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TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TRANSCRIPTION DES AUDIENCES DEVANT
LE CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
Review of 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 18, 2006 Le 18 octobre 2006
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Canadian Radio‑television and
Conseil de la radiodiffusion et des
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 18, 2006 Le 18 octobre 2006
- iv -
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
*ARGUMENT by / PLAIDOIRIE par:
The Companies 1387 / 9528
MTS Allstream 1406 / 9606
TELUS Communications Company 1423 / 9685
The Competitors 1437 / 9763
The Consumer Groups 1460 / 9842
L'Union des consommateurs 1479 / 9943
BCOAPO et al 1489 / 10001
The City of Calgary 1497 / 10048
- v -
EXHIBITS / PIÈCES JUSTICATIVES
No. PAGE / PARA
TELUS‑16 Response to undertaking,
TELUS Undertaking No. 2
internet services in
TELUS' serving territory 1509 / 10092
TELUS‑17 Follow‑up to TELUS'
Undertaking No. 3
regarding services with
frozen rate treatment basket 1509 / 10093
Gatineau, Quebec / Gatineau (Québec)
‑‑‑ Upon resuming on Wednesday, October 18, 2006
at 0859 / L'audience reprend le mercredi
18 octobre 2006 à 0859
9520 THE CHAIRPERSON: Order, please. À l'ordre, s'il vous plaît.
9521 Ladies and gentlemen, we are going to proceed now with oral final argument by the various parties.
9522 Before we do so, I don't doubt that madam secretary probably has a certain number of things to say to you but I must first discharge an important obligation and responsibility in wishing Mr. Bob Noakes.
‑‑‑ Laughter / Rires
9523 THE CHAIRPERSON: Mr. Noakes is one of the many unsung citizens of the CRTC who ensure that these commissioners don't make bigger fools of themselves than is absolutely necessary. He does it with particular efficiency and self‑effacement and we appreciate it very much.
9524 Madam secretary.
9525 THE SECRETARY: Good morning, everyone.
9526 We are at the final phase of the hearing, the final arguments. I will invite the counsel for The Companies to come forward, please.
9527 Counsel Denis.
ARGUMENT / PLAIDOIRIE
9528 MR. HENRY: Thank you, madame secretary.
9529 Good morning, Mr. Chairman and Commissioners.
9530 Mr. Chairman, this proceeding finds us in times of great change. Now, before you think this is a familiar refrain that you may have heard from the ILECs many times before, I would ask you to reflect on what is different about this proceeding from prior price cap proceedings.
9531 First, we have actual widespread competitive entry in the local market, no longer anticipated but this time real.
9532 We have cable companies themselves acknowledging that the market is competitive. They are quite comfortable with their role and prospects of the marketplace.
9533 We have the Commission itself having recently found that competition is more deeply rooted than it was thought just months ago.
9534 We have a Telecom Policy Review Panel report that has found massive changes in the competitive landscape in Canada.
9535 We have federal government policy‑makers having found that VoIP has transformed the nature and extent of competition in local telephony.
9536 We have a Draft Policy Direction tabled in Parliament calling for a greater reliance on market forces.
9537 We have a multitude of third party industry observers no longer debating whether entrants will be successful, but rather debating just how the ILECs will be able to adapt.
9538 Against this backdrop it may seem that your task has never been more challenging, and that is to design a regulatory framework that will take effect mid next year and progress sometime into the future.
9539 But I suggest to you that all these facts actually make your task easier than it was in the past, and that is because you can now have faith in market forces where entry has occurred and retain upward pricing constraints only in areas where that entry may not yet have occurred.
9540 Mr. Chairman, that is exactly what our proposal is designed to do.
9541 For the first time you are hearing from our competitors of their impressive growth that they have achieved with their telephony offerings. You have heard that they have already rolled their telephony services out to the majority of their cable companies, and that their intention is to have at or near 100 percent coverage wherever their cable infrastructure will support digital telephony.
9542 To underline the importance of telephony for the future of cable companies, Mr. Brazeau for Shaw noted that digital telephone is Shaw's number one investment and new product strategy focus for the company.
9543 Rogers and Vidéotron, for their part, provide local exchange services in both residential markets and business markets, and they have acknowledged that they have advantages not previously enjoyed by competitors in the local market. These advantages include their full suite of services, broadcast distribution, Internet access, and in some cases wireless, as well as their telephony services.
9544 Other significant advantages are their existing customer base in the millions and their well‑known household brands. They have stated that competition will deliver the benefits that were once thought achievable only by price cap formulas. For instance, the competitors have noted that for the next price cap period competition can be relied upon to share productivity gains and that:
"Consumers are becoming more comfortable with offerings from competitors as competitors establish track records as reliable providers of telephone service." (As read)
9545 Further, they have stated that the intensity of competition in the local residential market by May ‑‑ that is May of next year ‑‑ will be such that consumers will have lower‑cost competitive alternatives that will put downward pressure on ILEC rates.
9546 The market conditions we face today present us with an opportunity, an opportunity to relax regulation because market conditions will supply the pricing discipline and to focus regulation only where it is required.
9547 Furthermore, in deciding on the next price cap framework I would urge you not to attempt to guess what ILECs might need to do in the market during the next price cap period and then attempt to devise precise regulatory measures designed to give only enough flexibility to be able to do what is predicted. Quite simply, it is not possible to know what will be necessary in the future, particularly in an industry this dynamic.
9548 Regulation can have unintended consequences, all the more so, in today's uncertain and unpredictable environment.
9549 When our proposed alternative facilities test is satisfied, barriers to entry are unambiguously low. In recognition of this fact and the many supply and demand conditions present, services should be uncapped to let market conditions determine prices.
9550 I do not propose to repeat the mechanics of our uncapping test, I think by now you know it well, but I do want to reiterate that uncapping is not forbearance. It falls well short of it. All competitor safeguards, including the imputation test will remain in place. Restrictions and promotions, win‑backs and bundling will be unaffected by this proposal. Tariffs will still be filed and approval will be required before tariff changes can be implemented.
9551 In the discussion of uncapping the issue of orphan customers arose. The term "orphan customer", as I understand it at least, refers to a customer who would not have alternatives available even though an exchange in which he is located passes the test and is therefore uncapped.
9552 Now, the record shows that the orphan customer phenomenon can be expected to be rare. The forbearance decision concluded that where cable companies enter an exchange they generally cover in its entirety, thus choosing the exchange as the area for the alternative facilities test as we propose can be expected to minimize the occurrence of any orphan customers.
9553 Moreover, to the extent there are any orphan customers, they would not necessarily be left unprotected.
9554 Mr. Grieve for TELUS noted that it would be very difficult, if not impossible, to identify these customers. That tells us something important. It tells us that even if the ILEC wanted to single out these customers for some special treatment compared to others in the exchange, the ILEC would not do it.
9555 As a result, it would be unreasonable to reject the alternatives facilities test and its consequent uncapping on the basis that there is a possibility, albeit exceedingly small, that some customers could in theory be harmed.
9556 We submit that it is far better to rely on market forces where possible than it is to continue to impose price cap regulations based on remote possibilities and theoretical fears. That would not be focusing regulation only where it is required or relying on market forces to the maximum extent possible.
9557 Another feature of our proposal, Mr. Chairman, is the uncapping of discretionary services. These services do not need to be capped.
9558 First of all, in many exchanges they may be competitive.
9559 Second, they are discretionary in nature. It is for this second reason really that discretionary tiers of television service were never price regulated by this Commission.
9560 Society does not place the same value on these services as they do on connectivity services. Society has an expectation, I grant you, that most people rich and poor can be reachable by some form of telecommunications. But we don't have the same expectation that everyone should have three‑way calling or call return or call waiting. You have heard that many other jurisdictions are deciding not to regulate prices of discretionary services.
9561 As Ms Griffin‑Muir of MTS Allstream stated, you don't need to take these services to get basic telephone services. Even the Consumer Groups suggest a more relaxed treatment for these services. They propose a cap of inflation +3 percent.
9562 Let me turn to the rules that should be in place when and where price constraints are warranted.
9563 We have proposed individual rate element constraints of 5 percent for residential services and 10 percent for business services, as have been used since 1998 and, more importantly, a freeze on average prices overall in the residence and bus baskets.
9564 This will significantly constrain prices and is offered as assurance that affordability of service will not be jeopardized. In fact, assuming inflation continues in the future, this proposal offers customers price decreases in real terms.
9565 In previous price cap plans, the I‑X formula ‑‑ that is the difference between inflation and a productivity target ‑‑ has been used to cap aggregate price changes. In the current period, I‑X has also capped some competitor services individually and some business services.
9566 The formula is not needed to protect affordability. Clearly prices in Canada are affordable by any standard.
9567 Further, using the formula would undoubtedly influence price levels in a way that may differ from the competitive outcome.
9568 We have concluded that it is best to step away from formulaic approaches, as many other jurisdictions are doing, and we propose this despite the decreasing level of productivity to be expected in the next price cap period. That lower productivity level would actually allow for price increases in capped areas if the formula were applied.
9569 Nevertheless, if the Commission were to decide to employ an X‑factor in the next period, then it is essential that it take into account not only the historical productivity trend, but also those factors that can be expected to cause deviations from that trend. We have shown that future line losses, a phenomenon not captured in the historical trend, and other competition‑related factors will result in an X of minus 0.5 percent.
9570 TELUS has provided an expected X value that also would allow price increases. MTS Allstream, for their part in the Consumer Groups, have also proposed values of X. In so doing, MTS Allstream has acknowledged that line losses going forward can indeed reduce productivity improvement performance relative to its proposed X rate.
9571 The Consumer Groups have ignored this reality. The proposal of the Consumer Groups for a 6 percent X‑factor is riddled with other flaws, too many to discuss here this morning. Suffice it to say, it is built on a total factor productivity, TFP, measure developed not in this price cap proceeding, not in the last price cap proceeding, but the one before that, a measure that includes data for a period that ended over a decade ago and it is a measure that also reflects productivity associated with services that are no longer capped or even regulated by the Commission.
9572 The Commission has already rejected use of a total factor productivity measure for good reason in its last price cap decision and you have no credible evidence before you to justify a change in that position.
9573 Now, the Consumer Groups' proposal, having started with that number, then goes on to attempt to adjust this outdated total factor productivity measure with supposedly more current U.S. information, which is not only built on faulty theories and assumptions, but also frankly on made‑up numbers devoid of any empirical validity.
9574 As just one example, you will recall the difference between Bell Canada data and some U.S. data contained in one of Dr. Roycroft's studies regarding DSL. Now, Mr. Chairman, it only takes a cursory review of Dr. Roycroft's analysis to reveal its flaws. What Bell Canada presented was real data from real‑life experience. What Dr. Roycroft presented was constructed numbers based on equipment costs he pulled out of trade press articles. And even then, he only looked at one piece of equipment, the DSLAM, and just assumed a small token amount $25 capital I think it was and $1.50 per month expense supposedly to reflect all the myriad other costs that one could expect when introducing a new service based on a new technology. Things like truck rolls to conditioned loops.
9575 I think we all remember the early days of DSL when there were all kinds of that going on, truck rolls to install services long before things were plug and play and to the extent they were plug and play, we had activity desks, people calling in to figure out how it worked, change their password, truck rolls to maintain or repair services, other equipment costs including cabinets to house the DSLAM equipment, power to the cabinets. We had to extend fibre deeper in the network to reach these DSLAMs, we had sales and marketing expenses, the list goes on.
9576 Mr. Chairman, his numbers are simply not credible on their face.
9577 There are other serious problems with Dr. Roycroft's proposal. Incredible as it may sound, Dr. Roycroft confirmed on Monday that he is proposing that any forborne services remain subject to his price cap framework for a period of five years following forbearance.
9578 This would have the perverse effect of allowing prices in non‑forborne areas to rise higher than they otherwise would be allowed to, not to mention the fact that it would effectively stretch the effects of the next price cap regime well past his proposed four‑year period to potentially up to nine years, I think the year 2016 by my calculations.
9579 Let me now turn to the issue of price de‑averaging. The current restriction on further price de‑averaging harms customers, it keeps prices higher than they would be if the ILEC were able to meet competition where it exists. Customers are deprived of the best offers that could be made to them and this harms the competitive process as well.
9580 Now, let us look at a real example. In Ottawa Rogers offers a line with five features and unlimited North American long‑distance for $66.15. That compares to Cogeco's rate of $54.99 for the same services in Hamilton. Now if Bell were to set its prices to compete with Rogers in Ottawa it would not be able to compete with Cogeco in Hamilton. On the other hand, to compete with Cogeco's price in Hamilton, Bell Canada would have to lower the price in Ottawa by $11.00 more than would be required to compete with Rogers there.
9581 Now the fundamental problem is the de‑averaging rule does not allow the ILEC to price in accordance with market conditions. The ILEC is given perverse incentives. For example, to either compete less vigorously in some areas or not at all. And in either event, the important point is this sends wrong pricing signals to the market and it distorts the competitive market outcome.
9582 The incentive properties of the de‑averaging prohibition are likely to keep prices unchanged, even in the face of competition in one part of the band. Lowering price throughout the band will often be too costly. It is this incentive that is the intended consequence, of course, of those who seek to preserve the de‑averaging prohibition, as MTS Allstream confirmed in its testimony.
9583 Now Mr. Watt of Rogers acknowledged that de‑averaging prices in a band by province makes sense because, as he put it, the telephone companies are, "facing different market situations." Now I suggest to you that that is a very telling admission because, of course, the telephone companies are facing different market situations within a band as well. Competition is not uniform, it doesn't occur in a neat and tidy fashion defined by bands. Different competitors have different offers and even the same competitor has different offers in different areas.
9584 I suggest to you that it follows from Dr. Watt's reasoning that de‑averaging prices within a band to meet the different market situations within that band is equally warranted.
