ARCHIVED - Transcript - Hull, QC - 2001/10/12
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FOR THE CANADIAN RADIO-TELEVISION AND
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:|
Centre de Conférences
|October 12, 2001||le 12 octobre 2001|
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
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.
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
Conseil de la radiodiffusion et des
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|
|Legal Counsel / conseillères juridiques|
|HELD AT:||TENUE À:|
Centre de Conférences
|October 12, 2001||le 12 octobre 2001|
TABLE OF CONTENTS / TABLE DES MATIÈRES
PAGE / PARA NO.
|SWORN: MR. JIM BROOKES||2132 / 13725|
|SWORN: MR. WILLIE GRIEVES||2132 / 13725|
|SWORN: DR. STANDFORD LEVIN||2132 / 13725|
|SWORN: DR. CHARLES JACKSON||2132 / 13725|
|PREVIOUSLY SWORN: DR. DENNIS WEISMAN||2132 / 13725|
|EXAMINATION BY / INTERROGATOIRE PAR|
|2132 / 13726|
|2134 / 13756|
The Consumers Association of Canada, Alberta
|2166 / 13927|
City of Calgary
|2220 / 14208|
|PRESENTATION BY / PRÉSENTATION PAR|
|Ms Wendy Lill||2277 / 14485|
Mr. Andy Savoy
MP, New Brunswick
|2285 / 14514|
Mr. Darrell Paul
Union of New Brunswick Indians
|2288 / 14535|
M. Luc Bruneau
|2292 / 14569|
|EXAMINATION BY / PRÉSENTATION|
(Continued) City of Calgary
|2303 / 14613|
|2319 / 14690|
|2328 / 14748|
|2337 / 14829|
|2366 / 14984|
|Commission||2406 / 15188|
EXHIBITS / PIÈCES JUSTICATIVES
EXHIBIT NO. DESCRIPTION PAGE / PARA NO.
TELUS-4 CV of Mr. Brookes 2164 / 13916
TELUS-5 CV of Mr. Grieve 2164 / 13917
TELUS-6 CV of Dr. Levin 2164 / 13918
TELUS-7 CV of Dr. Jackson 2164 / 13919
TELUS-8 Response to CRTC Exhibit No. 2, which is an undertaking for TELUS regarding SIP 2164 / 13920
ARC-10 Letter dated July 5, 2001, from Mr. Grieve regarding Part VII application by CallNet Enterprises Inc. concerning local win-back rules 2165 / 13921
GT GROUP TELECOM-13 Decision CRTC 2001-366 2165 / 13922
GT GROUP TELECOM-14 Decision CRTC 2165 / 13923
THE COMPANIES-34 The Companies response to undertaking requested by Commissioner Langford, Transcript reference Volume No. 4, paragraph 7225 2296 / 14590
THE COMPANIES-35 Response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 4, paragraph 6710 2297 / 14591
THE COMPANIES-36 Response to Question No. 2 to CRTC Exhibit No. 6 2297 / 14592
THE COMPANIES-37 Response to Question No. 3 of CRTC Exhibit No. 6 2297 / 14593
THE COMPANIES-38 Response to Question No. 4 of CRTC Exhibit No. 6 2298 / 14594
THE COMPANIES-39 Response to undertaking requested by CRTC, transcript reference Volume 4, paragraph 6979 2298 / 14595
THE COMPANIES-40 Response to undertaking requested by Commission Counsel, Ms Moore, transcript reference Volume No. 7, paragraph 11275 2298 / 14596
THE COMPANIES-41 Response to undertaking requested by AT&T Corp and AT&T Canada Telecom Services Company, transcript reference Volume No. 6, paragraph 10487 2298 / 14597
THE COMPANIES-42 Response to undertaking requested by AT&T Canada Corp and AT&T Canada Telecom Services Company, transcript reference Volume No. 6, paragraph 10522 2299 / 14598
THE COMPANIES-43: Response to undertaking requested by Commission Counsel Ms Moore, transcript reference Volume 7, paragraph 11275 2299 / 14599
THE COMPANIES-44 Response to undertaking requested by GT Group Telecom Services Corp., transcript reference Volume 7, paragraph 11887 2300 / 14600
CRTC-28 CRTC undertaking for TELUS to provide for each year of TELUS proposed SIP roll-out separately for Alberta and B.C. and separately by high cost and non-high cost areas, the rate increase to residents, local service, in each of those categories which would be required to recover the SIP PWAC amounts shown in the response to Interrogatory TELUS(CRTC)26June01-1704 2300 / 14001
CRTC-29 CRTC undertaking for TELUS regarding forecast inflation 2301 / 14602
CRTC-30: CRTC undertaking for The Companies regarding forecast inflation 2301 / 14603
CRTC-31 CRTC undertaking for The Companies regarding productivity factors 2301 / 14604
CRTC-32: CRTC undertaking for The Companies to provide the information in respect of each of the 220 contracts to which Bell Nexxia is a party 2302 / 14605
AT&T-20 Response to CRTC Exhibit No. 23 for undertaking to provide The Companies financial statements, including statement of cash flows for the six months ending 30 June 2001 2302 / 14606
SASKTEL-1 Response to undertaking requested by Commission Counsel, Ms Moore, transcript reference Volume No. 7, paragraph 11197 2302 / 14607
Hull, Quebec / Hull (Québec)
--- Upon resuming on Friday, October 12, 2001
at 0900 / L'audience reprend de vendredi
12 octobre 2001 à 0900
13714 THE CHAIRPERSON: Good morning, ladies and gentlemen. We will return to our proceeding now.
13715 I understand Dr. Jackson has a time constraint and has to leave this evening, and I understand that Mr. Lowe has discussed this with a number of the parties, that if we could have, you know, those who are intending to question or would be directing any questions to Dr. Jackson, if we can arrange to move them up in the order so that we can complete any questions for him for today.
13716 Now, I understand that Ms Lawson may have, but she is up first in any event. So I guess I would simply ask any others who may be further down in the list -- and you can judge roughly by the amount of time that has been indicated -- if you have any questions for Dr. Jackson, if you could perhaps work out with either -- well, perhaps the Secretary of the hearing, and among the parties, to switch the order around so that we can, hopefully, do that today.
13717 Any other issues to bring to our attention before we commence? So is it Mr. Lowe or Jerome?
13718 MR. LOWE: Thank you, Mr. Chairman.
13719 Seated before you is the TELUS panel No. 1. It will speak to the TELUS proposal for price regulation, including the evolution of local competition. It's chaired by Mr. Willie Grieve, vice-president of Government and Regulatory Affairs.
13720 To Mr. Grieve's left, also with The Companies, is Mr. Jim Brookes, who is vice-president of Business Transformation with TELUS. Mr. Brookes has testified previously before the Commission, including in the last price cap proceeding.
13721 Dr. Weisman, at the far end of the panel is also with us. And beside Dr. Weisman is Dr. Standford Levin. And Dr. Levin has testified before the Commission previously. He was in the reg framework proceeding. He has been a student of the Canadian regulatory scene since then. And you may recall, Mr. Chairman, he is a Professor of Economics and was a commissioner on the Illinois Commerce Commission. He and Dr. Weisman have been involved in the development of the TELUS proposal from the early days.
13722 And finally, I don't know if you can see him, Mr. Chairman, Dr. Jackson is in the back row. He spoke to the Commission at the contribution proceeding. He holds a PhD in electrical engineering from MIT and he is an adjunct Professor of Electrical Engineering in computer science at George Washington University. He serves on the FCC's technical advisory committee.
13723 Now, backing up the witnesses, it is Anne Bowen beside Dr. Jackson, Stephen Schmidt in the middle and Allan Hamilton at the end.
13724 Might the witnesses be sworn in.
13725 MR. SPENCER: Thank you.
SWORN: MR. JIM BROOKES
SWORN: MR. WILLIE GRIEVE
SWORN: DR. STANDFORD LEVIN
SWORN: DR. CHARLES JACKSON
PREVIOUSLY SWORN: DR. DENNIS WEISMAN
EXAMINATION / INTERROGATOIRE
13726 MR. LOWE: Gentlemen, can you confirm for me that your qualifications which have been filed with the Commission in this proceeding are accurate?
13727 MR. BROOKES: Yes.
13728 MR. GRIEVE: Yes, they are.
13729 DR. LEVIN: Yes.
13730 DR. JACKSON: Yes.
13731 MR. LOWE: Thank you. Dr. Weisman, please confirm that Appendix A to the TELUS evidence dated May 31, 2001, and entitled "Price Cap Regulation and Accommodative Entry Policies," as well as the related interrogatories described in the TELUS letter of October 9, were prepared by you or under your direction.
13732 DR. WEISMAN: I so confirm.
13733 MR. LOWE: Is this evidence true and correct?
13734 DR. WEISMAN: Yes, it is.
13735 MR. LOWE: Thank you. Dr. Jackson, was the attachment to ARC-300 and ARC-301 and related interrogatories set out in the letter of October 9 prepared by you or under your direction?
13736 DR. JACKSON: Yes.
13737 MR. LOWE: Thank you. Is this evidence true and correct?
13738 DR. JACKSON: Yes.
13739 MR. LOWE: Dr. Levin, did you assist in the preparation of the TELUS proposal?
13740 DR. LEVIN: Yes, I did.
13741 MR. LOWE: Do you support this proposal and adopt it in this proceeding?
13742 DR. LEVIN: Yes.
13743 MR. LOWE: Thank you. Mr. Grieve and Mr. Brookes, can you confirm for me that other than the evidence authored by the other members of the panel, the evidence in interrogatories allocated to this panel 1 in The Companies' letter of October 9 were prepared by you or under your direction?
13744 MR. GRIEVE: Yes.
13745 MR. BROOKES: Yes.
13746 MR. LOWE: Is this evidence true and correct, to the best of your knowledge?
13747 MR. GRIEVE: Yes.
13748 MR. BROOKES: Yes, it is.
13749 MR. LOWE: Thank you.
13750 The witnesses are available for cross-examination, sir.
13751 THE CHAIRPERSON: Thank you, Mr. Lowe.
13752 Welcome, Ms Bowen and gentlemen.
13753 Dr. Levin, I would have thought by now you were pretty much an employee of TELUS you have been with TELUS so long and in front of us at so many proceedings representing them.
13754 We will turn now to the first party to cross-examine this panel and that is ARC et al, Ms Lawson.
13755 MS LAWSON: Thank you, Mr. Chairman. Good morning.
EXAMINATION BY / INTERROGATOIRE PAR
13756 MS LAWSON: Good morning, panel members.
13757 Mr. Grieve, I wonder if we could start by turning to page 35 of your May -- paragraph 35 of your May 31st submission, where you say:
"In TELUS' view, the fact that penetration rates remain high in Canada is an indication that residential basic exchange rates continue to be affordable and that there is no indication that the maximum yearly rate proposed by TELUS will not be affordable in the future." (As read)
13758 Would you agree with me, Mr. Grieve, that basic telephone service is an essential service in Canada?
13759 MR. GRIEVE: Yes, I would.
13760 MS LAWSON: And in economic terms, then, the price elasticity of demand for basic local phone service is extremely low, that is people tend not to give up local phone service as rates increase?
13761 MR. GRIEVE: Yes, I would agree with that.
13762 MS LAWSON: That's because, basically, people can't afford to be without phone service?
13763 MR. GRIEVE: I will let Mr. Brookes handle the affordability questions.
13764 THE CHAIRPERSON: Perhaps we could just make sure that -- Ms Lawson, could you turn your microphone off so we just have one microphone on at a time.
13765 DR. JACKSON: Ms Lawson, can I ask you to repeat your question?
13766 MS LAWSON: Okay. We have established that the price elasticity of demand for telephone service is very low, that it's an essential service and, therefore, as rates climb, people continue to pay those rates because it's so important to them.
13767 And I just asked the follow-up question, that's because people can't afford to be without phone service in Canada.
13768 MR. BROOKES: The way I would put it, Ms Lawson, is people do place a high value on local telephone service, and I do believe they find the service affordable, as well.
13769 MS LAWSON: So, Mr. Brookes, just take an example. If you were on a very limited budget and you had -- let's say you had cable TV service, you have your food expenses, you have your phone service and your rent, I mean, where are you going to cut first?
13770 MR. BROOKES: In my case, I believe I would cut cable service, but this is a matter of choice. And it is interesting to note of households that do not have service, approximately a third of them do have cable service, so, Ms Lawson, it is a matter of personal choice.
13771 MS LAWSON: My point, Mr. Brookes, is that people will hang on to their phone. It's one of the last things they will cut when they are on a limited budget. Would you agree?
13772 MR. BROOKES: I agree that it is a service that people will subscribe to, to the degree that they can, in most cases, but it is a situation where it is a matter of personal choice, as I indicated, in terms of which service you might choose to give up first.
13773 MS LAWSON: Would you agree, though, that the high penetration rates of phone service in Canada are more indicative of the essential nature of the service than they are of someone's ability to pay?
13774 MR. BROOKES: I think it's indicative of the high value that customers place on the service. There is no question about it. I think it's also clear that rates do remain affordable. We have seen that in the studies that have been done.
13775 In the testimony with Bell Canada, we saw in the lowest income quintile that for households that they are spending just a little over 3 per cent of their income on telecommunications services. So I think it indicates that service does remain affordable.
13776 MS LAWSON: Would you agree that high penetration rates don't tell you who is struggling to pay the phone rate, who has, for example, cut back on foods or prescription drugs in order to pay their phone bill?
13777 MR. BROOKES: Subscription rates tell you just that: the per cent of people that find service affordable. Again, we are representing around 3 per cent of income for the lowest income quintile.
13778 Having said that, there are people with lower incomes that are challenged, in terms of the services they buy, and they do have to make trade-offs.
13779 MS LAWSON: Well, let me put it to you, Mr. Brookes, that if we are trying to establish an upper threshold for basic local rates, aren't we really talking about customer tolerance rather than affordability here?
13780 MR. BROOKES: What we are talking about is customers' willingness to continue to subscribe to local service and the value that they place on it. And I think it's instructive, if we look back over the last number of years, we have seen a period where local rates have indeed increased significantly.
13781 When we also look at that period of time, we see that penetration rates have increased. We also see that the number of low income households that are without telephone service has reduced, as well.
13782 So there is no question that telephone service has been seen to be affordable and we believe will continue to be with our proposals
13783 MS LAWSON: Or, on the other hand, there is no question that it is an essential service that people cannot afford to do without.
13784 MR. BROOKES: It is indeed a very important service to our customers
13785 MS LAWSON: Now, would you agree that the affordability of, say, a $30 monthly basic phone rate is really only an issue for low income people; the rest of us don't have trouble paying $30, $35 a month?
13786 MR. BROOKES: It's a matter of choice, really, for all households. But I would agree, in terms of the issue of affordability, when we look at the tracking results that come as a result of looking at the penetration studies, there is a disproportionate number of those people that would have lower incomes.
13787 MS LAWSON: So you agree affordability of the rates we are considering in this proceeding is really only an issue for low income people?
13788 MR. BROOKES: No, I didn't say that. I said that when you look at the households that are without service, disproportionately it is people with low incomes. And that is where affordability, you would expect, would be the greatest issue.
13789 But affordability is in the eye of the beholder and in terms of their choice and the value they place on the service, and it is not exclusively low income people that choose not to have telephone service.
13790 MS LAWSON: So you disagree with me that affordability of a $30 local phone rate, for example, is only, really, an issue for low income people. You think it's an issue for high income people too?
13791 MR. BROOKES: I'm not sure -- I think it's the terminology we are using here. I agree that certainly for low income people it is a much more substantial issue, in terms of the percentage of their income. It is 3 per cent of their income. When we look at higher income groups, it is a lower percentage.
13792 So certainly the trade-off would be different for lower income people and this affordability issue would be more pronounced for them.
13793 MS LAWSON: So, then, Mr. Brookes, if we are really concerned about affordability of basic service, shouldn't we focus our attention, then, on the needs of that lower income segment, for whom it really is an issue?
13794 MR. BROOKES: Ms Lawson, I think we should look at both. And when we look at the penetration tracking results, again, that we have been looking at over the years, we see a number of things. Canada has amongst the highest penetration rates of countries in the world, and we see that these penetration rates have increased, even at a time when local rates have increased substantially.
13795 We also look at low income households and we see the penetration rates of low income households in Canada is at a level of overall penetration in the United States. So it is at a relatively high level, in terms of international comparisons. And we also see that these rates have increased over time.
13796 MS LAWSON: Yes. I think you may be anticipating a direction that you think I am going in that I am not, Mr. Brookes. I am really just trying to establish here that when we are concerned about affordability as an issue, we should be focusing on low income people. We don't need to worry about the affordability concerns for high income people because it's really not an issue for them.
13797 MR. BROOKES: I would agree that affordability is primarily an issue for lower income people. Penetration results, however, is an issue that we look at across all income groups.
13798 MS LAWSON: That's fine. But if we were really concerned about affordability and we wanted to do something to help the people for whom it really is an issue, the lower income people, wouldn't we then try to design some king of program to help them out, like a special discount rate program or something, like they have in the United States?
13799 MR. BROOKES: Perhaps we would if we did feel that there was an affordability problem. And if we harken back to the affordability proceeding that the CRTC had, it was determined at that time that the local rates were affordable. And in the subsequent tracking reports, it continues to be affirmed that local rates are affordable.
13800 But it was also pointed out that, if that situation were to change, then a narrowly targeted subsidy program of some sort should be looked at. But we don't have that situation where rates have been to not be affordable, so it is not, in our view, appropriate to be looking at such a plan. But we do have the tracking results, e can monitor the results and were that to become an issue, then, I suppose we would look at various alternatives.
13801 MS LAWSON: So then, your position is that affordability is not an issue at all in this proceeding?
13802 MR. BROOKES: Our view is that our rates that we are proposing over a five year period to go to a maximum -- or to have flexibility to go to a maximum level of $35 will keep rates affordable. And we can go through the reasons, if you like, as to why that would be. But we also believe that we have the tracking reports, that we can continue to monitor these results.
13803 We have seen in the past that, notwithstanding significant increases, penetration rates have improved. Now in part, the reason for this, Ms Lawson, is that affordability is more than an issue of dealing just with local rates.
13804 MS LAWSON: Yes, I am sorry, we are going out a big tangent here, Mr. Brookes. I'm really just trying to establish a conceptual point here about the class of subscribers for whom affordability is an issue, first of all, and how you would go about addressing that if you really thought it was a problem. And I think you have already answered that you have agreed, presumably, with the Commission that, if we decide affordability is a problem, then what we need to look at is a special program for lower income people. Agreed? Is that correct?
13805 MR. BROOKES: Yes. I'm pointing out that was what was determined in the affordability proceeding. And if that situation were to arise, which we do not believe it will, given our proposals, then that would be an option that we could look at. But, you know, we are quite a bit down the road in terms of that as a possibility.
13806 MS LAWSON: Yes, that's not what we are doing in this proceeding. Correct, Mr. Brookes?
13807 MR. BROOKES: Right.
13808 MS LAWSON: In this proceeding, we are focusing on rates for everyone, correct, not just poor people?
13809 MR. BROOKES: Yes, that's right.
13810 MS LAWSON: Okay. We are not looking at penetration rates for the low income segment or calling patterns of the low income segment? We are not focusing on that problem here?
13811 MR. BROOKES: We have data, as part of this proceeding, that does show the penetration rates for the low income segment and we do see that it has declined over the last few years.
13812 MS LAWSON: That's not the focus of this proceeding, Mr. Brookes.
13813 MR. BROOKES: I guess we could agree that that isn't the primary focus, but it is certainly one area that has been explored.
