Canadian Radio-television and Telecommunications Commission
Symbol of the Government of Canada

Common menu bar links

ARCHIVED -  Transcript - Hull, QC - 2001/10/05

Warning This Web page has been archived on the Web.

Archived Content

Information identified as archived on the Web is for reference, research or recordkeeping purposes. It has not been altered or updated after the date of archiving. Web pages that are archived on the Web are not subject to the Government of Canada Web Standards. As per the Communications Policy of the Government of Canada, you can request alternate formats by contacting us.



TRANSCRIPT OF PROCEEDINGS
FOR THE CANADIAN RADIO-TELEVISION AND
TELECOMMUNICATIONS COMMISSION


TRANSCRIPTION DES AUDIENCES DU
CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES


SUBJECT / SUJET:


Price Cap Regulation and Related Issues, pursuant to
Telecom Public Notice CRTC 2001-37/
Révision des Prix Plafonds et Questions Connexes, conformément
à L'Avis public Télécom CRTC 2001-37


HELD AT: TENUE À:
Conference Centre

Portage IV

Outaouais Room

Hull, Quebec

Centre de Conférences

Portage IV

Salle Outaouais

Hull (Québec)

October 5, 2001 le 5 octobre 2001


Volume 5






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


Price Cap Regulation and Related Issues, pursuant to
Telecom Public Notice CRTC 2001-37/
Révision des Prix Plafonds et Questions Connexes, conformément
à L'Avis public Télécom CRTC 2001-37


BEFORE / DEVANT:

David Colville Chairperson / Président
Ron Williams Commissioner / Conseiller
Barbara Cram Commissioner / Conseillère
Andrée Noël Commissioner / Conseillère
Jean-Marc Demers Commissioner / Conseiller
Stuart Langford Commissioner / Conseiller
David McKendry Commissioner / Conseiller


ALSO PRESENT / AUSSI PRÉSENTS:

Michel Spencer Hearing Manager and Secretary / Gérant de l'audience et secrétaire
Karen Moore

Natalie Turmel

Legal Counsel / conseillères juridiques


HELD AT: TENUE À:
Conference Centre

Portage IV

Outaouais Room

Hull, Quebec

Centre de Conférences

Portage IV

Salle Outaouais

Hull (Québec)

October 5, 2001 le 5 octobre 2001


TABLE OF CONTENTS / TABLE DES MATIÈRES


PAGE / PARA NO.
SWORN: WILLIAM E. TAYLOR 1169 / 7344
EXAMINATION BY / INTERROGATOIRE PAR
Mr. Henry

The Companies

1169 / 7347
Ms Lawson

ARC et al

1170 / 7359
Mr. Van Koughnett

ARC et al

1192 / 7507
Mr. Ryan

AT&T

1218 / 7641
Mr. Koch

CallNet Enterprises

1267 / 7977
Mr. Daniels

GT Group Telecom

1326 / 8413
Commission 1345 / 8548
PREVIOUSLY SWORN: ROBERT F. FARMER 1374 / 8736
SWORN: MARK CONNORS 1374 / 8736
SWORN: RICHARD STEPHEN 1374 / 8736
EXAMINATION BY / INTERROGATOIRE PAR
Mr. Henry

The Companies

1374 / 8737
Ms Lawson

ARC et al

1374 / 8747
Commission Counsel 1396 / 8915


LIST OF EXHIBITS / PIÈCES JUSTICATIVES


EXHIBIT NO. DESCRIPTION PAGE / PARA NO.
AT&T-10 Supreme Court of the United States decision AT&T Corporation v. Iowa Utilities Board 1265 / 7967
BELL CANADA-8 Bell Canada's response to undertaking information from ARC et al, transcript reference Volume 3, paragraph 4224 1266 / 7969
BELL CANADA-9 CV of Dr. William E. Taylor 1266 / 7970
CRTC-23 CRTC undertaking for AT&T Canada, CallNet and GT Group Telecom to provide The Companies financial statements, including statement of cash flows for six months ending 30 June 2001 1266 / 7971
CALLNET-5 Excerpts from Telecom Decision CRTC 1997-8, paragraphs 65 to 85 1324 / 8402
CALLNET-6 U.S. Developments in State Regulatory Policies Toward Competition 1325 / 8403
CALLNET-7 Excerpts from FCC 01-204 1325 / 8405




ERRATA / ADDENDA
Volume 2


Reference Action



Page iii EXHIBIT AT&T-4

"TSE 3000" s/b " TSE 300"



Page iv EXHIBIT CRTC-3

"NTS" s/b "MTS"



Page 323, line 6 "class" s/b "classic "



Page 333, line 3 "316" s/b "3-16 "

Page 333, line 10 "311" s/b "3-11 "



Page 334, line 11 "The Companies" s/b "the companies"



Page 341, line 23 Delete the word "so"



Page 342, line 7 "Spectrum" s/b "spectrum"

Page 342, line 14 "Spectrum" s/b "spectrum"

Page 342, line 15 "Spectrum" s/b "spectrum"

Page 342, line 17 "Spectrum" s/b "spectrum"



Page 349, line 19 "gage" s/b "gauge"



Page 350, line 9 "phenomena" s/b "phenomenon"



Page 351, line 7 "323" s/b "3-23"



Page 357, line 10 "come to have" s/b "come to expect"



Page 363, line 12 "below true" s/b "below the true"



Page 365, line 20 "king" s/b "kind"



Page 367, line 1 "provide" s/b "providing"



Page 370, line 20 "MR. INLOW" s/b "MR. FARMER"



Page 372, line 2 "populace" s/b "populated"

Page 372, line 16 "somewhat bases" s/b

"somewhat different bases"



Page 373, line 12 "3.40" s/b "3-40"



Page 385, line 4 "MR. FARMER" s/b "MR. TALBOT"

Page 385, line 19 "MR. FARMER" s/b "MR. TALBOT"



Page 387,line 9 "MR. FARMER" s/b "MR. TALBOT"



ERRATA / ADDENDA
Volume 2


Reference Action



Page 393, line 8 "MR. FARMER" s/b "MR. NICHOLSON"



Page 409, line 8 "subs" s/b "subscribers"



Page 411, line 9 "emergence" s/b "Emergis"



Page 412, line 9 "least AOL" s/b "least the"



Page 419, line 9 "PDTs" s/b "PTTs"



Page 424, line 20 Insert "MR. RYAN:"



Page 443, line 18 "has capitalized" s/b

"has been capitalized"



Page 470, line 10 Delete the word "be"



Page 471, line 14 "gong" s/b "going"



Page 493, line 10 "overbills" s/b "overbuilds"



Page 496, line 3 "3.28" s/b "3-28"



Page 497, line 25 "The Companies" s/b "the companies"



Page 507, line 7 "off a" s/b "off of a"



Page 508, line 13 Delete the word "us"



Page 510, line 11 "3.25" s/b "3-25"



Page 515, line 5 "central" s/b "essential"



Page 517, line 22 "rational" s/b "rationale"



Page 522, line 8 "4.22" s/b "4-22"



Page 530, line 9 "a per" s/b "upward"



Page 533, line 16 "10.23" s/b "10-23"



Page 539, line 12 "is aside" s/b "is set aside"



Page 541, line 8 "MR. FARMER" s/b "MS MOORE"



Page 544, line 12 "2.14" s/b "2-14"



ERRATA / ADDENDA
Volume 2


Reference Action



Page 545, line 2 "MR. FARMER" s/b "MR. NICHOLSON"



Page 546, line 9 "MR. FARMER" s/b "MR. NICHOLSON"

Page 546, line 14 "MR. FARMER" s/b "MR. NICHOLSON"



Page 547, line 7 "MR. FARMER" s/b "MR. NICHOLSON"

Page 547, line 13 "MR. FARMER" s/b "MR. NICHOLSON"



Page 548, line 12 "MR. FARMER" s/b "MR. NICHOLSON"

Page 548, line 17 "MR. FARMER" s/b "MR. NICHOLSON"

Page 548, line 22 "MR. FARMER" s/b "MR. NICHOLSON"

Page 548, line 25 "MR. FARMER" s/b "MR. NICHOLSON"



Page 561, lines 11-12 Delete the words "used to be"



Page 562, line 14 "numbers" s/b "number



Page 579, line 2 "leave" s/b "let"

Page 579, line 9 "emit" s/b "be met"

ERRATA / ADDENDA
Volume 3


Reference Action



Page 624, line 11 "know the emerging" s/b

"no rate deaveraging"



Page 625, line 25 "behind" s/b "ahead"



Page 626, line 14 "is" s/b "are"



Page 653, line 11 "comparative" s/b "competitive"



Page 654, line 18 "is that because" s/b

"is there because"



Page 658, line 6 "MR. HENRY" s/b "MS HIGHET"



Page 673, line 11 "long distance" s/b "local"



Page 698, line 13 "it" s/b "its"



Page 707, line 8 "drive forward" s/b "provide"



Page 722, line 22 "on" s/b "in"



Page 724, line 24 "in it" s/b "within"



Page 725, line 8 "described price" s/b

"describe a price"



Page 755, line 1 "loops" s/b "groups"



Page 756, line 23 "cite" s/b "citation"



Page 770, line 17 "capped" s/b "cap"



Page 771, line 23 Delete the word "notice"



Page 772, line 1 "notice" s/b "item"



Page 774, line 10 "Oftel" s/b "off-hook"

Page 774, line 24 "Oftel" s/b "off-hook"



Page 775, line 10 "Oftel" s/b "off-hook"



Page 782, line 16 "Pedcey" s/b "Peacy"



Page 786, line 12 "Oftel" s/b "Optel"



Page 788, line 19 "trim" s/b "term"

ERRATA / ADDENDA
Volume 3


Reference Action



Page 791, line 8 "is" s/b "are"

Page 791, line 24 "of" s/b "by"



Page 798, line 8 "picked" s/b "PICed"



Page 799, line 2 "picked" s/b "PICed"

Page 799, line 23 "Theresa" s/b "Teresa"



Page 818, line 22 "is standard" s/b "is a standard"



Page 837, line 25 "Parks" s/b "Park's"



Page 840, line 7 "picks" s/b "PICs"



Page 847, line 12 "ask" s/b "answer"



Page 851, line 21 "hoarder" s/b "order"

Page 851, line 24 "is" s/b "are"



Page 856, line 6 "is" s/b "are"



Page 857, line 2 "is" s/b "are"



Page 862, line "duty it is" s/b "due date"



Page 870, line 4 "pick" s/b "PIC"

ERRATA / ADDENDA
Volume 4


Reference Action



Page 896, line 21 "request" s/b "requested"



Page 901, line 7 "SPC" s/b "SBC"

Page 901, line 21 "What we is" s/b "What we see is"



Page 922, line 6 "indoor/outdoor" s/b

"indoor/outdoor distinction



Page 925, line 18 "education" s/b "communication"



Page 931, line 2 "acceptable" s/b "accessible"

Page 931, line 20 "incremental" s/b "more phones"



Page 943, line 25 "Anyone that who" delete "that"



Page 955, line 11 "is average" s/b "is the average"



Page 962, line 25 "regulatory" s/b "industry"



Page 966, line 9 "borne empirically" s/b

"borne out empirically"



Page 973, line 6 "has positioned" s/b

"has been positioned"



Page 987, line 21 "is" s/b "are"



Page 988, line 12-13 "of inability for us to serve" s/b

"we are unable to serve"



Page 991, line 6-7 "If a customer costs substantial to serve" s/b

"If the costs to serve a customer are substantial"



Page 1000, line 23 "MR. KOCH" s/b "MR. FARMER"



Page 1003, line 5 "parade" s/b "per rate"



Page 1010, line 17 "why" s/b "what"



Page 1011, line 3 "in terms of" s/b "have"



Page 1012, line 22 "perhaps" s/b "due to"



Page 1013, line 7 "uses" s/b "users"

Page 1013, line 8 "uses" s/b "users"

ERRATA / ADDENDA
Volume 4


Reference Action





Page 1019, line 17 "transmitting" s/b "transiting"



Page 1022, line 2 "MR. FARMER" s/b "MR. DIXON"



Page 1035, line 7 "not" s/b "no"



Page 1043, line 14 "be concern" s/b "be a concern"

Page 1043, line 21 "the" s/b "that"

Page 1043, line 25 "central" s/b "essential"

(two occurrences)



Page 1045, line 3 "reflection" s/b "information"



Page 1049, line 16 "I" s/b "the"



Page 1050, line 8 Delete comma, "or" s/b "in"



Page 1056, line 6 "it looks where" s/b

"it looks as if where"



Page 1058, line 12 "quality" s/b "qualify"



Page 1064, line 7 "to them" s/b "objective"

Page 1064, line 13 "that phone" s/b "the phone"



Page 1065, line 12 insert "concern" after "availability"



Page 1074, line 5 "(b) s/b "(d)



Page 1076, line 22 "pick" s/b "PIC"



Page 1079, line 21 "provide" s/b "provided"

Page 1079, line 22 Insert "effect" after "incremental"



Page 1082, line 14 "permits" s/b "permanent"



Page 1085, line 3 Insert "at" after "look"



Page 1095, line 23 "feeling like a pendulum" s/b

"facing a conundrum"



Page 1096, line 25 "measure" s/b "measures"



Page 1098, line 24 "co-carriers" s/b "competition carriers"



ERRATA / ADDENDA
Volume 4


Reference Action



Page 1102, line 18 Delete "like"



Page 1106, line 18 "lay an egg" s/b "get a log"



Page 1113, line 18 "530" s/b "5/30"



Page 1114, line 4 "530" s/b "5/30"

Page 1114, line 25 "name" s/b "named"



Page 1117, line 9 "530" s/b "5/30"



Page 1119, line 24 "generalist" s/b "generalized"



Page 1120, line 10 "530" s/b "5/30"



Page 1122, line 14 "530" s/b "5/30"



Page 1128, line 17 Insert "is" after "inside/outside"



Page 1132, line 11 Delete "a" at the beginning of the line



Page 1134, line 12 "discretional s/b "discretionary"

Page 1134, line 16 "has" s/b "have"



Page 1135, line 18 "prices" s/b "price increases"



Page 1136, line 11 "price goes" s/b "price increases go"



Page 1139, line 2 Delete "the message"



Page 1141, line 5 Delete the period after "business"



Page 1146, line 23 "profess" s/b "confess"



Page 1150, line 17 "one" s/b "the"



Page 1153, line 12 "75-23" s/b "75-25"



Page 1154, line 19 "pick" s/b "PIC"



Page 1158, line 23 "kind of go through" s/b "no-go to"



Page 1189, line 5 "prescriptions" s/b "proscriptions"



Page 1161, line 1 "was" s/b "were"

Hull, Quebec / Hull (Québec)

--- Upon resuming on Friday, October 5, 2001

at 0900 / L'audience reprend le vendredi

5 octobre 2001 à 0900

7334 THE CHAIRPERSON: Good morning, everyone.

7335 Are there any preliminary matters anyone wishes to bring to the attention of the Chair before we call the next panel? No.

7336 Mr. Henry.

7337 MR. HENRY: Thank you, Mr. Chairman.

7338 The Companies' next witness is Dr. William E. Taylor, who is testifying in relation to his economic assessment of The Companies' proposal which was filed as part of our original evidence, as well as the rebuttal evidence filed by Dr. Taylor on behalf of The Companies on September 21st.

7339 Dr. Taylor is well-known to this Commission, having appeared in various past Commission proceedings. He is currently Senior Vice-President at the National Economic Research Associates Inc., and he heads the Cambridge, Massachusetts, office where he also directs a telecommunications practice there.

7340 He has published extensively and appeared before the FCC and various state tribunals and courts.

7341 He is assisted in the back row by Mr. Fritz Schmidtz and Ms Judy Bodner.

7342 Mr. Chairman, Dr. Taylor's CV is set out in the September 20th letter, Attachment 2.

7343 Perhaps the witness could be sworn, Mr. Secretary.

7344 MR. SPENCER: Thank you.

SWORN: WILLIAM E. TAYLOR

7345 THE CHAIRPERSON: Good morning, Dr. Taylor, and welcome to our proceeding.

7346 DR. TAYLOR: Good morning.

EXAMINATION / INTERROGATOIRE

7347 MR. HENRY: Dr. Taylor, your qualifications as set out in Attachment 2 to The Companies' letter are accurate, are they?

7348 DR. TAYLOR: Yes, they are.

7349 MR. HENRY: You are responsible for Section 11 of The Companies' evidence dated May 31st, as well as The Companies' rebuttal evidence filed on 21st of September?

7350 DR. TAYLOR: That is correct.

7351 MR. HENRY: As well as those interrogatory responses set out in Attachment 2 to The Companies' letter of the 20th of September?

7352 DR. TAYLOR: Yes.

7353 MR. HENRY: Is that evidence and those interrogatory responses correct, to the best of your knowledge and belief?

7354 DR. TAYLOR: They are.

7355 MR. HENRY: Mr. Chairman, the witness is available for cross-examination.

7356 THE CHAIRPERSON: Thank you very much.

7357 I understand the first party to cross-examine Dr. Taylor will be ARC et al.

7358 Mr. Van Koughnett and Ms Lawson.

EXAMINATION / INTERROGATOIRE

7359 MS LAWSON: Thank you, Mr. Chairman.

7360 Good morning, Panel Members. Good morning, Dr. Taylor.

7361 DR. TAYLOR: Good morning, Ms Lawson.

7362 MS LAWSON: I have a number of questions on different topics that I would like to ask you about, Dr. Taylor.

7363 Maybe we could start with paragraph 11-71 of your evidence. This is just a small point.

7364 DR. TAYLOR: Sure.

7365 MS LAWSON: You say there:

"Precisely because non-essential custom calling services are discretionary, regulators in Canada and the U.S. have generally priced such services to generate as much contribution as possible to keep prices low for essential services." (As read)

7366 I take it that it is your view that this is an appropriate policy?

7367 DR. TAYLOR: It is an appropriate policy? Yes, I think it has been successful back in rate of return days as a way of generating contribution difference between revenue and cost to keep residential prices low.

7368 MS LAWSON: In competitive markets, would you agree that firms should have the flexibility to price various services as they see fit, given the competitive pressures that face them?

7369 DR. TAYLOR: Almost. I think it is wrong to say that firms price services in competitive markets actually. A wheat farmer would laugh if you said: "How are you going to price your wheat?" Rather, there is a market price, and the firm can meet it or not.

7370 MS LAWSON: Would you agree that when we are looking at competitive markets, or what matters to the firm, is that they recover the totality of their costs from the totality of their revenues?

7371 DR. TAYLOR: Yes, with one caveat, and that is it is not an objective of any firm on earth, that I know of, simply to recover its costs. We think of that in a regulatory world, because in a rate of return framework that was the object. But rather, as we come to more competitive times I think it is better to think about maximizing profit as what a firm intends to do. It doesn't stop when it simply recovers what its costs are.

7372 MS LAWSON: To rephrase the question along those lines: Firms in competitive markets attempt to maximize their profits through revenues over the totality of services that they offer.

7373 DR. TAYLOR: Yes, that is correct.

7374 MS LAWSON: And if we are looking specifically at optional services here, the revenues and costs of optional services, for example, are just part of the big pot of the incumbent's overall revenues and costs of providing phone service to consumers.

7375 DR. TAYLOR: Yes.

7376 MS LAWSON: Thank you. Dr. Taylor, in a more general matter of principle, I take it you would agree that the price cap regulatory regime should rely on full competition where it can and should otherwise attempt to approximate a competitive market as closely as possible.

7377 DR. TAYLOR: Yes, that is fair.

7378 MS LAWSON: So when it is emulating a competitive market, should the price cap regime provide incentives for productivity gains that are similar to those generated by market forces in a competitive market?

7379 DR. TAYLOR: Ideally, yes.

7380 MS LAWSON: If this simulated competition model of regulation is working, should it also produce similar results to competitive markets in terms of earnings returns?

7381 DR. TAYLOR: That is hard to say. If it were working perfectly, which it never does, and all else was equal, which is a mouthful, the answer would be yes.

7382 But it is hard to compare what earnings would be, for example, in the telecommunications industry if it were completely and fully competitive in every nook and cranny in Canada. I don't know what that answer would be. And we don't know what the margins, the difference between price and cost, for any individual service would be in that world.

7383 MS LAWSON: But you do agree that in theory, if the model is working and if we knew what the appropriate returns were in a competitive market, the returns that the simulated competition model produces should be similar to those that one would see in the competitive market.

7384 DR. TAYLOR: Holding all that equal, the answer is yes, sort of over the long run, recognizing that there is a great deal of variation, positive and negative, of returns to well-behaved firms in competitive markets.

7385 MS LAWSON: Right. So we would agree there is going to be variance among different firms, according to the different conditions they face and the different management decisions and styles that they have.

7386 But overall, industry performance overall should trend toward normal investment returns.

7387 DR. TAYLOR: The long-run average for a competitive market will be limited to an efficient measure of a forward looking cost of capital. If it isn't, entry we will come in and will force earnings to fall to that level.

7388 That doesn't mean even across all participants in the market in any year that you can look at the book earnings of those firms and say that this is what competition produces. There is variation from year to year even in the average.

7389 MS LAWSON: But if we look over a period of years, then we can start seeing some meaningful results.

7390 Would you agree?

7391 DR. TAYLOR: Sure.

7392 MS LAWSON: And you would agree that a regime that resulted in ongoing substandard returns for companies industry-wide would presumably need to be adjusted at the time of the review of that regime?

7393 DR. TAYLOR: No, not at all. I presume by this you mean telecommunications under price cap regulation.

7394 We don't have the luxury of having many regulated firms competing for the same customers under the same price cap plan. So there are a lot of reasons why earnings could be deficient in some accounting sense for a regulated local exchange carrier in Canada today that had nothing to do with the failure of the plan.

7395 It can well have a lot to do with the failure of the company. It is very important that that failure be recognized in lower earnings. That is the object of the game.

7396 MS LAWSON: Let me get this straight -- and of course my question was not about specific companies. It was premised on ongoing clearly substandard returns across the industry, all companies in the industry earning well below what their shareholders would consider a reasonable return.

7397 You would say that there would be no justification at the time of the prescheduled price cap review to consider that and adjust?

7398 DR. TAYLOR: To consider earnings per se, no, I don't think there is a role for considering industry earnings or firm earnings in a review of the price cap plan.

7399 We all wrote a contract five years ago that said we are through with accounting earnings in setting prices. If companies can make money at the given set of prices with the given price constraints, great; if they can't, too bad.

7400 Here were are five years, four years later, thinking about whether the process is working or not.

7401 There may be reasons to revisit the process, but actual accounting earnings of the participants, in my mind, isn't one of them.

7402 MS LAWSON: Even if they are earning zero rates of return across the board.

7403 MS LAWSON: Yes. There is probably a good reason why they ere earning zero, and it may have something to do with a failure of the plan. But per se, the fact that they are earning zero wouldn't trigger a necessary adjustment in my mind.

7404 MS LAWSON: It shouldn't be considered by the regulator?

7405 DR. TAYLOR: No. That is correct.

7406 If you had a zero earnings and could point your finger at some aspect of the plan that was leading to that, as opposed to change in taste, cable telephony taking over the business, cellular companies cutting their prices and local companies going out of business. Those are reasons to think about and reasons that you might want to adjust the regulatory regime.

7407 To my mind, the contract is a contract, and it didn't involve changes in the contract on account of earnings. Otherwise --

7408 MS LAWSON: Excuse me, Dr. Taylor, I just need to interrupt you because you are slipping again, I think. We are not in the middle of the price cap regime. The contract was for a certain number of years.

7409 We are now at the point of the review. There was no contract about what is examined at the time of the review.

7410 Would you agree?

7411 Let me ask you this question: Would you agree with me that the contract you are talking about has to do with the term of the price cap, not what you look at at the time of the review?

7412 DR. TAYLOR: Yes and no. Certainly, there was a contract in the first price cap regime in Canada, and I am sure you know its details better than I.

7413 However, if it were intended by the Commission to carefully measure accounting earnings and at the end of the contract to appraise the contract on the basis of accounting earnings, all we would have done five years ago would have been to create rate of return regulation with a known five-year lag.

7414 I thought we did something more.

7415 MS LAWSON: Fair enough. Let's move on, Dr. Taylor, to paragraph 11-64 of your evidence.

7416 DR. TAYLOR: Yes.

7417 MS LAWSON: You are here, I think, defending the incumbent's proposal to increase rates for non-competitive services.

7418 DR. TAYLOR: To have the flexibility to.

7419 MS LAWSON: Yes. The title is "Service Prices are Effectively Constrained under the Plan", the proposal.

7420 DR. TAYLOR: Yes.

7421 MS LAWSON: In the latter part of that paragraph you state:

"In markets where customers currently have no alternative source of supply today with low barriers to entry, price increases by an incumbent would increase existing margins and attract entrants, so long as they could make a profit at the higher price. Because entry would provide substitutes to which consumers could shift, the incumbents would have to consider the effect of this potential entry when making strategic decisions about the profitability of a contemplated price increase." (As read)

7422 DR. TAYLOR: Yes.

7423 MS LAWSON: I take it from this comment that it would be realistic to expect that The Companies may not take the full amount of the increases that they would be entitled to under their proposals if they perceive a risk that such increases would result in increased competitive entry and resulting market share loss that would ultimately be to their financial detriment.

7424 DR. TAYLOR: I think it is fair to say that they will take into account the effect of an increase in business or residence basic exchange rates on probability in the success of entry, because entry barriers are low.

7425 Whether that means the market price toward which competition is evolving is higher or lower than current rates, I don't know.

7426 MS LAWSON: Let's put it a different way. If the incumbent's proposal were accepted and if they determined that a rate increase that they were entitled to in any given year would lead to such a level of competitive entry that they would end up with a lower profit, despite the higher rate, they wouldn't take the allowed rate increase. That would not be rational.

7427 DR. TAYLOR: That is correct.

7428 MS LAWSON: Dr. Taylor, if the purpose of raising the price cap is to promote competition, allowing The Companies the flexibility not to take or even to reduce rates can actually undermine that objective.

7429 DR. TAYLOR: You have lost me.

0920

7430 MS LAWSON: We have just agreed that under this model companies are going to not take the increases they are entitled to or they could even reduce their rates if they feel that that will limit the competitive entry. They are going to be acting strategically in response to the competitive threats that they perceive. Correct?

7431 DR. TAYLOR: Correct. With the overall aim of long-run profit maximization.

7432 MS LAWSON: Right. So if the purpose of -- you may disagree about the purpose of the price cap, but let's just say if the purpose of allowing these rate increases is to promote competition in this industry, how does allowing The Companies, then, not to take the increase, or even to reduce the rates, achieve that purpose? Doesn't it actually potentially undermine that purpose?

7433 DR. TAYLOR: I see where you went. Yes.

7434 The answer is no. We need another adjective; namely, "efficient competition". That is, if the -- let's take residential access rates today. If they are below what a competitive market price -- there were hundreds of entrants and it was like the wheat market -- if the current price is below the competitive market price, then the ability to raise price, raising prices will be profitable for the regulated firms and more entry will occur. We will move towards an equilibrium in which there may be additional competitors. There may not. It's an experiment. We don't know what the true scope for competition is going to be.

7435 Alternatively, take the business market where it may be, in some circumstances, that rates might be too high, that is higher than the market rate, if that were the case then we would have entry today that we wouldn't want to have in the sense that in a competitive market equilibrium those firms wouldn't be here.

7436 MS LAWSON: You would agree, Dr. Taylor, we shouldn't be subsidizing inefficient competition through artificially high rates?

7437 DR. TAYLOR: Yes, that is correct.

7438 MS LAWSON: How do we determine whether a potential entrant is efficient or inefficient?

7439 DR. TAYLOR: We don't. We have a market test.

7440 MS LAWSON: So we don't know until the damage is done, right, until consumers are left without service or disrupted service when the company goes out of business.

7441 DR. TAYLOR: Well, I'm lost. When a new entrant goes out of business?

7442 MS LAWSON: Yes. If it turns out to have been an inefficient competitor.

7443 DR. TAYLOR: Oh, well, disruptive. I mean, one, that is the nature of competition. If you want assurance of continued service, then we had better nationalize the telephone companies and make them a grant or the army or something.

7444 Competition doesn't do that. It is an active sort of thing. I change the supplier of my automobiles every time I buy an automobile and I am not disrupted.

7445 When telecommunications customers lose their service, which we have in the United States as some CLECs have gone out of business -- customers are an asset, just like equipment is an asset, and a valuable asset, and it is in everyone's interest to serve those customers. As far as I know, there aren't horrible complaints that the process as a whole has been bad for consumers.

7446 MS LAWSON: No. My point is just I'm trying to get at how we can know. I think you have already said we can't really know in advance. It's up to the competitors to decide whether they can make a business case out of it or not. Right?

