
that there are some corrections to your evidence that we would like to put on
the record today and that the corrections have been put in the form of amended
pages to your testimony?
7790
DR. ROYCROFT: That is
correct.
7791
MR. JANIGAN: These sheets
have been given to the Hearing Secretary, as I
understand.
7792
I wonder if we could deal first with the two‑page sheet with
Table 6 at the top of the page.
7793
What corrections are involved in this?
7794
DR. ROYCROFT: The corrected
sheets replace values, specifically values that are in the third column of Table
6, which reflect calculations that I made on the average impact of DSL lines on
total factor productivity growth.
7795
In the course of responding to discovery, I uncovered an error within one
of the spreadsheets that led to a slight difference in the calculation outcome
and have replaced the original values in Table 6 with the corrected
values.
7796
That correction also caused Table 7 to require an update and the
values and discussion associated with Table 7 have been updated to reflect
the correction.
7797
MR. JANIGAN: Mr. Chair, I
don't know whether or not the correction itself should be marked as an
exhibit.
7798
THE CHAIRPERSON: Neither do
I.
7799
MR. JANIGAN: Perhaps we
will, just to make sure that it is on the
record.
7800
THE SECRETARY: For the
record, the two exhibits that were filed before the Commission, "Table 6,
Summary of DSL Impact on TFP Growth" is Consumer Groups Exhibit No.
2.
EXHIBIT NO.
CONSUMER GROUPS‑2:
Table 6 - (corrected) of the summary of DSL impact on TFP
Growth
7801
THE SECRETARY: The "Amended
Telecom Public Notice CRTC 2006‑5" is Consumer Group Exhibit
No. 3.
EXHIBIT NO.
CONSUMER GROUPS‑3: Amended
p. 69 of the testimony of Trevor R. Roycroft, on behalf of the Consumer
Groups
7802
MR. JANIGAN: I wonder if you
could deal with the single page correction,
Dr. Roycroft.
7803
DR. ROYCROFT: Yes. That page is page 69, which is the
very last page of the testimony.
7804
Once again, when responding to discovery I uncovered an error with regard
to the description of how I estimated dial equipment minutes associated with the
productivity studies that I undertook and have created a replacement page that
restates the estimation method.
7805
MR. JANIGAN: Thank
you.
7806
That page is marked as Exhibit No. ...?
7807
THE CHAIRPERSON:
Three.
7808
MR. JANIGAN: Three, thank
you.
7809
THE CHAIRPERSON:
Mr. Janigan, could I ask your indulgence, just to be sure I have
this right.
7810
Does the page being replaced begin with the words "data on local and
interstate toll"?
7811
MR. JANIGAN: You are
referring to Exhibit No. 3?
7812
THE CHAIRPERSON: Yes. I am just trying to figure out what it
replaces. I think my colleague has
just ‑‑ I'm still a little confused.
7813
Does the first sentence of the original last page remain or does the
entire last page get replaced by this Exhibit 3?
7814
DR. ROYCROFT: The entire
last page is replaced.
7815
THE CHAIRPERSON: So the
sentence that says:
"Data on local and interstate toll
dial equipment minutes is available from FCC monitoring report for the years
1985‑2000."
7816
That is gone as well?
7817
DR. ROYCROFT:
Yes.
7818
THE CHAIRPERSON: Thank you
very much.
7819
Sorry to interrupt.
7820
MR. JANIGAN: That's
okay.
Thank you.
7821
Subject to these corrections, then, your evidence is true to the best of
your knowledge and belief?
7822
DR. ROYCROFT: Yes, it
is.
7823
MR. JANIGAN: Thank
you.
7824
Mr. Chairman, Dr. Roycroft is available for
examination.
7825
THE SECRETARY: Before we do
so, I would like to affirm our witness, please.
AFFIRMED:
TREVOR ROYCROFT
7826
THE SECRETARY: Thank you
very much.
7827
I now invite counsel Denis to proceed on behalf of The
Companies.
7828
MR. HENRY: We are on a
first‑name basis.
7829
THE CHAIRPERSON: You are a
regular.
‑‑‑ Laughter / Rires
‑‑‑ Pause
7830
THE CHAIRPERSON: Counsel
Denis, would you, for the benefit of the webcast audience, introduce yourself
and your colleagues?
‑‑‑ Laughter / Rires
7831
MR. HENRY: I will, for all
those in webcast land particularly.
7832
I am Denis Henry, representing Bell Canada and Saskatchewan
Telecommunications and Bell Aliant this morning.
7833
With me, on my left is Dr. Patrick Owens of Bell
Canada.
7834
On my right I am assisted by Dr. Hariton. I must say, Mr. Chairman, I think I
am actually justified this morning in calling him Doctor, because I have a
feeling before I'm through here this morning I am going to need to rely on his
Ph.D. in Mathematics.
7835
THE CHAIRPERSON: That is not
good news, Mr. Henry.
‑‑‑ Laughter / Rires
7836
MR. HENRY: It was kind of
meant to be a warning.
‑‑‑ Laughter / Rires
CROSS‑EXAMINATION /
CONTRE‑INTERROGATOIRE
7837
MR. HENRY: Good morning,
Dr. Roycroft.
7838
DR. ROYCROFT: Good
morning.
7839
MR. HENRY: I would like to
start with some questions of clarification on one aspect of your evidence that I
have to say we remain somewhat unclear on.
7840
Before I do that, let me just recap the essential
elements.
7841
You were proposing an I‑X formula, an "X" of 6 percent and a price
cap period of four years.
7842
Is that correct?
7843
DR. ROYCROFT: That is
correct.
7844
MR. HENRY: The part I'm
unclear about is the effect of forbearance, because you do talk about it in your
evidence. What happens when areas
are forborne pursuant to the Commission's forbearance decision and the effect of
that on price cap. I wanted to just
explore that with you.
7845
Under today's regime, could you confirm that when services are forborne
their revenues and demand are removed from the price cap
indices?
7846
DR. ROYCROFT: That is
correct.
7847
MR. HENRY: As I understand
it, you recommend what you call a "hold harmless" provision. That would keep PES, primary exchange
service, within the price cap framework following a forbearance
grant?
7848
DR. ROYCROFT: Yes, it would
keep it within the framework, also recognizing that the Commission has assigned
a special status to primary exchange service within forbearance areas with
regard to a ceiling requirement associated with the
service.
7849
MR. HENRY: That would be for
a period of five years after the grant of forbearance?
7850
DR. ROYCROFT: The hold
harmless provision?
7851
MR. HENRY: Right.
7852
DR. ROYCROFT:
Yes.
7853
MR. HENRY: Does that mean
that price changes for primary exchange service in forborne areas would need to
comply with the price cap constraints for that five‑year
period?
7854
DR. ROYCROFT: It would mean
that they would be counted within the calculation of the actual price indices
that are used to check compliance for the overall price
cap.
7855
Within the forbearance area the primary exchange service is under an
alternative constraint as defined by the Commission in the final order
2006‑15.
7856
MR. HENRY: But does it mean
that the revenues subject to the I‑X formula would include the forborne
revenues?
7857
DR. ROYCROFT: The
recommendation that I make is that the primary exchange service quantities
remain in place within the calculation of the actual price index, and the
corresponding prices charged for primary exchange service would presumably be
used in that calculation as well.
7858
When you speak to revenues, I would then surmise that the impact of
evaluating both the quantities and the prices would then feed revenues into the
equation.
7859
MR. HENRY: Yes, because
demand times price equals revenues.
7860
DR. ROYCROFT:
Yes.
7861
MR. HENRY: Let me give you
an example.
7862
If I had a million dollars in revenue that was forborne and inflation
were at 2 percent and your X was 6 percent, then do I have to reduce my revenues
attributable to those revenues by $40,000?
7863
DR. ROYCROFT: I'm
sorry. Could you give me those
values again.
7864
MR. HENRY: A million dollars
in revenue in a forborne area and ‑‑
7865
DR. ROYCROFT: This is $1
million in primary exchange service rates.
7866
MR. HENRY: Right. And I‑X is 4 percent; I is 2 and X
is 6.
7867
Then do I have to apply the I‑X to the million dollars, which would
result in a $40,000 revenue bogey that I would have to shed to meet the price
cap?
7868
DR. ROYCROFT: I don't think
that you would from the standpoint that the impact within the overall basket
coming under the compliance would give you the ability to decide where you would
be reducing those revenues to come into compliance under the
cap.
7869
MR. HENRY: But don't I have
to apply my demand from the forborne revenues to the price to calculate the
index?
7870
DR. ROYCROFT: It seems that
you are assuming that the cap is being applied directly to the forborne area as
opposed to a broader basket, as it is today, with regard to covering the overall
set of primary exchange service offerings across rate
bands.
7871
That does not imply that you must reduce rates within each rate band
area. You have a degree of
flexibility.
7872
MR. HENRY: I'm still
confused.
7873
Could you turn perhaps to Interrogatory Consumer Groups‑The Companies 8
August, No. 11. And I think it is
at page 16 of the pile you gave us.
7874
Do you have that?
7875
DR. ROYCROFT: Yes, I
do.
7876
MR. HENRY: It is the (b)
part of the question I'm interested in.
It is on page 17.
7877
Do you see that?
7878
The question starts with "If residential stand‑alone
PES".
7879
Do you see that?
7880
DR. ROYCROFT:
Yes.
7881
MR. HENRY: Okay. Let me just read the
question:
"If residential stand‑alone PES in
forborne areas were to remain within the existing price cap framework following
a forbearance grant, as Dr. Roycroft suggests, would Dr. Roycroft advocate that
these PES be included in the calculation of the actual pricing index such that a
decrease in the rate for these PES would impact the calculation of this
index?"
7882
And your answer was a simple "yes".
7883
DR. ROYCROFT:
Yes.
7884
MR. HENRY: Which led me to
believe that the revenues were part of ‑‑
7885
DR. ROYCROFT: The question
that is posed here is different than the question you were asking just now, in
that this implies a price adjustment made at the company's discretion within the
forbearance area, which would then feed into the calculation of the actual price
index.
7886
Within the context of this question, that price reduction would then
allow the company to have higher offsetting price increases within the overall
cap from the standpoint that the revenues are going down within the basket
associated with the prices in the forbearance area.
7887
MR. HENRY: Let me understand
then.
7888
If the ILEC responds to competition in the forborne areas, which I think
you say is more likely because those would be the ones that were more
competitive by reducing prices, and leaves prices untouched in the non‑forborne
areas, your proposal would create head room in the non‑forborne areas to raise
rates.
7889
DR. ROYCROFT: That is what
the proposal does, yes. It
continues to treat the primary exchange service within the forborne areas as if
it was in the overall basket.
7890
MR. HENRY: So wouldn't this
allow prices to be higher in the non‑forborne areas than they would with the
current system where you remove the revenues?
7891
DR. ROYCROFT: Well, given
the structure of the actual price index, I don't know the exact answer to that
question from the standpoint if you remove primary exchange service from the
actual price index, as I have indicated through an example in my testimony,
there may be an impact on the overall compliance level implied by the actual
price index.
7892
The approach that I'm suggesting here holds harmless both sides of the
equation from the standpoint that it prevents an adjustment resulting from an
artifact of the actual price index either harming consumers or affecting the
company.
7893
MR. HENRY: I would suggest
that an artifact from your proposal would be that as prices fall in the forborne
areas, it would give you head room and allow you to increases prices which you
otherwise wouldn't be allowed to do in today's system in the non‑forborne
areas.
7894
I think we agreed on that.
7895
DR. ROYCROFT: That is
correct.
7896
MR. HENRY: By the way,
another curiosity. I notice that
you say that this treatment of leaving these PES demand from the forborne areas
in for five years after a grant of forbearance ‑‑ how would that
work?
7897
You have a four‑year price cap period. So if in year four, 2010 were forborne,
you still carry on for five years to 2015 counting these PES demand in the
forborne areas?
7898
I don't follow that.
7899
DR. ROYCROFT: I think I'm
proposing that the application of the hold harmless apply for a five‑year
period.
7900
MR. HENRY: Your price cap
period is four years. So even if
everything were forborne on day one, you would continue this beyond the end of
the four‑year price cap period.
7901
DR. ROYCROFT:
Yes.
7902
MR. HENRY:
Okay.
7903
I want to understand a little bit better your perception of the context
within which you made your proposal.
I take it your proposal is based in large measure on your view that
competition falls short of the level necessary to discipline
prices.
7904
DR. ROYCROFT: That is
correct.
7905
MR. HENRY: In fact, you say
that there is generally little evidence of entry in Canadian residential
markets.
7906
DR. ROYCROFT: That is my
testimony.
7907
MR. HENRY: I take it you did
not see competition progressing sufficiently during the next price cap period to
warrant removal of your I‑X price cap formula.
7908
DR. ROYCROFT: No, I don't
believe that there is a reasonable expectation that a blanket removal of I‑X
within the next price cap period is a reasonable
expectation.
7909
MR. HENRY: And we are
talking out to 2011.
7910
DR. ROYCROFT:
Yes.
7911
MR. HENRY: You base your
conclusions on the state of competition primarily ‑‑ I know not
exclusively ‑‑ on the documents that you cite of the CRTC's 2005 monitoring
report as well as the forbearance decision?
7912
DR. ROYCROFT: Yes, I used
information contained in those documents, as well as my own expertise and
experience based on observing competition unfold in U.S.
markets.
7913
MR. HENRY: So you would not
be of the view that local competition is more deeply rooted than it was at the
time of the local forbearance decision?
7914
DR. ROYCROFT: The local
forbearance decision of earlier this year?
7915
MR. HENRY:
Yes.
7916
DR. ROYCROFT: When you say
"more deeply rooted", that seems to imply a significant change. There may be marginal changes in the
intervening period but none that would warrant me changing my
perception.
7917
MR. HENRY: And you wouldn't
agree that growth in the residential local VoIP services is resulting in
significantly stronger competition in the local exchange market, more than what
was anticipated at the time of the local forbearance
decision?
7918
DR. ROYCROFT: Local VoIP
being defined as over‑the‑top, VoIP?
7919
MR. HENRY: Yes. Well, either.
7920
DR. ROYCROFT: Well, I view
the ‑‑
7921
MR. HENRY: Significantly
stronger competition than the local exchange market as a result of both kinds of
VoIP since the local forbearance decision.
7922
DR. ROYCROFT: No. With regard to over‑the‑top VoIP, I
don't see that technology is providing a reasonable alternative for a broad
section of the marketplace.
7923
With regard to cable VoIP, there is no question that cable companies are
in the process of planning and expanding their service offerings based on the
evidence that I've reviewed.
7924
Whether it's reasonable to expect that those cable service offerings will
be an alternative for a broad section of the market is not a reasonable
expectation at this point.
7925
MR. HENRY: Are you aware
that the Commission is now re‑examining its local forbearance decision and, in
fact, the two propositions I've put to you are exactly the Commission's words,
that competition is more deeply routed than it was at the time as a local
forbearance decision and that local VoIP is resulting in significantly stronger
competition?
7926
I guess you weren't aware of that, you didn't study those
decisions?
7927
DR. ROYCROFT: No, I did
not.
7928
MR. HENRY: Are you aware
that the Government of Canada ‑‑
7929
MR. JANIGAN: Sorry. It would be the notices, right; it
wouldn't be the decisions? You
didn't study those decisions. I
assume that he studied the forbearance decision, but it would be the notices
that you're referencing to?
7930
THE CHAIRMAN: No. There was a VoIP pre‑consideration
decision and there was a public notice, Mr. Janigan, and I think the witness has
said to us that he didn't read either.
7931
MR. JANIGAN:
Sure.
7932
THE CHAIRMAN: I think we all
know what we're talking about specifically here. It's fair enough to add that one of the
quotes may have been from a public notice.
I don't know whether you've got a TELUS counsel?
7933
MR. HENRY: One was from
Decision 2006‑53 and the other one may have been from the public notice,
but ‑‑
7934
THE CHAIRMAN: Fair enough,
but I think the point is that two official Commission documents came out and the
witness hasn't had the opportunity to examine
them.
7935
MR. HENRY: And that the
witness disagrees with the proposition in them. I think he's said
that.
7936
Are you aware that the Government of Canada in its order to the
Commission to reconsider VoIP, its VoIP decision, has stated that VoIP has
transformed the nature and extent of competition in the local
telephony?
7937
DR. ROYCROFT: Your statement
was their order to the Commission to reconsider VoIP. Are you saying they've ordered to the
Commission to reconsider the forbearance order?
7938
MR. HENRY: No, the VoIP
decision.
7939
DR. ROYCROFT:
No.
7940
MR. HENRY: And I take it you
would be ‑‑ you would disagree with that statement?
7941
DR. ROYCROFT: Could you
re‑read the statement?
7942
MR. HENRY: That the
VoIP ‑‑ VoIP has transformed the nature and extent of competition in local telephony.
7943
DR. ROYCROFT: I would agree
that it has the potential to.
Whether it has done that as of today's date, I don't believe it's done
that.
7944
MR. HENRY: Okay. So, you disagree with that
rule.
7945
Let's look forward a bit.
Are you aware of the cable companies projections in this proceeding about
the intensity of competition?
7946
DR. ROYCROFT: Yes, I have
reviewed their statements.
7947
MR. HENRY: And you're aware
that they've said that the intensity of competition in the local residence
market by May 2007 should be sufficient to put pressure down or pressure on ILEC
rates?
7948
DR. ROYCROFT: Well, I
understand their statements, but I also approached my analysis of this market
recognizing that what we wind up with if our alternative is cable is a duopoly
market.
7949
Duopoly markets are not known to perform particularly well with regard to
price reduction outcomes and I don't think that it's a reasonable expectation
that just because you have two firms providing service in the marketplace that
we will have an outcome that is sufficient to discipline market power and that
it's entirely reasonable to expect that the cable companies would like to see
prices go up rather than go down and not necessarily compete in a manner that
will result in a competitive outcome.
7950
MR. HENRY: And this duopoly
that you anticipate excludes VoIP over‑the‑top provider wireless loop
resellers?
7951
DR. ROYCROFT: As I indicated
earlier, the over‑the‑top VoIP alternative is one that is not widely available
for a number of reasons, the first being that consumers have to have a broadband
connection and not all consumers have broadband, not even a majority of
consumers have broadband as of my last look at the statistics for
Canada.
7952
Beyond that, there are a number of limitations associated with
over‑the‑top technology that make it an inferior choice that doesn't necessarily
suggest that it will be capable of replacing voice usage of voice services for a
broad section of the population.
7953
You mentioned wireless. As
well, wireless services have limitations, the first of which being the costs
associated with providing wireless service that also limits their substitute
ability for a broad section of the telecommunications marketplace, especially in
the residential market.
7954
MR. HENRY: Are you aware in
Canada of how many consumers have access to broadband services from
cable?
7955
DR. ROYCROFT: I don't recall
the exact percentage, but I know it is quite high, but access does not
necessarily imply the same constraint as consumption does and the consumer who
does not take broadband will evaluate the purchase price point based on the
expenditures associated with the broadband connection as well as an over‑the‑top
VoIP connection or service if that's what we're talking about and they will
weigh differences in the service quality and other limitations associated with
the VoIP ‑‑ over‑the‑top VoIP as well.
7956
MR. HENRY: In preparing for
this hearing, did you make yourself familiar with any of the projections of any
of the various well‑known Canadian consulting firms in the telecommunication
space as to their projections as to how this will unfold in the next year or two
or three?
7957
DR. ROYCROFT: I may
have. I am not sure of specifically
who you are referring to.
7958
MR. HENRY: Well, people like
M.B.I., Michaelson Associates. Are
you familiar with them?
7959
DR. ROYCROFT: Generally
familiar, yes.
7960
MR. HENRY: Are you aware of
their estimates that are on the record of this proceeding?
7961
DR. ROYCROFT: No, I don't
believe I've seen those, no.
7962
MR. HENRY: How about
Lemay‑Yates?
7963
DR. ROYCROFT: I'm
sorry?
7964
MR. HENRY: Lemay‑Yates, have
you heard of them?
7965
DR. ROYCROFT:
Yes.
7966
MR. HENRY: Are you aware of
their predictions?
7967
DR. ROYCROFT: I may have
seen predictions in the past. If
you're referring to specific predictions that are now in the record in this
proceeding, I don't believe I've seen those.
7968
MR. HENRY: Convergence
Consulting Group?
7969
DR. ROYCROFT: I may
have. I can't say for
sure.
7970
MR. HENRY: I take it you
would disagree. You can accept this
subject to chat, but people like that have projected anywhere from 27 per cent
loss of lines by the ILECS in as early as 2008 and in the case of Lemay‑Yates, I
think it's 40 per cent by 2010, which is still well within your four year price
cap period.
7971
I take it you would disagree with them.
7972
DR. ROYCROFT: I would have
to see their specific recommendations with regard to how they're referring to
lines as to whether they're talking about switched access lines or whether
they're including broadband connections and so forth.
7973
So, I couldn't speak specifically to their
projections.
‑‑‑ Pause / Pause
7974
MR. HENRY: Now, in
discussing the state of competition, you refer to VoIP services and you say that
VoIP does not provide a reasonable substitute for basic telephone service. Correct?
7975
DR. ROYCROFT: Over‑the‑top
VoIP are we talking about at this point?
7976
MR. HENRY: Well, you tell
me.
7977
DR. ROYCROFT: Well, if you
would like to talk about over‑the‑top VoIP first, that is my position,
yes.
7978
MR. HENRY: But it's not your
submission with respect to access dependent VoIP?
7979
DR. ROYCROFT: Such as that
offer by a cable company?
7980
MR. HENRY: Right, that is a
substitute.
7981
DR. ROYCROFT: Yes, it has a
much higher degree of substitute ability, especially if the cable company takes
care to provide functionality such as battery back‑up for the
service.
7982
MR. HENRY: Now, I'll confess
I don't know if this is a fair question to you, so maybe I'll ask and you can
let me know, but I gave some submissions ‑‑
7983
DR. ROYCROFT: Can I do that
for each question?
‑‑‑ Laughter / Rires
7984
MR. HENRY: I gave some
submissions to your counsel of the Consumer Groups on this VoIP issue made over
the last couple years and I have to say I'm a bit confused about the Consumer
Groups position because in the original VoIP proceeding in 2004, they took the
position that VoIP was a substitute for and in the same market as basic
telephone service, and they said that this applies for all
categories.
7985
Then, in 2005, in the local forbearance proceeding, they took the
position that VoIP was not a substitute for residential
PES.
7986
But, then, in June of this year, in the VoIP reconsideration proceeding,
they took the position that VoIP was a substitute and in the same market as res
PES, but then a month later they filed your evidence, which says that VoIP is
not a substitute.
7987
I just wondered if you know whether the position you express in your
evidence, that VoIP is not a substitute, is just your own view, or does it also
represent the views of your client, at least in October?
7988
DR. ROYCROFT: I think I am
best qualified to speak to my own evidence, and to also clarify your statement
with regard to my position on VoIP.
7989
We are talking about over‑the‑top VoIP with regard to the limitations
associated with substitution.
7990
MR. HENRY: Right, and they
were, too, but if you don't want to get into that, that's fine. Perhaps Mr. Janigan and I can deal with
it in argument.
7991
In any event, you would be aware, would you, that the CRTC has found that
VoIP ‑‑ all flavours of VoIP ‑‑ are substitutes for and in the same
market as residential primary exchange service?
7992
DR. ROYCROFT: Given that
finding, I believe it is still reasonable to consider the impact of the various
flavours of VoIP on market power, and that is the key issue here when we are
talking about lifting pricing constraints, in that if we have evidence that
consumers can readily substitute among a number of alternatives that are
approximately comparably priced, then there is a greater chance that market
power will be eroded and that regulation can step aside.
7993
At this point the market share evidence and the technology alternatives
that I am familiar with, based on my evaluation and research for this
proceeding, still point to a high degree of market power, significant
segmentation in markets, based on geography and on customer class
and ‑‑
7994
MR. HENRY: That is not
really my question. My question is,
is it in the same market?
7995
I take it that you say it is not and you disagree with the Commission,
which says that it is.
7996
Is that fair?
7997
It is all right to disagree with the Commission. We have been known to do it from time to
time.
‑‑‑ Laughter /
Rires
7998
DR. ROYCROFT: I think I have
testified several times here already that I don't believe that over‑the‑top VoIP
is in the same market as standard primary exchange
service.
7999
MR. HENRY: That's
fine.
8000
You mentioned wireless.
Again, you also don't think that is a substitute.
8001
DR. ROYCROFT: That is
correct.
8002
MR. HENRY: This is a
position you have taken in the U.S., as well. Correct?
8003
DR. ROYCROFT:
Yes.
8004
MR. HENRY: In fact, you took
that position fairly recently in California, didn't you?
8005
DR. ROYCROFT: Yes, I
did.
8006
MR. HENRY: As I understand
it, the California Public Utilities Commission concluded, despite your evidence,
that wireless services are in the same market as basic wireline voice
service.
Correct?
8007
DR. ROYCROFT: Yes, that was
one of their erroneous conclusions.
8008
MR. HENRY: In fact, they
found that landline and mobile services are substitutes and not mere
complements, as you had tried to convince them.
8009
DR. ROYCROFT: That is what
the Commission's conclusion was, yes.
8010
MR. HENRY: Thank
you.
8011
Now come the numbers.
8012
I want to go through your X factor.
Before I do, I have prepared a summary document, which is mostly from
your evidence, with a tiny bit more information on it.
8013
It is at Tab 2 of your binders, Mr. Chairman, and it is called "Dr.
Roycroft's Recommendations for Calculating the X Factor."
8014
THE CHAIRPERSON: Mr. Henry,
just give the Secretary a minute to number this exhibit.
8015
THE SECRETARY: I am giving
it Companies Exhibit No. 11.
EXHIBIT NO.
THE COMPANIES‑11: Dr.
Roycroft's recommendations for calculating the x-factor source: table 8 p. 58 of
Dr. Roycroft's testimony
8016
MR. HENRY: I want to go
through, very quickly, the arithmetic, and then I promise you that I will come
back and we will go through each number.
8017
As I understand it, you started with ‑‑ and we might want to keep
this out throughout the cross‑examination, because, as I say, we will keep
coming back to each of the numbers.
8018
You started with a historical TFP, that is the Total Factor Productivity
number, as a starting point. You
used that rather than the marginal cost studies that the Companies did. Correct?
8019
DR. ROYCROFT: The marginal
cost studies that the Companies had previously
done ‑‑
8020
MR. HENRY: And in this
proceeding.
8021
DR. ROYCROFT:
Yes.
8022
MR. HENRY: This TFP number
of 4.2 percent is based on previous TFP results filed with the Commission that
showed historical TFP that was for the period 1988 to
1995.
8023
Is that correct?
8024
DR. ROYCROFT: That is
correct.
8025
MR. HENRY: When you use TFP
as a starting point, the accepted methodology for an X, as I understand it, is
to then subtract the economy‑wide productivity growth, which you calculate at
1.06 percent, and that is Canadian data from the period 1995 to
2004?
8026
DR. ROYCROFT: That is
correct.