13814 MS LAWSON: In this proceeding, we are focusing on rate increases for everyone.
13815 MR. BROOKES: Indeed, we are.
13816 MS LAWSON: And affordability in this case remains an issue for lower income people, but for everyone else, as well as the low income people, the real issue is fairness, isn't it?
13817 MR. BROOKES: Well, there's a lot of issues. I suppose fairness of rates is one issue that the CRTC deals with. Our case is built on the issue of keeping us on the path to our competitive markets.
13818 MS LAWSON: But Mr. Brookes, fairness of rates is an issue for all subscribers, isn't it; whereas, affordability of rates is really just an issue for low income subscribers?
13819 MR. BROOKES: Yes, fairness is an important issue for all subscribers.
13820 MS LAWSON: And so, in a proceeding like this, it's important to focus on fairness of rates?
13821 MR. GRIEVE: Ms Lawson, I agree. And the best way to get the most fair rates you can possibly get is to allow the market to find its market levels. And that's what our proposal is all about.
13822 MS LAWSON: Thank you, Mr. Grieve.
13823 Now, I would like to move on to the issue of local access competition.
13824 Mr. Grieve, I understand that TELUS' proposal is intended to allow efficient competition to emerge. This is a key principle on which your proposal is based.
13825 MR. GRIEVE: Yes.
13826 MS LAWSON: Am I right?
13827 MR. GRIEVE: Yes.
13828 MS LAWSON: Now --
13829 MR. GRIEVE: Are we finished with our evidence?
13830 MS LAWSON: Yes.
13831 MR. GRIEVE: Okay, thanks.
13832 MS LAWSON: Dr. Jackson provided a paper entitled "The Likely Evolution of Local Communications", dated July of this year, in an attachment to TELUS(ARC et al)300. And I don't mind, Mr. Grieve, whether or Dr. Jackson answer these questions, but I just want to clarify.
13833 I take it that you are envisaging a great deal of facilities-based competition to develop in the local telecommunications market over the next few years, the next price cap term?
13834 MR. BROOKES: Ms Lawson, you will be back with me on the issue of the level of competition. And we do believe that competition will continue to unfold. And, clearly, we see the greatest degree of competition in the business market.
13835 What is fundamental to having competition continue to unfold is having retail rates be allowed to move to their competitive market levels.
13836 MS LAWSON: Excuse me, I'm not asking you the question of what you think is necessary for local competition to emerge. I'm just asking what your views are of how local competition will develop over the next few years.
13837 MR. BROOKES: But Ms Lawson, the reason for raising that point is I don't see how that it's possible to make an estimate of the degree to which competition will unfold unless we deal with the issue of whether retail rates are allowed to go to their competitive market levels. It very much will influence the answer to your question.
13838 MS LAWSON: Okay, then, I wonder how you are going to answer the question in CRTC Exhibit 18, which asks TELUS to provide its best estimate of projected market shares in the market for residential and business exchange services in the years 2002 to 2005.
13839 Will you provide different scenarios based on different assumptions or are you going to provide a single number? And do you have some numbers there to provide to me at this time?
13840 MR. BROOKES: I don't have the numbers here right now but, indeed, we will be doing a thorough analysis of this.
13841 And to kind of encapsulate the issue, if I may, in the business market, we do see significant competition that has rolled out and we expect it will continue to. Now, it will be important in the business market that rates be allowed to find their competitive market levels. But in the residential market, there has been less competition and the key issue, in our view, that will determine the degree of competition is that the rates are allowed to find their market levels.
13842 MS LAWSON: And so let's, then, move forward here on the basis that the rates do move up as you are proposing. Okay? So let's try to develop some estimates here on the basis of your proposal.
13843 Can you give me any numbers such as the CRTC has requested?
13844 MR. GRIEVE: Ms Lawson, there is one other key element here that has to be considered and that's -- you asked about facilities-based competition. We can be pretty sure that there will be facilities-based competition if the rates for competitor services are set at rates that are competitive; in other words, in our case, Phase 2 costs plus a mark-up that will give us an opportunity to recover our embedded costs. That establishes a standard in the wholesale market. If that standard is breached somehow, then you have a whole different problem.
13845 MS LAWSON: Okay. I guess I will just come back to my question. Can you provide any market share estimates for the next five years?
13846 MR. BROOKES: Now, can I just be clear? Are you focusing on the residential market in your question or are you thinking of both the residential and business markets?
13847 MS LAWSON: I am thinking of both.
13848 MR. BROOKES: Okay. Well, I am not going to give you numbers, but I can directionally give you my sense of it, if I may.
13849 In the case of the business market, we do see significant competition that has rolled out to this point. And we have various views of market share that TELUS has put forward, the facilities-based, the facilities-based plus resale, and then a number with single-source agreements, as well, in the case of the business market. And by all standards, we see that there is significant competition. And the footprint of competition has expanded. In terms of business customers, approximately 60 per cent of TELUS' business customers are in locations where there are facility-based alternatives. That footprint of competition expands to about over 80 per cent, if you include resale.
13850 So, as one would expect, facility-based and resale-based competition is expanding. And so, the key issue, we believe, is that as long as rates can be allowed to find their competitive market levels and we don't have any forces that drive them down further in some price cap mechanism that drives rates perhaps below what competitive market levels may be, we believe that competition will continue to expand in the business market.
13851 MS LAWSON: Okay, thanks. Just a few questions for Dr. Jackson.
13852 And to say I did read your paper, Dr. Jackson, and you don't -- I think you focus on the technology in this paper and the technological developments that have occurred over the past few years, and that you see occurring over the next few years.
13853 I take it you expect to see a significant development in facilities-based competition in telecommunications over the next, say, four or five years as a result of these technological improvements?
13854 DR. JACKSON: Well, we already see, as Mr. Brookes has pointed out, significant competition in various submarkets in Canada. My point of view, that I try to communicate in that paper, was that the changing technology, which will both -- both affects what suppliers can do and changes the demands consumers have for telecommunications will result in further competition.
13855 I mean, high speed -- I believe the high-speed Internet access will ultimately become almost universal over the next decade or so. Right now, about one third of the households in Canada that have high-speed Internet access get it from the telephone company and two-thirds from the cable company. There is competition today in an important residential service.
13856 MS LAWSON: So I take it the point of your paper is that this facilities-based competition is likely to make major in-roads into the incumbents' local telecommunications markets, both business and residential, through various technologies?
13857 DR. JACKSON: Well again, I don't know what "major" means to you. In the -- on page 6 --
13858 MS LAWSON: I am quoting you, actually, the term "major in-roads".
13859 DR. JACKSON: On page 6 of my paper, I referenced a presentation given by Niel Ransom of Alcatel at the FCC. In that presentation, he asserted that they expected -- they being Alcatel -- I think the world's telecommunications manufacturer -- projected cable to capture 15 per cent of the North American telephony market by 2005.
13860 I point out the example of Finland, where 20 per cent of households don't have a wired telephone. I would argue that a 15 per cent penetration into telephony by the cable company, together with, say, a 15 or 20 per cent penetration by wireless, is a major change.
13861 So, to quantify it, yes, by "major," I mean something in -- the new enterprises, the new entrance within the decade, having a 15, 20 per cent share of what -- of the market that's currently served by residential voice lines.
13862 I think in business, of course, it will be harder to define because there is a greater portfolio of business services and competition is already more advanced in the business world.
13863 MS LAWSON: Would you characterize this as a relatively rapid development of competition that you are expecting? Do you expect -- would you characterize it as facilities-based competition ramping up quite quickly over the next several years -- five, six, seven years?
13864 DR. JACKSON: Well, my perception is that it is probably the case that a few per cent of Canadian consumers today use wireless rather than wired telephony as their sole -- or their primary access to the telephone network. We have some data that I am familiar with from the United States that indicates it is about 3 per cent of basic telephone subscribers use wireless. I have got reason to believe that is about the same in Canada. But the survey data in the United States also shows that there are a lot of people who have both wired and wireless telephony, and, if they had to make a choice they would give up the wired, not the wireless.
13865 MS LAWSON: Excuse me, Dr. Jackson.
It's not the details I am asking you for at this point, it's just the general. I just want to make sure that I am understanding your paper well, because the way I read it is -- the message you are giving the Commission and the parties in this proceeding is that we should be expecting facilities-based competition in local telecommunication to ramp up very quickly over the next few years, through a number of technologies.
13866 DR. JACKSON: I understand your question. I was trying to make the point first with wireless.
13867 The wireless infrastructure, if I remember correctly, Canada started licensing wireless telephony carriers using cellular, and then PCS, starting in 1984. That infrastructure has been building up over that time. You know, you have to put up towers and switches. It takes a while. But that infrastructure is in place today. People are using it to substitute for wired telephony. That process will continue.
13868 Similarly, the cable infrastructure in this country has been built up over decades. At this point, a majority of Canadian households are passed by cable systems that have two-way high-speed data capability that is capable of delivering voice communications. And building that infrastructure is taking a long time, but it is in the market now, the rules are in place for interconnecting, exchanging traffic with the other local exchange carriers.
13869 So I guess my view is that this is a process that has taken many years to get everything in place, but it is in place. Some incremental investment is needed for it to become a very substantial part of the voice telephony market, but that investment is relatively small compared to the historical investment that has already been put in place.
13870 So the competition doesn't develop overnight. It takes a while. But it's here, it's now. Its market shares is going to expand quickly. But it wasn't an overnight phenomenon. It took a while to get it all built.
13871 MS LAWSON: I understand. So the logical conclusion or inference of what you are saying is that, if we are looking at the next, say, five-year period, we should be expecting to see significant developments in facilities-based competition?
13872 DR. JACKSON: Well, again, the point I am trying to make is that I believe that the view that five or six years from now that 10 per cent, 15 per cent, of the voice access lines in residences in Canada will be provided over the cable network doesn't seem to me to be a very big step. It's very natural and fits in with everything we know.
13873 Similarly, the thought that five years from now 10 per cent of primary voice telephone lines are provided wirelessly, rather than through wired technology, seems to me to be a relatively highly likely development, you know, that we can expect that to happen. You know, 10 years ago, hardly anybody had wireless for their primary line. Now, a few per cent do. Wireless is getting better, and it is going to continue to expand.
13874 Again, I point to the situation in Finland. In 1999, 20 per cent of Finland households had only wireless and they had 95 per cent telephone penetration.
13875 MS LAWSON: Thank you, Dr. Jackson.
13876 I was hoping not to have to spend this long.
13877 But let me just pass out an exhibit that I have -- I have provided copies to the Commission with. It is a submission by TELUS dated July 5th.
13878 MS LAWSON: Mr. Grieve, I have given you a full copy of the submission. Everyone else has a --
13879 THE CHAIRPERSON: Excuse me, Ms Lawson.
13880 Mr. Secretary, do you have -- we don't have -- or at least I don't.
13881 MS LAWSON: So it is a one-page exhibit. The front page is just the first page of the TELUS submission to the Commission, dated July 5th, 2001, regarding a Part VII application by CallNet concerning local win-back rules.
13882 And on the opposite side of that one-page exhibit is an excerpt from that submission -- and I have highlighted the parts that are relevant to the discussion we are having now.
13883 In paragraph 9, TELUS states:
"Call-Net's account of the development of the residential local exchange market is very misleading. Their account transforms the stubborn economic facts of competition in a network industry (significant capital expenditures, ongoing need for funding, long investment recovery periods, the inevitable failure of some market participants) into a pathology caused by the incumbents. This is bad economics and bad history. Facilities-based competition in telecommunications is, by its very nature, slow, expensive and risky."
13884 And then there is a footnote that states:
"The practical and financial challenges posed by infrastructure development appear, in magnified form, in the Canadian context. The difficult task of constructing transportation and communications infrastructure in a vast and sparsely populated country is a recurrent theme in Canadian historiography...".
13885 Mr. Grieve, do you want to comment on this?
13886 MR. GRIEVE: Sure. I would be happy to, and I will ask Dr. Levin to comment as well.
13887 Let's start with paragraph 9. What paragraph 9 is talking about is the same story that we are hearing from the competitors in this case here, that somehow it's the fault of the ILECs that things haven't worked out for them in the way they wished they had.
13888 From our perspective, the one big concern that the ILECs should be facing -- and the one big issue that our case addresses -- is the fact that the -- you know, this was a proceeding to deal with the price cap mechanism, so we focused on the price cap mechanism. Price cap mechanism, everyone agrees, drove business rates down and the price cap mechanism kept residential rates from rising to market levels. That was a concern of the competitors.
13889 But it is the fact that it is difficult to build facilities. But the fact, as Dr. Jackson has stated, is people are building facilities. And our concern -- one of our other concerns in this case is that the Commission not do something that will slow down or stop the building of those facilities.
13890 Now, as to the footnote, I think it is quite clear that there are many areas in Canada that are high cost areas to serve. We serve them today in Alberta and British Columbia under an obligation to serve. We don't necessarily expect people to be building loops out in those areas. We do know, though, that -- and the Commission has indeed recognized that the loops are essential facilities in those areas. But that doesn't mean people will just be looking to build copper loops.
13891 We have, for example, in Alberta now, Microcell has entered as a CLEC in Calgary. It has entered in Vancouver and Calgary, but it has also entered in Red Deer. And so, you know, we may have difficulty building wire-line facilities in Canada's geography, but Microcell seems to be able to offer service in parts around Red Deer.
13892 But the fact of the matter is that for wire-line competitors wanting to build wire-line facilities, it does take time. There is no question about it. But the fact is also that we see them building in the major centres where you would expect them to start to build. And where they don't -- and where they are not building yet in some of these remote areas, they will be building. But they may not be, necessarily, be building local loops. There is still lots of transport.
13893 I don't want to get too technical, but there is lots of transport available in many areas to get from local switches to local switches. There is less available, in terms of wired local loops, especially when you get outside of base rate areas.
13894 So I don't see anything wrong with anything that it says here. I mean, I stand by this 100 per cent.
13895 MS LAWSON: So, Mr. Grieve, then, the Commission shouldn't be expecting to see vibrant facilities-based competition throughout the local exchange market for some time, even with the most accommodative entry policies?
13896 MR. GRIEVE: Well, I will let Mr. Brookes speak to this, but the first thing that I think it is important to understand is that all that's required to become, what I call, a facilities-based entrant is you don't have to have all of your own facilities, in fact, you are going to have a mix of your own facilities. You know, it was revealed yesterday that we buy more from Group Telecom than Group Telecom buys from us. People will buy facilities from each other. The wholesale market will be a vibrant wholesale market quite independent, I think, in some ways, from the retail market.
13897 So what we are going to find is that when you need to provide local service in an area, you will co-locate at a central office and you will have a switch somewhere, and you will co-locate so that you can pick up local loops. Transporting back from those local switches, there is lots of transport available, especially on major routes. And where there isn't, it is a regulated rate.
13898 So facilities-based competition doesn't mean that everyone owns all of their own facilities.
13899 MR. BROOKES: If I might just briefly deal with this issue of facilities-based competition and its expansion, we would expect, as a natural path of competition, that it would start in the most densely populated areas, where the costs are lowest to serve. And, indeed, that's what we have seen with facility-based competition. But we have seen, as well, that is has expanded. It started in what we know as band A. It has expanded in TELUS territory to cover almost all of band B, which, in the case of TELUS, is where the big bulk of the business lines are found.
13900 So we do have a situation where 60 per cent of the business lines are in areas where there is facilities-based entry. But we also see that resale extends beyond that footprint, and it is the natural evolution of competition that resale allows competitors to build critical mass in areas and then presents opportunities for future facility builds. And we see these facility builds are continuing. The number of co-locations continue to increase.
13901 So this is the picture in the business market. And, if you wish, we can discuss the residential.
13902 MS LAWSON: No, that's fine.
13903 Those are all my questions, Mr. Chairman.
13904 MR. CHAIRMAN: Thank you, Miss Lawson.
13905 I understand there may be a problem with this microphone, so I will have the technical people actually change this microphone at the cross-examination table, if I can call it that. It will only take a minute.
13906 So we will do that just before the next party comes, the next party being the Consumers' Association of Alberta. And, I'm sorry, I don't know counsel's name.
13907 MR. WACHOWICH: Wachowich.
13908 MR. CHAIRMAN: Walker.
13909 MR. WACHOWICH: Wachowich.
13910 THE CHAIRPERSON: Wachowich.
13911 We are just going to change this microphone right now.
--- Technical difficulties / Difficultés techniques
13912 MR. SPENCER: Mr. Chairman, I have eight documents to be entered.
13913 MR. CHAIRMAN: Now, just before -- it doesn't seem to have solved the problem.
13914 Mr. Secretary, I understand you have a couple of documents to bring in?
13915 MR. SPENCER: Yes. I have eight documents to enter. Thank you.
13916 The first document is Mr. Brookes' CV which will be entered as TELUS Exhibit No. 4.
EXHIBIT NO. TELUS-4: CV of
13917 MR. SPENCER: Mr. Grieve's CV will be entered as TELUS Exhibit No. 5.
EXHIBIT NO. TELUS-5: CV of
13918 MR. SPENCER: Mr. Levin's CV will be entered as TELUS Exhibit No. 6.
EXHIBIT NO. TELUS-6: CV of
13919 MR. SPENCER: Mr. Jackson's CV will be entered as TELUS Exhibit No. 7.
EXHIBIT NO. TELUS-7: CV of
13920 MR. SPENCER: We also have a response to a CRTC Exhibit No. 2 which is an undertaking for TELUS regarding SIP. This will be entered as TELUS Exhibit NO. 8.
EXHIBIT NO. TELUS-8: Response to CRTC Exhibit No. 2, which is an undertaking for TELUS regarding SIP
13921 MR. SPENCER: Letter dated July 5, 2001, from Mr. Grieve regarding Part VII application by CallNet Enterprises Inc. concerning local win-back rules will be entered as ARC et al Exhibit No. 10.
EXHIBIT NO. ARC-10: Letter dated July 5, 2001, from Mr. Grieve regarding Part VII application by CallNet Enterprises Inc. concerning local win-back rules
13922 MR. SPENCER: Decision CRTC 2001-366 will be entered as GT Group Telecom Exhibit No. 13.
EXHIBIT NO. GT GROUP TELECOM-13: Decision CRTC 2001-366
13923 MR. SPENCER: Finally, Decision CRTC 2001-217 will be entered as GT Group Telecom Exhibit No. 14.
EXHIBIT NO. GT GROUP TELECOM-14: Decision CRTC 2001-217
13924 MR. SPENCER: Thank you.
13925 THE CHAIRPERSON: Thank you, Mr. Secretary.
13926 It doesn't sound to me like this switched microphone has cured the problem, so I will just remind folks to let's try and just make sure we only have one microphone on at a time.
EXAMINATION / INTERROGATOIRE
13927 MR. WACHOWICH: Good morning, Commission and panel.
13928 My name is James Wachowich and I am legal counsel for The Consumers Association of Canada, Alberta Division. That is, as is known to the Commission, a residential consumer advocacy group, the Alberta division of that
13929 So, the take, gentlemen, that I will tend to come at this from is the residential consumer within Alberta, but appreciating that TELUS' service territory does cover a broader geographic base than that.
13930 And, gentlemen, one of the first areas that I was interested in, having read some of the transcripts of the Bell cross-examination, was that -- well, let me put it this way. I understand from even your filing, and earlier than that in this process, that we view this now as an industry in transition from the regulated rate of return, through price cap, with a target of getting to market forces. And in doing that, we view the market as this triangle of customers on one corner of the triangle, or one point of the triangle, the CLECs on the other and ILECs on the third point of the triangle.
13931 I just wanted to ask the question at the start, the position of TELUS is that each point of that triangle, including customers, are going to have a responsibility or obligation to move this through to a market force. Is that correct?
