ARCHIVÉ -  Transcription

 

 

 

 

 

 

 

              TRANSCRIPT OF PROCEEDINGS BEFORE

             THE CANADIAN RADIO‑TELEVISION AND

               TELECOMMUNICATIONS COMMISSION

 

 

 

 

             TRANSCRIPTION DES AUDIENCES DEVANT

              LE CONSEIL DE LA RADIODIFFUSION

           ET DES TÉLÉCOMMUNICATIONS CANADIENNES

 

 

                      SUBJECT / SUJET:

 

 

 

Review of regulatory framework for wholesale

services and definition of essential service /

Examen du cadre de réglementation concernant les services

de gros et la définition de service essentiel

 

 

 

 

 

 

 

 

 

 

 

 

 

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 9, 2007                       Le 9 octobre 2007

 

 

 

 

 

Transcripts

 

In order to meet the requirements of the Official Languages

Act, transcripts of proceedings before the Commission will be

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

and staff attending the public hearings, and the Table of

Contents.

 

However, the aforementioned publication is the recorded

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

either of the official languages, depending on the language

spoken by the participant at the public hearing.

 

 

 

 

Transcription

 

Afin de rencontrer les exigences de la Loi sur les langues

officielles, les procès‑verbaux pour le Conseil seront

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

membres et du personnel du CRTC participant à l'audience

publique ainsi que la table des matières.

 

Toutefois, la publication susmentionnée est un compte rendu

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

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

officielles, compte tenu de la langue utilisée par le

participant à l'audience publique.

               Canadian Radio‑television and

               Telecommunications Commission

 

            Conseil de la radiodiffusion et des

               télécommunications canadiennes

 

 

                 Transcript / Transcription

 

 

 

Review of regulatory framework for wholesale

services and definition of essential service /

Examen du cadre de réglementation concernant les services

de gros et la définition de service essentiel

 

 

 

 

BEFORE / DEVANT:

 

Konrad von Finckenstein           Chairperson / Président

Barbara Cram                      Commissioner / Conseillère

Andrée Noël                       Commissioner / Conseillère

Elizabeth Duncan                  Commissioner / Conseillère

Helen del Val                     Commissioner / Conseillère

 

 

 

 

ALSO PRESENT / AUSSI PRÉSENTS:

 

Marielle Giroux-Girard            Secretary / Secrétaire

Robert Martin                     Staff Team Leader /

Chef d'équipe du personnel

Peter McCallum                    Legal Counsel /

Amy Hanley                        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 9, 2007                   Le 9 octobre 2007

 

- iv -

 

           TABLE DES MATIÈRES / TABLE OF CONTENTS

 

 

                                                 PAGE / PARA

 

AFFIRMED:  GEORGE HARITON                           6 /   40

AFFIRMED:  PATRICK HUGHES

AFFIRMED:  JEFFREY CHURCH

 

Examination-in-chief by the Competition Bureau      7 /   46

Cross-examination by The Companies                 8 /   62

Cross-examination by Rogers Communications Inc.    25 /  211

Cross-examination by TELUS                        111 /  754

Cross-examination by MTS Allstream                164 / 1121

Cross-examination by Primus / Globility           259 / 1765

 

 

 

 

- v -

 

              EXHIBITS / PIÈCES JUSTIFICATIVES

 

 

No.                                              PAGE / PARA

 

ROGERS-1      Document entitled "Report of        73 /  525

the ICN Working Group on

Telecommunications Services"

 

MTS-1         Order Varying Decision             167 / 1153

CRTC 2006-15

 

MTS-2         Excerpt of Telecom Decision        181 / 1271

CRTC 2006-15

 

 

                  Gatineau, Quebec / Gatineau, Québec

‑‑‑ Upon commencing on Tuesday, October 9, 2007

    at 0830 / L'audience débute le mardi 9 octobre 2007

    à 0830

LISTNUM 1 \l 11                THE SECRETARY:  Please be seated.

LISTNUM 1 \l 12                THE CHAIRPERSON:  Good morning.  Bonjour, mesdames et messieurs, et bienvenue à cette audience sur les services essentiels.

LISTNUM 1 \l 13                Our panel today is made up, from left to right, of Commissioner del Val from B.C., Commissioner Noël from Quebec, myself, Chairman von Finckenstein, Commissioner Cram from Manitoba and Saskatchewan, and Commissioner Duncan from the Maritimes.

LISTNUM 1 \l 14                Our team will be assisted by Robert Martin, the Team Leader and Senior Manager, Essential Services; Amy Hanley and Peter McCallum as Legal Counsel; and Marielle Giroux‑Girard as Hearing Secretary.

LISTNUM 1 \l 15                This proceeding marks the first time that the Commission has held a comprehensive review of its approach to wholesale services.  It also provides us with an opportunity to clearly define what constitutes an essential service.  This will undoubtedly be one of the key issues in this proceeding.

LISTNUM 1 \l 16                Given that we have lots of ground to cover at this hearing, we have asked the parties in a letter of organization and conduct dated September 26th to be efficient and focused in their cross‑examinations.

LISTNUM 1 \l 17                In addition, the Commission identified, in a letter dated October 3, six categories which it would ask all parties to refer to when making arguments on the issues in question.  We believe these six baskets will facilitate a more focused and informed discussion on the issues at hand.  We would appreciate your diligence and cooperation.

LISTNUM 1 \l 18                Finally, as you are aware, Commissioners Noël and Cram will finish their term at the end of the month.  Given their broad expertise, I have asked them to sit on this panel.  This, unfortunately, means that they will be unable to participate in our final discussion.

LISTNUM 1 \l 19                However, we will benefit from their extensive experience and knowledge during the conduct of this hearing and they have kindly agreed to share with us, the remaining members, their preliminary views prior to leaving their office.

LISTNUM 1 \l 110               We have a lot of ground to cover.  I would ask you all to be very short and to the point so that you can conceivably do it within the time allotted.

LISTNUM 1 \l 111               I will now turn the hearing over to our Hearing Secretary Mrs. Giroux‑Girard.

LISTNUM 1 \l 112               Madame Giroux‑Girard.

LISTNUM 1 \l 113               THE SECRETARY:  Thank you, Mr. Chairman.

LISTNUM 1 \l 114               Bonjour, tout le monde.

LISTNUM 1 \l 115               As you know, all procedural matters that will apply for this hearing were provided in the Commission's organization and conduct letter issued on the 26th of September 2007.

LISTNUM 1 \l 116               For your convenience, you may get a copy of that letter on the table at the back of this room or retrieve it on our Commission's web site.

LISTNUM 1 \l 117               Aussi, nous avons mis à votre disposition une salle pour examen public, laquelle est située dans la pièce Papineau, près de la réception.  Elle sera ouverte à toutes les parties et au public pour la durée de l'audience.  Vous pourrez y trouver un exemplaire du dossier public de l'instance et certains services administratifs.

LISTNUM 1 \l 118               Simultaneous interpretation service is available during the hearing.  Receivers are available from the commissionaires outside the hearing room.  The English translation is on channel 7.  L'interprétation française se trouve au canal 8.

LISTNUM 1 \l 119               All submissions heard at this public hearing will be transcribed and will form part of the public record for this proceeding.  Anyone wishing to purchase a copy of the transcripts may speak with the court reporter.

LISTNUM 1 \l 120               Copies of the transcripts will be available on the Commission's web site shortly after each day of the hearing.

LISTNUM 1 \l 121               If you have not already completed a written record of appearance, please see me for copies of the form.  The information is required and will allow us to contact you at all times if necessary.

LISTNUM 1 \l 122               Any parties wishing to apply for an award cost should file a request on or before November 30th, 2007, copying all other parties and parties should reply by December 7, 2007.  In doing so, parties are encouraged to identify the specific amount of costs for which they wish to apply and to file with the Commission all information necessary for the Commission to fix costs.

LISTNUM 1 \l 123               Also, please be reminded when you are in the hearing room to turn off all your electronic devices.

LISTNUM 1 \l 124               Tout autre message jugé opportun vous sera communiqué pendant le déroulement de l'audience.

LISTNUM 1 \l 125               Finally, along with the staff Team Leader Robert Martin and Commission counsel Peter McCallum and Amy Hanley, on my right, I will be available throughout the hearing to assist any parties who have questions regarding practices or procedures that we follow.

LISTNUM 1 \l 126               Merci pour votre attention.

LISTNUM 1 \l 127               We will now proceed with the Competition Bureau witness panel and I'm asking Counsel Abugov to present his witnesses before their solemn affirmation.

LISTNUM 1 \l 128               Thank you.

LISTNUM 1 \l 129               MR. ABUGOV: Good morning, Mr. Chairman, Commissioners and Commission staff.

LISTNUM 1 \l 130               My name is Lorne Abugov, I am Counsel for the Bureau of Competition in this proceeding; seated to my right is my co‑counsel, Josephine Palumbo, Senior Counsel at the Department of Justice; and to my left is Mr. David Teal, Competition Law Officer at the Bureau of Competition.

LISTNUM 1 \l 131               I would like to introduce the witness panel for the Bureau, beginning with the witness closest to the Commissioners, that would be Mr. George Hariton, principal with TIA Telecom.

LISTNUM 1 \l 132               Next to Mr. Hariton, seated in the centre, is Mr. Patrick Hughes, Senior Economist at the Bureau.

LISTNUM 1 \l 133               Finally, closest to our table, is Dr. Jeffrey Church, Professor of Economics at the University of Calgary.

LISTNUM 1 \l 134               Each of the witnesses has filed their CVs with the Commission as prescribed in the org and conduct letter.

LISTNUM 1 \l 135               I would now ask the witnesses to please confirm that the evidence of the Bureau was prepared by or under your supervision.

LISTNUM 1 \l 136               THE SECRETARY:  Before you do so, Mr. Abugov, I would like to affirm the witnesses.

LISTNUM 1 \l 137               MR. ABUGOV:  Thank you.

LISTNUM 1 \l 138               THE SECRETARY:  Please stand up.

LISTNUM 1 \l 139               Please state your name for the record.

LISTNUM 1 \l 140               MR. HARITON:  George Hariton.  I do.

AFFIRMED:  GEORGE HARITON

LISTNUM 1 \l 141               MR. HUGHES:  Patrick Hughes.  I do.

AFFIRMED:  PATRICK HUGHES

LISTNUM 1 \l 142               MR. CHURCH:  Jeff Church.  I do.

AFFIRMED:  JEFFREY CHURCH

LISTNUM 1 \l 143               THE SECRETARY:  Thank you very much.

LISTNUM 1 \l 144               You may proceed, Counsel Abugov.

LISTNUM 1 \l 145               MR. ABUGOV:  Thank you.

EXAMINATION / INTERROGATOIRE

LISTNUM 1 \l 146               MR. ABUGOV:  Yes, witnesses, please confirm that the Bureau evidence was prepared by or under your supervision.

LISTNUM 1 \l 147               MR. CHURCH:  I do.

LISTNUM 1 \l 148               MR. HUGHES:  I do.

LISTNUM 1 \l 149               MR. HARITON:  I do.

LISTNUM 1 \l 150               MR. ABUGOV:  Can you confirm that there are no changes at this time or updates to the Bureau evidence?

LISTNUM 1 \l 151               MR. CHURCH:  Yes.

LISTNUM 1 \l 152               MR. ABUGOV:  Can you confirm indeed that your CVs and qualifications were filed with the Commission?

LISTNUM 1 \l 153               MR. HUGHES:  Yes.

LISTNUM 1 \l 154               MR. CHURCH:  Yes.

LISTNUM 1 \l 155               MR. HARITON:  Yes.

LISTNUM 1 \l 156               MR. ABUGOV:  All right.

LISTNUM 1 \l 157               Mr. Chairman, I think our witnesses are ready to respond to questions.

LISTNUM 1 \l 158               Thank you.

LISTNUM 1 \l 159               THE CHAIRPERSON:  All right.  Who is going to lead us in cross‑examination, please?

LISTNUM 1 \l 160               MR. HOFLEY:  I am, Mr. Chairman.  Good morning.  Good morning, Members of the Panel, good morning Commission staff.

LISTNUM 1 \l 161               My name is Randall Hofley.  I am here with my co‑counsel Jonathan Daniels and our favourite economist, Mr. David Kraus.  We are from "The Companies", as we have become known.

EXAMINATION / INTERROGATOIRE

LISTNUM 1 \l 162               MR. HOFLEY:  I have a few questions for you, gentlemen.

LISTNUM 1 \l 163               I have provided you with four documents, all of which you will be very familiar with.

LISTNUM 1 \l 164               The first document is the opening statement of the Commissioner of Competition which is updated and revised to yesterday's version.  That is what I'm going to be asking most of my questions on and then I will have one or two other questions.

LISTNUM 1 \l 165               In your opening statement that was received I guess yesterday, but there was another version received a few days ago, you made a change to your test for essential facilities.

LISTNUM 1 \l 166               Correct?

LISTNUM 1 \l 167               MR. CHURCH:  Yes.

LISTNUM 1 \l 168               MR. HOFLEY:  That change related to the third condition of your test?

LISTNUM 1 \l 169               MR. CHURCH:  Yes.

LISTNUM 1 \l 170               MR. HOFLEY:  Can you explain the nature of that change?

LISTNUM 1 \l 171               MR. CHURCH:  Yes.

LISTNUM 1 \l 172               So the Bureau has proposed two definitions.  The initial definition which was proposed in our evidence of March 15th required that mandated access would result in entry or expansion that would likely result in competition sufficient to remove economic regulation in the downstream market within a reasonable period of time.

LISTNUM 1 \l 173               This definition was proposed prior to the Variance Order and by the GIC and its implementation by the Commission.

LISTNUM 1 \l 174               In recognition of those two significant changes in the regulatory environment, the Bureau has changed its third condition, as stated in its opening written comments, to:

"... such entry or expansion as is likely to result in a substantial increase in competition in a downstream market within a reasonable period of time."  (As read)

LISTNUM 1 \l 175               MR. HOFLEY:  This change is in recognition of the situations in which forbearance have been granted downstream in retail markets.

LISTNUM 1 \l 176               Is that the principal reason for this change?

LISTNUM 1 \l 177               MR. CHURCH:  Like I say, there are two reasons for the change, one simple and one a little bit more complicated, but both on their own we think are compelling.

LISTNUM 1 \l 178               The first is, at the very least a change was required to avoid the measure of benefits for a competitive benefits test being, in the words of some parties, virtually meaningless by the advent of widespread forbearance.