8027
MR. HENRY: Again, I think
the accepted methodology when you start with a TFP is to add back an input price
differential, which is the difference between the rate of inflation in
economy‑wide prices and the rate of inflation in prices paid by the ILEC for its
inputs, and you calculate that at 2 percent.
8028
DR. ROYCROFT: Yes, with the
caveat that the differential is best reflecting the economy‑wide input prices as
opposed to just the economy‑wide prices.
8029
MR. HENRY: Fair enough. I should have said
that.
8030
The inflation in the economy‑wide prices compared to the rate of
inflation in the ‑‑
8031
DR. ROYCROFT: Inflation in
the economy‑wide input prices.
8032
MR. HENRY: Right, input
prices.
8033
And then you add a stretch factor of 1 percent, which you justify, in
part, on your findings that economies of scope resulting from the provision of
DSL services can be expected to add .57 percent to
productivity.
8034
DR. ROYCROFT: No. I am suggesting that the stretch factor
is to reflect the overall scope economies and how well they are
reflected ‑‑ or how well the Commission feels they are reflected in the
total productivity study.
8035
MR. HENRY: Fair enough. You use an example with DSL to get
.57. You are saying there may be
other economies of scope.
8036
Is that correct?
8037
DR. ROYCROFT: Right, and the
example with regard to DSL is illustrative with regard to
the ‑‑
8038
MR. HENRY: Sure. Understood.
8039
DR. ROYCROFT: ‑‑ fact that it is based on U.S.
data.
8040
MR. HENRY: I
understand.
8041
But using that .57 percent, you get a resulting ‑‑ the math is a
resulting X factor range of 5.14 percent to 6.14 percent, and then you suggest 6
percent.
8042
DR. ROYCROFT: You linked
this, once again, to the .57 percent.
The 5.14 to 6.14 is based on whether or not there is any stretch factor
added, with the upper limit being suggested at 1 percent, which would give you
the 6.14. A stretch factor of zero
would lead to the 5.14.
8043
MR. HENRY: Fair
enough.
8044
Let's go back and look at each of these
numbers.
8045
Let's go back to the top.
The 4.2 percent ‑‑ the TFP that you use as a starting point, it
measures productivity for the company as a whole, rather than for regulated
services only, does it not?
8046
DR. ROYCROFT: Depending on
how the study is structured, yes.
8047
MR. HENRY: Would you also
agree that if the Commission were to develop an X factor, it would be applied to
the regulated capped services?
8048
DR. ROYCROFT: That is
correct.
8049
MR. HENRY: And, to the
extent possible, the X factor should represent the productivity growth
associated with the regulated services of the company.
8050
DR. ROYCROFT: With the
caveat that some of those regulated services may be sharing inputs that are
unregulated and, if there is productivity associated with those unregulated
services, it is fair to at least recognize that these alternative sources of
productivity are available and that that productivity can have a positive impact
on the overall structure of the productivity offset.
8051
MR. HENRY: Those services,
to the extent that they increase the productivity of the other service, as a
result of economies of scope, should be reflected.
8052
DR. ROYCROFT:
Correct.
8053
MR. HENRY: You are not
suggesting that productivity within the other service itself should be reflected
in the regulated service, but to the extent that the other
service ‑‑
8054
DR. ROYCROFT: When you are
talking about shared inputs, it may be difficult to allocate or assign the
productivity ‑‑
8055
For example, when DSL is added to the overall service set and it shares
significant investments associated with local loop, that, in itself, then
expands overall productivity and it is difficult to say that 5 percent of
this or 95 percent of this should be assigned to a specific
service.
8056
If you ignore the productivity gains that are associated with expanding
services such as the addition of DSL, then you are implicitly saying that they
should all go to the new service and that the residual services, those that have
relied on the local loop prior to the introduction of DSL, should not enjoy and
of those productivity benefits.
8057
MR. HENRY: I assure you we
will come to that, but we will do it when we get out of the stretch factor. Let's stay with the 4.2 for a
moment.
8058
You are aware that in the last price cap decision of this Commission, the
Commission rejected an approach based on TFP for the company as a whole and
concluded that the productivity offset should be based on service‑specific
marginal costs in order to reflect the actual productivity gains that are likely
to be achieved for individual capped services ‑‑ capped
baskets?
8059
DR. ROYCROFT: Yes. And that approach, at least based on my
ability to review information on how that calculation was made, implicitly
assumes that all of the costs of shared inputs such as the local loop are solely
attributable to primary exchange service and therefore prohibits any sharing of
productivity gains from the introduction of new services like DSL and the
corresponding increase in economies of scope.
8060
MR. HENRY: Let's turn to
another document at Tab 3 of your binder that I gave to your counsel on
Friday. That is your rebuttal
testimony filed with the Indiana Utility Regulatory Commission in January
2004.
8061
DR. ROYCROFT: That is
correct.
8062
MR. HENRY: Could you turn to
page 26, starting at line 13.
8063
THE CHAIRPERSON: Which
tab?
8064
MR. HENRY: Tab
3.
8065
THE SECRETARY: That would be
Exhibit No. 12.
EXHIBIT NO.
THE COMPANIES‑12: Dr.
Roycroft's Rebuttal Testimony before the Indiana Utility Regulatory Commission -
Cause No. 42405, 13 January 2004
8066
MR. HENRY: If you will bear
with me I just want to read your testimony here, starting at line 13 on
page 26. You start by asking
yourself a question:
"Dr. Currie indicates that when
measuring productivity the totality of an industry's outputs must be
measured. Do you agree?" (As read)
8067
And you answer:
"I would agree as long as the scope
of the productivity study is first appropriately defined. If one is interested in measuring the
productivity growth associated with the totality of the industry, then measuring
the totality of an industry's output is appropriate. However, the focus of the study that I
performed was on the regulated operations of the RBOC industry and as a result I
believe that it is important to try to capture the best representation of the
RBOC industry's regulated operations.
Inclusions of all aspects of the RBOC industry would not be appropriate
for rate‑making purposes. The RBOCs
engage in a wide variety of operations from regulated telephone service to
foreign investments, commercial real estate, thus narrowing the focus to
regulated operations is appropriate and thus is the approach that I utilized in
my study. Inclusion of the totality
of RBOC operations could result in a biased TFP calculation."
(As read)
8068
So you yourself have recognized and advocated an approach to productivity
that is confined to the regulated activities of the
company.
8069
Is that correct?
8070
DR. ROYCROFT: The study that
I performed associated with this testimony focused on the regulated activities,
although by discussion in this testimony, especially in the direct filing of the
testimony, discussed the impact of DSL and other technologies such as wireless
on the productivity potential of the companies.
8071
So it is quite clear that the specifics of my argument directed at
Dr. Currie is of a much more general and broad nature, focusing, as
indicated in the passage that you read, on operations outside of the United
States, foreign investments, commercial real estate ventures that have nothing
to do with the question at hand, the question at hand being productivity growth
associated with the regulated telecommunications
operations.
8072
MR. HENRY: Was DSL a
regulated service?
8073
DR. ROYCROFT: Pardon
me?
8074
MR. HENRY: Was DSL a
regulated service?
8075
DR. ROYCROFT: At the time,
yes, although it was regulated in a different
jurisdiction.
8076
MR. HENRY: Your statement
here is to focus on the regulated.
Okay. Thank
you.
‑‑‑ Pause
8077
MR. HENRY: As we
established, the 4.2 percent starting point of TFP, that is based on
historical Canadian telco data from the period 1988
to 1995.
8078
You are not using anything more recent?
8079
DR. ROYCROFT: I did not have
the opportunity as part of the procedure to conduct discovery or otherwise
address the calculation afresh of TFP for the Canadian
companies.
8080
The United States regulatory set‑up offers some access to publicly
available information that is not available in Canada, so I could not go about
constructing such a study.
8081
I will note that the period in question here is one where technological
change was much more limited than it is today, so I would view the
4.2 percent reflecting a period where we have conservative technological
change and declines in input prices that were not
as ‑‑
8082
MR. HENRY: Not as much
productivity in the time period?
8083
DR. ROYCROFT: That is
correct. There certainly
was ‑‑
8084
MR. HENRY: So you have
assumed that that is conservative?
8085
DR. ROYCROFT: That is
correct.
8086
MR. HENRY: But wouldn't that
period include outputs for that period that would include high‑growing services
such as long distance that were very high‑growing in those
days?
8087
Wouldn't that contribute to high productivity?
8088
DR. ROYCROFT: It would
depend on the overall share in the output mix.
8089
MR. HENRY: You haven't
looked at that?
8090
DR. ROYCROFT: No, the
studies were not available to me.
8091
MR. HENRY: What about data
services? Wouldn't those have been
high growth in those days?
8092
DR. ROYCROFT: Well,
depending on what sort of data services you are referring to. The period in question has a part of the
uptake of data services. I would
say that you had very rapid expansion in data services beginning in the
mid‑1990s. Certainly there was
expanding data service provisioning and demand in that period, but the most
robust growth has been after the commercialization of the
Internet.
8093
MR. HENRY: But in any event,
more importantly, these services are not regulated today, are
they?
8094
DR. ROYCROFT: That is
correct.
8095
MR. HENRY: So let's turn to
the next factor, No. 2 on the list, Canadian economy‑wide multi‑factor
productivity.
8096
That is the economy‑wide productivity growth and back on the table we see
that factor is 1.06, which is subtracted from the 4.2 starting
point.
8097
As you show on your table, that data is from Statistics Canada for the
period 1995 to 2004, which is not the same period, is it, on which the TFP of
4.2 percent is based, is it?
8098
DR. ROYCROFT: No, it is
not. And I selected a more recent
time span to bring up to date what I could. I certainly would have liked to have
brought a more up to date TFP calculation to my testimony, but I did not have
that capability. I didn't see any
reason not to reflect the more recent periods economy‑wise multi‑factor
productivity.
8099
MR. HENRY: On the TFP you
make an assumption that it's a proxy for today and then you use the most recent
data for the economy‑wide?
8100
DR. ROYCROFT: I assumed that
the industry‑wide TFP growth is one that provides a conservative
approximation of what would be capable today.
8101
MR. HENRY: All right. An assumption.
8102
Let's turn now to the input price differential, which is No. 3 on
the list. Yes, No. 3 on the
table that we handed out.
8103
You calculate a +2 percent adjustment there and let me just
understand.
8104
The input price differential, as I understand it, is a measure of the
difference between input price inflation and the economy as a whole and
inflation in the price of inputs used by the telephone
company.
8105
Is that correct?
8106
DR. ROYCROFT:
Yes.
8107
MR. HENRY: So your proposed
input price differential of 2 percent means that on average you expect the
prices paid by the telephone company for the goods and services it uses as
inputs to produce its goods and services will be 2 percentage points less
than the economy‑wide input price inflation
rate.
8108
Do I have it?
8109
DR. ROYCROFT: That is
correct.
8110
MR. HENRY: So if the
economy‑wide input price inflation were to use 2 percent, you would expect
the telephone company to experience input price inflation of
zero?
8111
DR. ROYCROFT:
Yes.
8112
MR. HENRY: You have used
GDPPI as one proxy for the economy‑wide plant input price
differential.
8113
Is that correct?
8114
DR. ROYCROFT: I report the
information on the GDPPI. The
primary basis of my comparison was with the economy‑wide input price inflation
for the non‑farm business sector, which is shown in the table in my
testimony.
8115
MR. HENRY: And you say that
was the primary one.
8116
Did you say that in your evidence?
8117
DR. ROYCROFT: I'm not sure
that I did, but it is certain ‑‑
8118
MR. HENRY: It is 20 percent,
and I kind of thought the primary one was the other one, the
1.92.
8119
But it doesn't much matter.
You used two different inflation measures, and one gave you 2.96 and one
gave you 1.92. And you picked
2.0.
8120
DR. ROYCROFT: Right, which
is between the two.
8121
MR. HENRY: Is it fair to say
that when we are looking at this factor, the input price differential, what we
are looking at is the rate of change in unit prices only, independent of
quantities of input?
8122
It is the prices.
8123
DR. ROYCROFT: No. The indices involved are standard price
indices which also reflect quantity.
8124
MR. HENRY: Isn't the
quantity taken care of in the TFP and now you are looking at
price?
8125
DR. ROYCROFT: We are looking
at ‑‑
8126
MR. HENRY: Let me give you
an example.
8127
I understand this is the common way to do this in all textbooks, as some
of my friends are fond of saying, but let me give you a simple
example.
8128
If I use two pieces of equipment at a total cost of $10 one year, the
average price that year is $5.00.
Correct?
8129
DR. ROYCROFT: Two pieces of
equipment...
8130
MR. HENRY: For $10. The average price is
$5.00.
8131
DR. ROYCROFT: Right. And you couldn't have figured out the
average without the quantity.
8132
MR. HENRY: That's why I said
two is the quantity.
8133
DR. ROYCROFT:
Right.
8134
MR. HENRY: If I use three
pieces of equipment at a total cost of $18 the next year, my average price has
increased to $6.00.
8135
DR. ROYCROFT:
Yes.
8136
MR. HENRY: In that example,
the input price inflation would be $1.00: six minus five; in other words, one
over five, 20 percent.
8137
That would be the input price differential in that example, would it
not?
8138
Not the input price differential, the input price.
8139
DR. ROYCROFT: I'm sorry, it
would be what?
8140
MR. HENRY: It would be the
input price inflation.
8141
The $5.00 unit price would have gone up to $6.00. That would be $1.00, or 20
percent.
8142
DR. ROYCROFT:
Yes.
8143
MR. HENRY:
Okay.
8144
You say in your evidence that you have attempted to capture this input
price differential on a forward looking basis. Correct?
8145
DR. ROYCROFT:
Yes.
8146
MR. HENRY: As I understand
it, you have conducted a study of telecom input price for the RBOCs in the U.S.
over the period 1995 to 2004?
8147
DR. ROYCROFT:
Yes.
8148
MR. HENRY: Could you turn to
an exhibit at Tab 4 that I provided to you counsel.
8149
It may not be labelled. It
is at Tab 4 in your book. I think
we have labelled it this morning "Input" ‑‑
8150
THE SECRETARY: Excuse me,
Mr. Henry.
8151
I note in the binder that Tab No. 4 and Tab No. 5, the attachments are
identical. So I just want to make
sure.
8152
MR. HENRY: Actually, I can
explain that, Madam Secretary.
8153
THE SECRETARY: That's
okay. So we are
talking ‑‑
8154
MR. HENRY: I don't fault you
for coming to that conclusion. I
hope it is only the first page that is identical and that we have changed the
title, and that the data and pages behind are quite
different.
8155
THE SECRETARY: That will be
Exhibit No. 13.
8156
MR. HENRY: Thank
you.
EXHIBIT NO. THE COMPANIES‑13: The IPD Trend
Source: p. 27 of Dr. Roycroft's
testimony
8157
MR. HENRY: The first page of
this is just a photocopy of Table 3 of your evidence where you summarize your
data. I have attached it really
just for convenience here so we don't have to keep flipping forward to two
books.
8158
This table, as I understand it, presents your data for the plant portion
of the inputs.
8159
On Line A at the end, you have an average of minus .04 percent for the
telco input plant price inflation.
8160
Is that correct?
8161
DR. ROYCROFT:
Yes.
8162
MR. HENRY: If I understand
correctly, if we go down to the last row of the table, we see one calculation of
the telecom plant input price differential, which is the difference between
telecom plant input prices and economy‑wide inflation for each of the years 1995
to 2004 for that period.
8163
DR. ROYCROFT:
Yes.
8164
MR. HENRY: The last row is
the difference between the economy‑wide measure of GDPPI and the telecom plant
price index you calculate in Line A.
So the bottom corner 1.92 percent is the difference between the 1.88
percent, which is the GDPPI a couple of lines up, and the minus .04 for the
telecom.
8165
The difference between that is 1.92. And that is one of the ways you
calculated input price differential.
I recognize you did the other way as well.
8166
DR. ROYCROFT: That is
correct.
8167
MR. HENRY: I am
curious. If we are just looking at
telecom plant differential, why did you compare the telecom plant price index to
the economy‑wide measures such as GDPPI or the non‑farm inflation
index?
8168
Both of those things, as I understand it, include more than plant. They include labour, they include
materials and other things.
8169
DR. ROYCROFT: They were
benchmark measures that were available, and the Federal Communications
Commission, when it was conducting price cap regulation, relied on the non‑farm
input price inflation differential as the benchmark to compare telecom price
changes.
8170
So I found it to be a recognized benchmark to
utilize.
8171
MR. HENRY: They used it to
compare to telecom plant?
8172
DR. ROYCROFT: To telecom
input price inflation.
8173
MR. HENRY: To telecom input
price inflation.
8174
DR. ROYCROFT:
Yes.
8175
MR. HENRY: You are comparing
this to telecom plant input price inflation. Did the FCC do it that
way?
8176
DR. ROYCROFT:
No.
8177
MR. HENRY:
Okay.
8178
DR. ROYCROFT: But I
separately evaluated the impact of labour and
materials.
8179
I generally assumed that given that we are interested in a differential
between price trends, the contribution of materials prices would be small from
the standpoint that if one of the RBOCs like SPC is buying a pick‑up truck or
buying paper clips, it is likely to be facing prices that are similar to other
large corporations that are making similar purchases.
8180
MR. HENRY: Another
assumption you made.
8181
DR. ROYCROFT: It is a hazard
of the trade. If you are an
economist, you run into a few assumptions from time to
time.
8182
MR. HENRY: Fair
enough.
8183
As I understand it, the 1.92 percent on the bottom corner represents an
average of the rates of change in the plant input price differential that you
have calculated for each of the years 1995 to 2004.
8184
So we add up those and we get an average of 1.92 percent on the last
row. Correct?
8185
DR. ROYCROFT: That is
correct.
8186
MR. HENRY: When we looked at
that row, it seemed to us that the differential peaked in 1999 at 4.07. Do you see that?
8187
And then it steadily declined after that every year until
2004.
8188
DR. ROYCROFT: If we are
looking at the GDPPI alone, that is a fair assessment of the trend
exhibited.
8189
MR. HENRY: Well, we are
looking at the differential.
8190
DR. ROYCROFT: The
differential based on GDPPI as opposed to the differential above that, which has
slightly different characteristics.
8191
MR. HENRY: Fair enough. So the 2.96 might be
different.
8192
Rather than the average of 1.92 percent, we attempted to project the
trend line out into the future beyond 2004. So we performed an extrapolation of the
data rather than using an average, as you did.
8193
The data is on page 2, but I think the fastest way I am hoping to do
this ‑‑ I think it is most illustrative if we turn to the third page of
that exhibit where it is graphed.
8194
What we did was do an extrapolation using a common technique ‑‑
well, common to my associates anyway ‑‑ least squares regressions to
extrapolate the data into 2005, 2006, 2007 and 2008.
8195
Let me just explain these three lines.
8196
The line with the boxes is the raw data, the one that peaks and then
falls.
8197
The flat line with the diamonds is a representation of what you did. It is the 1.92 percent average of
that.
8198
The straight sloped line with the triangles, I guess they are, represents
our extrapolation.
8199
When we extrapolated that way, we found that out in 2007 and 2008, the
first two years ‑‑ in our proposition, the only two years of the next
price cap proceeding ‑‑ we got an average between those of 1.17, instead of
your 1.92.
8200
Would you agree with me that that's another way to do
this?
8201
DR. ROYCROFT: I would agree;
however, I think your approach is incorrect, for a number of reasons, the first
reason being that it focuses on only one of the differentials, and the
differential which has the more favourable trend from your perspective. It ignores the data that is available on
the differential for the non‑farm input price inflation in the row above
that.
8202
The other points that I would make with regard to your projection would
include the fact that when you make a progression based on a regression
analysis, it is typically the protocol to provide some summary statistics
about your regression and to provide a confidence interval associated with your
projection, and I don't see that information here.
8203
Lastly, I would note that, in determining your average, the 1.17 percent
that you just highlighted, that average is not based on your projection, but
rather on a subset of your projection, in that you only look at two of the
points, and I see no reason to exclude the other data points that you have
calculated.
8204
MR. HENRY: We just projected
out to the two years of the price cap.
8205
In fact, we probably did that based on what you said in paragraph 47,
that the components have to be forward looking.
8206
DR. ROYCROFT: And the series
of data points that I have identified in my Table 3 are data points that I
believe are consistent with the estimation of a forward looking
differential.
8207
In calculating the 1.17 percent average that you show on the second page,
you are ignoring your own data and your own calculations. If you were to include those, then you
would have a higher average projection of 1.27 percent rather than 1.17
percent.
8208
Once again, that projection is only based on partial information that is
presented in Table 3, and you have ignored the data that doesn't show a
declining trend over time, uniformly.
8209
The non‑farm input price inflation row, which is the second row from the
bottom in Table 3, shows, too, a peak in 1999, then a decline, and then an
increase, which is different from what is in the final
run.
8210
MR. HENRY: Fair enough. I am only looking at one of your two,
but I am trying to suggest that, depending on your assumptions ‑‑ you had a
1.92, and then you had this 2.96.
If we just look at the 1.92, you could just as easily conclude that it is
1.17.
8211
I am not suggesting that this is necessarily the only way to do it, but
just eyeballing the line, it looks better than yours, and, at least, is an
alternative to yours.
8212
You have assumed it's an average; why can't we assume it's a
trend?
8213
DR. ROYCROFT: You raised the
"assumption" word here, and, of course, you are free to assume whatever you
like. My point is, you have ignored
specific information that is provided here to draw your conclusions. Not only do you ignore the information
that was contained on my table, you also ignore information that you have
generated.
8214
And in calculating your average for 2007 and 2008, you throw out two data
points that, apparently, you feel are not representative. If those data points aren't
representative, then why are the ones that you have homed in on and selected
representative?
8215
MR. HENRY: Dr. Roycroft, we
looked at your TFP studies. Do you
recall something called "Dial Equipment Minutes" in your .57
calculation?
8216
DR. ROYCROFT: Yes, Dial
Equipment Minutes.
8217
MR. HENRY: We noticed
something very similar to this. You
had to project holding times out into 2001, 2002, 2003 and 2004, because you had
a historical series, and the line was going like "this", and, interestingly
enough, you didn't take the average, you projected it out on, actually, quite a
steep scale.
8218
Do you recall doing that?
8219
DR. ROYCROFT: I did not use
a linear regression to do that, I used averages to do
that.
8220
MR. HENRY: You used averages
to do that. You did not do an
extrapolation?
8221
DR. ROYCROFT: I don't
believe that I did a linear regression.
8222
MR. HENRY: Can you confirm
that for us, exactly what you did?
8223
In fact, I am informed that you did not ‑‑ again, subject to check
on your part ‑‑ you did not assume a flat trend. You did not assume a constant
average. You projected out by
assuming a continued rate of growth.
8224
I didn't think I was going to have to go into this. We did plot it on a graph. I could leave it with you and ask you to
undertake to confirm that we did it correctly.
8225
DR. ROYCROFT: You could ask
me to undertake ‑‑
8226
MR. HENRY: Undertake to
confirm that we did it correctly.
8227
DR. ROYCROFT: Did what
correctly?
8228
MR. HENRY: Took your data
and just plotted how you did your projection.
8229
Could I leave that with you?
I didn't expect to have to go there ‑‑
8230
COMMISSIONER LANGFORD: Mr.
Henry, from my point of view, you have asked him a question, and, at least, we
should give him the opportunity to answer the question as to how he did his
work.
8231
MR. HENRY:
Okay.
8232
COMMISSIONER LANGFORD: Then,
if you want to leave something with him following from
that ‑‑
8233
MR. HENRY: That's
fine.
8234
COMMISSIONER LANGFORD: That
is only a personal opinion, but I am sitting at the edge of my chair waiting for
his answer.
‑‑‑ Laughter / Rires
8235
MR. HENRY: So am
I.
8236
I can give you the references.
8237
In Consumer Groups/The Companies 8(j), and then your discussion at pages
68 and 69 of your evidence, you make reference to this.
‑‑‑ Pause
8238
MR. HENRY: I am reminded
that the exhibit you filed this morning talks about, for the period 2001 to
2003, projected DEMs per call.
Projected DEMs. I am
suggesting to you that you projected those DEMs on an extrapolation basis. You did not assume a constant average,
you did what we did, or something very similar.
8239
DR. ROYCROFT: The projection
with regard to the Dial Equipment Minutes was done on a basis of average growth
over a period of time. I don't have
the electronic version of the document, but I believe it was for a four or
five‑year period prior to the last data point.
8240
I did not use regression, and I did not take the approach that you have
identified here, but I did not project it in the way that you suggest, that I
was just using the last data point.
8241
MR. HENRY: Whether you used
a regression or not, there are a number of ways to extrapolate. My point is, you did not use a flat line
average, you projected it out, and on a steep curve. You took the last
point ‑‑
8242
The graph goes like "this", and then you have put it
out.
8243
As I say, I have a graphic representation. If you want to take it away and study
it, and give us an undertaking to look at that, I would be quite happy with
that.
8244
DR. ROYCROFT: The actual
data that I did have in the DEM projection was going on an upward incline, and I
took an average based on a subset of periods toward the end of the overall
number of data points and used that to project forward.
8245
MR. HENRY: Okay. Fine. I think you have confirmed what I was
trying to confirm. Thanks. We don't need to go
there.
8246
Now, so far we have been looking at telecom plant price inflation versus
economy‑wide plant price inflation.
But as you quite rightly point out in your evidence, there is another
important component of input prices and that is the labour component or wage
inflation. So I want to turn to
that component.
8247
Again, just as was the case for plant, with labour we are looking at the
rate of change in the labour rate or wages only.
8248
Is that correct?
8249
DR. ROYCROFT: I looked at
the total compensation which would encompass wages, benefits, insurance and also
reflect the quantity of labour at a particular point in
time.
8250
MR. HENRY: I thought it was
accepted that you are trying to get a price differential here and you are
including quantity. Again, let me
give you the example out of the textbooks I have been
reading.
8251
Another simple example: I
have three employees at a total wage of $150,000 one year, the average year
would be $50,000 per year.
8252
Is that correct?
8253
DR. ROYCROFT: The average
wage rate, yes.
8254
MR. HENRY: If I had two
employees the next year at a total wage of $120,000, my total wages may have
gone down, but my average wage would have increased from $50,000 to $60,000 and
so the wage inflation rate would be $10,000 or
20 percent.
8255
Is that correct?
8256
DR. ROYCROFT: That is
correct. However, your total
compensation would have a declining rate of inflation from the standpoint that
your wage bill has gone from $150,000 down to $120,000.
8257
MR. HENRY: Well, that is
because you have included the quantities, but here we are supposed to be just
looking at price. You confirmed
that earlier with equipment, you confirmed it with wages.
8258
TFP does the quantity. The
input price differential is supposed to be price. That's how you did it with all the other
components. It's price, unit
price.
8259
DR. ROYCROFT: But to
calculate an index it has to have quantities associated with it. That is the way that indices are
calculated, while spares or partial methods use quantities. You can't get away from it if you want
to create an index.
8260
MR. HENRY: But quantities
are weights only, not the total.
8261
Is that correct?
8262
DR. ROYCROFT: The weights
are certainly important to acknowledge from the standpoint that it recognizes
how the market basket that you are focusing on changes with regard to the
ability of the consumer or the firm to substitute for the various components of
the basket.