13932 MR. GRIEVE: I'm not sure I would say that anyone has an obligation to move the industry towards the market -- any of these groups has an obligation to do that. I think what happens is when the Commission, as it has done, opens the market to competition and sets in place the rules, the accommodative entry rules, that competition happens. And it is happening.
13933 So, I mean, yes, customers will benefit from that -- our companies, and the CLECs and the economy as a whole. So, to me, it's not a question of any of those groups having a responsibility. I think they are incented to participate in a competitive market.
13934 MR. WACHOWICH: So in looking at the customers' point of that triangle, Mr. Grieve, the customer, in order to make an informed choice as a market participant, is going to have to undertake to inform themselves of the developments in this telecommunications marketplace?
13935 MR. GRIEVE: I don't think so, Mr. Wachowich. I think that the market will drive the competitors seeking to enter the market to make sure that customers know their services are available.
13936 MR. WACHOWICH: Okay. Thank you. The other part that I was interested in in your filing, and it's at paragraphs 20 and 21 -- you probably don't have to turn this up -- was that TELUS indicates it's here in a dual capacity, both as an ILEC and as an entrant. And so that's covering basically two points of that triangle that I discussed.
13937 And I know from the question put to Bell -- it was put to them who are their competitors -- I just wanted to get the same response on the record from TELUS. As an entrant, who is it that TELUS competes with?
13938 MR. BROOKES: TELUS competes with a number of carriers, Mr. Wachowich. In the business market, there is the Intrigna and Nexxia, Group Telecom, CallNet and AT&T are some of the key competitors. We, as well, see the Mobility companies competing with us, to some degree, and that takes you into the whole issue of substitution with Mobility and the fact that we see Mobility companies, at least one company, obtaining CLEC status.
13939 So these are some of the more direct forms of competition. We see the cable industry emerging as a competitive force. And we also see voice-over IP as a competitive force that is developing, as well.
13940 MR. WACHOWICH: Thank you.
13941 And what I am interested now to know is, to the extent, then, that TELUS and Bell compete with each other, is I think the first two names that you used in terms of competitors were Bell companies, if I am getting that correctly.
13942 I am interested to know, are you adverse in interest with Bell in this proceeding, or, as ILECs, are you all in the same pool and, therefore, not adverse in interest?
13943 MR. GRIEVE: Mr. Wachowich, that's a really good question because I will tell you there are times when I listen to Bell's witnesses and I am convinced we are adverse in interest, and there are times when I listen to Bell's witnesses and I am convinced that we are not, and there are times when I read the evidence of some of the competitors and I am convinced that we are adverse in interest, not surprisingly, and there are times when I read some of their evidence and I go "Right on."
13944 So I think that what's really interesting about this proceeding is that we have, for the first time, a mix of participants in the room who have a number of different interests as entrants, as incumbents and as in "other incumbents," like AT&T and CallNet in the long distance market getting into the local market, that we have a whole mix of interests in this room.
13945 So where do our interests lie? Really our interests in this proceeding are, as an incumbent and a new entrant, as TELUS, not as any other ILEC.
13946 MR. WACHOWICH: Okay. The reason I asked that, Mr. Grieve, was, you know, I know Bell or one of their witness panels made this comparison of, you know, rolling friction versus the starting friction. And I am assuming it's safe to adopt some of these, I will call them catch phrases or concepts, that have been developed from the Bell panel and assume that you would agree with them, but the one I wanted to really focus in on was the other --
13947 MR. GRIEVE: I wouldn't count on it exactly.
13948 MR. WACHOWICH: Okay. But the one I wanted to focus on and put to you directly was the statement -- and I have lost the transcript reference -- but it was, simply put, that we have to raise prices in order to lower prices.
13949 Can I get the TELUS view of that statement? Thank you.
13950 MR. BROOKES: Yes. I wouldn't put it quite that starkly.
13951 The issue is we need to allow prices to go to the competitive market levels. Once that happens, we have to rely on the marketplace and the dynamics of the marketplace in terms of the prices that it provides in the market.
13952 Now, that dynamic process, what may see prices increase or decrease over time, but importantly, it sees a redefinition of the very product that is being provided and the innovation that is brought to the market.
13953 So we cannot rule out that there will be price increases or decreases, once we find the competitive market levels, but that is the very nature of a competitive marketplace.
13954 DR. WEISMAN: Mr. Wachowich, if I could just follow up. We focused a lot about price in this proceeding, but a key aspect of competition is innovation. And what we will also foster by allowing prices to reach the market levels is innovation, the likes of which we can't exactly foresee what it will look like.
13955 But I recall a story I read recently by Charles Kettering approaching Henry Ford, who liked to make his cars one colour, black, and price them at a very low level. And Kettering had come up with an electric starter and Ford said that so long as he had a say about it, Ford cars would never have electric starters.
13956 And I think the key is I don't think we want one company or one person dictating where the market is going to go. We want to foster those market processes in innovation and with certain specific price quality feature functionality that will come with that competition.
13957 MR. WACHOWICH: It's like you read my script here, Dr. Weisman, because the next question I wanted to ask was: you said a key aspect of competition was innovation, but I wanted to add that a key aspect of competition is a number of competitors?
13958 DR. WEISMAN: As I said yesterday -- and I think it's critically important, given the Commission's accommodative competitive entry policies -- competition disciplines before it attacks. I will say that because it's very important, particularly given that a key focus of the Commission's accommodative competitive entry policies was reducing or eliminating barriers to entry.
13959 So it is not the actual number of competitors, but the opportunity for those competitors to enter in response to a price quality mix that is out of line with the market.
13960 MR. WACHOWICH: So we have to have competitors, plural, though. You used "competitors" not "competitor".
13961 DR. WEISMAN: The discipline imposed by competition is not dependent upon any number of competitors. That discipline can take place with one or many.
13962 MR. WACHOWICH: Thank you.
13963 DR. LEVIN: I would just like to add that I think it's important not to get caught up in numbers and it's important to understand that you need real competitors there.
13964 The FCC, in my understanding, got itself into the position of having to evaluate its success or failure in long distance competition by counting the number of competitors. And they would every month put out a release that said there were so many hundreds or tens or whatever of long distance companies.
13965 But a lot of those people were in the market because the FCC had created artificial incentives and artificial cost benefits to those people. That wasn't really competition. There was a bunch of people that were in there that probably shouldn't have been, and, in fact, haven't survived in the long run.
13966 So I think it's really risky to get into the game of counting the number of competitors. It is very important to understand that the rules have been set right. In this case, the Commission has put in place policies that will allow facilities-based entry to occur, and then we will get that discipline from competition. And there will probably be more than one competitor. Twenty artificial competitors is worse than three good ones.
13967 MR. WACHOWICH: To borrow from a U.S. Supreme Court justice, who was talking about another subject, it's that we are going to have some difficulty defining "competition," but we will know it when we see it.
13968 MR. GRIEVE: I suppose so, Mr. Wachowich.
13969 MR. WACHOWICH: Thank you.
13970 You are smirking, Mr. Grieve. Do you know what the original quote was about?
13971 Gentlemen, I just wanted to ask a quick couple of questions about -- I'm calling up the ancestry of TELUS.
13972 In the last 10 years or thereabouts -- so let's take it from 1990-1991 -- the company that's TELUS today was three individual corporate entities, AGT, EdTel and BCTel. That's correct?
13973 MR. GRIEVE: AGT, EdTel, B.C. Tel, ClearNet and Quebec Tel.
13974 MR. WACHOWICH: I guess I was thinking --
13975 MR. GRIEVE: And a number of other smaller IT companies.
13976 MR. WACHOWICH: Thank you. I guess I was thinking more in terms of what it served, the local market in the geographic territories. But in any event --
13977 MR. GRIEVE: You want to focus on Alberta and B.C., and I understand that.
13978 MR. WACHOWICH: Yes.
13979 I make that comment because in paragraph 2 of your application, you talk about this being the fourth in number of regulatory regimes since 1994. Correct?
13980 MR. GRIEVE: I believe so.
13981 MR. WACHOWICH: And why I wanted to touch upon the ancestry, Mr. Grieve, was that I want to discuss not just the regulatory changes since 1994 or just a bit earlier, but also the, I will call them, changes corporate to the TELUS group.
13982 MR. GRIEVE: I will do my best, Mr. Wachowich.
13983 MR. WACHOWICH: Thank you. I don't think it's going to get into any detail that you won't be able to respond to.
13984 But there were a number of mergers and acquisitions, as you have just alluded to by listing those names.
13985 But the question I had focused down to was: had those not occurred, any one of the components of what is today TELUS could be competitors with what are now other parts of that whole company. Is that fair?
13986 MR. GRIEVE: I suppose. I mean it depends upon so many things. It depends on many things, of course, with BCTel and Quebec Tel. Neither of those companies could compete outside of their operating territories. But Dr. Levin has something to say.
13987 DR. LEVIN: I would just like to point out that as we move to competitive industries --and that has been under way for some time -- what we find is that, in this case, the geographic boundaries of companies, as well as the mixed products that they might have, was created historically by regulators, probably for very good reasons, but those reasons become out of date.
13988 And what we have seen clear through this industry are a number of mergers and realignments and people selling parts of their business. That's really an inevitable consequence of competition, and it's a good one in the sense that it redeploys all these assets in a way that is much more efficient.
13989 So when you ask the question: could EdTel and TELUS and BCTel be competitors with each other if they had not combined, my response is I don't know whether those people would exist if they had not combined.
13990 I am not going to argue every single merger that has taken place is going to be good or be successful in the long run, but we can't look at this industry and just assume that all these companies would go on the way they were. I think that a lot of them are not viable in the longer run in this industry and you would have no competitors rather than three.
13991 MR. WACHOWICH: I was going to describe the changes, the evolution of the companies, gentlemen. And to understand the next analogy I am going to make, you have to understand I am the parent of a five-year-old son.
13992 So, it's a little bit like if you were a dinosaur and you went to bed at night a plant eater and you woke up in the morning and you are a meat eater. You guys, that is TELUS, has changed significantly in terms of what it was yesterday, say ten years ago, or eight years ago or seven, to what it is today. Is that fair?
13993 MR. GRIEVE: Well, I don't know if I would go plant eater to meat eater. I might go one kind of salad to one with much spicier dressing!
13994 MR. WACHOWICH: I thought the dinosaur analogy would offend you, Mr. Grieve. I wasn't inferring that you were dinosaurs, but...!
13995 Do you think -- is it fair to say that some of the change that the company has been able to internally manage, as a corporation, has caught some of the industry off guard?
13996 MR. GRIEVE: I don't know. I really don't know what you are asking.
13997 MR. WACHOWICH: I guess maybe if I rephrase that. Do you think some of the CLECs were surprised at the TELUS ability to adapt, both to the regulatory regimes in place to the business realities of the world, and adapt as a corporation?
13998 MR. GRIEVE: I don't know the answer to that. I think that, you know, TELUS, in Alberta, was -- it was no secret that TELUS in Alberta was seeking to expand. Nobody should be taken -- have been taken by surprise entirely with the things that TELUS has done. TELUS has been very open about its plans to expands, its plans to grow, its plans to compete nationally. I don't think anyone should have been taken by surprise that we would work as hard as we could to fulfil that objective and, at the same time, to ensure that we fulfilled our obligation to provide service in Alberta and British Columbia.
13999 MR. WACHOWICH: Thank you.
14000 Now turning to another point of that triangle, Mr. Grieve, and that's the customer side -- and this is customers within the TELUS service territory, the residential customer -- a customer who is watching this rapid change of the corporations which form the constituent parts of TELUS, that is, in that area AGT, EdTel and BCTel, what would have been fair expectations, on the part of the customer watching those companies change? And maybe I will be more pointed than that. Would the customer have been watching those changes -- call them mergers and acquisitions -- and said: "Well, this is nice, it's going to end some of the duplication that those companies may have in place?
14001 MR. GRIEVE: I think the customers would look at that and they would say we want to -- that their interest would be to continue to get service from the companies, as they had always expected they would get.
14002 MR. WACHOWICH: So if they were expecting just to get service as they always had, they would not have expected to get any new benefits from these mergers and acquisitions?
14003 MR. GRIEVE: Well, I think customers have benefited from the mergers in many, many different ways, including the rapid deployment of new services, such as ADSL.
14004 You know, the company doesn't operate in a vacuum, Mr. Wachowich, it operates in the real world. And the real world demands that we roll out and expand our services -- expand the number of services we offer and meet customer demand for those services.
14005 MR. WACHOWICH: So if I just take for a moment, Mr. Grieve, a singular customer, a hypothetical singular customer, who takes only local res service from TELUS, and we will put them in the old EdTel service territory in Edmonton, my neighbour or yours, and we will get them a little bit up to speed, we won't have them on the old dial phone, we will get them on touchtone here, but he is only taking that service, and he has watched this -- I have used the term "morphine of the company" in my notes, and I am going to drift into that, I am sure, so I take it you know what I mean when I am talking about "a morphine."
14006 MR. GRIEVE: Yes, I have a young son as well!
14007 MR. WACHOWICH: And the morphine of this company, and he has just got his local res land line service, what benefits has he seen? You have mentioned ADSL, but he is not taking ADSL.
14008 MR. GRIEVE: Well, Mr. Wachowich, I think that our obligation is to provide telephone service to this customer under our obligation to serve. And as long as we continue to do that, we are meeting our obligation to that customer.
14009 The benefits that the customer receives from the merger are the benefits that I described: new services, new innovations, those kinds of things, as we go forward. But, you know, the mergers and the growth of the company are done for the benefit of the customers, not directly but indirectly.
14010 I mean, the company is run to provide service to customer. The company wants to have satisfied customers. But the company also has to run the company for the benefit of the shareholders, who are the owners of the equity in the company. So, what do we do? We run the company to provide service to customers. And this customer, I think, your neighbour and mine, as long as he or she is still getting the service that they expect and the improvements, like touchtone and any other kinds of services -- optional services they may want to buy, and availability of other things, we are fulfilling our obligation.
14011 MR. WACHOWICH: Mr. Grieve, do I take it from that answer that the plain vanilla service that I described is still simply plain vanilla service, it hasn't deteriorated at all, it hasn't really changed that much? There's other sprinkles on top, et cetera, that that customer could get, if they choose to, but it's still plain vanilla service?
14012 MR. BROOKES: Mr. Wachowich, let me answer that by saying customers benefit in a couple of ways. We continue to upgrade the underlying infrastructure of our network and it does provide benefits, certainly, to our customer base. Now, we have seen that in some of the more rural areas of the province, with upgrade programs, as an example, and we have the service improvement program that we are discussing at this proceeding. So, these are examples that have affected the base service and so there are benefits that are provided. But of course, there are other benefits that Mr. Grieve referred to.
14013 Your characterization of a customer that just buys a local line certainly is not typical of our customers And they do purchase a wide variety of services and do get the benefits of our combined forces in B.C. and Alberta, in bringing those services to the market.
14014 MR. WACHOWICH: Thank you.
14015 Gentlemen, I wanted to turn to another area, and the reference -- and I appreciate it's a reference that was provided as a responsibility for panel 2, but I think we can cut a fair bit out, if you will indulge with me for a moment to explain why I am referring to CRTC 400 in the attachments thereto, which are the financial statements of the TELUS companies over the period.
14016 If I can just list a few of the financial statements and comments they make -- and they are at a fairly high level -- that:
"Our developments that the company had over the period of time..." (As read)
14017 MR. GRIEVE: What are you looking at exactly, Mr. Wachowich?
14018 MR. WACHOWICH: Well, there are attachments there --
14019 MR. GRIEVE: Yes.
14020 MR. WACHOWICH: -- to CRTC 400, which are the various financial statements of the company.
14021 MR. GRIEVE: Annual reports?
14022 MR. WACHOWICH: Or annual reports, yes.
14023 MR. GRIEVE: Yes.
14024 MR. WACHOWICH: And the first one in 1998, page 7, "Note to Financial Statement"--
14025 MR. GRIEVE: Nineteen --
14026 MR. WACHOWICH: 1998.
14027 MR. GRIEVE: Okay. Which attachment is that?
14028 MR. WACHOWICH: It's Attachment 2, I believe.
14029 MR. GRIEVE: Okay. Okay, which page?
14030 MR. WACHOWICH: Page 7.
14031 MR. GRIEVE: Thank you. Okay.
14032 MR. WACHOWICH: And it talks about developments in the fourth quarter of 1997, where:
"The company ceased to use those regulatory accounting practices which were applicable to regulated telephone companies and replaced them with generally accepted accounting principles." (As read)
14033 And then, it references note 5 where it says:
"The company was not assured cost recovery through rates, and, therefore, certain assets previously recognized as such must be written off to a net realizable value." (As read)
14034 MR. GRIEVE: Right. I can't answer this.
14035 MR. WACHOWICH: Okay.
14036 MR. BROOKES: I am sorry. Maybe you could ask the question, but I just -- I don't know the details of this.
14037 MR. WACHOWICH: Well -- okay. So I just wanted to point that as one development early in the price cap regime that the company was able to undertake, not just in a sense of a peer corporate restructuring, in restructuring its entities, but in terms of an internal restructuring or internal accounting method. And the other ones that I was --
14038 MR. GRIEVE: I guess I can't find that exact quotation. I would like to find it. Note 5, you said?
14039 MR. LOWE: Mr. Chairman, I know this interrogatory is the responsibility of panel number 2.
14040 MR. WACHOWICH: I appreciate --
14041 THE CHAIRPERSON: No, I know. Mr. Wachowich acknowledged that in asking his question and said that he would ask and see whether the panel could answer. And, obviously, Mr. Grieve has indicated that he is unable to answer that question, and, I gather, still trying to find the exact reference. So I don't know whether --
14042 MR. GRIEVE: This line, "The accounting changes resulted from certain recent developments."
14043 MR. WACHOWICH: So --
14044 MR. GRIEVE: Oh, you are at the bottom of the page there?
14045 MR. WACHOWICH: You are now on page 11, Mr. Grieve?
14046 MR. GRIEVE: Yes.
14047 MR. WACHOWICH: Yes, that's where I was. That was note 5 to the financial statements, in that instance.
14048 And I don't think we have to dwell on it, except to suggest -- and then, I was going to follow up with its two other examples -- and you may know the others as more obvious examples. In the 2000 financial statement, at note 2, it indicated that the company adopted revised pension recommendations.
14049 MR. GRIEVE: Yes, Mr. Wachowich, I would really prefer that you discuss those with Ms Hale.
14050 MR. WACHOWICH: Okay.
14051 MR. GRIEVE: She's familiar with this.
14052 MR. WACHOWICH: All right. Mr. Grieve, would you generally agree that the company was able to -- the company was able to, over the first price cap period, able to manage its internal affairs and prosper by the price caps' regime?
14053 MR. GRIEVE: Yes, the company did well financially.
14054 MR. WACHOWICH: And the company's proposal, which is making in this process for price cap regime 2, would similarly allow the company to prosper. Is that fair?
14055 MR. GRIEVE: Well, I think there is a major difference between the first price cap period and the second price cap period. The most significant difference, of course, is that we now do have competitors in the market place. We do all have all the accommodative entry rules in place.
14056 You know, whether the company does well or doesn't do well in the next price regulation period depends on many things, but especially what kind of price regulation plan the Commission puts into place. But something the Commission were to adopt our price regulation plan, it would depend on many, many things, not the least of which is competition in the market place.
14057 So, I mean, as we have said before, we have a rate structure that is quite -- it's not healthy. It has rates that were -- that are too low for residential, rates are either below competitive levels, competitive market levels. We have business rates that were forced down by the last price cap regime, that are apparently, in some -- in many areas still below competitive market levels. Competitors are not happy about them, but we are still seeing entry.