7447 DR. TAYLOR: Oh, that is correct.

7448 MS LAWSON: Okay.

7449 DR. TAYLOR: We don't know the outcome of the process.

7450 MS LAWSON: Right. Now, if it turns out, though -- and I ask you to make this assumption -- if a competitor's costs are significantly higher than the incumbent's costs, should retail rates be increased to a level that provides the competitor with an attractive margin, regardless of the incumbent's costs and margins?

7451 DR. TAYLOR: Not in my view.

7452 MS LAWSON: No. Because that would amount to subsidization of inefficient competitive entry. Correct?

7453 DR. TAYLOR: Yes, which would, in the end, be bad for consumers.

7454 MS LAWSON: Okay. Thanks.

7455 Dr. Taylor, can we move on to paragraph 11-33 of your evidence. This again is just another small point --

7456 DR. TAYLOR: Sure.

7457 MS LAWSON:  -- I want to go over with you.

7458 You are talking about alternatives for local telephony. In paragraph 11-33 you are talking about wireless or mobile service and you say there in the middle of the paragraph:

"Mobile service has become a viable substitute for landline local service, particularly in underserved areas." (As read)

7459 Now, would you agree, Dr. Taylor, that mobile service is in the nature of a personal communication device? Precisely because the phone is mobile, it makes sense for an individual but not as a shared service for, say, a family of five.

7460 DR. TAYLOR: Well, no, Ms Lawson, I don't think I would agree.

7461 Mobile service has that advantage over wireline service that you can put it in your pocket and carry it away. On the other hand, wireless service can sit on the desk at home and everyone can use the phone.

7462 The idea behind the sentence you read actually comes from underserved areas. What we do with them in the western part of the U.S., often where the ILEC is unable or unwilling or whatever to provide adequate wireline service, they are now obliged to give people a mobile line in order to get them on the network, and under some circumstances it appears that that is not a bad long-term solution.

7463 MS LAWSON: Well, let me just clarify.

7464 You are not talking about fixed wireless service here. You are talking about a cellular phone. The old-style wireless --

7465 DR. TAYLOR: Correct. Mobile.

7466 MS LAWSON:  -- terminals that people walk around with. It's mobile. Yes.

7467 DR. TAYLOR: Yes.

7468 MS LAWSON: Well, I guess I'm not understanding.

7469 Are you saying it is a perfect substitute in economic terms for a landline service?

7470 DR. TAYLOR: No. No, not at all. It is becoming closer and closer, that is in the sense that as the cost, the price of mobile service converges to that of landline plus usage, which is getting close in the U.S. and I think in some parts of Canada, it is getting to be a nearly perfect substitute. I wouldn't call it quite that because it is more than a perfect substitute, that is mobile has a characteristic that wireline does not have, you can walk around with it.

7471 MS LAWSON: Are there any features of wireline service that you are aware of that wireless does not have?

7472 DR. TAYLOR: Sometimes quality and sometimes privacy, but those are small for most of us.

7473 MS LAWSON: But they may be significant for some people. You agree?

7474 DR. TAYLOR: For bond traders possibly. Yes, under some circumstances those differences may matter.

7475 MS LAWSON: Just to get back to my earlier point, because I don't think we fully understand each other on it.

7476 If you have, say, a family of five people in a house and they want to have -- and can only afford one line in that house, what would you advise them to get? What makes sense for them to get?

7477 DR. TAYLOR: Suppose the price were the same, the monthly price were the same for --

7478 MS LAWSON: Okay, let's -- yes.

7479 DR. TAYLOR:  -- a mobile set as for a wireline subscription, my advice, if it were the same, would be to get a mobile set because it sits on the table just like your ordinary wireline telephone. Your son may walk off with it, but I suppose you could tie it --

7480 MS LAWSON: I guess that is my point, Dr. Taylor, someone may walk off with it.

7481 DR. TAYLOR: You could always tie it to the table. That's not a --

7482 MS LAWSON: They could tie it to the table, okay.

7483 Let's move on, Dr. Taylor, to paragraph 11-50.

7484 Here you mention that:

"In the United States regulators have had considerable experience adapting price cap regulation to conditions of increased competition, at least for subsets of services." (As read)

7485 You say later on in that paragraph:

"As the U.S. price cap plans have expired, proposed next generation price cap plans have evolved away from overall price constraints determined by inflation and a productivity offset towards caps for residential basic exchange service and pricing flexibility for most other services." (As read)

7486 You provide the example of Maine, which in the footnote there you say:

"In June 2000, the Maine Commission, after capping basic local rates at current levels, gave Verizon pricing freedom on all other retail services except for directory assistance and other operator services." (As read)

7487 DR. TAYLOR: Yes.

7488 MS LAWSON: Correct?

7489 You have also provided us with a table. You provided a table in your evidence, I guess first of all, at page 164, following paragraph 11-91, where you listed all the states in the U.S. The title is "Sharing is Rare in Current U.S. Incentive Regulation Plans."

7490 Your point there is that very few States here are using the classic earnings sharing model. Right?

7491 DR. TAYLOR: Yes.

7492 MS LAWSON: We asked you to provide a little more detail on each of those States' plans. You provided that kindly in Interrogatory Response The Companies(ARC et al)104 attachment. I would like you to pull that up, please.

7493 DR. TAYLOR: I'm there.

7494 MS LAWSON: So we have a four-page attachment listing each State and a very brief description of the type of regulatory regime that State is operating under.

7495 I have reviewed this table in some detail. My review, together with the evidence you have provided here in the preceding paragraphs, indicates to me that of the American States, seven still use rate -- I'm looking here just at how they regulate basic local residential service, okay.

7496 DR. TAYLOR: Okay.

7497 MS LAWSON: Just basic local residential rates.

7498 Seven of them are using rate of return regulation. That is actually stated in your paragraph 11-60.

7499 One provides the regulator with discretionary action with respect to rates, sort of deregulated but the regulator is allowed to come in and say "No, you can't do it" or "You have to lower your rates", or whatever.

7500 Five of them have indexed caps of which four, the index is less than inflation. And 32 have non-indexed caps, rate freezes and/or rate reductions for basic residential local service.

7501 The remaining five or so were unclear to me from the evidence you provided.

7502 But would you agree with me, Dr. Taylor, that the vast majority of U.S. State regulators are, in fact, reducing basic local rates, either in real or nominal terms?

7503 DR. TAYLOR: Almost. I think if I were to characterize the treatment of basic residential service in State price cap plans -- or State regulatory plans, the modal method is a freeze on basic residential rates. So that is a reduction in real terms and a freeze or a cap in nominal terms.

7504 MS LAWSON: Thank you very much, Dr. Taylor.

7505 Those are my questions, Mr. Chairman.

7506 I am going to pass the microphone over to Mr. Van Koughnett to continue.

EXAMINATION / INTERROGATOIRE

7507 MR. Van KOUGHNETT: Mr. Chairman, Mr. Taylor, my questions will relate simply to the question of quality of service and how it should be addressed in this proceeding for residential subscribers.

7508 Dr. Taylor, can we begin at page 133 of your evidence, please?

7509 DR. TAYLOR: Sure.

7510 MR. Van KOUGHNETT: I'm looking at the bottom under 11.2.3 where you state:

"Unlike the current regime, The Companies' proposal applies different price constraints to services within the residence and business service category. Each service is treated according to the degree of competitive activity currently experienced in Canada. Thus, under The Companies' proposal each residence or business service is subject to a price constraint designed to protect consumers and/or the competitive process as required by market conditions." (As read)

7511 Can I just stop there for a moment and say that I gather from the thrust of your testimony and the manner in which you phrase the text that you approve very much of the notion of separating out services into separate categories depending upon the degree of competitive activity currently experienced, and indeed forecast to be experienced over the forthcoming price cap regime?

7512 DR. TAYLOR: Yes.

7513 MR. Van KOUGHNETT: The thrust of your testimony is clearly to support The Companies' proposals and therefore you would be supportive of each of the categories as they have been selected, in general terms?

7514 DR. TAYLOR: That is correct.

7515 MR. Van KOUGHNETT: So now if we can just go on, then, to the next page and look under "Basic Residential Services," we see a brief synopsis of what the company is proposing:

"The proposal treats prices for services in high-cost areas differently from service prices in non-high-cost areas. Prices in high-cost areas currently low-cost would be allowed to increase from current levels at a pace not exceeding $2.00 per line per year. On average prices in non-high-cost areas would be allowed to increase by the rate of inflation each year." (As read)

7516 If I can just stop there. If I am reading these two pages correctly, then, you are impliedly stating that regulation of the primary exchange rates paid by residential subscribers is appropriate and in the public interest for the next price cap period?

7517 DR. TAYLOR: Yes. Continued price regulation, in my view, is still an appropriate thing for basic residential service.

7518 MR. Van KOUGHNETT: So it would follow, then, would it not, that if you were asked to testify on behalf of a company in another jurisdiction where it was proposed that residential primary exchange service be unregulated over a forthcoming price cap period, you might be somewhat reluctant to support that proposal?

7519 DR. TAYLOR: Not at all. There are jurisdictions, I can think of one in the United States, where there is sufficient competition that I would move basic residential service into a competitive category. It depends upon the state of the market.

7520 MR. Van KOUGHNETT: It depends upon the forecast competition in that sector of the market in the jurisdiction in question?

7521 DR. TAYLOR: Existing and forecasted, yes.

0935

7522 MR. Van KOUGHNETT: In this context could we please then turn to your response to Interrogatory The Companies(GT)-25 at page 3 of 3.

7523 Thank you. I would like to focus on the two sentences that constitute your response to part (b) to the question that appears in the middle of page 3. You state:

"In theory, if competition is inadequate to constrain The Companies prices for wholesale services, it is also inadequate to ensure an adequate level of service quality. That is, it makes no sense to regulate price without regulating quality."

(As read)

7524 You are, of course, as the sentences state on their face, addressing wholesale services -- this is a GT interrogatory response -- but is it not safe to say that you would apply those sentences more generally?

7525 DR. TAYLOR: Yes, that is correct. Just think about it naively, what sense does it make if a company has market power, the ability to change price, hold price above the competitive level, what sense would it make to try to control the price if you didn't also control the quality of the service.

7526 MR. Van KOUGHNETT: So these words would be equally applicable to residential primary exchange service in this proceeding.

7527 DR. TAYLOR: That's correct.

7528 MR. Van KOUGHNETT: So this, of course, leads to the view that you would support, the regulation of service quality over the forthcoming price cap period in this jurisdiction, for primary residential exchange service, does it not?

7529 DR. TAYLOR: Yes. I have no problem with the principle. The phrase says "in theory" of regulating residential service quality. I believe you have to.

7530 MR. Van KOUGHNETT: So one of the tasks that you might advise the Commissioners in this proceeding that they could appropriately -- should appropriately take on, is to seek an efficient and effective means to regulate service quality for residential primary exchange service.

7531 DR. TAYLOR: Well, if it doesn't already have one. I'm not in a position to say that the service quality rules that this Commission has had over the last 30 years are necessarily thrown out the window.

7532 You have the same incentive before we had price caps regarding service quality and the mechanisms that this Commission has used to provide the level of service quality that people have today are just as valid today as they were under a rate of return regulation.

7533 It's not clear that we have to move to something different, but I would agree that we do have to regulate service quality.

7534 MR. Van KOUGHNETT: Well, can we please cast our mind back to the era of rate base rate of return regulation and look to the way in which service quality was policed in this jurisdiction -- and I believe equally in others -- very briefly as an underpinning to this discussion?

7535 Isn't it the case that these -- these words to me, these two sentences to me, have resonance with what this Commission and others have often said, that just and reasonable rates -- under rate base rate of return regulation just and reasonable rates have, as their underpinning, quality certain service quality measures.

7536 DR. TAYLOR: Yes. I think that's correct.

7537 MR. Van KOUGHNETT: So under rate base rate of return regulation that notion was actually translated into occasionally, where service quality was particularly bad, a financial penalty to the company in question.

7538 DR. TAYLOR: I'm sure you know the Canadian history better than I. That is not uncommon in my experience.

7539 It is more than that typically, however. Generally, the Commission monitors various measures of service quality. If they go south the Commission uses whatever arm-twisting it has. One piece of that is a financial penalty. Another piece of it is telling the company to straighten out and fly right.

7540 What we have seen, at least in the jurisdictions that I am familiar with, have been a historical mix of service quality regulation like that.

7541 MR. Van KOUGHNETT: Can we just explore and nail down the rate base rate of return mechanism for the benefit of the Commissioners who perhaps were not on the Commission at the time of rate base of return.

7542 Can I just get you to agree with me the manner in which rate base rate of return approached this question very briefly.

7543 Rate base rate of return, either a revenue requirement proceeding commenced by the Commission itself or an application by The Companies for an increase, led to, for most jurisdictions, a forecast test year --

7544 DR. TAYLOR: Yes.

7545 MR. Van KOUGHNETT:  -- where the Commission would take a look at forecast revenues, scrutinize what it felt to be an appropriate number for forecast revenues, forecast expenses for the test year in question, and an appropriate rate of return based upon unregulated companies, companies in the unregulated sector of the economy, in order to come up with a revenue requirement, generally speaking. Correct?

7546 DR. TAYLOR: So far, yes.

7547 MR. Van KOUGHNETT: So far.

7548 DR. TAYLOR: There is still more.

7549 MR. Van KOUGHNETT: Generally speaking, a range was established for a rate of return, in light of the fact that one was dealing with forecast data, and, generally speaking, absent service quality considerations rates were set by the Commission to achieve the mid-point of the range of the rate of return?

7550 DR. TAYLOR: Subject to check. I'm not sure. I'm not that familiar with rate of return regulation in Canada, but that is not unusual in my experience.

7551 MR. Van KOUGHNETT: Now to the quality of service component, if the service quality was significantly below standards that the Commission felt appropriate in the context of this rate case or revenue requirement proceeding, the Commission might then, as its financial penalty, set rates to achieve a rate of return below mid-point of the range, perhaps even the bottom of the range in question?

7552 DR. TAYLOR: That is certainly one of its tools. It has others. I again can't speak much to the Canadian experience, but another one is: Sure, you have a revenue requirement and as soon as your quality of service reaches standard levels we will deal with your rate of requirement.

7553 That is not an explicit two points on the rate of return penalty, but rather you fix it and then we will talk to you. That is not an uncommon thing either.

7554 You have focused on more or less a mechanical way in which a Commission can enforce its service quality of standards, and I agree with you that that works, and that there are less mechanical ways as well.

7555 MR. Van KOUGHNETT: Can we turn, then, still in the same context, to page 161 of your evidence. Here I would just like to touch base with you concerning the first sentence in the first new paragraph, 11-83. Here you state:

"It is well known, of course, that the efficiency properties of pure price cap regulation are superior to those of rate of return regulation and earnings sharing regimes." (As read)

7556 The reason I am focusing on this sentence is simply to address with you that the evidence adduced to date in this proceeding appears universally to prefer price cap regulation to rate base rate of return regulation.

7557 DR. TAYLOR: I would agree with that.

7558 MR. Van KOUGHNETT: Nonetheless, from the point of view of the residential subscriber the two tools that we have addressed, the one that I suggested, which in fact this Commission has used, and the one which you suggested, which is to delay a revenue requirement or delay a general rate increase proceeding -- which I would have thought illegal, at least in this jurisdiction -- both of those tools have been lost as a result -- both of those mechanical tools have been lost as a result of a move from rate base rate of return regulation to price cap regulation, haven't they?

7559 DR. TAYLOR: Yes, that's correct.

7560 MR. Van KOUGHNETT: And lost forever, if one accepts the evidence in this proceeding that we are not going back to rate base rate of return?

7561 DR. TAYLOR: Yes. The two particular rate of return were -- price-related tools that were used in a rate of return context don't work when the Commission turns over control of prices to a formula, begging one exception I guess.

7562 There are exogenous cost arrangements in a cost price cap plan and, I suppose, if service quality died and the Commission were to order some change in procedures that would fix it, there might be a way to do that in the context of an exogenous cost, but I'm just guessing.

7563 MR. Van KOUGHNETT: The Companies have proposed a residential service quality guarantee in this proceeding. May I take it that you are generally familiar, as the saying goes --

7564 DR. TAYLOR: Yes.

7565 MR. Van KOUGHNETT:  -- with this aspect of the proposal.

7566 This aspect of The Companies proposal is, if viewed from a sufficient distance, say 30,000 feet, analogous to the "Q" factor found in many jurisdictions, is it not?

7567 DR. TAYLOR: No, not in my taxonomy.

7568 A "Q" factor, at least in the U.S. among State regulatory plans, a "Q" factor is like a "Z" factor or an "X" factor. It is a number which would be calculated mechanically and at the end of the year it would be turned into a percentage change in the price cap index with which the company would then have to live.

7569 That's what a "Q" factor means to me and that is very different from what The Companies, I think, are proposing.

7570 MR. Van KOUGHNETT: Can you just go on then and do the other half.

7571 The guarantee, as you would see it in The Companies proposal, would instead --

7572 DR. TAYLOR: Would instead entail, as I understand it, a set of standards that The Companies must meet and financial penalties that would -- not necessarily it doesn't, as I read it, claim to be tied to the price cap index, but rather writing a cheque is what financial penalty means to me if those standards are not met over significant periods of time.

7573 MR. Van KOUGHNETT: Right. It was not meant to be a trick question.

7574 The residential service quality guarantee as proposed by the company applies a penalty in respect of the year in which the service quality services have gone south. The "Q" factor model, I agree with you, takes a look at an add-on to the GDPPI price deflator, if there is one, for future years.

7575 But my point is, in each instance there is a financial penalty that is there for The Companies to see as an incentive to provide service quality up to the standards of the service quality measurements of the jurisdiction.

7576 DR. TAYLOR: Yes, that's correct.

7577 That is not uncommon in the U.S. as well, that is that service quality regulations are enforced by means of explicit penalties.

7578 MR. Van KOUGHNETT: In other words, you would be in favour of the notion, regardless of the individual details, of either a residential service quality guarantee or a "Q" factor, for example.

7579 DR. TAYLOR: Well, I have steadfastly fought two factors in the sense that they are unlike the guarantee.

7580 A "Q" factor has to aggregate all of the sins of the company into a single number, turn that number into a percentage drop in the price cap index. That has a whole lot of other problems involved in it, that is weighting the various elements of service quality failure that we don't have to play with much if we have individual penalties for individual acts.

7581 MR. Van KOUGHNETT: Hold on. Okay. You have introduced the third one which is later on my page.

7582 Are you now talking about penalties that would cause rebates to individual subscribers for a failure to meet, for example, an appointment date to the individual subscriber?

7583 DR. TAYLOR: No, no. I'm still speaking of there are probably a thousand measures of residential service quality that we could agree should be in such a plan. The Companies plan says take the thousand, or some subset of them hopefully, and we will attach a penalty to failure to meet those plans.

7584 It is not a cheque written to the individual, it is still failing to meet an aggregate, if you like, over customers' measure of quality of service.

7585 A "Q" factor goes one step further and it says: Add together failing to keep appointments, failing to answer the phone, blah, blah, blah, into a single number, an index if you like, and turn that into a penalty as far as the price cap index is concerned.

7586 MR. Van KOUGHNETT: I think you might be wrong about the residential service quality guarantee, so I better -- I don't want to force you as the external expert into, you know, a level of detail that you are not comfortable with.

7587 Could we agree to this proposition, that the "Q" factor looks forward, the residential service quality guarantee looks backward. The residential service quality guarantee, as proposed by the company in their portion of -- which is Interrogatory CRTC-503, expanded in 1503 and 1504 -- does look at the individual indicators that the Commission has prescribed, does look at the months that the company has passed or failed --

7588 DR. TAYLOR: Correct. That is my understanding.

7589 MR. Van KOUGHNETT:  -- does come up with a total number, which is a total dollar figure. That total dollar figure is, at least from 30,000 feet, very much analogous to a per cent figure, because the per cent figure comes from the same mathematical calculation, does it not?

7590 DR. TAYLOR: I guess the difference is -- I share your understanding of The Companies plan and I agree with you that adding up the $100 here and the $100 here does combine the different elements of a company's failure. I guess the difference is: What happens when, in a "Q" factor, the price cap index changes? That is different from writing a cheque.

0950

7591 MR. Van KOUGHNETT: In the sense that?

7592 DR. TAYLOR: In the sense that in writing a cheque, that doesn't affect prices for example. Lowering the price cap index, depending on how the company is permitted or chooses to respond to a reduction in its price cap index, has a very different effect.

7593 MR. Van KOUGHNETT: Okay. But from the point of view of the residential subscriber he or she pays "X" dollars over the year and gets a cheque back for "Y" dollars, so he has paid "X" minus "Y" dollars, or he pays in the future "X" minus "Y" dollars for the future year. It is, I appreciate, mechanistically different, but conceptually, from the point of view of both the subscriber and the company, there is a similar thinking.

7594 DR. TAYLOR: Let me give you a simple example.

7595 Suppose the company is pricing below the price cap index in aggregate. Something we observe in the U.S. where competition is important. AT&T under its price cap plan was pricing well below the price cap index at the time that it was removed from price regulation. In that case, a "Q" factor has no effect at all.

7596 MR. Van KOUGHNETT: Yes, I do see.

7597 Can we move onto the third one which I thought you introduced wrongly a moment ago, which is rebates to individual subscribers. Do you have a view on those?

7598 DR. TAYLOR: I guess. I didn't address this at all in my testimony.

7599 On the one hand, rebates, in addition to whatever is in the tariff, as far if you fail to meet an appointment you don't charge for the appointment or whatever, but a rebate has the advantage that the injured party, namely the consumer, gets something for his trouble.

7600 It has possibly the disadvantage that it sets up a possibility of moral hazard in a transaction, not so much on the consumer side, that is consumers would probably rather have the repairman there than a cheque for $25 and the repairman there next week. But still, so many of these transactions, and particularly when we come to wholesale services, involve mutual trust and working together.

7601 Any time you stick a financial wedge into that ant hill you may cause some problems that you don't like.

7602 Those are my caveats that suggest you should be careful if you do consumer-specific rebates, though they do, as I say, have the advantage that they reward the offended party.

7603 MR. Van KOUGHNETT: In a sense they are not mutually exclusive options either.

7604 DR. TAYLOR: That's correct. I mean, from an economist's perspective what I really care about is that the ILEC -- excuse me, the LEC -- have exactly the right incentives to provide high-quality service. Whether the people that the LEC inadvertently offend get reimbursed for their troubles is a lesser concern of mine.

7605 So I really care about the incentives that the company faces, and for that it doesn't really matter whether the cheque goes to the individual or the cheque goes to the State, or wherever else it could go.

7606 MR. Van KOUGHNETT: You have nicely touched on the next question I wanted to ask you.

7607 How does one determine the quantum -- and I agree with you, what you want is the exactly correct incentive. How does one define -- what did you mean by "exactly correct incentive"?

7608 DR. TAYLOR: Just the obvious. I have this view, this picture of the folks back at Bell Canada headquarters, the great big dial in the office, and they can choose to set service quality by moving that dial anywhere from 0 to 100, where 100 is meeting both the Commission standards, whatever they are, and market standards. I envision the incentives to be -- perfect incentives to be those that induce Bell Canada pursuing its own self-interest to keep the dial at 100.

7609 MR. Van KOUGHNETT: So that one must make sure that the penalty regime or penalties regime, however it works, in the aggregate, is such that if the company has an incentive to meet the service quality standards as opposed to paying the penalties as simply a cost of doing business?

7610 DR. TAYLOR: That's correct. You said "in the aggregate" and I agree that is an important thing, but what is even more important is in the individual, that is for the individual list of measures of service quality. One of the big dangers in all of these plans is that the vector of service quality characteristics is very long and very important, and my experience with phone companies are: If you tell them what to do, and in particular if you give them a financial incentive, they are going to do it.

7611 So whatever vector of characteristics comes out of this or another proceeding, you can bet that the local exchange carriers are going to meet it.

7612 Now, the danger is that by meeting those they may find that they have to ignore others and you may have made consumers worse off. So you have to be very careful about that.

7613 These incentives are very powerful incentives. Like the Russian boot factory that only made left boots because they only counted boots in the requirement, you don't want to do that.

7614 MR. Van KOUGHNETT: One of the problems that I have had in approaching the question of quantum -- and let's just focus our attention on the residential service quality guarantee so that we avoid any issues that may be between us concerning the difference between that and the "Q" factor.

7615 DR. TAYLOR: Sure.

7616 MR. Van KOUGHNETT: This Commission and others have, of course, explored quality of service indicators over many years, and have revised them as circumstances have so required.

7617 DR. TAYLOR: Sure.

7618 MR. Van KOUGHNETT: And they are not different from jurisdiction to jurisdiction. But some of them cost a lot more to meet than others.

7619 DR. TAYLOR: Yes.

7620 MR. Van KOUGHNETT: So to set the quantum exactly right so that it is, let's say, $1.00 more for a penalty than to meet the standards, maybe that is what one might define, to use your words, as the -- I can't remember your words -- perfect incentive.

7621 One would have to make sure -- the math is probably incredibly complicated, isn't it. Just plain math is difficult to do because you have to speak to provisioning the most expensive of the indicators to meet. Some of them would simply require, presumably, more customer service reps.

7622 DR. TAYLOR: Right. And you have only addressed half the problem. If we were doing this, if this were the Soviet Union and we were doing this on a planning basis, we would have to know not only what the cost, the incremental cost of improving each one of the service quality indicators is, we would also have to know what consumers are willing to pay for it, that is how much -- not just how much it costs to get the phone picked up at the representative's office in 30 seconds or 10 rings, it is how much people are willing to pay for 10 rings rather than 9 or rather than 11.

7623 If you are going to this correctly at the margin, we should trade off the incremental cost of one less ring against what people are willing to pay for it. That is how in theory, if we had all the data in the world, we would try to set this immensely complex vector of service quality standards and penalties.

7624 MR. Van KOUGHNETT: Yes, I see your point. In fact, it has some resonance with what you were saying to Ms Lawson before, that it could be the case, that in the longer term the Commission might want to revisit some of the very well-accepted quality of service indicators from the base rate of return regime. It could be that one lesson we can learn from the rapid increase in mobile subscriptions is that people don't mind a degradation of service quality in comparison to what we used to think was the standard that people aspired to.

7625 DR. TAYLOR: For example, we did that experiment in the U.S. when we started long distance competition. The first year or so if you wanted to use MCI, which was very cheap, you had to dial 27 digits or so, a big difference in service quality from that for AT&T, and people loved it. Yes, it's a pain to dial 27 digits, but the idea of getting long distance for half the cost was wonderful.

7626 As an economist I thought it was great. Finally in this monolith people have a choice. You can pay a lot of money for high-quality service or a little money for low-quality service. That is a good thing. I'm ashamed to say that equal access has made all that go away. Consumers don't have that choice any more. You have to have good service.

--- Laughter / Rires

7627 MR. Van KOUGHNETT: Now, it won't surprise to learn that the Commission has already ruled that new quality of service indicators are not part of the four corners of this proceeding. So it wouldn't surprise you to think, I am going to suggest to you, that it would be appropriate for any change in service quality indicators to be part of another proceeding.

7628 DR. TAYLOR: It wouldn't surprise me.

7629 MR. Van KOUGHNETT: So for the purpose of this proceeding, one might want to just start with where we are -- which is, as I say, well established, they date back to 1982-13 -- and establish penalties, to the extent we are able, that so far as we can tell are at least $1.00 more than the cost to provisioning to the standards that the Commission has prescribed.

7630 DR. TAYLOR: Well, you could do that possibly, but I don't think I would trust the cost study that would be necessary. It doesn't take into account the incremental benefit that we spoke of.

7631 I think the way that, at least in the U.S, companies have been approaching service quality penalties is rather an incremental one, that is start with something, perhaps a study like the one that you suggest, though I wouldn't put much weight on it, and then see what happens. That is, the companies themselves know in some inarticulate sense what the effect of the service quality penalty is going to be, that is they may not be able to do the study in a way that they can put in front of you and you can judge, but they know from month-to-month, "Good lord, expenses are going up because we are having to do this", blah, blah, blah, "and customers are unhappy or customers are leaving because they don't like the service quality over here". You learn over time whether any given system of penalties is producing the result that you want.

7632 I think it is that sort of incremental view that I would put a little more faith in than spending a lot of time trying to get it exactly right at first, because you won't.

7633 MR. Van KOUGHNETT: One last area, Dr. Taylor.

7634 As a corollary to our discussion, would it make sense for the Commission to consider a requirement that quality of service results be audited, so long as the cost of the audit is not likely to be disproportionate to the benefit of having audited results?

7635 DR. TAYLOR: I think as an economist I have to agree with that. By definition, the Commission should do everything where the benefit exceeds the cost. I have no idea whether an audit is either necessary or makes sense, but in the hypothetical that you gave me if the benefits exceed the costs, of course.