8263
MR. HENRY: But you are
weighting prices.
8264
DR. ROYCROFT: Right. And the weights are based on
quantities.
8265
MR. HENRY: Well, do you deny
the example we just went through, that the wage inflation in the example I gave
you was $10,000 or 20 percent?
8266
DR. ROYCROFT: No, with the
caveat that the compensation inflation was a decrease, a negative amount because
the total bill went down.
8267
MR. HENRY: All
right.
8268
Well, let us say that we did it on a wage inflation basis, as I have put
to you.
8269
DR. ROYCROFT: Just looking
at wage ‑‑
8270
MR. HENRY: At the wage
price, just like you did with the plant, just like you did with everything else,
it was on a quantity unit‑price basis.
Let's do the same thing with labour.
8271
You state in your evidence that you also analyzed the labour cost
transfer, the U.S. private business sector and the RBOC industry and
found that the input labour prices for the RBOCs were growing less rapidly
than those in the general business sector and that the difference was also
about 2 percent, which is the same number you estimated for the plant
component.
8272
Is that correct?
8273
DR. ROYCROFT: Right. Compensation is the focus of my study,
looking at the difference in total compensation.
8274
MR. HENRY: Right. So I want to look at this 2 percent
labour component a little bit with you and see how it was
calculated.
8275
Could you turn to the exhibit, please, at Tab 5 which we have
labelled "Input Price Differential Labour Component"?
8276
Again, the first page is just the same page from your
evidence.
8277
On reflection, we didn't need to attach this one here because it is not
really relevant to labour.
8278
Mr. Chairman, before your eyes
glaze over ‑‑
8279
THE CHAIRPERSON: Actually,
we need a number too, I think.
8280
THE SECRETARY: Exhibit
No. 14.
EXHIBIT NO. THE COMPANIES‑14: The IPD - Labour
component
8281
MR. HENRY: There is a lot of
data here. It was given to Dr.
Roycroft to give him an opportunity to see what we had
done.
8282
What I would like to do, and I'm hoping I can do it this way, is just go
to the punch line, the second to last page, describe our conclusions and his
conclusions and then let him comment on that and then see if we can go from
there.
8283
Is that a fair way to do it?
We will give the conclusions and then you can tell us why we are right or
wrong.
8284
DR. ROYCROFT: It sounds
reasonable.
8285
MR. HENRY: So that is on the
second last page. it looks like
this.
8286
If we turn to the second line, the first line with the numbers on there,
if we look at the first row of numbers, that represents a summary of your
results. You looked at the total
economy‑wide U.S. wage inflation rate for two time periods and you got
3.262 percent and 3.89 percent.
Then you compared it to the RBOC wage inflation rate which you calculated
at 1.6 and 1.73 percent, or again the two different time periods, and the
difference between those shows that the RBOC wage inflation exceeds the
economy‑wide U.S. average by 2.02 percent and 2.15 percent for the two
different periods.
8287
That's what you did? So far,
so good?
8288
DR. ROYCROFT: That is
correct.
8289
MR. HENRY: Now the
next line of numbers is what we did.
8290
Again, based on theories of input price differentials as we understand
them, and as I think you agreed earlier in our elementary examples, we took
your data for the RBOCs and we took U.S. Bureau of Labour statistics for
the U.S. average, and all we did was take the total compensation and divide it
by the total employees, because what we found was the total employees was
changing, dropping significantly for the RBOCs, sometimes in half over this
period, but the total compensation was moving in a much different
direction.
8291
So what we got as a result of that analysis was, for the U.S. average we
got 2.34 percent and 3.68 percent, depending on the period. This is on a per‑employee
basis.
8292
Then when we did the RBOC averages we found something interesting. We found the RBOCs were 5.8 percent
and 8.13 percent, again depending on the period. So what that shows is that the RBOCs
wage inflation was actually considerably more rather than less, as you had
calculated, than the U.S. economy as a whole by ‑3.46 percent
and ‑4.5 percent.
8293
That is a swing of 5.5 to 6.5 percentage points from yours, isn't
it?
8294
DR. ROYCROFT: It is
certainly a different number.
8295
MR. HENRY: What is wrong
with it?
8296
DR. ROYCROFT: The approach
that you have utilized is essentially abstracting from the conventional methods
used to create price indices from the standpoint that you are focusing stricture
on the price and not on the weights associated with the creation of the
index.
8297
MR. HENRY: Well, when you
did your plant ‑‑ let me go back to the plant one ‑‑ was that prices
or was that quantities? Did you
just take the total quantities they spent on switches and compare it to the
total quantities of plant in the economy as a whole or did you convert it to a
price?
8298
DR. ROYCROFT: It was
reflective of weights associated with the plant categories and those weights
essentially allocate the price increases based on the quantities reflected in
the RBOCs RMIS data.
8299
MR. HENRY: Back in my
example, I thought you confirmed to me ...
‑‑‑ Pause
8300
MR. HENRY: Is the telephone
plant the total expenditures on telephone plant or is it the prices weighted by
the quantities?
8301
DR. ROYCROFT: Can you take
me to something specific as far as your reference?
8302
MR. HENRY: When you did your
telephone plant price index, was it just the total expenditures year‑over‑year,
or did you weight it by the quantities?
8303
DR. ROYCROFT: It was
weighted by quantities.
8304
MR. HENRY: With your total
compensation, isn't it just the total compensation? You didn't weight it by the quantities
as near as we can tell.
8305
DR. ROYCROFT: The total
compensation reflects the quantities.
8306
MR. HENRY: Well, of course
it does, because it is the total compensation. But it is not weighted by the
quantities.
8307
DR. ROYCROFT: It is a
different type of index from the standpoint that it only has one series in it as
opposed to the multiple series that were included in the plant
index.
8308
So the weighting process doesn't look the same.
8309
MR. HENRY: Okay. I think we understand what you have
done. We can leave this for
argument.
8310
One last thing. Could I turn
to the last page of the exhibit.
8311
We wanted to get a sense of ‑‑
8312
DR. ROYCROFT: This is No.
5?
8313
MR. HENRY: The same exhibit,
yes, the very last page with the number 28 on the bottom.
8314
There is a whole bunch of numbers with the number
28.
8315
DR. ROYCROFT:
Yes.
8316
MR. HENRY: All we did there
is we were just trying to get a sense of what proportion of any telco input
price differential could reasonably be attributed to wage inflation. So we went to the data in your TFP
studies which you did for 14 U.S. telcos for the purposes of your economies of
scope discussion, which we will be coming to, and we found, based on your data,
that about 28 percent of total telco input volumes in that study were
labour.
8317
We have set out how we did that on the last page.
8318
As I say, it is a weighted average of 28 percent.
8319
Does that sound about right?
Does it look like we did it right?
8320
DR. ROYCROFT: You take the
average of the entire period for each state and then average those averages to
come up with the .28.
8321
MR. HENRY: That's a
reasonable approximation of the weight of labour in the input prices, based on
your own data.
8322
DR. ROYCROFT: It is one
approach to take. It certainly is
taking a snapshot across a broad period.
If you are looking at a forward‑looking perspective, you might want to
focus on a different subset of time.
8323
I do not dispute the calculation.
8324
MR. HENRY: It is your
data.
8325
DR. ROYCROFT: But it is your
calculation.
8326
MR. HENRY: You wouldn't deny
that labour is a fairly significant component to telco input
prices?
8327
DR. ROYCROFT: It is
certainly non‑trivial, but the telecommunications industry is a highly capital
intensive industry that has been shedding labour significantly over the past ten
years. Therefore, its importance
has declined.
8328
MR. HENRY: And capital has
been dropping too, hasn't it.
8329
DR. ROYCROFT: I'm
sorry?
8330
MR. HENRY: And capital has
been dropping too, hasn't it.
8331
DR. ROYCROFT: Capital as a
factor share?
8332
MR. HENRY: Right. You have no evidence to suggest that 28
percent isn't a reasonable approximation of the total input
price.
8333
DR. ROYCROFT: Right, but
understanding that the 28 percent in this is presumably going to contribute to
the overall factor shares, which adds up to one.
8334
MR. HENRY:
Absolutely.
8335
DR. ROYCROFT: So when you
substitute out labour, something else has to be going up because your factor
shares always have to add up to one.
8336
So if you are using less labour, you are using more capital and/or more
materials within the context of these studies from which you have drawn the
numbers.
8337
MR. HENRY: Fair
enough.
8338
THE CHAIRPERSON: Mr. Henry,
did the word "last" prefacing your last question imply that this might be a time
to take a break?
8339
MR. HENRY: It's a perfect
time, Mr. Chairman. I have one
area left.
8340
THE CHAIRPERSON: That's even
better.
8341
MR. HENRY: That's
perfect.
8342
THE CHAIRPERSON: So because
you have only one area left, I will say a quarter to
11:00.
8343
MR. HENRY: Thank
you.
8344
THE CHAIRPERSON: We will
rise and sit again at a quarter to 11:00.
8345
Thank you.
‑‑‑ Upon recessing at 1025 / Suspension à
1025
‑‑‑ Upon resuming at 1044 / Reprise à
1044
8346
THE CHAIRPERSON: Order,
please.
8347
Mr. Henry.
8348
MR. HENRY: Thank you, Mr.
Chairman.
8349
If we go back to that table again, I want to turn to the last factor, the
stretch factor.
8350
DR. ROYCROFT: I'm sorry,
which table?
8351
MR. HENRY: The original
table that I handed out. We have
been through each of the first three numbers. We are on the last one, the 1 percent
stretch factor.
8352
DR. ROYCROFT:
Yes.
8353
COMMISSIONER LANGFORD:
Excuse me, Mr. Henry.
There have been so many tables.
Could you just tell us where it is in your book.
8354
MR. HENRY: It is at Tab
2.
8355
COMMISSIONER LANGFORD: Tab
2; thank you.
8356
MR. HENRY: That is what you
call a stretch factor of 1 percent.
8357
In recommending this factor, as I understand it, you recommended in part,
agreed in part, based on your assertion that economies of scope should be
reflected in the X factor.
8358
One of the examples you use is the study that you did in the U.S. where
you calculated economies of scope relating to the provision of DSL service to
contribute .57 percent to productivity.
8359
Is that right?
8360
DR. ROYCROFT: I think you
are combining two aspects of my overall analysis and
recommendations.
8361
The stretch factor is provided as a mechanism for the Commission to
assess the total factor productivity number that they ultimately go with and to
what degree they believe it reflects the economies of scope which are, I would
argue, not reflected in the historical number, the 4.2 percent,
above.
8362
So the 5.7 percent ‑‑
8363
MR. HENRY: Point
57.
8364
DR. ROYCROFT: I'm
sorry. The .57 percent number that
resulted from my study is an illustrative example of the magnitude of the scope
economies and its impact on total factor productivity group within a sample of
U.S. firms.
8365
MR. HENRY: Fair
enough.
8366
As I understand your approach, you estimated productivity for 14 state
level holding companies, which are subsidiaries of AT&T and Verizon, based
upon two scenarios which are then compared to each other.
8367
Let me make sure I understand the
scenarios.
8368
The first scenario estimated productivity in relation to the production
of telephone services and is based on the period 1988 to 2003. Then, as I understand it, you calculate
productivity under a second scenario which adds DSL outputs and inputs to the
production mix based on data for 1999 to 2003?
8369
DR. ROYCROFT: That is
correct.
8370
MR. HENRY: Then you
calculate the difference in TFP growth between the two
scenarios.
8371
DR. ROYCROFT:
Yes.
8372
MR. HENRY: And that
difference is the .5 percent which you assume is attributable to economies of
scope.
8373
DR. ROYCROFT: It is the
weighted average result of the increase in productivity that arises from the
study.
8374
MR. HENRY:
Right.
8375
I want to give you a very simple scenario and ask for your
conclusions.
8376
Suppose you had a firm with two products, Product A and Product B, and
suppose the productivity of Product B is increasing much faster than the
productivity of Product A.
8377
If you were to measure the productivity of the company as a whole and
compare it to the productivity of the company's Product A, the productivity of
the company as a whole would be greater than the productivity of the company's
Product A.
8378
Is that correct?
8379
DR. ROYCROFT: If I'm
understanding your example, it sounds like the two products are produced in
entirely disparate and separate production processes; that there are no shared
inputs. Therefore, you can
specifically identify productivity with the individual lines of
business.
8380
MR. HENRY: Well, it may or
may not. Let's take one where there
are economies of scope.
8381
Isn't that what you did? You
took the productivity of the company with telephone service and then the
productivity of the company with telephone service and DSL and compared the two
and subtracted on average, weighted average, and got .57
percent?
8382
So you could do this exercise whether or not there were economies of
scope.
8383
DR. ROYCROFT: Well, my
approach is a little bit different than what you described it. And I may have misheard your example or
some of the details.
8384
It sounded like you were separately calculating ‑‑ I calculated
total factor productivity for two scenarios: one with and one without DSL. It sounded as if you were separately
calculating for individual product lines.
8385
MR. HENRY: No. I did it with Product A, so
that's ‑‑
8386
DR. ROYCROFT: but you said
that Product A's productivity was growing much less rapidly than Product B, if
I'm recalling correctly.
8387
MR. HENRY:
Right.
8388
DR. ROYCROFT: That is what
raised my clarification or need for clarification as to whether you are
separately ‑‑ if you have pure separability across your production
processes.
8389
It sounds like you are calculating separately the productivity of one
product line and then the productivity of the other product
line.
8390
MR. HENRY: No, I was
calculating the productivity of one product, and then I was calculating the
productivity of the company as a whole, with two products.
8391
DR. ROYCROFT: But, then, to
do that ‑‑
8392
MR. HENRY: There may or may
not be economies of scope.
8393
THE CHAIRPERSON: But if
there are, Mr. Henry, how do you calculate the productivity of the first
product?
8394
MR. HENRY: Isn't that what
Dr. Roycroft did with the telephone service, and then you added in the
DSL?
8395
DR. ROYCROFT: But I
calculated the total factor productivity for the entire company in each case, I
did not separate out the product lines in the way that your example is
suggesting.
8396
MR. HENRY: Suppose that the
two products were totally independent.
8397
DR. ROYCROFT: So no
economies of scope?
8398
MR. HENRY: No economies of
scope.
8399
Wouldn't you get the same mathematical result?
8400
You would calculate the productivity of the company as a whole, and the
company with the two products, and the company as a whole with the one product,
subtract the difference and attribute that to economies of
scope.
8401
DR. ROYCROFT: But you said
there were no economies of scope.
8402
If there are no economies of scope ‑‑
8403
MR. HENRY: That's my
point. You would assume that the
difference was economies of scope.
8404
DR. ROYCROFT: I'm sorry; if
there is a question, I am not hearing it.
8405
MR. HENRY: You have a
company with two products, with no economies of scope. You calculate the
TFP.
8406
Then, you have a company with one product ‑‑ the same company with
one product. You calculate the
TFP.
8407
You would subtract the difference and say that's economies of scope, and
you attribute it all to the first product.
8408
DR. ROYCROFT: I'm sorry; I
am getting confused.
8409
I thought the starting assumption was that there were no economies of
scope, and if there are no economies of scope, then the company's total factor
productivity would simply be reflective of the weighted average productivity
across the product lines.
8410
If there are no economies of scope, then the resulting calculation
doesn't generate any differential which represents economies of
scope.
8411
MR. HENRY: My point is, how
do you know that all of the difference between the two scenarios is attributable
to economies of scope, as opposed to economies within the DSL product
itself?
8412
DR. ROYCROFT: So we are
moving away from a hypothetical Product A and Product B.
8413
MR. HENRY: Sure. We will come
back ‑‑
8414
DR. ROYCROFT: We are coming
back to a specific discussion of my study?
8415
MR. HENRY:
Right.
8416
DR. ROYCROFT: How do I know
that there are economies of scope associated with the production of
DSL?
8417
MR. HENRY: I understand that
you have calculated the difference, and that the company with the two products
is more productive than the company with the one product. I accept that.
8418
I don't see where you have proven that the .57 has anything to do with
economies of scope. It may have
something to do with that, but it could also have a lot to do with economies
within the DSL service itself.
8419
DR. ROYCROFT: If we were to
artificially force the company to produce DSL through a fully separate
subsidiary, that would require that it would build its own loops to provide DSL
service. In order to build its own
loops, it would incur substantial investments and the associated costs with
those investments.
8420
Loops are just one part of the picture. There are a number of other aspects of
their operations, including the physical floor space, rack space, customer
support facilities that are all shared or shareable when the production of DSL
is added.
8421
So the fact that the alternative to producing DSL jointly with voice
services, using the existing facilities, is a complete replication of the plant,
that certainly would result in much higher costs, and, ultimately, much lower
productivity, if you were to be calculating how you would add that service under
that scenario.
8422
MR. HENRY: My main point is
that all of that or some of that or none of that may be
true.
8423
There is a difference between the two productivity scenarios. How do we know how much of that
difference is attributable to efficiencies within the DSL service
itself?
8424
Do you not think there would be any within the DSL service that would
have nothing to do with the loop?
8425
DR. ROYCROFT: The
calculation that I make evaluates the growth in outputs and the growth in
inputs, and therefore is, by definition, generating the total factor
productivity associated with DSL. I
don't assume that the production of DSL results in the ability of the firm to
sell anything else but DSL, which is a conservative assumption from the
standpoint that the company may be able to add value to the DSL with other
service offerings, be they Internet related or gaming or even video‑related
services; my focus is on the production of DSL alone and the sale of DSL
alone.
8426
MR. HENRY: Would you agree
that, at the early stages of a product's introduction, productivity gains can be
expected to be easier to achieve than at later stages?
8427
DR. ROYCROFT: It would
depend on scale effects, from the standpoint that, with many products, rolling
them out results in scale effects that result in lower unit costs over
time.
8428
MR. HENRY:
Sure.
8429
The data used for your DSL results was for the period 2000 to 2003. That is a period when DSL was in the
early days of being rolled out.
Correct?
8430
DR. ROYCROFT: Yes, it was in
the relatively early period of DSL adoption.
8431
MR. HENRY: Isn't it fair to
say that you could expect some productivity to be realized within the DSL
service itself, things that have absolutely nothing to do with economies of
scope?
8432
Let me give you some examples.
8433
Fewer truck rolls. In the
early days of DSL, I think it is common knowledge that there were many truck
rolls. As time went on, there
became more plug‑and‑play.
8434
Do you know how many truck rolls would have been involved in the year
2000 versus today, for DSL itself?
8435
DR. ROYCROFT: No, I don't,
but if there are fewer truck rolls, that would indicate that the production
process is leading to productivity improvements associated with
DSL.
8436
MR. HENRY: And would you
expect it to drop substantially?
8437
DR. ROYCROFT: I certainly
believe it is reasonable within any production process to assume that learning
by doing and the scale effects that I mentioned earlier could lead to further
productivity gains over time, from the standpoint that it becomes easier and
cheaper to provision this technology that shares the existing infrastructure
which provides the other services.
8438
MR. HENRY: Things like less
activity at help desks?
8439
Would you expect that to happen, get better, fewer activity at help
desks?
8440
DR. ROYCROFT: Help desk
activity is a function of sales. If
sales are growing, then you would expect to see activity associated with
that.
8441
If you are referring to the expertise associated with the help desk and
being able to troubleshoot, that would likely have a life cycle associated with
technology modifications and the way the service operates over
time.
8442
MR. HENRY: And better
utilization rates for DSLAM ports as traffic and customers
increase?
8443
You would get better utilization levels within the DSL service
itself?
8444
DR. ROYCROFT: Right, and
that would result in improved productivity.
8445
MR. HENRY: Exactly. My point is, how much of that .57
percent productivity differential, which is the difference between Scenario A
with DSL and Scenario B without DSL, is attributable to those kinds of
efficiencies which have nothing to do with economies of
scope?
8446
I am not saying there aren't economies of scope, but the ones we have
talked about have nothing to do with economies of scope.
8447
DR. ROYCROFT: As far as the
numerical value, the assumptions that go into the creation of the input costs
are, I believe, conservative and reflective of telephone company practices that
were existing at the start of the overall process, and to the extent that there
were improvements in those processes, I did not include that
dynamic.
8448
I assumed constant, for example, maintenance and operating expenses
associated with DSL over the period.
If those were declining, which I did not assume, then the number would
actually be higher.
8449
MR. HENRY: When you
estimated productivity for the DSL scenario, did you use any data provided by
telephone companies themselves in the U.S.?
8450
DR. ROYCROFT: Yes, some of
the data is based on telephone company reporting in the
U.S.
8451
MR. HENRY: Volume of DSL
customers?
8452
DR. ROYCROFT: Volumes of DSL
sales, yes.
8453
MR. HENRY: Yes. You used that from telephone company
data?
8454
DR. ROYCROFT:
Yes.
8455
MR. HENRY: And prices they
charge for DSL?
8456
DR. ROYCROFT:
Yes.
8457
MR. HENRY: How about capital
dollars?
8458
DR. ROYCROFT: Capital
dollars...?
8459
MR. HENRY: Spent on DSL over
that time period?
8460
DR. ROYCROFT: No. The estimates that I made were based on
information that I was able to obtain through trade press reports on the costs
of DSL‑related equipment.
8461
MR. HENRY: Expense
dollars? Did you get those from the
telephone companies?
8462
DR. ROYCROFT: I used an
approach that was based on telephone company cost studies with regard to central
office equipment, cost factors from TSLyric studies that were associated with
provision of components of central office equipment and therefore related to
telephone company experience.
8463
MR. HENRY: Could you turn,
please, to the next exhibit found at Tab 6.
8464
This one was not given an exhibit number, Madam
Secretary.
8465
THE SECRETARY: The Companies
Exhibit No. 15.
8466
MR. HENRY: It is already on
the record.
Right.
8467
This was an undertaking provided as a result of a discussion between your
counsel and Dr. Hariton.
8468
On page 1 of this exhibit we set out, in the top half of the page, your
assumptions about telco capital and expense dollars required to provide DSL
service per subscriber. You can
see, the capital costs are $218.75 declining to $118.75 in
2003.
8469
The little formula on the side basically says that what you
assume ‑‑ take 99 ‑‑ $155 for a DSLAM piece of equipment, you divide
it by a .8 utilization ratio and then you added an extra $25 to represent
unknown capital costs.
8470
Then, as I understand it, the annual expense per subscriber you assumed
was $1.50 per subscriber per month, which is the $18.
8471
I was wondering, how many truck rolls do you think you would get for the
$25, and help desk inquiries do you think you would get for $1.50 a
month?
8472
DR. ROYCROFT: Well, not
every customer requires a truck roll and not ever customers calls the help
desk.
8473
MR. HENRY: No, I mean on
average. On
average.
8474
DR. ROYCROFT: The estimated
expense was drawn from cost studies that I have reviewed for regional Bell
operating companies in the United States associated with central office
equipment and also associated with help desk ‑‑
8475
MR. HENRY: For DSL? The $18 was based on
DSL?
8476
DR. ROYCROFT:
No.
8477
MR. HENRY:
No.
8478
DR. ROYCROFT: As the cost
studies were associated with basic local exchange service I
looked ‑‑
8479
MR. HENRY: Basic local
exchange service? We are
introducing a brand new DSL service and you assumed $1.50 a month for
DSL?
8480
DR. ROYCROFT: The process of
introducing DSL involves placing DSLAMs into central office space and those
DSLAMs are sitting right alongside other components of central office equipment
which are used to provide basic exchange service and other services that are
sold by the telephone company.
8481
I believe it is reasonable then to assume that the operating expense
factors of electronic equipment that looks very similar and acts very similar to
the electronic equipment that is already in place would be captured in a cost
factor associated with the existing electronic equipment.
8482
MR. HENRY: Another
assumption.
8483
DR. ROYCROFT:
Certainly.
8484
MR. HENRY: Do you know if
these capital expense numbers bear any relationship to any Canadian telephone
company who was introducing DSL over this period of time?
8485
DR. ROYCROFT: Well, the
market for equipment associated with the provision of DSL is one where the
electronics associated with that are readily available from multiple supply
sources. This equipment primarily
comes from East Asia. It is
considered ‑‑
8486
MR. HENRY: Well, the DSLAM
does.
8487
DR. ROYCROFT: Pardon
me?
8488
MR. HENRY: the DSLAM
does. You just assumed ‑‑
even if I take that, you assumed another $25 for other equipment without ‑‑
you just kind of picked it out of the air as near as I can
tell.
8489
DR. ROYCROFT: With regard to
other equipment, I'm not aware of significant impediments in input markets that
are associated with telecommunications companies that would drive huge cost
differentials between U.S. ILECs and Canadian ILECs.
8490
MR. HENRY: Well, but you
don't ‑‑ where does the $25 come from in terms of the U.S. ILECs? that was an assumption, wasn't
it?
8491
DR. ROYCROFT: I added
additional capital costs to provide a degree of conservative
estimation.
8492
MR. HENRY: Another
conservative estimation.
8493
But it's just an assumption, it is an American assumption, and then you
assume that an American assumption is a valid assumption in
Canada.
8494
Is that correct?
8495
DR. ROYCROFT: No. I think you are misunderstanding my
testimony. My testimony focuses on
an example in the United States where I have data and the information there is
representative of telecommunications carriers in the United States and is based
on dollar values associated with U.S. markets.
8496
The process of transplanting DSL technology into Canadian
telecommunications firms does not present any undue or unusual obstacles, rather
the operations are going to ultimately be
similar.
8497
In the final analysis, the analysis that I present here is reflective of
U.S. experience, but it is one that I believe is reasonable to assume would be
similarly enjoyed by Canadian companies.
8498
MR. HENRY: Well, let's look
at that.
8499
When Dr. Hariton was on the stand he was asked if we had looked at it in
terms of Canadian values and in the transcript he described Bell Canada's costs
over that period and they are on the bottom half of the
page.
8500
You can see in Canadian dollars ‑‑ and again I remind everybody this
was the very early days of DSL rollout ‑‑ our capital dollars were $1,541
in '99, falling to $645 in 2003. We
converted that using purchasing power parity to U.S. dollars and then we used an
annual expense of $100 rather than $18 and I think if you go to the transcript
Dr. Hariton testified that was a very conservative
number.
8501
Then what we did was, we re‑ran your study using all of your data, but
with the Bell Canada numbers for DSL.
8502
If you flip the page you will see that.
8503
Basically the .57 disappears, doesn't it? To be fair, it is .03 percent
instead of .57 percent?
8504
DR. ROYCROFT: That's what
your number says if I am ‑‑ I have not seen the underlying work
papers. It's difficult to audit
exactly what has gone on here, but what you seem to
be ‑‑
8505
MR. HENRY: Sorry, can I just
stop you on that?
8506
DR. ROYCROFT: Pardon
me?
8507
MR. HENRY: Can I just stop
you on that?
8508
We have given the assumptions on the previous page, so if you haven't
been able to could you just rerun your study with those numbers and confirm that
these are the results you get?
8509
DR. ROYCROFT: I could engage
in that undertaking. It would take
more time than I have had given that I received
these ‑‑
8510
MR. HENRY: That's fair
enough. Well, I think the dates are
October 26th.
8511
Can you get it done by then?