LISTNUM 1 \l 179               So as noted by some parties, the third element of the Bureau's test has been superseded by the advent of widespread forbearance.

LISTNUM 1 \l 180               I think the basic point here is that it would be hard to understand what it would need for determining whether a facility is essential if there has already been a forbearance, because the initial bullet required that granting access would result in forbearance and so if you already have forbearance it would be hard to interpret that.

LISTNUM 1 \l 181               So that was the simple reason.

LISTNUM 1 \l 182               MR. HOFLEY:  Can we just stick with that for a second?

LISTNUM 1 \l 183               MR. CHURCH:  Yes.

LISTNUM 1 \l 184               MR. HOFLEY:  Would you agree with me that for those retail markets that have not been forborne as yet that your original test would continue to be appropriate?

‑‑‑ Pause

LISTNUM 1 \l 185               MR. CHURCH:  I mean, I guess you could do it two ways or one way, it depends.

LISTNUM 1 \l 186               You know, the question is the relationship between the significant increase in competition and what would be required for the removal of economic regulation.

LISTNUM 1 \l 187               I think that if you go back and we think a little bit about why we had our third bullet, initially with the significant ‑‑ which led to this idea that we would want to have mandated access only if it resulted in a reduction or elimination of economic regulation, I mean there was two reasons for that in that particular context.

LISTNUM 1 \l 188               One was that we wanted to avoid ‑‑ we wanted to make sure, pardon me, that the costs of mandating access were less than the benefits.  We wanted to make sure the benefits where greater than the cost of mandating the access.

LISTNUM 1 \l 189               Also, we had this idea that it struck the Bureau that if you were in a situation where you had regulation at retail and regulation at wholesale that double regulation perhaps is not such a good idea and so you should be very clear that the benefits were going to be substantial of mandating access.  So if it would allow you to eliminate retail regulation, then that was why we had this kind of a threshold on the test that was required for the amount of competition that would be created by mandating access.

LISTNUM 1 \l 190               MR. HOFLEY:  You didn't talk about double regulation, Professor Church, in your opening statement.

LISTNUM 1 \l 191               Correct?

LISTNUM 1 \l 192               MR. CHURCH:  No, we didn't.

LISTNUM 1 \l 193               MR. HOFLEY:  Yes.

LISTNUM 1 \l 194               MR. CHURCH:  I think in the opening statement, as I recall, there is no discussion about the nature of the change.  We just made the change.

LISTNUM 1 \l 195               MR. HOFLEY:  All right.

LISTNUM 1 \l 196               Would you agree that the likelihood of retail forbearance, the original test, was, in essence, a screen for determining the cost benefit threshold for determining whether or not there would be a substantial effect on competition.  In this case it would be, I guess, from your standpoint, a pro‑competitive effect.

LISTNUM 1 \l 197               MR. CHURCH:  Yes.

LISTNUM 1 \l 198               MR. HOFLEY:  You say when you changed your threshold in your opening statement that the third condition now requires a substantial increase in competition.

LISTNUM 1 \l 199               Is that a fair ‑‑

LISTNUM 1 \l 1100              MR. CHURCH:  Yes.

LISTNUM 1 \l 1101              MR. HOFLEY:  Now, I just want to make sure, "substantial increase", that would be the standard competition law analysis Bureau test.

LISTNUM 1 \l 1102              Correct?  "Substantial increase in competition".

LISTNUM 1 \l 1103              MR. CHURCH:  Yes.  The terminology is a little different than a substantial lessening.  All that is designed to reflect, I guess, a minor variation in perspective.  So in the tab where we use "substantial lessening of competition" we are dealing with a case where you have ex post denial.

LISTNUM 1 \l 1104              Here it is an ex ante mandating, so it's a substantial increase.

LISTNUM 1 \l 1105              MR. HOFLEY:  This is the flip side?

LISTNUM 1 \l 1106              MR. CHURCH:  Yes, it's the flip side, but interpretation is the same.

LISTNUM 1 \l 1107              MR. HOFLEY:  But it's the same standard?

LISTNUM 1 \l 1108              MR. CHURCH:  Yes.  Yes.

LISTNUM 1 \l 1109              MR. HOFLEY:  All right.

‑‑‑ Pause

LISTNUM 1 \l 1110              MR. HOFLEY:  Dr. Church, just a point of clarification.

LISTNUM 1 \l 1111              I'm not sure whether you agreed with me or not that in a situation such as DNA, low‑speed DSO or DS1 where there is no retail forbearance test, would you agree with me that you would use the test that you initially proposed in those circumstances?

LISTNUM 1 \l 1112              MR. CHURCH:  Yes, we would use the original test.

LISTNUM 1 \l 1113              MR. HOFLEY:  I would like to now take you to a different subject, and that is one that you have written about in various interrogatories and in your evidence.  You first write about it in your evidence at paragraph 60.  This is the so‑called weaker and stricter standards.

LISTNUM 1 \l 1114              Do you recall that?  Paragraph 60 of your March 15 evidence is the ‑‑

LISTNUM 1 \l 1115              MR. HUGHES:  We will just be a moment.

LISTNUM 1 \l 1116              MR. HOFLEY:  You don't actually have to turn there, I just wanted to let you know where it first started.

LISTNUM 1 \l 1117              Now, I'm sorry, Mr. Chairman, I am in ‑‑

LISTNUM 1 \l 1118              THE CHAIRPERSON:  Where are you in this red binder, just so I can follow your questioning?

LISTNUM 1 \l 1119              MR. HOFLEY:  Okay.  Is your red binder the one with the four tabs, Mr. Chairman?

LISTNUM 1 \l 1120              THE CHAIRPERSON:  Yes.

LISTNUM 1 \l 1121              MR. HOFLEY:  I'm not in the red binder, I am in the evidence.

LISTNUM 1 \l 1122              THE CHAIRPERSON:  Yes, no, I have two things ‑‑

LISTNUM 1 \l 1123              MR. HOFLEY:  Sorry.

LISTNUM 1 \l 1124              THE CHAIRPERSON:  ‑‑ I have the four tabs and I have a red book here, which says "The Bureau", which I gather is the equivalent of a compendium for the purpose of this cross‑examination.

LISTNUM 1 \l 1125              MR. HOFLEY:  I'm at a loss, Mr. Chairman, with respect to the red binder.  I gave you the tabs.

LISTNUM 1 \l 1126              THE CHAIRPERSON:  Okay.  One moment, please.

LISTNUM 1 \l 1127              COMMISSIONER del VAL:  Are you on the March 15th evidence?

LISTNUM 1 \l 1128              MR. HOFLEY:  Yes, March 15th evidence, paragraph 60.

LISTNUM 1 \l 1129              THE CHAIRPERSON:  Okay, I'm with you.  Thank you.

LISTNUM 1 \l 1130              MR. HOFLEY:  Thank you.

LISTNUM 1 \l 1131              As I said, I want to just make sure I understand the stricter and weaker standard which is referenced in your evidence and your interrogatory responses.  I'm going to go slowly here because I'm pretty slow myself.

LISTNUM 1 \l 1132              Am I correct that under the weaker standard the Commission could determine, assuming there is market power downstream and upstream, that a facility is essential where the facility can be duplicated, but the duplication would not be of a nature to effectively discipline the exercise of market power downstream?

LISTNUM 1 \l 1133              MR. CHURCH:  Yes.

LISTNUM 1 \l 1134              MR. HOFLEY:  Now, under the stricter standard, the Commission could not determine that a facility is essential once it concluded that a facility can be duplicated.  Correct?

LISTNUM 1 \l 1135              MR. CHURCH:  Yes, or, alternatively, if it cannot be duplicated profitably, then it is an essential facility.

LISTNUM 1 \l 1136              MR. HOFLEY:  Is your answer "yes" to my question, Dr. Church?

LISTNUM 1 \l 1137              MR. CHURCH:  Please rephrase it.

LISTNUM 1 \l 1138              MR. HOFLEY:  Well...

LISTNUM 1 \l 1139              MR. CHURCH:  Or just repeat it.

LISTNUM 1 \l 1140              MR. HOFLEY:  Okay.

LISTNUM 1 \l 1141              Under the stricter standard, the Commission would not determine ‑‑ we say "would not" ‑‑ that a facility is essential if it concludes that a facility can be duplicated?

LISTNUM 1 \l 1142              MR. CHURCH:  Yes, where the standard for duplication is that it would be profitable for an entrant to duplicate, yes.

LISTNUM 1 \l 1143              MR. HOFLEY:  Fine, thank you.  That's in your evidence.

LISTNUM 1 \l 1144              MR. CHURCH:  Now, is it fair to say that you would prefer, when in doubt, an approach which aired on the side of not mandating access and incenting investment?

LISTNUM 1 \l 1145              MR. CHURCH:  So I guess in response to that, you know, the Bureau's perspective on this, and the way we have set things up in kind of an optimal decision‑making framework, is to look at the two types of errors that could be made.  One type of error would be to mandate access to facilities which are not essential.  The other kind of error would be to not mandate access to the facilities that turned out to be essential.

LISTNUM 1 \l 1146              The Bureau's view, as set out in its evidence, is that the costs of the first type of error, mandating access to stuff which is not essential, are much larger than the costs of not mandating access to things which turn out to be essential.

LISTNUM 1 \l 1147              So that kind of puts a whole tilt in saying that, you know, you should have a fairly strong test to make sure that you are not making a mistake, because we think that the costs of the one error are much larger than the costs of the other error, and so we have incorporated that, you know, in putting the three bullets together as a whole, as a package.

LISTNUM 1 \l 1148              MR. HOFLEY:  In fact, you have said at your interrogatory response, which is at Tab B of the materials I gave you.  Correct?

LISTNUM 1 \l 1149              It's page 3 of 3.  You don't need to go there, I can read it to you.

LISTNUM 1 \l 1150              MR. CHURCH:  Okay.

LISTNUM 1 \l 1151              MR. HOFLEY:

"...that the error of concern is mandating access to facilities that are not essential."  (As read)

Correct?

LISTNUM 1 \l 1152              MR. CHURCH:  Yes.

LISTNUM 1 \l 1153              MR. HOFLEY:  So is your answer "yes", Dr. Church, to my question?

LISTNUM 1 \l 1154              MR. CHURCH:  My answer is yes, in the sense of the way we designed the three bullets was to reflect these relative costs of benefits for the two errors.

LISTNUM 1 \l 1155              THE CHAIRPERSON:  I'm sorry, Mr. Hofley, you may be slow, I'm even slower.  I still don't know what the answer to your...I understand your question, I don't understand the answer.

LISTNUM 1 \l 1156              Could you repeat that, Dr. Church?  He asks you is your bias, when in doubt, on the pro‑incentive side or not, and what was the answer?

LISTNUM 1 \l 1157              MR. CHURCH:  My answer is yes, and that's been incorporated in our three bullets, sir.

LISTNUM 1 \l 1158              THE CHAIRPERSON:  Okay.

LISTNUM 1 \l 1159              MR. HOFLEY:  Now, would you agree that if the Commission were to adopt an ex‑anti approach in this proceeding, the appropriate standard would be, given your preference, the stricter standard?

LISTNUM 1 \l 1160              MR. CHURCH:  Well, I guess we would have real concerns about an ex‑anti approach in this, sorry.

LISTNUM 1 \l 1161              MR. HOFLEY:  No, I understand.  That's why I said "if".

LISTNUM 1 \l 1162              MR. CHURCH:  If.  Well, I guess we would have to see, you know, what the nature of that test was and what the errors would be between using a strict versus the weak standard.  Right?  We would have to evaluate.

LISTNUM 1 \l 1163              MR. HOFLEY:  Would you agree with me ‑‑

LISTNUM 1 \l 1164              MR. CHURCH:  But we would be concerned.  We would be concerned about a weak standard on an ex‑anti basis, but that might result in more errors than a strong standard on an ex‑anti basis.

LISTNUM 1 \l 1165              MR. HOFLEY:  Those are my questions, Mr. Chairman.

LISTNUM 1 \l 1166              THE CHAIRPERSON:  Thank you.

LISTNUM 1 \l 1167              Any other party want to examine?

LISTNUM 1 \l 1168              Okay, then, on this last point, Dr. Church, in ex‑anti and ex‑post approach, an ex‑post approach, of course, makes a lot of sense when you have some way to discipline, since, as you know, the CRTC does not have them.

LISTNUM 1 \l 1169              Doesn't that necessarily drive you to an ex‑anti approach unless there is legislative change to have a means of disciplining?

LISTNUM 1 \l 1170              MR. CHURCH:  Sorry?

LISTNUM 1 \l 1171              MR. HOFLEY:  Or do you see the disciplining being done all by the Competition Bureau?

LISTNUM 1 \l 1172              MR. CHURCH:  Sorry, Mr. Commissioner, by "disciplining", you mean punishing for denying access?

LISTNUM 1 \l 1173              THE CHAIRPERSON:  Well, if you want to put in those cool terms, yes.

‑‑‑ Laughter / Rires

LISTNUM 1 \l 1174              THE CHAIRPERSON:  Usually, you don't have to go that far.  Just the fact that you have the means usually encourages compliant behaviour.

LISTNUM 1 \l 1175              MR. CHURCH:  I guess that, in some sense, depends on, you know, where you think, in some sense, the property rights lie, if you think that the normal course of affairs should be that entrants should have access to the facilities of the incumbent or whether you think that should be an exceptional thing.

LISTNUM 1 \l 1176              I think that the Bureau's evidence suggests that, based on our analysis of the costs of the various areas, we think mandating access should be something ‑‑ that would be exceptional and not normal course of affairs.

LISTNUM 1 \l 1177              THE CHAIRPERSON:  Yes, I went on the assumption there is something that is considered essential.  Right?

LISTNUM 1 \l 1178              MR. CHURCH:  I guess we would want to go through the analysis before we decided that something was essential, and you need the right kind of information to do that.  That's why we typically think that the ex‑post approach ‑‑

LISTNUM 1 \l 1179              THE CHAIRPERSON:  Okay, and now you have gone through the analysis and you have decided something is essential, okay, and therefore you still believe it should not be an ex‑anti approach?

LISTNUM 1 \l 1180              MR. CHURCH:  I see.  No.  So I think that the differences that we have here, perhaps, is that the way the Bureau has used ex‑anti in its evidence would say at the end of these proceedings, and the ‑‑

LISTNUM 1 \l 1181              THE CHAIRPERSON:  Oh, okay.