14058 So, our plan, it seeks to move toward competitive market levels, and we expect to see entry fairly quickly because people are in place, ready to go -- in many co-located spots, as we indicated yesterday.
14059 MR. WACHOWICH: Mr. Grieve, the place I was trying to get to -- and maybe you will just agree with the final conclusion, though -- is that the internal management of TELUS that translates into productivity gains, those productivity gains, in the first price cap regime, accrue to TELUS, the company or its shareholders, excepting that productivity factor that is granted to customers under the formula?
14060 DR. LEVIN: That's actually not correct, I don't believe. There were some productivity gains which were historically larger than had been -- I am sorry, some productivity gains that were larger than those that had historically been achieved that were passed through to customer through the part of TELUS' revenues that were under price caps. Many of the other productivity gains were passed through to customers in lower prices in competitive services.
14061 Competitive markets captured the productivity gains. The productivity gains that are experienced result in lower prices for our customers.
14062 So I think that, from my point of view, most of the productivity gains -- or all of the productivity gains would have been passed through to customers, in terms of lower prices.
14063 MR. WACHOWICH: And does that apply to residential customers, as well?
14064 MR. GRIEVE: Well, if I might start there, Mr. Wachowich.
14065 First of all, under the Commission's rules, we can't lower the residential prices below their incremental costs. And in most places, I think, they are still below their incremental costs. We are not about to lower residential rates to levels that are contrary to the Commission's rules.
14066 Secondly, we are trying to get those residential rates to market levels. That is what our program or our proposal is all about.
14067 MR. WACHOWICH: And Mr. Grieve, just so we are clear on this, would you agree that the average residential consumer -- and I am almost prepared to extend this to almost every residential consumer in your service territory -- would not be aware of what you were just describing to me about the resistance to lowering prices below a certain floor, so they are not conversant in imputation tests, they are not conversant in what band they are in, they are not conversant in what -- whether they are in a high cost service area or non-high cost service area; they are conversant in "I get my service and I get a bill."
14068 Is that fair?
14069 MR. BROOKES: Yes, it is. Certainly, they would have no knowledge of imputation tests, but what they do see is the results of competitive marketplaces. And I believe, you can see a good deal of that in the Commission's report on competition, where we show the implications and show that consumers have been very well served across the board as a result of competitive marketplaces.
14070 MR. WACHOWICH: And it's The Companies' position that we are not to be here raising various issues that might be viewed by, say, customers, or their advocates, as flaws of price cap one. Is that fair?
14071 MR. GRIEVE: I am sorry, I missed an important word in your question. Could you repeat your question, please?
14072 MR. WACHOWICH: It is The Companies' position that we are not to be here raising issues that may be viewed by customers or their advocates as flaws in the price cap one period. And I should have added the word in there that we are not to claw back from price cap one. Is that fair?
14073 MR. GRIEVE: Well, I think that it -- well, first of all, I think that if you have issues that you believe are flaws in the first price cap plan, then this is the proceeding to be raising those issues in. We may disagree that it is a flaw, but it's certainly open to you to do that.
14074 Secondly, you know, you said something about stepping back. You know, Mr. Wachowich, the competitive forces have been unleashed. There is no turning back. There is no turning back for the Commission. They can't retreat back to the safe haven of rate of return regulation because it just won't work. They can't even retreat back to price caps because price caps is just another rate-based rate of return kind of tool that was developed for natural monopoly public utility company regulation. It was not developed to regulate competition; it was developed for another purpose, which just happens to be a little bit better than rate-based rate of return for the transition to competition.
14075 So there is no turning back. Let's be very clear about that. And our proposal is designed as the next logical step in the Commission's evolution of its regulation, and eventual deregulation, of at least the residential -- or the retail, including residential marketplace.
14076 MR. WACHOWICH: Mr. Grieve, perhaps I should have stated it as: the past, though, is closed off. What we are looking at is what regime is going to be in place in the future?
14077 MR. GRIEVE: Well, the regime for the future has already been determined. It was determined by Parliament in 1993 in the Telecommunications Act. And the Commission has done a marvellous job in opening up the markets in, you know, the way that -- in typical Canadian fashion, in an orderly manner -- opening up the markets, creating the accommodative entry rules -- and we are seeing competition.
14078 So I don't think it is a question of looking at what kind of regulatory scheme we are going to have going forward; I think it is a question of looking at what kind of -- how we are going to allow markets to develop further in the next regime.
14079 MR. WACHOWICH: And we have to be cautious, though, about what mistakes we may have identified so that problems don't -- and I am quoting from the filing here "compound in perpetuity." Is that fair?
14080 MR. GRIEVE: Absolutely. I think, you know, there are serious potentials in this proceeding to make serious mistakes at the wholesale level that have magnifying and compounding effects far greater than mistakes that might appear to be of a similar magnitude that might be made at the retail level.
14081 And we know that there were some unexpected results at the last price cap period and one of them was that business rates got driven down as quickly as they did and, you know, some companies were bottoming out very early on in the piece. And we know that residential rates did not rise to market levels because we didn't see as much typical wire-line facilities-based entry. Of course, we have competition from wireless. But you know, in the typical facilities-based wire-line entry, we didn't see as much in the residential market as many people had hoped or expected we would.
14082 But of course, Mr. Wachowich, we have to remember that when we were doing the last price cap proceeding -- I believe it was AGT -- it turned into TELUS halfway through that proceeding, had to change names in midstream -- and the Stentor companies, at that time, all of those companies were proposing residential rate increases during that price cap period. And so it was -- you know, the price cap mechanism that was chosen didn't do that.
14083 MR. WACHOWICH: And, gentlemen, I want to pose to you a hypothetical question -- and since we have a number of economists I thought it was safe to make a few assumptions built into that question.
14084 So for the sake of the question, I want "residential customer" to mean that hypothetical residential customer I spoke of earlier, who takes just local service. And "choice," for the sake of the question, means a viable alternative -- or alternatives, plural. And to build into it what we have been talking about, I guess we should say it is facilities-based -- knowing, Mr. Grieve, what you said facilities-based means we may be sharing facilities, et cetera.
14085 But the question is, based on those two assumptions, if we adopt the TELUS proposal as filed, would the residential customer have a choice in five years?
14086 MR. BROOKES: Yes, there is no question that they will. And the residential customer does have some degree of choice today. In TELUS territory there is CLEC-based competition in Calgary and Vancouver. And we also see substitution occurring with wireless service. And the impacts of competition, we believe, have been greater on the wireless substitution side than on the CLEC-based side to this point.
14087 But the key issue here is that the level of rates in the residential market have been at a level that discouraged competitive entry. And our proposal puts forward the $35 maximum level over the five-year period that will allow rates to move to competitive market levels and maintain affordable rates, and, in so doing, will bring significant increases in competition.
14088 MR. WACHOWICH: Something you said there, Mr. Brookes, intrigues me. The rates in place today are not enough to support competitive entry, but the customer has competitive entry today?
14089 MR. BROOKES: The competitive entry today is less than what most parties at the last price cap proceeding expected would be the case. There is, nonetheless, some competitive entry occurring, but certainly not at the level of magnitude that was anticipated at the last price cap case.
14090 But as Mr. Grieve referenced, the level of rate increases that were imagined by parties like TELUS and the Stentor Group last time were higher than what has actually occurred. And we do not see rates rising, as of yet, in most places to competitive market levels, and that fundamental dynamic is necessary to encourage further competitive entry.
14091 MR. WACHOWICH: And just to contrast that with the rate of return regulation, what the customer would have had was a cost plus fair rate of return to set the rate or price they paid, and what they got under price cap one was rising rates which now, by your admission, have attracted some, but not viable, competition?
14092 MR. GRIEVE: Well, first of all, under rate-based rate of return regulation residential rates typically and traditionally, across North America at least, and probably many other places in the world, did not provide for a recovery of costs for residential services and any kind of a return for the company.
14093 The system that was in place was a system of massive and complex implicit subsidies. And the purpose of this -- one of the outcomes of moving to competition, and one of the things that the Commission cannot stop, is that implicit subsidies will be driven out of the system. They cannot be sustained by regulation in the face of competition.
14094 In fact, you know, I was reminded the other day about Dr. Gerald Brock, who was before the Commission in 1991, 10 years ago in the long distance competition case, telling the Commission that it could have subsidies and competition, too, with the right model. Five years later in the -- it was either the price cap proceeding or the local competition proceeding -- I can't remember, they were back to back, but in the hearing he was being cross-examined by Microcell's lawyer -- and his statement was that you cannot sustain subsidies in a market open to competition or in a competitive market.
14095 So you know, what we are moving toward, Mr. Wachowich, is a system -- is a competitive market, and in a competitive market the market will set those prices. And to suggest that residential customers somehow in the past -- and you said you were speaking for residential customers -- had paid the cost of their service, I don't think is correct and it's not going to be correct even under -- in all cases under the Commission's current regulatory scheme because of the contribution mechanism for high cost serving areas.
14096 MR. WACHOWICH: Some customers paid the cost of their service, Mr. Grieve?
14097 MR. BROOKES: Yes, indeed, some do.
14098 MR. WACHOWICH: Thank you.
14099 Should customers be concerned that TELUS -- and I am referring now to the corporate restructurings that we saw and amalgamation -- should customers in the TELUS service area be concerned that TELUS has developed a market power position?
14100 MR. GRIEVE: I don't understand what you mean by "developed a market power position." Maybe you could be a little more explicit?
14101 MR. WACHOWICH: Well, that TELUS has a large enough market share, and within the rules under which it is regulated, can do things that prohibit competition.
14102 DR. WEISMAN: I'm not sure that I understand completely your question, but let me try.
14103 The TELUS proposal on -- for price regulation is based on accommodative entry policies, and market shares do not matter in those types of policies. What has essentially happened is that the policies have been in place to eliminate or greatly reduce barriers to entry, and in that type of environment market share is not significant.
14104 MR. CHAIRMAN: Okay. And perhaps, Mr. Wachowich, I am going to want to take our morning break within the next couple of minutes.
14105 MR. WACHOWICH: I wasn't sure what time, sir. Now is an appropriate time.
14106 MR. CHAIRMAN: Okay. We will take our morning break now then, and reconvene in 15 minutes.
--- Upon recessing at 1030 / Suspension a 1030
--- Upon resuming at 1055 / Reprise à 1055
14107 THE CHAIRPERSON: Order, please, ladies and gentlemen. We will return to our proceeding now.
14108 I just want to note that, unless anybody has got any violent objections, I want to propose we have a one-hour lunch today. And since we have scheduled the teleconference for, now, six parties -- that's scheduled for two -- that I would suggest we take the lunch break from one to two.
14109 And we will continue beyond five o'clock, no later than six, you know, if somebody is in the middle of their cross-examination at that time.
14110 Anything else? Okay, we will turn to Mr. Wachowich, then.
14111 MR. WACHOWICH: Thank you, Mr. Chairman.
14112 Dr. Weisman, I wasn't sure, did you get enough of the question to have the answer?
14113 DR. WEISMAN: Could you repeat the question for me?
14114 MR. WACHOWICH: I think where we had left off was talking about a potential development of something like a market power position. And I thought -- I don't have the exact transcript or question in front of me because it was an elaboration on an earlier question, but it was whether customers or whether the marketplace should be concerned that -- I guess regardless of whatever market enhancements or accommodative entry policies are put in place that there is this corporate entity in the Alberta-B.C. geographic territory that is a very dominant player.
14115 Is that a concern to customers who are being told you are going to get choice?
14116 DR. WEISMAN: My sense of accommodative competitive entry policies is that, for the most part, it works to make size immaterial to the extent that competitors are able to access the technologies, scope and scale of the incumbent. And if there is difference in size, that difference is levelized via the accommodative entry policies that the Commission has pursued.
14117 MR. WACHOWICH: Thank you. And so in light of that answer, it's not important that TELUS would have, what I have termed, a survival instinct. It's not important that TELUS -- assuming TELUS is a competitor -- and I am quoting from your paragraph 22 in your evidence that says about price cap:
"It allows pricing flexibility necessary to compete against new market entrants." (As read)
14118 And when I take that clause, "pricing flexibility necessary to compete against new market entrants," TELUS is still going to try to hold on to its market share, to be a competitor. Is that fair?
14119 DR. WEISMAN: Well, I think all firms have a survival instinct. Some are better at it than others. And I think what this goes to is the fact that you want to make sure that firms succeed or fail on the basis of their own merits.
14120 And I view those price caps, to the extent that they apply, and the Commission's accommodative competitive entry policies as facilitating that outcome.
14121 MR. WACHOWICH: And, Dr. Weisman, at paragraph 54, and subsequent, in your evidence, you talk about the incumbent's firms rivals ability to intervene in the regulatory process in an attempt to peg prices at artificially high levels. And somewhere later you go on to talk about their "strategic behaviour before the regulator".
14122 Do you accept that that's some of the discussion that is contained in your evidence?
14123 DR. WEISMAN: Certainly, there is a long history of that. I'm most familiar with the U.S., but, yes.
14124 MR. WACHOWICH: And as TELUS becomes a competitor in the marketplace, how do we assure ourselves that it is not before the regulator with a strategic behaviour?
14125 DR. WEISMAN: I believe you would have to evaluate what TELUS is proposing on the merits.
14126 Again, I think that the way sound regulatory policy should work is to foster an equal opportunity to compete, succeed or fail on the merits.
And I think it would be clear from what is being proposed, relative to the policies that are in place, whether there was a strategic behaviour objective or a principled public interest perspective that was being proposed.
14127 MR. WACHOWICH: And to continue this, in -- and I will put it in quotation marks -- "regulated industries", then, the corrective measures are ones that the regulator can implement, as opposed to markets, where the market implements those corrective measures? And I think, as you said, markets discipline before they attack?
14128 DR. WEISMAN: I'm not sure that I understand your question. Could you clarify it for me, please?
14129 MR. WACHOWICH: If participants in the industry -- and I'm now talking broadly, all stakeholders -- as long as the industry continues to be regulated, the historically most obvious avenue for corrective measures is to appear before the regulator and seek some change or corrective measure, but in a competitive industry, it's the market that contains those competitive forces. There is not a regulator to enact a corrective measure, it's the market that enacts the corrective measure. And you said, I believe, it disciplines before it attacks?
14130 DR. WEISMAN: I believe, given the Commission's accommodative competitive entry policies, in some sense, and maybe in a very important sense, I think it has less control than it once did. It has set these policies in motion and it must be prepared to back away when it is sufficiently assured that market discipline can take the place of regulatory prescription.
14131 MR. WACHOWICH: Thank you. And I just wanted to follow up though, the line "disciplines before it attacks". When the market attacks, it can attack with great severity. Business entities can go out of business. Is that fair?
14132 DR. WEISMAN: Yes, they can.
14133 MR. WACHOWICH: Thank you.
14134 One question, gentlemen, on the issue of the affordability, as expressed in the filing -- or application of TELUS, and it's around the TELUS proposal of $35 per month, based on the CRTC's approval of Telebec at $34.42 per month.
14135 Mr. Brookes, you are prepared to answer those questions?
14136 MR. BROOKES: Yes, I am.
14137 MR. WACHOWICH: Thank you.
14138 I am no mathematical expert, but when I took math some years ago, rounding $34.42 would have brought me to, first, $34.40, and then if I went to the dollar, $34, and if I went to the $10, $30. So why $35?
14139 MR. BROOKES: I don't quibble with your rounding practice. The point that we were making is, in looking at the $35 rate over a five-year period, there is a number of ways we could look at the reasonability of this.
14140 One of them was to look at comparable rates that have been approved to this point. And so we weren't suggesting it precisely equalled $35, but it was a rate that was close to $35 today. But, of course, we are looking at a period of five years that, at maximum, the rates would go to $35.
14141 MR. WACHOWICH: Sorry, is there a reason that you wouldn't have chosen the higher number, say, $40 or $45?
14142 MR. BROOKES: It's clearly a matter of judgement. And we chose $35 to really achieve two things: to encourage competitive entry by allowing the prices to achieve competitive market levels, but also to ensure that rates remained affordable. And we feel that the $35 rate achieves both of these objectives.
14143 MR. WACHOWICH: And the next line, gentlemen, and I, just looking at it, perhaps, Dr. Weisman, would turn to you because you were just talking in terms of the regulator has to implement the regime and then watch it develop. And I think at footnote 61, which is page 25, and from paragraph 59 of your evidence, you have the quote, there are words in quotation, "about letting go."
14144 I think the nod won't be on the record, though.
14145 DR. WEISMAN: Yes.
14146 MR. WACHOWICH: Is that letting go in some way equivocal with deregulation of the marketplace?
14147 DR. WEISMAN: I think the context in which Professor Kahn was -- what he was addressing at this point was the idea that in many cases -- and he aligns these in careful detail in his book -- is that regulation was actually getting in the way of the competitive process and that, in some sense, it is difficult to know when to let go.
14148 And I think what is clear is that once you put in place these accommodative competitive entry policies, the role of the regulator becomes less of a player and more of a referee to make sure that the policies are working as intended and they are having the desired outcome. And that is why in the proposal we have outlined a role for the Commission in monitoring these competition policies and making sure they are consistent with the Commission's long run objectives.
14149 MR. WACHOWICH: I don't know how familiar you are with Alberta, sir, and perhaps, Mr. Grieve, I know you live there when you are in Alberta, but Alberta historically, I will say, has had three regulated utility sectors. One has been local telecom, for the sake of this discussion, another has been the electrical utility marketplace and the third has been the natural gas marketplace.
14150 Residential customers in Alberta, a province with high phone penetration rates, would obviously avail themselves to the local res market, almost entirely are dependent upon the electrical grid for electrical power, and, again, almost entirely dependent on natural gas for home hearing, and to see all of those marketplaces exposed to deregulation in the past few years, I wanted to get your comments on whether that's necessarily a good thing or a bad thing.
14151 MR. GRIEVE: It's like "Reach for the Top."
14152 First of all, in the natural gas industry, the word "deregulation," as it most often is in any of these sectors, is kind of a misnomer. What was deregulated was the price of natural gas at the field, and then the ability of companies to provide natural gas through the pipelines, through the monopoly public utility pipelines, to end users under contract, mostly large users -- and more and more and more we see people aggregating as smaller customers -- so there is still public utilities. As I understand it, there is still public utility regulation of the transmission and distribution systems in natural gas. The same thing with the electric industry. It's not fully deregulated because the transmission and distribution systems are still regulated as public utilities.
14153 In the telecom industry, we know that the Commission has introduced its accommodative entry policies. We know that long distance competition was introduced in Alberta about a year later than the rest of the country, and we know that consumers have benefited tremendously from long distance competition.
14154 So I don't know if your question is: should consumers be concerned that they are getting more competition? I think that competition is good for consumers. It is certainly good over the longer term.
14155 MR. WACHOWICH: So if consumers in Alberta -- and you can accept this subject to check -- in January of 2001 -- and I am talking about residential consumers in Alberta, taking electricity, natural gas and local telephone service -- were paying the highest prices they had ever paid and being told all of these industries are in the throes of some form of deregulation or another, what would you expect, as an executive in one of those industries, to be the consumer reaction?
14156 MR. GRIEVE: Well, I'm not an expert on the electric and gas deregulation in Alberta, but here's my sense of it.
14157 The gas prices went up because it's part of the world market. The electricity prices went up because, when the Alberta government announced electric deregulation, much as in California, everyone stopped building base load plants. And so when competition did arrive, we had this unfortunate coincidence of rising international gas prices and the need to generate electricity with -- a lot with gas turbines. It created higher electricity prices because of the higher natural gas prices and the low amount of base load for electricity.
14158 So, would consumers be concerned? Sure, they would be concerned about that, just as consumers are always concerned when natural gas prices and oil prices in the world rise. And they should be concerned about how "electric system deregulation", in quotation marks, was introduced in Alberta. But it's a very difficult thing to do to go from the old to the new in an industry like the electric industry.