9585 Now our competitors have called de‑averaging anticompetitive. I think they tend to depict anything that increases or intensifies competition as anticompetitive. But there is nothing anticompetitive about de‑averaging. De‑averaging is not, of course, prohibited or restricted by the Competition Act. The cable company is a service that offer a special price to a group of customers as long as those customers are not defined, in geographic terms, would not be prohibited by the current restriction. This would allow they claim, or I think some of them claim, a special price discount to students if we wanted or a special price to new customers.
9586 So apparently there are some de‑averaging practices that even the cable companies would not label anticompetitive as they use the term.
9587 MTS Allstream indicated that whether de‑averaging would be considered anticompetitive depends on the facts of the situation.
9588 Mr. Chairman, it is not clear what tips the balance in their minds. When is de‑averaging anticompetitive and when is it not? What is the defining characteristic of the practice that makes it anticompetitive to them? These questions have not been answered by them. Of course, the real answer is that price de‑averaging is not anticompetitive at all.
9589 Now the competitors, I am sure, will likely try to advance an economic theory, and one that is not universally held by the way, that de‑averaging is not found in perfectly competitive markets. What they fail to say, however, is that perfectly competitive markets do not exist in reality and that in reality the consequence is that de‑averaging is common in all industries. Our witness panel gave numerous examples of de‑averaging in telephony, in other lines of businesses and indeed in many other industries, airline, you name it.
9590 As for the cable companies, and this was very interesting, their story changed dramatically as the hearing progressed. First of all, their counsel first suggested that price de‑averaging is not happening and that was the first theory of the case. Then they suggested, well de‑averaging is a practice of monopolists but it's not found in competitive markets. But when their witness panel got on the stand they had quite a different story. When confronted with an example of de‑averaging in their wireless business, they retorted that this was because wireless was a robustly competitive market. The contradiction between their theory and their practice was striking.
9591 In further discussions, it became clear that de‑averaging examples abound in all their lines of business, including Internet, broadcast distribution and telephony offerings. There is only one reasonable conclusion, de‑averaging is a normal feature of markets.
9592 Indeed, this Commission has so found in its wireless decision 2003‑26, which was discussed with Mr. Watt and actually Commissioner Noël as well the Commission concluded that targeted offers are to be expected in robustly competitive markets.
9593 Try as they might, not one of the cable companies that appeared before you could offer an adequate public policy justification for the regulatory protection they seek to preserve in the form of the de‑averaging restriction. It became very evidence during the discussion with the panel, the commissioners in particular, that the de‑averaging prohibition was all about furthering the economic self‑interests of the cable companies.
9594 I was struck, Mr. Chairman, when I listened to your questions from several of you. Your questions were about the effect on consumers. Almost universally their answers were about themselves and only themselves. The discussion exposed their argument as an infant industry. Without debating whether infant industry protection us ever justified, it certainly has no place in the current environment when you consider just who these supposed infants are.
9595 Now counsel for The Competitors also questioned whether the de‑averaging restrictions really matter if The Competitors did not engage in de‑averaging. Well frankly, whether or not they do it and whether or not other competitors choose to do it is not really the point, although it is clear that they do. The relevant question is whether customers are harmed if de‑averaging is prevented or curtailed by regulation, and the answer is that they are.
9596 Let me turn finally, very briefly, to the issue of income trusts and their implications for regulated prices. An income trust arrangement should not lead to an adjustment in prices. It is a fundamental principle of price cap regulation that the consequences of initiatives taken by a company should lie entirely with the company and its investors. To do otherwise would blunt and possibly fully defeat the incentives that are the intended objectives of price cap regulation.
9597 In any event, the income trust arrangements of interest here are nonrecurring events that fall within the present price cap period. So any gains that may be associated with them should not affect the future price cap period.
9598 But secondly, it is not at all clear that these arrangements result in any material gains, and there is material on the record, I think, that we filed on behalf of uh.. Bell Aliant in that regard. So therefore, even if the Commission were to take them into account, any consequent price adjustments can be expected to be small.
9599 Now, Mr. Chairman, this is a somewhat complex issue I will confess and I don't propose to go into more detail here. I can just assure you that we will be addressing it in much more detail in our written final argument.
9600 One last word on a related issue, however, and I would just like to address the question posed by Commissioner Langford regarding the likely outcome on prices if the government were to introduce a tax increase to take into account the tax leakage arising from income trusts.
9601 In this eventuality, we would not request a change to the price caps in effect. Any such tax would be economy‑wide, that is it would not be directed at the telecommunications industry exclusively and therefore would not be an appropriate exogenous adjustment under the current rules. Further, The Companies have proposed that for the upcoming price cap period only Commission decisions would qualify for exogenous treatment.
9602 Mr. Chairman, there are many other details that will be discussed in our proposal and throughout this hearing and I cannot attempt to do them justice here this morning. So I will just come to a close by commending to you our written final argument and reply yet to be filed.
9603 I wish you and your fellow commissioners well in your deliberations. On behalf of my colleagues, I would also like to thank you and your fellow commissioners, Commission counsel, Commission staff and the hearing secretary for the consideration that has been shown to all parties.
9604 Thank you very much, Mr. Chairman.
9605 THE CHAIRPERSON: Thank you, Counsel Denis.
ARGUMENT / PLAIDOIRIE
9606 THE CHAIRPERSON: Counsellor?
9607 MR. KOCH: Thank you, Mr. Chairman, Commissioners.
9608 In this proceeding, in our view, the Commission must confirm where appropriate pricing flexibility for the ILECs ends and inappropriate pricing flexibility begins. It is not an easy task. But in other words, how much pricing flexibility is necessary and how much flexibility is too much?
9609 The answer to this question, we believe, begins with establishing the appropriate objectives for the next price cap regime. The first objective MTS Allstream has identified is promoting competition. Competition is emerging, but the transition to competition is far from complete. The market for PES, or PES I will call it, is not yet workably competitive. Demand and other conditions fall short of the Commission's own forbearance criteria. In our submission, the price cap regime should not be permitted to serve as a Trojan horse that undermines this recently established regime.
9610 The price cap applicable to retail services, also in our view, cannot be considered in a vacuum. The terms and conditions under which wholesale services are provided should be considered in tandem.
9611 The second objective MTS Allstream has identified is protecting consumers. Where market power persists and forbearance criteria have not yet been met, in our submission, upward price controls must be retained. These controls should include a reasonable estimate of productivity that reflects market conditions anticipated during the next price cap period. In our view, the basket structure can also be greatly simplified without harming consumers. The third objective MTS Allstream has identified is increasing reliance on market forces. Passing on predicted efficiencies to customers should not go so far, in our view, as mandating price reductions that might impede competition or may simply be unnecessary in light of emerging competitive market forces.
9612 We are also of the view the case has not been made for the requirement of ILECs to de‑average rates within the same rate band. It is important, as I indicated at the outset, to distinguish between appropriate and inappropriate pricing flexibility, otherwise ILECs will be able to take advantage of their dominance to control the pace of competitive entry or, and I think this is key, to selectively bestow the benefits of imperfect competition on only a subset of consumers.
9613 The combined effect, in our submission, of removing the prohibition against de‑averaging and uncapping services will be to undercut the forbearance criteria and damage the development of competition.
9614 The fourth and final objective MTS Allstream has identified is reducing the regulatory burden. We are of the view that price cap regulation can be streamlined by removing discretionary services and bundles from the cap without prejudicing the goal of affordability of stand‑alone PES.
9615 I will try to distil the remainder of my remarks into three topics. The three I would like to cover, the state of competition, protecting consumers and the transition to forbearance.
9616 In the second price cap decision the Commission noted that competition had not emerged as anticipated. As we move into the third price cap period competition is emerging in the local residence market. In the business market there is relatively more competition, although that competition has been stagnant for sometime.
9617 We have heard much evidence regarding emerging competition, particularly competition from the cable companies in the residence market. Emerging competition, however, should not be confused with the establishment of workable competition, a prerequisite of which is the elimination of the ILECs' SMP, significant market power.
9618 The Commission has recently established the criteria for local forbearance, which are meant to ‑‑ which are meant to measure exactly that, where the ILECs continue to have SMP and it is important to bear in mind that those criteria have yet to be met.
9619 Included among the criteria for local forbearance is the requirement that the ILECs meet important quality of service indicators for competitors. This criterion reflects the importance of those wholesale regime to competition ‑‑ particularly in the business market where competition relies on access to underlying infrastructure built during the monopoly era.
9620 The treatment of wholesale services is not within the scope of this proceeding, as we have learned, but MTS Allstream is of the view that a price cap regime that promotes competition is difficult to establish in the absence of a robust comprehensive wholesale regime.
9621 MTS Allstream looks forward to participating in the Commission's anticipated proceeding dealing with wholesale access, but in the meantime, we have proposed that the Commission's current treatment of competitor services be maintained.
9622 Next, I would like to speak to protecting consumers.
9623 The Commission, in my view, can be justly proud of its record with regard to local rates. As the TPR panel noted, prices for residential and business local services in Canada are the third and fourth lowest among the O.A.C.S. countries respectively.
9624 Canada enjoys a local services penetration rate of more than 98 percent. The Commission has previously recognized penetration is a good measure of affordability.
9625 In short, we are not here because there is a crisis in the provision of local service to Canadians. The areas identified by the T.P.R. panel where Canada is supposedly lagging are, in fact, broadband and wireless, two market segments that have never been subject to retail regulation by the Commission.
9626 These are the facts against which the Commission should evaluate extreme proposals such as that of the consumers to attribute alleged higher productivity from other service, such as D.S.L. to local services.
9627 Notwithstanding the good state of local rates, we recognize the Commission statutory mandate to uphold the public interest by ensuring regulatory mechanisms to protect consumer interests and address the needs of all users, regardless of location or ability.
9628 We are proposing an X factor of 1.5 percent as a reasonable measure of productivity growth fro the ILECS as service going forward.
9629 In the second price cap regime, the Commission adopted a productivity offset based on an analysis of the marginal costs associated with Bell Canada's Res PES.
9630 Since that time, there has been a dramatic directional shift in the trend for access line growth. It is therefore necessary to adjust the measure that was used the last time to reflect this movement.
9631 The Consumer Groups' expert, doctor Roycroft, confirmed under cross‑examination that in an earlier study, he controlled for unusual changes in output growth, using precisely that, an access line variable as a reasonable proxy for output growth.
9632 MTS Allstream's expert, Mr. Lefebvre, testified that studies have shown that between 60 percent and 80 percent of TFP growth has been identified as being attributable to scale economies.
9633 MTS Allstream took the conservative end of this range and adjusted the 3.5 percent measure by the Commission in the last price cap regime and reduced it by 60 percent to arrive at a proposed X factor of 1.5 percent.
9634 In the unlikely event that inflation is lower than the X factor, MTS is proposing that rate reductions not be mandated. We believe that passing on predicted efficiencies to consumers should not go that far.
9635 Such mandated reductions might impede competitive entry or may simply be unnecessary in light of emerging competitive market forces.
9636 We propose that the Commission maintain the individual price constraints from the last price cap regime of 5 percent for residential services and 10 percent for business services.
9637 And finally, we have proposed modest changes to the basket structure, including placing high cost serving areas and non high cost serving areas in the same basket.
9638 I would like to speak to that for a moment.
9639 The separation of high cost serving areas and non high cost serving areas into separate baskets in the second price cap plan was driven by the Commission's establishment of a deferral account, in in of itself and our defect of the Commission's recognition at that time that residence rates should not be forced downward by a price cap formula in high cost ‑‑ in non high cost serving areas.
9640 Under our proposal which does not call for mandated price decreases, there is no longer any need to maintain this separation and as Mr. Sheppard, witness for MTS Allstream testified, there is no incentive for the company to raise rates in high cost serving areas as these rates are significantly below cost and any rate raising would result in a proportionate reduction of the subsidy.
9641 I would like to move now to the third subject that I wanted to discuss with you this morning, which is the transition to forbearance.
9642 Our plan acknowledges changes taking place in the market for local services and proposes to meet these changes by providing ILECS with significant additional flexibility.
9643 This additional flexibility takes the form of no‑mandated price reductions where the X is greater than inflation. It also takes the form of removing options and features and bundles from the residential basket on the simple logic that customers have choices not to take these services at all, let alone from the ILECS.
9644 These measures provide additional flexibility to ILECS in the transition to forbearance. When thinking about the extent of pricing flexibility these measures provide, they must also be added to the transitional flexibility that the Commission has already made available to the ILECS in the form of the ability to engage in targeted win‑back activities once they are able to demonstrate a market share loss of 20 percent.
9645 Please do not forget this point. You have already gone down the road towards providing greater flexibility on the transition to forbearance.
9646 In our view, all of these transitional measures are appropriate in light of and can coexist with your recently established forbearance framework.
9647 That framework again was established to determine when an ILEC continues to enjoy SMP. As the Commission is well‑aware, this framework focuses heavily and appropriately so, in our submission, on the demand characteristics of the market and not solely on competitive supply.
9648 This framework also establishes the relevant market for the application of the forbearance criteria as the F.L.R. and not the local exchange.
9649 Once it achieves forbearance, an ILEC is able to both de‑average rates within a band and raise rates without any upward constraint.
9650 Until the Commission's criteria are met, the ILEC continues to have SMP, however, and in our view, it is both unnecessary and inappropriate to grant the ILECS additional flexibility that would permit them to take advantage of that fact.
9651 That is why MTS Allstream opposes Bell and TELUS proposals to remove the prohibition against de‑averaging. That is why MTS Allstream opposes Bell and TELUS proposals to uncap.
9652 The Commission's forbearance criteria have not yet been met in these instances and those proposals are inappropriate.
9653 The proposals in this regard, in my view, and in my clients' view, are being driven largely by theory, but the Commission ought not to establish the regulatory framework based on theory alone.