8512
DR. ROYCROFT: Yes, I
could.
8513
MR. HENRY: All right. So I have your undertaking to verify
these numbers, verify that we have done your calculation correctly based on
our numbers?
8514
DR. ROYCROFT: Yes, I will do
that.
8515
MR. HENRY: Okay. Thank you.
8516
MR. JANIGAN: I wonder if
Dr. Roycroft can complete his answer with respect to the assumptions
associated with the numbers that he was about to give.
8517
THE CHAIRPERSON: Yes. If you have anything to add, Dr.
Roycroft, feel free.
8518
DR. ROYCROFT: Yes, I
do.
8519
The assumptions that have been supplied here result in, as is clearly
shown on page 2 of 2 of Companies Exhibit No. 2, as is marked here, that the
impact of adding DSL is essentially a wash; that the companies involved here
don't really experience any productivity improvement as a result of
this.
8520
During this time period, as part of my normal consulting operations I
keep track of what telephone companies such as these here tell their investors
and read the transcripts of investor conferences. During this period, as is still the case
today, these companies speak very favourably of their DSL
operations.
8521
Investors at these conferences I think are very astute individuals. If they believed that adding DSL had no
impact on productivity, I think they would call the persons conducting the
investor conference on their numbers, saying: Isn't it true that your costs of
providing DSL are so high that you are not able to recover those through
revenues? Isn't it true that your
productivity is actually flat as a result of adding this new line of
service?
8522
I simply don't believe that this is a reflection of any sort of reality
with regard to adding DSL.
8523
MR. HENRY: I am content to
let the Commission decide whether the numbers that come from Bell Canada are to
be preferred to your American assumptions based on catalogue
prices.
8524
Thank you very much, Dr. Roycroft.
Those are all of my questions.
8525
THE CHAIRPERSON: You have
concluded your questions?
8526
MR. HENRY:
Yes.
8527
THE CHAIRPERSON: I have a
couple of questions on the subject we have just discussed.
8528
To be clear, Dr. Roycroft, is it possible ‑‑ and I'm asking this as
someone who clearly doesn't have the expertise of the three doctors on either
side here.
8529
Is it possible that the years in question would have been years in which
the productivity improvements had not yet appeared and they would appear in
subsequent years, or be expected to appear in subsequent years, and therefore
justify the investment notwithstanding the ‑‑ I'm putting a word in here
that may be inappropriately used ‑‑ the relatively static picture that you
get from those introductory years?
8530
DR. ROYCROFT: Certainly the
companies when they make their investments anticipate that they may have
opportunities to sell additional products and services over that time
period.
8531
My assumptions and my approach use the best data that I had available to
evaluate what was happening right then and there, and it is certainly possible
that over time the productivity improvements associated with the investments
will expand further, especially with regard to once you have the opportunity to
sell ‑‑ once you have the broadband platform, then the ability to add
additional products, value‑added products, to that platform becomes relatively
easy.
8532
You have the opportunities associated with expanding scope economies and
expanding productivity in the future.
8533
THE CHAIRPERSON: Would it be
possible that equally notwithstanding the neutral or wash effect that comes out
of these figures, companies might regard themselves as doing the right thing if
they could reduce term by adding a product to the basic
PES?
8534
DR. ROYCROFT: During this
particular period?
8535
THE CHAIRPERSON: Or make
themselves less vulnerable to competitive inroads?
8536
DR. ROYCROFT: Certainly they
could view this as having a positioning impact on their overall operations and
market position.
8537
THE CHAIRPERSON: So overall
it is conceivable at least, forgetting about this particular case, that in
theory relatively unattractive numbers for productivity associated with
incremental investment in a telecom business could be perfectly compatible with
a rational business strategy that could be defensible to
investors.
8538
DR. ROYCROFT: Well,
ultimately if investors have a long‑term point of view, I think investors tend
to require the performance to be satisfactory on a relatively short‑term basis
and to see rewards from that as well.
8539
If you read the companies' filings with their investors, they tout the
additions that they are getting and the revenues that they are getting from
those additions in a fashion that indicates to me that they think they are
coming out ahead as a result of those investments, even in the near
term.
8540
THE CHAIRPERSON: Do you
think that the RBOCs and their Canadian homologues had any choice with respect
to the introduction of broadband into the legacy PSTN?
8541
DR. ROYCROFT: There
certainly have been variations in their strategies, particularly in the U.S.,
with regard to how rapidly they've rolled out this
service.
8542
For example, BellSouth has been a relative laggard in good portions of
its service territory and now that it is being merged with the old AT&T is
looking to expand its broadband footprint as a result of the
merger.
8543
So they certainly have exhibited behaviour that indicates that choices
have been made with regard to how they are deploying this new
technology.
8544
THE CHAIRPERSON: Thank
you.
8545
Commissioner Noël.
8546
COMMISSIONER NOËL: Dr.
Roycroft, you mentioned early in your testimony this morning that you saw the
telecommunications market in Canada more as a duopoly than as a really
competitive market because the telcos are facing another body of corporations,
namely the cablecos.
8547
You are certainly aware that cablecos' footprints are very limited
regionally and that the same telco ‑‑ let's take, for example, Bell Canada
in Quebec and Ontario ‑‑ will face numerous cablecos' competitors with
various pricing strategies.
8548
Do you think that this is really a truly duopoly market rather than one
competitor, namely Bell Canada, facing a number of various competitors in
different regions and having to face more than one other price, or one other
strategy?
8549
DR. ROYCROFT: There is no
question that they will face multiple strategies depending on the location of
the cable company and its footprint.
The competitive process is driven by the consumer's ability to make
choices. If a consumer is residing
in a particular cable company's service area, they don't have the ability to
take cable service from some other company.
8550
So the choices are limited and the market response recognizes the
consumer's limitations.
8551
When companies know that in a particular area they face only one other
firm, there is a natural tendency to try to avoid price competition. This has been evidenced in numerous
examples in a variety of markets, including those in the telecommunications
industry.
8552
If you look at what happened in the United States where we had a cellular
duopoly in the early days of wireless, the market performed very poorly. Prices were very high. Service quality was low. And then through changes in policy which
enabled the introduction of up to six new wireless licences in a particular
market area, suddenly you had multiple firms providing services and offering
them to the same customers that previously just had two
choices.
8553
When you started to have six, seven, eight firms competing for those
customers' businesses, the consumers enjoyed lower prices, improving service
quality and a greater consumption of the service as a result of those lower
prices.
8554
COMMISSIONER NOËL:
Apparently some time today you will reach in the U.S. 300 million people
as the population of the U.S. Here
we are about 33 million and we have a territory that's at least as large as
the territorial U.S. or continental U.S., as you call it.
8555
Do you think we have the luxury of having eight competitors with eight
infrastructures?
8556
DR. ROYCROFT: In the
wireless environment or the ‑‑
8557
COMMISSIONER NOËL: Or the
wireline environment.
8558
DR. ROYCROFT: That, to me,
gets to the core of the policy issue here with regard to how to proceed in
addressing this market from a regulatory perspective.
8559
If you do have a duopoly and the duopoly is going to behave as duopolies
normally do, then market power continues to be an issue even though you have two
firms supplying in the market.
8560
Even in the United States with our large population base, we are seeing a
similar development there, with tremendous consolidation on the local exchange
carrier side, with the CLEC industry essentially ramping down and either
disappearing through a merger or exit from the market, leaving the primary
alternative as the cable companies.
8561
It appears that a duopoly is a market environment that is emerging across
the borders and, in my opinion, consumers need protection in such an
environment, and price cap regulation provides a reasonable set of protections,
especially when it is quite clear that the competition from cable is tending to
be targeted at a specific segment of the market, namely, the higher end of the
market.
8562
If there are uncontested customers, vulnerable customers, they need
protection even in this duopoly environment, and I think that price cap
regulation emerged as a theoretical construct to address the presence of
competition in telecommunications markets.
8563
COMMISSIONER NOËL: And that
is what we are discussing here, price cap regulations. We are not discussing
forbearance.
8564
DR. ROYCROFT: That is
correct.
8565
COMMISSIONER NOËL: Thank
you.
8566
THE CHAIRPERSON: There is a
lot more to be said about all of this, and I wish we could discuss it now, but
we will find a moment.
8567
You have completed your questions, counsellor?
8568
MR. HENRY: I
have.
8569
THE CHAIRPERSON: Thank you
very much.
8570
COMMISSIONER LANGFORD: Mr.
Chairman, perhaps I could ask a question.
I know that normally we would wait, but this flows right out of the last
exhibit that Mr. Henry put before us, and it seems probably more appropriate now
than to try and revive it in three hours' time.
8571
This is difficult stuff if you don't have a Ph.D. in mathematics or a
Ph.D. in economics, and, unfortunately, I don't have either of those, so I may
not couch my questions as clearly as I wish I could.
8572
I think when we left the last exhibit that you and Mr. Henry were
discussing you had agreed to get out your calculator and make sure that he
didn't make any arithmetical errors on the last page. That is, I suppose, useful to us. If there are errors, we should know
about them. But I wonder if you can
go any further with what we have here.
8573
I don't feel that I heard an explanation or even a guess from you ‑‑
which is not a criticism, I just didn't hear it. It might have gone on, as I say, at a
level that I missed, but there is this wide gap between the figures based on all
of the companies you looked at that you came up with and the figures that apply
to Bell Canada DSL costs ‑‑ the figures that you supplied at the top of
page 1 of Exhibit 2, and the figures that Bell Canada has supplied at the bottom
of page 1 of Exhibit 2.
8574
It seems to me, that will require more than work with a calculator. Where I am lost is ‑‑ can you
hazard any guesses as to what might explain these
disparities?
8575
We are looking at numbers that, in the first year, are five or six times
higher, one‑time capital costs, and in the fifth year they are four or five
times higher. If I had a calculator
I could come closer.
8576
Could you hazard a guess, from your experience, as to why these numbers
seem to be so far out of line with yours?
8577
DR. ROYCROFT: I don't know
what the company's numbers include or what they reflect, as far as what are the
investment items behind that. My
focus was on DSLAM, which is the electronic equipment that essentially adds the
DSL functionality and an additional adder to account for other
investment.
8578
What I know is that the DSLAM market is one, as I was indicating in my
earlier testimony, that is a market for electronic equipment. There are multiple providers, multiple
vendors. This equipment comes from
Asia and is purchased by both users and by telecommunications
firms.
8579
Press reports that I have identified for this period, for example, for
2003, identify prices ‑‑ list prices ‑‑ that are significantly below
the prices that are indicated here, and they reflect the prices that I have
identified in my assumptions.
8580
As a result of that, the numbers are substantially below Bell Canada's
numbers.
8581
To me, if Bell Canada is talking about DSLAMs, these numbers are really
not credible.
8582
I found a reference to an individual talking about Canadian prices in
2002 ‑‑ and I provided this in response to a discovery to Bell Canada, I
believe ‑‑ where it identifies an individual named Ted Yeap, who is a
researcher at the University of Ottawa School of Information Technology and
Engineering, and in 2002 he discusses Canadian DSLAM list prices, I believe, in
the range of $250 to $300 per port.
8583
If you translate those numbers using exchange rates, which I believe is
more appropriate than purchasing power parity, as purchasing power parity is
designed to reflect the non‑fluid nature of certain aspects of markets and here
we are talking about DSLAMs, which are like a commodity, and therefore are
likely to be priced very similar based on exchange rate ratios, his value is
much closer to the value that I identify in 2002 than the value that the company
has identified.
8584
The company says $829; this individual says $250 to $300 Canadian per
port.
8585
I can't explain it.
8586
There is other evidence, as well, in the trade press talking about major
vendors and their prices per port, and they are identifying prices that are
consistent with mine, because that is the method I have used to develop the
prices, and they are way out of alignment with the capital costs associated with
Bell's data.
8587
I don't know the source of the discrepancy; I can only explain the logic
behind my estimates.
8588
COMMISSIONER LANGFORD: All
the companies you have listed, which you have done research into, do they
basically look at the DSLAM price, or are some of them different? Do some of them add other factors in
when they are doing their costing?
8589
DR. ROYCROFT: When it comes
to evaluating the addition of DSL, the major increment to existing technology is
going to be the DSLAM. The DSLAM is
going to pick up the copper loop, through some sort of physical connection to
the loop, and then transfer on the other side of the DSLAM some of the
information that comes over the loop to the voice switch, and the rest to an
Internet service provider, or possibly the company itself, if it is acting as
its own Internet service provider.
8590
The DSLAM itself is the major cost driver when you are talking about the
addition of DSL service, given the sharing of many of the other facilities,
given their pre‑existence and use for providing the whole host of voice
services.
8591
COMMISSIONER LANGFORD: Thank
you very much, Dr. Roycroft.
8592
That was my question, Mr. Chair.
8593
THE CHAIRPERSON: Madam
Secretary.
8594
THE SECRETARY: Thank you,
Mr. Chair.
8595
Thank you very much, gentlemen.
8596
I was informed this morning of a mutual agreement that took place between
MTS Allstream and TELUS Communications that they would trade places in the order
of appearance.
8597
Therefore, I would invite TELUS counsel to come
forward.
8598
THE CHAIRPERSON:
Commissioner Langford suggests that we take a 10‑minute break to make
sure the witness has an opportunity to prepare.
8599
We will start again at 20 minutes to 12.
8600
THE SECRETARY: Yes, with Mr.
Ryan.
‑‑‑ Upon recessing at 1130 / Suspension à
1130
‑‑‑ Upon resuming at 1139 / Reprise à
1139
8601
THE CHAIRMAN: Order, please. À l'ordre, s'il vous plaît.
8602
We have order but we do not have madame la secrétaire. Elle s'en vient. Elle s'en vient en courant.
--- Laughter / Rires
8603
THE CHAIRMAN: That is
right.
8604
Mr. Langford points out that there cannot be order without the
Secretary.
--- Laughter / Rires
8605
THE SECRETARY: I am so
sorry.
8606
Mr. Ryan, please proceed on behalf of the company TELUS
Communication.
8607
MR. RYAN: Thank you, Mr.
Chairman.
8608
And for the record, again, my name is Michael Ryan. I appear on behalf of telecommunications
company and with me this morning is Dr. Jeffrey Bernstein.
8609
Good morning, Dr. Roycroft.
8610
DR. ROYCROFT: Good
morning.
8611
MR. RYAN: Dr. Roycroft, it
has already been established as a result of your cross‑examination by Mr. Henry
that you filed testimony in a recent proceeding before the California Public
Utilities Commission, I understand.
8612
DR. ROYCROFT: That is
correct.
8613
MR. RYAN: And since the
filing of your evidence in this case, the California P.U.C. has rendered its
decision in that other case?
8614
DR. ROYCROFT: Yes, it
has.
8615
MR. RYAN: And I've provided
you yesterday through your counsel with a copy of the decision of the California
P.U.C. in that proceeding, which you've probably already had some familiarity
with in any event, but did you receive a copy?
8616
DR. ROYCROFT: Yes, I
did.
8617
MR. RYAN: And that document
that I provided to you, is that ‑‑ is that indeed the decision of the
California P.U.C. in the proceeding in which you've
testified?
8618
DR. ROYCROFT: Yes, it
is.
8619
MR. RYAN: Mr. Chairman, you
should have a largest document in front of you, a couple of hundred pages, which
is the document that doctor Roycroft and I have been referring
to.
8620
THE SECRETARY: I have
this. Yes, and it's referred to as
"TELUS Exhibit number 13".
8621
MR. RYAN: And just to orient
ourselves at the beginning, doctor Roycroft, could we go to page 2 of the
decision?
8622
DR. ROYCROFT: Roman numeral
2 or ‑‑
8623
MR. RYAN: Numeral 2, please,
the page that begins "Summary".
8624
DR. ROYCROFT:
Yes.
8625
MR. RYAN: And the Commission
says at the outset of its decision:
"This decision evaluates both
statutory guidance and market conditions in determining whether we may rely more
heavily on competitive forces to produce just and reasonable rates for
California's telephone consumers."
8626
They go on to say:
"We grant carriers broad pricing
freedoms concerning almost all telecommunication services, new
telecommunications products, bundles of services, promotion and
contracts."
8627
And towards the end of the paragraph, they say:
"With few restrictions we permit
carriers to add services to bundles and target services to specific geographic
markets."
8628
Is that a reasonable shorthand summary of the conclusions of the P.U.C.
in this proceeding?
8629
DR. ROYCROFT: Yes, with the
caveat that they also address the limitations associated with their decision
with regard to high cost areas and lifeline programs which are treated
differently under the framework.
8630
MR. RYAN: And which are
referenced in the next paragraph of the summary, I
believe.
8631
DR. ROYCROFT:
Yes.
8632
MR. RYAN: Now, on who's
behalf did you testify in that proceeding?
8633
DR. ROYCROFT: I testified on
behalf of TURN, which stands for "The Utility Reform
Network".
8634
MR. RYAN: And who is or was
TURN?
8635
DR. ROYCROFT: TURN is a
independent non‑profit organization that focuses on utility matters in the State
of California.
8636
MR. RYAN: Could we go to
page 113? And here, at least with
regard to one particular issue, the California P.U.C. appears to be summarizing
the position of TURN and I'm looking at the subheading on the page TURN and just
initially, that first instance, the P.U.C. says:
"TURN maintains that ILECS continue
to have significant market power."
8637
And I understand that that conclusion, the TURN, or that proposition that
TURN was advanced, it was based on the observation that ILECS are very large
market shares; is it not?
8638
DR. ROYCROFT: That
contributed to the evaluation of the market ‑‑ market shares were evaluated
as well as the ability of firms to substitute between alternative sources of
supply, so the evaluation looked at more than strictly market share evaluated
alternative technologies, evaluated observed consumer behaviour on the market
and drew that conclusion.
8639
MR. RYAN: So, in the next
couple of paragraphs, for instance the P.U.C.
says:
"With respect to Sure Western Varies
and TURN states that its analysis found that market concentration, a little
change from pre‑1996."
8640
It goes on to say that:
"TURN asserts that
Frontier ‑‑",
presumably another carrier in
California:
"‑‑‑ maintains a pure monopoly
position and, finally, that AT&T retains an overwhelming market share for
both the residential and small business market segments."
8641
Are you with me?
8642
DR. ROYCROFT:
Yes.
8643
MR. RYAN: And I note that
those statements, footnotes 464, 465 and 466, citing TURN, referring TURN to
comments that you've made in the proceeding, you mentioned in the
footnotes?
8644
DR. ROYCROFT: That is
true.
8645
MR. RYAN: So that indeed
reflects the evidence that you put before the Commission, I take it then, that's
been ‑‑ that's been cited there?
8646
DR. ROYCROFT: Yes and I
mean, for example, with regard to Frontier Telecommunications, they are a
company that serves primarily rural areas, the evidence indicated that among
their ‑‑ I believe it was 30 wire centres, only one wire centre had
evidence of a cable alternative provider.
8647
The rest were strictly provided by Frontier and Frontier had not sold a
single unbundled network element to any Select in the period since 1996, which
reflected a dominant market position which, from the consumer's perspective
looks like monopoly.
8648
MR. RYAN: And, of course,
you go on to mention AT&T in your evidence as well and its position in the
market?
8649
DR. ROYCROFT: That is
correct.
8650
MR. RYAN: And that would be
the former S.B.C. effectively that's been referred to
there?
8651
DR. ROYCROFT: Yes,
after ‑‑ after S.B.C. acquired AT&T, which was S.B.C.'s largest
competitor in the California market, S.B.C. took AT&T's name, I guess to the
Victor Gelvis(ph) spoils, and the evidence indicated that the acquisition of
AT&T not only took residential consumers off of AT&T's network and
placed them on S.B.C.'s service offerings, but S.B.C. also acquired significant
facilities that AT&T was ‑‑ had deployed in primarily business sectors
in a large number of wire centres around the State.
8652
MR. RYAN: Of course, your
evidence in this proceeding is analogous to the position that you advanced in
California, to the extent that you're concerned here also that the ILECS
continue to have significant market power?
8653
DR. ROYCROFT:
Yes.
8654
MR. RYAN: And if we look at
the second full paragraph on page 113, the California P.U.C.
says:
"TURN's analysis of market to
competition, however, relies on its conclusion that the relevant market only
includes wire‑line circuits switch telecommunication
services."
8655
Again, citing to comments filed by you. Am I correct?
8656
DR. ROYCROFT: That is what
it says. It mischaracterizes my
evidence and analysis.
8657
MR. RYAN: All right. Would you explain to us to what extent
it mischaracterizes your evidence?
8658
DR. ROYCROFT: Well, the
analysis that I conducted evaluated market share and the market share
calculations were based on E‑911 counts from E‑91 data basis that included both
cable provided VoIP services as well as circuit switch services offered by the
incumbents and by the ‑‑ any Selects still remaining in the
market.
8659
So, the statement that I only considered wire‑line circuit switch was
erroneous with regard to my evaluation of market share.
8660
However, my analysis also evaluated wireless services as well as
over‑the‑top VoIP services, with the distinction that the over‑the‑top VoIP
services, at that time, were not included in the E‑911 data basis whereas cable
VoIP services would be included.
8661
So, my evaluation was much more broad ranging than circuit switch
telecommunication services and evaluated a variety of supply alternatives which
consumers might consider and made a determination based on that
evaluation.
8662
MR. RYAN: But in point of
fact, the thrust of your evidence before the California P.U.C. was that wireless
services, for instance, is not a substitute for wire‑line service. Is that
correct?
8663
DR. ROYCROFT: The evaluation
that I presented the Commission certainly acknowledged that for certain
customers wireless services has begun to provide an alternative, but that for
the overwhelming majority of consumers, wireless has both a higher price and
characteristics of functionality that make it inferior to wire‑line offerings
and as such then, does not provide a cheque on market power that would be
consistent with removing the regulatory constraints to the extent that the
Commission in California has done.
8664
MR. RYAN: Well, let me see
if I understand.
8665
Are you saying that wire‑line and wireless are in the same market? I'm talking now of
California.
8666
Were you saying, shall we say, in your testimony in California that
wireline and wireless were in the same market or that they were
not?
8667
DR. ROYCROFT: My testimony
was that they were generally not in the same market for most consumers, that the
decision‑making process did not include a reasonable alternative from wireless
to replace wireline given existing functionalities associated with wireline that
are not available from wireless and given higher wireless prices when compared
to services available over the wireline
network.
8668
MR. RYAN: Turning then to
VoIP, was it your testimony in California or was it not that VoIP is not in the
same market as wireline telephone service?
8669
DR. ROYCROFT: There again I
have made the distinction between over‑the‑top VoIP and VoIP that would be
provided by facilities‑based service provider such as a cable company with
regard to over‑the‑top VoIP, both the limitations on the availability of
broadband and the consumption of broadband, as well as limitations associated
with the technology itself lead me to conclude that it does not provide a
service which is capable of constraining ILEC market
power.
8670
MR. RYAN: Another way of
saying that is it is not in the same market?
8671
DR. ROYCROFT:
Yes.
8672
MR. RYAN: So when I go back
to the second full paragraph from the California decision and the Commission
says:
"TURN's analysis of market
competition however relies on his conclusion that the relevant market only
includes wireline, circuit‑switched telecommunications
services."
8673
Which you said was a mischaracterization of your
evidence.
8674
I have to say, it sounds to me like a fairly fair characterization of
what you have just told us, because that same market we have just heard you say
does not include wireless or over‑the‑top VoIP.
8675
DR. ROYCROFT: But it does
include cable‑provided VoIP and therefore the comment saying "only .. wireline,
circuit‑switched telecommunications services" is not
correct.
8676
MR. RYAN: All right. So it is your testimony here today that
cable‑provided VoIP is in the same market as circuit‑switched telephony
services?
8677
DR. ROYCROFT: Yes. Especially ‑‑ well, depending on
the cable company's business strategy that would define the relevant segment of
voice services. Cable companies
typically are focusing on bundled service offerings to target it at the higher
end of the market.
8678
MR. RYAN: Could we go next
to page 120 of the decision, please?
‑‑‑ Pause
8679
MR. RYAN: I'm looking now at
the top of the page and the Commission is stating some of its conclusions, as I
understand them.
8680
They say:
"We agree that the build out of
wireless carrier's network since this Commission's last major telecommunications
regulatory review 18 years ago has made wireless technologies a close substitute
for land line services. This
evidence is a significant factor in this decision." (All read)
8681
As I understand them, they, on this point, rejected your evidence and
preferred an alternative, that wireless technology is indeed a close substitute
for wireline service.
8682
Is that correct?
8683
DR. ROYCROFT: Yes. Given the evidence presented to the
Commission in many cases it was the only alternative that the Commission
considered from the standpoint that it has concluded that each and every
residential customer in California, regardless of their location, is facing the
same level of competitive forces which will lift the Commission's responsibility
to ensure directly just and reasonable rates and allow market forces to govern
that.
8684
As I indicated earlier, in wide swaths of California ILEC service
territory, the only alternative to the ILEC services are what are available from
wireless carriers.
8685
MR. RYAN: So you remain, as
it were, unrepentant in terms of your position on this issue in light of the
California PUC's decision on the evidence they had before
them?
8686
DR. ROYCROFT: Yes, To give you a personal experience that
helps me reach this conclusion, among extensive other analysis, I live in an
area that is not a high density area and while I can receive telephone
service over my wireless phone if I step outside, I cannot receive wireless
service indoors. In fact, wireless
carriers do not design their networks or guarantee the delivery of service
indoors and, as such, their service is certainly not comparable to basic
exchange services or even bundles of exchange services which are designed to be
received indoors.
8687
In the United States, wireless carriers fall over themselves to explain
to their customers that when you buy this service there is no guarantee that
it's going to work anywhere, especially indoors, that it is primarily a service
that is designed for outdoor operation.
8688
MR. RYAN: I presume these
are all matters that you put before the Commission as part of your evidence in
that case.
8689
DR. ROYCROFT: I don't recall
if I presented them my personal experience, but in general the fact that the
wireless carrier networks are not designed to function in a manner consistent
with wireline services certainly was, as well as the fact that wireless and
wireline carriers are oftentimes the same companies have a vested interest
in maintaining consumer subscription to wireline and therefore do not encourage
substitution of wireless for wireline services.
8690
MR. RYAN: Could we look at
the next full paragraph on page 120, because the Commission goes on then to
deal with the question of VoIP.
8691
It says:
"In addition, Verizon's evidence,
especially when coupled with data produced by AT&T, convincingly establishes
that a competitive threat is offered by the new VoIP technologies." (As read)
8692
Would you agree with me that the Commission there was essentially
accepting the idea that VoIP is in the same market as wireline services and
essentially rejecting the view that you had put forward that VoIP over‑the‑top
service was not in that market?
8693
DR. ROYCROFT: That is the
Commission's position, yes.
8694
MR. RYAN: All
right.
8695
Can go to page 126 next, please?
‑‑‑ Pause
8696
MR. RYAN: Will you agree
with me one of the criticisms that the California PUC had of your evidence was
that it paid undue attention to the question of market share to the neglect of
other factors that needed to be considered in evaluating whether there was
market power present or not?