7636 MR. Van KOUGHNETT: Thank you, Dr. Taylor.

7637 Those are my questions. Thank you, Mr. Chairman.

7638 THE CHAIRPERSON: Thank you, Mr. Van Koughnett.

7639 I believe the next party to cross-examine is AT&T, Mr. Ryan.

--- Pause

7640 MR. RYAN: Thank you, Mr. Chairman.

EXAMINATION / INTERROGATOIRE

7641 MR. RYAN: Good morning, Dr. Taylor.

7642 DR. TAYLOR: Good morning, Mr. Ryan.

7643 MR. RYAN: Dr. Taylor, I plan to focus my questions on the second piece of evidence that was referred to this morning, that is the rebuttal evidence that was filed on the 20th of September 2001.

7644 You might find it useful that have that in front of you as I am going to refer immediately to paragraph 2 of that evidence.

1005

7645 DR. TAYLOR: I am there.

7646 MR. RYAN: Looking at line 6, Dr. Taylor, you state the thesis that:

"Requiring ILECs and ILEC customers to subsidize the supply of services used by competitors, or to provide them at incremental cost without a mark-up, would turn facilities based competitors into resellers and would decimate competition for wholesale services." (As read)

7647 DR. TAYLOR: Yes.

7648 MR. RYAN: It seems to me that there are actually two propositions here -- and correct me if I am wrong.

7649 First, you are stating that requiring ILECs to subsidize the supply of services would lead to economic distortions.

7650 DR. TAYLOR: Correct.

7651 MR. RYAN: If we go to paragraph 5 of your evidence, you indicate there -- and I am looking at the second sentence in paragraph 5.

7652 It says:

"The next section addresses in detail their..."

7653 Meaning CallNet and AT&T.

"...pricing proposal for services used by competitors and shows the economic harms that would arise from subsidized provision of these services." (As read)

7654 DR. TAYLOR: Correct.

7655 MR. RYAN: As you indicate in that sentence in Part 2, which runs from paragraphs 6 to 60, I think it is, you elaborate on your views of the harm subsidization would entail.

7656 Is that fair enough so far?

7657 DR. TAYLOR: Not quite.

7658 MR. RYAN: All right.

7659 DR. TAYLOR: In the text between 6 and 60 I speak both of the harms of subsidized provision of services and of the harms of pricing essential services without a mark-up.

7660 So both of those elements are there.

7661 MR. RYAN: All right. I will come back to what I will call the second proposition that is in that sentence in paragraph 2.

7662 You don't define subsidy, if I recall your evidence correctly. But would you agree with me that --

7663 DR. TAYLOR: Sorry, I don't define it correctly or if you remember correctly?

7664 MR. RYAN: You don't define it, if I remember correctly.

7665 DR. TAYLOR: Yes.

7666 MR. RYAN: But I am sure if you did, you would get it right.

--- Laughter / Rires

7667 MR. RYAN: Would you agree with me that the provision of a service can be said to be subsidized when the price paid for that service is lower than the incremental cost of providing that service?

7668 DR. TAYLOR: Yes. The total service incremental cost and the incremental revenue are the only changes I would make to that sentence.

7669 In English, it is roughly correct; that if the incremental cost of providing the service exceeds the revenue you get from providing the service, that service is receiving the subsidy.

7670 MR. RYAN: Referring back again to paragraph 2, the second proposition that you advance in the sentence that I quoted has to do with incremental cost and mark-ups.

7671 DR. TAYLOR: Correct.

7672 MR. RYAN: More specifically, what you say is that there would be economic inefficiency unless in addition to paying incremental costs, the purchaser of a service also pays a mark-up on incremental cost, which is designed to assist the supplier of the service in recovering its common costs or joint costs.

7673 DR. TAYLOR: Yes, that's correct.

7674 MR. RYAN: I would like to look at each of these propositions in turn, then, in the context of the AT&T evidence.

7675 First, I would like to deal with the subsidy issue, if I may.

7676 DR. TAYLOR: Sure.

7677 MR. RYAN: Do you have a copy of AT&T's opening statement?

7678 DR. TAYLOR: No.

7679 MR. RYAN: You might want to have it, just for the comfort of knowing what else is in it. I am going to refer to a very short portion of it.

7680 It is AT&T Exhibit No. 2.

--- Pause

7681 DR. TAYLOR: I'm there.

7682 MR. RYAN: I am going to go specifically, Dr. Taylor, to page 2, in the second paragraph. I will read that to you:

"AT&T Canada is proposing the introduction of a facilities based carrier (FBC) rate to eliminate the existing cost advantage the incumbents have over new entrants. The FBC rate does not represent a subsidy from the incumbents to the competitors as has sometimes been claimed by the incumbents. On the contrary, AT&T Canada's proposal will in fact ensure that, in aggregate, incumbents recover the incremental cost of supplying their facilities." (As read)

7683 I acknowledge that saying it isn't necessarily the same thing as doing it. But if AT&T is as good as its word, as it says in its opening statement, at the price level it proposes no subsidy issue would arise.

7684 DR. TAYLOR: Many a slip between the cup and the lip. However, let me quibble, at least, with the middle sentence.

7685 What you say is that FBC rate does not represent a subsidy from incumbents to competitors. What we spoke of a moment earlier was whether a service or group of services was being subsidized.

7686 Would you agree, as I try to interpret this English language, that what you really mean in that sentence is that the aggregate of competitor services provided by ILECs to CLECs -- that the ILECs receive incremental revenue from that set of services that exceeds the incremental cost of providing those services?

7687 Is that what you mean by subsidy here?

7688 MR. RYAN: I want to use your definition of subsidy.

7689 DR. TAYLOR: I just did.

7690 MR. RYAN: Yes. If you say it again, I will listen carefully. I am not in the habit of trying to answer questions.

7691 Let's try to help each other. I want very much to have your evidence as a result of this cross-examination, not mine.

7692 DR. TAYLOR: Let me put it positively, then.

7693 If AT&T proved its case -- a big "if", and I disagree that it has.

7694 But if it did, and if it were using subsidy the way I use subsidy, it would then follow that what AT&T is claiming here is that the incremental revenue that ILECs get from CLECs for the provision of competitor services, a set of specific services, that the incremental revenue exceeds the incremental cost.

7695 That is what I interpret you to have claimed that your proposal does.

7696 MR. RYAN: Under that scenario, as you have described it, using your definition as you have presented it -- under that scenario, your concerns about subsidization would be alleviated.

7697 DR. TAYLOR: The concern about subsidization would be alleviated. The concern about efficient pricing of wholesale services, the second part that we spoke of, has not been alleviated.

7698 MR. RYAN: Right.

7699 DR. TAYLOR: Yes.

7700 MR. RYAN: Let's leave the first part now and go to the second part. That is the proposition concerning mark-ups on top of incremental costs, as you described it in paragraph 2.

7701 DR. TAYLOR: Yes.

7702 MR. RYAN: I think we can assume, can we not, that the retail rates being charged by the incumbents for services and facilities provided to competitors currently cover the incumbents' costs of providing those services, plus some mark-up?

7703 DR. TAYLOR: Let's be careful. Costs by costs: I assume you are going to mean incremental costs like Phase 2 costs.

7704 MR. RYAN: Yes.

7705 DR. TAYLOR: The answer is for most services, yes.

7706 MR. RYAN: Can we go to AT&T's evidence at page 35.

7707 That is the evidence dated the 20th of August, 2001, Mr. Chairman.

7708 DR. TAYLOR: Page 35, Mr. Ryan?

7709 MR. RYAN: Yes.

7710 DR. TAYLOR: Okay.

7711 MR. RYAN: My page 35 starts with Table 5-1. Is your pagination the same?

7712 DR. TAYLOR: Yes.

7713 MR. RYAN: You have reviewed this evidence, and indeed that is the subject matter of your rebuttal evidence.

7714 You will agree with me that it is AT&T's position as expressed in this evidence, and in particular at around page 35, that it pays ILECs more than the cost of the services that it receives from them.

7715 DR. TAYLOR: Well, no. You are away ahead of me. I can't infer that from this table at all.

7716 MR. RYAN: I will come to the table.

7717 AT&T's proposition is that it pays the telephone companies too much for the services it obtains from them. It pays far more than the cost of providing the services.

7718 That is the proposition.

7719 DR. TAYLOR: Are you asking me to find that proposition on this page? I don't see reference to the cost of providing the services. That is not what this story is about.

7720 MR. RYAN: Let's look at paragraph 5-11 on that page. This is one of the specific statements, at the fourth line:

"Had the services been rendered on AT&T Canada's facilities alone, the ILEC portion of the direct costs would have decreased by $304 million, a reduction of roughly 70 per cent in AT&T Canada's ILEC costs." (As read)

7721 That is one place where AT&T advances the proposition that it is paying far more than the cost of the relevant services.

7722 DR. TAYLOR: Unless I am utterly confused, Mr. Ryan, that sentence doesn't say that at all.

7723 MR. RYAN: All right.

7724 DR. TAYLOR: Let me be explicit about what it doesn't say.

7725 MR. RYAN: All right.

7726 DR. TAYLOR: It doesn't address anywhere what the ILECs' cost of providing the wholesale service is. It simply speaks to what AT&T Canada would pay if it had its own network and had no costs, compared with what it pays today.

7727 I can't see anywhere where the ILECs' cost comes into that calculation.

7728 MR. RYAN: All right. We did agree a few moments ago, though, did we not, that we could assume for practical purposes that the prices that the ILECs charge for the services that they provide cover their costs, plus a mark-up -- the retail prices they are charging at the moment to competitors.

7729 DR. TAYLOR: There are a whole set of prices that they charge to competitors. Some are for retail services that competitors use. Some are for essential facilities and near essential services, which are priced differently, Phase 2 plus a mark-up.

7730 MR. RYAN: But at a price that is sufficient to cover incremental cost plus a mark-up, as you say.

7731 DR. TAYLOR: Yes.

7732 MR. RYAN: Let's look in detail at Table 5-1, then, and what it is suggesting.

7733 DR. TAYLOR: Sure.

7734 MR. RYAN: We have here, as the table indicates, a comparison prepared by AT&T of its financials based on provision of its services over the present type of network it uses, which is referred to as a hybrid network, an on net scenario, which is described in the evidence.

7735 We have in column 1 actual financial results that the company has achieved, and then in column 2 we have the hypothetical or theoretical costs that the company would incur in a scenario that is described in the evidence, whereby it provides the services that it does to its customers, not with the use of telephone company facilities for the most part but by moving traffic on to its own network.

7736 Are you with me so far on that?

7737 DR. TAYLOR: I am. I would quibble -- and we will come back to it, of course -- whether that is all the costs that it would incur in carrying the traffic on its own network, in the second column.

7738 Aside from that, that is what it claims to be showing.

7739 MR. RYAN: For instance, under the actual financial results we have ILEC cost of goods sold, $421 million, which, put another way, represents the payments that are currently being made to ILECs for services received from them.

7740 DR. TAYLOR: Yes.

7741 MR. RYAN: And then there are other costs of goods sold, which represent an assortment of other costs that AT&T presently incurs, yielding a total cost of goods sold of $817 million, for instance.

7742 Are you with me so far?

7743 DR. TAYLOR: Yes.

7744 MR. RYAN: Moving to the hypothetical column and going back to the sentence that I have already quoted to you in the middle of paragraph 5-11, the proposition that AT&T is advancing is that had the services been rendered on AT&T Canada facilities alone -- now we are moving from column 1 to column 2 -- the ILEC portion of the direct costs would decrease by $304 million.

7745 And you will see that figure in column 2.

7746 That would result in a reduction of roughly 70 per cent in AT&T Canada's ILEC costs. So those costs would go down to $117 million in a situation where the traffic was provided AT&T's network rather than over the facilities of the ILEC.

7747 DR. TAYLOR: That is correct. As I interpret the $304 million, those were payments to ILECs for either services or unbundled loops, or things like that, that in the hypothetical AT&T would provide itself.

7748 MR. RYAN: Correct.

7749 DR. TAYLOR: The remaining $117 million of ILEC costs, I presume, would be for things like interconnection costs; that is, terminating traffic when an AT&T customer calls a Bell Canada customer. Those would remain whether you were on net or not.

7750 MR. RYAN: You have stated your presumption, and we will come back to that presumption in due course.

7751 DR. TAYLOR: Sure.

7752 MR. RYAN: You will agree with me that if AT&T has done this calculation properly -- and I know, from having carefully read your evidence, that you have some difficulties with that. But we will come to those.

7753 If AT&T has done its calculations correctly and it has adjusted its financial statements to represent a situation where instead of obtaining services from the ILECs it instead provides these services, in a hypothetical model, over its own network, the cost that AT&T accounts for as part of that process should properly include an allowance for the common costs that AT&T would incur in providing all of those services on its own.

7754 That would be an essential part of the proper accounting for the costs that AT&T is going to incur.

7755 DR. TAYLOR: Yes. I am assuming that in column 1 and in column 3, as we look at AT&T financial results, we have AT&T's accounting for all of its shared fixed and common costs on this page; otherwise, the EBITDA would not be meaningful.

7756 MR. RYAN: If, as AT&T has suggested in this proceeding, it pays Bell a price that is equivalent, let me put it this way, to the cost that AT&T would incur in providing those services itself, that is on net -- and using AT&T's costs as a proxy for Bell's own -- then that price should be sufficient to permit Bell to recover its incremental costs plus a mark-up.

7757 DR. TAYLOR: You will have to say that again, Mr. Ryan. That's a mouthful.

7758 MR. RYAN: I think we got to the point where if AT&T has properly accounted for its common costs in Table 5-1 under the hypothetical model in column 2, then those common costs are embedded in those figures, as it were.

7759 DR. TAYLOR: By column 2, do you mean the -- I think you mean column 1, the first column of figures.

7760 MR. RYAN: They would certainly be in column 1, the first column of figures, wouldn't they.

7761 DR. TAYLOR: Yes.

7762 MR. RYAN: These are actual financial results.

7763 The question I put to you a minute ago was if AT&T has properly constructed the model that is reflected in the next set of figures, beyond that model, then those common costs should be included there as well.

1020

7764 DR. TAYLOR: Well, yes. There may be a different set of common costs. If the AT&T hypothetical network is now a full-fledged end-to-end network, you can conceive that the president's desk might be just a little bit bigger, something like that. But that is all embodied in column 2.

7765 MR. RYAN: Where it should properly be.

7766 DR. TAYLOR: Yes.

7767 MR. RYAN: Now, the proposition that AT&T is advancing in its evidence is that the price it pays for the services that it receives from the telephone companies should be adjusted so that it pays no more than the costs that the incumbent themselves incur in providing that sort of service to themselves. That is the proposition. You have taken exception to that proposition, I think, but that is the proposition.

7768 State your understanding of the proposition then.

7769 DR. TAYLOR: I'm not sure what you mean by "the proposition".

7770 That isn't what is calculated here. There is an additional assumption built in, I guess, namely that the costs of the hypothetical network that AT&T has embodied in column 2 are the same as the costs of an ILEC.

7771 MR. RYAN: Yes, that is an assumption that is embodied there.

7772 DR. TAYLOR: All right. That is --

7773 MR. RYAN: You make that point specifically in your evidence elsewhere, and I will come to that.

7774 DR. TAYLOR: Okay. I guess then we will come to that.

7775 But the only other thing I would quarrel with you on is, that wasn't the -- I can't find that explicit rationalization in your text anywhere.

7776 The text all spoke of a level playing field more or less. I didn't see, perhaps you could point it out to me, exactly where this assumption that the hypothetical AT&T network is identical to the ILEC network, and therefore if AT&T pays only -- pays the 70 per cent discount, it would be paying the ILEC's costs, I didn't see that in the text anywhere.

7777 MR. RYAN: Well, let's start, first of all, at paragraph 5-8 of this evidence then.

7778 DR. TAYLOR: Sure.

7779 MR. RYAN: Just remind us what some of the discussion was leading up to this paragraph 5-11 we have looked at.

7780 Perhaps we have gone too fast in our mutual interest in getting to the point here, Dr. Taylor, but you made reference to level playing field. That notion is introduced in paragraph 5-8 and let's just review together what was said there.

7781 AT&T says:

"However, simply constraining the price of competitor services in this manner..." (As read)

7782 That is a comment that relates to some text that precedes this:

"... will not provide the level playing field that is required for sustainable competition. An adjustment to the overall rates paid by facilities-based competitors for these services is also required. As noted in the previous section, AT&T Canada proposes that this adjustment factor be determined in relation to the implicit cost of network services supplied by the ILECs to themselves, i.e., self-supply, relative to the rates for these same services currently charged to competitors. In order to determine an appropriate proxy for this adjustment factor, AT&T has relied on an analysis of its own cost structure." (As read)

7783 Are you with me now?

7784 DR. TAYLOR: Yes.

7785 MR. RYAN: So what we see in Table 5-1, just to come back to that, is an effort to put into figures precisely that notion.

7786 According to AT&T's calculation, if this adjustment is made, that is if an adjustment is made so that the implicit cost of network services supplied by the ILECs to themselves is used instead of the current set of rates, then the prices that AT&T would pay to the ILECs for the use of their facilities would decline by 70 per cent in aggregate?

7787 That is what is being said. I know you don't necessarily subscribe to that.

7788 DR. TAYLOR: Well, yes. Without going to whether that is correct or not, yes, if I draw the line between paragraph 5.8 and assume that by appropriate proxy in paragraph 5.8 you mean cost, which is -- appropriate proxy can be the devil's tool -- but you mean cost, then yes, I would take the interpretation that you say AT&T puts on Table 5-1.

7789 MR. RYAN: To go back where we were in respect of common costs, I think we have, as I say, agreed that properly constructed, the figures we see in the second column of numerals on Table 5-1, should include an allocation for common costs. If we make the 70 per cent adjustment now --

7790 DR. TAYLOR: Well, wait. Not an allocation. There is no allocation in column 2, it is just an accounting. They are in there somewhere.

7791 MR. RYAN: Yes. I stand corrected on the use of that word.

7792 I know from previous discussions, the word "allocation" sets off some light bulbs in your head sometimes. We are not talking about that.

7793 Now, if AT&T pays Bell the price based on this 70 per cent adjusted factor, AT&T's costs being used as a proxy for Bell's own costs, then it follows that an allocation -- pardon me, an allowance for common costs is included in the price that is being paid?

7794 DR. TAYLOR: Yes. Assuming that common costs are in column 1 and in column 2 under the two different circumstances, and assuming that column 2's hypothetical network reflects AT&T's costs in that network, and an ILEC's costs in that network, and ignoring some other pieces of the calculation, namely the increase in operating expenses which you haven't taken into account, then you would end up with the 70 per cent discount being an approximation to a cost-based rate for an ILEC. Under all those assumptions --

7795 MR. RYAN: Yes. Including a mark-up or including a contribution to common costs?

7796 DR. TAYLOR: Yes. Assuming that is sitting in there.

7797 MR. RYAN: You have noted some assumptions and I think all of them are dealt with elsewhere in your evidence and we will come to those either in the course of this cross-examination or in the course of the evidence of the AT&T panel I'm sure as a result of questions put by my friends.

7798 But under those assumptions, and subject to the comments you have just made, AT&T's approach is advocated in paragraph 5-11. There is no reason to think that if that price was paid the telcos would not be receiving a contribution to their common costs in addition to the incremental cost, which ties back to your proposition 2, just to complete the circle.

7799 DR. TAYLOR: Well, yes. I mean we are repeating ourselves.

7800 It is a small point, Mr. Ryan, but since Table 5-1 includes a $66 million increase in operating expenses, which is part of this hypothetical network, for the life of me I can't see how you can exclude that from your discount calculation. Again, it is a small point but, gee --

7801 MR. RYAN: That is a point you make in paragraph -- I mean I am not ignorant of the point you are making. It is addressed expressly, I think, in paragraph --

7802 DR. TAYLOR: The section called "Inconsistent."

7803 MR. RYAN: Yes.

7804 DR. TAYLOR: Yes.

7805 MR. RYAN: Paragraph 51 and following.

7806 DR. TAYLOR: Yes.

7807 MR. RYAN: Yes, 51 and 52.

7808 Mr. Chairman, would it be a convenient time for break now.

7809 I think Dr. Taylor and I would like to carry on after the break.

7810 THE CHAIRPERSON: Okay.

7811 We will take our morning break, then, and reconvene in 15 minutes.

--- Upon recessing at 1030 / Reprise à 1030

--- Upon resuming at 1050 / Reprise à 1050

7812 THE CHAIRPERSON: Order, please.

7813 Ladies and gentlemen, we return to our proceeding now and cross-examination of Dr. Taylor by Mr. Ryan.

7814 MR. RYAN: Thank you, Mr. Chairman.

7815 I said that we would get to some of your specific comments on AT&T's evidence, Dr. Taylor, and I would like to do that now.

7816 Could we turn first to paragraph 39 of your rebuttal evidence.

--- Pause

7817 DR. TAYLOR: Yes.

7818 MR. RYAN: Now, in paragraph 39, alluding to the table that we were referring to before the break and the discussion around that table, you say:

"Finally, the value of self-supply cannot be measured using costs in a competitor's network." (As read)

7819 Is that fair?

7820 DR. TAYLOR: Yes, that's correct.

7821 MR. RYAN: What you are targeting here, I suggest, is AT&T's attempt to measure the costs Bell incurs in self-supplying services by calculating what it would cost AT&T to provide the same services to itself.

7822 DR. TAYLOR: Yes, that is correct.

7823 MR. RYAN: You are saying it is not legitimate for AT&T to look at the costs it would incur in providing services as a proxy for the costs that Bell would incur in providing those same services.

7824 DR. TAYLOR: Well, yes, Mr. Ryan, particularly because the method that is in the sentence you are quoting from, using the fraction of costs a CLEC currently pays for ILEC services, which is how AT&T calculates the discount, that number can vary, as the paragraph goes on to explain, from the very small fraction to a very large fraction and yet we don't really believe that ILEC's costs change in those circumstances.

7825 MR. RYAN: You will acknowledge, I think, Dr. Taylor, that the difficulty anybody in the position of AT&T is in in the real world in trying to estimate what Bell's costs are is that that data is simply not made available to us, understandably so. We have asked for it on various occasions in the past and not obtained it.

7826 So what we have done here is suggest to you going to a reasonable proxy for what Bell's costs would be, that is the costs of doing the same thing on AT&T's network.

7827 DR. TAYLOR: Well, I understand you say that was the intention. The point of the paragraph we are addressing is how can that make sense if what we are trying to measure is cost to an ILEC of providing some service and that cost, calculated the way AT&T does, would be radically different depending upon which CLEC's share of ILEC services costs we use.

7828 Simply because one CLEC uses a whole lot of Bell services, another uses a little, makes a big difference in this cost number. So whether you have done it correctly or not, the correct answer can't have that characteristic.

7829 MR. RYAN: You are talking now, I take it, about the point you make towards the end of that paragraph about how the same exercise performed by CallNet might come up with a different number. That is essentially what you are saying.

7830 DR. TAYLOR: That is correct.

7831 MR. RYAN: The difficulty in the real world remains, Dr. Taylor, that is that in estimating Bell's costs for the purpose of an exercise like this we go to the information that is in fact readily available to us. We don't have any specific information, I take it, on the record at this point as to what CallNet's costs would be similarly constructed?

7832 DR. TAYLOR: I certainly don't. I constructed a hypothetical in my paragraph that just said take a CLEC that provides rural services predominantly as opposed to one that provides urban and you would see a big difference.

7833 MR. RYAN: At worst though, I would suggest, the situation we arrive at is, before the Commission actually implemented a proposal such as AT&T's it might want to investigate what the costs of other competitors might be, calculated on a similar basis, before arriving at just what adjustment would be appropriate for introduction of a scheme such as AT&T is proposing.

7834 DR. TAYLOR: No, I wouldn't agree with that at all. I think a far better -- the Commission could use its time far better, if it wanted to, looking at the Phase 2 costs for the ILECs -- which, though you say AT&T doesn't have, surely the Commission and its staff has and is quite familiar with -- and building costs on that basis strikes me as a far better use of time than exploring this alternative method which has great flaws.

7835 MR. RYAN: Well, the value of a Phase 2 for a process such as this is something I think perhaps we will coming to later in this proceeding.

7836 But you present the choices that are available to the Commission for dealing with an issue such as this, this sort of approach or a Phase 2-based approach.

7837 DR. TAYLOR: Correct. I guess, though, when we look at what we know now, taking AT&T's numbers to be correct, which I don't want to do, we see that it makes a great deal of difference. That is, taking as an approximation the ILEC's costs as Phase 2 plus a mark-up, which isn't exactly correct in the set of services you are looking at, but supposing that to be roughly correct, we are off, depending on which method of measurement, by 70 per cent. That is quite significant. That is a bigger error than I think the Commission is used to making.

7838 MR. RYAN: Well, we might provide you with the opportunity yet to make that error, Mr. Chairman, but we hope to persuade you that it won't be erroneous to do it.

7839 But that is maybe as far as we can get, the two of us today, on that particular point, Dr. Taylor.

7840 DR. TAYLOR: Okay.

7841 MR. RYAN: Paragraph 36 --

7842 DR. TAYLOR: Yes.

7843 MR. RYAN:  -- is where I would like to turn next. You have already alluded to this point in answer to one of my earlier questions and I said I would come back to this point.

7844 Let's just look at what you are saying here.

7845 Beginning with the opening words of paragraph 36:

"In effect, AT&T appears to be saying that of the $421 million...-"

7846 We are looking now at -- it would be useful to have Table 5-1 in front of us at the same time. I will wait for you to do that.

--- Pause

7847 DR. TAYLOR: Yes.

7848 MR. RYAN: Okay. I will back up.

7849 You say in paragraph 36:

"In effect, AT&T appears to be saying that of the $421 million..." (As read)

7850 That number appears in the first column figures. It calls ILEC cost of goods sold.

"...$117 million is for interconnection services that would continue to be needed..." (As read)

7851 That is the number we see in the third column figures.

"...and paid for, even assuming AT&T served all of its customers with its own facilities. The remaining $304 million is for interconnection, essential, near-essential transport and resold end user services that AT&T purchases from ILECs and that would be avoided if AT&T used its own facilities." (As read)

7852 Then towards the bottom of the paragraph, the last four or five lines, you say:

"In other words, under its proposed discount AT&T would effectively pay for those ILEC services which a fully facilities-based competitor would require, but would pay nothing at all for any other ILEC services. AT&T would effectively obtain for free ILEC services..." (As read)

7853 Et cetera.

7854 DR. TAYLOR: Yes.

7855 MR. RYAN: Now, let me suggest to you as gently as I can, Dr. Taylor, that you are really playing a bit of a game with the numbers we put forward here, aren't you? There is no suggestion anywhere in AT&T's evidence that it is proposing to get any of the ILEC services for free and only to pay for some subset of the services.

7856 I think as we established earlier, AT&T's proposition is that it will pay for the aggregate basket of services that it is seeking to obtain from the telephone companies, price equivalent to the costs of self-supply of those services for the incumbent. It doesn't involve getting anything for free, does it?

7857 DR. TAYLOR: With respect, Mr. Ryan, no, it does involve getting something for free. Perhaps the phrase "ILEC services" is misleading.

7858 What AT&T is getting for free in Table 5-1 is a local network, that is the services that an ILEC currently provides.

7859 There is nothing that I can find in Table 5-1 or in AT&T's explanations of 5-1 which explains how the network that AT&T would use in its hypothetical serve everyone, all of its current customers, on net network. Where are the costs of that, of those ILEC services? That is what it is assuming it is getting for free in this Table 5-1.

7860 MR. RYAN: Well, we have your evidence on that point. I will have to take our own look at the evidence and draw our own conclusions on that.

7861 Thank you.

7862 Could we next go to footnote 5 of your evidence. I say footnote 5 because I think my pages might be paginated a little bit differently than other people's, but it is associated with paragraph 32.

7863 DR. TAYLOR: Yes.

7864 MR. RYAN: I have also passed to you, through your counsel, Dr. Taylor, a copy of the decision of the Supreme Court of the United States referred to in that footnote, AT&T Corp. versus Iowa. The Commissioners have that available to them. That is where we are in the process of this cross-examination.

7865 I will just look first with you at the passage that you are quoting and footnoting. It is a citation from an opinion of Justice Breyer of the U.S. Supreme Court in a recent case that involved review by that court of the decision -- am I correct in saying, Dr. Taylor -- of the decision of the FCC in 1996 on the implementation of local competition?

7866 DR. TAYLOR: Yes. Actually it passed through the Eighth Circuit Court of Appeals and then on to the FCC. So technically it is reviewing the Eighth Circuit decision I think, but yes.

7867 MR. RYAN: I'm not often corrected by economists on points of law, but you are quite correct, Dr. Taylor.

--- Laughter / Rires

7868 DR. TAYLOR: U.S. law.

7869 MR. RYAN: It is an interesting statement by Justice Breyer.

7870 The second paragraph -- let me just help people follow along with us -- reads as follows:

"The upshot, in my view,..."