9654 We submit that those proposing significant changes to the regulatory regime have the onus of not only demonstrating a pressing need, but also of satisfying the Commission that the change will not work at cross purposes with or undermine the Commission's existing framework.
9655 Bell and TELUS, in our submission, have failed on both counts.
9656 I would like to address de‑averaging specifically as the Commission has recognized, the rule against de‑averaging within the same rate band does not prohibit the ILECS from lowering prices to meet competitors. Rather, the rule prohibits the ILECS from lowering prices selectively and in reliance under SMP.
9657 So, where is the ILECS beef? Bell and TELUS have failed to make the case for the ILECS need to de‑average rates within the same rate band. Even if price discrimination is common in competitive markets where no firms is able to exercise market power, for example in the market for wireless services, the local market is not yet such a market, based on the Commission's own criteria.
9658 Furthermore, as Bell's doctor Krause agreed, in markets where an incumbent is found to possess SMP, targeted win‑backs are unlikely to improve consumer surplus or welfare, given that there is no expansion of output.
9659 No consistent rationale, in my submission, has been provided for the proposal to remove the prohibition against de‑averaging.
9660 Bell and TELUS witnesses were hard pressed to explain why they wanted or needed this additional flexibility, whether it be geographic or otherwise, or in fact how they would use it.
9661 When the question was put to TELUS, its marketing guru Mr. Hansen stressed that the company generally likes to go out with a consistent marketing message across a large area. This, in my submission, does not suggest the need for de‑averaging and the ability to meet competition in the focused way that the ILECs are contending.
9662 The TELUS Marketing Panel provided the example of the advertisement in the Calgary Herald aimed at a number of different communities in different rate bands but within the same, as they called it, community of interest.
9663 But this example didn't hang together either, as one of the communities mentioned, Bragg Creek, is in fact in Band F where prices are already below costs.
9664 In any event, even if the example worked surely TELUS could use an asterisk in its advertising to explain that a particular offer may not be available in all areas. I have encountered a few of these asterisks myself when looking at their and other wireless marketing.
9665 Bell and TELUS also failed to make the case for the dangers of maintaining the prohibition against de‑averaging. Both their economists quoted theory about inefficient entry and the need to recover their fixed costs, but neither of these claims have any basis in reality. Bell and TELUS witnesses were not able to point to either inefficient entry or their failure to recover their costs, and Bell's evidence regarding the competitive landscape omits any mention of inefficient entry.
9666 The prohibition against de‑averaging, again, does not prevent an ILEC from improving its offer to customers. Under cross‑examination, Bell's witnesses admitted that the consequences of making the prohibition were either that all customers in a rate band would benefit from price reductions designed to meet competition, or competitors would gain market share if the ILEC chose not to lower its prices.
9667 De‑averaging is about targeting. This is inappropriate in a non‑forborne market because the ILECs have a captive customer base to fund this targeting.
9668 The issue is not protecting competitors, as Bell alleges; the issue is protecting customers from being used in this manner to fund the ILECs efforts to maintain their dominant market share and deter entry.
9669 I would like to turn now to Bell and TELUS' proposal for uncapping.
9670 If their case for the removal of the prohibition against de‑averaging is weak, in my submission the case for uncapping is even weaker.
9671 Commissioner Langford's first question for Bell hit the nail on the head: Where there is competition expected to discipline prices why remove the constraint against prices rising?
9672 We were troubled by the same question and could arrive at only two possible explanations.
9673 The first is that neither Bell's nor TELUS' test for competitiveness is a sufficient measure of the ability of competitive market forces alone to discipline prices throughout the exchange. The tests proposed are inconsistent with the Commission's forbearance criteria, which rely heavily on demand characteristics, evidence of rivalrous behaviour, and found that the local exchange was not the relevant geographic market.
9674 Mr. Bibic was ready. He was very well prepared with a long list of explanations why Bell's uncapping test is not a test for forbearance. But the fact is that this test is aimed at measuring the very same thing, whether competition is sufficient to protect the interests of users. That is the language from the Act.
9675 Permitting the ILECs to uncap services on strict supply criteria, such as the presence, as they indicated, that fall well short of your own forbearance criteria, in my respectful submission, would make a mockery of those same criteria.
9676 The second possible explanation that we had for this proposal is related to the first. If the competitiveness test is, as we say, insufficient to identify areas where the ILECs no long possess SMP, then this flexibility can be used to fund the ILECs ability to control the pace of competition where that competition does exist.
9677 Under the Commission's local forbearance rules, the ILECs can only achieve this type of flexibility where they meet essential criteria, including the requirement to meet quality of service indicators for services provided by competitors.
9678 Granting the inappropriate flexibility requested by Bell and TELUS before these criteria are met will work against the goal of promoting competition and against the very forbearance criteria established by the Commission a mere six months ago.
9679 At the beginning of my remarks I stated that the challenge for the Commission will be drawing the line between appropriate and inappropriate pricing flexibility. In our respectful submission, the Bell and TELUS proposals to permit de‑averaging and uncapped services clearly cross this line and should be rejected.
9680 On behalf of MTS Allstream I would like to thank you and your staff for your attention and patience throughout the hearing and wish you all the best in your deliberations.
9681 Thank you, Mr. Chairman.
9682 THE CHAIRPERSON: Thank you, Mr. Koch.
9683 THE SECRETARY: We will now move on with counsel Ryan, please, on behalf of TELUS Communications.
9684 THE CHAIRPERSON: Mr. Ryan, on behalf of TELUS.
ARGUMENT / PLAIDOIRIE
9685 MR. RYAN: Thank you and good morning, Mr. Chairman.
9686 Mr. Chairman, the Commission began to introduce competition in telecommunications markets 25 years ago. It recognized from the outset that a gradual relaxation of regulation is a natural part of the transition to full competition. This proceeding represents another important step in that transitional process.
9687 The task before you, in our respectful submission, is to design a new price cap regime that protects consumers from the exercise of market power, but does so in a way that does not deprive them of the benefits of the competition that the Commission has been promoting.
9688 A key principle espoused by Dr. Weisman which underpins TELUS' proposal is that the scope and intensity of regulatory oversight should vary with market conditions. The discipline imposed by economic regulation should shade seamlessly into the greater discipline imposed by increasing competition as market power declines.
9689 Mr. Chairman, looking back over the last five days of hearings, I think there are five issues that I could usefully address before you this morning to help you crystallize your thinking on the issues before you.
9690 I propose to talk about, therefore, TELUS' competitive presence test; our proposal for further de‑averaging; our proposal respecting bundling; fourth, our proposal respecting option services; and, fifth, the X factor. I will also have a few words to say by way of conclusion about income trusts.
9691 Before I turn to these points let me repeat what we have said several times before: We are not proposing forbearance. There is nothing in our proposal which affects price floors or imputation tests, the tariff approval requirements for regulated services; restrictions on win‑backs or promotions; the bundling rules, or CRTC oversight to ensure there is no unjust discrimination.
9692 Turning first to the competitive presence test.
9693 Consistent with what I have said already about the importance of regulation varying with market conditions and market power, TELUS has proposed a competitive presence test. Although Mr. Koch lumped the Bell and TELUS test together they differ.
9694 The TELUS test states that where there are at least two alternative full facilities‑based providers, one of which can be wireless, price regulation should be eased in recognition of the greater role that market forces will play in protecting consumers.
9695 The practical effect of TELUS' competitive presence test is that in exchanges that pass the test customers will have options from four different carriers available to them: TELUS, the cable companies telephone service and, since there is rarely one wireless carrier without there being a second, two wireless carriers.
9696 Mr. Chairman, you questioned TELUS' inclusion of wireless in the test. There are two reasons for this.
9697 First, because three carriers or four will provide more protection to consumers than a duopoly.
9698 The second reason was given by Janet Yale in her testimony; She said that wireless pricing affects wireline pricing because of the increasing substitution of wireless for wireline.
9699 Satisfaction of the competitive presence test, Mr. Chairman, means that the Commission can rely upon market forces to a greater extent and that less regulation is required to protect the interests of consumers.
9700 For services in exchanges that do no pass this test, customers will, under TELUS' proposal, receive greater regulatory protection to offset less robust market forces. Prices cannot increase on average and an individual rate element cannot increase by more than 5 percent.
9701 TELUS' prices will also be constrained by self‑interest.
9702 TELUS is a provider of a number of telecommunications services. You heard the evidence of Paul Hansen. He testified that if TELUS were to raise prices for basic services it would risk losing customers for other services.
9703 TELUS doesn't want to lose customers. It is much harder and more expensive to win back a customer than to retain a customer. As Mr. Hansen emphasized, TELUS will not implement price increases that might damage customer good‑will.
9704 Some U.S. States have implemented tests that resemble TELUS' competitive presence test. In fact, in some cases passing the test leads to forbearance rather than simply relaxed regulation.
9705 Let me underline that satisfaction of the TELUS competitive presence test triggers only a relaxation of certain regulatory requirements. It is not a test to determine forbearance.
9706 As I have already indicated this morning, there was a host of existing regulatory rules, tariffing win‑back rules, bundling restrictions, promotion rules, et cetera, that will remain in place.
9707 Uncapping may not adequately describe, Mr. Chairman, what TELUS is proposing for services and exchanges that pass the competitive presence test. While TELUS used the shorthand term "uncapped" to describe what happens to residential local services in exchanges where the competitive presence test is passed, passing the test does not mean that all upward pricing constraints are removed. Far from it.
9708 A 5 percent rate element constraint will remain in place. That is the same rate element constraint that exists under the current price cap regime.
9709 Furthermore, customers in exchanges that do not pass the competitive presence test who might not have any competitive options available to them are able to ask for the regulated price in the nearest regulated exchange.
9710 TELUS acknowledges the special issues raised by uncontested customers or what have sometimes been referred to in this proceeding as orphan customers in exchanges that meet the competitive presence test.
9711 TELUS will address this subject further in its written argument, but it is interesting to observe that if TELUS can't identify those customers, as Mr. Grieve testified is the case, it can't discriminate against them by targeting them with price increases.
9712 That brings me, Mr. Chairman, to the second subject I propose to address, and that is further de‑averaging.
9713 I have been asked not to respond to arguments made before you this morning by counsel that precede me and I will not respond directly, therefore, to the arguments that Mr. Koch has made on this subject this morning, but we will do so in our written final argument.
9714 In the meantime, I will satisfy myself with simply outlining for you our position on the subject.
9715 The TELUS proposal for de‑averaging is better described in fact as a proposal for further de‑averaging, because rates within bands or even within exchanges have never been completely averaged. TELUS is asking for a relaxation of the rule against further de‑averaging in order to allow it to respond more effectively to competition.
9716 You will remember the testimony of the TELUS marketing panel. They talked about the need for further de‑averaging across geographic markets that straddle exchanges and bands.
9717 The prohibition on further de‑averaging means TELUS cannot use normal channels ‑‑ the example of the Calgary Herald has been cited in evidence and cited to you again this morning ‑‑ for marketing TELUS services, because TELUS is not allowed to offer the same price throughout the circulation area of that newspaper. Because the paper circulation area cuts across a number of bands and exchanges, TELUS needs the flexibility to de‑average in order to create a uniform price in the paper circulation area.
9718 There is another aspect to our request for further de‑averaging.
9719 There are considerable cost differences within bands and exchanges that are not recognized in the rate structure left over from the days of monopoly regulation. You heard from Mr. Grieve about the very long loops throughout TELUS' ILEC territory that are priced below cost. TELUS is asking for the opportunity to address the unhealthy aspects of its historical rate structure.
9720 Eliminating the rule against further de‑averaging will be good for consumers, Mr. Chairman.
9721 At present, consumers are deprived of one of the normal benefits of competition and competitors are left with a comfortable price umbrella that means they don't have to present their best offers to customers.
9722 We heard concern during the hearing that de‑averaging would allow ILECs to raise prices in some areas to make up for competitive price reductions in others. TELUS' proposal addresses that concern.
9723 TELUS advocates taking services in areas that pass the competitive presence test out of the residential basket. That way, if prices for these services go down the ILECs won't be able to raise prices in the areas that don't meet the test.
9724 In addition, as Commissioner del Val pointed out, the section 27(2) rules on unjust discrimination would continue to apply.
9725 Let me turn next to uncapping of bundles.
9726 Bundles are uncapped under TELUS' proposal, but remember that the very definition of a bundle is that it is offered at a discount to the sum of the individual prices of the services offered on a stand‑alone basis.
9727 Moreover, bundles face significant competitive pressures. The prices are being forced down by competition.
9728 Removing bundles from the residential services basket is good for consumers. If they were not removed and prices of bundles decreased as a result of competitive pressures, then ILECs would receive headroom to increase the prices of standalone PES services that do not pass the competitive presence test.
9729 Dr. Roycroft agreed that leaving bundles in the cap would create headroom for PES price increases in these areas.
9730 Mr. Chairman, you suggested that such a result would be perverse. We agree.
9731 I will turn quickly then to the fourth subject, uncapping of optional services.
9732 Services should only be regulated if they are essential. Essential services, we say, are those both used by nearly all consumers and widely regarded as essential to an acceptable standard of living. To justify regulation of essential services, they must be supplied on a monopoly basis.
9733 The Commission has already frozen the rates for services such as call block because of privacy concerns. However, local optional services are, by their very nature, discretionary. Discretionary services compete for discretionary dollars of customers. Optional services are discretionary because they do not meet the criteria I just described. They are not used by nearly all consumers and not widely regarded as essential to an acceptable standard of living.
9734 Now, for the X factor. I also propose to deal with this subject only briefly.
9735 The need to impose a constraint on prices arises only in areas where the competitive presence test is not passed.
9736 TELUS is proposing a price freeze for these services rather than the adoption of an explicit X factor. Customers will, Mr. Chairman, get greater protection from TELUS' price freeze than from an explicit X factor because they will be insulated from the risk of high inflation. That is a risk that the company will bear.