14159 DR. LEVIN: Could I just add a couple of comments because I am familiar with gas and electric utilities as well?
14160 First of all, I will agree with you that nobody likes to see prices rise. We would all hope that they don't, but sometimes they do. We have to distinguish in the gas and electric market from the cost of fuels changing, which I think is what Mr. Grieve was talking about. That has happened under rate of return regulation under any kind of markets. They tend to be relatively volatile.
14161 And we have to distinguish that from the fact that in all three of the industries that you mentioned -- gas, electricity and telecommunications -- residential customers, under monopoly markets, tended to be subsidized. And they were subsidized at the expense, generally, of other ratepayers -- somebody else paid more.
14162 I don't think that that's good even for residential customers in the long run. We have already seen from the Commission's report that when we have competition in telecommunications which entails ending those subsidies that customers have benefited.
14163 We find in these other industries that there is no longer a source of subsidy. When they become competitive, the industrial customers won't overpay and we are forced to rebalance the rates.
14164 And my final comment is to remember that customers pay for those higher rates that businesses have to charge. They pay higher prices and businesses charge higher prices to cover their higher utility costs. So, it's not that this is just simply a lose situation for residential customers.
14165 Now, I admit this is very subtle and it's a point that the average person on the street won't necessarily understand, but when we lower input prices for gas, electricity and telecommunications for businesses, that gets reflected in lower prices and it's the same consumers that benefit from those lower prices.
14166 MR. WACHOWICH: Part 11, you said -- and I just wrote it out, I hope I have it, and not out of context or form -- no one likes to see prices rise.
14167 DR. LEVIN: I did say that, and then I think I said: "But sometimes it happens."
14168 MR. WACHOWICH: Okay.
14169 And so I want to return now to a line that I had pulled from the Bell panels earlier: "we have to raise prices to lower them." And how are we supposed to explain that to the average household consumer in Alberta that, you know, just -- we are taking it along, trust us, we had to raise prices because you may -- you may -- I have never heard this with a certainty, you may get downward pressure on prices. That's where we are left. We are just explaining that to the average household consumer?
14170 DR. LEVIN: I think we have already told you that we don't quite agree with that statement.
14171 I certainly don't look at it that way. I look at prices having to rise to market levels. Dr. Weisman has pointed out that that's going to engender investments and innovations and new products and services in ways that I certainly can't imagine, sitting here at this table.
14172 What happens to prices after that, whether they go up, whether they go down, depends on the competitive market. We don't have a lot of choice about that. The mechanism is in place. We are all going to get swept along with competition. We see that it's already been good for customers in telecommunications, and I believe it will continue to be good for customers in telecommunications, but it doesn't mean that every price can go down, either in the short run or the long run. Some may go up and that's the price that we pay, if you will, for the fact that others will go down and that there will be substantial benefits.
14173 MR. WACHOWICH: The notion, then, that TELUS has put forward: we have to raise prices to these market levels, turning to CRTC Exhibit 18 to TELUS, which is really dealing with projected market shares in the service territory of each ILEC, the second page of that:
"Provide the methodology employed to arrive at the market share estimates and the underlying assumptions..." (As read)
14174 DR. LEVIN: Excuse me, was that TELUS (CRTC)18?
14175 MR. WACHOWICH: It's an exhibit from the CRTC to TELUS, asking for an undertaking. I only have the one copy here. I believe Ms Lawson mentioned it to the panel, as well.
14176 MR. BROOKES: We have it.
14177 MR. WACHOWICH: And just turning to part two of that interrogatory -- or undertaking, rather, it says:
"...provide the methodology employed to arrive at the market share estimates and the underlying assumptions." (As read)
14178 And I wanted to clarify: will one of those underlying assumptions be the price that service is going to have be at to attract these various forecast shares of the market place?
14179 MR. BROOKES: Yes. I discussed that in previous testimony with Ms Lawson.
14180 MR. WACHOWICH: So you are going to disclose, too, in answer to that, some of the price assumptions you have built into it?
14181 MR. BROOKES: Yes, indeed.
14182 MR. WACHOWICH: Thank you.
14183 And I am getting close to the end here, gentlemen, but if we go into this future period of time -- and even assuming that we adopt the TELUS proposal of five-year and three-year renewals -- what happens if we just don't get it right? What happens if we get to the end of that period and we are where today: negligible competitive entry and higher prices?
14184 MR. BROOKES: We really do have to be confident that competitive markets will work. And I think it is important to reflect and look back how well Canadian residential customers are served by competitive market places today. And we do see this in the competition report. When we look at the net effects of local and long distance pricing changes that have occurred as prices have moved closer to the cost, there is a substantial benefit that consumers have received.
14185 And as well, when we look at a variety of services that are subject to competition, there is this benefit. And so, yes, there have been some price increases that have occurred, and we are suggesting some further local rate increases that we are confident will result in greater competition when these prices find their competitive market levels.
14186 MR. WACHOWICH: Mr. Brookes, we just can't say "if we get there five years out from implementation." And I defined it earlier as: we may not be able to define this competition, but we will know it when we see it. So five years out, we do this critical assessment, or four and a half years out, and we are just not there, what's -- on a forecast basis, what are we to do?
14187 MR. BROOKES: You know, I don't really see it as an issue of "we are just not there." The issue that I think is a fair one to raise is: precisely how much competition should you expect by a given point in time and, you know, how precisely can we predict this?
14188 And competition, by its nature, is difficult to predict and there is a certain amount of messiness around it. But you know, we have seen competitors enter every market in telecommunications and provide significant benefits. Local service is the last major area to open up and, admittedly, is one of the more difficult ones to enter because of the facility basis for it. But I think we should be confident that if prices do find their competitive market levels, that entry will be encouraged. We see the start of that today, we should be confident that it will continue.
14189 MR. WACHOWICH: Yesterday, Mr. Kolesar mentioned a focus group, and focused on that and the chap with the cowboy hat who cut to the chase and said: "Why don't you just tell me my obligations and responsibilities and tell me your obligations and responsibilities?"
14190 Is TELUS supportive of some program out there in the future where customer groups, the Commission, all sort of stakeholderes, the CLECs and the ILECs, could go out and gauge customer reaction?
14191 I mean, I guess that's what we are trying to measure. There may be competition, like you say today there is in certain centres in your service territory, but isn't it going to come back to: is the customer aware that there is competition? Is the customer aware that remaining with the incumbent is in fact exercising a choice, even though there's an option that they may not be aware of if that option does exit? Should we be gauging the customer side of this equation, better measuring from the customer's perspective?
14192 MR. BROOKES: Let me just respond to that by saying the monitoring of competition really is a very important way that we can understand the implications of the local market as it unfolds. And there are many dimensions to it and, indeed, the implications to customers is a very important part of it and, I would expect, will continue to be so.
14193 MR. WACHOWICH: Is it fair, gentlemen, to sum up, that it's markets that are working don't necessarily foster competition, but rather they tolerate or allow it and it's markets, when they are not working, have to have some mechanism to foster competition?
14194 MR. GRIEVE: Mr. Wachowich, I have a lot of trouble with the concept of -- with those kinds of concepts.
14195 I think that what the Commission has to do, and what it has done, is put in place accommodative entry policies. This Commission has done that. There is competition.
14196 And I think that it is very dangerous -- I mean, I hear a lot of people talking about sustainable competition. That's not what you are after. You are after self-sustaining competition. You are after a market place where competitors can enter and exit, and do enter and exit, where competitors are competing amongst each other for the business.
14197 If there is something wrong at the end of a five-year period, and the Commission looks and says: "Gee, this just hasn't happened," it's very difficult to know what to look at. In this case, what we have said is: "Let's look first at the price cap mechanism you had the last around." What did it do? It suppressed business rates, lowered the business rates over the period and didn't allow the residential rates to rise to their levels. That's the problem with competition. It's not that, if there -- you know, where there is less entry than people expected, that's the reason for it.
14198 And so, I think you have to look and see why something is the way it is before you start to prescribe a remedy. And that's why I am hesitant, you know, to speculate about what that might be.
14199 MR. WACHOWICH: Thank you very much, Mr. Chairman.
14200 On behalf of my client, we are thankful of the opportunity to appear before the Commission, and I would like to thank the Commission secretary for his assistance in arriving at my scheduled time to appear here.
14201 Those are all -- that will be our only involvement in the hearing room proper.
14202 I do want to add, though, that, with respect to oral argument, we will send a letter indicating we want to participate in that and we are just wondering if a telecommunications link is going to be available or whether our presence will be required in person here, in Ottawa -- or Hull.
14203 THE CHAIRPERSON: I hadn't thought about that, frankly. So, let's leave that for consideration and we will get back to you.
14204 MR. WACHOWICH: Thank you very much.
14205 THE CHAIRPERSON: Thank you, Mr. Wachowich.
14206 So, we will turn to the next party now, which I understand will be the City of Calgary. Mr. Inlow.
14207 MR. INLOW: Thank you, Mr. Chairman. EXAMINATION / INTERROGATOIRE
14208 MR. INLOW: Mr. Grieve, let me throw out the ceremonial first pitch to you.
14209 You indicate in your evidence that TELUS speaks from the perspective of both an ILEC and a CLEC. I am wondering if you could just give the Commission an approximation of your relative revenues from those two aspects in the last fiscal year.
14210 MR. GRIEVE: ILEC big, CLEC small.
14211 MR. INLOW: Could we put "very" in front of those?
14212 MR. GRIEVE: Sure.
14213 MR. INLOW: I wanted to focus, perhaps, Dr. Weisman, more with you but at the moment on just understanding some basic principles of price cap.
14214 Would it be fair to say that the purpose of price cap is to predict business behaviours and outcomes that would occur in a market place that doesn't exist in reality, in other words, a competitive market place that doesn't exist?
14215 DR. WEISMAN: I believe that a properly designed price cap plan should attempt to emulate a competitive market outcome and it is superior to a rate-of-return regulation in doing that, if it is designed correctly.
14216 THE CHAIRPERSON: Mr. Inlow, your microphone.
14217 MR. INLOW: Sorry, Mr. Chairman, I wasn't aware I had turned it off.
14218 Would you agree with me that, in a truly competitive market, that production costs and prices come into alignment or are forced into alignment by the market?
14219 DR. WEISMAN: Competitive markets set forth a dynamic which tends to move prices in the direction of underlying costs.
14220 MR. INLOW: Now, to try and understand the position that TELUS is taking here, is TELUS indicating that they don't want the Commission to review outcomes, financial outcomes, to the various parties, in terms of prices or return on equity, during a price cap period or is the position that that's not appropriate even at a time where they are reviewing the price cap with the idea of going into a second period of a price cap?
14221 MR. GRIEVE: Well, Mr. Inlow, our position is that once you go into a price cap or price regulation plan earnings are irrelevant and they become -- they are especially irrelevant when you have opened the market for competition and you have the accommodative entry policies in place.
14222 MR. INLOW: Now, appreciating in your proposal that the X-factor has perhaps less application because you are removing it from certain portions of your business, would it be fair to say that the X-factors would probably be the most important consideration you would look at as a company, from a financial perspective, to say: what are we looking at over the next price cap period? What do we need to do?
14223 MR. GRIEVE: No, I don't think so, Mr. Inlow. I think the challenge over the next price regulation period will be competition, and adapting to competition as it rolls out, especially if the Commission allows prices to rise and more competitive entry is present.
14224 MR. INLOW: So if I am to understand your premise, then, you are saying that you are proposing that an X-factor be continued only in those areas where you do not envision competition over the next price cap period?
14225 MR. GRIEVE: The X-factor is applied to what is currently defined as high cost serving areas. It is there for the purpose of reducing, in real terms over the price cap period, the amount of contribution that is required or the amount of subsidy required from one group of customers, you know, nationally, under the national fund, and paid to support rates for customers in those high cost serving areas. That is the purpose of it.
14226 Whether we expect competition there, we have been told by competitors that they don't want to rely on contribution as a revenue stream for them. I am not sure that is necessarily correct. I am not sure about the situation with wireless entrants.
14227 MR. INLOW: Dr. Weisman, returning to you, then, if an X-factor is set by a regulator that is too high a hurdle for -- and the company is unable to meet it, I take it over some period of time that company is going to have difficulty accessing capital and, ultimately, could be forced out of the market?
14228 DR. WEISMAN: Yes, it could be an outcome if the X-factor is not set consistent with emulating a competitive market outcome, yes.
14229 MR. INLOW: Now, if that were to occur, would you agree with me that it would be likely that an incumbent would return to the regulator, as forced to by their financial situation, to review the X-factor?
14230 DR. WEISMAN: If the premise for your question is, if the price cap plan fails in emulating a competitive market outcome, is it, in my view, appropriate for the firm to return and suggest to the regulator that there was an error, my answer is yes.
14231 What we are trying to do is emulate a competitive market outcome, not raise the bar higher than that. And if there is a fundamental flow in the price cap plan, then, clearly that should be pointed out and taken care of.
14232 DR. LEVIN: Let me just add that it's important to set the X correctly, as Dr. Weisman has explained, but that might allow for a firm to earn more money or less money than it had been in the past. So you might look at that and say earnings are high or earnings are low. But that wouldn't be due, necessarily, to the fact that the X was wrong. So just because we see high earnings or low earnings we can't draw a conclusion that the X was set incorrectly.
14233 MR. INLOW: Mr. Chairman, I'm sure I didn't turn that off, so I don't know if this has happened automatically.
--- Laughter / Rires
14234 MR. INLOW: Well, now I am very nervous!
14235 To return to my question, in terms of the X-factor, though, is that not determined by looking at all the various aspects of the inputs into production and deciding how those would change if there in fact was a competitive market? So in terms of setting an X-factor, what inputs to production are not considered?
14236 MR. GRIEVE: Mr. Inlow, if you are asking for -- if you are asking for how X-factors are properly calculated, Dr. Bernstein is available on the next panel.
14237 MR. INLOW: No, I'm not trying to ask how they are calculated. I was simply asking to what extent there were other competitive factors that would have occurred in a competitive marketplace that somehow are not taken into account in setting an X-factor?
14238 MR. GRIEVE: That is something definitely for Dr. Bernstein in the next panel.
14239 MR. INLOW: Dr. Weisman, to return to you, then, in terms of a situation where an incumbent, in the face of an X-factor, was suffering financial difficulty and returned to a regulator, would you not say that would be a result of that incumbent having made an expressed connection between an earnings outcome during a price cap period and its financial results?
14240 DR. WEISMAN: Let me try and address the question this way.
14241 The idea behind setting an X-factor in a price cap plan is to set up a tournament, if you will, between, say, two or more firms that look exactly alike. And suppose the regulator follows that process and puts in place this X-factor. If, at the end of that period all of the firms that were subject to this X-factor do look exactly alike, all of them have what I will call financial results that are inconsistent with a competitive market outcome, it is possible, then, to perhaps draw an inference that the X-factor was set incorrectly.
14242 However, if some of those firms survive and some do not, then that is the way a competitive market works and you can infer that the X-factor may not have been set incorrectly. It is not a one-to-one linkage, if you will.
14243 MR. INLOW: So to continue on with that question, then, your answer suggests that there is an evaluation process that could look at an X-factor that was set at a previous price cap period and would say, "Let's look at some of the outcomes, let's look at earnings, let's look at prices, let's look at some of those original parameters" and say, looking at them historically, "It appears we may have got this wrong or we may have misunderstood this," is that a fair evaluation process?
14244 DR. WEISMAN: The problem with any type of evaluation process is that, if the firm does particularly well under price caps, there will be a tendency to say, "We got the parameters wrong." And what you are suggesting is in some sense that we reevaluate the price cap on the basis of the earnings of the firm. And when you do that, you basically are practising rate of return regulation under the label of price caps, but it is still rate of return regulation.
14245 MR. GRIEVE: Mr. Inlow, perhaps I could add something here.
14246 When you get to the end of a price cap plan, as we are now -- and let's be clear that this was a price cap plan on some things and not on others -- when you get to the end of the price cap plan and you are looking to evaluate the plan, as we are doing in this case, we looked at -- one of the things the Commission said in its price cap decision in 1997 was that it was going to look at competition and the state of the industry, the competitive industry. And so we look at the price cap plan and we say, "What did the price cap plan do to prices? What did it do to competition?" It drove prices down in the business market, as I mentioned before, and did not allow residential prices to increase. So we didn't see the kind of competitive entry we expected. That was what the Commission was going to look at.
14247 And so you get to the end of the period and you go, "The prices aren't at market levels." And I think that, then, that's the thing you have to remedy.
14248 MR. INLOW: Well, Mr. Grieve, on that issue, you said that prices aren't at market level. That strikes me as a proposition that you cannot answer in any -- other than a speculative way, because if there is no market, how do you know what market prices are?
14249 MR. GRIEVE: Well, you know that we have the accommodative entry policies in place, you know that competitors have been entering, and you know that competitors have been saying during the last price cap period that the business rates were being driven down by the price cap plan too low and you know that you don't have as much residential entry as you might otherwise because those prices have been kept lower than the market levels.
14250 So how do we know they are not at market levels? Because with all the barriers, the regulatory barriers to entry removed, and people actually entering in some markets, you are not getting as much entry as you like.
14251 MR. INLOW: Would it be fair to say underlying your answer is the premise that the only factor that is important to competitive entry is price?
14252 MR. GRIEVE: Price is extremely important. And the other thing that is important is the margin between the costs, including the wholesale rate level and the retail rate level. Those two things are very important, and you have to make sure that you establish the prices for the wholesale services or for the input level those ones that you are going to regulate at prices that do not foreclose competition at that level, and then you have to allow the retail prices to find their levels to establish the competitive margin.
14253 MR. INLOW: Dr. Weisman, to return to our earlier discussion, would it be fair to say, then, in terms of the job of the Commission, which may in part be to evaluate how well the price cap regime worked in the first era and perhaps how well the X-factor may have been seen to work, if you were contracted as a consultant to evaluate how the Commission had done, would you not look at some of the outcomes of what happened to prices -- I'm just asking this on a theoretical basis -- of what happened to prices, of what happened to the earnings of the firms, what may have happened to cost of capital, those sorts of issues, to say, "Here is my evaluation of how well the Commission did in simulating a competitive market"?
14254 DR. WEISMAN: The idea behind price caps is essentially to do something the rate of return doesn't do, and that is under price cap prices and the actual earnings of a firm are delinked. When you do that you get superior incentive properties which you do not get under rate of return regulation.
14255 So what I would look at would be primarily whether rates had fallen, on average, faster under price regulation than they have historically under rate of return regulation. If the firm still wanted to continue with price caps, and all stakeholders appear better off, I think we get into problems when we start balancing off how much better off was one party vis-à-vis the other because as soon as you start doing that, again, you re-establish that link between prices and earnings and you are going back to rate of return regulation -- you may be calling it price caps, but it is still rate of return regulation.
14256 And in the States, for example, the States, typically, do not look at earnings precisely because of these poor incentive problems. In fact, in the state where I am from, in Kansas, it is written into the state telecommunications law that when you are reevaluating the price cap plan, the commission is not allowed to look at the earnings of the company. And they did that for a reason.
14257 MR. INLOW: I understand TELUS' position on that, in terms of saying that during the period you can't look at that.
14258 The question I put to you was if somebody said to you, "I am not going to allow you to look a that, but I still want you to evaluate, on an academic basis, how well the Commission did in setting an X-factor," would you not agree with me that would be an enormous constraint on your ability to undertake that assignment to evaluate how well they have done? You are simply saying whatever happened, happened.