8697
DR. ROYCROFT: The Commission
was generally not inclined to evaluate market share information. Which in my opinion is a mistake, as I
am an economist and market share has been demonstrated to matter in a wide
variety of market situations
8698
MR. RYAN: Let me just read
you the passage that I have in mind from the PUC's decision and invite your
comment on that.
8699
The PUC says:
"Substantial legal precedent
discusses the dangers of relying on market share as a measure of competition in
regulated markets. Such dangers are
well recognized by the courts, the FCC and this Commission. For example, in dismissing a claim that
a cellular telephone company with a 100 percent share of the wholesale
market exercised market power, the Ninth circuit
stated..."
8700
And I'm going over to the next page and I will continue and read that
quote, if I may:
"Blind reliance upon market share
divorced from commercial reality can give a misleading picture of a firm's
actual ability to control prices or exclude competition. Reliance on statistical market share in
cases involving regulated industries is at best a tricky enterprise and is
downright folly where, as here, the predominant market share is the results of
regulation. In such cases, the
court should focus directly on the regulated firm's ability to control prices or
exclude competition."
(As read)
8701
I will just give you the opportunity to comment as an economist on the
validity of the California PUC's comment as I have just read it to
you.
8702
DR. ROYCROFT: Well, if I
might start with the quote from the Ninth Circuit, you will note that that quote
is from 1989 and therefore the context of the market share being the result of
regulation is one that I would point out is in a very different context given
that this is prior to 1996.
8703
If market shares remain high after entry barriers are removed, and
enabling the entry has been pursued by a Commission through the availability of
unbundled network elements at cost‑based rates, if market share still persists,
something must be driving that high market share and continuing entry barriers
are a likely candidate. Where you
have entry barriers you have market power and market power needs to be managed
to ensure that the outcome is in fact just and reasonable
rates.
8704
The other aspect of the quote that I would want to comment on is that my
approach was neither blind ‑‑ rather, it was a broad‑ranging evaluation of
not only market share, but also of alternative sources of supply and a thorough
evaluation of those technologies and how consumers are observed to respond to
them in the marketplace ‑‑ nor was it divorced from commercial reality,
given the backdrop to the market environment that the Commission was evaluating:
one where the Commission in the State of California had observed the complete
collapse of CLEC industry, the merger of the number one and number two CLECs
with the respondent companies in this case and therefore, if anything, pointed
to a retrenching and consolidation in the industry which was not consistent with
expanding competition.
8705
MR. RYAN: To sum up, as I
understand it, the California PUC's concern was that you relied unduly on market
share in coming to your conclusions, and indeed your calculation of market share
was high precisely because you excluded competition from wireless and VoIP
service providers in calculating market share.
8706
Is that a fair summary of the situation?
8707
DR. ROYCROFT: No, I don't
believe that it is.
8708
I certainly evaluated market share and I used the best tools that I had
available with regard to market share.
I used the Herfindahl‑Hirschman Index approach to evaluate market share,
which as a means of assessment focuses on the sum of the market shares, each
share being squared.
8709
What this does is result in a numerical measure that allows you to focus
on what is important from the theoretical perspective, and that is the market
shares of the major players.
8710
I did not dispute before the Commission that it was likely that some
percentage of consumers had cut the cord and gone wireless only. Given the structure of the market,
however, that fact resulted in each of those wireless carriers having a very
small market share, and therefore the fact that I did not include it in the
calculation, because the data was not available to me, did not have a
significant impact on that aspect of my
assessment.
8711
The market share information that I presented to the Commission was only
one aspect of my overall analysis.
I evaluated demand side conditions and supply side conditions to see
whether or not there was evidence of consumers' ability to freely substitute
among alternatives in a manner that would be consistent with the constraint on
the incumbent's market power.
8712
MR. RYAN: Is it fair to say
that the Commission was particularly critical of your use of the HHI index that
you just referred to, the Herfindahl‑Hirschman Index?
8713
DR. ROYCROFT: I didn't rate
their criticisms on a scale of 1 to 10, so I couldn't give you
the ‑‑
8714
MR. RYAN: They were very
critical of your use of that index, though, were they not?
8715
DR. ROYCROFT: They indicated
that they did not think that the market share information generally
mattered.
8716
If you have specifics that you want to show to me, I would be happy to
comment on them.
8717
But I think it is a fair statement, as has already been said in my
discussion with you, that they do not pay any attention to market share even in
instances where the market share is still 100 percent and line growth is
consistent with historical line growth in areas of the state; in other words,
that walk and talk just the way they did before 1996 and the removal of entry
barriers.
8718
The Commission says that that does not matter; that that is the same
market as one where we have a cable company providing service in a wire centre
and that wire centre has a cable market share of 20 percent
now.
8719
So the Commission in its wisdom does not see any difference between those
market conditions, which I disagree with very strongly.
8720
MR. RYAN: You testified in
California, again as you have testified here ‑‑ and I'm thinking of page 37
of your evidence here ‑‑ that wireline and wireless are actually
complements; that is, that increased use of one leads to increased use of the
other.
8721
Is that correct?
8722
DR. ROYCROFT: Complements in
the sense that they are consumed by consumers and not viewed as outright
substitutes for one another.
8723
MR. RYAN: Well, complements
in the sense that they are consumed by consumers. You would have to explain that to
me.
8724
What I thought a complement was, was when there was complementarity that
increased use of one service would lead to increased use of
another.
8725
Is that not a proper understanding of what complementarity
involves?
8726
DR. ROYCROFT: I'm not
sure. It sounds like you are
alluding to a crossed elasticity evaluation with regard to complementary
products so that if there is a price relationship, a price occurrence with
regard to one product or service that there is a reaction on the part of the
other product or service.
8727
The fact that wireless subscription has expanded so dramatically in the
United States while wireline subscription has not dropped correspondingly
indicates that consumers are using both wireless and wireline services; that
they have not done a one‑to‑one substitution across the two service
sets.
8728
MR. RYAN: We are not just
talking about substitution here. We
are talking about complementarity and the propensity to use more of one service
as a result of your use of another.
8729
That coincides with the normal understanding of complementarity, does it
not?
8730
Why don't we go to page 37 of your evidence and you can tell us what you
mean by complementarity here.
8731
MR. JANIGAN: Mr.
Chairman?
8732
Mr. Chairman? Over
here.
8733
THE CHAIRPERSON: Mr.
Janigan; sorry.
8734
MR. JANIGAN: I have no wish
to interrupt my friend's cross and there are certain hooks or certain relevance
that this line of cross may have to the design of a price cap framework, but I
wonder if it might be possible for us to connect the dots a little bit quicker
on this.
8735
The exploration of some of these aspects is probably best confined to a
forbearance proceeding rather than to a price caps
proceeding.
8736
I appreciate the fact that there are some relevant aspects of this, but
this is ‑‑
8737
THE CHAIRPERSON: At the
moment, Mr. Ryan, you appear to wish the witness to agree with your
analysis that complementary products imply that the consumption of the one
increases the consumption of the second.
8738
I think the witness is saying to you that the importance of a
complementary ‑‑ and he will confirm or deny this. His analysis of complementary is that
the consumption of one does not necessarily diminish the consumption of the
second; i.e., it is not a substitute.
8739
Is that a fair characterization?
8740
DR. ROYCROFT:
Yes.
8741
THE CHAIRPERSON: And I don't
think he is going to agree with you on the other proposition. So let's leave it
there.
8742
MR. RYAN: Can we look at
page 37 of your evidence.
8743
I am bearing in mind your comment, Mr. Chairman. I hope I'm not transgressing here your
advice or direction.
8744
You say on page 37:
"It is reasonable to expect that
wireless and wireline will continue to be utilized in a complementary fashion in
Canada."
8745
Are you with me there?
8746
DR. ROYCROFT:
Yes.
8747
MR. RYAN: And perhaps just
so I understand correctly what your definition of complementarity is, could you
explain to me what you mean in that statement.
8748
DR. ROYCROFT: What I am
characterizing here is that consumers will not substitute wireless services for
wireline services.
8749
The reference point of Canada here is also reflecting the fact that
wireless services are currently much more expensive than wireless services in
the United States, which suggests a further impediment on
substitution.
8750
MR. RYAN: Would you agree
with me that lack of substitution is not the same as
complementarity?
8751
DR. ROYCROFT: I think, as I
indicated earlier, there is certainly an economic definition of complementary
relationships based on cross price elasticities.
8752
I think there is also a more casual usage of complementary relationships
as opposed to substitute relationships.
8753
I think that the latter is being characterized in this particular
instance.
8754
MR. RYAN: So it is that more
casual, as you put it, understanding of the concept of complementarity that you
are referring to on page 37 of your evidence?
8755
DR. ROYCROFT:
Yes.
8756
MR. RYAN: Could we go to
page 129 of the California decision?
8757
I will give you an opportunity, given the parallels between your evidence
on this, particularly the notion of complementarity, before this Commission and
before the California PUC, to comment on this observation by the California
Commission.
8758
At the first full paragraph on page 129 they say:
"Neither TURN nor
DRA..."
‑‑ which was another intervenor, I take
it:
"...presents adequate evidence in
support of their contention that wireless services complement wireline
services." (As
read)
8759
And skipping a sentence:
"TURN attempts to address changes in
the number of landline telephone lines, but its analysis is not convincing. TURN only generates an increase in the
number of wirelines by treating a single voice plus data line as two lines. This double counting of lines that
provide both voice and DSL services is inappropriate. It is a poor and misleading analysis to
argue that line losses are indeed line increases, and then conclude that
wireline and wireless services are complements." (As read)
8760
I understand that you haven't conducted the sort of count that is
referred to in this passage from the California decision as part of your
analysis of complementarity for the purposes of your evidence in this
proceeding, but would it be fair to say that the analysis of complementarity on
which you based your California evidence is the foundation for your statement in
this proceeding that the two are complements; that is, wirelines and
wireless?
8761
DR. ROYCROFT: As the passage
that you read indicates, the Commission is speaking broadly here and brings DSL
into this discussion. I would say
that my testimony in California analyzed the evidence with regard to the
substitution of wireless for wireline circuits, and I am not sure of the exact
point of reference that the Commission is using that word here, but portions of
my evidence in California were addressing whether or not wireless and wireline
were substitutable for one another.
8762
MR. RYAN: Is it fair to say
that that evidence was the subject of particular criticism, the reasoning that
led you to that conclusion in California?
8763
It was referred to as poor and misleading analysis.
8764
DR. ROYCROFT: The analysis
that the Commission appears to be critical of here, as you read, is the
interpretation of line loss associated with DSL substitution, and here the
Commission reaches the conclusion that if a telephone company loses a second
line, but continues to sell that customer DSL service, that is the same as the
company losing the second line and not selling DSL
service.
8765
The Commission is focusing on a line loss analysis that was presented by
multiple parties to the Commission which pointed out that you can't evaluate the
impact of competition on the market while you are observing second line losses
and treat that as if that is a competitive loss, when, in fact, those second
line losses are simply the company rolling over the technology onto
DSL.
8766
MR. RYAN: All right. We will move on. Thank you.
8767
Could we go next to page 46 of your evidence?
8768
I am going to set aside the California decision for the moment, Mr.
Chairman.
8769
COMMISSIONER LANGFORD: Mr.
Ryan, I wonder if you would be kind enough to get me, at least, paragraph
references to Dr. Roycroft's evidence.
8770
For some reason my photocopy lacks page numbers.
8771
We are tracking down the culprit, and there will be a public execution on
Confederation Square at two o'clock this afternoon.
‑‑‑ Laughter / Rires
8772
MR. RYAN: I hope that madame
la secrétaire is not implicated.
‑‑‑ Laughter / Rires
8773
MR. RYAN: I would say
paragraph 84.
8774
COMMISSIONER LANGFORD: Thank
you.
8775
MR. RYAN: You start with the
heading, Dr. Roycroft, posing yourself the question: "Have you performed a productivity study
which illustrates the impact of the production of new services on TFP
growth?"
8776
Of course, you have covered a good part of this subject matter already
with Mr. Henry today.
8777
Are you with me?
8778
DR. ROYCROFT:
Yes.
8779
MR. RYAN: As I understand
it, to illustrate your theory that there are economies of scope associated with
new services, you set out to measure the impact on TFP of adding new services to
the product mix of the 14 U.S. telephone companies that we have already heard
referred to.
8780
Is that true?
8781
DR. ROYCROFT:
Yes.
8782
MR. RYAN: And the new
service that you added, of course, was DSL.
8783
DR. ROYCROFT:
Yes.
8784
MR. RYAN: Could we go to
paragraph 85 of your evidence?
8785
In calculating TFP growth for the U.S. telecommunications carriers you
utilized data for the years 2000 to 2003.
8786
Is that correct?
8787
DR. ROYCROFT: Starting in
1999 and going to 2003, yes.
8788
MR. RYAN: However, you had
relevant data going back to at least 1985 for RBOC TFP, did you
not?
8789
DR. ROYCROFT:
Yes.
8790
MR. RYAN: Are you not
omitting important information when you choose to use only the period 2000 to
2003 for the purpose of your analysis when you have data for the timeframe
beginning with 1985 available to you?
8791
DR. ROYCROFT: I do not have
the data on broadband available to me prior to 1999, so I could not include
that.
8792
I believe that is not an unreasonable omission from the standpoint that
DSL was not widely pursued in that period, and that the statistics that I have
are representative of the rollout period beginning in the late
1990s.
8793
MR. RYAN: Could we go to
Table 8 of your evidence, which is associated with paragraph
95.
8794
On Table 8, the first entry is "Industry TFP Growth," and you say, "From
previous plan."
8795
The previous plan, is that a reference to Decision
97‑09?
8796
DR. ROYCROFT:
Yes.
8797
MR. RYAN: Can you confirm
that the source of the 4.2, if it is not already clear to everyone that you cite
there, is from Decision 97‑09?
8798
DR. ROYCROFT: That is
correct.
8799
MR. RYAN: Decision 97‑09
was, in turn, based on data for the years 1988 to 1995, was it
not?
8800
DR. ROYCROFT:
Yes.
8801
MR. RYAN: Given that that
information is over a decade old, are you not concerned about the reliability of
it for the purpose of this analysis?
8802
DR. ROYCROFT: I think that
the value is conservative from the standpoint that technological change and
expanded ability to produce inputs is much greater in a more recent period. I think it would be preferable to have
TFP growth for a more recent period, but, as I indicated in my earlier
testimony, that was not available to me, nor was the opportunity to prepare such
a study.
8803
MR. RYAN: Could we go to the
transcript for Friday at page 880?
8804
Do you have that page?
8805
DR. ROYCROFT:
Yes.
8806
MR. RYAN: I am going to look
at the bottom of the page, and I will give you a chance to catch up with
me.
8807
Essentially, that passage relates to a cross‑examination that was
conducted by Mr. Lawford of the MTS Allstream panel on Friday, and in this
passage, beginning here ‑‑ and I will take you through it ‑‑ Mr.
Lawford criticized MTS Allstream for using data that ended in
2001.
8808
I will give you a chance to catch up with me. I'm looking starting at page 880,
line 5898, the question is to ‑‑
8809
DR. ROYCROFT: I'm sorry,
which page?
8810
MR. RYAN: Page 880, line
5898 at the bottom.
8811
DR. ROYCROFT: All
right.
8812
MR. RYAN: Question
5898. Mr. Lefebvre
says:
"The issue here is, when you look
back at the marginal cost trend data that has been used, it was for the period
1988, I believe, to 2001..."
8813
Then going over to the next page, question 5904 at the bottom,
Mr. Lawford says:
"It seems that you are basing your
position of the productivity factor ‑‑ you are inclined to do that on
future estimates, and yet the productivity numbers you are using are, in a
sense, derived from more ancient data, if I could put it that
way.
Wouldn't it be better, if we are
going to be consistent with your position at paragraph 35, to use more
recent productivity numbers?"
8814
Are you with me?
8815
DR. ROYCROFT:
Yes.
8816
MR. RYAN: Given that your
4.2 TFP figure was based on data that ends in 1995, I thought it curious that
your counsel was criticizing MTS Allstream for using data that ended in
2001 and referring to that as "ancient data".
8817
By that measure, the data that you are using is practically prehistoric,
isn't it?
8818
DR. ROYCROFT: I would have
to carbon date it, but the ‑‑
‑‑‑ Laughter /
Rires
8819
DR. ROYCROFT: As I just
testified a few moments ago, I would prefer to have more recent data if that
data was available, and this was the most recent data that I had available for
the Canadian situation.
8820
MR. RYAN: Well, it is the
most recent data, but that doesn't necessarily qualify it as reliable data for
the purposes that you are using it, does it,
Dr. Roycroft?
8821
DR. ROYCROFT: As I
indicated, the technological change in the intervening period as well that is
going to have a strong impact on input usage and the ability to provide a
broader set of services certainly would have an impact on productivity measured
more recently, and because of that I believe that the value stated here is
conservative as it does not include those expanded
opportunities.
8822
MR. RYAN: Well, can we move
on to further on page 53. You
say:
"The X factor you calculate is based
on TFP analysis."
8823
I'm still on paragraph 95.
"The X factor you calculate is based
on a TFP analysis."
8824
Is that right?
8825
DR. ROYCROFT: The X factor
is based on the information contained within Table 8 which we have just been
discussing.
8826
MR. RYAN: It starts with the
TFP growth factor of 4.2 ‑‑
8827
DR. ROYCROFT:
Right.
8828
MR. RYAN: ‑‑ that we have already referred
to.
8829
TFP measures, of course, the difference between output growth in all
services provided by a firm versus growth in all factor inputs used by the
firm.
8830
Is that fair?
8831
DR. ROYCROFT:
Yes.
8832
MR. RYAN: Since the X factor
that you have produced here is based on a measure of the productivity of the
firm as a whole, it is not specific to Res PES, is it?
8833
DR. ROYCROFT: No, it is
not. And the total factor
productivity of an individual product line, especially when you have a
multi‑product firm with significant shared inputs is something that is logically
impossible to calculate, so it's not done.
8834
MR. RYAN: I'm sorry, are you
saying it is logically impossible to calculate the productivity for a specific
subset of services?
8835
DR. ROYCROFT: You would have
to make some sort of set of decisions about how the inputs were going to be
allocated across the services, and therefore the approach, as is indicated by
total factor productivity is to evaluate the operations of the firm and then
that is the answer that you get as a result.
8836
MR. RYAN: So we are agreeing
that total factor productivity isn't an approach that can be adapted to use for
measuring the productivity of a specific subset of
services?
8837
Is that correct?
8838
DR. ROYCROFT:
Right.
8839
MR. RYAN: Right. Okay.
8840
DR. ROYCROFT: From the
standpoint of you can only calculate the total number.
8841
MR. RYAN:
Right.
8842
MR. RYAN: Could we go next
to another document that I passed to you through your counsel, and that is some
selected pages from Decision 2002‑34, which you may recognize as the
decision of this Commission in the previous price
cap case.
‑‑‑ Pause
8843
MR. RYAN: Do you have a copy
of that in front of you?
8844
DR. ROYCROFT: Yes, I
do.
8845
MR. RYAN: Could we look at
paragraph 629, please?
‑‑‑ Pause
8846
MR. RYAN: I would just like
to read a couple of paragraphs from this decision to you and invite your comment
on them.
8847
The Commission says, in
paragraph 629:
"In part of this decision the
Commission determined that the productivity offset will be applied directly to
certain baskets of services and individual rate elements. The Commission notes that this is
significantly different from the initial price cap regime in which a
productivity offset was imposed on cap services overall. The Commission considers that in
applying an X factor to certain baskets of services and individual rate
elements, a TFP‑based approach would be more comprehensive than a marginal
cost‑base approach. However, the
Commission notes that the ILECs were not able to calculate a TFP‑based X factor
on a service‑specific basis."
(As read)
8848
The Commission continues in paragraph 631:
"In these circumstances the
Commission does not consider the continued use of a TFP‑based X factor to
be appropriate. In the Commission's
view, the basic productivity offset for the next price cap regime should be
based on service‑specific marginal costs in order to reflect the actual
productivity gains that are likely to be achieved for individual capped
baskets."
(As read)
8849
So if is fair to say that the approach you are advocating before the
Commission here, which is a TFP‑based approach, is at odds with what the
Commission decided to do in the previous price cap
proceeding?
8850
DR. ROYCROFT: Yes, certainly
it is different. The application of
a total factor productivity based number on specific service sets is something
that has been done in other jurisdictions.
For example, the Federal Communications Commission calculated total
factor productivity for the RBOCs and then applied that number to the interstate
services that were governed by the Commission.
8851
The problem with going with marginal cost‑based approaches, especially
for primary exchange service, given my review of studies performed by Bell, is
that those marginal cost studies assume that 100 percent of the local loop
is attributable to primary exchange service, when it is quite clear that the
local loop is capable of delivering a broad set
of services.
8852
So that the marginal cost‑based approach then, in my view, unfairly
burdens primary exchange service customers with the costs of providing the
shared infrastructure that enables a wider variety of outputs to be
provided. When a company builds a
loop they can provide local services, they can provide long distance services,
vertical services, and now DSL‑type services.
8853
So the approaches are certainly different and it is my opinion that the
marginal cost approach is a weaker one than the total factor productivity
based approach. The Commission
indicates that it at the time thought that a TFP‑based approach would be
more comprehensive, but decided to go otherwise.
8854
MR. RYAN: Right. The considerations you identified were
certainly considerations the Commission would have had in mind the last time
around in price caps 2 when it made its choice as to whether a TFP‑based
approach or a marginal‑cost approach would be a superior way of identifying the
appropriate X factor for a specific subset of
services.
8855
Is that fair?"
8856
DR. ROYCROFT: Yes. The Commission changed its mind once and
I imagine the Commission could change its mind again.
‑‑‑ Pause
8857
MR. RYAN: Could we look next
at your TFP‑DSL study, if I can refer to it that way, which again you have
already touched on, as I said, with Mr. Henry.
‑‑‑ Pause
8858
MR. RYAN: I'm going to go
back to my copy to make sure I can provide some paragraph references as well as
some page references.
‑‑‑ Pause
8859
MR. RYAN: I am going to say
page 49, which is in and around paragraph 88.
8860
Are you with me?
8861
DR. ROYCROFT: This is the
page with Table 6 on it?
8862
MR. RYAN: That's correct, in
and around those pages.
8863
This is where you discuss your TFP growth study for U.S.
telecommunications carriers.
Correct?
8864
DR. ROYCROFT: Yes, I
do.
8865
MR. RYAN: You already
discussed many aspects of this study with Mr. Henry and I won't go over that
territory again. But as I
understand your study, you calculated TFP growth for all services without DSL
and then you proceeded to calculate TFP growth for all services including
DSL.
8866
Is that essentially what you did?
8867
DR. ROYCROFT:
Yes.
8868
MR. RYAN: In point of fact,
the 14 companies you were looking at over the relevant timeframe, which is
2000‑2003, were already providing DSL to one degree or
another.
8869
Is that correct?
8870
DR. ROYCROFT:
Yes.
8871
MR. RYAN: So in order to
calculate, at the first stage of your analysis, the TFP growth for all services
without DSL, you had to back out the DSL relevant costs from these
companies.
8872
DR. ROYCROFT: No, because
the data that I was basing that original TFP study on didn't include the
DSL.
8873
It included the inputs that were ultimately to be shared with the
provision of DSL, such as local loops, but the other aspect of the study was not
necessary to back out.
8874
MR. RYAN: I'm not sure I
understand.
8875
How did you identify all of the inputs associated with DSL then in order
to arrive at your base case for calculating TFP growth without
DSL?
8876
How did you derive that base case number or
numbers?
8877
DR. ROYCROFT: The data
involved with the base case numbers did not identify the production of
DSL.
8878
MR. RYAN: Are we not
proceeding from the premise here that there are some shared inputs between DSL
and other services?
8879
DR. ROYCROFT:
Yes.
8880
MR. RYAN: So how do we
conceptually create the base case where we extract all of the costs associated
with DSL so that we can create a TFP growth number that excludes
DSL?
8881
DR. ROYCROFT: When shared
inputs are present, they only go away when all of the services that use those
shared inputs go away.
8882
So the inputs that ultimately would be shared with DSL were already
present in the data as inputs identified in the company's books of account, but
then ultimately with the addition of DSL I had to account for the production of
the output and the revenues associated with that and the additional investments
that the company would have to make to add DSL, a service that would share the
existing facilities.
8883
When the company added DSL, they did not have to go out and build a new
wire centre. They did not have to
go out and build new loops. They
did not have to build a new main distribution
frame.
8884
All of those inputs were already in place when they began to add the
incremental technology associated with the electronics, which allowed them to
split the loop into its high and low frequency portions.
8885
Therefore, those shared investments were appropriately counted in the
pre‑existing period and in fact because of them demonstrate the potential for
the expanded economies of scope when we add the DSL.
8886
MR. RYAN: For the purpose of
your analysis, all of what become shared expenses you assign to the wireline
service effectively. The costs of
DSL that you refer to are simply the add‑on costs associated with the production
of DSL. They don't include any of
the common costs.
8887
DR. ROYCROFT: No. When I performed the DSL alternative
case scenario, I again calculated total factor productivity with the additional
inputs and additional outputs included in the study.
8888
MR. RYAN: I'm talking about
the base case now.
8889
The base case included all of the ‑‑ you did not extract all of the
costs relevant to the production of DSL.
You only extracted those that are specifically identified with DSL, none
of the shared costs, as it were.
8890
That was your method.
8891
DR. ROYCROFT: The base case
was reflective of the company's production of outputs associated with the FCC's
original modelling, which included things like access lines, dial equipment,
minutes, and so forth.
8892
Those outputs were produced given the set of inputs that the companies
were using at that time, and those inputs would ultimately be shared when the
companies begin to provide DSL.
8893
MR. RYAN: This is what I
said at the beginning. The fact of
the matter is these companies were already providing DSL in the timeframe that
we are talking about here, 2000 to 2003.
Correct?
8894
DR. ROYCROFT:
Correct.
8895
MR. RYAN: It's not like we
had a situation that existed at one point in history where DSL didn't exist, and
then we are looking at a later point in history and we are comparing TFP between
period one and period two.
8896
We are looking at the same period of time. We are extracting certain costs
associated with DSL but not those that are shared with other services in
creating the base case. That is the
approach you took to calculating the TFP growth for DSL.
8897
Is that right?
8898
I think that is what you have told me.
8899
DR. ROYCROFT: Well, I'll
stand by what I told you. I'm not
sure that you characterized what I told you in the same way that I spoke it to
you.
8900
Essentially, the difference that may be driving this discussion is the
underlying data. And the underlying
data for the base case scenarios needed to be augmented to reflect the
introduction of DSL.
8901
MR. RYAN: We start from the
premise that there are costs common to DSL and to wireline services, and you
wish to identify the TFP growth associated with DSL alone.
8902
In order to do that, you need to be able to isolate the costs related to
DSL, do you not?
8903
DR. ROYCROFT: The direct
costs, yes; the shared costs ‑‑
8904
MR. RYAN: All of the
costs.
8905
DR. ROYCROFT: No, I don't
need to isolate or identify the shared costs, because the shared costs represent
pre‑existing infrastructure.
8906
MR. RYAN: I see. So it's a matter of timing
then.
8907
DR. ROYCROFT: How else will
economies of scope arise when you add services if there is not sharing of the
inputs?