9737 Should the Commission decide to adopt an explicit X factor, it should be based on the marginal cost approach adopted in the second price cap decision. Using that approach Dr. Bernstein has calculated an X factor in the range of 1.1 to 1.8 percent.
9738 Now, you also have before you the evidence of Dr. Roycroft that that number should be in the range of 6 percent. But, Mr. Chairman, for reasons you have already heard this morning, and for others I am about to explain, his approach to the subject is seriously flawed.
9739 Dr. Roycroft uses data from disparate time periods, 1998 to 1995 for his calculation of total factor productivity; 1995 to 2004 for the Canadian economy‑wide multi‑factor productivity calculation; 1992 to 2004 for the input price differential; 1988 to 2003 for the DSL study which underpins his proposal respecting the stretch factor.
9740 Second, Dr. Roycroft uses U.S. data in preference to Canadian data in calculating the input price differential. Use of the Canadian data already contained in his own evidence to calculate the input price differential would reduce his X factor by about 2.4 percent.
9741 Dr. Roycroft includes a stretch factor in his calculation, however the use of a stretch factor is an approach the Commission expressly rejected in the second price cap decision. Elimination of the stretch factor would further reduce his X factor by 1 percent.
9742 So these last two adjustments alone, the one to the input price differential calculation and to the stretch factor, would already take Dr. Roycroft's number down from 6 percent to 2.7 percent.
9743 But Dr. Roycroft's greatest sin was to use a TFP methodology.
9744 As Mr. Henry has already reminded you, TFP is a methodology that was rejected by the Commission, for good reason, in the last price caps decision, principally because it does not allow measurement of the productivity of a subset of services. That is a point that Dr. Roycroft conceded.
9745 Dr. Roycroft's proposal would take us back to the base number adopted in the first price cap decision, a number which the Commission declined to use in the second price cap decision.
9746 Mr. Chairman, I said I would add a few words about income trusts.
9747 The evidence on the record shows that a trust conversion should not cause any change in the Commission's approach to price cap regulation. Even if the Commission were to adopt an explicit X factor, Dr. Bernstein's evidence demonstrates that using the Commission's accepted marginal cost approach a trust conversion would have no impact on the level of the X factor.
9748 In any event, it should be kept in mind that the purpose of price cap regulation is to break the link between prices and operational risks associated with things like acquisitions, corporate restructurings and, of course, income trust conversions.
9749 Price cap regulation is designed to provide the regulated firm with incentives that more closely approximate those of a competitive market structure and to insulate customers from the risks associated with management‑initiated changes such as acquisitions and corporate restructurings and the creation of income trusts.
9750 So by way of conclusion, Mr. Chairman, what are we asking you do to? Well, we are asking you to do the following:
9751 To approve the competitive presence test and, with it, first, a rate freeze in areas where the test is not passed.
9752 Second, relaxed regulation in areas where it is passed.
9753 We are asking you to approve further rate de‑averaging.
9754 We are asking you to approve a 5 percent rate element constraint for PES and a 10 percent rate element constraint for business services, as is currently in effect.
9755 We are asking you to approval removal of bundles from the cap and we are asking you to uncap optional services.
9756 Mr. Chairman, these measures will achieve what TELUS believes is a key objective for the next price cap regime, a matching of price cap regulation with current competitive market conditions and the market conditions we expect will evolve over the next four years.
9757 Thank you to you, Mr. Chairman, your fellow Commissioners and Commission staff and the sundry other people who have made the hearing process an efficient one. Thank you very much for your attention this morning.
9758 Those are my submissions on de‑averaging.
9759 THE CHAIRPERSON: Thank you, Mr. Ryan.
9760 THE CHAIRPERSON: I think we will have one more final argument before break, Madam Secretary.
9761 THE SECRETARY: Thank you very much, Mr. Chairman.
9762 I am now inviting counsel Engelhart on behalf of The Competitors to come forward.
ARGUMENT / PLAIDOIRIE
9763 MR. DUNBAR: Thank you. Thank you very much, Mr. Chairman.
9764 It's Lawrence Dunbar and Ken Engelhart on behalf of The Competitors, being for Canada's largest cable companies, Cogeco, Québecor Media through their subsidiary Vidéotron, Rogers Communications Inc. and Shaw Communications Inc.
9765 This price cap proceeding comes at a very interesting juncture in the evolution of the Canadian telecommunications market. After almost a decade of laying the groundwork for a competitive local exchange market, and after a major false start with the first wave of CLECs, and after a considerable amount of hand‑wringing, the industry is now showing some very positive signs of competitive life.
9766 This more competitive environment if the product of the cable industries' heavy investment in high‑speed broadband infrastructure, the Canadian public's love affair with high‑speed Internet, and the development of IP telephony.
9767 It is also, in no small measure, the result of the Commission's ongoing efforts to foster the development of a competitive local exchange market through its regulatory policies.
9768 The two previous price cap regimes might be characterized as trying to replicate the impact of competitive market forces on the ILECs and to give them a little more pricing flexibility.
9769 On the eve of the third price cap regime, we find ourselves further along the continuum towards a competitive local market. Competitive market forces are clearly gathering strength. They are not yet reaching the threshold set by the Commission for regulatory forbearance.
9770 It is quite possible that by the time the new regime takes effect in June of next year that some local forbearance regions, or LFRs, will have satisfied the tests for forbearance and the new regime will have little or no application to them.
9771 Other LFRs will take longer to reach this stage and some, in more remote areas, may never get there. So the new price cap regime must be more adaptable than its predecessors to diverse market conditions.
9772 Where competition is still weak or non‑existent, the Commission must have regard to its statutory obligation to ensure that rates are just and reasonable, and it must protect consumers from the ILEC's ability to raise prices to unreasonable levels.
9773 At the other end of the spectrum where competition is strong and the Commission's forbearance tests have been met within an LFR, we are of the view that the Commission should let market forces replace regulation.
9774 In between these two extremes is the inevitable grey area where competitive market forces are clearly present and are gaining strength, but have yet to reach levels that justify forbearance.
9775 The big question seems to be: How much can we ease up on regulatory restraints without hurting the interests of consumers?
9776 There has been considerable debate over the past year about the role of competition in telecommunications in Canada, whether it is an objective in itself or a means to an end, namely the improvement of consumer welfare. We believe that both are true. The ultimate goal of telecommunications regulation is to improve the lot of consumers and business users, not competitors.
9777 However, since competitive markets are generally considered to benefit consumers to the greatest possible extent, it has become the role of regulators to foster the development of competitive markets where monopolies were previously the norm.
9778 It is therefore a mistake, in our view, to look at the existing regulatory framework as a system designed to protect competitors as we have sometimes heard it referred to in this proceeding. It is a system designed, at least in part, to foster the development of a competitive marketplace that will hopefully soon obviate the need for regulation and will ultimately maximize consumer welfare.
9779 Looked at from this perspective, the question should not be whether this or that particular restriction of the ILECs marketing and pricing activities should be lifted now that the cable companies are truly engaged in the market. But rather, whether the relaxation of these restrictions, prior to forbearance and hence prior to the ILECs' loss of market power, will jeopardize the maturation of the competitive market and jeopardize ultimate forbearance.
9780 This is a public policy issue, not a competitive equity issue. The assumption in this proceeding seems to be that now that the cable companies have made their investments in network infrastructure and are attracting customers, the ILECs should be allowed to fully take the gloves off and the cable companies should take their lumps.
9781 There is a number of problems with this analysis. First, although the competitors have successfully launched their IP‑based telephone services, all competitors, including cable and non‑cable companies, still only have about 10 percent of the market nationally. To our knowledge, only one ILEC has met the Commission's thresholds for market share loss in a single LFR, namely Aliant in the Halifax LFR.
9782 Furthermore, to our knowledge, no ILEC has yet satisfied the Commissions Q of S requirements, quality of service requirements, for forbearance. Clearly therefore, whatever liberalization takes place in this proceeding, it should not replicate the degree of pricing flexibility accorded to the ILECs in forborne markets. This doesn't mean simply requiring tariffs to be filed for approval. The tariff filing mechanism will achieve nothing if it simply grants approval to a wide range of discretionary prices. What you will end up with is a form of forbearance under a different guise.
9783 Secondly, it is a mistake, in our view, to assume that the competitive market will survive in a form that will best serve consumers' interests simply because the cable companies will not abandon their sunk investment. While The Competitors have indicated that they will not vacate the market if prices are driven down towards marginal cost, this doesn't mean that they will necessarily make the new investments that will be required in their networks in order that they can expand their customer base and actively develop new products and services.
9784 As pointed out by Mr. Brazeau in his testimony, it is a fallacy to think that the existing cable network is capable of carrying an infinite amount of traffic, it clearly is not. If the cable companies grow their subscriber base and provide the capacity necessary to serve the ILECs' existing customer base, current investments will have to be significantly augmented. This will not occur in a predatory environment or an environment in which targeted pricing responses denies competitors the opportunity to recover their investment.
9785 Given this situation, the question is not whether greater pricing flexibility prior to forbearance will drive the cable companies from the market, but rather whether it will stall competitive entry at current levels, discourage further investment and result in a mixed regime involving regulated competition.
9786 We believe the Commission is on the right track, it has established conditions for market entry that will enable a competitive market to develop and it has established measurable thresholds for forbearance. Now is not the time to short‑circuit this process by dramatically altering the rules of the game in advance of forbearance.
9787 Now turning to our proposal, we believe that our proposal for the next price regime best fits the dynamic market structure in which it will operate. Our proposal will provide the ILECs with increased pricing flexibility while continuing to protect consumers from price increases associated with the ILECs' residual market power.
9788 In our view, the so‑called one‑on‑one pricing proposed by the ILECs in this proceeding falls only marginally short of a forbearance proposal. As Mr. Engelhart will discuss in a few minutes, this degree of pricing flexibility is inappropriate in markets where the ILECs still possess market power. It would enable them to target lower pricing to customers who have decided to try a competitor's service while maintaining higher prices in more inert markets.
9789 The Competitors' proposal takes a more balanced approach. In our view, it allows the ILECs a level of pricing flexibility that is commensurate with emerging competition while stopping short of allowing them to engage in individual pricing strategies to recapture lost customers.
9790 There are several components to our proposal that will provide the ILECs with greater flexibility to move prices both up and down. First, we are proposing that the ILECs be permitted to engage in de‑averaging on a provincial basis at the commencement of the new price cap regime. This will enable both TELUS and Bell to address market differences that may exist across provincial boundaries in the provinces they serve.
9791 Secondly, we are proposing to eliminate the X‑factor from the price cap formula in respect of primary exchange services. This is fully consistent with the Commission's approach to business local services in the second price cap proceeding. At that time, the Commission decided that the competitive market forces were sufficient to justify the removal of the X‑factor, but not sufficient to justify forbearance. In our view, this is the situation that now obtains in the non‑high‑class residential PES markets.
9792 The proposal to limit the X‑factor has been referred to on occasion in this proceeding as a reform that is designed to permit prices to rise, but in fact that is only half the equation. Our proposal equally provides the ILECs with more room to pursue a pricing strategy that involves price increases in some bands and price decreases in others, provided that the other requirements of the price cap regime are satisfied.
9793 The third component of our proposal is to restrict the overall price increases in the residential and business local exchange markets to the rate of inflation and to restrict individual price increases for specific rate elements to 5 percent for residential and 10 percent for business. In our view, these measures will protect consumers in more inert markets from unreasonable rate increases while providing some additional pricing flexibility for the ILECs. In our view, this proposal lies somewhere between the Consumers' proposal and the ILECs proposal.
9794 The fourth element of Competitors' proposed reforms relates to price de‑averaging. We are proposing that the ILECs be granted additional pricing flexibility where there is cogent evidence of increased competition within an LFR. When the ILECs have lost a 20 percent market share in an LFR and the Q of S requirements have been satisfied, we are proposing that the ILECs be permitted to engage in rate de‑averaging between LFRs.
9795 In other words, we propose to allow prices in one LFR to differ from prices in another while still requiring average prices within the more competitive LFR. This would enable ILECs to respond to increased competition in LFRs such as Calgary within a given LFR while leaving prices untouched in other more inert markets. We believe that this approach is fully consistent with the approach of the Commission in forbearance and its relaxation of winback rules within LFRs where market share losses reached 20 percent and Q of S standards have been satisfied.
9796 This approach is also superior to the ILECs' approach which looks at competitive presence, but totally ignores market share loss in assessing competitive intensity. Our approach also differs from the ILECs insofar as it uses an LFR as a relevant geographic area. Again, this is consistent with the Commission's approach in the forbearance decision.
9797 We believe that our approach involves a logical transition to full forbearance and provides some initial price flexibility at the commencement of the price cap period, it increases flexibility when market share losses of 20 percent are achieved and it allows for complete pricing flexibility following forbearance where the ILECs have lost their market power.
9798 In our view, consumers will benefit at each stage of our proposal. At the outset, they will benefit from some increases in ILEC prices, pricing flexibility, while being protected from unreasonable price increases. In exchanges where competitive forces are gathering strength consumers will benefit from LFR‑based rate de‑averaging.
9799 Under our proposal, all consumers within a given LFR will benefit from this type of rate de‑averaging since it will be applied on an LFR‑wide basis.
9800 Finally, once an LFR is forborne, consumers can benefit from one to one marketing if this is in fact what the ILECs want to provide. While there are inevitably tradeoffs to be made with this type of transition from regulation to competitive market, we believe that our proposal satisfies the need to protect consumers with a desire to give greater weight to market forces when they gather sufficient strength to be relied upon.
9801 MR. ENGELHART: The ILECs' proposals call for significantly greater pricing flexibility at an earlier stage than our proposal. In fact, as disclosed by Mr. Bibic during cross‑examination, what the ILECs really want is the ability to engage in one‑on‑one marketing. Although it is acknowledged to be impractical to do this on a company‑wide basis, that is not what the ILECs have in mind. What they have in mind is using this ultimate pricing flexibility as a tool to retain vulnerable customers and to win back customers who have opted for a competitor's service, this is the so‑called "save queue" referred to by Mr. Collyer in his testimony.