14259 DR. WEISMAN: As a matter of philosophy with regard to price caps, if the X-factor was set according to the principles that I believe we have articulated in this case, and prices have fallen at a rate that exceeds that experienced historically under rate of return regulation, I'm probably not the best choice of a consultant for the Commission because I don't believe earnings should be looked at.
14260 MR. INLOW: I won't get into that, but your answer suggests to me that what you were evaluating would be price cap vis-à-vis rate of return regulation. What I'm saying is how would you evaluate without looking at those connections between earnings and price, et cetera?
14261 DR. JACKSON: Counsel, can I interject something here from the point --
14262 MR. INLOW: I would rather finish my question, if I could.
14263 DR. JACKSON: I'm sorry. I apologize. I related your question.
14264 MR. INLOW: What I'm saying is, I am then asking you to say I am looking for an evaluation of how the "X" factor predicted happened under price cap regulation versus what would have happened if there truly had been competition.
14265 DR. JACKSON: Counsel, I would like to interject something at this point that responds to that question, although not completely directly, but sort of a technological point of view, and that is in the rate of return regulation world, we tended to have very static and unchanging entities, but we are in a world where -- you know, Canada has started down this path and taken some big steps towards a competitive telecommunications industry.
14266 If I look at other nations, in Finland, as I observed in my report, there was actually a decline in the number of access lines between 1996 and 1999. Last fiscal year, Verizon, the largest carrier in the United States, reported, I believe it was, a 0.4 per cent decline in the number of access lines.
14267 We looked at some of TELUS' numbers -- and I think Mr. Brookes has the specifics -- but the rate of growth of access lines has fallen off sharply. If two years from now there is some idle plant that is not used to provide service but was on the books today to provide service, then when you go back and look at the financial accounting for right now, you will see that the traditional accounting measures are not properly reported -- I mean, the accounting is being done properly, but it doesn't reflect the technological and market obsolescence of the plant. Consequently, --
14268 MR. INLOW: I am trying to ask the question if my understanding of the process --
14269 THE CHAIRPERSON: Your microphone, first.
14270 MR. INLOW: My understanding was this isn't a process for direct evidence. This is cross-examination. I ask a theoretical question of what could be looked at. I wasn't looking for an answer about if you did that, then you would have to do this and do that and the other. I was simply asking a theoretical question of why, in doing an evaluation, you would not look at earnings outcomes and price outcomes.
14271 I'm not really concerned with how you might do that evaluation. I'm concerned about what you would access in terms of information, not how you would process that information or how you would analyze that information.
14272 DR. WEISMAN: Mr. Inlow, I believe I indicated that I would look at prices. I think I pointed out -- and I have been clear about this in my evidence and in my writings -- that when you do look at earnings, you essentially retrace your steps on rate of return regulation.
14273 So the question is: are we practising price caps or are we practising rate of return regulation? And let's be clear about that.
14274 And as a philosophical matter, if consumers are getting a good plan, in terms of the rate at which prices are falling, then any time you go back and you look at earnings, I don't believe you can possibly help but evaluate whether maybe consumers got too much, maybe consumers got too little, because the problem is that as soon as the firm understands that that is how the price cap game is played, it will affect their incentives, adversely I might add, going forward, in terms of the degree of cost-reducing innovation, et cetera.
14275 I'm not saying you can't do it. I'm simply pointing to the incentive problems if you do do it.
14276 MR. INLOW: So to remove the focus then from earnings, for example, would it not be fair in an evaluation to say "The Commission set an X-factor indicating that productivity gains would be a certain number"?
14277 When we analyze that post facto, we see that a Commission or a regulator in fact apparently missed that number by a hundred per cent, that the firm was able to realize productivity gains considerably in excess of that. Would that not be a factor you would look at in saying: what should a regulator set the X-factor for going into the next period? Or are you saying that a regulator can't look at that because it violates the principles of price cap?
14278 DR. WEISMAN: What I'm saying is that, and you may talk -- I would advise you to talk to Dr. Bernstein tomorrow about the methodology, but history gives you some guide in how to set that X-factor. And the egregious outcome that you are discussing, I believe, is inconsistent with the methodology that he has proposed and you would not get that outcome.
14279 The point of the matter is, if a firm, for example, earns below normal earnings, below the earnings it would get under rate of return regulation, it can't come into this Commission, in my view, and say "I need my rates increased, but that must operate symmetrically". If the firm's earnings are above what you might get under rate of return, I think the regulator has a commitment not to take them away. And if they are below, I think the firm has a responsibility to say, "These were the terms of the price cap plan, whether they be successful or unsuccessful," and they have to live by those terms. It operates symmetrically.
14280 MR. INLOW: But did you not indicate earlier, though, that if this lack of symmetry got to a point that a firm's financial integrity was threatened, they would in fact come back to a regulator and say, "We want you to reconsider this. We know in principle we think you shouldn't, but, gee, this is an outcome we can't live with"?
14281 DR. LEVIN: You know, I sort of wonder, if you set the parameters of the price cap plan correctly and the firm's financial integrity is threatened, I don't think rate of return can help.
14282 If this firm, for some reason, is not financially viable under a correct price cap plan, it's not going to be financially viable under rate of return either.
14283 MR. INLOW: Well, Dr. Levin, isn't it fair to say that if the X-factor was set correctly, we wouldn't be here having this discussion? If a regulator was so good at predicting X-factors that they were always right on the mark, presumably, we wouldn't be here at a second price cap proceeding.
14284 DR. LEVIN: I'm not sure that I understand that. I mean, if you set the parameters of the price cap plan correctly, that does not mean that you necessarily want to let your price cap plan run forever.
14285 We have sketched out things in the evidence that the Commission should look at to review a price cap plan -- and I think you just had that discussion with Dr. Weisman about what he might look at to review a price cap plan. You still may review it, we still may be here, but I think we need to be careful what things we look at as we design the second price cap plan.
14286 DR. WEISMAN: Mr. Inlow, if I could just follow up. It is possible to revisit the X-factor and looking forward without, per se, looking at actual earnings of the firm. It's possible that productivity changes will vary over time.
14287 I'm not saying it's unreasonable not to look at that. It's looking at the earnings of the firm that dilutes, in fact undermines, the incentives of price cap regulation, whether it be the firm earning, quote-unquote, "too much" or, quote-unquote, "too little".
14288 MR. INLOW: But would it be fair to say that earnings is one possible indicator of whether an X-factor has been set too high or too low?
14289 DR. WEISMAN: It's not clear to me what conclusion you would draw. If I was a particularly good firm --
14290 MR. INLOW: I didn't ask what conclusion you would draw. I'm saying would that be a relevant consideration to look at?
14291 DR. WEISMAN: I would generally not look at data if I thought there was no inference to be drawn from that data.
14292 MR. INLOW: Let me put this question to you then. If the position that you are taking is that the regulator cannot look at ex post facto information, in other words, information that was revealed during the course of the first price cap proceeding and going into the second price cap proceeding, how is the regulator any wiser going into the second price cap proceeding?
14293 DR. LEVIN: I don't think that's what we have been trying to convey to you, so I'm sorry if you have drawn that conclusion.
14294 What we have said is that we do not think that there is a role for an evaluation of profits. Now, that does not mean that there is not information that has been revealed during the current -- during a first price cap period that you might use to help design a price cap plan the second time.
14295 For instance, one of the things that we have always said to look at is the development of competition. And that, in fact, played a major role in the proposal that TELUS has put forward here. And that's information that was revealed during the first plan that we have that we would use to help design the second plan.
14296 MR. INLOW: So you would say, for example, that it would not be of assistance to the regulator to, say, going into the first proceeding, AGT thought an X-factor in the range of 0.8 to 1.3 per cent was the proper number, and that a different number was set and that perhaps a third number was actually met, in terms of the performance that TELUS was able to achieve during that price cap period.
14297 Would you say those are not relevant things that a regulator could look at to say, you know, "Here's information that will help me going forward"?
14298 DR. WEISMAN: It's information that a regulator could look at. It's information that, as I have indicated, for example, in the U.S. regulators typically do not look at at the state level and it becomes a public policy decision on whether or not you are practising price regulation or earnings regulation, and if you are practising price regulation, if you go back and look at those earnings, you are diluting the desirable incentive properties of price cap regulation.
14299 MR. GRIEVE: Mr. Inlow, could I add one thing?
14300 I think the other thing that you really have to look at is -- I know that you want to focus on the X-factor, but you have to look at what was put in the basket by the Commission and what happened in relation -- if you are going to compare it to another price cap proposal, you have to look at what the proposal was, what was proposed to be in the basket, and then look forward and decide what you want to price cap in the next period, do a historical X-factor calculation on the services that you want to price cap.
14301 Certainly, you can compare to what was originally proposed by the company, but you have to look at what the Commission actually did. Because you can't draw any conclusions about whether the company had a good proposal or a bad proposal when the Commission did something entirely different.
14302 MR. INLOW: Mr. Grieve, my understanding of your evidence was that you are urging the Commission, if anything, to have a longer price cap period for the second period. And that's on the basis that the Commission, and I quote here:
"The Commission is now more experienced with this form of regulation and can consequently move to a longer duration without fearing unforeseen detrimental effects."
14303 And I am beginning to understand your evidence to say well, yes, they can be more experienced as long as that experience has nothing to do with looking at earnings.
14304 MR. GRIEVE: Well, I think that's right, Mr. Inlow, and I think that it's really important to look at what the Commission's price cap decision did.
14305 MR. INLOW: Well --
14306 MR. GRIEVE: The Commission's price cap decision did not put in place anything that any other party to that proceeding had recommended be put in place.
14307 You have to look at what happened to prices during that period. And what happened to prices was they didn't go to market levels. Some of them went below market levels, were forced down through the price cap plan.
14308 It doesn't make any sense to me to look at earnings when you know, just looking at prices, what happened. And we know that the prices in the utility segment are below market levels.
14309 MR. INLOW: Fair enough, Mr. Grieve. I understand and I have heard that particular expression of position a number of times. I would have to say I have some difficulty understanding how TELUS made any return on their equity considering the number of markets they appear to be into that are unprofitable.
14310 MR. GRIEVE: Well, you can ask Ms Hale when she is on the stand and she will be happy to explain it to you, how we can have prices below market levels.
14311 MR. INLOW: Let's move on then to your proposal with respect to the residential rate increase in non-high cost areas.
14312 My understanding is that you have indicated that you are looking for -- and I think this is a quote -- "no more than $3 per month per year over the next five years and not to exceed a ceiling of $35." Correct?
14313 MR. BROOKES: Yes, that's right.
14314 MR. INLOW: All right.
14315 Now, just to focus on the "no more" part, in terms of the $3 per month, is that based on some type of a formula or calculation that there would be circumstances determined by that formula where the price increase might be $1.50? What is it in the "no more" that says: "Here's the circumstances in which it might be less that $3"?
14316 MR. BROOKES: The issue as to whether it is less than $3 will depend on a number of factors. Certainly one of the most important ones is the competitive market place. And just, if I may, give you an example in the case of Calgary. We do see competition developing in Calgary. And there is CLEC-based competition in Calgary. We have also a wireless company in the process of getting CLEC status throughout various allocations in B.C. and Alberta.
14317 So, in the case of Calgary, there are competitive pressures. And the likelihood that a $3 rate increase would be appropriate in a competitive market that's developing there is probably less likely than in the case of a higher rate band where the costs are at a greater distance from the incremental costs that we have and where there is less competitive entry.
14318 So, certainly that is one of the factors, but we would also have to just gauge the environment that we are in, in terms of our customers' willingness to accept the increase.
14319 MR. INLOW: Now, as indicated earlier in the discussion with previous cross-examiners, that your justification for an increase in, let's take Calgary, for example, is not based on a relationship of price to cost in that area. Correct?
14320 MR. BROOKES: Yes. The issue is one of prices finding their competitive levels.
14321 MR. INLOW: Well, it appears that has been expressed in a couple of ways. I thought, from this panel, I have heard two issues. One is that rates should rise to what is considered to be affordable, I believe was the word that's used. The other proposition seemed to be that rates should rise to what's necessary to allow competitive entry.
14322 MR. BROOKES: Yes, indeed.
14323 MR. INLOW: Can you help the Commission to understand whether those are two different concepts or whether TELUS's position is: we want to raise rates to allow competitive entry and we think, as an adjunct to that, that they happen to be affordable -- but which is the prevailing criteria?
14324 MR. BROOKES: Both of the criteria are important. The $35 rate does ensure that, at maximum, the $35 maximum, ensures rates remain affordable, but it will encourage competitive entries. So, both issues are important.
14325 MR. INLOW: But in the absence of a competitive market that disciplines prices, would it be fair to say that, to most customers, affordable -- and we had a discussion earlier about whether these are essentials services or not -- but that the question of whether something is affordable is really an expression of saying it's affordable until what you want to charge for me is more than my next-best alternative to get that service is. Would that be fair?
14326 MR. BROOKES: There's really two issues, I think, you have introduced in the question. Indeed, there are alternatives and so there is the issue of competitive market discipline, if we raise the price to a level, that a competitive alternative would make sense to a customer. But certainly, in terms of reaching a threshold where it was no longer affordable, that is an issue that would have to be determined on an individual basis, considering alternatives.
14327 MR. INLOW: But to come back to what "affordable" means in a more precise sense, if I am a consumer and there are not competitive entry -- and let's assume in this business you are not going to get competitive entry overnight -- is "affordable" to me not simply saying: "Well, I will have to pay for that service up to the amount that I would have to pay to get my communication needs met through some other technology," whether it's by using payphones or beating drums, or whatever it may be?
14328 MR. BROOKES: Well, affordability is an issue that we have discussed earlier, we measure by the tracking results, and we can talk about that as, you know, the way we evaluate affordability overall. And it is an individual decision, in terms of how individuals evaluate this. But alternatives are important. I think it is important to note that the affordability tracking that is done, and the results that we report, do include wire-line local access as well as wireless local access. So that the very nature of the tracking that is done reflects the alternatives that do exist.
14329 MR. INLOW: Returning again to that same hypothetical of saying that, at the moment, there's not a competitive market --
14330 MR. BROOKES: May I just clarify? At the moment, in the residential market, because prices have not been allowed to rise to the degree that is going to encourage competitive entry at these market-based prices, indeed, we don't see the level of entry that most people thought would occur. But there is competition developing today. I wanted to be very clear about that. We see the wire-line CLEC competition starting to develop.
14331 On a more substantial basis, we have seen impacts from the wireless market, but, I think it's clear to say, are at the early days in the residential market, but it's really a pricing issue that we must address in the retail market.
14332 MR. INLOW: In a situation, going back to the assumption that price cap is trying to simulate competition, do you think it's very likely that in a high-cost service area, where there are margins, and given the current return on equity for TELUS, that that's a very likely scenario where a competitor would be -- sorry, the incumbent, but in a competitive environment, would be looking at increasing rates? Or are you simply saying that you can move those rates up because the reality is there isn't a competitor who is going to come in and put downward pressure on them?
14333 MR. GRIEVE: Yes, Mr. Inlow, I think that if you are going to throw in comments about rate of return, you really should be throwing them in with Ms Hale, because I think there's a great deal of misunderstanding about what you are actually looking at.
14334 We know that the prices are not at market levels. We know that, in a competitive market, any kind of sensitive rate of return analysis is completely irrelevant. What you find is that prices go to their market levels and people earn what they earn in a competitive market. That's the reality of it. Their actual measured rate of return may change year to year because of things that have very little to do with prices, they have things to do with accounting changes and all of those things. That's the mainstay of the practice of public utility, rate-based rate of return, regulatory law.
14335 But the fact of the matter is, in competitive markets, all that stuff goes out the window. You are dealing with prices and you try to bring your costs into line with the prices that are established in the market.
14336 MR. INLOW: Would it also be not fair to say that, in a perfectly competitive industry, that extra-normal profit is eliminated in the long run? Do you disagree with that proposition?
14337 MR. GRIEVE: No, I don't. But I don't know that anybody has defined what "extra-normal profit" means in any particular industry.
14338 MR. INLOW: Now, in terms of the kind of data that TELUS may have looked at in proposing a $3 increase in their evidence, was the focus of your analysis on the issue of affordability to customers or was the focus of your analysis on looking at what you felt competitors needed to get into the industry, looking at what you thought might be hypothetical cost structures? Which one was the focus, in terms of deciding on a $3 rate increase?
14339 MR. GRIEVE: Well, for the $3 in particular, TELUS looked at a number of things. TELUS looked at the fact that prices weren't at market levels, and I won't -- competitive market levels. Then TELUS looked at the fact that the rate structure that it has inherited from a regulated past is not at all in line with what one would expect in a competitive market. We know that -- also, we knew that the Commission had said, as we expected it to say, in the rebanding decision that it would no longer be subsidising business rates in high-cost serving areas.
14340 So, we needed to find a mechanism that would allow the rates to be restructured, rising to competitive market levels in different markets with different rates in different markets. The constraint to us, with the accommodative entry rules, we expect the competition from both direct competition for those services and the competition around those services, like long distance and options and features and those things, will constrain our ability to raise those rates quickly and will restrain our ability to raise the rates in some places all the way to the limits that we have prescribed.
14341 We needed to have, though, a limit for the Commission, and so we looked at what is the affordable rate? And we said for residential that affordable rate -- we determined that we thought we could satisfy the affordability test at $35. With business rates, I expect that the business customers will receive competition a little more quickly because they are in more concentrated areas.
14342 But what did we look at first? We looked at the need to get our rate structure fixed. And the rate structure is not efficient the way it is. And the best way to fix it is not to go in and try to do a whole bunch of calculations, but when you have the market open, you have the accommodative entry policies in place, is to let the market figure that out and give us the freedom and flexibility to get these prices into line.
14343 MR. INLOW: Now, I take it it's fair to say, then, that we are talking about you are continuing to provide the same service, notwithstanding there has been a $3 increase. Correct?
14344 MR. GRIEVE: Yes.
14345 MR. INLOW: And would you expect that your costs of providing that service would, if anything, not fall over the five-year period?
14346 MR. GRIEVE: Well, one would expect that, if history repeats itself, that the costs decline in relation to the rate of inflation -- in relation to the economy. So, yes, I might expect them to decline. But when you are starting with rates that aren't at market levels, you need to get the rates to market levels.
14347 MR. INLOW: So, would it be fair to say, from a customer perspective, they are not likely to say: "Well, I am better off paying $3 more than I was the day before I was paying that"?
14348 MR. BROOKES: This issue has, I think, come up a number of times, where customers would prefer not to pay an increase, if given the choice. I think that is very clear. But I think when we step back and look at the type of benefits that competition has provided, it is clear as well that it has been very good for residential customers.
14349 MR. INLOW: I don't dispute that people don't particularly like the price increases. What I was saying is: what would the customer look at to say: "Yes, I am paying more, but I'm trading that off because I am getting this additional feature, or whatever it is, on the service." And my understanding from your previous answer was: "We are not providing anything additional." Is that correct?
14350 MR. BROOKES: There are a number of benefits that customers get. If we look at strictly in the case of local service, there is the emerging competition and the benefits of that. But we have discussed why it hasn't emerged as quickly as it might otherwise have.
14351 But what we have seen is a trend towards competition across a wide variety of markets. And certainly we have seen, in the case of local and long distance, a move for prices to be more cost reflective. And, yes, that has resulted in significant increases in local rates over the past number of years, but we have also seen that the net effect of that with local and long distance has been substantial savings to customers. And we have seen, as well, across a wide variety of markets opened up to competition, the benefits that customers have received.