LISTNUM 1 \l 1182              MR. CHURCH:  ‑‑ Commission would have a set of rules, which they would then apply to everything, ex‑anti it.

LISTNUM 1 \l 1183              THE CHAIRPERSON:  Subsequent?

LISTNUM 1 \l 1184              MR. CHURCH:  Yes, subsequently?

LISTNUM 1 \l 1185              THE CHAIRPERSON:  Okay.

LISTNUM 1 \l 1186              MR. CHURCH:  That's what we mean by "ex‑anti".

LISTNUM 1 \l 1187              THE CHAIRPERSON:  Okay, thank you.

LISTNUM 1 \l 1188              Commissioner Cram, you have some questions?

LISTNUM 1 \l 1189              COMMISSIONER CRAM:  I just had two questions...well, maybe one.

LISTNUM 1 \l 1190              What is your minimum and maximum timeframes for resolving competitive complaints, anti‑competitive complaints?

LISTNUM 1 \l 1191              MR. HUGHES:  I'm not sure we have thought that much in those terms.  Do you mean for the CRTC to deal with them or...?

LISTNUM 1 \l 1192              COMMISSIONER CRAM:  No, I mean you, people complaining ‑‑

LISTNUM 1 \l 1193              MR. HUGHES:  Oh, in the Bureau.

LISTNUM 1 \l 1194              COMMISSIONER CRAM:  ‑‑ finding an anti‑competitive complaint, and what are your minimum and maximum times for processing them?

LISTNUM 1 \l 1195              MR. HUGHES:  The minimums, when someone comes in and we are giving some sort of advice and they are going to comply, particularly voluntarily, is relatively quick.  I can't give you a number, I'm afraid, off the top of my head.

LISTNUM 1 \l 1196              COMMISSIONER CRAM:  Two months?  Three months?

LISTNUM 1 \l 1197              MR. HUGHES:  I think there are certainly cases where matters get resolved in that sort of timeframe.  Contested cases, on the other hand, take quite some time.

LISTNUM 1 \l 1198              COMMISSIONER CRAM:  And what is that?  Two, three years?

LISTNUM 1 \l 1199              MR. HUGHES:  When you think about the court process and going even to an appeal, yes, a matter of years.  That's partly outside the Bureau's control, but, yes, that is true.

LISTNUM 1 \l 1200              COMMISSIONER CRAM:  So two to three years?

LISTNUM 1 \l 1201              MR. HUGHES:  I think that's probably fair.  It could even be longer.

LISTNUM 1 \l 1202              COMMISSIONER CRAM:  And am I correct that the bill that was going to give you increased AMPs has died?  Is it before Parliament? It is not before Parliament, is it, or has it passed?

LISTNUM 1 \l 1203              MR. HUGHES:  I am afraid I don't know the answer to that.  My apologies, I just am not prepared with that information.

LISTNUM 1 \l 1204              COMMISSIONER CRAM:  So what is the maximum AMP you can impose?

LISTNUM 1 \l 1205              MR. HUGHES:  To my knowledge, we don't have any right now.

LISTNUM 1 \l 1206              COMMISSIONER CRAM:  Thank you.

LISTNUM 1 \l 1207              Thank you, Mr. Chair.

LISTNUM 1 \l 1208              THE CHAIRPERSON:  If there are no other questions, we will now go over to Rogers' cross‑examination.

LISTNUM 1 \l 1209              THE SECRETARY:  Thank you, gentlemen.  Please, Counsel Dunbar and Counsel Englehart.

LISTNUM 1 \l 1210              THE CHAIRPERSON:  Okay, go ahead.

EXAMINATION / INTERROGATOIRE

LISTNUM 1 \l 1211              MR. DUNBAR:  Good morning, Mr. Chairman, members of the Commission and the witness panel from the Bureau.  I am going to begin our cross‑examination of this panel, Mr. Chairman, and then Mr. Englehart is going to ask some additional questions.

LISTNUM 1 \l 1212              Gentlemen, I would like to begin by looking at the issue of whether it is a necessary requirement for the essential facilities definition to have dominance in the upstream market or monopoly in the upstream market.

LISTNUM 1 \l 1213              As I understand it, the first element of the Bureau's definition of essential facilities requires as a necessary condition that the firm controlling the facility in question is vertically integrated and dominant in two markets; the first relevant market being the upstream market and the second being the downstream market in which the facility is an input.  Is that correct?

LISTNUM 1 \l 1214              MR. CHURCH:  Yes, it is.

LISTNUM 1 \l 1215              MR. DUNBAR:  And in contrast TELUS' definition states that a necessary condition for a facility to be essential is that the facility is monopoly controlled in the upstream market.  And I would like to explore the interaction that there has been in the proceeding between the Bureau and TELUS on this issue.

LISTNUM 1 \l 1216              In paragraph 31 of your supplemental evidence the Bureau states that if TELUS means that monopoly control requires 100 per cent market share in the input market its definition is too restrictive.

LISTNUM 1 \l 1217              I would like you to explain, why is monopoly control in the input market too restrictive?

LISTNUM 1 \l 1218              MR. CHURCH:  So the TELUS proposal, as I understand it, and you know it is based on our understanding of the record, is that they require monopoly upstream.  You know, if they are defining monopoly to be 100 per cent market share in an input market where we define the market using antitrust market definition principles, right, we are taking a share of something, we have to define what it is that we are taking a share of, the Bureau is assuming we are doing that using antitrust market principle definitions.

LISTNUM 1 \l 1219              Then if you had a 100 per cent market share in that, that would be the only circumstances under which TELUS would say that there should be mandated access.  I guess the Bureau's point would be that you may be ruling out instances where the ILEC or the firm that owns that facility has substantial market power.  There may be other alternatives available.  Where those other alternatives are weak in terms of their disciplining effect on the market power of the owner of the essential facility, so there could still be cases where you would want to mandate access because it would increase welfare downstream and that would be ruled out by using a TELUS test.

LISTNUM 1 \l 1220              MR. DUNBAR:  And is it your position that the TELUS test is still too restrictive?

LISTNUM 1 \l 1221              MR. CHURCH:  Yes, that is why we have a dominance requirement and not a monopoly requirement.

LISTNUM 1 \l 1222              MR. DUNBAR:  Thank you.

LISTNUM 1 \l 1223              Now, as we have discussed, the Bureau's test requires dominance in both the upstream and the downstream market.  And in contrast TELUS has proposed that a facility can only be considered essential if, without it, competition downstream is prevented.  In other words, the monopolist upstream is also a monopolist downstream.

LISTNUM 1 \l 1224              In paragraph 32 of your evidence you discussed this difference and you again characterized TELUS' test as problematic.  You state that as with dominance upstream, it raises issues of market definition and market share.  And you go on to state that if TELUS is talking in terms of 100 per cent market share, then adoption of this standard will inefficiently restrict access to facilities.

LISTNUM 1 \l 1225              Do you continue to believe that that is the case?

LISTNUM 1 \l 1226              MR. CHURCH:  Yes.

LISTNUM 1 \l 1227              MR. DUNBAR:  And can you explain what the problem is there?

LISTNUM 1 \l 1228              MR. CHURCH:  Again, it is a similar problem that is, as we just talked about in terms of upstream, is that the TELUS test might result in situations where mandating access would be good for consumers and it is not being identified correctly by the TELUS test, whereas it would be with a dominance requirement.

LISTNUM 1 \l 1229              MR. DUNBAR:  Thank you.

LISTNUM 1 \l 1230              Now, I would like to turn next to consideration of how the Bureau's test in this proceeding or proposed definitions and tests of essential facilities would be operationalized by the Commission.  And I would like to begin by referring to your opening statement, the version dated October 2.

LISTNUM 1 \l 1231              Now, on page 2 of the opening statement of October 2 the Bureau has outlined its three‑part test ‑‑

LISTNUM 1 \l 1232              MR. HUGHES:  Excuse me, could you give us a moment?

LISTNUM 1 \l 1233              MR. DUNBAR:  Sure.

LISTNUM 1 \l 1234              MR. HUGHES:  We have got the eighth, but the second?

LISTNUM 1 \l 1235              MR. DUNBAR:  We have a handout there if you don't have it.

LISTNUM 1 \l 1236              COMMISSIONER del VAL:  Mr. Dunbar, it is October 2, right, the earlier version of the opening statement?

LISTNUM 1 \l 1237              MR. DUNBAR: That is correct.

LISTNUM 1 \l 1238              THE SECRETARY:  We have the October 8 version, but not the October 2 version at hand.

LISTNUM 1 \l 1239              MR. DUNBAR:  It is the same test, sir.

‑‑‑ Pause

LISTNUM 1 \l 1240              MR. DUNBAR:  So anyway, if we look at this test, you have a three‑part test.  We have already mentioned the first part of the test requiring a vertically integrated company that is dominated in two markets.  And you state that, within that definition, that a necessary condition for concluding that there is dominance in the upstream market is that it is not practical or feasible for competitors to duplicate the facility in question.

LISTNUM 1 \l 1241              Your second test requires mandating access to the facility is likely to result in competitors entering or expanding the downstream market.  And your third requirement, such entry or expansion is likely to result in a substantial increase in competition in the downstream market within a reasonable time.

LISTNUM 1 \l 1242              I am going to come back to that opening statement, so maybe you can keep that handy.  And I would like to turn to the Bureau's supplementary evidence at page 18, paragraph 47.

LISTNUM 1 \l 1243              Now here, in talking about how the Commission might apply your test to specific facilities and services, you indicate that your test has three conditions.  But in implementing the test you say it should be recognized that one of the most difficult aspects is assessing whether the facility is duplicatable.

LISTNUM 1 \l 1244              MR. CHURCH:  Yes.

LISTNUM 1 \l 1245              MR. DUNBAR:  Hence, you say the focus should be on using the other conditions to reduce the set of potential facilities that might be essential.

LISTNUM 1 \l 1246              As I understand it, you are proposing that you look at other aspects of the test as sort of a screen that is easier to apply before going to the more difficult question of whether the facility is duplicatable.

LISTNUM 1 \l 1247              MR. CHURCH:  Yes.  In fact, if you look at our test in our evidence, we suggest that there are two screens that you should do.  One would be to look for dominance downstream, and the second one would be to look and see if there are other impediments to competition, such that mandated access may not have the effect of leading to a substantial increase in competition.

LISTNUM 1 \l 1248              Those would be the two screens we would recommend.

LISTNUM 1 \l 1249              We would think that in most cases looking at those two things may save you having to go further in the analysis.

LISTNUM 1 \l 1250              MR. DUNBAR:  So, you are doing the process of elimination here, using the easier parts of the test?

LISTNUM 1 \l 1251              MR. CHURCH:  Yes.  So in anti‑trust parlance, it would be called a structured rule of reason, where you try and have some screens to identify on the basis of things that you can do easily, and then it sets up a structure for how you proceed in the analysis.

LISTNUM 1 \l 1252              MR. DUNBAR:  I would like to look at the first part of the screen of your structured rule of reason test and refer to the Bureau/CRTC‑103, where the Bureau has provided its views on how to assess market power dominance.

LISTNUM 1 \l 1253              That was one of the handouts.

LISTNUM 1 \l 1254              THE CHAIRPERSON:  Where are you now?  What document are you referring to?

LISTNUM 1 \l 1255              MR. DUNBAR:  I am in Bureau/CRTC, 12 April, 103.

LISTNUM 1 \l 1256              COMMISSIONER deVAL:  Mr. Dunbar, can you please give us the date of that?

LISTNUM 1 \l 1257              MR. DUNBAR:  Yes, it is April 7th ‑‑ sorry, 12 April, 2007, and it is number 103.

LISTNUM 1 \l 1258              So, as I was saying, in this interrogatory response, the Bureau has provided its views on how to assess market power dominance, as I understand it, in the upstream and downstream markets.  Is that correct?

LISTNUM 1 \l 1259              MR. HUGHES:  Yes.

LISTNUM 1 \l 1260              MR. DUNBAR:  Can you confirm that this is the same test of market power that was advocated by the Bureau in the local forbearance proceeding before the CRTC?

LISTNUM 1 \l 1261              MR. HUGHES:  It is certainly the standard test we use and that was a major part of the local forbearance, yes.

LISTNUM 1 \l 1262              MR. DUNBAR:  You start out under this analysis, as I understand it, in defining the appropriate geographic and product markets.  Is that correct?

LISTNUM 1 \l 1263              MR. HUGHES:  Yes.

LISTNUM 1 \l 1264              MR. DUNBAR:  And you gather and analyze the detailed list of qualitative and quantitative information specified in the merger enforcement guidelines?

LISTNUM 1 \l 1265              MR. HUGHES:  Not limited to that, but, yes.

LISTNUM 1 \l 1266              MR. DUNBAR:  And you use a hypothetical monopolist test?

LISTNUM 1 \l 1267              MR. HUGHES:  We use the hypothetical monopolist, of course taking into account things like the "Cellophane Trap" and matters like that.

LISTNUM 1 \l 1268              MR. DUNBAR:  Would I be correct in thinking that the product definition test used to assess market power in the relevant market requires you to examine whether there are reasonable substitutes for the facilities in question?

LISTNUM 1 \l 1269              MR. HUGHES:  Yes, certainly.

LISTNUM 1 \l 1270              MR. DUNBAR:  And this analysis would require the regulator to assess possible substitutes in terms of functionality, quality, price, acceptability to consumers or users, among other things?

LISTNUM 1 \l 1271              MR. HUGHES:  Among other things, yes.

LISTNUM 1 \l 1272              MR. DUNBAR:  So, the fact that there might be an alternative access functionality available in a given geographic market might not mean that it is a suitable substitute, for example, if it was not acceptable to consumers or business users in terms of those factors such as price and quality?

LISTNUM 1 \l 1273              MR. HUGHES:  Yes.

LISTNUM 1 \l 1274              MR. DUNBAR:  So, for example, hypothetically, if a wireless connection was not generally acceptable to business customers who require certain quality and reliability of service, would that be a relevant type of consideration for the Commission to consider?

LISTNUM 1 \l 1275              MR. HUGHES:  It is certainly relevant, and you would take it into regard, looking at the entire nature of their competitive response.

LISTNUM 1 \l 1276              MR. DUNBAR:  Similarly, if residential subscribers did not consider a mobile phone to be a cost‑effective substitute for their home phone, that would be relevant?

LISTNUM 1 \l 1277              MR. HUGHES:  Certainly.