9802 If granted this pricing flexibility prior to forbearance, the ILECs will use it to retain or recapture valuable customers while continuing to charge more inert customers higher rates. The ILECs claim that this form of Ramsay pricing is normal in competitive markets. In fact, it is not the norm in fully competitive markets or workably competitive markets since in such markets there are no inert customers and higher prices cannot be sustained. Ramsay pricing is the pricing strategy of choice for firms with market power.
9803 It is the presence of significant market power that enables price increases to be made, not the presence of competitive market forces. It is precisely because of the ILECs' ability to engage in selective price discrimination that regulatory safeguards continue to be required prior to forbearance. It is also because of this dominant position as former monopoly suppliers of PES that the ILECs know which customers are most valuable to retain or recapture and what their specific telecommunications requirements are and when they leave. This puts the ILECs in a unique position to target these customers and address their individual needs.
9804 This was borne out by Bell Canada's own expert witness in the local forbearance proceeding last year. According to Dr. McFetridge, perfect price discrimination requires that the seller charge each buyer the maximum amount that each buyer is willing to pay, known as the buyer's marginal evaluation, for each successive unit of the product purchased.
9805 This requires that the seller know the demand characteristics of each buyer and deal with each buyer separately. This is highly unlikely in practice, because this type of information is almost never available to the seller. It is, however, largely available to former monopolies in network businesses such as this because of their unique knowledge of the customer base and it enables the ILECs to engage in this selective form of price discrimination in a surgical manner.
9806 If there is any question as to who benefits from Ramsay pricing in these circumstances, Dr. McFetridge provided the answer in very succinct terms. If there is perfect competition among sellers, the entire surplus gained from exchange accrues to customers. If there is perfect price discrimination, the entire surplus gained from exchange accrues to the seller.
9807 We are not alone in our criticism of rate de‑averaging prior to forbearance. As recently as last year the Commission stated that allowing the ILECs to respond to market forces within a geographic area of a rate band through rate de‑averaging would allow for a degree of targeted pricing which could subject other customers in the rate band to an undue discrimination, result in rates that are not just and reasonable and slow the development of fair and sustainable competition.
9808 In these circumstances, one might wonder how the ILECs can justify their Ramsay pricing approach as being in the public interest. Bell Canada offers three principal arguments. First, they say this is business as usual in competitive markets. Everyone does it so why can't we? As I mentioned in my cross‑examination of the Bell panel, this puts me in mind of my children saying that all their friends have a TV in their bedrooms or everyone else gets to stay out until 2:00 a.m.
9809 Upon examination, this type of proposition usually ends up being untrue. There may be one kid with a TV in his or her room or one kid that gets to stay out all night, but it is not the norm. The same is true of the type of rate de‑averaging sought by the ILECs in this proceeding.
9810 You will recall that during cross‑examination of Bell's panel I asked them to give examples of rate de‑averaging that Bell engages in in the long‑distance high‑speed Internet and broadcasting distribution markets, all competitive markets in which their retail pricing activity is not regulated. The panel was hard‑pressed to come up with any examples other than a $2.00 price differential on Sympatico service in Quebec.
9811 It was not until after the lunch break on Tuesday following what I assume was a wild flurry of activity that the panel was able to come up with a few more examples of what they said were price de‑averaging in those markets. All of these examples were unadvertised and unpublished save offers. This hardly amounts to evidence of any widespread practice.
9812 The truth is that, with one or two exceptions and some provincial differences, the communications industry in Canada generally does not engage in widespread price de‑averaging. It is a practice that pays the greatest dividends for companies that face competition in some sectors and enjoy monopoly power in others. It allows the perpetrator to fleece the inert segments and marginalize competitors where they surface. It is not the competitive norm and it is not in the public interest.
9813 The second justification advanced by Bell for rate de‑averaging is that in a market characterized by high‑fixed and common costs differential pricing is necessary in order to stay financially viable. If Bell were correct in its assertion, one would expect to find numerous examples in the long‑distance BDU and high‑speed Internet markets. However, the record of this proceeding defies Bell's proposition. Geographic de‑averaging is the exception rather than the rule.
9814 If one really wants to understand the rationale for Bell's proposal, one needs to insert the words "monopoly profit" into the equation. What Bell wants is the ability to exact a monopoly profit from inert customers and customers who do not yet have competitive alternatives while protecting its customer base in other regions where competition is emerging.
9815 The reason why we don't see this pricing strategy in competitive markets is because such markets are generally not characterized by suppliers with market power and inert customers. As far as financial viability is concerned it is difficult to see how Bell's financial viability is anymore at stake than its competitors who also have high‑fixed and common costs, but who lack inert markets from which to recover them.
9816 The big danger, if Bell is granted the flexibility it seeks, is that Bell will drive prices down to cost in a selective manner, thereby denying its competitors the ability to expand their operations.
9817 The third reason advanced by the ILECs in favour of eliminating the restriction on rate de‑averaging is that the current rule encourage uneconomic entry insofar as it provides a price umbrella effectively protecting new entrants even where they are inefficient. Again, this proposition does not hold up to scrutiny.
9818 The cable companies have not invested hundreds of millions of dollars to enter a market on an uneconomic basis knowing that rates will be forborne in most major markets over the next year or so. Who are the uneconomic entrants? The ILECs have failed to identify them. As acknowledged by Mr. Hariton, it is also a fallacy to suggest that competitors are facing a single averaged price in the regions in which they compete.
9819 The ILECs themselves already have numerous rate bands and sub‑bands within their respective operating territory. If The Competitors' proposal for provincial de‑averaging is accepted, this number of different bands will double in Bell Canada's territory. Moreover, these rate bands already embody cost differentials inherent in providing services.
9820 Some companies like Vidéotron already face competition from three different ILECs in their operating territory. This obviously multiplies the number of different rates they already face. There are also other competitors in the market such as Primus and Vonage who again have different rates. Which of these many rates provides the umbrella for a new entrant?
9821 If what Bell suggests were true, one would expect the cable companies to have at least one rate plan for each ILEC rate band they compete in, but this is not the case. While The Competitors' price plans and service bundles may differ, they generally do not segment their pricing on a customer‑specific or narrow geographic basis in the way that the ILECs say they want to.
9822 TELUS complaint about rate averaging is a little different than Bell's. TELUS is worried that competitors will target customers within an exchange that have short loops since these customers are less expensive to serve. TELUS fears that its obligation to provide service to urban ranchers with long loops increases its marginal costs and enables competitors to engage in cherry picking. Again, this is not borne out by the facts.
9823 As testified to by The Competitors' panel on Friday, the cable companies are entering the telephony market on a network‑wide basis wherever they have upgraded facilities. They are not picking and choosing their locations based on the ILECs' loop lengths. Indeed, the cable companies do not use loops that run from the customers' premises to a central office, they use drops which run from the cable distribution network to the customers' premises and they are offering their services to anyone who is served by their network.
9824 Since over 95 percent of homes in Canada are passed by cable networks and approximately 88 percent of them can be served by high‑speed Internet, there really is no reason at all to think that a cherry‑picking strategy is being pursued.
9825 Other competitors like Vonage and Primus do not use loops either. They either run their VoIP service over the ILECs and cable companies' high‑speed Internet services or resell ILECs' local loops. It is difficult to identify any major new entrant who is cherry picking in the manner suggested by TELUS.
9826 As pointed out by Commissioner Langford during the proceeding, the company's own evidence contradicts the notion that the ILECs' longer loops are a burden to them. According to the companies, once the network is in place the marginal cost of providing services to premises passed by its network is negligible. Since the ILECs have already constructed their networks and their marginal costs are negligible, it is difficult to see why they feel the need to raise prices to these customers with the long loops.
9827 TELUS marketing panel also made the point that it is difficult to market its local services to a marketing region like Calgary that has a number of different rate bands. The Competitors have some sympathy with this problem. It is for this reason that we are proposing to permit an ILEC to adopt a new LFR‑specific rate whenever that ILEC has lost 20 percent of its market share in a given LFR. By allowing new LFR‑specific rates when competitive market forces have established a firm foothold, it will be possible for TELUS and the other ILECs to simplify their marketing efforts within the Calgary or other LFRs.
9828 Such relief is not far away. We expect that a number of major LFRs will reach the 20 percent threshold in 2007, possibly prior to the commencement of the third price cap period.
9829 We also believe that the ILECs have more pricing options available to them under the existing rules than they have acknowledged in their evidence. The shackles of regulation are not nearly as constraining as the ILECs would have you believe. During their cross‑examination of The Competitors' panel of witnesses the ILECs' counsel identified numerous bundles of services offered by the cable companies.
9830 But as pointed out by Mr. Watt, the ILECs are quite capable of providing bundles themselves. Why they don't do more bundling is a mystery to the cable industry. Although the ILECs are required to cost local service at the tariff rate, they can cost other unregulated items in their bundles such as high‑speed Internet, long‑distance service or BDU services at acquisition costs which is a modest threshold indeed.
9831 Counsel for The Companies also pointed to both purchase deals for multi‑tenant buildings that Rogers engages in in its cable TV business. Again, the ILECs can already do this. There are numerous examples of tariffs that contain volume discounts that have been approved by the Commission. This has nothing to do with rate de‑averaging.
9832 Counsel for The Companies also introduced The Companies' Exhibit No. 10 to The Competitors' panel, which was the offer to new housing owners of three‑year service for Rogers cable TV, telephone and high‑speed Internet service. As explained by Mr. Watt, this was a deal purchased by the real estate developer to assist with its house sales. Mr. Watt also pointed out that Aliant had made a similar deal available to developers in its operating territory.
9833 Why other ILECs don't do this, we don't know. The answer is not to do away with rate de‑averaging. Indeed, the record shows that the ILECs could be doing more innovative marketing than they are currently doing under the existing rules.
9834 For all of these reasons, we believe that our proposal best meets the policy objectives of a price cap plan at this juncture in the development of the competitive local telephone market.
9835 Thank you very much.
9836 THE CHAIRPERSON: Thank you, Messrs. Dunbar and Engelhart.
9837 We will take a break and begin again at five minutes to 11:00.
‑‑‑ Upon recessing at 1035 / Suspension à 1035
‑‑‑ Upon resuming at 1055 / Reprise à 1055
9838 THE CHAIRMAN: Order, please. À l'ordre, s'il vous plaît.
9839 Madame la secrétaire.
9840 LA SECRÉTAIRE: Merci, monsieur le président.
9841 I would like to invite now counsel Janigan and Lawford on behalf of Consumer Groups to proceed with their final argument.
ARGUMENT / PLAIDOIRIE
9842 MR. JANIGAN: Thank you, Mr. Chair, and members of the hearing panel for the opportunity to address you today and to give the substance of the argument of the Consumer Groups that we'll be advancing in written form next week.
9843 My colleague, Mr. Lawford, and I intend to proceed in a tag‑team fashion and that will hopefully terminate somewhat less histrionically than the wrestling variety.
9844 We apologize that we are unable to touch upon all the items under consideration implicitly or explicitly raised by the Public Notice, but hopefully we may be able to address them in our argument next week.
9845 The Commission has flagged objectives of the regime as initial item to be addressed. With the benefit of hindsight, the Consumer Groups question the utility of the concept of objectives, particularly in relation to statutory test tasks before the Commission.
9846 With respect, the Consumer Groups believe that the introduction of a set of values on top of the Commission's clear responsibilities to set rates based upon a standard of just and reasonable has not generally been helpful, particularly for the consumer interest in the rate‑making process.
9847 Many participants in this proceeding have quoted from the Telecommunications Policy Review Panel Report, a comprehensive document that advances an agenda of change and reform, both in terms of reducing regulatory oversight in some areas and enhancing them in others.
9848 Whatever the view concerning its recommendations, care must be taken in the context of this proceeding to parcel those elements that require statutory change that has not yet occurred.
9849 In particular, in this proceeding, rates must be fashioned in a way that engages the balancing of the rate payer and regulated company interest, namely the right to earn a return that fairly compensates the company and recovers its investment and, at the same time, provides service at the most efficient rate for the rate payer.
9850 This principle did not go selling out the door when price caps were adopted. Price caps were adopted as the best way to meet this objective principally through the control of prices and an allocation of a share of estimated productivity benefits as well as provision of incentives to the regulated company.
9851 Since Decision 9419, the price cap company has financial incentives for efficient allocation of costs and introduction of productivity enhancement. I should say since the principles advanced by Decision 9419.
9852 There is a diminution of the opportunities to cross‑subsidize products and services of the basket structure and reduction of regulatory scrutiny between performance reviews.
9853 All of this comes with the implementation of a price cap. Thus, a price cap is thought by many to be the superior instrument for regulation ‑‑
1100 ‑‑ of incumbent monopoly services in markets where there is a merging competition in that it better prepares the incumbent for competition or protecting rate payer interest.
9854 While the specified terms of the price cap formula and its application involve the application of judgment, they are not so elastic as to enable some kind of re‑configuration to meet other policy objectives, particularly those that conflict with the Commission's duty to set just and reasonable rates.
9855 The Consumer Groups don't object to the restatement of the accepted objectives of the price cap regulation. We just believe that the experience of the last price cap is a cautionary tail involving the perils of using the price cap rate‑making tool as a fixer of all perceived problems in telecommunications markets.
9856 The record is a replete with the complaints of the effects of the existing regulatory regime on the interest of particular stakeholders.
9857 We will address a little later some of these complaints that deal with the necessity to maintain particularly regulatory constraints as part of the price cap framework, but we would first speak to the aspect of redress of structural or financial inequities that seems to flow through elements of the record of this proceeding put forth by some key industry stakeholders.