14352 So this is what I would expect a residential customer to consider.
14353 MR. INLOW: Mr. Brookes, I don't really want to renew the discussion that was earlier in these proceedings with Bell about whether customers are better off vis-à-vis local versus long distance. There was a long cross-examination about that. I don't wish to get into that again with TELUS, just to note that, apparently, that's not clear that is an overall benefit but.... Now, just given that --
14354 MR. GRIEVE: Is that your testimony, Mr. Inlow?
14355 MR. INLOW: Given your earlier answer, then, that the costs are providing the service are not going to increase and the rates will, is there any reason to suggest that the additional incremental revenue from that would not drop directly to TELUS' profit line?
14356 MR. GRIEVE: Absolutely.
14357 Mr. Inlow, first, let's start with a little recap. The rates are not at competitive levels now. If we had a rate structure that wasn't the product of regulation of a monopoly public utility over 85, or whatever number of years -- maybe 75 for Alberta -- if we didn't have a rate structure like that, if we had a rate structure that actually had reflected, on an individual service-by-service, geographic-area by geographic-area basis, fully rebalanced, fully restructured rates under a public utility model, then perhaps what you would find is that those rates were at market levels, and perhaps you would find that they weren't at market levels because there is a higher risk in a competitive market. If they were at market levels and you opened it up to the market with accommodative entry, you would see entry and then the marketplace -- the marketplace would drive those prices down in relation to inflation the way productivity gains in the market are realized everyday: productivity gains by firms in the market are realized in the prices they charge.
14358 But we are not starting there. So to suggest that you can expect that residential customers are going to get increases when they -- or decreases when what is needed is to restructure and get rid of all the implicit subsidizes in the rate structure is very difficult for me to understand.
14359 MR. INLOW: Well, Mr. Grieve, I think all I asked was that if there is incremental revenue being gained from these price increases and there are no corresponding rise in costs associated with them, why would that not fall to the bottom line? It doesn't make any difference where you start.
14360 MR. GRIEVE: Oh, it makes a big difference where you start, Mr. Inlow. I think that those improvements in productivity will be reflected in the competitive market, if you allow competition to arise. And I think it will be reflected in the competitive market and those productivity gains will result in lower prices. But you are not going to find productivity gains in a service that is already priced too low being reflected in lowering the price for that service.
14361 MR. INLOW: Let me move on to one issue of clarification.
14362 I think in the TELUS evidence, it indicated that services in the high-cost bands, E, F and G, will no longer be capped when they cease to qualify for a subsidy. Is that correct?
14363 MR. GRIEVE: Yes. They will no longer be set subject to an I minus X type of price cap, that's correct.
14364 MR. INLOW: What constraint then would stay in place, if any, on prices in those high-cost bands?
14365 MR. BROOKES: We have said that the $35 maximum rate would apply to high-cost and non-high cost areas, so the $35 constraint would remain.
14366 MR. INLOW: Let me return to you, Dr. Weisman, for a moment to talk about risks in price cap.
14367 I think you indicated that one of the key tenets to price cap regulation is the wholesale shift and risk-bearing from customers to the regulated firm. Is that correct?
14368 MR. BROOKES: I believe it is correct.
14369 MR. INLOW: And would it be fair to say that's the underlying principle for advocating that earnings have to be severed from any relationship to costs or price?
14370 DR. WEISMAN: I am sorry, could you please repeat the question?
14371 MR. INLOW: I am not used to witnesses being informed on something when I haven't finished my question yet.
14372 DR. WEISMAN: That wasn't the nature of it, but we can go on.
14373 MR. INLOW: Is your premise that because price cap shifts the risk involved from some combination of customers in the firm to being entirely resting with the firm, that what flows from that is that in a price cap regime earnings have to be severed from any relation to costs or prices; in other words, because the firm is bearing all the risk, theoretically, there is nothing wrong with a firm yielding all the profits?
14374 DR. WEISMAN: I'm not sure I understand your question, but let me take a stab at it.
14375 First of all, TELUS has proposed a price regulation plan and a subset, there is a relatively small set of those services are subject to price cap. And we have indicated the other constraints on prices in that plan.
14376 The idea behind price caps is that all stakeholders can be made better off: the firm, competitors, consumers and the advantage for the Commission, though I doubt it has been your history, is that less regulatory hearings and fewer issues regarding price caps, but, in theory, that is in place, as well.
14377 The idea behind price caps is the benefits that -- one of the critical ideas behind price caps is that the consumers enjoy gains, in terms of price reductions, that are independent of the firm's actual performance. Under rate of return regulation, because costs and prices would be linked, if for some reason those costs were to go up, prices would go up as well. So consumers would be bearing a greater risk under rate of return regulation than they would be under price regulation, appropriately defined.
14378 MR. INLOW: Now, in a truly competitive market, what would you identify as the risks that a customer bears?
14379 DR. WEISMAN: I really don't understand your question.
14380 MR. INLOW: I'm saying if, under price cap or under rate of return, you are saying that because those are non-competitive environments, they are artificial environments in a sense, that risks fall to the various parties who are interested, in other words, some of the risk is on the firm, there are risks to customers, I am saying, in a truly competitive market, what would you say would be the risks to a customer?
14381 DR. WEISMAN: Let us draw the linkage back to price caps. Suppose you have two firms under price caps and they are identical, and one firm is fairly efficient in the market -- let's say very efficient -- and the other firm is not. The efficient firm will realize, perhaps, higher than -- higher returns than would be experienced under rate of return regulation and the less efficient firm will realize returns, perhaps, less than would be realized under rate of return regulation.
14382 Competitive markets, if the price cap is designed to correctly, operate very much the same way: if one firm is competing with another firm, the less efficient firm has no opportunity to raise prices regardless of its own performance because the market is setting those prices. That is exactly what happens under price caps.
14383 Now, you have mentioned the term several times, "perfect competition." There is no regulatory treatise that I have ever read that suggests that "perfect competition" is the model for regulation. In fact, if you go back all the way to Bonbright's theory of public utility rate making, you will find that the idea behind the competition that should be emulated is competition between two firms that look fairly much alike, in terms of controlling for exogenous characteristics. So mixing up this idea of perfect competition as the standard, I think, is misleading, and I just want to correct that.
14384 MR. INLOW: Well, the idea of whether it is perfect competition or there is a better adjective for it isn't really what I was driving at. It's more the issue of saying: you have agreed that the concept of price cap is to try to emulate a competitive market, in terms of outcomes, in terms of price, for example. That's obviously the primary focus. And to take an example, one of the risks that would be borne by a firm under price cap would be that the X-factor was set higher than one would have expected it to be in a truly competitive environment; in other words, that the firm, to be profitable, would have to be more efficient than it could have even expected to have to be in a competitive market to survive. Right?
14385 DR. WEISMAN: Your premise is that the X-factor is somehow setting a hurdle that is even more stringent than would be seen under competitive conditions. Is that correct?
14386 MR. INLOW: I am saying that one of the risks is that is a potential outcome, right?
14387 It might be set too easy, in which case it is still a risk to the firm, but it is obviously a much lower risk. Correct?
14388 DR. WEISMAN: There would be that type of risk, I would presume.
14389 MR. INLOW: But to come back to my other question, if one was in a competitive environment, where there were truly competitive firms -- not necessarily "perfect," if that's an objectionable word -- if I am a customer in that market and I have choices about what firms supply me a service, what risks do you think I run as a customer? Or would you agree with me that a customer in that environment doesn't really incur any significant risks?
14390 DR. WEISMAN: Well, if we go back to your analogy of -- and this is a key difference -- between perfect competition and the competition we are talking about, where consumers are perfectly informed, the market sets quality levels, the market sets prices and provides the consumer with an ideal outcome, from the perspective of economic theory.
14391 MR. INLOW: Right. So, again, coming back then to the notion of trying to compare price cap to a competitive environment that it is trying to emulate in the way that it is regulated, would it be fair to say that if an X-factor was set that was -- turned out to be too high a hurdle, the firm wasn't able to meet that even though they were incented to do so, because I think, irrespective of what X-factor you set, the firm is incented to meet that X-factor. Correct? It doesn't mean they will meet it, but they are certainly incented to try and beat it?
14392 DR. WEISMAN: They would certainly try and beat it.
14393 MR. INLOW: Yes.
14394 DR. WEISMAN: And they may fall short or they may exceed it.
14395 MR. INLOW: Yes. And if they fall short, one would say that the risk to the company was that their bottom line would be less than it would have been if there had been true competition.
14396 DR. WEISMAN: If we are retaining the same premise: that the X-factor was set too high, then those returns would be below competitive return levels. I presume that would be true.
14397 MR. INLOW: So you would agree at that point that the risk to the firm from the X-factor is manifested in the fact that, if it's too high, the firm has less on its bottom line than it would have had it been a competitive market because the competitive market would not have set that high a hurdle?
14398 We are trying to -- I appreciate this is difficult because you are trying to draw an analogy between a conceptual framework and an actual framework that doesn't exist, but we have agreed that's what this form of price cap regulation is trying to do. Correct?
14399 DR. LEVIN: The thing that is causing us to hesitate here is that when you say "X" is too high and the firm doesn't meet that target, there's two possibilities. One is that the parameter of the price cap plan was set incorrectly, and the other -- and so that the firm can never meet it, and the other is that the parameter was set correctly and the firm just isn't efficient.
14400 And if the latter is the case, if the firm isn't going to do very well under price caps, it is not going to do very well under -- in a competitive market either because it's not sufficiently efficient.
14401 MR. INLOW: All right. Let me try and clarify that, then. What I'm trying to drive at is the fact that in a competitive market the X-factor, if I can put it that way, or what we mean by the X-factor, wouldn't be set by a single firm, it would be set by the competitive rivalry. Correct?
14402 In other words, if you had three competitors in a competitive environment, their competition would set an X-factor, in reality. In other words, each firm in that competitive rivalry would have to meet that threshold or they have business problems. Correct?
14403 DR. WEISMAN: It's safe to say that at any given point in time the rivalry between them, say the intersection of supply and demand, would create a competitive price.
14404 MR. INLOW: Okay. So the construct I am asking you about is to say, let's assume in a competitive situation that the firms themselves, if we had been -- if we had had the wisdom to know how that unfolded, if the firms themselves were able, in a competitive sense, to achieve 5 per cent increases in efficiency each year, if we had drawn an X-factor that said you need to make seven, the reality is that the firm would not perform as well under price cap as they would have performed if it had been replaced with competition. Correct?
14405 DR. WEISMAN: You would have been departing from the competitive market standard. The firm would not likely not be able to attract capital and likely go out of business.
14406 MR. INLOW: Okay. And that's the risk to the firm, correct, under price cap? That's a significant risk to a firm under price cap, is that that could happen: the regulator could set an X-factor that was too high?
14407 MR. INLOW: I'm just following up the hypothetical I gave you.
14408 DR. LEVIN: No. I think we agree with that.
14409 MR. INLOW: Okay.
14410 DR. LEVIN: We have always said that in order for the price cap plan to work that the parameters have to be set correctly. I think all you are saying is: what if the regulators don't set the "X" correctly and they make it too high, is that bad for the firm? Yes, it's bad for the firm. It may threaten the firm's survival.
14411 MR. INLOW: All right. Now, I am coming back to the issue of saying that -- you have indicated earlier that a key tenet of price cap regulation is that there is a wholesale shift in risk to the firm. Correct?
14412 DR. WEISMAN: That is correct right now.
14413 MR. INLOW: Now, let's look at the other situation of saying that in those two comparisons of the X-factor under price cap and what the equivalent would have been under competitive market, if the regulator sets it too low, is it not fair to say that the customer doesn't get as good a price as they would have in a competitive market?
14414 DR. WEISMAN: If the X-factor is set too low relative to the emulation of a competitive market outcome, that would imply that prices would be somewhat higher than in a competitive outcome.
14415 MR. INLOW: And would it be fair to say in that circumstance that a customer, from a personal point of view, has less on their bottom line in terms of income?
14416 DR. LEVIN: That's true, unless that market that you are talking about is competitive, in which case the price cap constraint is not binding and the price is going to reflect the competitive market price. It won't be higher than that.
14417 So think you have made an assumption that there is no competition. If there is competition, then, the statement is not correct.
14418 MR. INLOW: No, I haven't changed my assumptions between these two situations. I'm simply saying in the situation where it turns out that the threshold set was lower than what the firm would have had to meet in a competitive sense that customer is worse off than if the customer had been in a competitive environment. Right?
14419 DR. LEVIN: Well, it depends on whether the firm can actually raise prices as high as the price cap would allow. If the market --
14420 MR. INLOW: But if it is not a competitive environment, what keeps them from doing that? You are now introducing something new, which is to say, well, there are some competitions around the fringes that are going to restrain them. I wasn't trying to put that as part of the hypothetical.
14421 DR. LEVIN: That's fine. I was just trying to clarify the point that your statement is correct only if there is no competition in the market for the service.
14422 MR. INLOW: Okay. So is it fair to say in that situation that there is a risk to the customer under price cap? And specifically that risk is an X-factor, in this case, could be set that's lower than would have been realized in a competitive environment?
14423 DR. WEISMAN: Yes, under certain conditions. For example, under price caps, as we transition into price caps, the idea behind in transitioning from rate of return to price caps that all parties could be better off, consumers were guaranteed a rate of declining prices that exceeded that experienced historically. So it is better than they enjoyed under rate of return regulation, but under your hypothesis, if that were set, the X-factor were set incorrectly, it may be higher than they would see in their competitive conditions, but they are not worse off.
14424 DR. LEVIN: You know, the conclusion that we all should draw from this is that it is very important to set the "X" correctly. And I think everybody in this room probably agrees with that. Indeed, parties such as TELUS have put a good deal of effort into trying to explain clearly and carefully how to set that "X". It is very important, I agree with you.
14425 MR. INLOW: I'm sure we can all agree to that. I think the problem is that, unfortunately, the decision rests with the Commission. And to say that they have to get it right --
14426 THE CHAIRPERSON: I would say that's quite fortunate, Mr. Inlow.
14427 DR. WEISMAN: Well, let me follow up on one point which Dr. Levin has triggered in my mind here, and that is that whether -- the TELUS price regulation plan, part of subsidised services are capped and part are not. Getting the X-factor correct, as precise as we can, is of course very important. It is also essential -- critical -- that the relevant measure of cost be the actual cost of the firm and not some hypothetical, ideally efficient, set of costs. That's equally critical.
14428 MR. INLOW: And I can promise you we will get to that point of discussing that.
14429 Now, again, simply to follow up on an earlier discussion, did I understand that TELUS was taking a position that, if, during a price cap regime their financial results were threatening to their viability, that they would or they would not come back to the Commission, in terms of asking for a review during the price cap period?
14430 MR. GRIEVE: If we assume that the Commission sets a price cap parameter that is consistent with historical trends over, you know, an X-factor, or something like that, yes. I mean, we do not believe that we should be going back in the middle of a price cap period.
14431 MR. INLOW: Now, you just indicated, Mr. Grieve, that if they set an X-factor -- and I believe you said based on historical review. Is that correct?
14432 MR. GRIEVE: That's right. That's what Dr. Bernstein's evidence is all about, is an historical average.
14433 MR. INLOW: Okay. Now, if -- and, again, I appreciate this is a hypothetical situation, but it's all well and good to say that if the regulator sets the right X-factor, everything works out fine, but somebody has to make a decision as to what that is. I think we can all agree that's a forecast, it's a prediction and it has some uncertainty around it.
I'm simply asking if the result of that is that TELUS was in a position of saying: "We may no longer be able to supply that service next year," are you saying you would not come back to the Commission for a review during price cap?
14434 MR. GRIEVE: Well, Mr. Inlow, I think we have to go back a step.
14435 First, if the Commission -- and I guess we should make this clear -- if the Commission sets an X-factor that's correct for the subset of services, and correct as a range, then we don't see any reason to go back. But that doesn't mean that we wouldn't, pretty soon after the order, be back to the Commission.
14436 Now, if we were satisfied that the Commission had made its decision that was something we could live with over that period of time and that did set the parameters properly -- and remember, we are not dealing with a monopoly here, we are dealing with a competitive market so there are many things you would have to look at -- there would be no reason for us to go back.
14437 If, however, the Commission decided that it was going to start using X-factors and baskets and all of these things to try to micro-manage and manipulate the system, then we have a whole different ball game. That's not a price cap regulation regime at all. What it is is just market manipulation, and that's the kind of thing the Commission would have to look at, probably every six months, to try to tweak something in it during the period because things like that aren't sustainable for very long.
14438 DR. LEVIN: Let me just add, too, that there is a lot -- this is very complex, and the fact that there is now competition makes these kind of price cap decisions very important.
14439 But, for instance, the Commission might set an "X" that everyone agreed was exactly the right "X", with all the information that we had, but they might come along and do something to wholesale prices, say, offer a big discount that didn't reflect costs, that really undercuts the entire structure of wholesale and retail rates. And that could have tremendously negative consequences on the financial performance of the ILECs. They might come back because of that. And it wouldn't be because the "X" was wrong, it would be because one of the other components of this price regulation plan was so bad that they really were threatened.
14440 So I think it's really -- it makes me uncomfortable to just focus on one thing like the "X" and say, "Well, if we get that right, everything is okay," because you have to get a lot of things right here, or at least as close as we can.
14441 MR. INLOW: That's fair enough. I wasn't trying to suggest that that was the only factor.
14442 Mr. Grieve, let me come back to the point with you about accommodative entry. And I happened to look at the original AGT submission going into this proceeding, where it said that rapidly changing technologies resulted in the death knell of monopoly in all telecommunications markets.
14443 Can you indicate whether there was at that time a specific technology that appeared to be on the market? Or do you still stick with that, that there is a technology solution that is going to allow competitive entry?
14444 MR. GRIEVE: You said AGT.
14445 MR. INLOW: Yes.
14446 MR. GRIEVE: So I thought, are you talking 1993, 1996 --
14447 MR. INLOW: 1996
14448 MR. GRIEVE: -- 1995 --
14449 MR. INLOW: 1996, sorry.
14450 MR. GRIEVE: Okay. You said in the last price cap period, okay.
14451 MR. INLOW: Yes.
14452 MR. GRIEVE: In 1996.
14453 Is there a particular technology? Well, I think, you know, Dr. Jackson can speak to this, but certainly there are lots of technologies coming along that --
14454 MR. INLOW: No, sorry, let me be clear. I'm saying at that time was there a particular technology that the company had in mind or could see that they felt was going to change their competitive landscape?
14455 MR. GRIEVE: I think Dr. Levin remembers better than I do.
14456 DR. LEVIN: Yes, here's what I remember because I was involved in making some forecasts and things.
14457 Certainly, we all knew about wireless and we knew that there was a possibility for other companies to enter that looked like TELUS. We had at the time a lot of, what we called in the United States, competitive access providers, but people putting in fibre rings in cities. And they were there.
14458 But the big thing I think we were focused on at the time was cable. The cable companies -- if you went back and looked at that record, you would also find the cable companies indicating that they expected to enter pretty rapidly and pretty substantially into the residential telephone market. And everybody thought that would happen.
14459 Now, what has happened in the meantime is that has slowed down, for something that was unforeseen at the time. The cable companies have decided, as I understand it, that they didn't want to put in telephone service with the switch technology that was available because the IP telephony looked like it would be a much more attractive product for them and they said it would be better to wait until that was ready. Now, we are hearing again that this is about ready, it's about commercial and that they expect to go forward.
14460 So I would say that the single biggest thing that was said at the time that didn't materialize was the residential competition from cable.
14461 MR. INLOW: And it's fair to say that that -- for example, in the Alberta area, that that's still true today, that the cable providers are not yet into providing telephony?
14462 MR. BROOKES: Yes, that's right. Voice telephony services, they are, of course, very focused on high-speed Internet.
14463 MR. INLOW: Now, just while we are on this then, I take it that that particular type of competition that was thought to materialize, that in fact in that area TELUS is, in fact, if anything, now trying to compete in the cable area, to a certain extent, with some of its services, such as, I believe, Velocity DSL Internet service?