8908
I can't go out there and say I'm not producing DSL so therefore I need to
remove loops. Those loops are
already being used to provide voice services. If I take the loop away, take the
investment associated with the loop away, then I have effectively disabled the
company's ability to provide voice services.
8909
MR. RYAN: What I am going to
suggest to you, Dr. Roycroft, is that your whole approach in this study is
conceptually flawed because it proceeds from the assumption that you can isolate
the costs associated with DSL when in fact it is also one of our assumptions
that DSL shares certain costs with wireline services.
8910
So the whole process is misconceived from the beginning, I would
suggest.
8911
DR. ROYCROFT: No. What I do is I conduct two separate
total factor productivity studies.
I compare the results of those total factor productivity studies, and I
do not attempt to isolate or allocate costs in a manner that you are
suggesting.
8912
You are implying that I somehow needed to go in there and allocate costs
in order to identify which costs perhaps that will be incurred in the future
would be attributable appropriately to DSL.
8913
Well, that's not the way that the economics of the situation
works.
8914
The existing facilities are there.
When I add additional services to them, it increases my
outputs.
8915
The same basic logic happened when we went from electronic switching to
digital switching, which enabled the creation of advance custom calling
features. Those advance custom
calling features used the same underlying loop facilities, they shared those
loops, the companies didn't have to go out and build new loops because they were
providing these new custom calling services, and their economies of scope and
their productivity went up as a result.
8916
MR. RYAN: You said near the
beginning of your response, doctor, that you didn't allocate the common costs
associated, such as the loop costs, but in fact you did. You allocated them all to the wireline
side of the business and ignored them for the purposes of
DSL.
8917
Based on your theory that, because the wireline services came first
historically, it was fair to allocate them to that service rather than to take
them into account in calculating the TFP growth of DSL on a standalone
basis.
8918
Isn't that fair?
8919
DR. ROYCROFT: No, it is not
fair at all.
8920
The approach that I utilized did not engage in any allocation of
costs. What it did was to expand
the service set of the companies in question and to account for expanded outputs
and expanded inputs that are reasonably associable with the DSL
service.
8921
Once again, it sounds like you are asking me to go in and do some sort of
cost allocation, when cost allocation is not consistent with doing a
productivity study. A total factor
productivity approach is to look at the overall totality of the inputs within
the definition of the study.
8922
MR. RYAN: Okay. Could we look at Footnote 57 on this
page?
8923
THE CHAIRPERSON: Mr. Ryan, I
am relying on you to tell me when in the next 15 minutes you want to break for
lunch.
8924
MR. RYAN: Thank you, Mr.
Chairman.
8925
Could we look at Footnote 57?
8926
DR. ROYCROFT:
Yes.
8927
MR. RYAN: It is not
necessary to delve into all of the text associated with Footnote 57, but the
last two sentences in the footnote read:
"Given the widely ranging size of
the companies in the study group..."
‑‑ and you are talking about your 14 companies
here, I think:
"...I also included as a control
variable the size of the company as measured in total access lines. The results of the regression are shown
in Table 7 below." (As
read)
8928
Are you with me?
8929
DR. ROYCROFT:
Yes.
8930
MR. RYAN: Could we look at
the part of the table that refers to firm size?
8931
DR. ROYCROFT:
Yes.
8932
MR. RYAN: In your study, you
calculate that the coefficient on the firm size variable is ‑‑ and I know
you have modified this number today ‑‑ ‑.897?
8933
DR. ROYCROFT: Yes, and that
is stated in scientific notation, so between the decimal point and the 8 there
would appear nine zeros.
8934
MR. RYAN: The minus sign
indicates that increasing access lines actually reduces productivity, does it
not?
8935
DR. ROYCROFT: It indicates,
within the sample group here, that the larger firms are associated with slightly
lower productivity increases.
8936
MR. RYAN: That is not quite
what I asked.
8937
DR. ROYCROFT: I'm
sorry.
8938
MR. RYAN: The negative sign
indicates that, as access lines increase, productivity
decreases.
8939
That is what the negative sign indicates.
8940
DR. ROYCROFT: It indicates
that, as the size of the firm in the study group grows, the larger firm
is ‑‑
8941
MR. RYAN: Less
productive.
8942
DR. ROYCROFT: It exhibits
slightly lower productivity numbers.
8943
MR. RYAN: Isn't that result,
that growth in firm size results in ‑‑ growth in access lines results in
lower productivity, isn't that result at odds with what most people would expect
in a study of this sort?
8944
Is it not the conventional wisdom that there are economies of scale and
scope that would be realized as a firm grows in size?
8945
DR. ROYCROFT: Yes. There are also considerations with
regard to the impact of the size of a firm on the coordination ‑‑ the
ability of the firm to coordinate its activities, and there is the potential
that there may be greater difficulty with some of these very large firms in
their ability to implement the DSL technology.
8946
MR. RYAN: I see. So they lack economies of scale and
scope, perhaps due to management‑related issues. Nevertheless, the economies of scale and
scope that one would have expected to be reflected in this study appear not to
exist.
8947
DR. ROYCROFT: No. The order of magnitude of the
coefficient size here is quite a bit smaller than the DSL additions coefficient
and, as a result of that, the net impact is still a positive impact, as
reflected by the averages expressed in Table 6.
8948
MR. RYAN: Is that
coefficient statistically significant or isn't
it?
8949
DR. ROYCROFT: It is, but the
coefficient also says ‑‑ the coefficient associated with DSL additions says
that you have a statistically significant and positive impact, considering this
overall data set.
8950
MR. RYAN: I'm sorry; would
you repeat that?
8951
DR. ROYCROFT: The
coefficient associated with DSL additions says that you have, with the same data
set, an overall positive and statistically significant
coefficient.
8952
MR. RYAN: But I am talking
about the firm size variable.
8953
I just want to make sure that I and the Commission understand your
evidence.
8954
For the purpose of your TFP growth study of the U.S. industry, the result
you arrived at is, I would suggest, at odds with the conventional wisdom; that
is, as the number of access lines has grown, the productivity of the firm has
declined, within your 14‑company study sample.
8955
DR. ROYCROFT: No, you are
misunderstanding what this information is showing, from the standpoint that it
is targeting as a control variable the size of the firm. It is not a direct analysis of scale
economies, as you are suggesting, but rather indicating that ‑‑ controlling
for firm size within this study group, that there is evidence that the larger
firms are exhibiting a more difficult time in achieving the productivity gains
that are consistently shown across the board for all of the firm sizes in the
averages in Table 6.
8956
It sounds like you want me to say that AT&T California, which is a
very large firm, because of this negative sign down here, somehow has not
achieved the 1.02 percent that I show up in Table 6, as far as the average
impact of DSL growth. What this is
saying is that, if you were to break up AT&T into smaller firms, those
smaller firms would exhibit a higher productivity growth than that exhibited in
the table, the 1.02 percent.
8957
MR. RYAN: I think that is
what I have been suggesting, is it not, that as the firm size increases, the
productivity decreases within your sample group?
8958
If you broke up the largest firms, the productivity would be higher than
it is as a consolidated firm.
8959
DR. ROYCROFT: Yes, but still
recognizing that this does not in any way imply that they are experiencing
productivity decreases overall as a result of the addition of
DSL.
8960
MR. RYAN: But I have to say
that it does raise questions in our minds, Dr. Roycroft, about the adequacy of
your model to get a result that appears to be spurious like
that.
8961
DR. ROYCROFT: I don't see
the result being spurious, and I couldn't even comment on what you mean by that,
given the context of the question.
8962
THE CHAIRPERSON: I must say
that I agree, Mr. Ryan. We have
worked this over considerably. The
witness has made a tremendous attempt to explain to you his view. You have another view. That is legitimate. But asking him to agree whether or not
his data is spurious after all of the explanation he has given is not a
constructive use of our time.
8963
MR. RYAN: Thank you, Mr.
Chairman. This would be a
convenient time for lunch.
8964
THE CHAIRPERSON: Thank you
very much.
8965
We will break for lunch and meet again at about 2:20 p.m.,
please.
‑‑‑ Upon recessing at 1250 / Suspension à
1250
‑‑‑ Upon resuming at 1416 / Reprise à 1416
8966
THE CHAIRMAN: Order,
please. À l'ordre, s'il vous
plaît.
8967
Mr. Ryan, you're at bat.
8968
MR. RYAN: Thank you, Mr.
Chairman. Doctor Roycroft.
8969
THE CHAIRMAN: I think we'll go ahead in any case,
Mr. Ryan.
8970
MR. RYAN: Yes, all
right.
8971
Could we go ‑‑ well, doctor Roycroft, in around paragraph 46 and
following of your evidence, you've discussed the input price differential. Feel free to turn to those pages, if you
wish.
8972
It's important, I take it you would agree with me, that in calculating an
X factor, one takes into account the difference between inflation and the price
of inputs used in the telecommunications industry versus prices ‑‑ changes
in prices of inputs used in the economy as a whole.
8973
That's essentially what the input price differential represents, isn't
it?
8974
DR. ROYCROFT:
Yes.
8975
MR. RYAN: Now, you reject
the input price differential used by the Commission in Decision 97‑9, which was,
I think, 0.3. Am I correct? Do you
recall?
8976
DR. ROYCROFT: I believe
that's the value that they applied.
It was based on a historical period that was quite lengthy. I don't remember the exact starting
date, but it went back a number of years.
8977
MR. RYAN: Yes. You characterized that input price
differential from the standpoint of this proceeding. You've characterized it as extremely
backward looking, I think, and on that basis rejected it?
8978
DR. ROYCROFT: Yes. There was information available that was
more recent, that I took a look at.
8979
MR. RYAN: I find it curious
that you would reject the input price differential from Decision 97‑9 as
extremely backward looking and yet, embrace the T.F.P. calculation of 4.2 from
the same proceeding and defend it on the basis that it's simply a conservative
choice.
8980
Do you see any ‑‑ do you see why I find it
curious?
8981
DR. ROYCROFT: Well, I think
if you compare the time series involved with the earlier input price
differential, that it went back into the 1960's whereas the T.F.P. measure was
from 88 to 95.
8982
And as I've already stated, the ‑‑ you know, I would have preferred
to have had more recent total back‑to‑productivity data and given that it is not
available, I applied the number that was available, also noting that it was
characterized by a period where input utilization and output expansion was
conservative, compared to what has been available in the intervening
period.
8983
MR. RYAN: Now, rather than
use the input price differential calculated by the Commission based on that
lengthy series of data that you've just referred to, you opted to use a figure
based on calculation from US data instead.
Is that right?
8984
DR. ROYCROFT:
Yes.
8985
MR. RYAN: If we can go to
page 26, Table 4, that's about paragraph 49, we see your calculation of the
input price differential here?
8986
DR. ROYCROFT:
Yes.
8987
MR. RYAN: And what you've
proposed to use, instead of the input price differential used in the previous
proceeding, is a figure of about two per cent, which is a conflation I think you
explained earlier to Mr. Henry of your 2.96 and your 1.92?
8988
DR. ROYCROFT:
Yes.
8989
MR. RYAN: Could we go next
to page 23 of your evidence, Table 1, around paragraph 46?
8990
DR. ROYCROFT: I'm
there.
8991
MR. RYAN: Now, instead of
using US data to calculate an input price differential, don't we have here in
Table 1 the makings of a plausible input price differential based on Canadian
data?
8992
And I'm referring specifically to the ‑‑ if I look at the right‑hand
column, the second and third figures that appear here is because we have, first
of all, the figure of 1.92 per cent which is the growth in capital equipment
P.P.I., which could serve as a proxy for the economy as a whole and then, the
1.48 is the growth in electrical and communications equipment P.P.I., which
could serve as a proxy for the telecommunications industry and if we subtracted
1.48, a negative 1.48 from 1.92, we would have an input price differential of
negative .44 instead of your positive two per cent.
8993
Now, is there anything wrong with adopting that as the input price
differential instead of the ‑‑ an input price differential based on the US
data that you have used?
8994
DR. ROYCROFT: I don't
believe that it reflects as broad a set of inflation measures. The growth in electrical and
communication equipment P.P.I. is a roll‑up of a number of sub‑categories, some
of which are not publicly available that are more specific to the communication
industry.
8995
The growth and the capital equipment P.P.I. is not necessarily reflective
of the overall growth in inputs, but rather would be focused, you know, more on
the capital equipment side.
8996
MR. RYAN: They're both
capital, aren't they?
8997
DR. ROYCROFT:
Yes.
8998
MR. RYAN: Well, it's you
that put these numbers forward. It
is part of your evidence, Dr. Roycroft, so I'm a bit puzzled as to if they
suffer from those frailties, why do they appear in your evidence at
all?
8999
DR. ROYCROFT: Well, the
capital equipment P.P.I. is reflective of capital equipment values, whereas the
values that I've relied on in Table 3 includes, you know, as expressed in
the non‑farm input price inflation as a broader scope and the growth in capital
equipment, you know, would as a overall measure not be as
well‑matched.
9000
And it was not, you know ‑‑ the approach that I've applied here was
reflective of approaches that were applied by the Federal Communications
Commission in that day, focused on a non‑farm input price inflation as being an
appropriate bench‑mark of comparison.
9001
MR. RYAN: Well, I
can ‑‑ I can see why the F.C.C. might use it in calculating an input price
differential in the context of United States, but I still find it ‑‑ did
you make any effort at all to identify an input price differential based upon
Canadian data, given that you think the data that you've presented in Table 1
isn't suitable for that purpose?
9002
DR. ROYCROFT: Yes, I did try
to find similar data series for Canada and I was informed by the people at
Statistics Canada that they did not have a comparable
series.
9003
MR. RYAN: Comparable to
what?
9004
DR. ROYCROFT: To the
non‑farm input, non‑farm sector input price inflation.
9005
MR. RYAN: So, your
understanding is that it would not be possible to construct an input price
differential using available Canadian statistical data and that the best choice
this Commission can make is to use US data for that
purpose?
9006
DR. ROYCROFT: Given the
limitations on the data that I ran into, I think that this approach is one that
is reasonable from the standpoint that inflation between the United States and
Canada is not that different when you look at various categories, including
things like the G.D.P.P.I.
9007
MR. RYAN: Well, can we go to
paragraph 51 of your evidence because I think you touch on exactly that theme in
paragraph 51.
9008
Now, I didn't mean to interrupt you, but in paragraph 51 you say ‑‑
acknowledging, I suppose, the concerns that I have raised with you:
"While these calculations are based
on US data, I would not expect a significantly different trend for Canadian
telecommunications in general business input prices."
9009
Are you with me there?
9010
DR. ROYCROFT:
Yes.
9011
MR. RYAN: And then, the
point you've just made to me:
"I think Canadian and US inflation
follow similar trends"?
9012
DR. ROYCROFT:
Yes.
9013
MR. RYAN: And that's the
basis for your judgment that one can use US data as an adequate substitute for
Canadian data in a situation that you think ‑‑ output inflation, pardon
me ‑‑ in the situation you ‑‑ that we find ourselves in in this
proceeding?
9014
DR. ROYCROFT: Yes, I think
the paragraph speaks for itself with regard to my
position.
9015
MR. RYAN: O.K. Well, you say, just continuing on in the
paragraph, for example, for the period 2001 to 2005 US inflation calculated on
the G.D.P.P.I average 2.27 per cent, Canadian inflation based on the G.D.P.P.I
average 2.6 per cent for the same period.
9016
And the thrust of what you're saying there is that those figures are
sufficiently similar for your purposes to allow us to rely on the US data for
the input price differential calculations.
9017
Am I understanding you correctly?
9018
DR. ROYCROFT: Yes, that they
are, you know ‑‑
9019
MR. RYAN:
Yes.
9020
DR. ROYCROFT: ‑‑ they are in the same general neighbourhood. It's not as if one is rising and the
other ‑‑ one is positive and the other is negative, they are different
numbers, but they are reflecting generally similar
experiences.
9021
MR. RYAN: So, you don't find
the difference between 2.27 per cent, I take it, which is the US inflation
figure and the 2.6 per cent for Canada, you don't find those to be significantly
different?
9022
DR. ROYCROFT: Given the
level of comparison, you know, three tens of one per cent difference is a
difference, but it is not a order of magnitude sort of difference. They are numbers that are relatively
close.
9023
MR. RYAN: Well, it is. It is if you ‑‑ it is a 15 per cent
differential between them. Would
you agree with me?
9024
DR. ROYCROFT: I can take
your word for the calculation, I would have to do it myself to verify, but it's
.33 per cent, percentage points.
9025
MR. RYAN: Yes. Am I right that this sentence is
about ‑‑ or this paragraph about comparing Canadian and US inflation trends
is the only place in which you address your mind in your evidence to the
suitability of using US data for calculating the input price differential versus
using Canadian data?
9026
Or do you have any other further discussion of the issue somewhere
else?
9027
DR. ROYCROFT: Not that I
recall.
9028
MR. RYAN: Could we go next
to the last document? I intend to
refer you to, Dr. Roycroft, which is an extract from ‑‑ of a few pages from
the Economist for September 16th, 2006?
9029
DR. ROYCROFT: If I have that
document.
9030
THE SECRETARY: Yes. This document would be registered as
TELUS Exhibit number 15.
9031
MR. RYAN: I just thought we
could look at some other comparators ‑‑ economic indicators comparing the
performance of the Canadian and US economies to supplement what you've said
about the ‑‑ what you've described as the similarity in the inflation
trends.
9032
So, could we look first at the table‑headed of "Output demands and jobs"
and the column G.D.P.?
9033
And under the row of numbers headed "Latest," the Economist reports a
figure of 2.9 for Canada and a figure of 3.6 for the United
States.
9034
DR. ROYCROFT:
Yes.
9035
MR. RYAN: Would you regard
those numbers as also similar?
9036
DR. ROYCROFT: I think the
numbers are comparable numbers from the standpoint that once again we are not
looking at multiples or orders of magnitude difference here. We are looking at a difference in this
particular case of 7/10ths of a percent between the two
values.
9037
MR. RYAN: Percentage
points?
9038
DR. ROYCROFT: Yes,
percentage points.
9039
MR. RYAN: If we look in the
column headed industrial production, latest, the figure for Canada is
.4 percent and the figure for the United States is
4.9 percent.
9040
Would you regard those as in the same ballpark as
well?
9041
DR. ROYCROFT: These I would
say are a little bit more different than the previous number in that the value
for Canada is close to zero and the value for the United States is
4.9 percent.
9042
Given that this is tracking industrial production, the relevance of this
with regard to the issues associated with an input price differential for the
telecommunications industry, I don't see them as being quite as pertinent and
GDPPI inflation differences.
9043
MR. RYAN: You don't think
that is pertinent, but you think a simple general measure of inflation
experience in the two economies is pertinent as establishing a sufficient link
between the Canadian and U.S. data to make it suitable to rely on the U.S.
data?
9044
DR. ROYCROFT: Well, the
GDPPI factors into the price cap formula whereas industrial production does not
factor into the price cap formula so it would seem to have somewhat more
bearing, that is the GDPPI inflation as opposed to industrial
production.
9045
MR. RYAN: Well, let us look
at the next table on the same page headed "Prices and Wages". I'm looking now, for instance, under
producer prices.
9046
You see the number for Canada is ‑.3 percent a year
ago.
9047
DR. ROYCROFT:
Yes.
9048
MR. RYAN: And the figure for
the United States a year ago is 4.7 percent.
9049
Does the divergence between those numbers give you any cause for concern
about your approach to the income price
differential?
9050
DR. ROYCROFT: Well, these
would suggest that producer prices in Canada are not rising as rapidly as they
are in the United States. In fact,
they actually decline for that year ago period identified here which, if you
were to rely on the U.S. experience, would tend to not accurately reflect what
is happening in Canada.
9051
MR. RYAN: So all in all do
you have any second thoughts about your evidence to the Commission that there is
not what you refer to as a sufficiently significantly different trend in input
prices in Canada and the United States to lead you to have any concern about
your approach to the calculation of the input price
differential?
9052
DR. ROYCROFT: If I could
have acquired data for Canada that matched the type of data that I found
available in the U.S. and has been used in the U.S. in the past to address these
issues, I would have relied upon that information. And I did make the effort to try to
uncover that data, but was told that it was not available. So in my opinion I did the next best
thing, and that was present the data based on the u.S.
experience.
9053
MR. RYAN: All right. Those, then, are all my questions. Thank you, Mr.
Chairman.
9054
Thank you, Dr. Roycroft.
9055
DR. ROYCROFT: Thank
you.
9056
THE CHAIRPERSON: Thank you,
Mr. Ryan.
9057
Madame la secrétaire.
9058
THE SECRETARY: Thank you,
counsel.
9059
We will now proceed with MTS Allstream, counsel
Koch.
‑‑‑ Pause
9060
MR. KOCH: Thank you,
Madam Secretary.
CROSS‑EXAMINATION /
CONTRE‑INTERROGATOIRE
9061
MR. KOCH: My name is Michael
Koch, Dr. Roycroft, and I am representing MTS Allstream. With me is Mr. Bernie Lefebvre of Wall
Communications, who has assisted MTS Allstream in this
proceeding.
9062
The first line of questions I have for you ‑‑ and I don't have a lot
for you, Dr. Roycroft, it has been a long day ‑‑ goes back to one of
your working papers which you provided in answer to Interrogatory Consumer
Groups MTS Allstream‑14.
9063
Mr. Chairman, I believe Madam Secretary has passed that up not because it
is a new exhibit but just out of convenience so that we don't all have to go
digging in the binders.
9064
THE SECRETARY: I'm
sorry.
9065
THE CHAIRPERSON: Mr. Koch,
whether you like it or not, it is an exhibit.
9066
THE SECRETARY: It is an
exhibit.
9067
THE CHAIRPERSON: It has been
made an exhibit. It is MTS
Allstream‑4.
9068
MR. KOCH: This is what
happens when one tries to keep things simple. Thank you.
EXHIBIT NO.
MTS ALLSTREAM‑4: International
Journal of Development Planning Literature Vol. 16 Numbers 1 &
2
‑‑‑ Laughter / Rires
9069
MR. KOCH: Dealing with that
exhibit, then, the document ‑‑ do you have it
Dr. Roycroft?
9070
DR. ROYCROFT: I don't have
it at this point, no.
9071
MR. KOCH: I'm sorry, I gave
a copy to your counsel. Perhaps you
could just ‑‑
9072
DR. ROYCROFT: Now I have
it.
9073
MR. KOCH: Great. Thanks.
9074
This is an article that you authoured in 2001 entitled "The Impact of
State and Federal Regulation on RBOC Productivity Growth, Estate Level
Analysis".
9075
As I understand the overall objective of this paper was to try to measure
the effect of the move from rate of return regulation to price cap regulation on
a firm's productivity growth.
9076
Is that a fair statement of what you were trying to
measure?
9077
DR. ROYCROFT: Yes, it
is.
9078
MR. KOCH: The article itself
didn't have page numbers, but there are page numbers on the
exhibit.
9079
If you could look at the page with 38 at the top,
please.
‑‑‑ Pause
9080
MR. KOCH: Do you have
that?
9081
DR. ROYCROFT: Yes, I
do.
9082
MR. KOCH: Thank
you.
9083
At the bottom of that I want to focus your attention to the sentence
at the end of the first paragraph.
9084
It says:
"It is commonly recognized that the
determinance of TFP growth are the growth in total output and technological
advances."
9085
I take it you would agree with me that growth in total output generally
leads to an increase in productivity.
9086
Is that correct?
9087
DR. ROYCROFT: Right. Recognizing that total output here is
talking about both the number of outputs produced as well as the potential
quantities associated with that output.
9088
MR. KOCH: Thank
you.
9089
In order for output growth to be a determinant of TFP growth, I take it
economies of scale must exist.
9090
Is that correct?
9091
DR. ROYCROFT: Economies of
scale certainly can contribute to total factor productivity growth. They are not the sole source of total
factor productivity growth.
9092
MR. KOCH: So there may be
other sources, but they typically do exist for output growth to be a determinant
of TFP growth?
9093
DR. ROYCROFT: Economies of
scale?
9094
MR. KOCH:
Yes.
9095
DR. ROYCROFT: Yes, they can
contribute.
9096
MR. KOCH: All
right.
9097
In measuring the effect on TFP of moving the price cap regulation, I take
it you wanted to isolate the other variables that might be at play other than
the move from one form of regulation to the other.
9098
Is that correct?
9099
DR. ROYCROFT: That is
correct.
9100
MR. KOCH: You deal with
this, I take, on the next page. If
we just turn over to the page marked 39 you indicate:
"TFP growth can be affected by
factors beyond regulatory plans."
9101
That is what you are talking about.
There could be other things affecting TFP growth other than what you were
trying to measure, which was the move from rate of return regulation to price
cap regulation.
9102
Is that correct?
9103
DR. ROYCROFT: That is
correct.
9104
MR. KOCH: All
right.
9105
The first that you list is:
"Unusual changes in the growth of
outputs and/or inputs may influence TFP growth."
9106
You also say:
"In addition, technology deployment
may affect TFP growth."
9107
I take it what you wanted to do in this study was control for the
effects of those other factors.
9108
Is that correct?
9109
DR. ROYCROFT: That is
correct.
9110
MR. KOCH: To control for the
factor of unusual influences on output growth, in fact you used a line growth
variable.
9111
Is that correct?
9112
DR. ROYCROFT:
Yes.
9113
MR. KOCH: All
right.
9114
You indicate here:
"Line growth tracks the change in
growth of switched access lines."
9115
You state:
"During the period 1996 to 1998
growth of the Internet has led to increased demand for LEC services, especially
second lines. This can lead to
increases in TFP growth."
9116
You continue then:
"However, the Telecommunications Act
of 1996, by allowing facilities based local exchange competition, may lead to
decreases in access line growth."
9117
Do you see that?
9118
DR. ROYCROFT:
Yes.
9119
MR. KOCH: I take it the
reason you used line growth ‑‑ I mean, generally when you are conducting
this type of analysis, you would try to identify variables that are reasonable
proxies for the phenomenon that you are trying to isolate.
9120
Is that correct?
9121
DR. ROYCROFT: Yes,
recognizing that a perfect dataset is not available and you approximate as best
you can.
9122
MR. KOCH: So the proxy that
you used for output growth was in fact line growth, access line
growth.
9123
DR. ROYCROFT:
Right.
9124
MR. KOCH: Thank
you.
9125
Another variable that you were controlling for was, as you indicate on
this page, technology deployment because that is another major determinant of
TFP in telecommunications, is it not?
9126
DR. ROYCROFT:
Yes.
9127
MR. KOCH: At the foot of
this paragraph you say:
"Finally, a quantitative variable
fibre is added to control for technology deployment. Fibre measures the total kilometres of
fibre optic cable deployed by each company in the study."
9128
What you are doing there is you are using ‑‑ just as you used access
line growth as a variable, or proxy rather, reasonable proxy, to reflect output
growth, here you are using fibre optic cable deployed as a reasonable proxy for
technology deployment.
9129
Is that correct?
9130
DR. ROYCROFT:
Right.
9131
MR. KOCH: Thank
you.
9132
I would like to move to another area.
9133
DR. ROYCROFT: Another area
of this paper?