9858 We believe that any balancing exercise associated with the rate‑making process must consider what residential rate payers have already paid to attempt to facilitate the development of competitive markets.
9859 And when we see this, we realize it's far too late in the day to roll back the clock, but it's important to remember where we have been.
9860 We embarked upon the restructure in the telecom markets in a major way in the proceedings that gave rise to Commission Decision 9278 allowing competition interconnection on the toll market.
9861 With the advent of competition and the cost pressures inefficiencies that would be so enabled, the Commission, at that time, in a sunny fashion, deflected the inevitability of local rate increases. They came later in a three‑year sequence.
9862 By the middle of the decade, the incredible productivity enhancement associated with digital technology and the digitization of incumbent networks paid for by years of rates and service improvement plans were to finally deliver on their promise.
9863 At this juncture, by a remarkable coincidence, we migrated the separation of the company and the competitive and utility elements and subsequently, the price regulation rather than cost of service.
9864 Did we fairly share the productivity associated with the technological developments in subsequent regulation? We will return to that point.
9865 Later, in the first price cap period, the basket structure so designed facilitated the flowing of price reductions exclusively to business customers to bitterest the high like defence against competitive entry.
9866 Residential rates payers also funded local numbered portability costs and other costs of local competition.
9867 Through the application of Decision 2002‑34 almost one billion and a half dollars from rate reductions were never passed on to residential local consumers to make sure the competitors had a price that they could beat.
9868 Much of this money flowed out to pay for price discounts, for access digital networks to Competitors who still, by and large, only serve the business market.
9869 The customer benefits were modest in comparison. By mid‑2002, ten years after Decision 9278, customer price changes were slightly less than inflation for the decade before with higher telephone bills being paid by the typical residential customer.
9870 This is hardly an impressive record for an industry that showed five times the long run economy‑wide TFP growth in the same period of time.
9871 Residential customers are tired of being the shock absorbers for every bump on the road to competition paradise. There are seemingly no limit to the willingness of other stakeholders to volunteer us for financial burdens and risk in order to make the market work for them.
9872 Unless they be deterred from awarding their shareholders by the courageous pursuit of every productivity enhancement or the cost cutting measure available, we will also not be peeking behind the corporate veil to judge winners and losers from the last price cap period.
9873 Thus, we have in this proceeding not only the heads scratching task of constructing a price cap from the assortment of an imperfectly max. statistical instruments and assumptions attributable to the difficulty of matching inputs and outputs in the corporate structures, even if the data could be produced.
9874 Residential primary exchange service seems to have wholly grail proportions from a marketing standpoint what is a seeming back allay for productivity, destined to be another service riding on the ILEC network as Bell Canada's Mr. Hariton has noted.
9875 My colleague, Mr. Lawford, will describe the model that commands itself to the Consumer Groups based on the record, but I wish to direct some comments after Mr. Lawford is finished on the subject of various uncapping and de‑averaging proposals that have been ventilated by Bell and TELUS in this proceeding.
9876 Actually, I wish to do this now and I'll have some comments after Mr. Lawford's finishing edition.
9877 With respect to the uncapping and de‑averaging proposals, we would submit that the net effect of these proposals is to reargue the appropriate tests for forbearance. This time, the bar is to be set lower to enable more pricing flexibility.
9878 In the case of the uncapping tests, the Commission Decision 2006‑15 would suggest that the ILEC would be left with residual market power. Market power means the ability to raise prices profitably above competitive levels.
9879 Rate decreases spurred by rate de‑averaging can create head room under the cap that needs rive rate increases for customers residing in non competitive areas that depend upon regulatory protection.
9880 Finally, the proposal struck away the practical of the benefit of the price ceiling for local PES that was established in Decision 2006‑15.
9881 From what we can gather, the insurance against the ILECS exercising market power or their ability to increase rate is yet another blue sky view of the market, something to the effect that this time we are really really really certain that competition will protect you.
9882 What the proposals actually say is that customers should once again provide the shock absorber, this time the insulation against the incumbents losing too much market share.
9883 If the market is competitive and market power cannot be exercised to the detriment of customers, then forebear regulation. Let's not have pretence structures that are for the benefit of the incumbent only. We have already paid billions for competition. We can wait till it actually arrives without once again compensating the incumbents.
9884 Mr. Lawford will now discuss the model that we have proposed, as I've indicated.
9885 MR. LAWFORD: Good morning. The Consumer Groups have proposed retaining the present basket structure for a further period of four years which, we submit, is a reasonable position, given the emphasis of the companies and TELUS upon what is, in our submission, an effective avoidance of the price cap and in an round around the Commission's forbearance framework.
9886 The Commission has not, in our submission, received compelling evidence that would indicate competition is sufficient to prevent the exercise of ILEC market power in the areas where the companies or TELUS uncapping tests would be met. The actual evidence of substitute ability is also spody. Cable telephony is offered as part of higher price bundles in markets where competition could be expected for PES under the present price capping ‑‑ pardon me.
9887 Cable telephony is offered as part of higher price bundles in markets where competition could be expected under the present price cap if indeed there are room for an economic entry. Instead basic service, customer simply face a competitive choice with cable telephony that is no choice at all.
9888 Cable operators either are not offering equivalent of a stand‑alone PES, instead offering bundles with optional features or with forborne services or pricing their stand‑alone PES at prices which are well above ILEC primary exchange service rates under the present rate cap.
9889 Retaining a price cap would enable a more coherent transition to forbearance than allowing ILEC dominance to be cemented in areas where the potential for competition from cable and VoIP is only just beginning to take hold.
9890 The Consumers' proposed price cap index calculation is the only one that fairly attempts to reflect the reality of network growth and economies of scale in the last price cap period.
9891 While the assumptions have baseline productivity used in this analysis may be questioned as to their exactitude, it is notable that the unavailability of more recent figures is a consequence of the ILECS own insistence on avoiding reporting any costs or revenues, even for the purpose of designing an appropriate rate cap.
9892 In such circumstances, it is entirely reasonable for the Consumer Groups to propose an X factor based on the latest hard figures for a total factor productivity.
9893 Total factor productivity calculation driving X factor is a key issue in this proceeding. The Consumer Groups are well aware that the Commission has moved away from TFP calculation. However, we are requesting a consideration of likely ILEC TFP precisely because it is the fairest theoretical measure of the reality of ILEC outputs.
9894 Scope economies, outputs and therefore productivity enjoyed by the ILECs since the last price cap decision will be implicitly assigned under the ILECs proposals to unregulated services such as DSL and wireless while primary exchange service subscribers are saddled with nominal inputs for these services, resulting in higher primary exchange service prices.
9895 The Consumer Groups price index is also the only one that attempts to fully reflect the totality of inputs.
9896 We include a calculation of input price differential which we feel accurately reflects the real performance of ILECs relative to the general economy.
9897 As for outputs, we also include an explicit stretch factor to account for rising industry productivity levels due to economies of scope from such newer services as DSL, gaming and ring tones.
9898 This stretch factor is an attempt to fairly proportion some of the scope productivity benefits to the consumer side of the ledger in the Commission's attempt to set just and reasonable rates.
9899 Again this is a mechanism to avoid the situation where ILECs attribute 100 percent of productivity gains to forborne services and 100 percent of the joint and common cost to residential PES, which unjustly raises rates for consumers and provides supernormal profits to shareholders in areas where ILECs have significant market power.
9900 ILEC productivity estimates produces at the prodding of the Commission in this proceeding lack the air of reality required to avoid the risk that consumers will gain nothing from the likely positive industry performance during the next price cap period.
9901 As a belt that we add to the suspenders of the price cap formula, the Consumer Groups have further called for any rate increases under the cap for residential services basket to be limited to the lesser of GDP, PI inflation or five percent.
9902 I would like to say a word about high‑cost service areas. The Consumer Groups strongly support the continuation of a separate high‑cost service areas sub‑basket.
9903 High‑cost service areas are under‑served and unserved areas where affordability of telephone service is a major issue for many residents.
9904 Proposals to eliminate the high‑cost service area basket by combining with other non‑high‑cost service area baskets in a single residential services basket as supported by some of the ILECs raises a host of potential problems for these sensitive areas which are well outside the scope of the proceeding.
9905 We urge the Commission to consider these proposals to remove high‑cost service area baskets with much caution.
9906 We are turning now to the basket structure. The Consumer Groups are very concerned with the Commission's treatment of optional services such as caller ID or voicemail.
9907 Optional services, a highly lucrative segment of ILEC utility operations during the reporting period, were not capped under the first price cap, and consumers experienced significant increase.
9908 The present optional services price cap of a dollar per year is a rather casual limitation, and not reflective of other rate caps in other baskets.
9909 These are services that cannot be obtained on a stand‑alone basis. Leaving the option of doing without is the only choice in areas without meaningful competition.
9910 In the Consumer Groups view, the Commission has had enough fights on their match card already to open another one with Canadian consumers about whether optional services are really important to them.
9911 We think that they are. In our survey, which is contained in our response to CAC/MSOS number 6, we feel that there is a contention that the Commission shouldn't be blasé about the exercise of market power in these services.
9912 We therefore propose a more rational optional services price cap of GDPPI plus three percent.
9914 I am just going to address one more area: pay phones. Pay phones is a subject close to our heart.
9915 Only the companies have proposed an increase in pay phone rates. In fact, a one hundred percent increase from 25 cents to 50 cents per call, while the other parties have seen fit at most to call on the Commission to consider rates on a case‑by‑case basis.
9916 What is most intriguing to the Consumer Groups is the company's willingness to engage the proceeding about the financial performance of an underperforming service such as pay phones ‑‑ which according to their statement 60 percent of pay phones are losers and only 40 percent winners ‑‑ but clearly not in their other lines of business.
9917 From this we feel it is fair to infer that the other product areas, including primary exchange service, are doing quite well.
9918 It is far too late in the day to contemplate cherry‑picked price changes in the cap structure in turn driven by notional concepts of appropriate financial results.
9919 We don't have a public service regime for pay phones, and doubling rates without even a cursory analysis of the impact on access would be potentially reckless to customer interests.
9920 The Consumer Groups call upon the Commission, to whom these costs and revenues have been provided, to refuse the company's request of doubling pay phone rates as unnecessary and excessive.
9921 MR. JANIGAN: Thank you.
9922 The final section of our oral argument deals with what I have termed policy options, and we have set out in this argument a price cap model that we believe fairly advances the interest of customers who, as I indicated, are still waiting for delivery of promises of a half‑generation ago.
9923 However, there are other potentially practical options perhaps less commendable than those that we have advanced before the Commission that perhaps the Commission might wish to consider.
9924 Now the companies and TELUS say that their proposals are not about increasing rates. And I know it is received wisdom that when someone tells that it is not about the money it usually is about the money.
9925 Let us take them at their word for the purpose of considering this option. The ILECs, as a general proposition, don't wish to increase rates on average.
9926 Their proposals, on the other hand, torture the very principles of price cap regulation, particularly simplicity to produce the desired result with large gaps in consumer price protection.
9927 Perhaps in incorporating some elements of the proposals from the ILECs the Commission may wish to consider a cap which simply provides that rates for regulated services will not increase during the price cap period.
9928 This means that the ILECs may decrease rates whenever, whatever rates they wish, provided the imputation test is met and the rates are not discriminatory within the meaning of the Act.
9929 We take no position on matters such as win‑back or promotion rules. We assume they are going to remain in effect.
9930 We would then have no average price index, no baskets, no de‑averaging rule or competitive presence tests. Rates simply won't be increased.
9931 When the Commission forbearance test is met the service is forborne in the forbearance area subject to customer protections provided in the decision.
9932 This option preserves the logical framework of deregulation and transition that has been commenced by the Commission and puts an end to ILEC whining about the regulatory straightjacket.
9933 It is administratively simple and provides some real protection to customers in non‑competitive areas.
9934 There is also some rough justice about this option.
9935 If the industry fuss is really about barriers to price competition, then go ahead and let them compete. If it is about raising rates driven by market power, Ramsay pricing or some other cozy one‑sided concept to benefit shareholders, then the door should be firmly shut.
9936 Consumer Groups are pleased to have had the opportunity to make these submissions to the Commission. We look forward to amplifying them in our written argument. We hope our submissions will be of assistance to you in the deliberation. And we extend our thanks to the hearing panel, to you, Mr. Chairman, to the Commission and Commission staff, and our fellow parties for the cooperation throughout this proceeding.
9937 THE CHAIRMAN: Thank you, Mr. Janigan. Thank you, Mr. Lawford.
9938 LA SECRÉTAIRE : Merci.
9939 Nous allons maintenant procéder avec le plaidoyer final de monsieur Dany Provençal au nom de l'Union des consommateurs.
9940 LE PRÉSIDENT : Me Provençal, bienvenue.
9941 M. PROVENÇAL : Malheureusement, je ne suis pas un maître. Je suis le représentant...
9942 LE PRÉSIDENT : C'est bien. On va procéder quand même.
‑‑‑ Rires / Laughter
ARGUMENT / PLAIDOIRIE
9943 M. PROVENÇAL : Merci beaucoup.
9944 Alors, Monsieur le Président, Conseiller et Conseillères, mon nom est Dany Provençal. Je suis économiste en politiques et réglementation à l'Union des consommateurs.
9945 J'aimerais tout d'abord remercier le Conseil ainsi que l'ensemble des intervenants impliqués dans cet audience suite à l'avis public Télécom CRTC 2006‑05.
9946 Notre argumentation sera brève et concernera les principaux éléments jugés pertinents pour la prise en compte des intérêts des consommateurs de services téléphoniques résidentiels.
9947 Les sujets en question seront dans l'ordre des éléments du cadre de l'audience : le test de présence de concurrence, la formule de plafonnement des prix, la composition des paniers de service, la subdivision des tarifs, et nous allons terminer par de brefs commentaires en guise de conclusion.