LISTNUM 1 \l 1278              MR. DUNBAR:  The Commission is going to have to do a significant amount of qualitative assessment to determine the relevant product market?

LISTNUM 1 \l 1279              MR. HUGHES:  Yes.

LISTNUM 1 \l 1280              MR. DUNBAR:  Is this the same type of analysis that the Commission must do to determine whether it is practical or feasible for competitors to duplicate the facility in question, or is that a different test?

LISTNUM 1 \l 1281              MR. HUGHES:  I think once we get there, we are probably moving to another ‑‑ the first issue is to analyze the markets, and if you don't analyze the markets right, you are going to get the wrong answers.

LISTNUM 1 \l 1282              Once you have the right market, then you can look at issues like duplicability, and I have the same problem pronouncing this word as you do.

LISTNUM 1 \l 1283              MR. DUNBAR:  I should have looked it up to see if it's a real word, but I didn't.  It is all over the place.

LISTNUM 1 \l 1284              Thank you.

LISTNUM 1 \l 1285              MR. CHURCH:  Excuse me, if I might just add something to that, to Mr. Hughes' response.

LISTNUM 1 \l 1286              You are correct in the sense that when we are looking for duplicability under either standard, our weak or our strong standard, you are trying to assess what the market conditions would be like if there was entry, and so it is going to be entry into what, and it will be entry into the relevant market.

LISTNUM 1 \l 1287              So, the same analysis is going to be required to start the duplicability analysis.

LISTNUM 1 \l 1288              MR. DUNBAR:  I guess what I was wondering there, this is part of your first screen, and you said you wanted to use the first screen because it is easier to apply than the test of duplicability, and I am just wondering really whether it is that much harder, easier or whether you are really looking at the same kind of factors.

LISTNUM 1 \l 1289              MR. HUGHES:  I think it would be easier in the sense that you define the market to do your dominance analysis, especially downstream, and it is a first step in a duplicability analysis, but the duplicability analysis requires you to then forecast or assess what would happen if there was entry, and that is much more difficult than just defining the market.

LISTNUM 1 \l 1290              MR. DUNBAR:  Thank you.

LISTNUM 1 \l 1291              MR. CHURCH:  If I may add, I think there is probably a lot more experience and easier proxies to deal with market definition and to try to assess at least at a first pass the market power.  This is something that competition authorities do a lot.

LISTNUM 1 \l 1292              Duplicability requires us to get into the business plans and really try to forecast what is going to happen in this market.  It is something that we, I think, have been in a position to do.  It is somewhat harder, in my opinion.

LISTNUM 1 \l 1293              MR. DUNBAR:  When you are defining the market and looking at whether or not there is dominance in the two markets, when you are looking at the downstream market, are you looking solely at the level of competition there would be in the absence of an essential facility, if there is already one out there?  Are you trying to isolate facilities‑base competition from non‑facilities‑base competition?

LISTNUM 1 \l 1294              MR. HUGHES:  That would be a sufficient test.  So, you would be worried if your conclusion was there is no market power, and the reason there is no market power is because of a player who is dependent on the facility.  That would worry you.

LISTNUM 1 \l 1295              It doesn't mean that you are completely off the table, but I would feel a lot more comfortable if I knew it was a facilities‑base player.

LISTNUM 1 \l 1296              MR. DUNBAR:  Thank you.

LISTNUM 1 \l 1297              Just on that point, that is another factor the Commission would want to look at to try and isolate where the competition is?

LISTNUM 1 \l 1298              MR. HUGHES:  Absolutely.  Other factors might be relevant too in terms of identifying the players.  Not all parties are equal necessarily as competitive forces.

LISTNUM 1 \l 1299              MR. DUNBAR:  If we could turn to what I refer to your second screen, second part of your three‑part definition, this is the requirement that mandating access to the facility is likely to result in competitors entering or expanding in the downstream market.

LISTNUM 1 \l 1300              I take it from your evidence that this requires as a first step the Commission establishing that there are not any other significant impediments to competitors in the downstream market except for access to the alleged essential facility.  Is that fair?

LISTNUM 1 \l 1301              MR. CHURCH:  Yes.  The second bullet just says that if you mandated access, then competitors will enter and expand.

LISTNUM 1 \l 1302              The third bullet is designed to assess how effective that entry and expansion would be in creating competition.

LISTNUM 1 \l 1303              MR. DUNBAR:  I understood that your second test also requires you to isolate whether or not there might be other impediments to entry that might be blamed for lack of entry in order to get out of looking at whether or not there is an essential facility requirement?

LISTNUM 1 \l 1304              MR. CHURCH:  I guess I was thinking about that second screen, the screen about impediments to competition.  It was kind of taking the second bullet and the third bullet together and saying what you are really interested in is if I gave you access, would there be a substantial increase in competition in the downstream market, or are there other things that even if you gave me access there still would not be any competition.  Therefore, why bother mandating access.

LISTNUM 1 \l 1305              MR. DUNBAR:  So that would be part of the second screen because that is ‑‑

LISTNUM 1 \l 1306              MR. CHURCH:  It is part of the second screen.  You are trying to tie it to the two bullets or a specific bullet.  I would tie it to both the second and the third bullet.

LISTNUM 1 \l 1307              MR. DUNBAR:  That is fair.

LISTNUM 1 \l 1308              THE CHAIRPERSON:  Can I just clarify?  You are talking about impediments other than those that have the origin in the dominance of the player, because you have dealt with the dominance by mandating access.  You want to see are there other impediments not related to the dominance of the player.

LISTNUM 1 \l 1309              MR. CHURCH:  There may be other reasons for the dominance besides the essential facility.  So, there may be other reasons why the firm might be dominant downstream besides the essential facility.

LISTNUM 1 \l 1310              THE CHAIRPERSON:  Wouldn't you have taken that into account when you deal with dominance?  Your second screen deals with impediments.  I assumed it was impediments other than those coming from the dominance of the player.

LISTNUM 1 \l 1311              MR. CHURCH:  When I think about this, you know, you are asking if I give you access to this essential facility, would you be able to enter and effectively compete against the incumbent.  There may be other reasons why you can't effectively compete.  Those other reasons may be contributing entry barriers downstream, which are different than the essential facility.  They may support dominance for another reason besides access to the essential facility being denied.

LISTNUM 1 \l 1312              MR. DUNBAR:  Can you give me some examples of what you are talking about there?

LISTNUM 1 \l 1313              MR. CHURCH:  This would kind of be the standard kinds of things we would run through better found in the merger enforcement guidelines.  They would be things like switching costs, brand loyalty, those kinds of things.

LISTNUM 1 \l 1314              MR. DUNBAR:  So, this analysis also would follow the type of guidelines that are in the merger and the use of dominance guidelines?

LISTNUM 1 \l 1315              MR. CHURCH:  Yes, we're looking at impediment analysis.  That is part 6 of the merger enforcement guidelines.

LISTNUM 1 \l 1316              MR. DUNBAR:  I would like to turn next to the Bureau/CRTC, 12 April, 2007, 101.  I would like to refer to, on that particular handout, page 3, it says 3 of 36, page 3 in the third paragraph on the page.

LISTNUM 1 \l 1317              I believe this is where you get to the issue of whether duplication is practical or feasible.  At the bottom in that paragraph, second to last from the bottom, near the end of it, you said:

"The third step reached only after the first two have not eliminated the possibility of an essential facility is to identify whether duplication is practical or feasible."  (As read)

LISTNUM 1 \l 1318              Then you say:

"Unfortunately, the analysis required to determine if entry is profitable and, if profitable, effective is fact intensive.  The analysis required to assess the incentives and effective entry is very similar to the analysis required to determine if entry is sufficient to prevent a horizontal merger having anti‑competitive effects."  (As read)

LISTNUM 1 \l 1319              I wonder if you could explain that concept to me?

LISTNUM 1 \l 1320              MR. CHURCH:  Sorry, could you be more precise about which concept you would like me to explain?

LISTNUM 1 \l 1321              MR. DUNBAR:  You say that the analysis required to assess the incentives and effective entry is very similar to the analysis required to determine if entry is sufficient to prevent a horizontal merger from having anti‑competitive effects.

LISTNUM 1 \l 1322              I wonder if you could just explain why that is the case?

LISTNUM 1 \l 1323              MR. CHURCH:  In the merger enforcement guidelines and in a merger context, if there are not substantial barriers to entry, if we think that entry is easy, then even though there might be a merger, we are not worried about a substantial lessening of competition from that merger in response to any kind of market power that might be created by the merger.  It is disciplined by entry.

LISTNUM 1 \l 1324              So, to figure out if there is the potential for a discipline from entry, we do an analysis, the Bureau does an analysis of entry barriers to determine whether entry is sufficient, timely and likely to discipline any market power which might be created by the merger.  So, that is a discussion of entry barriers.  That is part 6 of the merger enforcement guidelines.

LISTNUM 1 \l 1325              The discussion about duplicability is kind of the same thing.  This goes back to what we talked about earlier, is that I am trying to forecast if an entrant was to come in and duplicate the facility, what would be the outcome?

LISTNUM 1 \l 1326              So, under the strong standard you are asking whether it would be profitable.  That corresponds very nicely to likely and timely in the merger enforcement guidelines.

LISTNUM 1 \l 1327              Also, if you are looking at the weak standard, which is asking what the competitive effects would be, then that is the inverse of sufficient to control the market power.

LISTNUM 1 \l 1328              That same kind of analysis here, when you are addressing duplicability, in the Bureau's estimation, that is very similar to a discussion of what the entry barriers are and what the effects of entry might be post‑merger.

LISTNUM 1 \l 1329              MR. DUNBAR:  That is what I was wondering because it seems that we keep going back to part 6 of the MEGs on each of these tests, and I just wonder are each time the Commission is running these tests we are really doing it on a different issue even though we are applying part 6?  You said we apply part 6 to the second part of the test; we apply the guidelines to the first part of the test.  We seem to be keep re‑applying them.

LISTNUM 1 \l 1330              I am just wondering is it a separate issue each time?

LISTNUM 1 \l 1331              MR. CHURCH:  In the definition of our essential facilities, there are two entry analyses that are required, right?

LISTNUM 1 \l 1332              There is one which is to ask about duplication.  So, you are asking could it be duplicated, which is you are asking could an entrant come in upstream and duplicate the essential facility?  To answer that, you need some apparatus to decide whether or not the entrant could come in.  That is one analysis that is required.

LISTNUM 1 \l 1333              There is a second entry analysis which is required, which is to say, given that you mandate access to the upstream essential facility, would there be entry and what would the effect of that entry be from the mandated access in the downstream market.  Again, that is an entry question, so there are two possible ways in which entrants can come in to the market.  They can come in by duplicating the upstream facility, or they could come in by having mandated access.

LISTNUM 1 \l 1334              In both cases you want to know what the effect of that entry is.  Part 6 of the merger enforcement guideline shows you how to analyze the potential for entry and the effects of the entry.

LISTNUM 1 \l 1335              MR. DUNBAR:  Would I be correct in saying that even after we have gone through these screens and we have looked at them, as I understand it, the screen we applied on part 2 of the test would only address part of the issue.  Would we still have to go back and consider whether mandating access is likely to result in competitors entering or expanding in the downstream market?  Is that an issue you have to go back to?

LISTNUM 1 \l 1336              MR. CHURCH:  I am not sure what it means to go back to but it is part of our test and that is part of our screen.

LISTNUM 1 \l 1337              MR. DUNBAR:  Does that analysis come after the screens are applied or is it part of the screen?

LISTNUM 1 \l 1338              MR. CHURCH:  It would be part of the screen.

LISTNUM 1 \l 1339              MR. DUNBAR:  Okay.  And then we still need to address the third test to determine whether entry or expansion is likely to result in a substantial increase in competition in the downstream market within a reasonable period of time?

LISTNUM 1 \l 1340              MR. CHURCH:  That is the second screen, I think.  I mean we are doing it at the same time.

LISTNUM 1 \l 1341              If you are going to identify whether there are impediments or not to competition, you are really asking if I have access to that central facility, would I be able to bring about a substantial increase in competition, and in order to answer that, you would have to know whether there are other impediments or not.  So they are the same kind of thing.

LISTNUM 1 \l 1342              MR. DUNBAR:  When we looked at your opening statement, that seemed to be the third test:

"Such entry or expansion is likely to result in a substantial increase in competition in the downstream market within a reasonable period of time." (As read)

LISTNUM 1 \l 1343              That is the third test, not the second.

LISTNUM 1 \l 1344              MR. CHURCH:  It is the third bullet but it is the second screen.

LISTNUM 1 \l 1345              MR. DUNBAR:  Okay.

LISTNUM 1 \l 1346              MR. HUGHES:  I think it is important to look at this test as a unified ‑‑ and there will be some duplication of what falls under which bullet.

LISTNUM 1 \l 1347              At the end of the day, the question is really ‑‑ can be put fairly simply.  Is there a problem ‑‑ and here I am talking about a problem that is going to affect consumers and it is going to affect the market in a substantive way ‑‑ and is there a solution?

LISTNUM 1 \l 1348              And you are right to say that we are doing a couple of things here because we have to do both the merger analysis to see whether there is a problem and the remedy analysis to see whether this solution is going to work.

LISTNUM 1 \l 1349              So it is a little bit more demanding but it is really not fundamentally very different and it is not any more duplicative except for the fact that you need to find out if there is a problem and find out whether this solution is going to work.

LISTNUM 1 \l 1350              THE CHAIRPERSON:  But if either one of those tests is negative, then you don't mandate something as essential?

LISTNUM 1 \l 1351              MR. HUGHES:  Right, because then you have concluded there is no problem, so you don't have to worry about whether this solution is going to work.

LISTNUM 1 \l 1352              THE CHAIRPERSON:  But let us assume you find yes, there is dominance ‑‑

LISTNUM 1 \l 1353              MR. HUGHES:  Yes.

LISTNUM 1 \l 1354              THE CHAIRPERSON:  ‑‑ but you find that mandating access to this particular service is not likely to create entry ‑‑

LISTNUM 1 \l 1355              MR. HUGHES:  Correct.

LISTNUM 1 \l 1356              THE CHAIRPERSON:  ‑‑ then you say you have a problem but this is the wrong solution, so therefore, don't worry, don't mandate?

LISTNUM 1 \l 1357              MR. HUGHES:  That is our position.