7871 Says Justice Breyer:

"...is that the statutes..."

7872 This is a reference, I take it, to the 1996 Telecom Act?

7873 DR. TAYLOR: Yes.

7874 MR. RYAN:

"...unbundling requirements, read in light of the Act's basic purposes, require balance. Regulatory rules that go too far, expanding the definition of what must be shared beyond that which is essential to that which merely proves advantageous to a single competitor, risk costs that, in terms of the Act's objectives, may make the game not worth the candle."

7875 One can see, in light of your evidence, why you take some comfort in what Mr. Justice Breyer has to say in that passage.

7876 I looked at the footnote 5 to that passage and I just had a bit of difficulty -- no fault of your own, it is a complex judgment -- a bit of difficulty understanding who in the court Justice Breyer was agreeing with and who he was disagreeing with and on what points he was in agreement with the majority and on what points he was not in agreement.

7877 It is partly for that purpose that I have passed you a copy of the decision itself.

7878 Could we go to page 5 of that decision.

7879 DR. TAYLOR: Yes.

7880 MR. RYAN: This, if we look at the right-hand column, it provides a summary of the judgment of the court, what lawyers like ourselves, Dr. Taylor, would refer to the headnote. It says at the top:

"SCALIA, J. delivered the opinion of the Court,..."

7881 It goes on to say:

"...Parts ... of which were joined by REHNQUIST, C.J., STEVENS, KENNEDY, SOUTER, THOMAS, GINSBURG and BREYER..."

7882 Other parts of which were joined by other members of the court and other parts of which were joined by a different composition of the court.

7883 It goes on to say:

"SOUTER, J. filed an opinion concurring in part and dissenting in part ... THOMAS, J. filed an opinion concurring in part and dissenting in part, in which REHNQUIST, C.J., and BREYER, J., joined..."

7884 And finally:

"BREYER, J. filed an opinion concurring in part, and dissenting in part."

7885 What that makes plain that Mr. Justice -- of the eight justices on the court nobody was subscribing to the judgment of Mr. Justice Breyer.

7886 DR. TAYLOR: Excuse me?

7887 MR. RYAN: Yes.

7888 DR. TAYLOR: Well --

7889 MR. RYAN: Mr. Justice Breyer was on his own. Nobody expressed any agreement with Mr. Justice Breyer's judgment.

1105

7890 DR. TAYLOR: With the written judgment which I have quoted from here?

7891 MR. RYAN: Yes.

7892 DR. TAYLOR: Ah, yes. I mean, Mr. Justice Breyer is part of a number of committees on the court, but what he wrote, being the economist on the court, he wrote by himself.

7893 MR. RYAN: Right.

7894 DR. TAYLOR: That is correct.

7895 MR. RYAN: The majority judgment was delivered by Justice Scalia, the judgment of the court, as the headnote indicates.

7896 Just so we are clear on this, although Justice Breyer agreed with Scalia in many respects, other members of the court never indicated they agreed with Justice Breyer --

7897 DR. TAYLOR: Right, and I think --

7898 MR. RYAN:  -- on his judgment.

7899 DR. TAYLOR: Correct. I think my footnote 5 was my economist's interpretation of what we have just been through. It doesn't say that others agreed with him, but that he concurs with the majority regarding the unbundling rules. Just to say that the statement about the economics of unbundling rules were, though not explicitly concurred with by anybody else, these were in support of, if you like, the majority opinion.

7900 MR. RYAN: Right.

7901 Could we go next to page 31 of that judgment. This follows up on a part of the point you were just making about Mr. Justice Breyer assuming the role of economist on the court.

7902 You will see in the right-hand column, the first full paragraph and the second full paragraph in the middle of the page, right-hand column, beginning, "Nor are any added costs..." and then the next paragraph beginning with "The upshot...".

7903 Are you with me?

7904 DR. TAYLOR: Yes, I am.

7905 MR. RYAN: The next paragraph, "The upshot...", that is the paragraph that I just read back to you from your evidence, "The upshot, in my view...". You ended the quotation with the last sentence of that paragraph, "... may make the game not worth the candle".

7906 DR. TAYLOR: Yes.

7907 MR. RYAN: Just go on to the next sentence there that you don't cite in your evidence. Mr. Justice Breyer says:

"I believe the FCC's present unbundling rules are unlawful because they do not sufficiently reflect or explore this other side of the unbundling coin".

7908 That is to say, what he is saying here, I suggest, is that the FCC had an obligation to look further than it did or explain better than it did why it took the decision it did to require incumbent carriers in the United States to unbundle elements of the local network for the use of competitors.

7909 DR. TAYLOR: That's right. And that is the majority opinion.

7910 MR. RYAN: And that is the majority opinion, that's right.

7911 THE CHAIRPERSON: Excuse me, Dr. Taylor. Is your microphone on?

7912 DR. TAYLOR: No, I'm sorry.

7913 And that is the majority opinion.

7914 MR. RYAN: That's right. That much all of the court agreed on.

7915 DR. TAYLOR: Correct.

7916 MR. RYAN: What the court is not saying, and which one, I think, might be inclined to think the court was saying if one only read the portion of the evidence or of the judgment that you cited in your document, is not that the FCC was wrong as a matter of policy, but simply that it did not give adequate reasons for the decision it reached. Indeed, it is not for the court to pass judgment, is it, on the policy of the FCC. the Court is there simply to ensure that whatever decision they take is within the ambit of the authority bestowed upon them by the statute.

7917 DR. TAYLOR: Yes, that is roughly correct.

7918 MR. RYAN: It would be --

7919 DR. TAYLOR: There are limits to FCC authority that go beyond: Did they hold the hearing and take into account the evidence. But you are the lawyer, I'm not.

7920 In any case, the decision was not based on that, it said, "Give us an explanation of the logic that you went through because you did not take into account, it appears to us, the Supreme Court, the following elements which we believe the Act requires you take into account".

7921 MR. RYAN: It would be wrong, if we were to look at the passage that you cited in your evidence, to read into that the possibility that the Supreme Court of the United States was passing any judgment on the wisdom or lack of wisdom of the decision of the FCC in respect of what network elements should be unbundled. It was purely a question of their jurisdiction that was before them and if Mr. Justice Breyer went off on a bit of a tangent of his own, that is exactly what it is?

7922 DR. TAYLOR: I hate to argue with a lawyer about legal points, however --

7923 THE CHAIRPERSON: I do it all the time, Dr. Taylor.

--- Laughter / Rires

7924 DR. TAYLOR: It's not merely a matter of jurisdiction, but you are correct that the Supreme Court did not substitute its wisdom and its trade-off of these elements for the FCC's trade-off. What it did say is the FCC did not adequately consider the "necessary" and "impair" standards of the U.S. version of the essential facility requirement for an unbundled element.

7925 Now, it "didn't adequately consider". The Supreme Court must mean when it says that that it is important, that there is policy and legal -- perhaps just legal -- requirement that it do so and that -- well, the upshot of all of this was that it was sent back to the FCC to consider, rethink and rewrite its decision. And it did.

7926 MR. RYAN: Right. It did and we saw that decision rendered sometime in 1999 I think.

7927 DR. TAYLOR: Yes.

7928 MR. RYAN: Is that right?

7929 The FCC on this particular point we are talking about, unbundling of network elements, essentially, I would suggest, reaffirmed what it had said the first time and expanded on its reasoning in the manner in which the Supreme Court invited it to do.

7930 DR. TAYLOR: Almost, but not quite. Two differences.

7931 One, it did eliminate several unbundled elements from the list of unbundled elements in the U.S.

7932 Second, though we have to go to dissents again. There was the dissent of now Chairman Powell, who is now head of the FCC, who was a mere Commission when he wrote his dissent, explaining great dissatisfaction with the mechanisms by which the Commission, the majority of the Commission, of the Clinton Commission, if we could call it that, reached its decision as to what elements were essential and what were not.

7933 Mr. Powell speaks eloquently of local switching which is essential -- it is an unbundled element in the FCC's decision with which Mr. Powell disagrees and is presumably now in somewhat of a position to do something about it.

7934 MR. RYAN: For the moment, though, it is fair to say that in respect of the FCC decisions that we have referred to, and the Supreme Court decision, you will take what comfort you can from the minority opinion of Mr. Justice Breyer and from the dissenting opinion of Commissioner Powell. I, for my part, will try to stick with the majority on those.

7935 DR. TAYLOR: You are lucky this time, yes.

--- Laughter / Rires

7936 MR. RYAN: Could we go next to paragraph -- it reminds me, before we go on, of a quip that I heard Mr. Justice Estey of our Supreme Court, when he was in that court, give in relation to a counsel that kept citing dissenting opinions of that court to him to support his opinion. He said:

"Sir, those you live by the dissent die by the dissent".

--- Laughter / Rires

7937 MR. RYAN: Paragraph 54 of your evidence.

7938 COMMISSIONER LANGFORD: Mr. Justice Estey wasn't always right.

--- Laughter / Rires

7939 MR. RYAN: There were a few occasions when he was found in dissent himself, that's true.

7940 The last sentence of this paragraph is where I want to go first, Dr. Taylor.

7941 DR. TAYLOR: Sure.

7942 MR. RYAN: I will just read you the passage.

7943 Referring to the U.S. Telecom Act of 1996 you say, starting mid-way through the sentence "In the U.S. where CLECs are given a choice" -- you say:

"CLECs are given a choice in the U.S. between purchasing essential network elements at an approximation to the ILEC's incremental costs or reselling the ILEC's retail services at an avoided cost discount". (As read)

7944 DR. TAYLOR: Yes.

7945 MR. RYAN: One small point. It would be more accurate to say in that last line that CLECs are given the choice between purchasing essential network elements and reselling the ILECs retail services at an avoided cost discount. That would be more accurate. They can do both, can't they?

7946 DR. TAYLOR: Oh, yes.

7947 MR. RYAN: Yes.

7948 DR. TAYLOR: I thought you were going to correct my "incremental cost" because TELRIC in the U.S. has incremental cost in it, but it does include a mark-up.

7949 MR. RYAN: Well, I wasn't going to go to that, but I was going to go to the word "essential" that you used in the line before that. You have already touched on the same point.

7950 You make a point earlier in your evidence of defining what you mean by "an essential facility". That is paragraph 30 of your evidence.

7951 DR. TAYLOR: Yes.

7952 MR. RYAN: You use that term "essential network element" in the passage that I have just quoted. But, as you have recognized in response to one of my earlier questions, the U.S. statute doesn't actually talk in terms of essential network elements. It doesn't use the concept of essential service, does it, central facility? It talks in terms of a "necessary" and "impair" standard.

7953 DR. TAYLOR: That's correct. Essential facility has certain overtones in U.S. antitrust law and the statute and the FCC are careful not to use the word "essential". I am just taking a shortcut here. It is what I respond to.

7954 What I really mean is "unbundled network elements", whatever they may be. Some of them may be essential. Some of them may be those that would impair a CLEC if they couldn't get them. Some of them may be an error of the FCCs and really shouldn't be there. But the choice the CLEC has is it can buy these unbundled elements.

7955 MR. RYAN: But it would be wrong, in reading that passage from your evidence, to conclude that what the U.S. statute does is adopt in essential facilities doctrine approach to the issue of unbundling.

7956 DR. TAYLOR: Oh, correct. It adopts -- after the Supreme Court got through with it, it adopted a "necessary" and "impair" standard.

7957 The relevant one is "impair". As close as I can decipher the FCC's turgid prose, "impair" means if supply of the element were not provided to a CLEC it would make it difficult, in a number of carefully articulated ways, for a CLEC to compete against an ILEC.

7958 Now how that is different from my definition of an essential facility is in the eye of the beholder I think. I mean, I think you could stand up for "impair", I could stand up for "essential", and we could argue all day and we would be arguing about exactly the same things.

7959 MR. RYAN: I would suggest to you, Dr. Taylor, that Congress had the opportunity to adopt an essential facilities doctrine, a doctrine which is well-defined in the United States, but instead chose words that made it clear that it wasn't embracing that doctrine, as defined up to that point at least in law in the United States.

7960 DR. TAYLOR: I would have to agree with that, except to the extent that "essential facility" is not a doctrine which is embodied in law anywhere in the United States and every time it comes up in a antitrust case that is sort of the first phrase in the court's decision that: We are not, by this decision, embedding a definition of essential facility into law. But it is a concept, a very loose concept, which permeates antitrust law.

7961 MR. RYAN: It is a concept that is much favoured by theoretical economists, but which hasn't been embraced by the law.

7962 DR. TAYLOR: Well, it hasn't been made specific, made operational let's say. All I was trying to suggest was that if you tried to make "essential facility" operational in some context, and I tried to make "impair" operational in the same context, most people would think we were saying the same thing.

7963 MR. RYAN: Thank you, Dr. Taylor.

7964 Those are all my questions, Mr. Chairman.

7965 THE CHAIRPERSON: Thank you, Mr. Ryan.

7966 Mr. Secretary, what would be the number for Mr. Ryan's exhibit?

7967 MR. SPENCER: Supreme Court of the United States decision AT&T Corporation v. Iowa Utilities Board will be entered as AT&T Exhibit No. 10.

EXHIBIT NO. AT&T-10: Supreme Court of the United States decision AT&T Corporation v. Iowa Utilities Board

7968 MR. SPENCER: Mr. Chairman, I would like to enter three other exhibits, if I may.

7969 We have Bell Canada's response to undertaking information from ARC et al, transcript reference Volume 3, paragraph 4224, will be Bell Canada Exhibit No. 8.

EXHIBIT NO. BELL CANADA-8: Bell Canada's response to undertaking information from ARC et al, transcript reference Volume 3, paragraph 4224

7970 MR. SPENCER: Mr. Taylor's CV will be entered as Bell Canada Exhibit No. 9.

EXHIBIT NO. BELL CANADA-9: CV of Dr. William E. Taylor

7971 MR. SPENCER: We also have a CRTC undertaking for AT&T Canada, CallNet, and GT Group Telecom to provide The Companies financial statements, including statement of cash flows for six months ending 30th June 2001. This will be CRTC Exhibit No. 23.

EXHIBIT NO. CRTC-23: CRTC undertaking for AT&T Canada, CallNet and GT Group Telecom to provide The Companies financial statements, including statement of cashflows for six months ending 30 June 2001

7972 MR. SPENCER: Thank you.

1120

7973 THE CHAIRPERSON: Thank you, Mr. Secretary.

7974 I understand the next party to cross-examination will be CallNet.

7975 Mr. Koch.

--- Pause

7976 MR. KOCH: Thank you, Mr. Chairman.

EXAMINATION / INTERROGATOIRE

7977 MR. KOCH: Good morning, Dr. Taylor. Welcome back to Canada.

7978 DR. TAYLOR: Good morning, Mr. Koch.

7979 MR. KOCH: Dr. Taylor, as I understand your evidence you have been retained by The Companies to provide expert testimony on the economic efficiency of its proposal and, in your rebuttal, the proposals of others. Correct?

7980 DR. TAYLOR: Yes.

7981 MR. KOCH: You are not providing expert evidence on any other aspect of the proposals, are you?

7982 Maybe I can help you out. It's not a trap.

7983 DR. TAYLOR: The evidence is before you. It is section 11, which may deal with things other than specifically economic efficiency of Bell Canada and my rebuttal evidence deals with things other than inefficiency, it deals with bad arithmetic and things like that.

7984 MR. KOCH: But let's just deal firstly with your evidence. I probably would be willing to admit that an economist might be qualified as an expert in arithmetic, but you are not proposing, to the extent that your evidence deals with technological changes and the state of competition in Canada, that you are an expert in those matters?

7985 DR. TAYLOR: No. For the Canadian competition parts of my testimony I rely on studies by other parties, studies by outside agencies. I have done none of my own.

7986 MR. KOCH: So to the extent that your evidence, for instance, deals with that issue, if that evidence is contradicted by other evidence on the record of the proceeding the Commission should feel free to accept the other evidence and not yours. Correct?

7987 DR. TAYLOR: I think that is almost tautological. Yes. I mean if --

7988 MR. KOCH: I'm not sure I even know what "tautological" means. So --

--- Laughter / Rires

7989 DR. TAYLOR: Correct, but content-free.

--- Laughter / Rires

7990 MR. KOCH: Oh, boy this is going to be a long day.

--- Laughter / Rires

7991 THE CHAIRPERSON: I hope not, Mr. Koch.

--- Laughter / Rires

7992 MR. KOCH: Maybe I should be canvassing the Commissioners' flight times.

--- Laughter / Rires

7993 MR. KOCH: The point being, you are a distinguished economist, Dr. Taylor. You are here to give economic evidence.

7994 DR. TAYLOR: Yes.

7995 MR. KOCH: That is what we are to take from your evidence. Correct?

7996 DR. TAYLOR: That is correct.

7997 MR. KOCH: I think we all understand that.

7998 You understand that the Commission has other factors to take into account when it makes its decisions, other than pure economic efficiency?

7999 DR. TAYLOR: Certainly.

8000 MR. KOCH: Okay. It is certainly not restricted to your knowledge by doing what is economically efficient in the short, medium or long term. Is it?

8001 DR. TAYLOR: Correct.

8002 MR. KOCH: Okay. That is not to say that economics is not important. I'm not saying that.

8003 You also understand that the Commission, in making its decisions, has to be practical. Correct?

8004 DR. TAYLOR: Yes.

8005 MR. KOCH: It has to weigh theory against practice, does it not?

8006 DR. TAYLOR: Yes.

8007 MR. KOCH: In fact, I noted that in your evidence filed last spring you yourself note that sometimes there is a gap between theory and practice. I wonder if I could take you to paragraphs 11-74 and 11-75 of your evidence, please.

--- Pause

8008 DR. TAYLOR: Yes.

8009 MR. KOCH: Here it is just an illustration of this notion that I think we can all agree on, which is that theory and practice sometimes differ. At the beginning of 11-75 actually you say:

"Unfortunately, theory differs radically from practice." (As read)

8010 So you don't disagree that theory sometimes departs from practice?

8011 DR. TAYLOR: Correct.

8012 MR. KOCH: I also noted an interesting passage at paragraph 11-52, where in addition to noting that -- or in addition to that other reference to theory departing sometimes radically from practice, there is an interesting statement in the middle of the paragraph 11-52, which is at page 149. Again, I have an abridged version. That means I am not allowed to see certain things so it may be different pagination than the Commission's version.

8013 In the middle of the paragraph there is a sentence starting:

"Abstract analysis in a regulatory proceeding..." (As read)

8014 Do you see that?

8015 DR. TAYLOR: Yes.

8016 MR. KOCH: Again, the comment there is:

"Abstract analysis in a regulatory proceeding is no substitute for real world experience." (As read)

8017 The point you are making is that sometimes you have to see how things work out in the real world?

8018 DR. TAYLOR: Well, yes. The context is that a major supplier, i.e., in my mind an ILEC, has to have the flexibility to find out from the market how things are going to work out.

8019 MR. KOCH: Fair enough.

8020 Now, one of the economic theories which you discuss in this same evidence is that an important check on the ability of an incumbent to raise prices is the ease with which a potential competitor can enter the market. Is that not correct?

8021 DR. TAYLOR: Yes.

8022 MR. KOCH: Paragraph 11-67, could I take you there, please.

8023 DR. TAYLOR: I'm there.

8024 MR. KOCH: You got there before I did. Very efficient.

8025 Actually I think this whole paragraph bears some attention.

8026 You write here:

"Furthermore, in economic theory an important check on the ability of an incumbent to raise prices is the ease with which a potential competitor can enter the market, provide a substitute service and apply competitive downward pressure on the market price. The presence of actual competitors is not a requirement for the incumbent companies' retail prices to be constrained. The Commission's implementation..." (As read)

8027 You are speaking of the CRTC here, I take it?

8028 DR. TAYLOR: Yes.

8029 MR. KOCH:

"...The Commission's implementation of unbundling and resale significantly reduced the sunk costs of entry by those means. Competitors no longer have to dig up streets or lay fibre to sink investment and provide ubiquitous service. Since many would-be competitors are currently providing other communication services in the same area, they do not incur significant sunk costs of marketing and customer acquisition in order to establish brand awareness. Instead, competitors are now able to lease facilities on a month-to-month basis or resell retail services so that if the market fails to materialize, the losses the entrant incurs are much smaller. As a result, if the incumbent increases its retail price, entrants can respond to the increased profit opportunity quickly, rendering a price increase above the competitive level unprofitable." (As read)

8030 I take it you would agree with me that based on this theory the incumbent's ability to raise prices has already been subject to this check in Canada?

8031 DR. TAYLOR: As we say, this is a theoretical paragraph and the answer is yes, to the extent that unbundling and resale of retail services does eliminate sunk costs, then the potential of entry is there whenever an ILEC -- if an ILEC were ever to try to raise its price above a competitive market level.

8032 MR. KOCH: But you recognize in addition to the cost of leasing unbundled network elements there are other significant costs that CLECs would have to undertake. Correct?

8033 DR. TAYLOR: Well, yes. But those aren't what I would classify as barriers to entry or things that impose an efficiency barrier that means that competition isn't going to work. Those are the costs that the incumbents incur as well.

8034 MR. KOCH: Okay. There are things like doing the market research, developing the strategy, creating a business plan?

8035 DR. TAYLOR: Sure, there is all of that.

8036 But the point, at least one point that I make here is that at least some of these competitors -- cable companies, long distance companies -- for them, that is a smaller arrangement. You already have customers. You are in touch with your customers. To acquire new local customers is a much easier affair than if you were to come into Toronto "de nouveau" with no history.

8037 MR. KOCH: So effectively a competitor like my client -- and I should have introduced myself properly, forgive me for that. My client is CallNet Enterprises and it actually owns Sprint Canada, which is a long distance competitor in the residential market.

8038 The theory is that it would be able to quickly enter, based on the Commission's rules, the residential market and the threat of that would keep in check the prices charged by the ILECs. Correct?

8039 DR. TAYLOR: That is correct. To the extent that -- as again 11-67 is a statement of theory -- if CallNet can actually buy unbundled elements or resell high volume residential services so that it has no large sunk costs, the fact that you send a bill to some moderately large number of residential customers in Canada every month suggests that getting into the business, if the price were right, the retail price were right, would be a pretty easy affair, compared with somebody who didn't have customers already onboard.

8040 MR. KOCH: Fair enough. But the theory is basically that the mere threat -- I mean CallNet doesn't have to do that, the mere threat that it would do that would be a check on the ILEC's prices?

8041 DR. TAYLOR: Yes, that is the theory. That is called "contestability" in economic lingo.

8042 MR. KOCH: Are you aware of the history of Bell's pricing of optional local services over the last -- since the residential market has been open to competition?

8043 DR. TAYLOR: No.

8044 MR. KOCH: Would it surprise you to learn that since the beginning of 1998 the price for optional local services has, on average, risen about 50 per cent?

8045 DR. TAYLOR: Help me understand. "Optional local services" are vertical services?

8046 MR. KOCH: Call answer, call waiting, things like that.

8047 DR. TAYLOR: No, I guess that wouldn't surprise me.

8048 MR. KOCH: So this is, I take it you would agree with me, one of those examples where theory differs from real-world practice. In other words, the ability of CallNet to enter the market has not -- the mere threat of that has not worked as a check in practice on the incumbents?

8049 DR. TAYLOR: Well, it hasn't prevented whatever rate increases have happened. That is correct.

8050 Competition for optional local services is a little different from competition for apples and wheat in the sense that generally speaking to provide an optional local service you have to have already acquired the customer for basic local service.

8051 MR. KOCH: Right.

8052 DR. TAYLOR: You could, I suppose, have call waiting without having the customer, but you would wait a long time to get your call.

--- Laughter / Rires

8053 MR. KOCH: The basic point, though, is this is an example where that theory, as put in your report, differs from practice?

8054 DR. TAYLOR: Well, be careful. This says that --

8055 MR. KOCH: I'm trying to be as careful as I can.

--- Laughter / Rires

8056 DR. TAYLOR: I understand.

8057 Prices for optional local services, as well as most other services, have been set over time, have evolved over time in response to a whole lot of different uneconomic characteristics. So when you point to a particular service whose price has increased and said, "What is competition doing for me here?" you can't automatically assume that somehow competition has failed.

8058 We know that if we had full, complete perfect competition in residential local telecommunications in Canada, that the price for optional local services would be well above its incremental cost. Because you can't set prices at Phase 2 costs and recover the entire costs of the company. Your company can't, the ILEC can't.

1135

8059 Take the most competitive telecommunications service you can think of. In Canada, it is probably long distance. In the U.S., that is a good example as well.

8060 Prices are well above forward looking incremental costs because of the fixed costs that your company incurs and the ILECs incur.

8061 When we look at an historically regulated price moving upward, can we say that competition has failed us and someone is exercising market power? Or can we say that competition is permitting this price to rise to its competitive level?

8062 I don't know the answer to that.

8063 MR. KOCH: I shouldn't go back in, but I will go back in. All I was trying to get you to acknowledge was that there are theories and there is practice. And I believe you are agreeing with me; which is that other things intervene.

8064 DR. TAYLOR: Yes.

8065 MR. KOCH: So we may not, in practice, see the theory work out exactly as a distinguished economist like yourself would indicate it will.

8066 DR. TAYLOR: I agree with that. You have to remember that in economics we often say that it works in practice, but does it work in theory.

8067 MR. KOCH: I will take it either way. My point is there is a distinction.

8068 DR. TAYLOR: Yes.

8069 MR. KOCH: Although your evidence is directed at an economic assessment of The Companies' proposal for the next price cap period, you also summarize in your evidence the regulatory changes that the Commission has implemented already.

8070 Is that correct?

8071 DR. TAYLOR: Yes.

8072 MR. KOCH: You say the list of regulatory improvements is striking.

8073 I wonder if I could ask you to turn to paragraph 1131.

8074 DR. TAYLOR: Sure.

8075 MR. KOCH: Here is your summary of regulatory changes. At the end of this paragraph you speak about Commission's forbearance decisions, and you say:

"On the determination that market forces are sufficient to protect consumers, the Commission has forborne from regulating long distance, paging, Internet, and mobile wireless services. While these steps are important and necessary components of an efficient economic outcome, it is also necessary to adapt the structure of the price cap plan to the changed competitive circumstances."  (As read)

8076 What you are saying is what the Commission has done on the forbearance side are important and necessary components of an efficient economic outcome.

8077 Is that correct?

8078 DR. TAYLOR: Yes. Moving out from under price regulation services for which competition can regulate price is a good thing.

8079 MR. KOCH: You list forbearance from regulating long distance as a necessary component of an efficient outcome; correct?

8080 That is on the list there.

8081 DR. TAYLOR: Right. I am not sure necessary is sitting there. I am just citing the forbearance that the Commission has done.

8082 I guess if I am saying long distance, I should footnote not basic long distance, but long distance.

8083 MR. KOCH: Fair enough.

8084 The point is that that forbearance, in your view, is the economically efficient thing to do.

8085 DR. TAYLOR: That is correct.

8086 MR. KOCH: Your client, BCE, had a witness on the first panel, and I don't recall whether you were in the room at that time. It was a Mr. Nicholson.

8087 DR. TAYLOR: I was.

8088 MR. KOCH: He is their chief strategic officer, and he agreed with me that long distance competition in Canada has been a success.

8089 You wouldn't disagree with Mr. Nicholson, would you?

8090 DR. TAYLOR: No.

8091 MR. KOCH: I take it you also approve of what the Commission has done so far in terms of its framework for local competition; correct?

8092 DR. TAYLOR: In broad strokes, yes.

8093 MR. KOCH: I wonder if I could ask you to turn on that subject to paragraph 1123.

8094 You will see at the top of the page in paragraph 1123:

"The Commission's framework for local competition encourages efficient interconnection arrangements, and by making network elements available to competitors at the incumbent's cost gives potential entrants access to the same economies of scale and scope that the incumbent experiences in its network."  (As read)

8095 You are referring to the unbundling and interconnection arrangements; correct?

8096 DR. TAYLOR: Correct.

8097 MR. KOCH: I have handed out a copy of some pages of a local competition decision, Dr. Taylor, and I wonder if I could ask you to look at that.

8098 I want to go back to what the Commission did about local competition. I would like you to look, first, at paragraph 74 of that decision.

8099 DR. TAYLOR: Yes.

8100 MR. KOCH: Do you see there the language:

"In light of the above, the Commission concludes that ILECs should generally not be required to make available facilities for which there are alternative sources of supply or which CLECs can reasonably supply on their own. Accordingly, the Commission considers it inappropriate to define an essential facility as a facility that is provided by a dominant firm with market power because it would require facilities to be treated as essential even in the face of the demonstrated feasibility of alternative provision, including self-supply. The Commission concludes that to be essential, a facility, function, or service must meet all three of the following criteria: (1) it is monopoly controlled; (2) a CLEC requires it as an input to provide services; and (3) a CLEC cannot duplicate it economically or technically. Facilities that meet this definition shall be subject to mandatory unbundling and mandated pricing. As well, the tariffed rates for these facilities shall be treated as costs in the imputation test."