9948 Alors, tout d'abord, les éléments concernant les revenus et bénéfices des ESLT n'ont pas été retenus à l'intérieur du cadre de la présente audience.
9949 Nous croyons cependant que les données sur les revenus et bénéfices peuvent permettre d'apprécier le niveau de productivité atteint par les entreprises et de le comparer avec l'évolution des tarifs.
9950 Nous aimerions également souligner le fait que les compagnies (donc, TELUS Canada, Bell Alliant et Sask Tel), TELUS et les concurrents ont également soulevé des informations de nature financière, que ce soit dans leurs preuves, durant les contre‑interrogatoires ou même comme pièces justificatives.
9951 Nous trouverions donc injuste que les compagnies puissent présenter et échanger ces types d'information pour ensuite les utiliser dans leurs argumentations, alors que les groupes de consommateurs ne peuvent pas s'y référer et ainsi juger du caractère juste et raisonnable des tarifs des services résidentiels. Toutefois, nous respectons et acceptons les consignes du Conseil à cet égard.
9952 En ce qui concerne les tests proposés par les compagnies et par TELUS pour déterminer le degré de concurrence dans un marché donné, l'Union des consommateurs croit que ces tests ne permettent pas de protéger adéquatement le consommateurs résidentiels de l'exercice d'un pouvoir de marché par les ESLT.
9953 La présence d'une seule alternative n'est pas suffisante pour générer les effets bénéfiques potentiels d'un marché en concurrence.
9954 Les possibilités de développement d'un duopole formé par une ESLT et une compagnie de câblodistribution sont réelles, et cette structure de marché n'est pas souhaitable du point de vue du consommateur.
9955 Ensuite, selon les compagnies, l'éviction d'un concurrent utilisant les installations de service locales existantes par une ESLT permettrait tout de même à un autre concurrent de tenter sa chance dans le marché.
9956 On peut se demander quelle entreprise pourrait bien vouloir se placer dans une telle position de vulnérabilité face à une ESLT qui a déjà évincé un concurrent.
9957 On peut se demander également :
9958 Pour quelle raison les ESLT veulent‑elles absolument voir le plafond tarifaire retiré ?
9959 En quoi l'augmentation des tarifs serait‑elle une réponse à l'émergence de la concurrence ?
9960 Et plutôt que de retirer le plafond pour le réintroduire après l'éviction de la concurrence, pourquoi ne pas la conserver et ainsi éviter des délais et des coûts de réglementation ?
9961 Si les forces du marché sont aussi fiables et leurs résultats si intéressants et presque certains que le prétendent les ESLT, pourquoi celles‑ci doutent‑elles de leur capacité à réduire les prix au bénéfice des consommateurs en voulant retirer le plafond ? Qu'est‑ce qui justifie de conserver la possibilité d'augmenter les tarifs si toutes les raisons pour ne pas s'en servir sont là ?
9962 La question se pose.
9963 Le souci des ESLT pour les entrants potentiels est sans doute louable, mais nous ne devons pas mettre de côté les intérêts des titulaires, soit la possibilité d'affronter la concurrence et de maximiser les profits en maintenant un facteur X qui ne décourage pas l'entrée de concurrents.
9964 Voilà qui nous amène donc à la formule de plafonnement des prix.
9965 L'établissement d'un facteur X qui reflète le plus fidèlement possible les gains de productivité dans l'industrie représente l'élément primordial d'un régime de plafonnement des prix.
9966 La protection des entrants ne doit pas servir de prétexte à l'établissement d'un facteur X plus faible que la productivité qui est effectivement observée dans l'industrie.
9967 Les consommateurs résidentiels ne devraient pas avoir à payer davantage pour protéger les concurrents ou favoriser l'émergence de la concurrence.
9968 Si la concurrence est effectivement inévitable, celle‑ci devrait être en mesure d'entrer selon le véritable état de la productivité dans le marché, incluant les gains générés par le service DSL ou LAM.
9969 Il serait donc préférable d'appliquer un facteur X qui permette de refléter le plus fidèlement possible les caractéristiques qui soient technologiques, structurelles ou historiques du secteur et d'éviter l'entrée inefficace de concurrents.
9970 L'argumentation des compagnies et de TELUS porte à croire que celles‑ci se préoccupent du sort des concurrents actuels et potentiels. En effet, ces ESLT ont mentionné que l'établissement d'un facteur X trop élevé pouvait nuire à l'émergence de la concurrence.
9971 Pourtant, ces ESLT ont également démontré une forte préoccupation relative à l'évolution foudroyante de la concurrence.
9972 Ces deux positionnements semblent quelque peu contradictoires, car d'une part ces ESLT invoquent la protection des entrants pour justifier une application conservatrice du facteur X, alors que d'autre part elles soutiennent que l'émergence de la concurrence semble inévitable et menaçante.
9973 Donc, pour éviter d'être sujettes à une formule de plafonnement des prix qui incite davantage à la performance, les compagnies et TELUS sont prêtes à soulever des arguments en faveur d'un soutien à l'entrée des concurrents.
9974 Par contre, toujours selon elles, ces mêmes concurrents constituent une menace imminente et menaçante.
9975 Juste avant de terminer ce point d'argumentation, nous jugeons utile de mentionner que la conversion de TELUS et de Bell en fiducies de revenus devrait être prise en compte.
9976 Les économies d'impôt ainsi réalisées risquent de permettre à ces deux compagnies d'être encore plus rentables, notamment grâce à la contribution de leur clientèle résidentielle stable et même captive par endroits.
9977 Si la structure du secteur des services téléphoniques locaux constitue un important facteur permettant à ces entreprises de se convertir en fiducies de revenus, pourquoi ne pas en tenir compte dans la détermination de la productivité dans l'ensemble de l'industrie ?
9978 Pour ce qui est de la composition des paniers de service, nous tenons seulement à mentionner que les services optionnels résidentiels devraient être considérés au même titre que les services résidentiels de base, ou du moins certains.
9979 En effet, l'impossibilité pour un client résidentiel de se procurer les services optionnels par un fournisseur autre que le détenteur de la ligne de services de base constitue un obstacle au choix du consommateur.
9980 La question des offres regroupées, ou des * bundles +, semble également poser problème.
9981 Dans le cas d'un client qui bénéficie du service de * Res PES + plafonné et du service d'afficheur, par exemple, qui n'est pas plafonné, le fait de se procurer ces deux services à l'intérieur d'une même offre de services aurait pour résultat d'éliminer le plafond pour les deux services composant l'offre regroupée.
9982 Dans un tel cas, le client devra de lui‑même s'assurer que le prix du forfait ne dépasse pas le prix des deux services pris individuellement.
9983 A notre avis, les ESLT devraient accepter une plus grande part de responsabilité dans l'application des modalités qui visent à donner une plus grande flexibilité. Pour elles, en fait.
9984 Comme dernier point, l'Union des consommateurs est préoccupée par les propositions de subdivision des tarifs des compagnies et de TELUS.
9985 En effet, la subdivision des tarifs à l'intérieur d'une même catégorie tarifaire pourrait permettre à une ESLT de réduire les tarifs dans les régions où la concurrence est présente et d'augmenter les tarifs dans les autres régions, où la concurrence n'est pas présente.
9986 Ces dispositions permettraient donc aux ESLT d'affronter plus efficacement la concurrence où elle se présente, tout en faisant absorber les pertes de revenu liées aux réductions de tarifs par les consommateurs des régions où la concurrence n'est pas présente.
9987 Ces consommateurs ne bénéficieraient pas nécessairement du régime de plafonnement des prix et pourraient même être désavantagés par les dispositions proposées.
9988 En guise de conclusion, l'Union des consommateurs tient à formuler certains commentaires généraux.
9989 D'abord, nous ne devons pas perdre de vue l'objectif de maximisation des profits qu'ont les entreprises, notamment celles sujettes à la réglementation de monopoles.
9990 Cela se traduit par une volonté pour elles d'augmenter ou d'éviter de réduire les tarifs malgré des gains de productivité importants, tout en voulant se donner une marge de manoeuvre pour affronter et écarter la concurrence.
9991 Ensuite, nous croyons que les ESLT ont encore un pouvoir de marché considérable, spécialement dans le secteur résidentiel, et un positionnement avantageux en termes d'infrastructure.
9992 Les ESLT auraient tout avantage à précipiter l'entrée de concurrents tout en réduisant autant que possible les contraintes réglementaires de façon à les devancer et ainsi contenir ou même freiner l'émergence de la concurrence dans les marchés les plus rentables : la clientèle stable et même relativement captive.
9993 Finalement, nous soutenons que l'établissement d'un facteur X qui reflète les véritables gains de productivité dans l'industrie même si sa valeur est relativement élevée pourrait inciter les ESLT à performer davantage constitue l'élément fondamental du régime de plafonnement des prix.
9994 Un facteur X supérieur à l'inflation pourrait même occasionner des réductions de tarifs, ce qui constituerait la meilleure façon de faire profiter des mérites de la réglementation par plafonnement des prix aux consommateurs résidentiels.
9995 L'Union des consommateurs soumet respectueusement ces éléments d'argumentation au Conseil, et je remercie beaucoup monsieur le président, les conseiller et conseillères et tous les membre du personnel du Conseil pour leur précieux travail. Nous souhaitons de bonnes délibérations à tous et toutes.
9996 LE PRÉSIDENT : Merci, Monsieur Provençal.
9997 Vous avez démontré votre maîtrise du sujet.
9998 Madame la Secrétaire ?
9999 THE SECRETARY: I now invite counsel Macdonald, on behalf of BCOAPO et al to come forward.
10000 Thank you.
ARGUMENT / PLAIDOIRIE
10001 MS MACDONALD: Good morning, and thank you for the opportunity to provide comments about our views for the next price cap regime that will go into effect in 2007.
10002 It has been a long morning and I will be filing written argument next week, so my comments will be brief.
10003 As you know, our clients represent the most vulnerable of consumers, the elderly, those who are disabled, persons on welfare and tenants.
10004 Many of these consumers are on fixed incomes, therefore increases in the cost of services which they need will take up a greater percentage of their monthly income and often cannot be absorbed. For these Canadians affordability is key.
10005 These consumers are also the least likely to have access to alternatives for telephone service or to afford those alternatives. While many consumers want choice and are willing to pay a premium for it, the consumers that I represent do not have that luxury. What they need is continued access to affordable telephone service.
10006 Basic telephone service continues to be an essential service. The outcome of this hearing will set the rules that determines the cost of that service for the foreseeable future.
10007 We recognize that as competition evolves and technological innovations emerge, that the basic service line may also evolve and the product that replaces it may look very different. Perhaps it will be an access line, as was suggested by Bell, but for today the provision of telephone service for a vast majority of Canadians continues to be through the basic local service, which is the residential PES line and which is provided to the majority of Canadians by the ILECs.
10008 You have asked whether the objectives of the present price cap regime should be changed. The Commission designed the last price cap regime to achieve a number of objectives, including rendering reliable and affordable services of high quality accessible to both urban and rural customers.
10009 We have no objections to the objectives that were set in place by the Commission in the last regime. The objectives, including the one that I just stated, continue to be appropriate going forward because the state of competition remains uncertain.
10010 There is no guarantee that there will be competition for local phone service.
10011 Currently, as I have said, the ILECs provide local phone service to a majority of Canadians and over 90 percent across Canada.
10012 Cable, which is emerging as the most promising form of competition is still in its infancy. Currently they serve approximately 4.5 percent of the market in B.C. and Alberta. Certainly their recent growth suggests that they have the ability to have a larger share of the market, and they are optimistically predicting that amount to be 10 percent in three years.
10013 However, that future is by no means certain or guaranteed and the future of competition remains uncertain and unpredictable. We need only to look at what has happened to mobile phones to see that this is so. The majority of consumers in Canada have had the option of switching from a basic telephone line to a mobile phone for the last five to 10 years, but only 5 to 6 percent of consumers in Alberta and B.C. have done so. These numbers speak loudly.
10014 Consumers do not see mobile phones as a suitable alternative for basic telephone service.
10015 Then I come to the specifics of the price cap regime itself. We will be supporting Ottawa PIAC's submissions with respect to the price cap formula.
10016 Specifically, we are supporting that there be no changes to the basket structure and assignment of services.
10017 We also submit that the constraints for baskets of services should continue to ply I‑X in order to lead to efficiency improvements.
10018 In addition, the benefits of expanding economies of scope should be shared by customers.
10019 We also support the constraints for individual services.
10020 Last, we support that the deferral account should be discontinued and put to the benefit of residential customers.
10021 We have some specific comments with respect to the uncapping proposals of TELUS and Bell. Neither of the tests that they have proposed are adequate.
10022 First, we submit that both proposals are based on a false assumption that the presence of competition equals competition. The market share achieved by the alternative providers do not support this assumption.
10023 As I outlined above, in B.C. and Alberta the market share for mobile phones is 5 to 6 percent, and for cable VoIP the market share across Canada is 4.5 percent.
10024 Over 90 percent of customers do not have access to alternatives or do not find that mobile phones or VoIP are acceptable alternatives. Therefore, it cannot be said that competition exists.
10025 Second, the TELUS proposal is based on the false premise that a mobile phone is a suitable alternative to local telephone service.
10026 With respect to mobile, Dr. Roycroft outlined reasons that a mobile phone is not a suitable alternative in his written evidence, including the higher prices for mobile service, that mobiles are more difficult for elderly and the disabled persons to use, and that multiple mobile phones would be needed for a family to switch to that type of service.
10027 The evidence of CAC Manitoba and MSOS also provided further reasons that mobile phones are not a realistic alternative, including that consumers need a reasonable credit rating or must pay a large deposit and that pay‑as‑you‑go plans are of limited use.
10028 Next, the over‑the‑top VoIP is not a suitable replacement. As explained by Dr. Roycroft, consumers must have a broadband connection. It does not have a reliable 9‑1‑1 service and it does not work when the power goes out.