LISTNUM 1 \l 1358              THE CHAIRPERSON:  Notwithstanding that one is purely based on prospective assumptions while the other one is actually based on existing fact?  I mean whether there is dominance or not is something you can establish.

LISTNUM 1 \l 1359              MR. HUGHES:  Yes.

LISTNUM 1 \l 1360              THE CHAIRPERSON:  Whether there is entry or not is prospective and is based on a whole set of assumptions which may or may not turn out to be true.

LISTNUM 1 \l 1361              MR. HUGHES:  And I think that is a fair consideration to take into account when you are doing your risk analysis of where you want to shade the answer ‑‑

LISTNUM 1 \l 1362              THE CHAIRPERSON:  Mm‑hmm.

LISTNUM 1 \l 1363              MR. HUGHES:  ‑‑ but we think this is the right framework and then you have to sort of take these into account.

LISTNUM 1 \l 1364              THE CHAIRPERSON:  Okay.

LISTNUM 1 \l 1365              MR. CHURCH:  If I might just follow up, sir.

LISTNUM 1 \l 1366              I mean we are worried about costs mandating access to facilities which are not essential and so we want to be very sure that in fact the remedy to the dominance downstream is going to be solved by this.

LISTNUM 1 \l 1367              And so, as Mr. Hughes has said, we want to ‑‑ you know, we will take into account that it is prospective and that we are going to make assumptions but we are still going to be fairly tough on them or we would recommend you be tough on them.

LISTNUM 1 \l 1368              THE CHAIRPERSON:  Mr. Dunbar, I interrupted your cross, please go on.

LISTNUM 1 \l 1369              MR. DUNBAR:  There is no problem, Mr. Chairman.

LISTNUM 1 \l 1370              You said in that case you might find a dominance in the market but that mandating essential services is not necessarily the answer even if you have gone through the three tests.

LISTNUM 1 \l 1371              What would you propose that the Commission do in that circumstance?  Would you propose that they regulate the service?

LISTNUM 1 \l 1372              MR. CHURCH:  Yes.  I mean if there is a market power issue in the downstream markets and solving it with mandated access doesn't solve it, mandated access is not the solution and they are worried about market power downstream, the answer should be to regulate at retail.

LISTNUM 1 \l 1373              MR. DUNBAR:  Thank you.

LISTNUM 1 \l 1374              I would like you to turn, finally, to paragraph 33 of the Bureau's Supplementary Evidence of July 5th and in particular the bottom of page 12, paragraph 33.

LISTNUM 1 \l 1375              THE CHAIRPERSON:  What was the paragraph number?

LISTNUM 1 \l 1376              MR. DUNBAR:  It is paragraph 33, Supplementary Evidence.

LISTNUM 1 \l 1377              THE CHAIRPERSON:  Yes.

LISTNUM 1 \l 1378              MR. DUNBAR:  Down at the bottom of page 12, paragraph 33.

LISTNUM 1 \l 1379              Here you say that:

"The Bureau's test for an essential facility consists of three necessary conditions.  In addition to these necessary conditions, before mandating access, the Commission should consider whether there are efficiencies that would be lost from mandating access and/or costs that would be incurred to implement access to a facility found to be essential." (As read)

LISTNUM 1 \l 1380              So I take it from this that even if you pass all three tests you want the Commission to embark on some sort of cost‑benefit analysis?

LISTNUM 1 \l 1381              MR. CHURCH:  Yes, because there may well be substantial costs incurred by consumers by mandating access which are not necessarily captured by those three bullets.

LISTNUM 1 \l 1382              So we would add that, I think, in most applications ‑‑ and again, remember that paragraph 33 was written in the context of the old third bullet.

LISTNUM 1 \l 1383              The new third bullet requires a substantial increase in competition, which we have already said today is the same as a substantial lessening of competition in terms of what it means.

LISTNUM 1 \l 1384              And so you might want to take into account the efficiencies either there in determining whether you had a substantial increase in competition or if there are other things that arise, you might want to take them into account later.

LISTNUM 1 \l 1385              But ultimately, what the Commission should be interested in is does this mandating access result in an increase in welfare for consumers in downstream markets.

LISTNUM 1 \l 1386              MR. DUNBAR:  So would you say the Commission should assume if there is a benefit involved that there is a significant increase in competition but they would still have to look at costs?

LISTNUM 1 \l 1387              MR. CHURCH:  My earlier point was it depends.  You can either do it when you consider a substantial increase in competition or you can do it later but if there are significant costs involved, then you should take those costs into account at some point in the analysis.

LISTNUM 1 \l 1388              MR. DUNBAR:  And what type of costs would those be?

LISTNUM 1 \l 1389              MR. CHURCH:  Well, it may be the case that mandating access involves large costs being incurred by the incumbents to make their facilities available to entrants.  So that would be one example of potential costs that should be looked at.  In some cases those costs may be small, in other cases they may be extensive.

LISTNUM 1 \l 1390              Usually in an essential facilities discussion there is some idea about how practical or feasible it is to allow access to those facilities.  This would be one of those considerations that should be taken into account.

LISTNUM 1 \l 1391              There may also be some vertical efficiencies that are involved in terms of when the ILEC is vertically integrated and is involved in both the upstream and the downstream and those vertical efficiencies, whatever they might be, might be impaired by mandating access.  That would be something I am sure that the ILECs would be very happy to come forward and tell us about.

LISTNUM 1 \l 1392              MR. DUNBAR:  Now, I take it from your evidence and the Merger Enforcement Guidelines that the tests you are proposing do rely to a significant extent on having the necessary data available.  The Bureau has asked questions in this proceeding, and in parts of its evidence it states it is unable to draw conclusions as to such things as market definitions due to lack of information.

LISTNUM 1 \l 1393              Would you agree with that?

LISTNUM 1 \l 1394              MR. CHURCH:  Yes.  I think the Bureau's point here in its Supplementary Evidence is that in terms of considering proxy rules which would involve market definition and the duplicability and the whole bit, without access to the information on the questions that we have asked, we are not in any position to say that proxy rules are possible or whether the ones that might be possible are good or bad.

LISTNUM 1 \l 1395              MR. DUNBAR:  So without that kind of data though, the Commission couldn't apply your tests either, could it?

LISTNUM 1 \l 1396              MR. CHURCH:  Well, that is the second question, right?  I mean any definition is going to imply certain things that you want to check for and those certain things you want to check for should be reflected in the proxy rule that you design.  So a proxy rule designed for definition A might not work very well for definition B.

LISTNUM 1 \l 1397              MR. DUNBAR:  Yes, but it seems to me that the rules you are proposing or the tests you are proposing in this proceeding involve quite a number of steps and each step requires a significant amount of information.

LISTNUM 1 \l 1398              What I am suggesting is if the Commission does not gather that information and utilize it in the manner you are suggesting, which is a significant amount of information, then your test isn't going to be very practical for the Commission to work with or it won't produce the right results.

LISTNUM 1 \l 1399              MR. HUGHES:  It may well depend on how it is applied.  If it is a question of looking for an across‑the‑board solution across the country in all markets, for those kind of ex‑ante rules or proxies our position is we don't have sufficient information right now to make a responsible recommendation.

LISTNUM 1 \l 1400              The Commission does have some of this information.  It is on the confidential record.  We haven't seen it, so we don't know.  There may be scope to streamline this to some degree.

LISTNUM 1 \l 1401              If that is not the case, which is, I think, where you are going, and you are looking at a fairly fact‑insensitive analysis, what we have in mind is something a little different process‑wise, is almost a test case.  Focus in on one or two or three specific areas where admittedly the information is fairly detailed, but it is only on one market, it is only on one issue.  You should be able to nail down these important factual and important evidentiary elements somewhat easier than trying to do it across the board.

LISTNUM 1 \l 1402              Then, if that is appropriate and it works, then perhaps that can be applied across the board.  So if you have one medium‑size city and you can delve down into the facts and get the right answer, then maybe you can apply that.  Unless someone shows the facts are different in their city.  The same thing for a large city or maybe a rural area.

LISTNUM 1 \l 1403              That's more of what we have in mind then an omnibus collection of all the relevant market information for the whole country.

LISTNUM 1 \l 1404              MR. CHURCH:  Right.  So if I might just add something to Mr. Hughes comments?

LISTNUM 1 \l 1405              I guess we have in mind that in ex post proceedings would be that there would be a number of these cases that would come along and that the Commission would learn and eventually we would evolve into a situation where we would have proxy rules that would implement the Bureau's definition.

LISTNUM 1 \l 1406              I think we have to be very careful here, is that it's fine to have administrative cost savings by having a nice easy, simple approach, but the nice, easy simple approach may result in very large errors in terms of your decision‑making process.

LISTNUM 1 \l 1407              So the Commission is going to have to trade off the ease of administrative cost ‑‑ of administratability versus the cost of an error that an easy rule brings about.

LISTNUM 1 \l 1408              MR. DUNBAR:  Thank you very much.

LISTNUM 1 \l 1409              Those are my questions, Mr. Chairman.

LISTNUM 1 \l 1410              Mr. Englehart will have a few.

LISTNUM 1 \l 1411              CHAIRPERSON:  Before he does, can we just follow up on this last point, because if I understood you correctly in response to Mr. Dunbar's questioning you really were suggesting that we do a merger analysis on each and every service, including an efficiency trade‑off at the end in the area which is, as you well know, fraught with difficulties and not easy to apply in mergers let alone in this kind of scenario.

LISTNUM 1 \l 1412              Do you really think that's practical?

LISTNUM 1 \l 1413              Everything is fact‑intensive when you do merger analysis.  Everything is driven by the fact of why are you ‑‑ I know, Doctor, you suggested we should do a test case and then apply the cost.

LISTNUM 1 \l 1414              Why would that be feasible here?  You don't do it in mergers.  You don't do it in competition.  Why could we do it here?

LISTNUM 1 \l 1415              Wouldn't there be a huge outcry of people saying, "You know, just a second, it may be true in your test case but it doesn't apply to me."

LISTNUM 1 \l 1416              I think Mr. Dunbar brought out the practicality of doing this.  It may be conceptually logical to do it, but to do it for each service and for five different companies or something like this is going to be a massive task.

LISTNUM 1 \l 1417              MR. CHURCH:  Right.

LISTNUM 1 \l 1418              Mr. Chairman, in responding to that I don't think it is quite so bleak, in the sense that if you thought about a sector ‑‑ and so when the Bureau does a merger analysis in a sector ‑‑ so if we have five forestry mergers, we learn something from the first one that informs the second one informs the third one informs the fourth one, and by the end of it those analyses can be done fairly simply.

LISTNUM 1 \l 1419              I think that's the kind of thing that the Bureau would see evolving up from an ex post rule, would be that in similar geographic regions for similar services you would learn something through time so that you would end up with a proxy rule where you had a nice trade‑off between the administrative cost savings and the errors that you might make, as opposed to this other approach which is, you know, if you have a bunch of proxy rules ex ante they are likely to be susceptible to substantial errors in terms misclassification of facilities.

LISTNUM 1 \l 1420              THE CHAIRPERSON:  On the efficiency trade‑off you actually suggest we go through two screens on whether there is dominance and whether there are other impediments, we find that both of those there are none and we still would not, at least theoretically, mandate access because the efficiencies are not there?  The cost of providing the service would outweigh the consumer benefit?

LISTNUM 1 \l 1421              MR. CHURCH:  Again, I think I would look at the Telecommunications Act which looks at competition sufficient to protect the interest of users.  So in terms of what kind of standard you are choosing that seems to me to suggest that it should be a consumer welfare standard that you are looking at.

LISTNUM 1 \l 1422              When there is a conflict between, as you well know, between total surplus and consumer surplus, if there is a conflict it suggests that you should look for a consumer welfare standard.  As we know, the consumer welfare standard is much easier to administer than a total surplus standard.

LISTNUM 1 \l 1423              THE CHAIRPERSON:  All right.

LISTNUM 1 \l 1424              Commissioner Cram, you had a question?

‑‑‑ Pause

LISTNUM 1 \l 1425              COMMISSIONER CRAM:  If I could follow up on that, Dr. Church?  I was going to ask you anyway about ultimately the issue is an increase in the benefits for consumers and that has to be examined.

LISTNUM 1 \l 1426              I'm going to put a question to you:  What's better, if costs go up for a consumer or if there is a reduction of a CAPEX?

LISTNUM 1 \l 1427              MR. CHURCH:  I guess I would want to know a little bit more information about the reduction in CAPEX and whose investment it is that's going down and what would have been the benefits from that.

LISTNUM 1 \l 1428              COMMISSIONER CRAM:  Well, you were referring in page 8 of 36 in the interrogatory, a copy of which Mr. Dunbar just gave us ‑‑ 8 of 36 is an attachment.  I can't tell you.  It's the one before 18 may the Bureau/CRTC 12 April 07.  Oh, it is 102, sorry.

LISTNUM 1 \l 1429              MR. HUGHES:  "Geographical extent" are the first two words on the page.

LISTNUM 1 \l 1430              Is that correct?

LISTNUM 1 \l 1431              COMMISSIONER CRAM:  Yes.

LISTNUM 1 \l 1432              There is a reference there to:

"... a rollout of facilities by CLECs in Canada being reduced by the availability of CD&A at low prices."  (As read)

LISTNUM 1 \l 1433              I'm going to ask you:  If the ultimate result would then be an increase in costs for consumers, what would be more important?

LISTNUM 1 \l 1434              If you say that's the ultimate test, the ultimate test is consumer welfare, if the costs go up then shouldn't we then say we should mandate that facility as essential, notwithstanding the reduction in capital expenditures?

LISTNUM 1 \l 1435              MR. CHURCH:  Right.

LISTNUM 1 \l 1436              I guess when the Bureau has put together its test and is thinking about these three bullets and ultimately this test at the end that says ultimately what you do should be to the benefit of consumers, I guess the Bureau looks at the experience in the cable companies in competition at residential markets and the Bureau looks and says "If we can have situations where we can have competing networks, really competing networks against each other, if that's possible that's the best thing for consumers because then we are going to get price competition and we are going to get innovation and we are going to get product differentiation, we are going to get ‑‑ you know, there is an increase in capacity on one network then the other network is going to be in a situation where it is forced to respond, it comes up with something new, then the other one has to respond."

LISTNUM 1 \l 1437              If we can have that situation, that, in the Bureau's estimation, would be the best for consumers.  It may take some time for that to happen.

LISTNUM 1 \l 1438              COMMISSIONER CRAM:  But we are not in Utopia, so what is more important, the consumer benefit or increasing CAPEX in Canada?