9134
MR. KOCH: No. We are going away from this paper, so
you can throw that out.
‑‑‑ Laughter / Rires
9135
MR. KOCH: I wasn't trying to
be funny ‑‑ but a lot of my questions may have unintentional
consequences.
9136
I would like to go directly to the bottom line, which is the calculation
that you propose for an X factor by this Commission.
9137
Mr. Chairman and Commissioners, this can be found at Table 8, which is at
page 53 of your report, Dr. Roycroft.
9138
I think it is also reproduced in an exhibit that my friend Mr. Henry
passed around, which is Companies Exhibit No. 11.
9139
THE CHAIRPERSON: And the
paragraph number is...?
9140
MR. KOCH: I think it is
associated with paragraph 78, but it's on the next page,
95.
9141
DR. ROYCROFT: Page
95?
9142
MR. KOCH:
Yes.
9143
THE CHAIRPERSON: And I don't
think it is fair to say that the table is the same. The table has additional editorial
material from Bell.
9144
MR. KOCH: You are
correct. Nothing turns on that, Mr.
Chairman.
9145
I am happy to use the table in your report, Dr.
Roycroft.
9146
As I understand your calculation, you are proposing that the Commission
first begin with the industry TFP growth from a previous plan. As Mr. Ryan clarified with you,
that was the TFP growth the Commission noted in its decision relating to the
first price cap period.
9147
Is that correct?
9148
DR. ROYCROFT: That is
correct.
9149
MR. KOCH: As I believe also
Mr. Ryan covered with you, that covered the period 1988 to
1995.
9150
Is that correct?
9151
DR. ROYCROFT:
Yes.
9152
MR. KOCH: You would agree
with me, would you not, that by its very nature, because this is a TFP
calculation, it had to have included certain economies of
scope?
9153
They may not be all the economies of scope you want to capture, but it
would have included economies of scope, would it not?
9154
DR. ROYCROFT: Yes, it
would. It would have included the
economies of scope associated with the production mix at that particular time
frame.
9155
MR. KOCH: If we turn back a
few pages to the erroneous reference I gave, which was to the table associated
with paragraph 78, Mr. Chairman ‑‑ it is found on page 43 of 60 ‑‑ you
have a table here of TELUS products and services.
9156
Do you see that, Dr. Roycroft?
9157
DR. ROYCROFT: Table
5?
9158
MR. KOCH: Yes. Do you see that?
9159
DR. ROYCROFT:
Yes.
9160
MR. KOCH: I think we before
we discuss the table, if I could take you to the last sentence of the paragraph
below the table, you say:
"Thus, given the expanding set of
services, the recovery of costs associated with looped plant, inter‑office
facilities, customer support and marketing and billing can be spread over an
ever‑growing set of services."
9161
That is essentially a statement of what you want to try and accomplish or
persuade the Commission to do through your analysis and evidence in this case,
is it not?
9162
DR. ROYCROFT: I am asking
the Commission to recognize that the productivity measure that has previously
been adopted does not address the growing set of services that are now
associated with the provision of the infrastructure or the use of the
infrastructure that underlies the services that are being
provided.
9163
MR. KOCH: If we look at
Table 5, you have a list of TELUS products and services.
9164
I want to ask you questions about this. My frame of reference for these
questions, Dr. Roycroft, is the period of 1988 to 1995, which was associated
with an earlier TFP calculation of the Commission's.
9165
You have here call services, local line. Those were services provided during that
period, were they not?
9166
DR. ROYCROFT: Local access
lines, yes.
9167
MR. KOCH: And long
distance?
9168
DR. ROYCROFT: Yes, that
would have been a service that would have been associated with that period as
well.
9169
MR. KOCH: And calling
cards?
9170
DR. ROYCROFT:
Yes.
9171
MR. KOCH: If you don't know,
that's an acceptable answer in this quiz.
9172
DR. ROYCROFT: I'm certain
that in the United States they were available. I imagine they were available here, but
I couldn't say with certainty.
9173
MR. KOCH: Calling features
and voicemail?
9174
DR. ROYCROFT: I think there
has been an expansion of the calling features that are available in the
timeframe in question.
9175
MR. KOCH: But there were
calling features and voicemail prior to 1995, were there not,
Dr. Roycroft?
9176
DR. ROYCROFT:
Yes.
‑‑‑ Background noise / Bruit de
fond
9177
MR. KOCH: There were not
ring tones, thankfully, Mr. Chairman.
‑‑‑ Laughter / Rires
9178
MR. KOCH: Bundles? Are you aware to what extent there was
some bundling of services during that period?
9179
DR. ROYCROFT: No, I'm
not.
9180
MR. KOCH: Internet. Was there high speed Internet during
that period?
9181
DR. ROYCROFT: No. The Internet did not reach the
privatization period until 1995. So
the Internet would have been not included in that.
9182
MR. KOCH: There was some
dial‑up, though, if we go two layers below, was there not?
9183
DR. ROYCROFT: I'm sorry, for
the period 1988 to 1995?
9184
MR. KOCH: That's
correct.
9185
DR. ROYCROFT: No, there
wasn't.
9186
MR. KOCH: That is your
evidence, that there was no dial‑up in ‑‑
9187
DR. ROYCROFT: Pardon
me?
9188
MR. KOCH: Is it your
evidence there was no dial‑up in 1995?
9189
DR. ROYCROFT: There was no
dial‑up to the ‑‑ the dial‑up to the Internet at that point was very
limited from the standpoint that the Internet had not opened to the general
public.
9190
The first interconnection with the general public occurred in 1995 with
America On Line and other ISPs at that point being able to interconnect with the
Internet, which previously had been a publicly funded entity alone utilized by
government agencies and research universities.
9191
While it was certainly the case that dial‑up technology existed, the
magnitude of dial‑up for data services was much more limited in the period in
question.
9192
MR. KOCH: There were other
data services being provided at that time?
9193
DR. ROYCROFT: Right. There was relatively limited
availability of data services as compared to what transpired after the Internet
was privatized in the mid‑1990s.
9194
MR. KOCH: In terms of the
lists of products here, you have telephones. Those were available during that period
of time.
9195
DR. ROYCROFT:
Yes.
9196
MR. KOCH: Some home
networking. Probably not what we
have today, you would agree with me?
9197
DR. ROYCROFT: Home data
networking?
9198
MR. KOCH:
Yes.
9199
DR. ROYCROFT: I wouldn't
rule it out that there as some technologically savvy person who had constructed
a home network, but it certainly was not of the magnitude that we are seeing
these days.
9200
MR. KOCH: In that period
there were certainly wireless services which were introduced in the
mid‑1980s.
Correct?
9201
DR. ROYCROFT: Yes. Once again on a much smaller scale of
operation compared to what has happened in more recent
years.
9202
MR. KOCH: And fax machines
certainly.
9203
DR. ROYCROFT:
Yes.
9204
MR. KOCH: Thank
you.
9205
I would like to talk to you about the stretch factor that you are
proposing the Commission impose.
9206
Perhaps you could turn to paragraph 92 of your report. You state there, in response to, I take
it, your own question of whether a stretch factor is still
appropriate:
"Yes. While the Commission has framed the
issue of a productivity dividend in terms of the need to offset the negative
bias associated with the carry‑over of rate of return incentives in the measure
of productivity, a consumer productivity dividend can do more than address the
gains from the abandonment of rate of return regulation." (As read)
9207
What you are reflecting there in the first part of that long sentence is
the fact that when the Commission applied a stretch factor for the first price
cap period ‑‑
9208
And we are agreed that they didn't reapply it in the second period. Correct?
9209
DR. ROYCROFT: That is
correct.
9210
MR. KOCH: Okay. When the Commission chose to apply a
stretch factor in the first cap period, it did so to reflect its thinking at the
time ‑‑ and that is in the decision ‑‑ that it was to reflect the
transition from rate of return regulation to price cap regulation. Correct?
9211
That was the rationale for the Commission's imposition of a stretch
factor at that time.
Correct?
9212
DR. ROYCROFT: Yes, and it
reflected a general thinking at the time that there was a bias associated with
productivity estimates based on historical data.
9213
MR. KOCH: And the stretch
factor that the Commission applied at that time was 1 percent. Correct?
9214
DR. ROYCROFT:
Yes.
9215
MR. KOCH: Now you indicate
that, in your view, the Commission must consider whether the calculation of TFP
growth reasonably reflects the future productivity gains likely to be
achieved.
Correct?
9216
DR. ROYCROFT:
Yes.
9217
MR. KOCH: If we go further
down in the paragraph, onto the next page, you have a sentence commencing with
the word "Marginal". Do you see
that sentence, Dr. Roycroft?
9218
DR. ROYCROFT:
Yes.
9219
MR. KOCH: It
reads:
"Marginal cost studies based on
historical data and directed at individual product lines are unlikely to reflect
these economies of scope. Thus, it
continues to be appropriate to include a stretch factor to make up for this
deficiency." (As
read)
9220
What you are referring to here, in terms of marginal cost studies, is the
type of study that was applied by the Commission in the second price cap
decision.
Correct?
9221
DR. ROYCROFT:
Yes.
9222
MR. KOCH: And the marginal
cost study resulted, in that case, in a productivity offset of 3.5 percent. Correct?
9223
DR. ROYCROFT: That is
correct.
9224
MR. KOCH: But you, in your
calculation of the X factor, which is on the next page, don't begin with the 3.5
and apply a stretch factor to that, do you? You begin with the 4.2 and apply a
stretch factor.
9225
Is that not correct?
9226
DR. ROYCROFT: That is
correct, and I think, if I were writing this testimony again, I would have been
a little bit more explicit about the language on the marginal cost studies and,
most likely, I would have had an "or" statement associated with reference to the
existing TFP study that is highlighted in Table 8.
9227
MR. KOCH: As I understand
your evidence, the only calculation you have done ‑‑ and I recognize, Dr.
Roycroft, I want to be fair to you, that you come here and you say that it is
illustrative ‑‑ is the calculation of the impact of what you say would be
the impact on productivity if one took into account the provision of DSL. Correct?
9228
DR. ROYCROFT: That is
correct.
9229
MR. KOCH: You will agree
with me that, even if we accept your study of the impact of that, it is not a 1
percent stretch factor, is it?
9230
DR. ROYCROFT: The number is
.57 percent.
9231
MR. KOCH: Right. In fact, the 1 percent that you use, Dr.
Roycroft, comes from the Commission's stretch factor in Decision
97‑09.
9232
You say at paragraph 93:
"In Decision 97‑09 the Commission
adopted a 1 percent stretch factor.
I believe that the Commission is justified in imposing a stretch factor
of this magnitude for the next price cap period." (As read)
9233
So you are basically taking that stretch factor that was done for that
purpose and applying it here for a different purpose.
9234
Is that not correct?
9235
DR. ROYCROFT: I think I
identify that as a point of reference.
Ultimately, my recommendation is that the Commission should consider
adding a stretch factor of up to 1 percent.
9236
MR. KOCH: So you are not
proposing, then ‑‑ maybe I misunderstood your evidence ‑‑ that the
Commission reapply a 1 percent stretch factor because that was the amount of the
stretch factor it applied in the first price cap period.
9237
Is that your evidence?
9238
I want to make sure that we all understand the basis for your
recommendation.
9239
DR. ROYCROFT: In the text
surrounding Table 8, I think I explain clearly my thinking with regard to
suggesting that the Commission interpret the evidence before them and then
develop a stretch factor that they believe is appropriate given that
evidence.
9240
MR. KOCH: Again, taking your
evidence, which, as you agreed with me, is restricted to the impact of DSL,
taking it at face value ‑‑ my friends have said a lot about whether it is
right or wrong, but I won't quibble with the figure ‑‑ the figure you use
is 0.57 percent.
Correct?
9241
DR. ROYCROFT: Correct,
recognizing that that study only addresses the DSL service and does not address
the value‑added services that the companies can then add on top of the DSL once
they have the broadband technology in place.
9242
MR. KOCH: As I understand
it, though, the 0.57, even itself, is not an average annual figure, but rather
is a figure over a four‑year period.
Correct?
9243
DR. ROYCROFT: That is
correct.
9244
MR. KOCH: So if we actually
were to reduce the 0.57 to an annual figure, would you not agree with me that it
would be more like .2 percent, since we would have three annual periods, or
three year‑over‑year increases, adding up to the
.57?
9245
DR. ROYCROFT: No, I think
that average is the average of the year‑over‑year
increases.
9246
MR. KOCH: Do you have before
you Interrogatory MTS Allstream‑10?
9247
Perhaps Mr. Lawford could get that for you.
‑‑‑ Pause
9248
MR. KOCH: Do you have that,
Dr. Roycroft?
9249
DR. ROYCROFT:
Yes.
9250
MR. KOCH: The question is
asked in (a):
"Clarify whether the estimated
overall weighted average TFP growth impact of 0.58 percent is an average annual
impact or the total impact covering the four‑year period under
consideration." (As
read)
9251
The answer you provide at page 39 of 40 is that the 0.58 percent, which
is corrected to 0.57 percent, reflects the overall weighted average over the
four‑year period across the 14 companies.
Correct?
9252
DR. ROYCROFT:
Yes.
9253
MR. KOCH: Should we not
unpack that to mean a year‑over‑year increase of roughly .2 percent, rather than
the .57 percent?
‑‑‑ Pause
9254
DR. ROYCROFT: I think I
would like to look at my work paper prior to giving an answer on that, because I
am really not certain of the answer at this point.
9255
MR. KOCH: Okay. I am prepared to have you undertake to
provide the answer, if there is that degree of
uncertainty.
UNDERTAKING NO.
MTS ALLSTREAM‑1: Dr. Roycroft
to verify whether the Average Impact of DSL on TFP Growth (2000-2003) of 0.57%
reflects an overall weighted average over the four‑year period or whether it
reflects an average annual impact
9256
DR. ROYCROFT:
Okay.
9257
MR. KOCH: That is the end of
my questions, Mr. Chairman.
9258
Thank you.
9259
THE CHAIRPERSON: Thank you,
Mr. Koch.
9260
Madame la secrétaire.
9261
THE SECRETARY: Thank you,
counsel.
9262
I will now call on counsel Macdonald on behalf of BCOAPO et al. Thank you.
9263
MS MACDONALD: Good
afternoon.
9264
THE CHAIRPERSON: Just let
the record show, this is Ms Macdonald.
CROSS‑EXAMINATION /
CONTRE‑INTERROGATOIRE
9265
MS MACDONALD: Dr. Roycroft,
could you comment on the appropriateness of having an uncapping test before the
elimination of market power specifically as well with respect to the forbearance
decision?
9266
DR. ROYCROFT: The
forbearance decision, in my understanding of it, provides a process for the
companies to achieve uncapping based on a set of criteria related to market
power.
9267
As result of that process, the companies can achieve both uncapping and
de-averaging in the areas that satisfy those tests. Given that structure, juxtaposed to a
price cap framework, it seems to overall create a reasonable approach to
addressing the management of market power and the development of
competition.
9268
The uncapping tests that I have seen proposed in this proceeding all
circumvent the standards that were developed in the forbearance proceeding and
offer an alternative approach to uncapping which, in my opinion, allows for
market power to continue to exist, even though the test has been
met.
9269
MS MACDONALD: Following from
that, if the Commission was to adopt the uncapping test of first TELUS and then
Bell, could you give me your prediction or, based on your experience, what would
be the impact on residential consumers?
9270
DR. ROYCROFT: The Commission
recognized in the forbearance decision that even in areas that passed their
forbearance test, which has a fairly rigorous standard associated with it from
the standpoint that it requires evidence that indicates the undermining of
market power, the Commission nonetheless recognized that there were still
uncontested customers and vulnerable customers in the forbearance
areas.
9271
That is going to be even more true if we were to pursue a forbearance
approach that would apply a test which did not address market power and rather
just relied on whether or not there was a presence associated with an
alternative provider.
9272
In those circumstances, the opportunity for abuse of market power would
be substantial in that consumers, given the mere presence of an alternative
provider, do not necessarily face market conditions which are capable of
disciplining market power. So, the
issues associated with price increases or undue discrimination would certainly
arise in that sort of an environment.
9273
MS MACDONALD: TELUS has
proposed a test that would ‑‑ pardon me, not a test, but has proposed a
mechanism by which customers could be potentially protected in their
uncapping.
9274
I can't recall the name of it.
Your question led me to think and ask you if the TELUS proposal to
protect customers in regions that are uncapped, can you tell me would that
protect customers? Are you familiar
with what I am talking about, even though I don't recall the name of it
offhand?
9275
DR. ROYCROFT: I think I
would need to refresh my memory on the specifics of it because I don't
recall.
9276
THE CHAIRPERSON: The TELUS
proposal is that if a customer could demonstrate that they did not in practice,
in an otherwise uncapped area, exchange in this case, as I recall, if the
customer could demonstrate they didn't have competitive alternatives, that they
could have, as it were, the right to the capped price in the nearest capped
exchange.
9277
Am I doing justice to the TELUS proposal? So, I think the question is: When you raise the concern about orphan
customers, let's call them orphan customers, Dr. Roycroft, do you think that
that compensatory protection proposed by TELUS would be
adequate?
9278
DR. ROYCROFT: It certainly
is in the right direction from the standpoint of offering an option for the
customer to continue to have price protection.
9279
The concern that I have regarding TELUS' proposal, now that my memory has
been refreshed, is how the customer would become aware of that alternative, and
it seems that there is something of an information problem there. So, if that could be adequately
addressed, you know, capping the prices of services for vulnerable customers is
certainly the type of direction that you would want to take, and it seems to be
in the general spirit of the price ceiling that the Commission describes for the
forbearance areas.
9280
MS MACDONALD: Thank you, Mr.
Chair.
9281
I want to move to a different area.
I wanted to ask you about the view expressed by the ILECs, that local
optional services are discretionary service and should be priced simply by how
much consumers are willing to pay for them.
9282
Can you comment on that view of the ILECs?
9283
DR. ROYCROFT: Yes. The discretionary services are, by their
very nature, optional. That is one
aspect which has led to a more generous treatment of discretionary services when
it comes to pricing flexibility.
9284
The fact, however, is that consumers, once they choose a service
provider, do not have alternative sources of those services which go with or
complement basic exchange service.
9285
As I describe in my testimony, there are certain services which the
Commission has identified which are related to basic exchange service which
deserve higher degrees of protection, and I think that in the process of
granting pricing flexibility for complementary services, that it is necessary to
keep in mind the impact of those services on the technology that the consumer is
using with basic service.
9286
Some of the newer features, such as caller ID, add a high degree of new
functionality to basic telephone service.
It is a service which consumers have generally warmed to from the
standpoint that they like caller ID and the power that it gives them over
management of their call services.
9287
The deployment of that sort of technology is certainly something that is
desirable in that it improves the quality of basic local exchange service, and I
think that it warrants some scrutiny and some examination to determine whether
or not it makes sense to completely let go of the pricing constraints on
services in general. But if the
Commission were to be interested in a more streamlined approach to certainly
identify certain services, and I think caller ID is certainly one of them, where
there is an improvement in technology, that would warrant price protection to
encourage the consumption of a service such as that.
9288
MS MACDONALD: In your
experience, are there any instances where ILECs have been allowed to reduce
prices for some customers before forbearance without acquiring the right to
increase them elsewhere?
9289
DR. ROYCROFT: Could you
reask the question? I just need to
hear it again.
9290
MS MACDONALD: Are there any
instances where ILECs have been allowed to reduce prices for some customers
before forbearance without acquiring the right to increase them
elsewhere?
9291
DR. ROYCROFT: Certainly in
regulatory plans in the United States there have been flexibilities granted with
regard to downward pricing by and large still at an averaged
level.
9292
I'm really not sure if I'm following your question as far as the latter
part of it and its connection to the first part of it. I'm just having difficulty
understanding.
9293
THE CHAIRPERSON: Ms
Macdonald, are you asking a question about American regulatory practice in
particular or are you asking a question about the world, or what is the universe
of relevant examples?
9294
MS MACDONALD: Well, I
understand from Dr. Roycroft's experience that it would be the American
experience that he would be able to comment, but certainly if he had any other
instances that he was aware of...
9295
Essentially that is how I understand the uncapping proposals that we have
here and I'm just wondering if you are aware of any other instances before
forbearance where something similar has happened and what has been the
impact?
9296
DR. ROYCROFT: Well, I have
seen instances where the services other than basic service have been uncapped
and as a result of that those services were subject to fairly substantial and
rapid price increases where the companies were allowed to increase prices for
calling features and bundles without regard to a cap, but still had the cap in
place on primary exchange service.
9297
So the response that I have seen in general with regard to what happens
when you lift the constraints is that the companies act in a manner which is
consistent with the exercise of market power, that especially for residential
customers you see the increase in prices.
9298
It is also true that companies, especially in the business market where
they have been granted individual case‑basis pricing respond accordingly, and if
they are feeling the sufficient competitive pressures may have decreased prices
for certain business services.
9299
MS MACDONALD: Just to follow
up on that, again in your experience, either in what you know about the United
States of America or anywhere, have you ever seen an instance where ILECs can't
raise rates, that in effect there would be a price freeze before
forbearance?
9300
DR. ROYCROFT: Prior to
forbearance?
9301
MS MACDONALD: Prior to
forbearance.
9302
DR. ROYCROFT: Yes, I think
that there have been a substantial number of, for lack of a better
characterization, ad hoc approaches to managing the transitional period in the
United States and those include rate freezes for basic services and substantial
pricing flexibility for other services.
The company in that situation is still under the Commission's authority
and the Commission does not forbear over the services in question, but price
freezes for basic service have characterized a large number of plans that are in
effect in the United States today.
9303
MS MACDONALD: Just so I'm
clear, when you are saying price freezing, when I first asked the question I
also had said that they wouldn't be allowed to raise rates. So not only a price freeze, but no
raising of rates for residential service.
9304
Is that the same answer?
9305
DR. ROYCROFT: Yes. Once again, as I mentioned, these plans,
as they are ad hoc plans, they vary from State to State and over time in States
from the standpoint that they generally mean that the prices of basic service
cannot rise. In some instances they
may allow for downward pricing of basic service, but by and large The Companies
are interested in the flexibility they get for pricing bundles and vertical
features as opposed to the price ‑‑ you know, the price of basic
service is kept constant, is not allowed to increase.
9306
MS MACDONALD: So if there
was a price freeze, there was no ability to raise rates before forbearance, if
the Commission decided to make that kind of decision, in the American
experiences that you say that you have knowledge of, is there enough time line
that we can see what the impact of that type of imposition of a mechanism before
forbearance?
9307
DR. ROYCROFT: Is there
evidence of what sort of price changes have occurred?
9308
MS MACDONALD: Yes, but
essentially I'm looking for what would be the impact on residential consumers
and the protection of residential consumers if that was
imposed?
9309
DR. ROYCROFT: Well, the
impact would depend on the overall structure of the framework. The data that I have seen, for example
over the last three years, a plan similar to what we have been describing here
in general terms was implemented in the State of Ohio for the large local
exchange carriers in that State, the largest being AT&T Ohio, formerly SBC
Ohio, and basic rates are capped, the customer pays the same basic rate during
this period without those rates going up, and they have experienced substantial
increases with regard to a host of calling features such as caller ID, three‑way
calling, call waiting, operator services such as operator busy verification and
operator interrupt, a whole host of complementary services under the plan are
allowed to have their prices determined at the company's discretion and the
company has selected to raise those prices.
9310
MS MACDONALD: Following up
on that, what if they weren't allowed to increase some of the optional features
that you mentioned? So they weren't
allowed to raise their rates, there was a rate freeze, and they weren't given
the opportunity to increase anything else before
forbearance?
9311
DR. ROYCROFT: As an
alternative what would have been the impact on consumers if there was
essentially an across‑the‑board rate freeze?
9312
Consumers would not have had their prices go up for the option
features. The impact on basic
service would be the same across the two regimes from the standpoint of basic
service rates don't change, but the vertical features, if they were capped,
would not have their price increased.
9313
MS MACDONALD: Thank
you.
9314
Do you have any comments upon the adjustments to the marginal cost
analysis proposed by the ILECs based on such factors as line
losses?
9315
MR. RYAN: Mr. Chairman, I
apologize for interrupting my friend during her cross‑examination, but
cross‑examination is normally reserved for parties who are adverse in interest
to each other and I'm not detecting that that is the direction some of these
questions are going.
9316
I am particularly concerned that the witness now is being asked to
amplify his evidence on a point that could have been the subject of his evidence
in chief in which I would have had an opportunity to cross‑examine him on if he
had done so.
9317
So I'm afraid I have to object to that question.
9318
THE CHAIRPERSON: I have been
trying to provide the cross‑examination a good deal of leeway because of the
general information recitation that is going on here.
9319
Mr. Ryan, I would like to permit the question and the subsequent
questioning and if you wish to return and go on re‑cross we will allow
that.
9320
Is that reasonable?
9321
MR. RYAN: Mr. Chairman, I
understand the informational needs and the Commission's desire to maximize the
opportunity to have all available information put at its disposal, but that
particular question I thought did go beyond that and simply asked for the
witness to restate his position on ‑‑
9322
THE CHAIRPERSON: I think it
does to a degree, Mr. Ryan, but I have also suggested you would have an
opportunity to follow‑up ‑‑
9323
MR. RYAN: Thank you, Mr.
Chairman.
9324
THE CHAIRPERSON: ‑‑ in what I consider to be the unlikely event you
feel that some piece of information has come out that you absolutely have to
come back on, we will permit you to do that.
9325
MR. RYAN: Thank you,
sir.
9326
DR. ROYCROFT: With regard to
the marginal cost study that was offered by Bell, the recent one associated with
CRTC Interrogatory 1102, it starts with an approach that was similar to the
marginal cost study summary provided in the previous proceeding and then
proposes to make a number of adjustments.
The adjustments are explained in a fashion which does not allow for a
full auditing of what is happening or even the underlying assumptions associated
with what the adjustments are purporting to accomplish.
9327
Starting from an estimate of an historical offset of 3.2 percent, the
company then makes a series of adjustments that takes that marginal cost
estimate into the negative realm.
On their face, the adjustments are illustrative of the problems of using
marginal cost alone, especially when it comes to primary exchange service where
the costs of substantial shared inputs, such as a local loop, are attributed to
primary exchange service alone.
9328
The company makes an adjustment for fill and therefore by changing the
fill rates associated with the facilities used to provide basic exchange
service, including shared facilities, they reduce the productivity
offset.
9329
Once again, the facilities here are not being used solely to provide
primary exchange service but are being used to provide a variety of services and
therefore the full assignment to primary exchange service does not seem to be
appropriate.
9330
There is also a description of a demand shift which the supporting
documents indicate is associated with the alleged fact that the line losses are
going to occur disproportionately in the low cost areas, which will increase
average costs.
9331
Once again without being able to audit the nature of this shift, it is a
very substantial adjustment taking the productivity measure down
2.4 percent. The immediate
question that came to my mind is that if this shift is associated with low‑cost
areas, doesn't it make sense that the cost increases in low‑cost areas would be,
relatively speaking, less substantial?