10029 The evidence of CAC Manitoba and MSOS also provided further reasons that VoIP is not a suitable option, including that lower income consumers do not have access to the necessary technology such as computers and the Internet, and that consumers living in rentals or apartments cannot access that technology.
10030 Last, costs must be looked at in assessing the two proposals from Bell and TELUS.
10031 In B.C. and Alberta VoIP from Shaw costs $55 a month as opposed to the cost of a local resident's phone, which ranges in B.C. from $23 to just under $29. Clearly this is not comparable.
10032 We do recognize for that Shaw service the monthly fee does include an option added to it, but for those customers who do not want options or cannot afford these options there is no choice, they continue to obtain and must obtain their local telephone service from TELUS.
10033 From the TELUS evidence we did see that the average monthly spending for a mobile phone is $79 per month. Some portion of that was for long distance and for optional services, but we were limited in the information that was released to the intervenors.
10034 I believe that when the Commission reviews this confidential information, they will find that mobile phone costs significantly more than local service slides for a similar and comparable service.
10035 Accordingly, there are clear and tangible reasons that VoIP and mobile phones are not suitable alternatives to basic residential service.
10036 The pricing flexibility under the TELUS and Bell proposals gives them the right to respond to competitive offers where they face competition and raise them, or not, elsewhere. These will be in areas where the consumers have no options and will be least likely to afford an increase.
10037 The Commission has undertaken an extensive review of competition in the local forbearance decision and has already determined what an LFR region will look like.
10038 The evidence in this hearing has certainly showed the potential of competition, but the outcome is uncertain and the timeframe is uncertain. Until we have the certainty, consumers should be able to continue to rely on the protections of the price cap regime and the oversight of the Commission.
10039 Additionally, the forbearance decision will allow flexibility for the ILECs should competition fully develop before that time.
10040 Services under price cap should remain under price cap until forborne.
10041 For these reasons, we are supportive of a four‑year term for the next price cap period. During that time the Commission will be able to assess whether and how competition has occurred, particularly with respect to cable VoIP. Before that time if real competition develops the forbearance decision will come into play.
10042 As noted by the Manitoba branch of the Consumers Association of Canada and the Manitoba Society of Seniors evidence, their written evidence, while the price cap regime is certainly not perfect it provides protection for a vulnerable segment of consumers in what is still essentially a monopoly environment.
10043 The Commission can and should continue to protect these consumers.
10044 This is the end of my comments and I wanted to thank the Commission, as well as Commission staff, for facilitating our intervention in this hearing.
10045 THE CHAIRPERSON: Thank you, Ms Macdonald.
10046 THE SECRETARY: Thank you very much.
10047 Last but not least, counsel Inlow for the City of Calgary.
ARGUMENT / PLAIDOIRIE
10048 MR. INLOW: Thank you, Mr. Chair.
10049 I would like to start, if I may, by briefly commenting on an issue we haven't had an opportunity to address before this point, which is the issue about out of scope with respect to some of the evidence that has been given by the City of Calgary.
10050 I wanted to clarify the positions that we are putting forward and hopefully remove any cloud over that evidence without debating whether the fault lies in the writing of the evidence or the interpretation of the evidence.
10051 The Commission ruling was with respect to profit levels, rate of return regulation and earnings sharing, and our submission is that clearly we are not looking at returning to rate of return regulation, nor are we proposing earnings sharing. To the extent we discuss profit levels, it is in a context that, in my view, is legitimate with respect to setting of an X factor level or an I‑X factor.
10052 Finally, in the briefing book, which I was not aware of, had not seen prior to receiving the ruling of the Commission, I see where that ruling may have come from. In there is also a reference to an X factor being adjusted to allow the ILEC to earn its cost of capital.
10053 We would submit that under price cap it is quite clear, I think, that the factor of I‑X, which clearly is within the scope of this proceeding, is a factor that in the evaluation of that between price cap regimes is a legitimate and necessary endeavour of the Commission.
10054 To be clear, we are not proposing any retroactive changes to the financial parameters of the current price cap regime. We are not proposing a different form of regulation than price cap. We are not proposing any re‑initialization of prices between the current and the next price cap regime.
10055 What we are proposing, and is suggested in the evidence, is that ILEC earnings over the current price cap period are a relevant consideration in determining an X factor over the next price cap regime.
10056 One need only look at the balance that the Commission is attempting to establish in the price cap regime to realize that it is a balance between the incumbents earning a fair return on their investment and their costs and allowing customers to have the benefit of productivity costs that would otherwise be realized in a competitive market.
10057 In fact, I would submit that our evidence in that respect does nothing more than reflect the observations of the Commission in Decision 2004‑34, where the Commission said that it recognized that ILEC financial returns will need to be available for the purposes of review of the next regime.
"Sufficient information must be reported to allow the Commission to gauge the financial state of the ILECs in order to ensure that the objectives of the price cap regime are being met." (As read)
10058 We submit that our evidence is very consistent with that statement.
10059 I would also suggest that the Commission may have inadvertently handcuffed themselves somewhat in that decision by relieving the ILECs of the requirement to report on a split rate base basis, because that makes any interpretation of those financial results that much more difficult.
10060 We will, Mr. Chairman, be submitting written argument in this matter and I am not proposing to try to touch on every subject that we will address on that. We would prefer to focus on a few matters that we think may be of particular interest to the Commission.
10061 One of them clearly is the competitive presence test that is proposed by TELUS. In looking at that test, it strikes us that it is intended to set some kind of middle ground between the discipline of the price cap regime and the discipline of the competitive market and clearly has to be evaluated in some context.
10062 Our submission is that it clearly falls well short of any of the criteria that the Commission set in its forbearance decision, and within the context of the price cap regime is not a test which can be construed as protecting consumers from the exercise of market power.
10063 The objectives of the price cap regime are to emulate a competitive market from the perspective of three parties, being the ILECs and competitors and customers, and emulates that market in the sense of both bringing to bear the pressures and the benefits that competition should bring, whether competition actually exists in fact or not.
10064 So in the absence of direct product and service competition, the primary benefit that consumers look to receive from the price cap regime is the pricing that would result from a competitive market and the pressure that exerts to move toward incremental pricing.
10065 We must concede that the TELUS test has one single virtue, which is that it is administratively clear and doesn't require any particular discretionary adjudication, but that the presence of a facilities‑based competitor and the presence of a non‑affiliated wireless competitor, do not meet the objectives of the price cap regime, and certainly fall far short of any detailed analysis of what the Commission was trying to achieve in the forbearance decision.
10066 It, in our submission, comes down to an issue of when an ILEC can no longer exercise market power, that being defined as the ability to impose profitable and sustainable price increase in the market.
10067 Now, the TELUS test for removal speaks of the presence of a facilities‑based CLEC, whereas the forbearance decision indicates that an ILEC must have suffered a 25 percent loss of market share.
10068 Without getting into the debate of wireless versus wireline substitution or competition, whichever it may be, it is clear that mere presence has a number of attributes, specifically it could be transitory, it could be unsuccessful in making any significant market penetration, it could only be in a narrow segment of the product or a narrow product offering, whereas the forbearance decision indicates that an ILEC has to demonstrate to the Commission's satisfaction that true rivalrous behaviour exists within the relevant market.
10069 In fact, the Commission went on to indicate that their test with respect to market share was intended to ensure that competition within the market would be sustainable and not transitory, which is certainly a possibility where mere presence of a facilities‑based CLEC is all that is required to trigger it.
10070 Specifically, the attributes of rivalrous behaviour include, in the Commission's deliberations, falling prices, expanding scope of competitor activity in terms of products and innovation in those products.
10071 So the underlying premise, in our submission, of the competitive presence test is that the presence of competition means that market forces can be relied on to replace Commission regulation in constraining upward movement of prices.
10072 Our position is that the Commission should reject that premise and would leave with the Commission the issue about how this test, which is clearly short of forbearance, advances the natural development of market forces. Certainly one of the underlying principles that TELUS is trying to put forward, is to say that in this particular price cap regime we need to look at a regulation that moves us seamlessly into a competitive environment.
10073 In our respectful view, the competitive presence test doesn't really contribute to that seamless transition.
10074 I would also like to look at that competitive presence from the aspect of a particular customer rather than on a conceptual level.
10075 Our focus isn't particularly about orphan customers and not even specifically about what has been described as vulnerable customers, it is more from the perspective of the proverbial Mrs. Grundy's ‑‑ although I think she is a literary figure rather than a proverbial figure, but we will leave it at that at the moment ‑‑ and try to in some ways envision what the market will look like as it enters a developing competitive phase from the point of view of that type of a customer who is more in the market for what I would call fairly basic residential services.
10076 Now, it is interesting to see that in wireless competition, where everyone started more or less on the same footing, there is a very wide variety of competitive product offerings. I think the evidence that has been in front of the Commission indicates fairly clearly that there are all sorts of plans that are available that meet individual needs of customers.
10077 We would submit that in respect of the wireline competition, which started in a very different way, that is a long‑standing ILEC who is being challenged slowly by CLECs who are trying to enter the market, that there isn't nearly that type of robust product offering competition.
10078 The likelihood, in our submission, is that competition will probably focus on fairly high margin services, or bundles of services, and that these will be coming from cable providers. I think it is clear, even from the TELUS evidence, that they are indicating that basic CLEC resellers of local service aren't really the competitive force in the market any more, that it is in fact cable companies who are providing telephony as an incremental service over their infrastructure.
10079 So one of the examples that came up in the evidentiary portion of this hearing that was relevant in the Alberta area was that Shaw Cable was providing a local telephony service that was priced at actually what would have been more than double basic monthly telephone service. I believe it included a number of optional services and features, those types of things which Commissioner Noël I believe described as a "table d'hôte" offering.
10080 So when one analyzes that and sees that the nearest offering or competitive offering for basic residential exchange service is more than double what basic exchange is ‑‑ and to be fair that offering includes a number of other features, being long distance and certainly optional calling features and perhaps even international minutes, so I'm not trying to put forward a proposition that this an apples to apples type of comparison, but nevertheless that customer is faced with the fact that they are paying a certain amount for a service and the next available option is stepping up more than double the price.
10081 Now, the proposition that is put forward is that competition is going to force prices downward, it is going to impose discipline in that respect, but when one examines that it is very difficult to see in that specific scenario where there is downward pressure on the ILEC with respect to costs for basic residential service when the next competitor is that high above them in the market.
10082 In fact, I think fundamental business might suggest, if anything, that the perception of headroom in terms of the pricing of services for basic residential is much more present than is the perception that there is downward pressure on prices as a result of that competitive offering.
10083 With respect to the I‑X component of the price cap, I am not at this point proposing to make any detailed submissions with respect to the proper amount of that factor, but would like to echo the comments of several who have gone before me, that customers have, for a considerable amount of time under the price cap regime, had the promised benefits of price cap disciplining prices down in a market be deferred for other purposes and that in fact it is not accrued directly to the customers who are basically paying into a deferral account which is intended to achieve other purposes.
10084 Without repeating those comments as to the why and the wherefore of that, simply say that in our submission it is perhaps time to say that the customers are due to receive some of those benefits which have long been deferred.
10085 I think it is important to note that a great deal of the motivation behind maintaining prices at a certain level and using the deferral account was to encourage the emergence of competition. It is interesting to note, as I indicated earlier, that that competition has not really materialized from basic service CLECs who are in the same local service business and might have the same cost structures as a local service provider, but in fact has developed from an alternate technology with a completely different cost structure.
10086 So there isn't really any clear evidence to suggest that but for the maintenance of costs in the deferral account that competition might not have entered the market. It, in our submission, has entered the market not because of the cost floor ‑‑ that is there ‑‑ but because new technology has provided different cost structures which are competitive without sort of duplicating an existing infrastructure for a local service.
10087 I will leave our submissions at that, Mr. Chairman.
10088 In addition to echoing the thanks of those who have gone before me to the Commission and its staff, I would also like to add that I appreciate that the Commission continues the tradition of holding an oral hearing on this very important subject and resisting the temptation to go to a paper proceeding. I think it is very satisfying to be able to participate in a hearing of that nature. I thank you.
10089 THE CHAIRPERSON: Thank you, Mr. Inlow.
10090 Madame la secrétaire, do we have any final business to transact?
10091 THE SECRETARY: Yes, we do.
10092 For the record, before we conclude this hearing I would like to introduce two new exhibits that were filed with us this morning by TELUS, and that is TELUS Exhibit No. 16, Response to undertaking, TELUS Undertaking No. 2 regarding high‑speed Internet services in TELUS' serving territory.
EXHIBIT NO. TELUS‑16: Response to undertaking, TELUS Undertaking No. 2 regarding high‑speed Internet services in TELUS' serving territory
10093 THE SECRETARY: The last one, TELUS Exhibit No. 17, a follow‑up to TELUS' Undertaking No. 3 regarding services with frozen rate treatment basket.
EXHIBIT NO. TELUS‑17: Follow‑up to TELUS' Undertaking No. 3 regarding services with frozen rate treatment basket
10094 THE SECRETARY: I believe this concludes this hearing, Mr. Chairman.
10095 THE CHAIRPERSON: Ladies and gentlemen, may I just thank you on behalf of the CRTC for your participation in the hearing? I appreciate your efficiency, your punctuality, your clarity, the large amount of work that you have gone through to prepare your positions. I think that is the cost, or part of the cost, of trying to develop an appropriate regulatory framework that can at least be said to have reflected, in principle if not in practice, the disparate points of view of different stakeholder. I think they have been very well represented here by each of you and all of you and we thank you very much for that.
10096 On behalf of my fellow panellists, I would like to thank the staff of the CRTC for their hard work and their efficient operation of this hearing.
10097 Thank you very much.
‑‑‑ Whereupon the hearing concluded at 1202 /
L'audience se termine à 1202
Johanne Morin Lynda Johansson
Jean Desaulniers Fiona Potvin