LISTNUM 1 \l 1439              MR. CHURCH:  Well, I guess my point would be to say that there may well be a trade‑off here that the Commission has to make in terms of assessing are we in a situation where we can have the two competing networks or are we going to opt for competition on a single network?

LISTNUM 1 \l 1440              COMMISSIONER CRAM:  So is your answer you don't know and it's up to us?

LISTNUM 1 \l 1441              MR. HUGHES:  I think that my answer is that it depends on the particular fact circumstances and what you are going to do.

LISTNUM 1 \l 1442              COMMISSIONER CRAM:  All right.

LISTNUM 1 \l 1443              Mr. Hughes, you used of the term "facilities‑based".

LISTNUM 1 \l 1444              Now, we have a particular problem here in that if you look at the directive to us overturning forbearance ‑‑ have you seen that at all?

LISTNUM 1 \l 1445              MR. HUGHES:  Yes, I have.

LISTNUM 1 \l 1446              COMMISSIONER CRAM:  Yes.  It includes a mix of resale and facilities‑based.

LISTNUM 1 \l 1447              MR. HUGHES:  Yes, I am aware of that.

LISTNUM 1 \l 1448              COMMISSIONER CRAM:  Which could mean it could be 99 per cent revenue from resale and 1 per cent from their own facilities.

LISTNUM 1 \l 1449              So when you say you are less concerned if there was facilities‑based competition, do you mean end‑to‑end facilities‑based competition?

LISTNUM 1 \l 1450              MR. HUGHES:  Yes, I do.

LISTNUM 1 \l 1451              COMMISSIONER CRAM:  Thank you very much.

LISTNUM 1 \l 1452              Now, duplicability.  I want to talk about this because telephone companies need scale in order to make money and to be sustainable.

LISTNUM 1 \l 1453              MR. HUGHES:  Yes.

LISTNUM 1 \l 1454              COMMISSIONER CRAM:  So if I used a test of duplicability ‑‑ you know, being duplicated ‑‑ based on the fact, well ‑‑ I'm going to use something very silly.  Well, based on the fact that a certain item has been duplicated in one market, let's use DSO, DS1, DS3 ‑‑

LISTNUM 1 \l 1455              MR. HUGHES:  Yes.

LISTNUM 1 \l 1456              COMMISSIONER CRAM:  ‑‑ that it has been duplicated in some markets but not in others, you say look at the business case.  So do I look at an individual business case, or do I look at the fact that it has been done before so it can be done again, or do I look at the fact that for a company to be sustainable it has to have a whole bunch of them?

LISTNUM 1 \l 1457              MR. HUGHES:  I think we can see two extremes here.  One is to look exactly at that particular market.

LISTNUM 1 \l 1458              COMMISSIONER CRAM:  Yes.

LISTNUM 1 \l 1459              MR. HUGHES:  ‑‑ one is to look broadly. And that's, I think, where proxy rules are going to come in because ‑‑ the answer I'm most confident in is look at the particular market.  That's a relevant geographic market that I'm comfortable with.

LISTNUM 1 \l 1460              Close to there, learning from other markets.  I think that has some merit.  The mere fact that it's duplicated one or two or three places that may be very different don't give me any comfort at all.

LISTNUM 1 \l 1461              So I guess somewhere in between.  I don't know if I have answered your question or not.

LISTNUM 1 \l 1462              COMMISSIONER CRAM:  Okay.  So what you are rejecting is the very simple ‑‑

LISTNUM 1 \l 1463              MR. HUGHES:  Correct.

LISTNUM 1 \l 1464              COMMISSIONER CRAM:  ‑‑ duplicability test that, if it's been done before, it can be done again?

LISTNUM 1 \l 1465              MR. HUGHES:  Yes.

LISTNUM 1 \l 1466              COMMISSIONER CRAM:  Okay.  And it's something more than that ‑‑

LISTNUM 1 \l 1467              MR. HUGHES:  Yes.

LISTNUM 1 \l 1468              COMMISSIONER CRAM:  ‑‑ but less than ‑‑ because when you are looking at the business ‑‑ you said, Look at the business case.  I would be looking at a whole proposed competitor ‑‑

LISTNUM 1 \l 1469              MR. HUGHES:  Yes.

LISTNUM 1 \l 1470              COMMISSIONER CRAM:  ‑‑ and seeing how many DS1s ‑‑ DSOs he would need in order to be sustainable, in order to have a good business plan.  Would that be ‑‑ you think that's too much?

LISTNUM 1 \l 1471              MR. HUGHES:  Whether you would need it per se, certainly you would look at it.  At the end of the day, we need an entrant to come in, we need that competition to be protecting consumers.  That's what we are after, at the end of the day ‑‑

LISTNUM 1 \l 1472              COMMISSIONER CRAM:  Yes.

LISTNUM 1 \l 1473              MR. HUGHES:  ‑‑ and we are trying to look at their business plans or whatever other kind of information we can to try to get an indication whether that kind of competition is going to come to that market.  Exactly how you do it, it's a bit of a judgment call, I guess, is the best answer I think I can give you.

LISTNUM 1 \l 1474              Do you have something to add to it?

LISTNUM 1 \l 1475              COMMISSIONER CRAM:  You guys have left it up to judgment calls to us the whole way.

LISTNUM 1 \l 1476              Thank you.

LISTNUM 1 \l 1477              MR. HARITON:  Well, just to mention that if you are looking at a service provider, and you may be looking at a specific geographic market, but you have to look at the scope and scale of that entrant because that's what brings unit costs down in all of the markets that they are going to be supplying.

LISTNUM 1 \l 1478              So that you cannot look at the market ‑‑ you have to look at the market, but you can't look at the market in isolation ‑‑

LISTNUM 1 \l 1479              COMMISSIONER CRAM:  In isolation.

LISTNUM 1 \l 1480              MR. HARITON:  ‑‑ you have got to look at what's happening elsewhere.

LISTNUM 1 \l 1481              COMMISSIONER CRAM:  Yes.

LISTNUM 1 \l 1482              MR. HARITON:  Similarly on the demand side, it may be that the customer is ‑‑ sorry, that the supplier is serving a customer who has multiple locations, so you cannot look at that in isolation.  The demand side may also be across different geographic locations, as well.

LISTNUM 1 \l 1483              COMMISSIONER CRAM:  Yes, like the contract with the Royal Bank or something.

LISTNUM 1 \l 1484              MR. HARITON:  That's exactly right.

LISTNUM 1 \l 1485              The other thing I just wanted to add very briefly is some of the costs that are ‑‑ you mentioned the trade‑offs between the short‑run benefits of having a new service ‑‑ what I call a service‑level entrant using unbundled loops and investing in plant and so on, and we have seen that in the long run it's investing in plants that will actually establish stable competitors and will actually bring innovation, which is a very great consumer benefit, as well as lower prices.

LISTNUM 1 \l 1486              Lower price is only one thing.  Innovation and better service is also very important.

LISTNUM 1 \l 1487              COMMISSIONER CRAM:  And I do want ask that about what is innovation?  Is it not primarily at the applications level?  No?

LISTNUM 1 \l 1488              MR. HARITON:  Innovation will happen at every level.  If you look at, though, communications over the last 50 years, many of the great innovations actually happened in the network itself, moving from analogue to digital and putting fibre in, which means you have a lot of capacity ‑‑

LISTNUM 1 \l 1489              COMMISSIONER CRAM:  Yes, but now.

LISTNUM 1 \l 1490              MR. HARITON:  ‑‑ mobile.  It's hard to know where the innovation is going to come over the next five years.

LISTNUM 1 \l 1491              COMMISSIONER CRAM:  Do you think there's going to be a new network innovation?

LISTNUM 1 \l 1492              MR. HARITON:  I think it's certainly possible.  I think that what we are seeing is that we are seeing different media for transmission.

LISTNUM 1 \l 1493              One of the more interesting things that happening right now ‑‑ and stop me if I'm getting too technical ‑‑ is on the wireless side.  On the mobile side, we used to have one antenna per car or per receiver.  Somebody had the bright idea of putting multiple antennas per car, and now we have a much better ‑‑ we have capabilities we didn't have before.  You can get higher speeds when you are driving along at 60 kilometres an hour.  You can get 1 meg, and probably more now.

LISTNUM 1 \l 1494              So that's really a change in the network, because what you need is you need coordination between different antennas ‑‑

LISTNUM 1 \l 1495              COMMISSIONER CRAM:  Yes.  Mr. Hariton, we are in Utopia again.  Today, where is the majority of the innovation?

LISTNUM 1 \l 1496              MR. HARITON:  Today, the majority ‑‑ well, innovation is happening everywhere.  It's happening both at the application level, but it's also happening in the network.

LISTNUM 1 \l 1497              COMMISSIONER CRAM:  Is that wireless, primarily?

LISTNUM 1 \l 1498              MR. HARITON:  A lot of it is happening in wireless.  We have had innovations in the actual wireline network.  We have seen a move from circuit switched to packet switched, and that's not finished.  There's a lot of circuit‑switched equipment still out there.  So that's something which is going on.

LISTNUM 1 \l 1499              COMMISSIONER CRAM:  Okay, so circuit to packet.  Okay, now ‑‑

LISTNUM 1 \l 1500              MR. HARITON:  That's a huge ‑‑ to my mind, that's a huge change.  It's not finished.

LISTNUM 1 \l 1501              COMMISSIONER CRAM:  Okay.

LISTNUM 1 \l 1502              MR. HARITON:  And even in the packet switched, we are getting a lot of different protocols, which make the quality better.

LISTNUM 1 \l 1503              So that you can have an application which is extremely innovative and wonderful, but if the network won't support it because it doesn't have the capacity or the control on the delays and the jitter, then your application will not work.  You have got to have the application working with the network.  You can't isolate them.

LISTNUM 1 \l 1504              COMMISSIONER CRAM:  Okay.  Thank you.

LISTNUM 1 \l 1505              Thank you, Mr. Chair.

LISTNUM 1 \l 1506              THE CHAIRPERSON:  Commissioner del Val.

LISTNUM 1 \l 1507              COMMISSIONER del VAL:  Mr. Hariton, just to follow up on Commissioner Cram's question, do you think that the emphasis on facilities‑based will be somewhat at the expense of innovation at the application layer and as the emphasis is placed on the network layer?

LISTNUM 1 \l 1508              MR. HARITON:  As we said before, forecasting is difficult to do, but I think that what you are going to have is that ‑‑ to get innovation, what you really need is you really need people coming at a market from a slightly different slant.

LISTNUM 1 \l 1509              In other words, in my experience, in my opinion, head‑to‑head competition seldom leads to a lot of innovation.  If you want innovation, what you want is somebody coming at a market from a slightly different angle.

LISTNUM 1 \l 1510              An excellent example, if I may, since we have got Rogers in front of us, is where you use a network which was built for one purpose, and then you say, "Ah, I can use it for another purpose".  And that's wonderful.  That's the kind of innovation which is really, really helpful.

LISTNUM 1 \l 1511              Similarly, to your point, if I'm looking at the applications alone, I will be able to come up with a lot of innovation, but, at the end of the day, it's the interaction between the applicational level and the other levels.

LISTNUM 1 \l 1512              And I know that we try to talk about them as if they were separate layers, and to some degree they are, but they do interact.  The applications drive the network and the network empowers the applications.

LISTNUM 1 \l 1513              So I don't really see the conflict.  Maybe in the very short run, but in the long run I think they reinforce each other.

LISTNUM 1 \l 1514              COMMISSIONER del VAL:  Thank you.

LISTNUM 1 \l 1515              THE CHAIRPERSON:  Okay, Mr. Engelhart, back to you.

LISTNUM 1 \l 1516              MR. ENGELHART:  Thank you, Mr. Chair.

LISTNUM 1 \l 1517              Good morning, panel.

LISTNUM 1 \l 1518              I notified your counsel on Friday that I would be referring to a document which is the "Report of the ICN Working Group on Telecommunication Services".

LISTNUM 1 \l 1519              Do you have a copy of that with you?

LISTNUM 1 \l 1520              MR. HUGHES:  We do, and I will just take a half second to get organized here.

LISTNUM 1 \l 1521              MR. ENGELHART:  Thank you.

LISTNUM 1 \l 1522              THE SECRETARY:  Are you filing this as an exhibit, counsel?

LISTNUM 1 \l 1523              MR. ENGELHART:  Yes.

LISTNUM 1 \l 1524              THE SECRETARY:  Okay, it will be Exhibit No. 1, obviously.

LISTNUM 1 \l 1525              MR. ENGELHART:  Thank you very much.

EXHIBIT ROGERS‑1:  Document entitled "Report of the ICN Working Group on Telecommunication Services".

LISTNUM 1 \l 1526              MR. HUGHES:  We have got it, thank you.

LISTNUM 1 \l 1527              MR. ENGELHART:  Thank you.

LISTNUM 1 \l 1528              This is an international group of competition authorities that are particularly interested in telecommunications matters.  Is that correct?

LISTNUM 1 \l 1529              MR. HUGHES:  Yes, it is.

LISTNUM 1 \l 1530              MR. ENGELHART:  And one of the three co‑chairs of the group is Sheridan Scott, the Commissioner of the Canadian Competition Bureau?

LISTNUM 1 \l 1531              MR. HUGHES:  That is correct.

LISTNUM 1 \l 1532              MR. ENGELHART:  Would it be fair to say that this report represents the consensus view of the members of the ICN Working Group on Telecommunication Services, including Canada?

LISTNUM 1 \l 1533              MR. HUGHES:  As all international reports would be, yes.

LISTNUM 1 \l 1534              MR. ENGELHART:  Take a look, if you could, please, at the executive summary, and in particularly the sixth bullet.  The sixth bullet reads:

"Competition is enhanced when an effective access regime is in place."  (As read)

LISTNUM 1 \l 1535              Do you agree with this statement?

LISTNUM 1 \l 1536              MR. HUGHES:  Excuse me, I'm now confused.  This is the beginning part?

LISTNUM 1 \l 1537              MR. ENGELHART:  Yes.  If you take a look at the executive summary, there's a bunch of bullets.  It's right after the table of contents.

LISTNUM 1 \l 1538              THE CHAIRPERSON:  Madam Secretary, why don't you give her copy of what you have given?

LISTNUM 1 \l 1539              MR. ENGELHART:  Oh, yes, sorry.