9332
The company also assigns a significant downward adjustment based on
customer retention and acquisition, once again assigning all of these costs
associated with retention and acquisition to primary exchange service alone when
in fact if the company is losing customers, what the evidence indicates is that
it is likely a customer that hasn't just been taking primary exchange service
but possibly a larger bundle. And
this inappropriately places all of the customer retention costs on primary
exchange service alone.
9333
So my ability to uncover all of the details and assumptions is quite
limited.
9334
But based on my review of the information, there is a number of questions
that come to my mind and make it doubtful that these adjustments are reflective
of a reasonable approach to addressing the issue that the company purports to
address.
9335
THE CHAIRPERSON: Ms
MacDonald, having heard that, I want to make it clear to you that I didn't hear
anything I had not already heard, and I'm looking to you to uncover new
information and not provide Mr. Roycroft with an opportunity to repeat
arguments that in essence he has already made.
9336
I'm not criticizing his answer in any way. I'm simply saying to you that it is not
the appropriate function at this point to permit him once again to go over
ground that has already been covered in cross by other parties which is relevant
to the evidence of those parties and not to your own evidence or his direct
evidence.
9337
MS MacDONALD: Yes, Mr.
Chairman. I am intending to move
on.
9338
With respect to rate de‑averaging and your position recommending that the
Commission not expand rate de‑averaging for the next price cap period as
recommended by the companies, your evidence was ‑‑ and I am quoting ‑‑
that it would open the back door to circumvent the Commission's rules on
forbearance.
9339
Isn't rate de‑averaging completely
different?
9340
I'm just wondering if you are treating them
equally.
9341
DR. ROYCROFT: Forbearance
and de‑averaging?
9342
MS MacDONALD: Yes,
specifically with respect to that it is opening the back door to circumvent the
Commission's rules on forbearance.
9343
DR. ROYCROFT: My
understanding of the Commission's rules on forbearance is that should they be
applied, they would enable the company to engage in de‑averaging within the
forbearance area.
9344
As the Commission has established a set of criteria that effectively
grants the company's ability to de‑average, it would not be a reasonable policy
to have a separate back door that the same objective could be achieved through a
de‑averaging process such as that proposed by the
companies.
9345
The companies' proposals do not require any showing that is related to
market power in the same manner that the forbearance order identifies showings
that are associated with a demonstration that market power has been eroded
before de‑averaging is granted.
9346
That, in my mind, is an appropriate means to address the issue of
de‑averaging in that you want de‑averaging to follow where there is competition,
competition that is viewed to be sustainable and therefore will survive any
de‑averaging that takes place.
9347
MS MacDONALD: Can price
decreases be acknowledged as a characteristic of a competitive
market?
9348
THE CHAIRPERSON: Ms
MacDonald, now we are in Economics 101 here.
9349
What are you trying to establish here? Do you think it likely that this
economist is going to tell you that price decreases are not characteristic of a
competitive market?
9350
MS MacDONALD: Well, I don't
know if I'm trying to establish that.
I am trying to lay the foundation to ‑‑ and I can go to the question
that I want to lay the foundation for.
9351
THE CHAIRPERSON: Perhaps
that would be the best thing to do.
9352
MS MacDONALD: Just one
moment.
‑‑‑ Pause
9353
MS MacDONALD: The ILECs are
seeking approval of flexibility pricing structures. In your opinion, how will such
flexibility affect residential consumers and will it increase competitiveness in
the market?
9354
DR. ROYCROFT: If pricing
flexibility is granted where market power exists, then it invites the abuse of
the market power to possibly undermine competition from the standpoint that
prices can be adjusted in a strategic manner. Cross‑subsidization can be established
and rivalry can be discouraged.
9355
So the appropriateness of using a market power test to address the issue
of de‑averaging is one that I believe makes sense and is provided in the current
structure associated with the forbearance process.
9356
MS MacDONALD: Thank
you.
9357
Are you aware of the Ofcom decision from 2003 that found that fixed and
mobile are not sufficiently close substitutes to fall within the same market
definition?
9358
DR. ROYCROFT: Yes, I am
generally familiar with that.
9359
MS MacDONALD: Are you able
to comment any further than what the decision says?
9360
Are you able to describe for us some of the U.K. experience and how that
decision came about?
9361
DR. ROYCROFT: No, I don't
think I am.
9362
MS MacDONALD: With respect
to the Telecom Policy Review Report, it contained numerous
recommendations.
9363
I am assuming that you have read that report?
9364
DR. ROYCROFT: Yes, I
have.
9365
MS MacDONALD: It contains
numerous recommendations concerning regulatory reform, including the abolishment
of the just and reasonable test.
9366
Can you comment from the United States' experience of regulatory
commissions on the intention, if you believe there is any, for the commissions
applying the traditional tests to determine rates and then, when competition is
sufficient, to forbear and let go.
9367
And contrast that, if there is any intention to legislative efforts to
deregulate.
9368
DR. ROYCROFT: In the United
States there certainly have been numerous legislative initiatives that have
followed circumstances where the regulatory commission reviewed evidence with
regard to a request for forbearance or for increased pricing flexibility that
the commission did not find in favour on the part of the
company.
9369
In other words, the commission looked at the evidence and said: We don't see where the competition is,
and we don't think that you deserve the increased pricing
flexibility.
9370
The consequences of that decision, in several cases, have been the
legislature being approached by the telephone company lobbyists and drafting
legislation which essentially takes the commission out of the picture. The consequences of some of those plans
have been quite unfavourable to consumers, from the standpoint that they
legislate price increases for basic service, for example, which was done in the
State of Indiana.
9371
So there certainly is a potential tension there, and I think the
consequence for consumers of these legislative initiatives has not been
favourable, that they generally do not reflect a matching of the regulatory
constraint with the level of competition present in the marketplace, and
therefore consumers are worse as a result of the process.
9372
MS MACDONALD: Mr. Chair, I
need to look at my notes. I have
jumped around a bit.
9373
I believe that I may be done.
‑‑‑ Pause
9374
MS MACDONALD: Thank you, Mr.
Chair, those are my questions.
9375
THE CHAIRPERSON: Thank you,
Ms Macdonald.
9376
I believe that concludes, Madam Secretary, our cross from the
parties.
9377
THE SECRETARY: I believe it
does, unless you have further questions.
9378
THE CHAIRPERSON: Are there
questions from Commission counsel, Madam Secretary?
9379
THE SECRETARY: No, there are
no questions.
9380
THE CHAIRPERSON: I am going
to ask your indulgence to consult my colleagues.
‑‑‑ Pause
9381
THE CHAIRPERSON: Dr.
Roycroft, I want to pursue with you your views with respect to the relationship
between market power and consumer interests and competitor
interests.
9382
Let's take the uncapped/de‑averaging proposals of the Companies, or of
TELUS, if you prefer, and let's walk through the different customer situations
that could occur, just to help me understand where we are
going.
9383
We have talked about the orphaned customers, and you have made the
important point, which came up last week ‑‑ I know you were not
here ‑‑ and it is a very important point: It is all very well that an orphaned
customer would have rights, but that orphaned customer has to know that he or
she can exercise those rights.
9384
That is an issue ‑‑ perhaps conclusive, perhaps not ‑‑ but it
is an important issue that one would want to consider in the protection of
orphaned customers.
9385
Is it your view that the seriousness ‑‑ the gravity of that problem
is enough that you would wish to maintain controls on the whole body of a
customer group, the very large majority of whom had a competitive alternative,
just in the interests of those orphaned customers?
9386
DR. ROYCROFT: If we are
describing a hypothetical situation where there is robust competition for the
overwhelming majority, then I think the balance would not be appropriate to
maintain regulatory oversight if there was robust competition for the
overwhelming majority.
9387
That is an empirical question and the evidence seems to point to
continuing market power for large numbers of consumers, as opposed to robust
competition for large numbers of consumers.
9388
THE CHAIRPERSON: Let's
pursue that, because I am anxious to understand whether it is indeed the market
power of the ILEC with respect to the customer whose premises are passed by a
cable VoIP provider which is troubling you, because you think that somehow
prices may be raised in that instance, which would be an appropriate application
of market power, or whether it is because you believe that the competition which
would eventuate from the cable company and the telco in such a situation would
not be robust, i.e., would be a duopoly with the kinds of negative implications
that you have implied, or suggested ‑‑ argued ‑‑ come with
duopoly.
9389
Which one is it? Is it the
notion that the cable company is going to join with the ILEC in maintaining a
certain buoyancy to prices, or is it because you think that the passing of the
premise by the cable company is simply not a crucial factor unless and until
some significant proportion of people actually take that
service?
9390
DR. ROYCROFT: If the
facilities are in place, it is certainly a step in the right direction. From there, I think it is important to
evaluate the business plans of the cable company and to take those into account
when evaluating the price constraints that remain on the
ILEC.
9391
Cable companies, in my experience, have tended to focus on bundled
service offerings directed at the high end of the market. If a consumer has those services
available, but may not subscribe at the present time, they are facing a market
constraint that is well above the price of basic services, and basic services,
maybe, even with some vertical features thrown in.
9392
So the constraint that is presented on the ILEC's market power in that
case is not a particularly robust constraint, in that they could raise prices
for individual services, including basic service and vertical features, some
degree without fearing that the consumer would switch providers, given a much
more expensive bundle being offered by the cable firm.
9393
THE CHAIRPERSON: So it is
your assumption that although the cable firm would have, for reasons about which
in the case of the ILECs you have been very eloquent, an incentive to add
services to its offering to the customer, it would not do so, notwithstanding
the upward pressure on ILEC pricing.
9394
In other words, the cable companies wouldn't be prepared to offer, say, a
standalone residential service price, which, in your view, would provide any
discipline for the ILEC's standalone residential service
price.
9395
DR. ROYCROFT: It depends on
the company. There are examples of
cable companies that do offer standalone service, and there are examples of
cable companies which do not offer standalone service.
9396
To the extent that standalone service is made available, that certainly
is a positive development from the standpoint of an alternative at a comparable
price point being available.
9397
That type of cable company would offer superior market discipline to one
that didn't offer the standalone service.
The dynamic, however, once the regulatory constraint was lifted, then
raises the question: This is a
duopoly market. How are those firms
going to behave?
9398
If we take the price constraint off the ILEC, does then the ILEC try a
trial 10 percent increase and see if the cable company follows
along?
9399
That is what is commonly observed in markets where you have small numbers
and, as a result, not a strong discipline on pricing behaviour, given the
interdependency of the pricing process across the small numbers of
firms.
9400
THE CHAIRPERSON: It is that
troubling notion of implicit price signalling and virtual cartelization that
bothers you.
9401
I think that is the core of your concern.
9402
DR. ROYCROFT: Yes, it's a
significant factor in my evaluation of what happens given the structure of the
market.
9403
THE CHAIRPERSON: Let's
suppose that we share that concern.
9404
Let me say parenthetically that I once ran a cable company ‑‑ or a
mobile phone company in a duopoly situation in the country that didn't have
anti‑trust enforcement that looked anything like an OECD country. I can assure you that your suspicion
about pricing behaviour in such situations is amply
justified
9405
Let's suppose that even in a country with stronger anti‑trust enforcement
and even absent a regulatory defence ‑‑ well, let's suppose that we are
equally concerned with you, that the Commission were to say, you know, that's a
plausible argument, let's forget the notion that the cable companies have some
costs and they are not yet making enough of an impression on them, and let's
forget the fact that the incremental cost of adding a subscriber who has a very
good chance of already taking your telephone services so high that you really
wouldn't bother wanting to compete aggressively with the ILEC on price, and
let's assume your premise, that there may be either disinterest in a stand‑alone
product or an interest in being extremely attentive to ILEC pricing leadership
on the part of the cable company would be real.
9406
When do we step back? You
would say the forbearance framework is adequate and we wouldn't be the only
person with that. I think MTS
Allstream's position can be plausibly described as saying in a sense that the
forbearance process is adequate and the price de-averaging and uncapping
proposals are inappropriate and unnecessary transitory measures. Would that be basically your
position?
9407
DR. ROYCROFT: Yes. I mean, viewing the overall structure
that you have in place, price caps make sense. Within the context of areas where market
power continues to exist and where the tests are met, then uncapping makes
sense.
9408
THE CHAIRPERSON: Did I
understand correctly that if we were to preserve ‑‑ the tests you refer to
are the forbearance tests?
9409
DR. ROYCROFT: That is
correct.
9410
THE CHAIRPERSON: Did I
understand you correctly that we will observe your post‑forbearance price caps
proposal and your answer early on to Mr. Henry that if, in those areas where
robust competition drove prices down in forborne areas, the effect of your
proposal would be because ILEC prices would be going down, there would be
substantial head room created for raising prices in fully regulated areas? Did I understand that correctly or have
I misunderstood?
9411
DR. ROYCROFT: I think you
understand the general proposition.
I just want to be sure you understand the specific in that we are only
talking about primary exchange as being the service that remains in the price
cap basket.
9412
To the extent that price competition was to lead to decreases in the
price offerings of primary exchange service alone, as that service is defined
within the forbearance criteria, then those downward adjustments would count in
the overall cap, yes.
9413
THE CHAIRPERSON: But given
that, wouldn't it be obvious that to the extent that bundles are critical, it
would be the nominal PES price that would go down and not the call display price
or the IP television price or the DSL price?
9414
DR. ROYCROFT: My presumption
was that the bundles would be off the table and that the PES within the bundles
would not be implicitly priced and included in the plan, that we are talking
about the set of services which the forbearance order applies the extra
protection.
9415
My understanding and interpretation of that was that this applies to
primary exchange service alone. It
doesn't apply to the bundling that might have primary exchange service within
it.
9416
THE CHAIRPERSON: Then we are
back to the fact that if in competitive areas the price of primary exchange
service goes down, it will create head room for increases in prices, even in
primary exchange service for those areas that are still regulated? Am I right or have I
misunderstood?
9417
DR. ROYCROFT: That is
correct.
9418
THE CHAIRPERSON: Isn't that
a perverse outcome from your perspective?
9419
DR. ROYCROFT: The two evils
that I was considering at this point were what do you do with regard to the
impact on the actual price index which also has the potential to result
in ‑‑ quote/unquote ‑‑ above cap adjustments resulting if you take the
demand out of the basket.
9420
So, the example that I developed in my testimony showed that it is
possible that once you take the demand out of the basket, that there will be a
change within the overall cap process that would lead to higher prices overall
for the services that remain under the price cap process.
9421
This alternative, then, essentially holds consumers harmless from that
adverse effect and the price that you pay for that is the potential head room,
as you describe, for services that result from the inclusion of the still price
ceilinged PES that results from the forbearance decision.
9422
THE CHAIRPERSON: So that
invidious tradeoff being the case, one is asking oneself, is it better to retain
residual control over potential two company abuse or disinterest in the
consumer, to be kind, even as we open up the possibility for zero competition
customers to have a price cap, a rising price cap, or is it better to take your
chances on a duopoly?
9423
Am I being unfair in my characterization of the
choice?
9424
DR. ROYCROFT: I think, if I
am understanding, the choice, as I see it, is do you allow the services that
remain under the cap to be subject to the vagaries of demand changes associated
with the actual price index, and we don't know what is going to happen exactly
with that, but it is likely that given high population concentration areas are
likely to be the target of the forbearance, large shifts in demand could
occur. That potential, I believe,
is worth addressing from the standpoint of recognizing that there is a potential
for the price cap to start doing things that it wasn't intended to do from the
standpoint that you have these substantial demand shifts.
9425
The approach that I am proposing is a middle ground from the standpoint
that it is allowing some of the shift to occur, but still maintaining the
primary exchange service that stays under the ceiling that is separately applied
as a result of the forbearance decision.
9426
THE CHAIRPERSON: Thank you
very much, Dr. Roycroft.
9427
Madame la secrétaire.
9428
THE SECRETARY: I guess all
we have left to do is for me to resume for the last time all the undertakings
and the exhibits.
9429
THE CHAIRPERSON: We don't
have the City of Calgary, madame la secrétaire?
9430
THE SECRETARY: Yes. I am so sorry.
9431
THE CHAIRPERSON: We will
rise for ten minutes and we will meet at 4:00 o'clock.
‑‑‑ Upon recessing at 1547 / Suspension à
1547
‑‑‑ Upon resuming at 1601 / Reprise à
1601
9432
THE CHAIRPERSON: À l'ordre,
s'il vous plaît.
9433
Madame la secrétaire.
9434
THE SECRETARY: Now counsel
Brad Inlow will present his witness and we will proceed with Consumer Groups
counsel Janigan.
9435
THE CHAIRPERSON: Mr.
Inlow...?
9436
MR. INLOW: Thank you, Mr.
Chair. I am back here in your far
right‑hand corner.
9437
I would like to present at the witness table Greg Matwichuk, who has
filed evidence with the Commission.
9438
Perhaps Before I ask him any further questions we could swear the witness
in.
9439
THE CHAIRPERSON: It's as
good a time as any, Madame Secretary.
AFFIRMED:
GREG MATWICHUK
EXAMINATION‑IN‑CHIEF /
INTERROGATOIRE‑EN‑CHEF
9440
MR. INLOW: Mr. Matwichuk,
your curriculum vitae outlining your experience and qualifications was filed
with the Commission on October 4th.
9441
Can you confirm that the experience and qualifications set out in
that document are accurate?
9442
MR. MATWICHUK:
Yes.
9443
MR. INLOW: Can you confirm
that the document entitled "Evidence of M. Greg Matwichuk, Stephen Johnson
Chartered Accountants" filed with the Commission on July 10th was prepared by
you or under your direction?
9444
MR. MATWICHUK:
Yes.
9445
MR. INLOW: Is that evidence
correct to the best of your knowledge and does it accurately present your
views?
9446
MR. MATWICHUK:
Yes.
9447
MR. INLOW: Thank you, Mr.
Chair.
9448
THE CHAIRPERSON: Mr.
Janigan...?
9449
MR. JANIGAN: Thank you,
Mr. Chair.
CROSS‑EXAMINATION /
CONTRE‑INTERROGATOIRE
9450
MR. JANIGAN:
Mr. Matwichuk, I would like to first begin with the fact that the
Commission has ruled out of scope evidence concerning the financial earnings of
the company and in particular how this may affect your evidence in terms of
assisting the Commission in the coming to a conclusion as to the making of a
price cap.
9451
First of all, in terms of the objectives that you have suggested that the
Commission should use in the formation of the price cap, how does the Commission
decision impact upon those objectives?
9452
MR. MATWICHUK: Well, to
begin with, Mr. Janigan, when we look at price cap it is no secret to
people in this room that what were looking at is trying to achieve the outcomes
that would exist in a competitive market.
One of those outcomes obviously is rates to
customers.
9453
When we set price cap we are doing it on a best‑efforts basis. That is what regulators attempt to do
and, quite simply, it is a forecast.
What it comes down to is that it is an attempt to replicate the market
forces and the competitive market forces are intended to compel the suppliers to
provide their services with ‑‑ and to realize productivity gains. Those productivity gains are typically
passed on to the customers in the form of lower rates.
9454
So those are the objectives that we are trying to achieve under price
cap.
9455
MR. JANIGAN: You have been
able to review the evidence in particular of TELUS associated with the
competitive presence test and their associated request for pricing
flexibility.
9456
In light of that evidence, do you believe that there should be some
alteration in the objectives of the price cap that you are requesting the
Commission produce?
9457
MR. MATWICHUK: Well, I think
we have to go back to the objectives, Mr. Janigan, and we say: Are we achieving those objectives? Are we replicating the market
forces? Are the suppliers realizing
productivity gains and are we passing on those productivity gains in the form of
lower prices?
9458
The evidence that was put forward on behalf of the City of Calgary was
directed at looking at whether we were achieving those objectives in the second
price cap regime and, if not, that should reflect on the following price cap
regime.
9459
You asked me earlier about the scope issue. Just to be clear, Mr. Janigan, the
evidence was not advocating a return to rate of return regulation, it was not
advocating re‑initialization of prices, and it was not advocating that there be
earnings sharing.
9460
However, what we are suggesting is that when looking at price cap and
evaluating the existing price cap we do have to look at the financial
performance of the incumbents that occurred during the price
cap.
9461
I don't think that is any news because I think that is something that the
Commission had articulated in its findings in the previous price
cap.
9462
So when we look at the proposals what we are seeing is the potential for
the ILECs to realize the productivity gains and there has been mention during
this particular proceeding that there is a need for them to recover their costs
on the down side.
9463
That type of thing would result in a distortion in the market because the
market would not be looking for an entity to be saved harmless on the down side,
but ability to realize on the up side.
9464
So when we look at the proposals, the TELUS proposal involves a
relaxation or a release from price cap if certain competitive conditions are met
and then a continued price cap for those exchanges where the conditions are not
met.
9465
Upon reflection, it would not necessarily be satisfactory ‑‑ well,
let me put it this way, we have to look at the sufficiency of competition in
whether the competitive presence test would actually meet with sufficiency of
competition.
9466
MR. JANIGAN: Could you
contrast ‑‑ what I'm trying to get at in terms of whether, in your view,
the competitive presence test is a necessary ancillary to the forbearance test
in relation to the options that a Commission may have available to
it?
9467
MR. MATWICHUK: Well, I
suppose, Mr. Janigan, what the Commission has to undertake is determine
whether, again, three is sufficiency.
Your question, if I understand it, is: Is there potential duplication in terms
of the competitive presence test versus the forbearance
test.
9468
I would urge upon the Commission that whatever they do end up
adopting that they go to the heart of what competition means, in fact is there
sufficient competition. Are there
actually very close substitutes?
Are there many sellers?
Because that is one of the necessary conditions of a competitive market
is to have many sellers.
9469
So those are the types of things.
9470
I'm not sure I came here prepared to comment on which is the better
regime, but what I'm suggesting is that those contributing to the regulatory
effort ‑‑ and I'm sure my client will submit argument on this ‑‑ as to
whether either one comes up with a sufficiency of competition to then release
the ILECs from the price cap.
9471
MR. JANIGAN: Thank you,
Mr. Chairman. Those are all my
questions for this panel.
9472
THE CHAIRPERSON: Thank you
very much, Mr. Janigan.
9473
I believe that is all the questions we have.
9474
Commission counsel, no questions?
9475
MS FRENETTE: No
questions.
9476
THE CHAIRPERSON: Mr.
Matwichuk, thank you very much.
9477
MR. MATWICHUK: Thank
you.
9478
THE CHAIRPERSON: Ladies and
gentlemen, we are going to adjourn until Wednesday morning at
9 o'clock. We will reconvene
then, on October 18th, for oral final argument.
9479
Parties are reminded that they may participate by teleconference but that
they must signal their intent to do so with the Hearing Secretary
today.
9480
Am I right it is today?
Yes.
9481
Each party will be afforded 30 minutes.
9482
In addition, parties may file written final argument by October
26th.
9483
We ask that parties resist the temptation to respond to another party's
final argument. The opportunity to
present such a response is in reply argument, which is to be filed by November
6th.
9484
I understand informally that some of you have asked whether the Panel
will ask questions.
9485
Well, you have seen how the Panel has behaved and you know the Chairman
has no control over it.
‑‑‑ Laughter / Rires
9486
In principle, we would not intend to ask questions. I emphasize the words "in
principle".
9487
COMMISSIONER LANGFORD: You
forgot to mention our Charter rights.
9488
THE CHAIRPERSON:
Commissioner Langford writes his own charters and you know how he
interprets them.
9489
Unless there are any questions about procedure...
9490
Just to make sure everyone is on the same page, are there any questions
about procedure and what is going to happen?
9491
So thank you very much, everyone.
9492
If we don't see you, those of you who are going back and will participate
by teleconference, I would like to thank all of you for your very valuable
participation in this proceeding.
It is very much appreciated.
9493
I will be saying a few more words at the end of the whole proceeding, but
for the moment to say to those of you who are here, thank you very
much.
9494
Do we have undertakings?
9495
THE SECRETARY: Yes, we have
registered two new undertakings today.
9496
That is The Companies undertaking No. 2 to Dr. Roycroft: to verify the accuracy of Bell Canada's
calculation of the total factor productivity as outlined in The Companies
Exhibit No. 2.
UNDERTAKING NO.
THE COMPANIES‑3: Dr. Roycroft
is requested to replace Dr. Roycroft's DSL input data with the data provided by
The Companies in The Companies' exhibit #2 (capital and expense) to verify the
results shown in The Companies Exhibit #2
9497
And MTS Allstream undertaking No. 1 to Dr. Roycroft: to verify whether the average impact of
DSL of TFP growth for 2000 to 2003, of 0.57 percent, reflects an overall
weighted average over the four‑year period or whether it reflects an average
annual impact.
9498
THE CHAIRPERSON: Madam
Secretary, I don't think the undertaking from The Companies to Mr. Roycroft
is accurately described. So I think
you should consult with The Companies and Mr. Roycroft to make sure that it is
accurately described.
9499
Mr. Roycroft is not checking the accuracy of Bell Canada's
calculation. He is just
recalculating, with Bell Canada's data in his own model, to confirm that the
results were the same.
9500
I don't know how you want to express it, but it is not what the current
title says.
9501
Maybe Mr. Roycroft and Mr. Daniels could sit down and negotiate a final
wording that accurately reflects what Mr. Roycroft is going to be asked to
do.
9502
THE SECRETARY: I
agree.
9503
MR. DANIELS: We would be
happy to do that.
9504
THE CHAIRPERSON: Thank
you.
9505
THE SECRETARY: And get back
to me, please, for the record.
9506
THE CHAIRPERSON: They will
do it with you, Madam Secretary.
9507
THE SECRETARY: All
right.
9508
Finally, the exhibits that were filed with us
today:
9509
Consumer Groups Exhibit No. 2:
Table 6 of the Summary of DSL Impact.
9510
Consumer Groups Exhibit No. 3:
Amended page 69 of the testimony of Dr. Roycroft.
9511
The Companies Exhibit No. 11:
Dr. Roycroft's recommendation for calculating the X
factor.
9512
The Companies Exhibit No. 12:
Dr. Roycroft's testimony before the Indiana Utilities
Commission.
9513
The Companies Exhibit No. 13:
The IPD trend.
9514
The Companies Exhibit No. 14:
The IPD labour component.
EXHIBIT NO. TELUS‑13: Decision dated August 24, 2006 before
the Public Utilities Commission of the State of California
EXHIBIT NO. TELUS‑14: Pages 90, 91 and 92 of Telecom Decision
CRTC‑2002‑34
EXHIBIT NO. TELUS‑15: Economic and financial indicators from
the Economist dated Sept. 16, 2006
9515
MTS Allstream Exhibit No. 4:
International Journal of Development Planning Literature, Volume 16, Nos.
1 and 2.
9516
I believe this concludes this phase of the hearing, Mr.
Chairman.
9517
THE CHAIRPERSON: Thank you
very much, madame la secrétaire.
9518
Ladies and gentlemen, see you at 9 o'clock on Wednesday morning,
those of you who will not be joining us by teleconference, in any event. So see and hear from you
then.
9519
Thank you.
‑‑‑ Whereupon the hearing adjourned at 1615, to
resume
on Wednesday, October 18,
2006 at 0900 / L'audience
est ajournée à 1615, pour
reprendre le mercredi
18 octobre 2006 à
0900
REPORTERS
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