8101 Are you aware that this definition was consistent, as I understand it, with the definition being advanced by Stentor at the time?

8102 DR. TAYLOR: That goes away back. I think it is consistent with the thrust of the decision. I am not sure it is exactly the same in detail.

8103 MR. KOCH: This is the classic economic definition of an essential facility.

8104 Is that correct?

8105 DR. TAYLOR: That is correct.

8106 MR. KOCH: Thank you. I would like you to turn to -- don't put that totally away, because I am going to take you back there.

8107 I also handed out an excerpt from some of the evidence that was adduced by Stentor in the proceeding that led up to the local competition decision.

8108 This is an excerpt from the evidence of Professor Robert G. Harris of the University of California, Berkeley.

8109 Do you have that before you, Dr. Taylor?

8110 DR. TAYLOR: Yes, I have a segment of it.

8111 MR. KOCH: Are you familiar with Dr. Harris?

8112 DR. TAYLOR: Yes.

8113 MR. KOCH: He is a distinguished economist, like yourself?

8114 DR. TAYLOR: He is a distinguished economist not like myself.

--- Laughter / Rires

8115 DR. TAYLOR: Yes, he is a good economist.

8116 MR. KOCH: Good. I would like you to turn to the excerpt numbered Appendix A-3 at the bottom. Under heading D "Unbundling" -- do you see that?

8117 DR. TAYLOR: Yes.

8118 MR. KOCH: It says:

"Prospective entrants into local exchange services markets have argued for 'unbundling' of the local exchange carrier's facilities. The only valid economic basis for this position is that the unbundled service in question is an essential facility."

8119 What Dr. Harris is saying is that, from an economic point of view, one should only unbundle the essential facilities; correct?

8120 DR. TAYLOR: Yes.

8121 MR. KOCH: And those are the essential facilities that meet, presumably, the definition that we just discussed, the classic economic definition.

8122 DR. TAYLOR: Yes.

8123 MR. KOCH: If I take you to the next page, above the heading "Ameritech's Unbundling Proposal", and if you go up two sentences -- so it is the penultimate sentence in the preceding paragraph -- it says:

"If market participants are forced to unbundle any facility or service they provide and sell it to their competitors, incentives to develop new technologies or innovative new services to compete more effectively in the marketplace are severely curtailed."

8124 What I understand Dr. Harris to be saying there is that if you go beyond the classic definition of essential facilities, or the economic definition, and unbundle more, then that will curtail innovation.

8125 DR. TAYLOR: Yes, that is what he is saying.

8126 MR. KOCH: Do you agree with that view?

8127 DR. TAYLOR: Yes. And moreover, this is exactly where Justice Breyer's quote comes in that it is in the unshared portion of the network that competition takes place.

8128 MR. KOCH: I take it you are also aware, as a student of the Canadian regulatory regime, that the Commission did go beyond unbundling strictly essential facilities in its local competition decision.

8129 Is that correct?

8130 DR. TAYLOR: You will have to point that to me. That is too subtle for my history.

8131 MR. KOCH: I will take you to paragraph 85 in the excerpt that I have produced for you. We are discussing loops.

8132 This is under the heading "F. Other Facilities" but not part of the discussion of essential facilities.

8133 DR. TAYLOR: Okay. These are what you call near essential.

8134 MR. KOCH: They have evolved to be called that, yes.

8135 DR. TAYLOR: Then, yes, I am familiar with that.

8136 MR. KOCH: In paragraph 85 -- and I am reading again:

"The Commission notes that, in the other bands, there is competitive supply but it is very limited. In the Commission's view, CLECs would not be able to provide a significant number of loops in these bands in the early stages of competition. The Commission therefore concludes that CLECs must have access to ILEC loops in these bands if they are to compete effectively in the short term. Accordingly, the Commission considers that, while local loops in these bands do not meet the criteria for essential facilities, they should nevertheless be unbundled and priced based on the rating principles for essential facilities. However, as these loops are not essential in accordance with the Commission's definition, ILECs will only be required to cost these loops at Phase II levels rather than at tariffed rates in the imputation test."

8137 Do you see that?

8138 DR. TAYLOR: I do.

8139 MR. KOCH: So here the Commission departed from strict economic theory on the practical basis that if it didn't unbundle these other facilities, competition might not get off the ground; correct?

8140 DR. TAYLOR: That is half of it. The Commission giveth and the Commission taketh away.

8141 MR. KOCH: Indeed.

8142 DR. TAYLOR: That is, when it comes time for imputing the price for those unbundled elements, the Commission does recognize that CLECs have alternatives and don't have to buy these services from ILECs. Therefore, the price should not be imputed into the price floor.

8143 MR. KOCH: Are you aware that there is another proceeding under way to determine whether or not that should remain the case for near essential facilities?

8144 DR. TAYLOR: No, I am not.

8145 MR. KOCH: The point is -- and you agreed with me -- that it departed from strict economic theory.

8146 Despite Dr. Harris' evidence, you will agree with me that there has been no chill on innovation, has there?

8147 Your clients are not coming to the Commission in this proceeding and declaring that innovation has been chilled by the Commission's unbundling policies, has it?

8148 DR. TAYLOR: No, not to my knowledge.

8149 However, in another place where non-essential facilities have been unbundled south of the border, the ILECs there have been complaining bitterly about the requirement to unbundle broadband services as a chill on the development of broadband services.

8150 I don't know if that is a problem up here, but it is certainly a big issue in the U.S.

8151 MR. KOCH: It is not an issue at this proceeding. It is no part of the incumbent's case. In fact, their case is that -- I put your glass half empty/half full metaphor to them, and they came up with a brilliant answer, which is that they see their glasses filling, which was a great way to deal with my question.

8152 Bell Canada and the other companies are not complaining about a chill on innovation, are they?

8153 DR. TAYLOR: I haven't seen it, if they are.

8154 MR. KOCH: You are also aware, I take it, that in a more recent decision of the Commission's -- sorry, we should probably go back.

8155 You will note that in paragraph 85 the Commission made these what have now become to be known as near essential facilities, subject to unbundling, but for a five year period.

8156 DR. TAYLOR: Yes.

8157 MR. KOCH: That became known as the sunset period. That was also subject to further discussion.

8158 The next document I would like to take you to is CallNet Exhibit No. 4, which is Order CRTC 2001-184.

8159 DR. TAYLOR: Yes.

8160 MR. KOCH: I would like to take you, as I did earlier witnesses, to the conclusion, in paragraph 28.

8161 This decision deals with the issue of whether or not to remove the sunset at the five-year period and make these facilities available on an unbundled basis for an undetermined period.

8162 I am going to read under this conclusion in paragraph 28:

1150

"The Commission notes that the near-essential facilities in question are critical inputs required by entrants, and that in virtually all cases the ILECs are the only available source of such facilities. The Commission considers that entrants in the local market face substantial barriers to entry, which limit their ability to expand their networks and acquire customers through self-supply of such facilities. Moreover, in light of the delays in implementing local competition and remaining entry barriers, the Commission considers that competition will not evolve sufficiently prior to the end of the sunset period.... The Commission considers that not extending the current mandated access period for near-essential facilities would make it more difficult for entrants to acquire the critical mass of customers necessary to make entry and expansion of their own networks economic, and would significantly limit the development of competition in the local exchange market."

8163 So initially the Commission departed from pure economic theory by going from "essential" to mandating "near-essential" and now, although it originally limited that to five years, has made that indefinite.

8164 I take it that you would agree with me that here the Commission is taking a pragmatic decision that in order to get competition to the point where competitors can build their own facilities, we are going to have to ensure that they can build a sufficient customer base. Correct? That is the logic that the Commission is employing, is it not?

8165 DR. TAYLOR: Yes. I mean this is based on, I presume, a factual record and a carefully considered decision regarding terms under which CLECs can actually purchase or self-supply loops from other parties.

8166 I'm sure there is disagreement as to the extent to which that is the case. The Commission thought about it and came to this conclusion.

8167 MR. KOCH: Again, because we are dealing with facilities that don't strictly meet the definition of the central facilities, this is not a case where the Commission is pragmatic, looks at the record and is prepared to move off strict economic efficiency doctrine. Correct?

8168 DR. TAYLOR: Yes, I would agree with that.

8169 MR. KOCH: I suggest to you that what the Commission is doing is taking a more dynamic view of efficiency. It's recognizing that an action it may take may not be efficient from a static perspective, but will bring efficiency in the long run. Would you agree with that?

8170 DR. TAYLOR: I will agree that that is certainly one characteristic. If I were going to take a piece of yellow paper and say what the pros and the cons of paragraph 28 are, yes, that is one way you could look at it.

8171 Another way you could look at it is that the Commission is willing to ignore the development of new services and facilities that ILECs would otherwise do if they were not required to make these non-essential facilities available, the Commission is also willing to live with a slower gestation period dynamically when CLECs actually supply or self-supply these services, that all of these policy issues are going on and the Commission has weighed them and made its decision.

8172 MR. KOCH: But that is your presumption from an economic theory that those two things would happen as a result of this decision. Your economic theory is that is going to chill innovation and slow down the dynamic process of CLECs building their own facilities.

8173 DR. TAYLOR: Yes. And I assume the Commission considered those. I'm sure that Bell Canada brought that to their attention and I am sure they thought about it.

8174 I would also throw one more on the good side, namely that by doing this I'm sure the Commission has on its "to-do list" to keep an eye on this and that when circumstances are such that the trade-off slips to the other side that they will instantly jerk this policy away and this will not become part of an embedded right that CLECs would have, because that would be devastating, I think we would all agree, in the market.

8175 MR. KOCH: In other words, I think your point is that although there are these theoretical risks from an economic efficiency point of view, you recognize that the Commission has the ability to manage these risks. Would you not agree with that?

8176 DR. TAYLOR: Yes. We have named a bunch of the risks.

8177 MR. KOCH: Okay.

8178 DR. TAYLOR: The last one being infant industry, if you want a quick word for it, that the Commission will be able to undo this temporary or indefinite, I guess -- it's not temporary, it's indefinite removal of sort of economic theory in deciding what ought to be unbundled.

8179 MR. KOCH: Now, perhaps we could turn to your rebuttal evidence.

8180 Mr. Ryan discussed AT&T Canada's proposal with you, so I don't want to re-cover that ground. I am only interested in exploring CallNet's proposal with you.

8181 It is difficult enough for me to keep all these economic theories in line, so I would ask you to try and focus just on CallNet's proposal.

8182 Before we get into economic efficiency concepts and how they relate to CallNet's proposal, I would like to make sure you understand what it is that CallNet is proposing.

8183 You understand, Dr. Taylor, that CallNet is proposing that the Commission create a new service basket called the "carrier segment".

8184 DR. TAYLOR: Yes.

8185 MR. KOCH: And that all of the facilities used by competitors would be placed in that basket and priced in a particular manner.

8186 DR. TAYLOR: Yes. By "all services", I trust you mean all services. If they buy toilet paper from the ILEC, then that would be in that basket as well.

8187 MR. KOCH: We are not asking for that on toilet paper.

--- Laughter / Rires

8188 DR. TAYLOR: But every service is --

8189 MR. KOCH: That is a little bit like tying the cell phone to the table. Right? I thought that was cute this morning.

--- Laughter / Rires

8190 MR. KOCH: Let's get serious, Dr. Taylor.

8191 We are talking about -- and actually it's significant that I used the word "facilities" and you are using the word "services". For instance, Centrex resale is not -- Centrex service is not one of the items that CallNet is proposing that be provided. Okay?

8192 So I would like to focus on the CallNet proposal.

8193 DR. TAYLOR: That's fine, but that catches me by surprise. I would have thought that was one that was in, from my reading of your evidence.

8194 MR. KOCH: My understanding is it's not.

8195 DR. TAYLOR: Okay.

8196 MR. KOCH: So I said that a certain pricing rule would be applied to these and specifically that they would be priced at the incumbent's incremental costs.

8197 DR. TAYLOR: Yes. That's my understanding.

8198 MR. KOCH: We are proposing to use either Phase 2 or a proxy for Phase 2 for that.

8199 DR. TAYLOR: Correct.

8200 MR. KOCH: Okay. And that rather than charging the competitor a mark-up to recover a portion of the incumbent's fixed and common costs, the incumbent would be able to recover this money by keeping its productivity gains. You saw that in our evidence?

8201 DR. TAYLOR: Yes.

8202 MR. KOCH: Okay.

8203 Now, with respect to the retail price floor or imputation test, I think we already reviewed the fact that currently the imputation test for facilities priced at incremental cost plus a mark-up requires the incumbents to impute the mark-up only in the case of essential facilities.

8204 DR. TAYLOR: That's correct.

8205 MR. KOCH: Okay. As I touched on briefly with you already, the issue of whether or not the imputation test should include the mark-up for other unbundled facilities is the subject of a separate proceeding.

8206 DR. TAYLOR: So you said.

8207 MR. KOCH: Okay. In that proceeding CallNet, along with other competitors, are arguing that the incumbents should be required to impute the market.

8208 DR. TAYLOR: I could have guessed that.

8209 MR. KOCH: I take it you would agree with me that your rebuttal contains some pretty strong language regarding CallNet's proposal, does it not?

8210 DR. TAYLOR: You will have to point it to me.

8211 MR. KOCH: Okay. You don't think it contains --

8212 DR. TAYLOR: I thought I was being moderate.

8213 MR. KOCH: You thought you were being moderate. Okay. Why don't we examine that.

8214 Perhaps you could turn to your rebuttal evidence.

8215 DR. TAYLOR: I'm there.

8216 MR. KOCH: Paragraph 1.

8217 DR. TAYLOR: Oh.

--- Laughter / Rires

8218 MR. KOCH: You know, the middle doesn't have the strong language, but the beginning and end sure do, Dr. Taylor.

8219 Paragraph 1, the last sentence in that paragraph:

"The proposed solutions differ in detail..."

8220 You are speaking of CallNet's solution and AT&T Canada's solution.

"...but both call for massive discounts from the current level of service prices for essential and near-essential services used by competitors." (As read)

8221 Do you see that?

8222 DR. TAYLOR: Yes.

8223 MR. KOCH: Okay. So you are alleging that we are calling for a massive discount from the current level of service prices for essential and near-essential services.

8224 DR. TAYLOR: Yes.

8225 MR. KOCH: Actually, for those services what is being requested by CallNet is the elimination of the mark-up. Correct?

8226 DR. TAYLOR: Yes, a 25 per cent discount.

8227 MR. KOCH: Well, actually an engineer I work with tells me that if you eliminate the 25 per cent mark-up you will actually only have the 20 per cent discount.

8228 DR. TAYLOR: Yes.

8229 MR. KOCH: Is that correct?

8230 DR. TAYLOR: Taking the initial price as the base, yes.

8231 MR. KOCH: Okay. Then there is yet another proceeding underway, which you may not be aware of, where the Commission is considering whether or not to keep that mark-up -- I'm not sure it's for loops and I'm not sure for what else -- at 25 per cent or to lower it to 15 per cent. Are you aware of that?

8232 DR. TAYLOR: Yes, I am.

8233 MR. KOCH: Okay. If the mark-up were in fact 15 per cent, then the discount CallNet would be asking for, if you remove the mark-up, would be -- and again I went to my engineer friend -- 13 per cent.

8234 DR. TAYLOR: Okay.

8235 MR. KOCH: I'm suggesting to you, Dr. Taylor, that your use of the words "massive discounts" is overblown. You have overstated the case, have you not?

8236 DR. TAYLOR: Well, I wouldn't agree with that simply because I am characterizing two different discounts. That is, I have discounts on the order of 70 per cent from -- that are part of this sentence as well as the discounts that you have named.

8237 MR. KOCH: This is where I'm asking you to focus on the CallNet proposal.

8238 DR. TAYLOR: Yes.

8239 MR. KOCH: Thirteen per cent or 20 per cent is a "massive discount"?

8240 DR. TAYLOR: Well, I have characterized it at that. I don't think I would change the name right now. If I were to write two sentences instead of one, I might characterize yours differently.

8241 MR. KOCH: How would you characterize --

8242 DR. TAYLOR: Think about it this way --

8243 MR. KOCH: How would you characterize it, Dr. Taylor?

8244 DR. TAYLOR: Well, let me finish my answer and maybe we will be done.

8245 I would characterize the discounts in play as being 20 to 70 per cent and that range I would characterize as "massive".

8246 MR. KOCH: I think it's fair to my client to focus on my client's proposal.

8247 DR. TAYLOR: Well, all right.

8248 How would I characterize the 20 per cent discount? Unwarranted I guess.

8249 MR. KOCH: Unwarranted. Okay. We have gone from "massive" to "unwarranted". I'm making progress.

--- Laughter / Rires

8250 MR. KOCH: In paragraph 3 --

8251 THE CHAIRPERSON: I hope we don't have to sit here until he says that it's warranted.

--- Laughter / Rires

8252 MR. KOCH: Whatever my skills, I don't think I could ever get Dr. Taylor to say it's warranted, Mr. Chairman.

--- Laugher / Rires

8253 MR. KOCH: You also quote an FCC decision at the foot of the page. This is a bit of a sideshow. This isn't to deal with your strong language. Maybe this is to deal with absent language.

8254 You quote from the fourth report in order entitled "In the Matter of Deployment of Wireline Services Offering Advanced Telecommunications Capability". You cite that here for a reflection of the FCC sentiment.

8255 If I could ask you to turn to the brief excerpt that I have reproduced which includes the statement. I take it you are referring there to the statement in the middle of paragraph 4 where it said:

"Through its experience over the last five years in implementing the 1996 Act, the Commission has learned that only by encouraging competitive LECs to build their own facilities or migrate towards facilities-based entry will real and long-lasting competition take root in the local market."

8256 There is a footnote there and you haven't reproduced the footnote. I just wanted to draw the Commission's attention to it, particularly the latter part of the footnote, which says:

"In addition to facilities-based entry, the 1996 Act envisions competitive entry through purchase of unbundled network elements and resale. We note, in particular, that it may not be economically feasible for most carriers to compete for residential customers without substantial use of unbundled network elements, at least based on the costs associated with some current technologies."

8257 So the FCC is putting forward a caveat with respect to residential competition, is it not?

8258 DR. TAYLOR: That's right. Let me point out --

8259 MR. KOCH: One more question and then I will let you go.

8260 DR. TAYLOR: Sure.

8261 MR. KOCH: It is a significant caveat, is it not?

8262 DR. TAYLOR: I'm sure all the Commission's caveats are significant, yes.

8263 MR. KOCH: So that makes this one significant. I'm sorry, I cut you off, Dr. Taylor.

8264 DR. TAYLOR: Right. I was just going to clear up, in American English "facilities-based entry", which is the phrase that the footnote comes off of, may mean something different in the U.S. than it does here.

8265 When the FCC speaks of "facilities-based entry" they include the purchase of unbundled elements from the ILEC in that phrase. That is, whether the CLEC buys its unbundled loop from Verizon or from Sears-Roebuck is all included in "facilities-based" entry in U.S. FCC parlance and that may not be the usage that you do here.

8266 MR. KOCH: Okay. So using that parlance, then, there is a recognition that that type of entry -- there is a recognition by the FCC that type of entry will also lead to real and long-lasting competition. Correct?

1205

8267 DR. TAYLOR: Yes.

8268 MR. KOCH: If we go to the end of -- we are back to the strong language, Dr. Taylor -- paragraph 73 of your rebuttal evidence you provide an answer in the first sentence. Then you say:

"Economic efficiency would be reduced through uneconomic entry and the CRTC's goal of fostering facilities-based local competition would be fatally compromised. If services used by competitors could be purchased at massive discounts..." (As read)

8269 Again, I guess for CallNet we would have to read "unwarranted discounts":

"...efficient entrants would be unable to self-supply such services profitably and every competitor's transition from resale and dependent competition to facilities-based competition for all network services would stop in its tracks." (As read)

8270 So what you are positing is a doomsday scenario, are you not?

8271 DR. TAYLOR: Yes. If services from the ILECs were purchased at massive discounts and below cost, who in his right mind would build his own.

8272 MR. KOCH: How about at unwarranted discounts and cost?

8273 DR. TAYLOR: Well, "unwarranted' gets us out of magnitude, so yes. Obviously if discounts are minor, the sin is minor. I mean this is a continuum.

8274 So if the prices for wholesale services are below where they should be, but not much below, the damage that would be done that is listed in this paragraph would be small. If the difference is large, the damage will be large.

8275 MR. KOCH: So I think it is fair to say, and it fits into our overall framework for discussion, that economic theory sometimes departs from reality and practice, that these kinds of doomsday scenarios are relative things.

8276 I mean, first of all, other factors may intervene which may not bring about the doomsday scenario, and also, obviously the further you go down the continuum the greater the risk of a doomsday scenario, but you are just dealing with a risk. Is that not right?

8277 DR. TAYLOR: Well, yes that is obviously correct.

8278 Just to make sure I'm understanding what I said here, the services that we are speaking of that are used by competitors in paragraph 73 are all services, not just essential or near essential.

8279 MR. KOCH: Yes.

8280 DR. TAYLOR: It is my understanding then that purchasing -- that CallNet's proposal would call for purchasing retail services at incremental costs.

8281 MR. KOCH: Facilities at incremental costs.

8282 DR. TAYLOR: Facilities. That surely could involve, for some facilities, massive discounts in the usual American use of the word.

8283 MR. KOCH: And the doomsday scenario?

8284 DR. TAYLOR: Correct.

8285 MR. KOCH: You know sometimes it's helpful in psychoanalysis and elsewhere when you are facing a doomsday scenario to throw the demons on the table and examine them. I would like to do that with you, Dr. Taylor.

8286 DR. TAYLOR: Sure.

8287 MR. KOCH: Let's get the demons out on the table and see if we can't deal with them. Okay.

8288 One of the economic theories you point out in your evidence is that our proposal would encourage uneconomic entry. Is that correct?

8289 DR. TAYLOR: Yes.

8290 MR. KOCH: That theory says that inefficient firms may enter based on our proposal but would be unable to sustain their entry. Is that not correct?

8291 DR. TAYLOR: But would be unable to sustain their entry, no. My understanding is under your proposal they would be able to sustain their entry.

8292 MR. KOCH: Until the measures that we are asking for are taken off, taken away. Correct?

8293 DR. TAYLOR: You have lost me.

8294 I was looking at purchasing wholesale services at a discount, not including that discount in an imputation price floor. That's what I meant.

8295 MR. KOCH: I think we had better slow down.

8296 Purchasing a wholesale service at a discount -- let's talk about CallNet's proposal.

8297 We are talking about purchasing a non-essential and not a near-essential facility or a near or essential facility at incremental cost. Correct?

8298 DR. TAYLOR: Yes.

8299 MR. KOCH: Okay. Do you understand that CallNet originally made a proposal that what would be imputed at that point is the incremental cost plus a mark-up but that the Commission has ruled that proposal to be out of scope of this proceeding?

8300 DR. TAYLOR: Yes, that is my understanding.

8301 MR. KOCH: Okay. So then we have what is on the table now is that the imputation test would be at the tariffed rates.

8302 DR. TAYLOR: Okay.

8303 MR. KOCH: It is your evidence, then, that in economic theory the demon we are dealing with -- one of the demons we are dealing with is uneconomic entry. Correct?

8304 DR. TAYLOR: I don't think so. I think what we are dealing with is uneconomic use of ILEC facilities. It is not entry per se.

8305 MR. KOCH: Well, the words "uneconomic entry" are in your evidence, are they not?

8306 DR. TAYLOR: Oh, sure. There are lots of pieces of policy which give rise to uneconomic entry. But the idea of giving a wholesale break -- a break or selling wholesale services at incremental cost and imputing the price, incremental cost, the way we should --

8307 MR. KOCH: And that is the proposal?

8308 DR. TAYLOR: Okay. Well, yes. I guess you can get to inefficient entry because the ILEC would be unable to compete or have a disadvantage competing against CLECs in the sense of recovering its shared fixed and common costs.

8309 So I guess the answer finally is yes. It is not as simple as I thought.

8310 MR. KOCH: But if it can recover those fixed and common costs through its productivity gains elsewhere, then that is not the case. The ILEC is still recovering its fixed and common costs?

8311 DR. TAYLOR: No, but it is still inefficient entry. It doesn't matter whether Bell Canada can get contribution -- small "c" contribution monies from elsewhere, you know, from other services, from other activities, we are still going to see inefficient entry if the prices for wholesale service for residential local exchange service are set incorrectly.

8312 MR. KOCH: My question to you which started out this discussion is that the theory of inefficient entry is that inefficient firms may enter the market based on our proposal, but if our proposal were taken away, at the end of the day they would fail. Correct?

8313 DR. TAYLOR: By your proposal "taken away," you meant --

8314 MR. KOCH: That it is non-sustainable.

8315 DR. TAYLOR: Wait a minute. Your proposal "taken away" means wholesale prices go back to Phase 2 costs plus 25 per cent?

8316 MR. KOCH: Is it or is it not one of your criticisms of the CallNet proposal that it will encourage inefficient entry?

8317 DR. TAYLOR: Yes.

8318 MR. KOCH: Okay. Inefficient entry, we just discussed the effect of that on the ILEC, but you said no, that is not the issue. The issue is that -- well, what is the issue?

8319 DR. TAYLOR: What happens for the particular service. The fact that Bell Canada may be rich or poor or have money coming in or going out elsewhere, your productivity suggestion --

8320 MR. KOCH: Right.

8321 DR. TAYLOR:  -- has nothing to do with the competition that Bell Canada and CallNet will have in the residential market.

8322 MR. KOCH: So in American English what is the demon that is going to happen to that service?

8323 DR. TAYLOR: The demon is that if CallNet's costs are high, higher than Bell Canada, CallNet can still survive using its advantage, its regulatory advantage in not having to pay for shared, fixed and common costs for the facilities that it uses.

8324 MR. KOCH: What is that going to lead to? I want to understand --

8325 DR. TAYLOR: It's going to lead to --

8326 MR. KOCH: So far I don't see a problem.

8327 DR. TAYLOR: Well, you are not an economist.

8328 MR. KOCH: Exactly. That is the beauty of it.

--- Laughter / Rires

8329 MR. KOCH: Dr. Taylor, what is the problem?

8330 DR. TAYLOR: What happens at the end of the day --

8331 MR. KOCH: What is the doomsday scenario?

8332 DR. TAYLOR: Yes, the doomsday scenario is, if this goes on forever we will have a long-run equilibrium in Canadian competition when there will be multiple carriers providing local service and the equilibrium price is going to be higher than it ought to be and that it would be if we had set the wholesale service prices correctly in the first place.

8333 MR. KOCH: So that is the doomsday scenario and that is -- what you are saying is that is the risk that economic theory would dictate?

8334 DR. TAYLOR: That is one of them, yes. The inefficient entry story is that at the end of the day you have high-cost firms providing service and therefore it must be the case that consumers are paying more for the service than they would if we had efficient entry.

8335 MR. KOCH: Do you know what CallNet's cost structure is?

8336 DR. TAYLOR: No.

8337 MR. KOCH: Do you know what AT&T Canada's cost structure is?

8338 DR. TAYLOR: It is even more of a mystery.

--- Laughter / Rires

8339 MR. KOCH: I take it one of the other economic theories that you point to is that our proposal could lead to price cutting. Correct?

8340 DR. TAYLOR: Yes.

8341 MR. KOCH: That is another one of the demons that we have to exorcise in this process?

8342 DR. TAYLOR: Well, exorcising demons is your view. That is another problem, opportunity that we have here.

8343 MR. KOCH: Okay. Another risk.

8344 DR. TAYLOR: Yes. That's fair.

8345 MR. KOCH: That risk presumes that the proposal would, in fact, lead to vigorous competition. Competitors are going to go at each other hammer-and-tong and we are going to have -- the doomsday scenario is price cutting?

8346 DR. TAYLOR: Yes, it is cutting prices so that -- cutting prices relative to what they would be in a competitive market.

8347 MR. KOCH: Are you familiar with the price cutting that occurred in the long distance market in Canada?

8348 DR. TAYLOR: Generally, yes.

8349 MR. KOCH: You are aware that this occurred after the Commission took the decision to forbear from regulating long distance rates?

8350 DR. TAYLOR: I believe that is the case.

8351 MR. KOCH: As we discussed earlier, in your view this decision was necessary to achieve an efficient economic outcome in Canada?

8352 DR. TAYLOR: By "this decision," you mean the forbearance of long distance --

8353 MR. KOCH: The forbearance decision.

8354 DR. TAYLOR: Yes.

8355 MR. KOCH: You also indicated that you wouldn't disagree with Mr. Nicholson's view that long distance competition was a success -- has been a success.