LISTNUM 1 \l 1540              And the sixth bullet says:

"Competition is enhanced when an effective access regime is in place."  (As read)

LISTNUM 1 \l 1541              Do you agree with that?

LISTNUM 1 \l 1542              MR. CHURCH:  Yes, Mr. Englehart, we would agree if it is understood that effective access regime means that it is balancing off the potential for competition from mandated access versus the potential for competition from competing networks.

LISTNUM 1 \l 1543              MR. ENGLEHART:  And have a look at the heading, 5.6 Access and Interconnection Issues.  And there it says at the beginning of that section:

"Difficulties in achieving access and interconnection have been ranked by many countries as the single most important impediment to advancing competition within the telecommunications sector. Few countries have attempted to rely exclusively on a competition law approach to resolving interconnection and access issues.  Such an approach would generally entail letting companies privately negotiate terms and conditions and intervening, for example, generally through the use of either refusal to deal remedies with the essential facilities doctrine only where negotiations fail. Accordingly, access and interconnection issues are still largely under the ambit of sector‑specific regulation." (As Read)

LISTNUM 1 \l 1544              Would you agree with that paragraph?

LISTNUM 1 \l 1545              MR. HUGHES:  Certainly, different countries have different perspectives and it is probably more true for some than others, but yes, I would agree with that as a principle.

LISTNUM 1 \l 1546              MR. ENGLEHART:  And then let us have a look at paragraph 16 to the first complete paragraph halfway through, beginning with the words "possible advantages."

"Possible advantages to local loop unbundling include:  reducing barriers to entry thus accelerating competition; encouraging innovation and upgrading since new entrants can combine new technologies with components of existing networks; avoiding unnecessary duplication of network components which, in turn, eliminates the need for public disruptions due to construction; facilitating access to rights‑of‑way by new entrants; and providing new sources of revenue the incumbent.  Possible disadvantages include:  reducing the incentives for both the incumbent and competitors to construct new and innovative network facilities and requiring regulatory intervention and technical coordination.  It has generally been found that the advantages of unbundling outweigh the disadvantages." (As Read)

LISTNUM 1 \l 1547              Would you agree with that statement?

LISTNUM 1 \l 1548              MR. CHURCH:  Yes.  Mr. Englehart, I think when you are looking at this paragraph and looking at this report it is also important to flip back to page 5 and read the last paragraph on page 5, which gives some perspective about where this report comes from and, in particular, the nature of the competition in the countries which are represented in this group.

LISTNUM 1 \l 1549              And what the paragraph at the bottom of page 5 indicates is that in many of these countries there is only a single network.  And so if you were in a situation where you only have a single network, then the conclusions which are found, it has generally been found that the advantages of unbundling outweigh the disadvantages, that will in fact be true.  If you only have one network, then it is likely the case that unbundling is a good thing.

LISTNUM 1 \l 1550              The Bureau's perspective on this is that there may be instances where you are not going to have just one network, you may be able to have multiple networks.  And if you are in a situation where you can have multiple networks, that is where you are going to get true competition and you should design your access regime to take that into account.

LISTNUM 1 \l 1551              MR. ENGLEHART:  So in the Canadian context then, in the residential marketplace where we have duplicate networks, that is one thing.  But then in the business market where we don't, as I think you phrased your answer, Dr. Church, the issue is whether we could have duplicate networks?

LISTNUM 1 \l 1552              MR. CHURCH:  Yes, that is right.

LISTNUM 1 \l 1553              MR. ENGLEHART:  Well, let us take a look then next at the residential marketplace in Canada.

LISTNUM 1 \l 1554              I understand from your evidence that you think it is unlikely that we need mandated essential facilities for the Canadian residential marketplace where there is cable television network‑based telephony, is that correct?

LISTNUM 1 \l 1555              MR. CHURCH:  So the third bullet of our test would require that mandated access resulted in substantial increase in competition.  The Bureau is sceptical that that would be the case where you already have competition between the cable company and the ILEC in digital telephony because of what the Bureau would characterize, I guess going back to the local forbearance submissions, that in that instance the competition between the duopoly in those circumstances, which are discussed and described in the response to The Companies number 9, the five conditions are listed there.

LISTNUM 1 \l 1556              Given those five structural characteristics then it is likely that you are going to have fairly vigorous competition between the two and that would appear to be the situation now, you know, two years on.

LISTNUM 1 \l 1557              MR. ENGLEHART:  So I don't want to challenge that scepticism as you described it, we are all here to try and get out of here by a week from tomorrow.  So I want to just have you assume that someone didn't accept your scepticism and that we do have mandated facilities in the residential telephone market in Canada.

LISTNUM 1 \l 1558              And now, I want to explore with you the costs of that decision.  And I want to have you have a look, if you could, to your opening remarks, which Mr. Dunbar has already distributed.  And, in particular, have a look at footnote 5 of your opening remarks.

LISTNUM 1 \l 1559              And there you say:

"The potential costs of mandated access are decreased incentives for investment in competing networks, decreased incentives for investment in innovation in the networks to which access is mandated and ultimately and most importantly the preclusion of end to end facilities‑based competition." (As Read)

LISTNUM 1 \l 1560              Would that be a fair summary of what you view as the costs associated with mandating facilities where those facilities are not truly essential?

LISTNUM 1 \l 1561              MR. CHURCH:  That would be many of them.  I guess I would add two more.  One of them would be that there is the cost of regulation, there is the cost of implementing the wholesale mandated access regulation scheme.

LISTNUM 1 \l 1562              MR. ENGLEHART:  You said two more?

LISTNUM 1 \l 1563              MR. CHURCH:  I am just checking to make sure my other one is not already listed here, sir.  Yes I am sorry, it is only one more.

LISTNUM 1 \l 1564              MR. ENGLEHART:  Let us have a look at the first of those costs, again concentrating on the residential telephone marketplace in Canada.

LISTNUM 1 \l 1565              You say that one of the costs is decreased incentives for investment in competing networks.  Would you agree with me that in most residential markets in Canada where cable television companies operate that the cable company has entered or will soon enter to provide telephony?

LISTNUM 1 \l 1566              MR. CHURCH:  Yes.

LISTNUM 1 \l 1567              MR. ENGLEHART:  Do you believe that if unbundled loops are mandated in these residential markets that they cable companies will withdraw their telephony operations or fail to enter?

LISTNUM 1 \l 1568              MR. CHURCH:  Probably not.

LISTNUM 1 \l 1569              MR. ENGLEHART:  So would you ‑‑

LISTNUM 1 \l 1570              MR. CHURCH:  Excuse me.  I might add, it might depend on what the price is which those loops are unbundled at.

LISTNUM 1 \l 1571              MR. ENGLEHART:  Say the current price?

LISTNUM 1 \l 1572              MR. CHURCH:  Then that, you know, we already know the answer to that because they have entered.

LISTNUM 1 \l 1573              MR. ENGLEHART:  So would you agree with me that mandating unbundled loops in residential areas in Canada would not decrease incentives sufficiently to prevent cable companies from entering this market?

LISTNUM 1 \l 1574              MR. CHURCH:  They have entered.

LISTNUM 1 \l 1575              MR. ENGLEHART:  Would you agree with me that mandating unbundled loops in residential neighbourhoods in Canada is unlikely to preclude end to end facilities‑based competition in Canada?

LISTNUM 1 \l 1576              MR. CHURCH:  I would.

LISTNUM 1 \l 1577              MR. ENGLEHART:  Then let us have a look at the decreased incentives for innovation and investment by the incumbents, in other words in the network to which access is mandated.  I wonder if you could have a look, for that purpose, at an interrogatory, TheCompanies‑TELUS‑12April07‑7.  And copies have been distributed for the Commission.  I have got a copy if it is easier for you.

‑‑‑ Pause

LISTNUM 1 \l 1578              MR. ABUGOV:  Excuse me, Mr. Chairman, could we have that interrogatory number again?

LISTNUM 1 \l 1579              MR. ENGELHART:  Yes, Mr.Abugov.  It is TheCompanies‑TELUS‑12April07‑7.

LISTNUM 1 \l 1580              If I could just read the question for you:

"Please refer to paragraph 49 of the declaration of Dr. Taylor.  Are the costs associated with providing traditional telephone voice service sunk; are there or should there be incentives for continued investment in network infrastructure for the provision of these services?  Explain." (As read)

LISTNUM 1 \l 1581              The following answer is provided by Dr. Taylor:

"Some costs for facilities required to provide traditional voice telephone service are sunk.  There are currently incentives for continued investment in this infrastructure and those incentives are affected by the regulation of the services those facilities provide.

Paragraph 49 of my declaration identifies a matter of degree, that the basic network infrastructure for next generation access services may not currently be sunk so that the investment in modernization disincentives for mandated access to those facilities are much more severe than similar disincentives for the current network infrastructure."  (As read)

LISTNUM 1 \l 1582              As you may be aware, in the United States the FCC has stated that where the incumbents invest in residential networks to provide new technologies, which Dr. Taylor refers to as next generation access, such as fibre to the home or fibre to the node, the competitors cannot obtain access to the next generation elements of these networks.

LISTNUM 1 \l 1583              The competitors can only get access to a DS‑0 in order to provide traditional services.  Are you familiar with that American rule?

LISTNUM 1 \l 1584              MR. HARITON:  Yes, I am, Mr. Engelhart.

LISTNUM 1 \l 1585              MR. ENGELHART:  Are you familiar with the fact that the Rogers' proposal for the residential market in Canada is the same?

LISTNUM 1 \l 1586              MR. HARITON:  I am aware that as far as access to loops and transport facilities and so on, the Rogers' proposal is modeled on the FCC.  I understand there are a few differences, but in general it is modeled on that.

LISTNUM 1 \l 1587              MR. ENGELHART:  If we had a rule like that, which said that you can get a DS‑0, but you don't get access to the IP functionality or any of the next generation functionality, where an incumbent invests in a next generation residential network, if we had a rule like that, do you believe the incumbents would continue to be incented to invest in their residential networks in Canada?

LISTNUM 1 \l 1588              MR. HARITON:  I think that what we are seeing in the States, Mr. Engelhart, the model that I see is Verizon, who is rolling out fibre to the home at a tune of, I think it is $23 billion or something of that sort.

LISTNUM 1 \l 1589              That network, some call it a next generation network, is going to replace both the fundamental ‑‑ the basic telephone service and a lot of other services.  It will enable a lot of other services that will hopefully be offered.  So that a distinction between basic telephony and all of these new services, this new world, is going to fade away.

LISTNUM 1 \l 1590              One of the difficulties, as I understand it ‑‑ I am not involved with Verizon ‑‑ but as I understand it, one of the difficulties going forward is that as you roll out fibre to the home, it becomes difficult to carve out a single DS‑0 and offer that as a copper loop, which is typically what has been required.  I recall seeing that there has been some discussion of that in the States:  How do you continue to offer unbundled loops when your whole network is becoming fibre based?

LISTNUM 1 \l 1591              I know that some of that discussion has been happening in Canada, for example, as the traditional telephone companies have been upgrading their networks and driving fibre closer to the home, you know, putting remotes, putting fibre carriers, the remotes and copper down after that, and using integrated remotes, it is becoming increasingly more difficult to provide the actual copper loop that is the subject of discussion, and they have to find alternative ways of doing that.

LISTNUM 1 \l 1592              Whether the fact that they have to continue to provide copper loops or the equivalent of copper loops as they go forward is a restraint or is a factor which slows down the roll‑out, I don't know.  I would imagine, though, that there is a cost to it.

LISTNUM 1 \l 1593              MR. CHURCH:  Excuse me, could I add something, please?

LISTNUM 1 \l 1594              MR. ENGELHART:  Sure.

LISTNUM 1 \l 1595              MR. CHURCH:  I would like to follow‑up with two things on this question about the incentives for the investment by the incumbent telephone companies in their existing networks.

LISTNUM 1 \l 1596              The first is, and Mr. Hariton may want to amplify on this because he is the expert we have on pricing, but I am sure there is an issue of the price that is being paid and whether that price is covering the ILEC's cost and giving incentives to maintain, let alone upgrade, but maintain the network.  That is an issue.

LISTNUM 1 \l 1597              The second point, which is kind of more general, is in this evolving world which we are seeing, the nature of the market is going to change substantially.  We are moving away from a POTS provider to pipes going into the house, which provide broadband access, and on that broadband access, provide a great variety of services, including digital telephony.

LISTNUM 1 \l 1598              Coming back to your original point, which is to say there is no cost associated with unbundling these local loops in residential neighbourhoods, because there is not going to be any effects on the incentives for the ILECs to make their investments, that might not be the case because of the pricing issue.  There might be these difficult technical problems in terms of untangling basic POTS service from the broadband access and the increased capacity, but you might wander what the competitive significance of it will be to have a narrow voice band provider using unbundled loops competing in a world where the competition is between the cable company, the incumbent cable company and the incumbent telephone company offering bundles of services down a broadband.

LISTNUM 1 \l 1599              So, there are costs going to be involved under regulation and these other things.  There might be difficulties with getting the price right.  It is not clear to me that your conclusion necessarily follows that the benefits are going to be greater than the costs because the benefits might be very small.

LISTNUM 1 \l 1600              MR. ENGELHART:  We have to stay a little bit focused here or it is going to take too long.

LISTNUM 1 \l 1601              As I explained in my question, we are not talking about the benefits.  We are not going to have that debate.

LISTNUM 1 \l 1602              We are talking about the costs.  I identified three costs and, Dr. Church, you added a fourth, which we haven't come to yet.  We have dealt with two of those costs.  The first one is the decreased incentive for investment in competing networks.

LISTNUM 1 \l 1603              We also dealt with a second cost, which is the preclusion of end‑to‑end facilities‑base competition.

LISTNUM 1 \l 1604              Now we are dealing with a third cost, which is decreased incentives for investment and innovation in the networks to which access is mandated.

LISTNUM 1 \l 1605              I want to stay on that issue.  In the United States, it is my understanding that whatever difficulties there are in getting DS‑0 capability from a loop that has fibre in it, the FCC has mandated it.  Is that your understanding too, Mr. Hariton?

LISTNUM 1 \l 1606              MR. HARITON:  That is my understanding.

LISTNUM 1 \l 1607              MR. ENGELHART:  You describe the fact that Verizon is spending $23 billion upgrading their networks to next generation architecture.  Would you say that it doesn't appear that that FCC rule has prevented Verizon from making the investments in upgrading its existing network?

LISTNUM 1 \l 1608              MR. HARITON:  That is certainly true.  However, I would say that there are several points which are important here.

LISTNUM 1 \l 1609              So far Verizon is the only one who is doing this.  It is widely seen as a gamble by various parties.

LISTNUM 1 \l 1610              But more importantly is that the impact of the various access rules I think may have to do more with the timing of when this happens than whether it happens at all.

LISTNUM 1 \l 1611              A lot of these things are going to happen, in my view, some day.  What we are talking about is whether the various rules slow down what is happening or whether it does not.  Slowing down is a huge cost.

LISTNUM 1 \l 1612              I am certainly not privy to the cable companies entry into the local telephony market and their decision behind that.  One of them at least entered in the late nineties.  A lot of them waited until 2005‑2006.

LISTNUM 1 \l 1613              I don't know whether unbundling had anything to do with the delay or not, or whether it was purely the technological problem.

LISTNUM 1 \l 1614              MR. ENGELHART:  I just don't think this is that complicated.  If you say to an incumbent phone company, if you invest in a new‑fangled network that has all sorts of new‑fangled capabilities, then the competitors can't get the new‑fangled capability; they can just get the old fashioned capability; they can just get a loop or the equivalent of a loop, if you say that, don't you think that it leaves the incumbent with the incentive to invest in the new‑fangled network?

LISTNUM 1 \l 1615              MR. HARITON:  The difficulty is that the new‑fangled network is not separate from the existing network.  That is really my difficulty.  You don't invest in the new‑fangled network separately from the existing one.

LISTNUM 1 \l 1616              I am back to the idea of driving fibre to the home.  You are investing in your network; you are investing in your local network, but you are investing in your new‑fangled network at the same time.  It is not an either/or.  It is a let's invest in this network.

LISTNUM 1 \l 1617              MR. ENGELHART:  I just wanted to question you about one thing you said about Verizon.

LISTNUM 1 \l 1618              Verizon is the one going all the way to the home, but would you agree with me that all the American phone companies, the incumbents, are driving fibre closer and closer to the home?

LISTNUM 1 \l 1619              MR. HARITON:  That is my understanding, just as in Canada, Mr. Engelhart.  Again, it is a question of speed and how quickly they are going to do it and how many resources they will put into it.

LISTNUM 1 \l 1620              MR. ENGELHART:  I want to turn to Dr. Church's fourth issue, which is cost, the regulatory cost.

LISTNUM 1 \l 1621              Would you agree with me, Dr. Church, that in the case of unbundled loops in Canada we have the tariffs, we have the dispute resolution mechanism, we have the rules, we have the regulations.  We have even got the co‑location facilities.  We have the unbundled loops.  It is a business that is up and running.  So that when you are weighing the cost, the regulatory cost of setting up a regime like that, given that the regime already exists in Canada and has been perfected or honed for some, well, ten years, would you agree with me that the regulatory costs associated with that are less of a factor as you are doing your cost benefit analysis?

LISTNUM 1 \l 1622              MR. CHURCH:  You are right in the sense that we have had some learning, so we have incurred some of these costs and they are sunk.  But I look around the room today and it clear to me that we are still incurring costing in terms of this regulation.

LISTNUM 1 \l 1623              I have to come back, right, to the fundamental question about this is a system, and after ten years, according to the CRTC's latest numbers, there are 350,000 loops on an unbundled basis across the whole country.  I can't remember exactly how many of those are in territories where there is an incumbent cable company, but I know that Rogers has indicated that they will move their unbundled loops, their CallNet customers that they inherited off of those unbundled loops on to their network.  So that number is likely to go down.

LISTNUM 1 \l 1624              In some sense there is very little benefits.  You might argue that there is very little costs, but it is strikes me that the default here should be to say that mandated access is something that is exceptional.

LISTNUM 1 \l 1625              MR. ENGELHART:  I said at the beginning I wasn't going to challenge your scepticism on the demand side.  We were having a look at the cost side.

LISTNUM 1 \l 1626              MR. CHURCH:  I want to say we have been going on for ten years, we have had costs.  It is likely if you continue this, we will continue to have costs that are incurred.  Why have those costs incurred without looking at what the benefits are, and our contention is that those benefits are not a substantial increase in competition, though they might well be, if you can make that case.  We just don't think that that case has been made by the applicants.

LISTNUM 1 \l 1627              MR. ENGELHART:  I would like to have a look now at the business market in Canada.

LISTNUM 1 \l 1628              THE CHAIRPERSON:  Mr. Engelhart, how much longer are you going to be?

LISTNUM 1 \l 1629              MR. ENGELHART:  Twenty minutes to half an hour.

LISTNUM 1 \l 1630              THE CHAIRPERSON:  In that case, I suggest we take a 15‑minute break.  Thank you very much.

‑‑‑ Recessed at 1025 / Suspension à 1025

‑‑‑ Resumed at 1047 / Reprise à 1047

LISTNUM 1 \l 1631              THE SECRETARY:  Please be seated.

LISTNUM 1 \l 1632              And just note when we get copies of documents, any extras are going back at the distribution table.  Thank you.

LISTNUM 1 \l 1633              THE CHAIRPERSON:  Let us resume with you, Mr. Engelhart.

LISTNUM 1 \l 1634              I just would like to tell the witnesses, I know you feel very passionate about this subject but we really have a lot of territory to cover, so if you could just answer the question precisely and refrain from overtalk or flourishes or argument, it would be appreciated.  Thank you.

LISTNUM 1 \l 1635              Mr. Engelhart.

LISTNUM 1 \l 1636              MR. ENGELHART:  Thank you, Mr. Chair.

LISTNUM 1 \l 1637              So we are looking now at the Canadian business telecommunications market, and Mr. Dunbar has already reviewed your test with you and reviewed how it operates in practice, so I am just going to deal with those three tests as described in your opening statement.

LISTNUM 1 \l 1638              I want to deal first with the dominance requirement, which is your first test.

LISTNUM 1 \l 1639              Am I correct that you apply a but‑for test to determine dominance in the downstream market, that is, you consider whether the ILECs would be dominant but for the presence of competitors using mandated facilities?

LISTNUM 1 \l 1640              MR. HUGHES:  It is a market power test but it does use that concept.

LISTNUM 1 \l 1641              MR. ENGLEHART:  And could you have a look for me at paragraphs 66 and 67 of your March 15th, 2007 evidence.

‑‑‑ Pause

LISTNUM 1 \l 1642              MR. ENGLEHART:  Now, in paragraph 66, you state that:

"Entry by the cable companies is likely to be sufficient to control the market power of the ILECs in the residential market." (As read)

LISTNUM 1 \l 1643              But in paragraph 67, you state as follows:

"The Bureau recognizes that the current competitive situation in markets for business services is likely very different.  The competitive significance of competing networks providing business services currently appears much less important than in residential markets, although this may change as cable companies expand into business markets or technologies develop that allow for the entry of new facilities base providers, e.g., fixed wireless networks." (As read)

LISTNUM 1 \l 1644              Now, as you discussed with Mr. Dunbar, you need a whole lot of data to do that analysis and you don't have the data to do it and you discussed with Mr. Dunbar the various steps that would be needed to do the analysis.  We are not going to go through that analysis right now.

LISTNUM 1 \l 1645              So I wonder if you would make an assumption for me.  If you assume that entry by cable companies and fixed wireless networks, as you referred to in this paragraph, and I suppose others such as municipal electric utilities, if you assume that the entry by those players would not be timely, likely and sufficient to restrain the ILECs' market power, would that lead you to conclude that the ILECs are dominant in the business telecommunications markets?

LISTNUM 1 \l 1646              MR. HUGHES:  That would be a strong indication, certainly, as a first look.

LISTNUM 1 \l 1647              MR. ENGLEHART:  Well, then let us have a look at the second part of your test, which is that mandating access will lead to competitive entry.

LISTNUM 1 \l 1648              Given that the CRTC has already mandated the facilities and given that they are used by Rogers, MTS Allstream and Primus, among others, are you of the view that the second element of your test has been satisfied?

LISTNUM 1 \l 1649              MR. CHURCH:  Yes, the second element would be satisfied.

LISTNUM 1 \l 1650              MR. ENGELHART:  Now let us have a look at the third part of your test, which is that entry would lead to a substantial increase in competition within a reasonable period of time, which, as has already been discussed this morning, replaces your original third test, which was that entry would be sufficient to lead to forbearance.

LISTNUM 1 \l 1651              As we have discussed, in the voice market the Cabinet has already deregulated the business markets in certain circumstances or perhaps in all circumstances simply because of the presence of unbundled facilities.

LISTNUM 1 \l 1652              Would you agree with me then that the federal government, the Cabinet, is of the view that entry using unbundled facilities is sufficient to lead to forbearance and that the federal Cabinet is of the view that entry using these unbundled facilities would be substantial within a reasonable period of time?

LISTNUM 1 \l 1653              MR. HUGHES:  It is not clear to me that you can read that into that conclusion.  They made a policy decision to have this occur, that is a policy decision and I can't comment on what the basis of it is.

LISTNUM 1 \l 1654              MR. ENGLEHART:  If the entry by Rogers and MTS Allstream and Primus and others, using those essential facilities, is not sufficient to restrain the ILECs' market power in the business market, then the Cabinet has made a mistake, haven't they?

LISTNUM 1 \l 1655              MR. CHURCH:  Yes.

LISTNUM 1 \l 1656              MR. ENGLEHART:  Now, in your exchange with Commissioner ‑‑ in your discussion with Commissioner Cram, you talked about a couple of elements in which ‑‑ a couple of ways in which mandated access to facilities might actually increase the likelihood of facilities‑based or end‑to‑end competition.

LISTNUM 1 \l 1657              One way would be if that gave the new entrant or the competitor scale and another way would be if it gave the entrant the ability to satisfy the demands of customers who have a demand for one‑stop shopping for multiple locations.

LISTNUM 1 \l 1658              If the provision of mandated access to facilities increased the likelihood of end‑to‑end competition or accelerated the development of end‑to‑end competition, would you agree with me that the third part of your test would be satisfied?

LISTNUM 1 \l 1659              MR. CHURCH:  Yes, but it is an awfully big if.

LISTNUM 1 \l 1660              MR. ENGLEHART:  Those are my questions.  Thank you very much.

LISTNUM 1 \l 1661              THE CHAIRPERSON:  Commissioner Cram, you have a question?

LISTNUM 1 \l 1662              COMMISSIONER CRAM:  Thank you.

LISTNUM 1 \l 1663              First, Dr. Hughes, I was remiss in calling you Mr. Hughes and I am sorry for that.

LISTNUM 1 \l 1664              I wanted to go back to the four reasons, four costs of mandating, and the first one being a reduction in investments in networks by competitors.

LISTNUM 1 \l 1665              I have to ask you what competitor in their right mind would totally work on a resale basis forever?  Because the margins are small, the possibility of higher profits is caused by owning your own network.

LISTNUM 1 \l 1666              MR. HUGHES:  Go ahead.

LISTNUM 1 \l 1667              MR. CHURCH:  Yes, Commissioner Cram, I think it is a question of the margin of the balance between what components are your own and what components you lease from an incumbent and so it is a question of the margin about what the relative size of the network might be.

LISTNUM 1 \l 1668              And in anticipation of a question from Rogers on the ICM thing, we were able to locate on the weekend a study that has just come out in September of '07 where they look at the distinction between investment in your own facilities versus unbundled local loops in Europe.

LISTNUM 1 \l 1669              They point out that if you lower the price of the unbundled loops by 10 percent it leads to a reduction in investment by the competitors, the competitor cable companies in this context, of 18 percent.  They substitute on the buy or lease margin.  They move away from the buy margin to the lease margin.

LISTNUM 1 \l 1670              COMMISSIONER CRAM:  Mm‑hmm.

LISTNUM 1 \l 1671              MR. CHURCH:  The Bureau is quite happy to provide that study as an exhibit.

LISTNUM 1 \l 1672              COMMISSIONER CRAM:  And are you aware of the Canadian statistics about investments by CLECs?

LISTNUM 1 \l 1673              MR. HARITON:  Just generally.

LISTNUM 1 \l 1674              COMMISSIONER CRAM:  And are you aware that in the early 2000 to 2002 there were fairly substantial investments by CLECs?

LISTNUM 1 \l 1675              MR. HARITON:  Yes.

LISTNUM 1 \l 1676              COMMISSIONER CRAM:  I can tell you what they were in 2002.  They were $4.7 million.  No, maybe I am wrong.  I am sorry.

LISTNUM 1 \l 1677              MR. HARITON:  I hope you have a few more zeros in there, Ms Cram.

LISTNUM 1 \l 1678              COMMISSIONER CRAM:  Billion, yes.

LISTNUM 1 \l 1679              MR. HARITON:  Thank you.

LISTNUM 1 \l 1680              COMMISSIONER CRAM:  Yes.

LISTNUM 1 \l 1681              MR. HARITON:  There was a number of things that happened in the period ‑‑

LISTNUM 1 \l 1682              COMMISSIONER CRAM:  No.  Are you aware?  That was the question.

LISTNUM 1 \l 1683              MR. HARITON:  Yes, I am aware.  I am aware of that.

LISTNUM 1 \l 1684              COMMISSIONER CRAM:  And are you aware that a large majority of these individuals who built the facilities and spent a whole bunch of capital went under?

LISTNUM 1 \l 1685              MR. HARITON:  Yes, indeed.

LISTNUM 1 \l 1686              COMMISSIONER CRAM:  Thank you.

LISTNUM 1 \l 1687              THE CHAIRPERSON:  Commissioner Noël.

LISTNUM 1 \l 1688              COMMISSIONER CRAM:  Oh! I had more questions.

LISTNUM 1 \l 1689              THE CHAIRPERSON:  Oh! I am sorry.

LISTNUM 1 \l 1690              COMMISSIONER CRAM:  Thank you.

LISTNUM 1 \l 1691              I have one more question and you actually answered it, Dr. Church, that you ‑‑ no, maybe not ‑‑ that another cost of mandating is a reduction in investment by the ILECs.

LISTNUM 1 \l 1692              MR. CHURCH:  Yes.

LISTNUM 1 \l 1693              COMMISSIONER CRAM:  Do you have any data showing other jurisdictions?

LISTNUM 1 \l 1694              MR. CHURCH:  I think that we refer in our evidence to some studies that were done on that, yes.

LISTNUM 1 \l 1695              COMMISSIONER CRAM:  And would you expect given that the United States is largely deregulated that it would be happening there?