8356 DR. TAYLOR: Yes. It was probably painful for the players, but yes, I think it would be characterized as a success.

8357 MR. KOCH: One of the final -- or finally, I should say, one of the economic theories you point out is that:

"CallNet's proposal could curtail the incentive for innovation and for new entrants to build their facilities." (As read)

8358 Correct?

8359 DR. TAYLOR: Yes. Those are two. The innovation by the ILEC and building out your own facilities for the CLEC.

8360 MR. KOCH: These are other doomsday scenarios that you say could occur?

8361 DR. TAYLOR: Other problems.

8362 MR. KOCH: Other risks?

8363 DR. TAYLOR: Yes.

8364 MR. KOCH: Okay.

8365 Dealing first with innovation, that is the same doomsday scenario that Professor Harris pointed to five years ago, is it not?

8366 DR. TAYLOR: He raised that issue, yes.

8367 MR. KOCH: As we discussed, your clients aren't taking the position in this proceeding that that doomsday scenario has come about, are they?

8368 DR. TAYLOR: Well, no, they are not. But, on the other hand, we have not had five years experience under the CallNet proposal either.

8369 MR. KOCH: Fair enough. Then the other -- and you are quite correct to say it is a different demon -- the demon of incentive on competitors to build their own facilities. Perhaps we could touch on that for a moment.

8370 DR. TAYLOR: Sure.

8371 MR. KOCH: I take it you are not denying there are significant benefits aside from pricing to owning one's own facilities, are you?

8372 DR. TAYLOR: I wouldn't dispute that, no.

8373 MR. KOCH: Including maintaining quality?

8374 DR. TAYLOR: Maintaining consistent quality, yes.

8375 MR. KOCH: I don't believe -- or maybe you were here on Tuesday when I was cross-examining Mr. Talbot, who was the capital markets expert who your client put up. He made a long speech about the reasons not only why a competitor would want to own their own facilities but also why the capital market would want them to do that. Do you remember that speech?

8376 DR. TAYLOR: I remember the subject matter. I don't remember the points he made to support it.

8377 MR. KOCH: Are you familiar with the business plans of the three wireline CLECs who are still in the game in Canada?

8378 Are you familiar with the business plan of Group Telecom?

8379 DR. TAYLOR: No.

8380 MR. KOCH: Are you familiar with the business plan of CallNet?

8381 DR. TAYLOR: No.

8382 MR. KOCH: Are you familiar with the business plan of AT&T Canada?

8383 DR. TAYLOR: No.

8384 MR. KOCH: Are you aware that CallNet's proposal would only apply to facilities-based carriers?

8385 DR. TAYLOR: To Canadian facilities-based carriers, if memory serves. Yes.

8386 MR. KOCH: Yes. Well, the two sort of go together.

8387 If I knew what "tautological" meant or "topology" that might be one.

--- Laughter / Rires

8388 DR. TAYLOR: Guilty.

8389 MR. KOCH: Dr. Taylor, let's be practical.

8390 The Commission has recognized before that it must sometimes depart from strict economic theory in the short or medium term in order to achieve a competitive market and therefore an efficient result in the long term. Is that not correct?

8391 DR. TAYLOR: Certainly.

1225

8392 MR. KOCH: And our real world experience in Canada hasn't led to any doomsday scenario, has it?

8393 DR. TAYLOR: It has not; that is, we are not in doom here in Canada. However, you have not put into effect the particular pieces of policy to which I am objecting here. We haven't done the experiment yet.

8394 MR. KOCH: We haven't. And as you acknowledged, economic efficiency in theory sometimes depart from practice. And abstract regulatory theorizing -- I think those were your words, or something to that effect -- sometimes departs from real world practice.

8395 Is that correct?

8396 DR. TAYLOR: Yes.

8397 MR. KOCH: Thank you.

8398 Those are my questions, Mr. Chairman.

8399 THE CHAIRPERSON: Thank you, Mr. Koch.

8400 Mr. Secretary, Mr. Koch's exhibits?

8401 MR. SPENCER: Yes, Mr. Chairman.

8402 The excerpts from Telecom Decision CRTC 1997-8, paragraphs 65 to 85, will be identified as CallNet Exhibit No. 5.

EXHIBIT NO. CALLNET-5: Excerpts from Telecom Decision CRTC 1997-8, paragraphs 65 to 85

8403 MR. SPENCER: U.S. Developments in State Regulatory Policies Toward Competition will be CallNet Exhibit No. 6.

EXHIBIT NO. CALLNET-6: U.S. Developments in State Regulatory Policies Toward Competition

8404 MR. SPENCER: Excerpts from FCC 01-204 will be CallNet Exhibit No. 7.

8405 Thank you.

EXHIBIT NO. CALLNET-7: Excerpts from FCC 01-204

8406 THE CHAIRPERSON: Thank you, Mr. Secretary.

8407 We will take our lunch break now. Would anyone have a problem if we took our lunch break to 1:20 instead of 2:00?

8408 No? Then we will do that. We will reconvene at 1:30.

8409 The next party, I understand, to cross-examine Dr. Taylor will be GT Group Telecom.

--- Upon recessing at 1225 / Suspension à 1225

--- Upon resuming at 1335 / Reprise à 1335

8410 THE CHAIRPERSON: We will return to our proceeding now and cross-examination of Dr. Taylor.

8411 The next part to cross-examine is GT Group Telecom.

8412 Mr. Daniels.

EXAMINATION / INTERROGATOIRE

8413 MR. DANIELS: Thank you, Mr. Chairman.

8414 Good afternoon, Dr. Taylor.

8415 DR. TAYLOR: Good afternoon, Mr. Daniels.

8416 MR. DANIELS: Dr. Taylor, I don't think we will be talking for very long today.

8417 I wonder if we could begin by discussing whether you would agree with me -- and I explored this earlier with one of your client's panels -- that compared to 1998, before competition was allowed, the ILECs in Canada have faced increasing amounts of competition since 1998 to 2001.

8418 That is a proposition that I take it you could agree with?

8419 DR. TAYLOR: Yes.

8420 MR. DANIELS: And as part of that many players have been signing customers to long-term contracts.

8421 Would you agree with that statement?

8422 DR. TAYLOR: I don't know it as a fact, but my experience in the business suggests that yes, that is a common way that large business customers receive services.

8423 MR. DANIELS: I should apologize. I should keep this on the theoretical level. I mean that within the context that you would expect that they would be interested in long-term contracts.

8424 DR. TAYLOR: Yes.

8425 MR. DANIELS: In fact, if I turn to your rebuttal evidence, at paragraph 50 -- do you have that in front of you?

8426 DR. TAYLOR: Yes.

8427 MR. DANIELS: In that evidence you point out that:

"Moreover, the retail customers most frequently sought by CLECs are large business customers and services are often sold to such customers through long-term contracts."  (As read)

8428 I take it you are suggesting that CLECs would concentrate on obtaining long-term contracts from their customers. That would be one approach.

8429 DR. TAYLOR: Yes. They tend to specialize in customers for whom it makes sense to sell services under long-term contracts.

8430 MR. DANIELS: In that regard would you agree with me that it makes sense for the ILECs, too, to focus in terms of their largest competitive efforts for these customers as well, to get them to sign up to long-term contracts?

8431 Would you agree with that statement?

8432 DR. TAYLOR: Sure. They have little choice, in the sense that if General Motors puts out an RFP and everybody responds to it, it may end up being that the competition will take the form of my contract against your contract.

8433 MR. DANIELS: I understand that earlier, I believe with Mr. Koch, we established that you were not familiar with the different business plans of all the companies. But there are some CLECs, such as my client, Group Telecom, which tends to focus on the small and medium business market as well.

8434 Would you agree with me that they, too, might be interested in signing their customers to long-term contracts?

8435 DR. TAYLOR: Sure, both ways; that is, small and medium business customers may value having a secure source of supply at a given price, at a discounted price for five years or so. Similarly, if you are going to play in that game, both ILECs and CLECs would want to offer what they want to buy.

8436 MR. DANIELS: So once again, it would be in the ILECs' interest to also sign these customers to long-term contracts, not just merely large businesses but, as well, small and medium businesses providing that scenario where the CLECs focus of attention.

8437 Would you agree with that?

8438 DR. TAYLOR: Yes. Assuming that these customers do want contract services, then, yes, you provide what your customer wants.

8439 MR. DANIELS: Would you also agree with me that the ILECs would have this incentive to sign customers to long-term contracts in anticipation of CLECs entering into these markets as well?

8440 DR. TAYLOR: By "in anticipation", you suggest that they are not facing competition today, expect competition tomorrow, and thus would offer a contract they otherwise wouldn't offer in order to lock out, in some sense, a CLEC from serving those customers.

8441 Is that it?

8442 MR. DANIELS: Yes, that is exactly what I am suggesting.

8443 DR. TAYLOR: That is exactly what you mean.

8444 Well, yes and no. Yes in the sense that ILECs are trying to maximize profit in this market, as well as any other. If customers want long-term contracts, contracts of any sort, the ILEC, even in a market where it doesn't face competition from CLECs, nonetheless has to offer these businesses what they want, or the business will always just take a tariffed service.

8445 The upshot of it is that customers who also are willing to take, or want to take under some circumstances, a long-term contract are also looking at competition. You have to make it worth the customer's while to stay with me for five years, or two years, or whatever the term of the contract, rather than waiting to see what the future might bring.

8446 Even if there aren't competitors -- which I believe there are -- the ILEC in this circumstance is still competing against its tariffed service. You can't make one of these people take a contract unless they want one.

8447 MR. DANIELS: Right. I don't think I am suggesting that the ILECs are trying to make people take.

8448 What I am asking is, from a theoretical standpoint, would you agree with me that the ILEC might have more of an incentive to create long-term contracts as an option for its customers prior to competition, in anticipation or in a competitive market, either/or, as opposed to in a completely regulated market?

8449 DR. TAYLOR: The completely regulated throws me, but let me do the other.

8450 MR. DANIELS: Sorry. I mean regulated as opposed to a non-competitive market.

8451 DR. TAYLOR: Right. I take your point that a profit-maximizing ILEC may find its business case for a given contract is more attractive if it anticipates, though it never knows, that there will be more competitive contracts on the horizon in two years or in three years and if it can lock someone in for five.

8452 If that's its belief, then it may have more of an incentive to offer such a contract and thus to offer customers a lower price to get them to take such a contract than if we were under regulation for the indefinite future, and there was no expectation that competitors would come in in the future.

8453 MR. DANIELS: In that regard -- and once again, I don't know if you were here for my cross-examination of the second panel. And I don't intend to pull out all the exhibits.

8454 It wouldn't surprise you to learn that the ILECs -- Bell Canada, your client, for example -- from an economic theorist's perspective, did an offer for business local primary exchange service, the option of a one or a three-year contract prior to competition.

8455 But with the introduction of competition, they now make that an offer available, as I say, to customers. They introduced that in the year 2000.

8456 That wouldn't surprise you, would it?

8457 DR. TAYLOR: If it is a fact, it probably wouldn't surprise me because at least in the U.S. we see such contracts all the time. I believe we saw such contracts even before the advent of competition.

8458 So I am not sure whether you can link the growth of competition for business services in Canada with the introduction of such contracts. I always see it going the other way; that it is customers that demand such contracts and that, over time, the RBOCs in the U.S. and the ILECs up here are becoming more attuned to what their customers want.

8459 MR. DANIELS: As a result of competition. Would you not agree with me?

8460 DR. TAYLOR: Yes, that is one of the advantages of competition.

8461 MR. DANIELS: Just to be clear, it is 100 years that Bell has been providing in Canada business primary exchange service.

8462 Would you agree with that?

8463 DR. TAYLOR: Give or take, sure.

8464 MR. DANIELS: Right, give or take.

8465 As I said, it wouldn't surprise you to learn that the option was only introduced with the advent of competition in the year 2000.

8466 DR. TAYLOR: I hate to argue facts with someone who knows them better than I, but I would be willing to bet a U.S. nickel that services have been sold by Bell Canada under contract before 1990, or the year 2000, or whatever year you gave me.

8467 I think you are naming some specific set of contracts which were put out for some specific size of customer. I would find it hard to believe that the Bank of Canada, or whatever, has been taking service under the tariff here in the 1980s.

8468 MR. DANIELS: Right. Just to be clear, I was referring to business primary exchange service, which is a regular business line. That is the main product for small and medium businesses.

8469 So I take your point.

8470 DR. TAYLOR: All right.

8471 MR. DANIELS: At this point I would like to explore with you some questions about the theoretical basis of regulation, the purpose of regulation.

8472 Would you agree with me that in a fully competitive market, regulation -- price cap regulation, for example, or rate of return regulation, when I refer to regulation -- in telecommunications wouldn't be required?

8473 DR. TAYLOR: Yes, I would agree.

8474 MR. DANIELS: Would you agree with me that the purpose of regulation, therefore, is basically to stand in the place of what I believe was referred to as the invincible hand of the marketplace?

8475 Is that correct?

8476 DR. TAYLOR: Yes.

8477 MR. DANIELS: Therefore, the primary purpose of regulation, from an economist's standpoint, as I understand it, would be to force a dominant carrier, such as the ILECs, to act as they would act in a competitive fashion in a fully competitive market.

8478 DR. TAYLOR: Yes, in all the different dimensions of acting; that is, pricing but also service quality, innovation, et cetera.

8479 MR. DANIELS: In that sense, I understand that it is your position, and generally accepted within economics, that the superiority of a price cap form of regulation as compared to one of rate of return, because it tends to create the right incentives and, as well, encourages the ILEC to act as if it were in a competitive market.

8480 DR. TAYLOR: To the greatest extent possible.

8481 MR. DANIELS: Would you agree with the concept that regulation is more effective if it is designed to incent the ILEC or create incentives for the ILEC to act in a certain manner as opposed to simply dictating the ILEC to act in that manner?

8482 DR. TAYLOR: Yes.

8483 MR. DANIELS: For that reason, I take it that is why you prefer a price cap regulation regime as opposed to a rate of return, because it is one that is based on incentive form of regulation.

8484 Is that correct?

8485 DR. TAYLOR: That is correct.

8486 MR. DANIELS: When given the choice between simply incenting the ILEC or dictating to the ILEC, I take it you would agree with me that, if appropriate, the Commission should choose a form that would incent the ILEC to act in a manner of whatever the Commission's goal is.

8487 DR. TAYLOR: Yes. When possible, regulation ought to be in the nature of setting the incentives for the regulated firm correctly, controlling whatever element needs to be controlled -- price or service quality -- and leaving everything else to the enlightened self-interest of the regulated firm.

8488 MR. DANIELS: In that regard, you would agree with me that incenting forms of regulation can take many forms. One of those forms could be financial benefits to the ILEC?

8489 DR. TAYLOR: Yes.

8490 MR. DANIELS: Would you also agree with me that another form could be financial penalties?

8491 DR. TAYLOR: Yes.

8492 MR. DANIELS: If I could turn to your evidence for a moment -- and I am actually at paragraph 11-28 of your evidence.

8493 I will give you a moment to find that.

8494 DR. TAYLOR: Okay.

8495 MR. DANIELS: I hope I am not misphrasing here, but if I read this statement, it says:

"Importantly, the prices for competitor services remain regulated. This regulation reduces, if not eliminates, the need for continual regulation of incumbent companies' retail service prices."  (As read)

8496 I take it this statement, which is repeated in a number of places in your document, sort of sets out, as I understand it, the essence of the model that you are putting forward to this Commission.

8497 That is, as best as I understand it, that what is important here is for the Commission to regulate competitor services and, in so doing, if you properly regulate competitor services, you reduce and eliminate the requirement to regulate the incumbents' retail services.

8498 DR. TAYLOR: Yes.

8499 MR. DANIELS: Both on a price and quality side.

8500 DR. TAYLOR: Yes, that is correct, in the sense that if competitor services' prices are regulated, quality is regulated, no barriers to entry, then the ability of a CLEC to buy competitor services to enter the market with no barriers to entry provides a check by itself on the ability of the ILEC to raise its retail prices.

8501 MR. DANIELS: What is key here is that the regulation of the competitor services be effective. Would you not agree with me?

8502 DR. TAYLOR: Yes.

8503 MR. DANIELS: If it is not effective, the ability not to regulate on the retail side is going to be -- the requirement not to regulate on the retail side is going to be somewhat compromised.

8504 DR. TAYLOR: Yes, that is correct. What is going on is that the Commission is controlling one part, the level of the river, not the level of the bridge, that CLECs face; that is, it controls the price at which CLECs can get into the market.

8505 If that is done, then if ILECs want to raise the bridge, that increases the margin for CLECs and is self-defeating.

8506 It is not perfect, obviously, but we have the effect then that regulation of the competitor services also puts a limit on the profitability of a price increase on retail services.

8507 MR. DANIELS: I also understand that you are familiar -- and I don't intend to turn to this -- with The Companies' proposal for residential service quality guarantee, generally?

8508 DR. TAYLOR: Yes.

1350

8509 MR. DANIELS: You would agree with me that this is a form of incentive-based regulation?

8510 DR. TAYLOR: Yes.

8511 MR. DANIELS: It's penalties if you don't do it. That is the incentive we are talking about. But that is on the retail side?

8512 DR. TAYLOR: That is correct.

8513 MR. DANIELS: So if I understand your evidence correctly, it is more important for the basis of this model -- as nice as this might be on the retail side, appropriate or inappropriate, it is more important to get the terms right for the incentives for competitors in terms of -- and here I'm not talking prices, I'm talking quality. Would you agree with me?

8514 DR. TAYLOR: Well, I'm not sure I would agree with "more important" that you put in place explicit regulatory mechanisms. Part of it depends upon what the history is of the current service quality rules, regulations, behaviour between the Commission and the ILECs.

8515 But your point is correct, if it's important to regulate price, it is important to regulate quality, and that applies to competitor services as well as to retail services.

8516 MR. DANIELS: Right. I guess the proposition that I'm trying to explore with you is from strictly a theoretical basis here, is it more important, based on your model, to make sure that we get effective regulation of both service -- let's just talk service now for a moment -- for service to competitors than it would be for service to retail customers, quality of service?

8517 DR. TAYLOR: Yes. I think I'm still reluctant to give you "more", that it is more important.

8518 Perhaps try it this way: Perhaps it would be more important if the Commission actually were relying on wholesale services and had deregulated or declared competitive, or whatever the phrase is here, all retail services. Had the Commission done that, then I would agree with you that it is very important in that circumstance to regulate competitor service quality. But for many services the Commission isn't relying on this mechanism.

8519 MR. DANIELS: Right. So if I understand correctly, though, it is your proposition that for a number of services, especially in the business market, the Commission should be relying on this proposition?

8520 DR. TAYLOR: No. In the business market, from the evidence that I have seen from the company, we don't need this sort of theoretical evidence that there are no barriers to entry and someone can enter even if no one is there.

8521 In the business market in urban areas people are there. I mean the business is on the -- competitors are on the ground and up and running and you don't really need to have this theoretical check to say that the business prices don't need to be regulated because you have got actual competition.

8522 This is a statement about potential competition. By "this", I mean paragraph 11-28, the relationship between competitor service prices and the regulation of retail prices.

8523 MR. DANIELS: So if we are getting practical for a moment, then you would agree with me that considering that we are hoping to rely in the business market on the actual competition today, what is important is to make sure that those barriers to entry are truly gone. I know I'm not discussing that today, but the issue I'm raising with you is, isn't it also important to make sure that the quality of service that is being given to the competitors meets with the Commission's requirements.

8524 You would agree with that statement, would you not?

8525 DR. TAYLOR: Yes, I would agree with it. The only place where we are apart, I think, is that whatever the quality of service that is being provided today and yesterday and the day before seems to be adequate to provide and give competitors the ability to come into the business markets, at least in urban areas, and compete.

8526 So I don't think there is evidence that suggests you have to do something about wholesale services for the business market, even if the Commission were to declare or reclassify as competitive business services.

8527 MR. DANIELS: Dr. Taylor, to be fair I hadn't brought it forward to take you through the actual evidence of what is going on in the market today because I understand that that is not your position.

8528 So from that perspective I think why don't we keep this conversation on a theoretical basis, because you would agree with me you are not well versed enough for me to take you through whether that is in fact the case today?

8529 DR. TAYLOR: Probably not and we would probably disagree. So let's not.

8530 MR. DANIELS: Right. Okay.

--- Laughter / Rires

--- Pause

8531 MR. DANIELS: So if we keep it on a theoretical level, which I think we both agreed that is the best for this course of examination here, then if I could ask you, in theory if competition is inadequate to constrain an ILEC's prices for wholesale services, you would agree that it is also inadequate to ensure an adequate level of service quality.

8532 You would agree with that statement, would you not? In fact, I have taken it from --

8533 DR. TAYLOR: Yes, in theory that is correct. Yes.

8534 MR. DANIELS: Right. In fact, I am actually referring to -- the statement shouldn't surprise you, it is from The Companies(Group Telecom)25 on page 3. I don't propose to have everyone turn to it. It was the statement that was read earlier.

8535 In that regard, you would agree with me in theory if competition in Canada is inadequate at this point to constrain an ILEC's prices, we have already agreed that for wholesale services it would also be inadequate to regulate the level of service quality. As you state, it makes no sense to regulate price without regulating quality.

8536 DR. TAYLOR: Yes, that is correct.

8537 MR. DANIELS: In that regard, we have agreed that regulating quality can take many forms. The Commission can establish what the requirements are. The Commission can monitor.

8538 I'm sorry. The record --

8539 DR. TAYLOR: Oh, yes. Yes, it can establish. Yes, it can monitor.

8540 MR. DANIELS: As effective form, it could also establish penalties?

8541 DR. TAYLOR: Yes, it could.

8542 MR. DANIELS: That concludes my examination.

8543 Thank you, Mr. Chairman.

8544 THE CHAIRPERSON: Thank you, Mr. Daniels.

8545 I believe that concludes, then, all the parties who had registered to cross-examine Dr. Taylor.

8546 I believe counsel does not have any questions.

8547 So I will turn to Commissioner Langford.

8548 COMMISSIONER LANGFORD: Thank you, Mr. Chairman.

8549 Dr. Taylor, I was interested in some of the comments you made about service quality this morning. I tried to write some of it down. I'm not fast and so I probably don't have it exactly. So I'm going to try to paraphrase one of your comments and if I don't get it right I assume you will correct me. Again, this is not a direct quotation.

8550 "My experience with phone companies is that if you give them a target and a financial incentive to meet it, you can be darn sure they are going to meet it."

8551 DR. TAYLOR: It sounds familiar.

8552 COMMISSIONER LANGFORD: Okay. That is pretty clear to me so I don't have any questions about that.

8553 But what I want to know is, are there other incentives? Are there other ways to do it, in your experience, that work? I'm thinking obviously of targets but not financial penalties or incentives.

8554 DR. TAYLOR: Well, yes. I think we have seen prior to competition, probably in Canada and surely in the U.S., Commission rules. That is, in the long history of telecommunications I think there has been a set of standards for retail telecommunication services in Canada -- well, forever sort of.

8555 Those measures have been explicit. They are measured. People watch them. It has been my understanding that if the telephone company, the ILEC, misses its target, its standard, for some period of time, the Commission gets irritated.

8556 That irritation in history used to take many forms. Sometimes it would take the form of a lower rate of return in a rate case until the deficiency was made up. Sometimes it was an order from the Chairman of the Commission to the CEO of the telephone company, "Do it", and many forms in between. Some of which are not financial, are just, "Hey, it's our rules and you are supposed to obey our rules."

8557 COMMISSIONER LANGFORD: Because you have had considerable experience in this I am interested in your opinions. Do you think that any of these, which sound to be pre-competitive models, the way you have described them, would transport into the present and competitive environment or increasingly competitive environment?

8558 DR. TAYLOR: Well, personally I think I probably do, in the sense that the ILECs as a whole are generally respectful of Commission orders and tend to obey them whenever they can.

8559 The difference, I think, is that once competitors are in the picture it is a different world. Suddenly now what used to be an understanding between a regulated firm and its regulator, is something which matters financially to a whole lot of independent corporations.

8560 I'm not sure that an understanding of Commission rules really would stand up to a situation where if the firm were ordered to do something and didn't do it a particular competitor would suffer financial harm.

8561 COMMISSIONER LANGFORD: Because what bothers me about any kind of new territory is that, of course, as I think you have made the point a number of times and perhaps best made in your reminder of that old adage about many a slip between the cup and the lip. It's hard to see where -- I mean this is so trite it hardly needs saying, but it really is it is difficult enough to make the rules going forward; almost impossible to figure out whether you have made them correctly.

8562 I have in mind the concept that in the end subscribers will pay somehow. That just because there are uncapped services, there is always elasticity, there is places where you could raise something a penny or half a penny or a nickel and whatever, that if you are getting fined, if you are getting penalized, if you are paying rebates, they are going to be taken out of one pocket and put into the next pocket and then passed on.

8563 I worry that a rebate or any kind of financial penalty scheme, though you certainly declare that it works, may work to the disadvantage of subscribers.

8564 Do you have any way of sort of looking into the future and seeing how that plays out or if there are safeguards for that?

8565 DR. TAYLOR: Well, yes, I think so. I mean at least for the financial one, the money goes in one pocket -- goes out of one pocket and comes back in the other. That one doesn't worry me so much in the sense that money in a large corporation, any corporation, is fungible. It is the fact that it doesn't -- there is no little note on a dollar bill that goes floating through that says, "Oh, this one is for the penalty," and it goes into a particular direction. It all flows into a pot.

8566 What that means is, if an ILEC were to pay penalties for something it would have no more ability or incentive to go get that money, that is the money, the $10 that it had to pay in a penalty, from some other service, than it would under any circumstances. If it could get $10 more out of toll service, gee, it would get it, even if it weren't being penalized in a competitive market.

8567 In a regulated market, you know, I'm presuming that these companies, all of these companies, are smart enough to be pretty much at the margin. That is, getting enough profit as they can within the rules from the services that they have.

8568 So if you drop another little rule on which says "Screw up over here you are going to have to pay money," I don't think there is any other place where they can say "Because I had to pay $10 over here, you are going to have to pay me $10 to make me whole."

8569 Under rate of return regulation perhaps that would have been the case, unless you, which I assume you did, ruled out penalty payments as part of the rate base or the revenue requirement. But that is so much for your financial ones.

8570 COMMISSIONER LANGFORD: You don't see it as an incentive to sharpen the focus on trying to up rates that perhaps you just wouldn't look at to -- that this wouldn't be an incentive in any way having to pay penalties. Having to pay out wouldn't be an incentive to go and find ways to bring more in.

8571 DR. TAYLOR: Well, trust me, I think all of the companies in this room are looking very carefully at all ways of getting money. I'm just an economist, I am not privy to what they do, but I take it as my working hypothesis that they are all pretty good at maximizing profits.

8572 If I use that as my sort of lens through which I look at their behaviour, I would expect that if you penalize them for service quality, you may have a lot of other changes in their behaviour, but they are not going to be raising prices somewhere else in any way that they wouldn't have anyway.

8573 COMMISSIONER LANGFORD: Thank you.

8574 I have one other area on the subject of prices. I'm thinking of the short piece, about a page and a half long, paragraphs 11-69 to 11-73 in your submission on the price regulation of discretionary services --

8575 DR. TAYLOR: Yes.

8576 COMMISSIONER LANGFORD:  -- which you declare to be unnecessary.

8577 I just wanted to explore whether that is always the case or whether there might be some exceptions.

8578 What triggered me on that was your statement in the first sentence of paragraph 11-71 where you say that:

"Second, precisely because non-essential custom calling services are discretionary, regulators in Canada and the U.S. have generally priced such services to generate as much contribution as possible to keep prices low for essential services." (As read)

8579 The word "generally", of course doesn't mean "always" and so I wondered whether there were exceptions to that rule, to your knowledge?

1405

8580 DR. TAYLOR: There probably are. What I used "generally" to mean was that they probably didn't succeed. That is, the prices for the custom calling services are very high relative to cost -- the cost is essentially zero for most of these services -- but that really market evidence suggests that the profit maximizing price is probably higher for many of them than even regulators could manage to do.

8581 There are some exceptions. I know there are some. I don't know in Canada, but in the U.S. there are some instances where U.S. ILECs have voluntarily reduced prices for generally exotic vertical features and found that to be profitable, that is reduced them from where the regulator essentially had set them under rate of return regulation.

8582 COMMISSIONER LANGFORD: So they did it voluntarily then.

8583 DR. TAYLOR: Well, yes, and found that profits increased if they lowered the price.

8584 COMMISSIONER LANGFORD: Have there ever been any examples in the United States of regulators trying to cap such services?

8585 DR. TAYLOR: To cap?

8586 Well, yes, there probably are, I mean in the sense that quite frequently all residential services may be thrown into a basket and in that sense those prices along with basic residential service would be capped.

8587 So yes, they are capped from time to time.

8588 COMMISSIONER LANGFORD: Thank you for that.

8589 In that same paragraph, I think it's the last sentence -- I put so much underscoring on it I can't tell any more -- that is:

"Unlike basic exchange service, there is no public interest goal in maximizing penetration of the service and there are no important network effects..." (As read)

8590 Et cetera.

8591 But when I look at public interest goals, you have named one of them, maximizing penetration. but can public interest goals, in your experience, change, in the sense of could there be a public interest goal in protecting subscribers who have signed up for these, perhaps built a small business practice around having certain of these services as part of the way they offer a service level to their own customers and then finding that they have gone up from $2.00 to $4.00 or $4.00 to $7.00 and realizing that they are trapped in a way?

8592 Is there a public interest goal? I know you make the example to Red Sox tickets, but I think that is a little unfair actually.

8593 Is there a public interest goal in trying to calculate whether some of these services have become ubiquitous enough and perhaps some of the subscribers have become dependent enough on them that they should be treated in a different way. Perhaps not all of them, but perhaps some of them?

8594 DR. TAYLOR: Well, I think not.

8595 I take your point that whenever you price a service, any kind of a service, at some level, that all of the customers look at that level, plan their businesses, plan their homes, plan their budgets around that level and if the next day you come in and radically change or change that price, all of their plans have to change.

8596 That is true of every service, not just telephone service, but, that's true of everything that we buy. We are accustomed to tomatoes cost roughly whatever tomatoes cost.

8597 COMMISSIONER LANGFORD: But if I can't get them at Smith's store, I will get them at Jones' store, but I can only get this service at this point, particularly if I am residential, from --

8598 DR. TAYLOR: Yes. You are ahead of me in the argument.

8599 COMMISSIONER LANGFORD: I'm sorry, I shouldn't interrupt you. Carry on.

8600 DR. TAYLOR: That's okay.

8601 That is the difference, that by assumption we are saying that these are not competitive and you have to get them from the serving local exchange carrier.

8602 However, what would be the public interest alternative? Would it be to say whatever the price is today or the price was yesterday, that is going to be the price forever because that is what people are planning on. Are you going to do that for discretionary services?

8603 I'm not sure that is a good answer, but I'm not sure that is a good policy either.

8604 COMMISSIONER LANGFORD: I'm not sure either. I'm trying to take the benefit of your experience here.

8605 I see by looking at your CV how many of these proceedings you have been in on and I thought, well, this is a chance to talk to someone who has probably been down this road before.

8606 So I don't have a position I am coming from on this in that sense, but does strike me that when we were talking just earlier about the certainty of long term contracts that there may be -- perhaps public policy is a bit heavy, but there may be a fairness issue in the sense of whether people, you know, as you say, build a plan around something and all of a sudden they have part of that plan pulled out from under them quickly.

8607 DR. TAYLOR: Well, let me throw one more log on the fire. Remember that we are talking about telecommunications services and ancillary services at best. We aren't talking about the price of natural gas or something like that which may be, you know, 50 or 60 or 70 per cent of some businesses' expenditure.

8608 Telecommunications, even for a telecommunications-intensive firm, is still down in the 10 per cent of expenditure range. While we are kicking around vertical services that are many times cost, we are still talking about prices which are less than a six-pack of beer a month.

8609 I take your point in principle, but in practice I'm not sure that the public interest is best served by freezing such prices.

8610 COMMISSIONER LANGFORD: Part of your public interest argument, I guess, is in paragraph 11-72. You link it to the contribution charge.

8611 DR. TAYLOR: Yes.

8612 COMMISSIONER LANGFORD: You say in the final sentence:

"When this target was established The Companies had full pricing flexibility for discretionary services and it would make little sense to maintain the same contribution target if pricing restrictions were imposed on those services." (As read)

8613 Would this still be true, Dr. Taylor, if The Companies had already attained or even surpassed, to use this example, the $60 level?

8614 DR. TAYLOR: Well, if you were essentially capping or freezing these prices at a level exceeding the level that you assume in the contribution calculation, then paragraph 11-72 has no force. Then it doesn't matter.

8615 COMMISSIONER LANGFORD: Thank you very much.

8616 Those are my questions, Mr. Chair.

8617 THE CHAIRPERSON: Thank you.

8618 Commissioner Cram.

8619 COMMISSIONER CRAM: Thank you, Dr. Taylor.

8620 One difference that I, in my very weak mathematical mind, thought I ascertained between the "Q" factor and the penalty, the guarantee, was that the "Q" factor is essentially cumulative. I have done a few calculations.

8621 DR. TAYLOR: Sure.

8622 COMMISSIONER CRAM: I drive everybody nuts when I do this.

8623 Start off with $10 as a basic charge. In the penalty side consider that you could raise rates by a maximum of 10 per cent under price cap annually.

8624 DR. TAYLOR: Okay.

8625 COMMISSIONER CRAM: And that the penalty is 5 per cent of the rate.

8626 DR. TAYLOR: Okay.

8627 COMMISSIONER CRAM: On the other side, when you work out "the penalty" you can raise rates 10 per cent, but the maximum penalty is deducted from that, so if the maximum penalty were 5 per cent in that year you could only raise the rates 5 per cent.

8628 DR. TAYLOR: Yes.

8629 COMMISSIONER CRAM: So year one I then would have a rate in the penalty side of $11, a penalty payable of 50 cents, for a net to the company of $10.50.

8630 DR. TAYLOR: Okay.

8631 COMMISSIONER CRAM: The same on the other side. The same on the "Q" factor side.

8632 DR. TAYLOR: Yes.

8633 COMMISSIONER CRAM: But year two, assuming no penalties and giving 10 per cent to each side, on the penalty side the company would be able to charge a rate of $12.10 and on the "Q" factor side they would be able to charge a rate of $11.55.

8634 DR. TAYLOR: Yes. I think that is correct.

8635 COMMISSIONER CRAM: Yes.

8636 DR. TAYLOR: If you don't undo the "Q" factor at the end of the year, then it cumulates, if that is the force of your example.

8637 COMMISSIONER CRAM: Yes. And if you do undo the "Q" factor, doesn't that end up in almost a boomerang to the consumer?

8638 DR. TAYLOR: Well, it does, except the example that I had earlier was remember the price cap index doesn't necessarily determine the price. It is just a level above which you cannot go. So that if the company is already pricing below it, in the example that we gave --

8639 COMMISSIONER CRAM: The AT&T example.

8640 DR. TAYLOR: Yes, then it has no force.

8641 COMMISSIONER CRAM: But if one assumed that the company was pricing in accordance with its maximum ability --

8642 DR. TAYLOR: Yes.

8643 COMMISSIONER CRAM:  -- then we would end up, if we undid the "Q" factor, in year two what would we end up with people paying? Would it be the $12.10?

8644 DR. TAYLOR: It would be the same as if you charged them --

8645 COMMISSIONER CRAM: The penalty.

8646 DR. TAYLOR:  -- the penalty in each year.

8647 COMMISSIONER CRAM: Okay.

8648 DR. TAYLOR: One example that comes close, it's not a "Q" factor, but at the FCC in the early days there was sharing in the price cap plan. The way they did the sharing was like this: that is, they put it into the price cap index, but it stayed in for one year and then it went back out again.

8649 So I presume if you were going to do a "Q' factor, which I am not urging you to do, and it were denominated in terms of "You owe us $10 a year", you would be smart enough in the arithmetic to put it back in after you took it out each year.

8650 COMMISSIONER CRAM: Are you aware in the States that they do have the "Q" factor, that they do put it back in every year at the end of the year?

8651 DR. TAYLOR: That I don't know.

8652 COMMISSIONER CRAM: Now, you have said philosophically that you don't like the "Q" factor, as I understand it, for administrative reasons.

8653 DR. TAYLOR: Largely, yes, because it affects price cap index rather than writing a cheque.

8654 COMMISSIONER CRAM: Yes. If the administrative issues were not there, would there be any difference in your mind between the "Q" factor and the penalty?

8655 DR. TAYLOR: Well, I think you could probably fine-tune something that looked like a "Q" factor, putting it in, taking it out every year, doing some adjustment if the firm isn't pricing up to the price cap index, to make it behave as a penalty, a straight write-a-cheque penalty would, but why do that? Why not simply --

8656 COMMISSIONER CRAM: Do the penalty.

8657 DR. TAYLOR: Do the penalty.

8658 COMMISSIONER CRAM: Yes. I am exploring it really, can you think of any reason why it would be -- why you would not reinstate the "Q" factor at the end of the year, I mean aside from sort of persistent quality of service problems?

8659 DR. TAYLOR: Well, yes, I guess so. If for an incentive purpose you are looking at a year as a discrete period of time and you find that the company has violated its standard and you have determined that if you violate the standard, the cost per year is going to be $10, then you only ought to charge them $10. Therefore, you should take the $10 "Q" factor out of the price cap index after it had been in for a year.

8660 COMMISSIONER CRAM: Yes.

8661 DR. TAYLOR: Or else you are actually giving the company a different incentive. I mean, not necessarily wrong, but the cumulative one I think sort of sounds bad from a fairness perspective in the sense that a hundred years from now they are still going to be paying for the sins of a hundred years ago.

8662 COMMISSIONER CRAM: Plus, because it grows every year.

8663 DR. TAYLOR: Yes. Well, yes.

8664 COMMISSIONER CRAM: I next wanted some idea from you of the issue of looking at returns.

8665 Ms Lawson talked to you about looking at returns, they are substandard.

8666 From a philosophical basis -- and I know you kept saying "should not consider earnings per se". Should we not, though, as a Commission look at the sort of aggregate earnings, aggregate returns to give us a guide to the success or failure of price cap, number one?

8667 DR. TAYLOR: Well, I would urge you not to. I understand coming from a rate of return in long history that it is hard to ignore it and your constituency makes it difficult to ignore as well, but to whatever extent you can, I would urge you to ignore it.

8668 Think of it this way: If in Canada all of the companies that are under your supervision were doing well, prices were low, consumers were happy with the service quality, new services were coming in, there was a great deal of investment in modernization, all of this was going on and the companies were earning some headline-making accounting rate of return, would you be happy or would you be sad?

1420

8669 I am urging you to be happy and to ignore the returns that go along with that.

8670 And we could tell the same story on the down side, that what ultimately matters to consumers, I would argue, are the services they get, the quality, the modernization, et cetera, and the prices that they pay. The earnings, high or low, of the firm that provides them is not an important issue.

8671 It sneaks in the back door in some sense. If the companies are earning well on an accounting basis today, someone can come in and say, "You could have cut a better deal five years ago had you known that the companies were going to do this well". But that is throwing the baby out with the bath water.

8672 COMMISSIONER CRAM: I understand your back door argument.

8673 DR. TAYLOR: Exactly.

8674 COMMISSIONER CRAM: I don't know if you have seen our monitoring report that we provided to the government. It's one of our exhibits. Because I never keep track of what number exhibit it is --

8675 DR. TAYLOR: Is this the Status of Competition Report?

8676 COMMISSIONER CRAM: Yes.

8677 DR. TAYLOR: Oh, yes.

8678 COMMISSIONER CRAM: If you look at page 16, Figure 4.4. -- and I tell you, I don't stutter but when I start to look at something like that I say incumbent's net income is increasing, the wireline competitors net income is decreasing, to me I have to say that that trend is at least something that I would consider highly relevant when I'm looking at the scheme that we would be thinking about for the future.

8679 You can tell me if I'm wrong. I mean, I'm not --

8680 DR. TAYLOR: Well, I would certainly urge you not to look at the level of earnings. Looking at the change in earnings --

8681 COMMISSIONER CRAM: The trend.

8682 DR. TAYLOR: The trend. It does tell you something about the industry, in the sense that we expect new competitors to lose money typically when a new business is formed, particularly in a capital-intensive industry. We expect it to lose money. That doesn't surprise us. That net income has fallen for wireline competitors. Well, there is probably a reason for that and if you are curious you should seek out the reason.

8683 I wouldn't make policy on the basis of the change itself, but to the extent that it is a signal that there may be something going on that is your business and you can and should fix, that's fine.

8684 COMMISSIONER CRAM: What about the increase in the ILECs? Let me suggest to you on a hypothetical basis that it has been increasing for four years in a row. Would I look at that trend and would it say something to me that I would end up having to do something about it?

8685 DR. TAYLOR: Well, again, looking at a trend as opposed to the level is something that I guess I would do. This is where I should give you the speech on accounting earnings and how that hasn't anything to do with economic profits, but take it as spoken.

8686 COMMISSIONER CRAM: I have heard it.

8687 DR. TAYLOR: I'm sure you have.

8688 But that if the explanation of that trend is something that is either a good thing or a bad thing, then take it as a symptom and look for the cause.

8689 One cause, and in fact one that you all put into play four years ago, was incentive regulation itself. If the cause of increased earnings is simply that given the ability to keep what they have made, these guys have just slashed their costs and expanded demand and have really gone to town and customers are thrilled, then pat yourselves on the back. Yes, earnings are going up, but you have done your job and customers are satisfied.

8690 On the other hand, I imagine we can think of some reasons how earnings could be going up but consumers could be suffering. I don't think that is the case, but you should look to the cause and not simply stop at looking at the trend.

8691 COMMISSIONER CRAM: If we end up saying the cause, discounting everything else, is that we were too generous to start out with, what would that lead us to do or should we ignore it and be happy?

8692 DR. TAYLOR: Well, it's a new price cap plan. I guarantee very little, but I will guarantee that the next five years will not be like the last five years. I think that's pretty safe. It already isn't.

8693 There is a great danger, particularly at times when trends, all sorts of trends are reversing in the economy, of sort of looking in the rear-view mirror, that because if it turns out to be in your interpretation that you underestimated productivity improvements, or something like that, for the last five years, can you infer that you would underestimate them or you should increase your estimate in the future? I'm not sure. The next five years is very different from the last five years.

8694 COMMISSIONER CRAM: However, of course, the only indicator of the future is the past I suppose.

8695 DR. TAYLOR: Future data is very hard to get.

8696 COMMISSIONER CRAM: Yes.

8697 DR. TAYLOR: Yes.

8698 COMMISSIONER CRAM: Thank you very much, Dr. Taylor.

8699 DR. TAYLOR: Thank you.

8700 COMMISSIONER CRAM: Thank you, Mr. Chairman.

8701 THE CHAIRPERSON: Thank you, Commissioner Cram.

8702 Commissioner Williams.

8703 COMMISSIONER WILLIAMS: Thank you, Mr. Chairman.

8704 Dr. Taylor, now that you have had the benefit of the cross-examination and the opportunity of having some of the various ideas and concepts challenged, how would you modify the contents of your position paper and rebuttal to reflect a different or new level of understanding?

8705 I guess, in essence, has your position changed in any way as a result of the time we spent today?

8706 DR. TAYLOR: Well, it's my professional responsibility to say no.

8707 Thinking about what I have learned as opposed to what I have taught, I guess the place where I will go home and think some more are issues of discretionary services. I do want to think about that point. That is an excellent point that has been raised.

8708 I would think about the uses of earnings. I mean, despite my -- I have a strong belief that the level of earnings is something that you should turn away from, it seems to me that Commissioner Cram brought up some useful and interesting points about what can be learned from trends as opposed to levels.

8709 So if any doubt were cast on my position or where I will sit tonight and ponder, it would be in those areas.

8710 On the basic areas of how price caps work of the deficiencies that we talked about in the other plans, I haven't learned anything new I guess.

8711 COMMISSIONER WILLIAMS: Okay.

8712 I'm interested in your opinion that if we followed the essence of The Companies' proposal, what do you think the competitive landscape would look like five year from now? Who would the players be? What would their roles be? I realize it's a crystal ball kind of effort, but I respect your opinion.

8713 DR. TAYLOR: Well, what I was taught as a statistician in graduate school was never predict anything observable.

--- Laughter / Rires

8714 DR. TAYLOR: But let me try.

8715 I think what the main difference would be -- and it is a difference -- would be if retail prices for residential services were to rise with inflation, which is one of the big differences in the plan going forward, as opposed to a continuation of an inflation minus a substantial "X", which is the condition in the past, I think we would be closer to a competitive equilibrium in local exchange competition, in the sense that prices would be allowed to move closer to the level that they would reach if we had lots of entry on the ground and everybody competing.

8716 I think my reading of the story in Canada has been that the forced reduction of rates, particularly business rates, by the 4.5 per cent productivity offset, has reduced rates, and in the residential case kept rates essentially fixed, perhaps rising slowly, but below the level that the market would dictate.

8717 I can't guarantee that in five years you are going to have a dozen or half a dozen -- in fact, I can bet you won't -- competitive providers on the ground, but you may have two or three. As we found in the wireless and the cellular business, two is actually a pretty good number.

8718 We got a lot of price competition in the U.S. starting with two cellular providers. If all we were to have -- if the entire system were to fail, from your perspective and possibly from mine, and the only CLEC left standing was TELUS' CLEC and Bell's CLEC out of region -- I'm not saying that would happen, but in that very, very worst case, that's still not bad. That is better than were we are today.

8719 Were rates to be permitted to rise to where residential services particularly could be provided profitably, I think we can do better than that.

8720 So my happy prediction is two or three CLECs providing business and residential local exchange competition, mostly to capture customers and provide long distance, but enough so that, probably not in five years but in 10, the CRTC can fold its tent and go home.

8721 COMMISSIONER WILLIAMS: Well, thank you for that happy prediction from a practitioner of a profession sometimes known as the dismal science.

8722 DR. TAYLOR: We try.

8723 COMMISSIONER WILLIAMS: I am finished, Mr. Chairman.

8724 THE CHAIRPERSON: Thank you, Commissioner Williams.

8725 I think those are all our questions, Dr. Taylor.

8726 I appreciate your coming here and participating in our proceeding.

8727 DR. TAYLOR: Thank you.

8728 THE CHAIRPERSON: You may step down.

--- Pause

8729 THE CHAIRPERSON: We will now turn to what has been characterized as Panel 3A. Will just hear this afternoon from the Aliant representatives for Panel 3A. As I indicated yesterday, we will have the MTS portion of that panel on Tuesday morning.

8730 MR. HENRY: Mr. Chairman, with your permission, we are going to have Mr. Farmer join that panel and the MTS panel as well, just for continuity with our overall proposal, much to his chagrin, I might add.

8731 THE CHAIRPERSON: He thought he was finished yesterday.

8732 So we will consider Mr. Farmer continues to be sworn in.

8733 MR. HENRY: I am pleased to introduce the panel for Aliant Telecom to deal with the company-specific evidence and interrogs from Aliant Telecom.

8734 Sitting closest to you is Mr. Mark Connors, who is Manager of Regulatory Matters of Aliant. Sitting in the middle is Mr. Richard Stephen, who is Director of Regulatory Matters. And, of course, there is Mr. Farmer seated at the end.

8735 Mr. Chairman, I believe we distributed yesterday the CVs of Mr. Stephen and Mr. Connors.

8736 Perhaps the witnesses could be sworn.

PREVIOUSLY SWORN: ROBERT F. FARMER

SWORN: MARK CONNORS

SWORN: RICHARD STEPHEN

EXAMINATION / INTERROGATOIRE

8737 MR. HENRY: Mr. Stephen, Mr. Connors, you are responsible for the company-specific evidence of Aliant Telecom and the interrogatory responses filed by Aliant Telecom in this proceeding?

8738 MR. STEPHEN: That's correct.

8739 MR. CONNORS: We are.

8740 MR. HENRY: Are they true to the best of your knowledge and belief?

8741 MR. STEPHEN: Yes, they are.

8742 MR. CONNORS: They are.

8743 MR. HENRY: Mr. Chairman, the witnesses are available for cross-examination.

8744 THE CHAIRPERSON: Thank you, Mr. Henry.

8745 Welcome gentlemen.

8746 I believe the first party, and only party I gather, to question is ARC et al, Ms Lawson.

1435

EXAMINATION / INTERROGATOIRE

8747 MS LAWSON: Thank you, Mr. Chairman.

8748 Good afternoon, gentlemen.

8749 MR. CONNORS: Good afternoon.

8750 MS LAWSON: I am not sure who to address my questions to. Mr. Connors or Mr. Stephen, I will leave it to you to decide who answers.

8751 I understand, gentlemen, that Aliant has been arguing in the media and to the public that local rates need to increase in order to offset approximately $70 million of reduced contribution revenues in 2002.

8752 Is my understanding correct?

8753 MR. STEPHEN: Ms Lawson, there have been a number of things that we have been trying to explain to the public, and certainly the politicians as well as other parties, about the regulatory process, about where this particular proceeding is going, the impact of this proceeding, as well as the impact of other proceedings that have gone on, such as contribution and banding.

8754 As you can appreciate, there is a lot of complexity dealing with a lot of the matters that we deal with. They are not simple; they are not something that is easily explained.

8755 One of the things we have been trying to educate people on is that there have been various impacts. So we are providing a lot of information to a lot of different parties about what is in fact going on.

8756 As you know, we have submitted our evidence here and have proposed a price proposal, which I will certainly review with you.

8757 Those are my comments at this point.

8758 MS LAWSON: I would like to refer to a quotation from the transcript on day one from the Minister from Newfoundland. He was the first presenter to the Commission.

8759 At page 15, lines 15 to 18 of that transcript, the Minister stated -- are you there?

8760 MR. STEPHEN: I'm sorry, could you repeat the page.

8761 MS LAWSON: It was page 15, lines 15 to 18.

8762 He said:

"The company has been rebalancing its product for years and is now seeking a rate rebalancing, apparently to compensate for the reduction in the national subsidy."

8763 MR. STEPHEN: Yes. I think when you look at rebalancing for years -- and I can only assume that he is talking about the overall rate rebalancing we went through throughout the 1990s, which initially started with the toll --

8764 MS LAWSON: I am more interested in the latter part of the statement.

8765 MR. STEPHEN: With respect to the latter part, it is very clear in our minds that we are rebalancing, going forward, in the high-cost areas. There is no new money associated with that. We are increasing the price. We are in fact reducing contribution.

8766 So that is the context under which I would classify rebalancing.

8767 MS LAWSON: Is he correct that you are doing it to compensate for the reduction in the national subsidy?

8768 MR. STEPHEN: One of the things that I have identified, probably to a number of parties, is my own personal concern about the sustainability of the fund. It is quite clear in my mind that when we have seen the original contribution and the impact of the banding decision, we have seen a substantial impact on us financially.

8769 To give you some sort of sense, on a utility basis that number is roughly $80 million.

8770 If we look at the gross revenue side of it, we would have had contribution on Aliant basis of $130 million, roughly, for the last two years.

8771 I think the interrogatories will bear it out; that the numbers are projected to be somewhere around $18 million next year. That is a fairly substantive decrease.

8772 From my perspective, I look and I say: Well, that $17 million, do I think it is going to be there for a long time? Probably not.

8773 So I think it is appropriate that we rebalance and move prices up, to the degree that they are affordable. I think that is a critical thing, obviously, that prices remain affordable, which I believe they would be under the proposal.

8774 So our proposal is looking to rebalance.

8775 What that does is assure us that we will in fact be able to recover the money in those areas that have high costs.

8776 MS LAWSON: I am still confused, though. I would like, if I could, a more concise, clear answer.

8777 Is it Aliant's position that local rates need to increase in order to offset the reduction in contribution revenues that is attributable to the Commission's decision to move from Phase 3 costing to Phase 2 costing in the calculation of the total subsidy requirement?

8778 MR. STEPHEN: If we were seeking to recover the money going from Phase 2 to Phase 3, we would be seeking an amount of approximately $80 million on utility. We are not doing that, Ms Lawson.

8779 MS LAWSON: It is not your position that you should be compensated on the basis of Phase 3 costs. You accept the appropriateness of the Phase 2 costs that the Commission --

8780 MR. STEPHEN: We have no such application in front of the Commission to go through the rate of return and that process.

8781 MS LAWSON: So the Minister who was here on Monday misunderstood your position?

8782 MR. STEPHEN: I think what he was describing, based on the discussions we had with him, was what I will call the broader issues of regulation, the broader issues of our finances, the broader issues of where the various proceedings have taken us.

8783 I can't say for sure what was in his mind.

8784 I look at this, and it is clear that he believes it to be a rebalancing. As I have said, certainly there are components of rebalancing in our proposal.

8785 MS LAWSON: Thank you, Mr. Stephen.

8786 I would like to move on to your brief supplementary submission that was filed on May 31st as a supplement to The Companies' submission.

8787 I am looking at paragraph 3, where you say:

"The application of the existing PCI constraint, inflation less 4.5 productivity factor, to a company's aggregate capped service revenues, forces disproportionate rate reductions to the business services segment as residential capped services have very little margin or are below cost and cannot support rate reductions of any kind."  (As read)

8788 Is that your submission?

8789 MR. STEPHEN: Yes.

8790 MS LAWSON: Am I correct that the only local residential rates that are below cost now are your high-cost serving area rates?

8791 MR. STEPHEN: That is not correct. Most of the prices would be less than what I would call regulated costs in our bands.

8792 MS LAWSON: Less than Phase 3 costs?

8793 MR. STEPHEN: No. Sorry, that would be Phase 2 plus a mark-up of 25 per cent.

8794 MS LAWSON: For all four companies?

8795 MR. STEPHEN: I would have to go through by province, by band. As I say, if you took the Commission's Phase 2 costs and added a 25 per cent mark-up on it and compared it to our prices, you would see that there are not many of the bands that are in excess of the price.

8796 MS LAWSON: In excess of the Phase 2 plus 25 per cent mark-up.

8797 MR. STEPHEN: That is correct.

8798 MS LAWSON: That information is on the record, Mr. Stephen?

8799 MR. STEPHEN: I would expect that that is easily determinable from the information that is on the record, if it is not.

8800 MS LAWSON: Am I correct, at least if we look at band "A", for example, for Aliant --

8801 MR. STEPHEN: Clearly, band "A" would be in excess of its -- the price would be greater than its cost.

8802 MS LAWSON: You are making a healthy margin there.

8803 MR. STEPHEN: When you say a healthy margin, I would take issue with that. It has a margin, yes.

8804 Would I describe it as healthy? It is a margin based on costs which -- at this point I would like to say that the costs that are being used for this exercise are the Commission's costs, which we have had some problems with, as other parties have.

8805 When we look at our data as compared to the data that is being used in this proceeding, or the Commission's costs, our variance to those numbers is between 10 and 25 per cent, depending upon the band.

8806 The margins that you would calculate on that we would take issue with as being low, compared to what our own calculations would be.

8807 MS LAWSON: We can of course argue over what is high and what is low.

8808 Just to get it clearly on the record, Mr. Stephen, if we are comparing your average residential individual line rates that you provided to the Commission in Interrog CRTC-1201 with the Commission-determined Phase 2 costs that have been provided in the proceeding of Decision 2001-238, can you list for me by four provincial components, I guess, of Aliant, by band, which rates do not cover the Phase 2 plus 25 per cent?

8809 I am talking only of the non high-cost area bands here, just bands "A" to "D".

8810 If you have not already done the calculations necessary to answer that, you can take it as an undertaking.

8811 MR. STEPHEN: I have them right here. Just a moment, please.

--- Pause

8812 MR. STEPHEN: Let's start with Prince Edward Island. In Prince Edward Island, there wouldn't be any based on the price increase that just went in recently.

8813 In New Brunswick, it would be all of the province, whether it is high-cost or non high-cost.

8814 MS LAWSON: I am only looking at the non high-cost bands.

8815 MR. STEPHEN: Yes. That is bands "B" and "C". In Newfoundland it would be bands "B" and "C". In Nova Scotia I guess they would all be covered.

8816 MS LAWSON: In fact, when we are looking at the non high-cost areas, it is only in --

8817 MR. STEPHEN: One moment, please.

--- Pause

8818 MR. STEPHEN: Ms Lawson, could you clarify the question.

8819 Were you asking for the ones where the price was above or below the cost?

8820 MS LAWSON: I was asking in which bands of Aliant the current rate does not cover Phase 2 costs plus 25 per cent.

8821 MR. STEPHEN: Thank you. That is what I answered.

8822 MS LAWSON: And your answer was that it is only in New Brunswick and Newfoundland that that is the case. In both those cases, there are no band "A" rates. Is that correct?

8823 MR. STEPHEN: That is correct.

8824 I would add that those are the provinces that we are proposing to move up to $25.

8825 MS LAWSON: But you are covering the rates with a margin above the 25 per cent in PEI and Nova Scotia.

8826 MR. STEPHEN: That is correct, based on these costs that are used.

8827 MS LAWSON: And Nova Scotia's rates have been $25 for some time now.

8828 MR. STEPHEN: That is correct.

8829 MS LAWSON: I am going back to the statement that I read out, where you said the price cap formula forced you to take the reductions on your business rates, because you couldn't take them on the residential rates.

8830 Given that the price cap formula applied to the basket and you could have done what you wanted, wasn't it really your choice to reduce business rates by the amount you did rather than not taking perhaps some of the allowed increases to residential rates or reducing, for example, the rates in Nova Scotia?

8831 MR. STEPHEN: With respect to the supplementary information, that was based on discussions or information dealing largely with New Brunswick and Newfoundland, not Nova Scotia.

8832 The issue that we were trying to demonstrate was that it is easy in number situations to determine that there are insufficient margins.

8833 I agree that if you look and you say: Can you find one location in the Atlantic Region in residential that has sufficient margin that you could actually decrease it if there was a price cap offset, the answer would be yes. But it is very narrowly focused.

8834 I think the logic would take you to yes, we could drop the price in Halifax to a very low number. So if you are looking for the math, yes, there would be some capability of doing that.

8835 I think that is probably contrary to the direction we are trying to obviously move in as a company and certainly opposite of being market-based, which is what we are trying to go to.

8836 MS LAWSON: I understand that it is not in The Companies' interest to reduce those rates. But I find it difficult to accept your comment that looking at Nova Scotia's $25 rate is very narrowly focused and inappropriate. In fact, it seems that your whole 2002 rate proposal is centred around the $25 rate in Nova Scotia.

8837 Is that correct?

1450

8838 MR. STEPHEN: What our proposal is centred around is -- and I think it may be helpful to just refresh kind of our recent history here.

8839 At the first of this year we became Aliant Telecom Inc., which was the coming together of the four operational companies that had previously existed in the Atlantic region.

8840 From our perspective, we are very much trying to take a uniform service across the region and part of that is to increase the standardization of the offerings, a standardization of whether it be service levels, whether it be prices, trying to -- there are benefits obviously for the company in that, but there is also benefits to customers in terms of simplicity of communication.

8841 One of the difficulties we have is obviously people saying, "Well, I live in a community in one province and the same-sized community under the same circumstances pay a different rate somewhere else."

8842 So in terms of the customer side of it, it does make sense to try to bring more uniformity. So our focus in terms of our proposal is to try to bring more standardization throughout the region.

8843 MS LAWSON: I understand. I guess what I am suggesting is you could have gone for a $24 uniform rate across the province. I think you would agree with me that your customers would have been probably quite happy with that, particularly the ones in Nova Scotia. I mean, you could have done that and in so doing you could have relieved some of the pressure on your business rates. No? And still achieved your goal of uniformity.

8844 MR. STEPHEN: That would be inconsistent. If you think of what that would do in the high cost areas. I realize you --

8845 MS LAWSON: But, sorry, I'm talking of the non-high-cost area rates here.

8846 MR. STEPHEN: At this point we are trying to move our prices to one consistent level, after which then we would start differentiating between high-cost and non-high-cost.

8847 MS LAWSON: Okay. Could we turn, Mr. Stephen, to your response to Interrogatory CRTC 3100.

--- Pause

8848 MS LAWSON: The Commission has asked you a question here about the amount of money, what is often referred to as "headroom" left in your rates under the price cap regime. In a table on page 2 of this interrog response you provide the dollar figures for each, I guess, instance in which there was headroom left, an unrecovered amount that the company did not take that it was allowed to take under the price cap. Am I interpreting it correctly?

8849 MR. CONNORS: That is correct.

8850 MS LAWSON: What we see here is a total of $12.4 million lump sum unrecovered monies that you were allowed -- you continue to be allowed to take under the price cap index until December 31, 2001. Correct?

8851 MR. CONNORS: No, that is not actually correct. The only amount that we could use by December 31st or the end of the price cap period would be $6.4 million.

8852 MS LAWSON: Okay. So $6.4 million.

8853 Just looking at these figures -- so the $1.4 million for NewTel, for example, is gone. You can't use that any more?

8854 MR. CONNORS: That is correct. In the preceding years of the price cap mechanism if your actual prices were below your price cap index then it was a given, you couldn't carry it forward.

8855 MS LAWSON: Now, I'm really confused, because I thought Mr. Farmer told me the opposite thing in a previous incarnation, a previous panel.

8856 Maybe, Mr. Farmer, you could explain where I'm misunderstanding the mechanics of the price cap regime?

8857 MR. CONNORS: The numbers are kept in the index themselves. The level of the index stays the same. If we miss pricing opportunities in past years then the index doesn't change but that pricing opportunity has passed by. The carry-forward is in the actual price index itself.

8858 If we could have recovered money, say, a year ago and did not increase prices, then that is a missed opportunity. If that helps. Does that conflict with Mr. Farmer's --

8859 MS LAWSON: I understand that, but I don't understand how it is consistent with what Mr. Farmer told me the other day.

8860 MR. FARMER: It would probably be perhaps helpful if Mark and I were to huddle for a little while first, so I'm speculating a little bit and doing a bit of interpretation as to Mark's response.

8861 I mean, he is quite right in the sense that if -- let's just make up some numbers here if we can.

8862 Let's say there was an opportunity to increase prices by $2 million in one year, and if one didn't take the $2 million one would be able to take the $2 million the next. But you wouldn't be able to sort of make up the difference for the lost year and ask for four the next year.

8863 Does that perhaps help explain it?

8864 Okay. I think that is really the sense that we are talking about. I don't think there is an inconsistency. It i's perhaps just the semantics we are using here.

8865 MS LAWSON: Thank you. That certainly helps me, Mr. Farmer.

8866 Well, first of all, Mr. Connors, then you would agree with me, then, that it is contrary to the price cap rules to take any of this amount, the $6.4 million or if you want to take the whole of the $12.4 million and carry it forward into the next regime?

8867 MR. CONNORS: The rules aren't, unfortunately, set for the next regime so I can't really identify what those would be.

8868 Under the previous four years, yes, there was no carry-forward mechanism.

8869 MS LAWSON: So what you are doing in this -- perhaps in another interrogatory and another interrog, which is CRTC 1400 -- maybe I should have you pull that up.

8870 In 1400 part (b), am I right, you are using this remaining $12.4 million -- or unused $12.4 million as an argument in equity, so to speak, for your proposed increases in 2002?

8871 MR. CONNORS: No, that is not accurate.

8872 MS LAWSON: That is not accurate?

8873 MR. CONNORS: No.

8874 MS LAWSON: Okay. Can you then correct me?

8875 MR. CONNORS: We are proposing that we have the $6.4 million remaining in room in this year, this price cap period. From our view, the price cap period doesn't end December 31st, but March -- whatever the date of filing is -- 31st.

8876 So in this price cap period if we apply for rates that use up that $6.4 million according to the existing rules, they should be approved. That is what 1400 says.

8877 MS LAWSON: Okay. You are applying for rate increases of 55 cents in P.E.I., $3.00 in New Brunswick and $3.05 in Newfoundland?

8878 MR. STEPHEN: We are actually not applying for any price increases. This is a price proposal.

8879 MS LAWSON: You are proposing. Well, I think this is semantics.

8880 You are proposing to raise rates in 2002 to $25 across the board?

8881 MR. STEPHEN: That would be a proposal and that would be where the prices would go as a consistent price.

8882 MS LAWSON: Right. Just as a mathematical calculation, by my understanding of your residential NAS, you are looking at approximately $2.45 million per month of extra revenues if you take those increases?

8883 MR. STEPHEN: That sounds rather high.

8884 MS LAWSON: Perhaps you can correct me.

8885 MR. STEPHEN: The number would be somewhere around $11 million on an annualized basis.

8886 MS LAWSON: No, I'm looking at a month, a monthly basis. What would you be getting per month as a result of these increases, these proposed increases?

8887 MR. STEPHEN: Well, it would be less than $1 million a month.

8888 MS LAWSON: Less than $1 million a month?

8889 MR. STEPHEN: Yes.

8890 MS LAWSON: Okay. I must have had drastically wrong figures. So if --

8891 MR. CONNORS: Excuse us. Could you hold for one moment, please.

8892 MS LAWSON: Sure.

--- Pause

8893 MR. STEPHEN: Perhaps, Ms Lawson, the answer I gave was dealing with the non-high-cost areas. Perhaps your math includes all accesses.

8894 But I would suggest, though, that in the high-cost areas, there is no revenue to us there, it is a rebalance from contribution.

8895 MS LAWSON: Point taken.

8896 So we are looking at something a little less than $1 million a month that you would be getting from these rate increases?

8897 MR. STEPHEN: Correct.

8898 MS LAWSON: So even if the Commission were to recognize this $12.4 million, say, and allow you the recovery of it through a -- I mean, one could think of it as a deferral account. You put it into a deferral account and then get to recover it all in the future. Even if they were to allow that, you are asking for rate increases that would continue on into the future. Correct? So you would have recovered the $12.4 million in 13 months. Right?

8899 MR. CONNORS: Again, I'm sorry. We are not asking for $12.4 million, it's $6.4 million.

8900 MS LAWSON: Okay. Then you would have recovered the $6.4 million in seven months, say.

8901 MR. CONNORS: Again, the $6.4 million is embedded in the current API for this year. Just like any rate increase that is approved in this year, it will indeed carry forward. There is no different accounting treatment or revenue associated with it.

8902 It goes into the base. It meets the PCI. It should be approved.

8903 MS LAWSON: Does it bring you to $25 a month across the board.

8904 MR. CONNORS: No. If you will read Aliant(CRTC)1400 assumes that plus an assumed inflation in 2002.

8905 MS LAWSON: What is the assumed inflation?

8906 MR. CONNORS: I think it was 4.3 or 4.4. I don't have those numbers right now.

8907 MS LAWSON: So if we assumed 4.4 per cent inflation and we allowed you to bring forward that $6.4 million, that, in your view, would be a cost justification for the rate increases you are proposing in 2002?

8908 MR. CONNORS: It's not a cost justification, it is using the mechanics that exist and not as part of our --

8909 MS LAWSON: But it would fully justify -- it would fully justify the rate increases you are proposing?

8910 MR. CONNORS: It would comply with the rules of the regime that we are proposing, yes.

8911 MS LAWSON: Thank you very much. Those are all my questions.

8912 THE CHAIRPERSON: Thank you, Ms Lawson.

8913 Counsel.

8914 MS MOORE: Thank you, Mr. Chairman.

EXAMINATION / INTERROGATOIRE

8915 MS MOORE: I have one question with respect to Aliant's SIP proposal.

8916 I note that both in your evidence at paragraph 18 and 32, as well as in Interrogatory Aliant(CRTC)601 you describe the parameters of your SIP. Just to summarize that, you say that:

"Unserved customers who identified that they wanted service and would be willing to pay a construction charge up to $1,000 on a reasonable instalment basis were included in the costing exercise." (As read)

8917 At paragraph 32 of your evidence, in the table, you show that 224 customers requested service and that your SIP will provide service to 173 of these.

8918 Your table in paragraph 17 of the SIP proposal shows that you distributed -- the number that I have is 3,379 questionnaires. Is that correct so far?

8919 MR. CONNORS: Well, actually the only one I have is the 3,379 and that does reflect the total of that table.

8920 I think it was September 28th we did send in an update to our SIP attachments, our costing attachments, and the total of questionnaires distributed were 3,992 as of that date.

8921 MS MOORE: Three thousand, nine hundred and ninety-two --

8922 MR. CONNORS: That is correct.

8923 MS MOORE:  -- as the update.

8924 MR. CONNORS: Yes.

8925 MS MOORE: So given that you indicated that only 173 would obtain service, there is roughly 3,700 who wouldn't be served under a proposal?

8926 MR. CONNORS: Sorry. We have also updated the numbers who would receive service as well.

8927 MS MOORE: Okay.

8928 MR. CONNORS: We will have to get those off the updated interrog.

8929 MS MOORE: Do you have a rough figure? Is it a dramatic increase or --

8930 MR. CONNORS: I think it was relatively proportional to the original numbers.

8931 MS MOORE: Okay. So assuming that it is relatively proportional, and we will just go with the first set of figures, you mailed over 3,000 questionnaires, but you resulted in just under 200 or so people being served under your proposal.

1505

8932 I just wonder if you have taken any steps in the meantime to explore what other possibilities there might be for providing service to all of these other customers that were surveyed who wouldn't be served under your SIP proposal?

8933 MR. CONNORS: The Companies belief is that those customers actually have no interest in service. There was an interrog, and I don't remember the number. We only actually had two of those undelivered by Canada Post which were returned to The Companies, so that means the customers got them.

8934 We did extensive communication efforts throughout the year and continuing this year. As the proceeding was in the news we got some additional calls, since March when we filed it, which is why the numbers have changed. So the customers, in our opinion, are very well informed of it.

8935 The types of areas that are focused in our SIP really are cottage areas where a small number of people have moved out and become permanent residents. Our experience shows that very few cottage owners actually want full telephone service, landline service.

8936 MS MOORE: So in your view it is not necessary to consider whether there are any other steps that could be taken to serve those customers, potential customers.

8937 MR. CONNORS: Well, everybody who replied, yes and was interested in service and was willing to pay $1,000 we evaluated. The ones that we do not propose to serve are due to the very high cost of serving those areas.

8938 MS MOORE: Thank you.

8939 I would like to turn now to some quality of service issues. I would ask you to turn to the CRTC exhibit, which is an eight page document with various tables. It is titled "Months Below Quality of Service Standards".

8940 MR. STEPHEN: One moment, please, while we get that exhibit.

--- Pause

8941 MS MOORE: This was provided to counsel three nights ago. I referred to it once in my questioning yesterday. It is Exhibit No. 15.

--- Pause

8942 MR. STEPHEN: I have seen it. I don't have one in front of me.

8943 MS MOORE: I think we should get you a copy.

8944 MR. HENRY: That is The Companies Exhibit 15?

8945 MS MOORE: No, CRTC Exhibit 15.

8946 MR. STEPHEN: Thank you.

8947 MS MOORE: In that exhibit there are a number of tables relating to the Aliant companies quality of service. Have you had a chance to look that over?

8948 MR. STEPHEN: I have not checked it for accuracy, but I have seen it, yes.

8949 MS MOORE: Okay. We are going to focus on Tables 3 through 7 which are for the four Aliant companies as well as Aliant overall.

8950 MR. STEPHEN: Yes.

8951 MS MOORE: I would suggest that those tables collectively, for the years 1998, 1999 and 2000, indicate that The Companies were below objectives for a number of indicators.

8952 Would you agree with that in general?

8953 MR. STEPHEN: In general, yes.

8954 MS MOORE: Okay. If you turn to Table 3 first of all for Island Tel, and if we look at indicator 1.5, which is "Access to Business Office", you can see that -- there is an error in the table, I apologize, but for 25 out of 36 months there were misses. So the "25" should be in the "Miss" column as opposed to the "N/A" column.

8955 MR. STEPHEN: Yes.

8956 MS MOORE: Then if we turn to Table 4 on the next page, for MT&T, the same indicator 1.5 was missed 30 out of 36 months.

8957 Turning to Table 5 for NBTel for the same indicator, the miss was for 21 out of the 36 months.

8958 Just staying with Table 5 for a moment, it seems that all the indicators for the year 2000 were below the standards.

8959 Would you agree with that?

8960 MR. STEPHEN: Yes, I would.

8961 MS MOORE: Okay. Now, I am going to list 10 indicators. You might just want to jot these down as I list them. I will just give the number.

8962 1.1, 1.2, 1.5, 1.6, 2.1(a), 2.1(b), 2.2(a) -- which I note is combined with 2.6 in your reporting -- 2.2(b), 2.5 and 3.1.

8963 Now I would like to go through the tables for the individual companies again.

8964 If you could go to Table 3 for Island Tel, you will see that -- and we are focusing on the year 2000 -- for the year 2000 four of the 10 indicators that I listed were missed by Island Tel. So that would be 1.5 -- sorry, 1.1, 1.5, 2.1(b) and 2.2.

8965 If we turn now -- do you have that?

8966 MR. STEPHEN: Yes.

8967 MS MOORE: Just stop me if you disagree with anything.

8968 Turning to Table 4, MT&T for the year 2000 missed six of the 10 indicators that I have listed. So this would be 1.1, 1.2, 1.5, 2.1, 2.5 and 3.1.

8969 Turning to Table 5 for NBTel, seven of the 10 indicators that I listed have misses in the year 2000. That is 1.5, 1.6, 2.1(a), 2.1(b), 2.2(a) and 2.2(b) -- oh, and 2.5, but that is combined with 1.5 in your reporting results.

8970 Finally, for Table 6 for NewTel, I get four of the 10 indicators being missed for the year 2000, 1.5, 2.1, 2.2 and 2.5.

8971 So collectively for the 10 indicators that I listed, the Aliant companies as a whole have reported misses for all 10 categories and for a number of the categories several of the companies have reported misses.

8972 Do you agree with that?

8973 MR. STEPHEN: Subject to checking that all the math is correct, yes.

8974 MS MOORE: Okay. Fair enough.

8975 Turning to Table 7, we see here results for Aliant as a whole for the first six months of 2001, because in 2001 you started submitting a single report for all four companies.

8976 Just looking at it visually, the results on a combined basis do seem to have improved substantially.

8977 Would you agree with that?

8978 MR. STEPHEN: There has been substantial improvement in the service levels in meeting objectives, yes, that's correct.

8979 MS MOORE: Okay. So that is what I would like to explore just a little bit more.

8980 Now that we have taken an overview of the general picture for the four companies and Aliant and the differences in the historical reporting and in the combined reporting in the year 2001, could you just explain for us in some further detail what happened between December 2000 and January 2001 to lead to these improvements in results.

8981 MR. STEPHEN: Actually, I wouldn't say anything particularly happened between the year end last year and this year.

8982 Over the course of 2000, despite the fact that we did have a lot of misses, I think the data -- and I don't have the monthly data in front of me, but my recollection of it is that we were making steady improvement throughout the year.

8983 There was a significant number of initiatives put in place to address the problems we were having. Clearly even the results in 2001 show that we are not there yet, but we are working towards it.

8984 While it shows quite apparent in this current year, it is something that the trend actually started to improve upon last year.

8985 A lot of the problems that we face in terms of the service delivery can go back to probably a -- well, every indicator probably has its own stand-alone explanation in each province.

8986 To generalize on where the service problems developed, a lot of it goes to a program we introduced late in 1999. The acronym used is ERIP. It was a retirement program for employees. It was of a voluntary nature. We lost a significant number of employees, a lot of them on the service side.

8987 After that occurred, we found ourselves in a situation with the service having to re-train people, hire people and obviously to address the service issues, which we took actually quite seriously.

8988 I know that the numbers certainly don't look very good, but I feel we have demonstrated -- as I say, if you go through some of the monthly statistics, we were demonstrating improvement throughout last year and finally seemed to be making good progress.

8989 Even the remaining indicators this year, there is a fair amount of effort being put on these to bring them around so that they are meeting the objective.

8990 With the loss of -- and the absolute number I can't recall, but it was approximately 500 employees, that had a significant impact on service. So we have been addressing that through re-hiring, re-training.

8991 I might just provide you some thoughts on this.

8992 When we say "training people", that is a very difficult thing when you lose people that have had a lot of experience that know a lot about the business and then to bring new people in and to train them. It is not something that gets done in 30 days, 60 days, 90 days, it can be a very long term issue to have people come back and get to the same level of knowledge that people who left had.

8993 We are addressing the service issues.

8994 MS MOORE: Would you say that in terms of hiring staff that now you are fully staffed up and it is more a matter of training at this point, that maybe there is some ongoing work to be done?

8995 MR. STEPHEN: In terms of something like business office access, part of the, I will say the challenge, is meeting growing demands as well. So it is a question of, you know, you build based on -- you build forecasts and the like, but you have to staff according to new demands as well.

8996 All I'm saying there is, that while we have hired staff the question becomes: What is going on in the rest of the business? Is demand growing?

8997 So training and getting the experience level up is certainly the most critical component of it.

8998 MS MOORE: Was it all of the Aliant companies that had lost a significant number of employees through their retirement program that you mentioned?

8999 MR. STEPHEN: While the program was open to all the previous companies that are now Aliant Telecom, the general, if you want to say the mix of the retirements, the heaviest concentration was in New Brunswick. I believe that the next might have been Nova Scotia.

9000 It wasn't consistent throughout the whole region. The reason for that was the demographics of the population in terms of the age of employees would have been greater in New Brunswick than elsewhere.

9001 MS MOORE: Now, if we could look at Table 7 again for a moment, please. I would like to concentrate on indicator 2.1 and 2.2.

9002 Based on Table 7 it appears that the company missed indicator 2.1 four of the first six months of this year and all six months for indicator 2.2.

9003 I will just note 2.1 is "Out of Service Troubles Cleared" and 2.2 is "Repair Appointments Met". I wonder what actions have been put in place to ensure that these standards will be met or exceeded on a going-forward basis.

9004 MR. STEPHEN: There is a new system to help manage the workload. It was put in place in -- I believe it is now in two of the provinces, and even perhaps this fall it will go into a third province, with the final installation next year, early next year in New Brunswick.

9005 There are tools that we are putting in place to better manage and understand the troubles and allow us to respond.

9006 One of the things that we do know is that when we get out to troubles, some of the troubles are not easily fixed instantly. While we may be able to get to, let's say, the customer's premise and determine what the problem is, some of those problems you can't fix in the 24-hour period. We are addressing that.

9007 What I am really referring to there is some of the issues relate to plant and facilities that are just not at the customer prem level which takes longer to repair.

1520

9008 MS MOORE: If we could return to Table 5 for NBTel, it seems that for 2.2(a) and (b) and 2.5 in the year 2000, there were some strings of misses. I wonder if you could tell me what the problems were and why they couldn't be rectified even over the full period of the year 2000, over a full period of 12 months.

9009 MR. STEPHEN: I'm going to have to undertake to get back to you on that. I don't have sufficient information to answer that.

9010 MS MOORE: Okay. If you could undertake to let us know what the problems were with those two indicators and why they couldn't be rectified over a period of 12 months. If you could provide us that information by the end of the hearing, please.

9011 MR. STEPHEN: Would you just repeat which indicators you were looking for?

9012 MS MOORE: It was 2.2(a) and (b) and 2.5 for the months that you reported results in year 2000. Because I think that for 2.5 in fact you only reported results for eight months out of the 12.

9013 MR. STEPHEN: Okay.

9014 MS MOORE: Thank you.

9015 Do you have any information about NBTel's performance on those same indicators so far this year?

9016 MR. STEPHEN: What I have is the Aliant. I wouldn't have any specific provincial data. Everything I have for this year is based on the combined Aliant.

9017 MS MOORE: You don't have any desegregated data available to you?

9018 MR. STEPHEN: I would have to check on that. I don't know.

9019 MS MOORE: Could you undertake to provide --

9020 MR. STEPHEN: I will see what we have available.

9021 MS MOORE: Okay.

--- Pause

9022 MS MOORE: I just wanted to ask, in terms of consecutive months or years of misses on the indicators, do you have a view on how many consecutive months it is acceptable to miss on?

9023 MR. STEPHEN: As I have indicated, we are addressing and have addressed and continue to address the problems. It is important to us from a service standpoint to address these and we are in terms of what is acceptable.

9024 I mean, it is not as if we are not taking action, we are. We are getting results, as I think the most recent reports show.

9025 MS MOORE: Okay.

9026 With respect to indicators 2.2 and 2.6, you are no doubt aware that in Decision 2001-217 the Commission directed all the telephone companies to report separate results for those two indicators commencing in the third quarter of 2001.

9027 Are you going to be in a position to do that?

9028 MR. STEPHEN: As I recall, there were a number of indicators that are required for the third quarter of 2001. I'm aware that we have people working on it now. We are expecting to meet it.

9029 I can't say categorically that we are going to meet all of them, but certainly that is what our game plan is at this point, to have the reporting done for -- I believe mid-November is the due date.

9030 MS MOORE: So at this point you are confident that you will be able to report those separately at that time?

9031 MR. STEPHEN: As I say, we are working on it and certainly that is what we are hoping to do and planning to do.

9032 MS MOORE: What would be the problem in meeting that? For what reason would you be unable to meet that?

9033 MR. STEPHEN: I guess I don't have any specific knowledge to that other than there is a fair amount of work involved. It has people's attention. I know people are spending time on it, but I am aware that it's not complete. So it's a work in progress at this point.

9034 MS MOORE: Okay. Similarly with respect to indicators 1.2, which is "Installation Appointment Met" and 1.6 which is "Competitor Installation Appointments Met", Aliant has been reporting results for these on a combined basis including, for example, in the year 2001. I wonder why those haven't been reported separately.

9035 MR. STEPHEN: Just one moment, please.

--- Pause

9036 MR. STEPHEN: That would be the urban/rural split? Is that the distinction?

9037 MS MOORE: I'm looking at 1.2, which my understanding is "Installation Appointment Met" and 1.6 which is "Competitor Installation Appointments Met".

9038 MR. STEPHEN: I'm sorry, could you repeat your question?

9039 MS MOORE: According to my information Aliant has been reporting results on a combined basis for those two indicators.

9040 MR. STEPHEN: I know to date we have not had the ability to break it out and I'm not sure what the status is of that in terms of getting it broken out.

9041 MS MOORE: Could you undertake to provide information specifically as to when you would be able to report that on a separated basis?

9042 MR. STEPHEN: Yes.

9043 MS MOORE: Thank you.

9044 Now, I just want to clarify that when you are reporting your quality of service results that all performance is included in your reports and that there are no adjustments made for any type of below standard performance that might have been related to weather, for example, or some other externality.

9045 MR. STEPHEN: I'm not aware of any adjustments that would be in the data.

9046 MS MOORE: So as far as you know, all performance is included in your "Q" of "S" reports.

9047 MR. STEPHEN: Yes, but I will have to undertake to review that. I can't say that I would have the knowledge of whether or not there were adjustments in there.

9048 MS MOORE: Okay. That's fine. Thank you.

9049 Now, can you confirm for me that NBTel has subscribers in Band B.

9050 MR. STEPHEN: Subscribers in Band B? Yes.

9051 MS MOORE: Yes, okay. So now I would like to refer you to a CRTC exhibit. It is a letter dated November 9, 2000 from Aliant. I will just check what the number is.

--- Pause

9052 MS MOORE: It doesn't have a number yet, but it is a one-page letter from Aliant to the CRTC.

9053 MR. STEPHEN: I'm sorry. Do we have copies of that?

9054 MS MOORE: Yes, it was provided to your counsel. It was provided yesterday is my understanding.

--- Pause

9055 MR. STEPHEN: Yes, I have it here.

9056 MS MOORE: Okay.

9057 So in that letter you were informing the Commission that you would begin reporting results for Aliant on an entirely rural basis. You say that:

"To ensure consistency between the Aliant companies, NBTel's quality of service results in this report and all subsequent reports will reflect a totally rural region". (As read)

9058 MR. STEPHEN: Correct.

9059 MS MOORE: My understanding is that Decision 97-16 requires reporting on the basis of rate bands, with Bands A and B being considered urban, and Bands C and D being considered rural.

9060 So in light of that, it just seems to me that really you should be continuing to report urban indicators for NBTel and any other companies that do have subscribers in Bands A or B.

--- Pause

9061 MR. STEPHEN: The discussion of bands, at least as I recall that decision, was A and B was talking about the Bell A and B. Our equivalent to their A and B was in fact C and D.

9062 I realize that if we named our bands we would have had Bands A, B and C, but it was based on the larger population centres. So the view was that the Atlantic region was all rural for the purposes of this calculation and based on the original decision.

9063 So New Brunswick had been breaking it out and when we started aligning our processes between the companies we concluded that we were having two approaches to it and we standardized on the approach that was consistent in the other companies.

9064 MS MOORE: I'm just looking at Decision 97-16 -- and I'm sorry, I haven't provided you a copy -- but at that time it listed Island Tel, MTT, NBTel and NewTel, that it would be appropriate to use the Bands A and B, considered to be urban and Bands C and D to be rural and remote.

9065 So perhaps I could just ask you to undertake to revisit this issue and just confirm for us your understanding that it is fully appropriate for you to report on a rural basis. If you believe that it is because of the distinction between your bands and those bands, if you could set that out in your response to the undertaking?

9066 MR. STEPHEN: Yes.

9067 MS MOORE: Thank you.

--- Pause

9068 MS MOORE: Those are my questions, Mr. Chairman.

9069 Thank you.

9070 THE CHAIRPERSON: Thank you, counsel.

9071 I believe those are all our questions for Aliant then. That, then, will conclude our work for today.

9072 This Panel 3A will be back on Monday at which time, Mr. Williams -- Tuesday, sorry -- at which time I understand MKO, represented by Mr. Williams, will cross-examine MTS, followed by the Commission.

9073 MR. HENRY: Right, but the Aliant people will be gone.

9074 THE CHAIRPERSON: Right.

9075 So that concludes our work for the day.

9076 I wish everybody in the room and those on the line a happy Thanksgiving weekend.

9077 We will see you back here Tuesday morning at 9:00 a.m.

--- Whereupon the hearing adjourned at 1534,

to resume on Tuesday, October 9, 2001 at 0900 /

L'audience est ajournée à 1534, pour reprendre

le mardi 9 octobre 2001 à 0900