14464 MR. BROOKES: I am not sure I would call high-speed Internet necessarily a cable or a wire-line service. It is, of course, an important marketplace that we both compete for.
14465 MR. INLOW: Well, are saying you don't feel that's competitive with cable companies?
14466 MR. BROOKES: No. I guess my quibble -- and it's a small one -- you characterized it, I believe, as a cable service that we are entering the market for. And what I am saying is high-speed Internet is provided by both cable companies and DSL companies. It's not a uniquely cable market, was my point.
14467 MR. INLOW: So, would it be fair to say, then, in that sort of area of technology, that the perceived competition has not yet developed and, if anything, there appeared to be some new opportunities, that the cable companies have been involved in, that are now business potentials for TELUS?
14468 MR. BROOKES: Yes, there's no question, as Dr. Levin suggested, that the cable companies have not entered the local market as they predicted they would. And in the first price cap proceeding, it was predicted by the cable companies that they would be the major facility-based alternative to the ILECs. And clearly, that hasn't taken place. It had a strong focus on building out their networks for high-speed Internet services. And this is a market that TELUS and other ILECs compete in, as well.
14469 THE CHAIRPERSON: Mr. Inlow, I know I said we would go to about one o'clock, but we have been at this for a fair stretch. I suspect there is those here, and those on the panel, who may welcome a break about this time.
14470 MR. INLOW: That's fine, Mr. Chairman. I'm amenable to that.
14471 THE CHAIRPERSON: We will take our lunch break now, then, and reconvene at two o'clock.
--- Upon recessing at 1245 / Suspension à 1245
--- Upon resuming at 1405 / Reprise à 1405
14472 THE CHAIRPERSON: Order, please.
14473 Good afternoon, ladies and gentlemen. We are going to turn back to a phase in the proceeding now to hear from the general public on this issue of price caps for the incumbent telephone companies. I think this is the third opportunity we have done this to try and accommodate the schedules of the various people who wanted to participate.
14474 So, Mr. Secretary, I will turn it over to you to take us through the order.
14475 THE SECRETARY: Thank you, Mr. Chairman.
14476 The first call today will be from Wendy Lill, NDP candidate. She is calling from Nova Scotia.
14477 THE CHAIRPERSON: Ms Lill?
14478 MS LILL: Hello?
14479 THE CHAIRPERSON: Ms Lill, are you there?
14480 MS LILL: Yes, I am.
14481 THE CHAIRPERSON: Please go ahead.
14482 MS LILL: Okay. Am I on?
14483 THE CHAIRPERSON: You are on.
14484 MS LILL: Thank you very much.
PRESENTATION / PRÉSENTATION
14485 MS LILL: I want to thank you for allowing me this opportunity to address you on the matter of continuing the price cap for major phone companies after this year. And the irony of us using the very technology that we are discussing is not lost on me.
14486 I just want to take a couple of minutes and give you some of my views on this issue. I have some things to say on the price cap specifically, but I also want to address what I think is the most inappropriate part of this hearing, and that is the back-door application for a rural rate increase being pursued by Aliant for high-cost service areas in Atlantic Canada.
14487 To begin with, I think that there are a few principles that you should be keeping in mind when looking at the continuation of the price caps.
Firstly, remember why there was a price cap to start with. You have had one in place because you were trying to keep rates stable for consumers who had no choice in their telephone provider.
14488 You tried to achieve a balance that allowed the orderly expansion of phone services in Canada at a time of technological change, and your policy was an unprecedented success. We are one of the most wired countries on earth. We have more phones, cells and faxes than you ever imagined, that any of us have ever imagined. The companies are more profitable then you estimated and, until next year, consumers have been protected. Many think the biggest problem in this field is finding enough telephone numbers.
14489 This has been good for Canadian businesses and good for our people. We have a country of 33 million talkers, occupying the second largest landmass on the planet. Our national economic and social well being relies on our ability to communicate with each other. We need affordable phone service more than any other society as well.
14490 Our phones have long since ceased being a luxury. Phones are our link to emergency care, through an almost complete 9-1-1 network. Across our half of this great continent, families now rely on the phone to stay together after economic forces have torn them apart. In this land of immigrants, affordable phone service has allowed many cultures to be both Canadian, and really multicultural as well, by staying in touch with their lands of origin around the world by phone.
14491 Telephone service is not just another commodity in Canada. It is an essential social connector which you, as our regulator, must protect. Remember the Telecommunications Act's objective is to ensure that Canadians have access to reliable telephone and other telecommunication services at affordable prices. But we are seeing pressures from the phone companies to treat residential phone services as a cash cow for shareholders and not as a public trust which gives a fair return to investors.
14492 There are several arguments coming from phone companies in this area. The idea of increasing prices or eliminating price caps, narrowing what is covered by a price cap or allowing two-tier pricing for high service areas, which are generally areas of reduced service. All these suggestions amount to consumers paying more, getting the same or less and companies making more money.
14493 I do not think that this is what Parliament meant when it passed the Telecommunications Act calling for reliable phone service at affordable prices. You have an obligation to protect Canadian pocket books from predatory pricing practices of phone companies.
14494 I also urge you not to believe in the perfect model, market model, that the phone companies suggest is at work in Canada. I believe some the premise is false. When long distance was deregulated, the market model kicked in, in a limited way, for business customers. But the Public Interest Advocacy Centre, who has been offering you some good advice in this hearing, showed that residential customers did not receive the predicted benefits from long distance competition.
14495 Their research published in '99 called, "Still a Long Way to Go," concluded that there is significant inertia in the residential market that works to the perpetual benefit of the former Stentor companies. The short version is that Canadians don't like switching. They don't trust the new service providers. They think it is safer to stay with the devil of a phone company they know. So the competition in the marketplace is not real.
14496 I have no reason to believe that local competition will be any different. And I would also venture that local service competition will only exist in large urban areas. Let's face it, high-cost areas cost more and competitors aren't interested.
14497 I also believe that consumers generally prefer to stay with the company they know, as opposed to switching to the ones they don't know. So who will protect the consumer, the public, urban or rural, during this time of deregulation? And I come back to the fact that I believe it's the CRTC's job to do this. Your job is not only to extend the price cap, but either reduce the monthly price or extend the range of services included within the cap.
14498 I think that one option should be to extend the basket of services in the price cap, for a number of reasons. We have seen increasing reliance of customers on the new boutique services offered by the phone companies. I'm referring to call waiting, call answer, call return, call display and call privacy. Since the companies are hell-bent on making these add-on services essential to us all, as their ads seem to imply, then they should come under the price cap.
14499 Let's look at the importance of one of these services, call privacy. In my constituency office, I hear from many women who legitimately fear for their personal safety. One of the things that can terrify them is repeated phone calls and hang-ups. They know that many are innocent calls, such as telemarketers. I understand that's irritating, but this is little comfort. Women should be able to have more control over who has their number and have better knowledge of who is calling them, without having to pay dearly for that right. Call privacy should not be an add-on service, I would say. It should be part of the basic service offered for women and others.
14500 I will now come to the question of high-cost service areas and the request from Aliant to make rural Canadians pay more for basic services. As a Canadian and as a New Democrat, I fundamentally disagree with any kind of two-tier services in this country. I believe that we are a country based on comparable levels of health care, transportation and communication services at comparable costs. That should be our goal and we should always be striving for it.
14501 A question is: why would we say that Canadians living in Toronto, where there is more service and real local competition available, why should they be granted guaranteed lower monthly phone rate than the good folk of Ecum Secum, Nova Scotia where there is poor service and real economic hardship?
14502 If Aliant really wants an increase only for rural customers, then once you, the CRTC, has extended the price cap, ask them to apply for a rate increase for only their rural customers. Then hold hearings in the affected areas. I dare them to try. It is one thing to apply for a rate hike behind the closed doors of the CRTC hearings and quite a different thing to apply for one in the community centres in Moser River or Ingonish. I dare say they would think again if they were forced to face the affected consumers in these communities.
14503 And I don't buy the argument that the market dictates that they do so. If you follow that logic, we should not have a country at all because, as a market, Canada doesn't really make sense. But we do have a country. We have a constitution that says all Canadians are equal. We have a tradition of a mixed economy, where companies have to live within rurals to operate and profit. Part of that tradition is having a phone regulator to protect consumers.
14504 I also don't buy the argument from Aliant that, without increases in rural rates, there will be an increase in the technological divide between rural and urban Canadians. This divide is a product of company policy. The companies are already providing less service to rural customers. Unless you, the regulator, direct them to increase services to rural Canadians, then no matter what price they charge, rural Canadians will remain second class customers. The digital divide is not a market problem; it is a regulatory challenge.
14505 When should these companies be allowed to increase prices? When the phone companies' profits start to come down to the 11 per cent level, which you have identified as a reasonable level, let them come back and discuss changes in prices. And given the trend in the markets, I would say that we would be all very long in the tomb by then.
14506 In conclusion, my party and I support having a strong CRTC on both the broadcast and telecommunication side. But that support waivers as the public sees price increases and no service increases. So for all of our sakes, I urge you to do your important work in protecting the public interest and in reinforcing the price cap and treating all Canadians equally.
14507 Thank you very much for your time, and I would be glad to answer any questions if there is time for it.
14508 THE CHAIRPERSON: I don't think we have any questions, Ms Lill. I want to thank you for your presentation this afternoon.
14509 MS LILL: Thank you very much.
14510 THE CHAIRPERSON: Bye, bye.
14511 MS LILL: Bye, bye.
14512 THE CHAIRPERSON: Mr. Secretary?
14513 THE SECRETARY: Mr. Chairman, we have Mr. Andy Savoy, M.P., New Brunswick.
PRESENTATION / PRÉSENTATION
14514 MR. SAVOY: Thank you for this opportunity to address you on a matter of great concern to the constituents in my riding.
14515 Tobique-Mactaquac is a vast, rural riding, the largest federal riding in the Maritimes with just over 14,000 square kilometres. It stretches from the outskirts of Fredericton in southern New Brunswick to Saint André in the northwestern part of the province and to Boiestown on the Miramichi River in central New Brunswick.
14516 Tobique-Mactaquac is an industrious riding, with less than 5 per cent unemployment in many areas. In fact, Tobique-Mactaquac was recently named the fourth fastest growing region in Canada over the past 10 years.
14517 I am proud to say that Tobique-Mactaquac is home to some of Canada's business leaders, including McCain Foods, the largest producers of French fries in the world and Day & Ross, one of Canada's largest trucking firms.
14518 We don't ask for much here in Tobique-Mactaquac, just a fair shake. The rate structure proposal before you is not fair to the proud, hard-working people of Tobique-Mactaquac. More significantly, this proposal goes against Canada's fundamental principles of fairness. It creates a two-tiered pricing system that discriminates against residents sheerly on the basis of geography.
14519 Do you want to set this precedent? What is next? Should rural residents pay more for their postage stamps than urban residents? Should rural residents have higher power bills than their urban neighbours? Or course not. So why should fees for telephone service be any different?
14520 Rural areas already face serious challenges. Economies of scale work against us and urban areas generally have more developed highway and road infrastructure, better community recreation facilities and schools and hospitals that are better equipped and staffed at adequate levels.
14521 I urge you not to tip the scales further. If, indeed, a rate hike is necessary, then apply it across the board. Distribute the price increase evenly and fairly among urban and rural residents. Keep parity in the financial equation.
14522 A country-versus-city policy is contrary to everything Canadians know, believe in and are willing to accept.
14523 Today, I ask for fairness on behalf of the constituents of Tobique-Mactaquac. I would also ask you reconsider holding public hearings in Atlantic Canada. Given the importance of this issue, it is imperative that all stakeholders have ample opportunity to express their views.
14524 Thank you again for allowing me to address you today and I urge you to consider the precedent that could be set with this decision and the impact it will have on life in rural Canada, both in the near term and the long term.
14525 Thank you very much.
14526 THE CHAIRPERSON: Thank you very much, Mr. Savoy.
14527 THE SECRETARY: Mr. Chairman, our next person on line is Mr. Darrell Paul for the Union of New Brunswick Indians.
14528 THE CHAIRPERSON: Good afternoon, Mr. Paul.
14529 MR. PAUL: Good day. How are you?
14530 THE CHAIRPERSON: Good. Go ahead.
14531 MR. PAUL: We have a presentation that I will read out to you. Can you hear me?
14532 THE CHAIRPERSON: Yes, we can.
14533 MR. PAUL: Okay.
14534 Okay, I will start off with the presentation.
PRESENTATION BY / PRÉSENTATION PAR
14535 MR. PAUL: It is the Union of New Brunswick Indians and this is concerning the New Brunswick telephone application and Public Notice CRTC 2001-37, Price Cap Review and Related Issues.
14536 I would like to offer you a good afternoon, whoever the panel is, the members of the panel and yourself, Mr. Chairperson.
14537 The UNBI represents roughly 10,000 aboriginal people from 14 Mi'kmaq and Maliseet First Nations, including aboriginal people of those First Nations not living on reserves.
14538 New Brunswick First Nations, represented by the Union of N.B. Indians, are Eel Ground, Indian Island, Fort Folly, Kingsclear, St. Mary's, Eel River Bar, Buctouche, Woodstock, Oromocto, Madawaska-Maliseet, Pabineau and Red Bank. The Union of New Brunswick Indians also represents Lennox Island and Abigweit Prince Edward Island First Nations.
14539 The activities of the UNBI are directed by the chiefs of those 14 First Nations. The majority of our people live in rural areas of both New Brunswick and Prince Edward Island and no doubt many of our people have telephone service. Consequently, our people will be directly affected by any price increase for telephone service. Not only will our individual people be affected, but also the few businesses and the organizations that exist on our First Nation reserves.
14540 In the case of our people on reserves, we have no choice about where we can live. The government has many years ago arbitrarily assigned geographic areas to our people called reserves, and, naturally, these reserves are mainly in the rural parts of the two provinces we represent. Why should we be discriminated against and have to pay more for our telephone service just because we have to live in rural areas?
14541 If we assume that there are at least 3,000 aboriginal rural telephone subscribers, then the cost per year for our people will be over $180,000 more than they are paying now.
14542 In addition to telephone service, the local telephone provider, NBTel, also has a service for Internet users over their telephone wires. At the present time, NBTel provides a high-speed Internet service to urban users, but does not provide the same service to rural users, probably because it would cost more to provide high-speed service to rural areas.
14543 This is discrimination. It impacts on our people and on any business we operate from our reserves. If the CRTC were to approve the rate different for regular telephone service, and at this time, then surely NBTel is going to use the same argument to a higher -- to set a higher rate different for its high-speed Internet service whenever it gets around to providing the service to rural customers.
14544 It is our position that one cost should be charged for telephone service regardless of where the service is provided, and, in this way, the larger population centres -- urban centres -- can assist in ensuring that their rural neighbours pay the same fee for service as they do. Any other approach would be unfair and discriminatory.
14545 Thank you for this opportunity to participate in this hearing. That is our presentation.
14546 THE CHAIRPERSON: Thank you, Mr. Paul.
14547 MR. PAUL: Do you require a copy of this be faxed to your office?
14548 THE CHAIRPERSON: No, that's not necessary. We are recording this, so we have a transcript.
14549 MR. PAUL: Okay.
14550 THE CHAIRPERSON: Thanks a lot.
14551 MR. PAUL: Any questions you might want to ask?
14552 THE CHAIRPERSON: No. We have no questions.
14553 MR. PAUL: Okay.
14554 THE CHAIRPERSON: Thank you.
14555 MR. PAUL: Thank you very much.
14556 THE CHAIRPERSON: Bye, bye.
14557 MR. PAUL: Okay, bye.
14558 LE GREFFIER DU TRIBUNAL: Monsieur le président, la prochaine présentation serait donnée par monsieur Luc Bruneau de Brossard, Québec.
14559 LE PRÉSIDENT: Bonjour, Monsieur Bruneau.
14560 M. BRUNEAU: Allô?
14561 LE PRÉSIDENT: Monsieur Bruneau?
14562 M. BRUNEAU: Oui, oui, je vous écoute.
14563 LE PRÉSIDENT: On vous écoute.
14564 M. BRUNEAU: Okay. Le sujet aujourd'hui, c'est... pourriez-vous me rappeler le sujet de l'appel conférence?
14565 COMMISSAIRE NOËL: C'est la réglementation sur le plafonnement des prix, Monsieur Bruneau.
14566 M. BRUNEAU: Okay. Pour les tenants de facturation mensuelle résidentielle, hein?
14567 COMMISSAIRE NOËL: Entre autre.
14568 LE PRÉSIDENT: Oui.
PRÉSENTATION / PRESENTAION
14569 M. BRUNEAU: Okay. Bon bien, moi, je trouve que l'état actuel devrait être gelé pour encore un certain nombre d'années parce que vous savez qu'est-ce qui se passe au niveau économique au niveau de la planète présentement. Et puis moi-même, j'ai perdu mon emploi à cause des événements du 11 septembre à New York. Je transportais... j'allais chercher les passagers aux aéroports de Mirabel et de Dorval et je les amenais au centre-ville à Montréal. J'étais chauffeur d'autobus classe 2. Puis j'aimais mon travail, tout ça.
14570 Voyez-vous, ça me place dans une situation présentement très difficile au niveau économique pour moi. Je dois déménager ce mois-ci de ma résidence en plus et puis aménager un autre endroit que je n'ai pas trouvé.
14571 Donc, moi, je trouve que le coût de la vie est tellement cher. On a de la difficulté à rejoindre les deux bouts. Et puis je ne suis pas le seul Québécois au Canada actuellement qui... parce que là, de toute façon, Bell Canada avait cherché ses parts de... va chercher ses... les revenus supplémentaires avec les antennes paraboliques ExpressVu qu'elle appelle, je pense. C'est à partir de Bell Canada ça. Puis il y a aussi le téléphone Bell Mobilité, c'est une autre division de Bell Canada aussi.
14572 Donc, il a étendu son marché au niveau des produits de consommation d'un public. Donc, au Canada, c'est que je trouve qu'il y a juste la compétition au niveau de l'interurbain avec d'autres compagnies, comme exemple, Sprint Canada ou Fonorola ou d'autres compagnies au niveau de l'interurbain. C'est sûr que le service même outre-mer, ils ont baissé un peu. C'est sûr, mais moi, j'ai pas... j'ai déjà appelé dans les années antérieures, entre '95 et '97. Je faisais des appels outre-mer. Je dépensais des centaines et des centaines de dollars parce que même à cette époque-là, appeler du Canada vers la France, ça coûtait moins cher d'aller sur la minute tandis que, mettons, appeler du Canada vers le Maroc, c'était plus cher. C'était plus que deux dollars la minute.
14573 Mais actuellement, c'est ça, c'est ça la situation économique. Il n'y a pas beaucoup de gens au Québec, comme au Canada qui... il y a une crise économique actuellement, on s'en va peut-être en récession. Si on va en récession, peut-être que ça va nous affecter aussi que là-bas aussi. Peut-être qu'on va avoir une récession. Je ne le souhaite pas. Je souhaite plutôt qu'on ait un retour en sorte du marché du travail pour que tout le monde puisse avoir du travail malgré qu'est-ce qui se passe au niveau des cribles militaires outre-mer.
14574 Fait que c'est ça. Moi, je trouve que les prix mensuels, puis même avec Simplitel quand je fais des appels interurbains, à dix sous la minute au Canada, c'est assez, je pense. Pour moi, là, je veux pas avoir ça plus cher que ça présentement.
14575 C'était ça mon opinion personnelle.
14577 LE PRÉSIDENT: Merci, Monsieur Bruneau.
14578 M. BRUNEAU: Okay. C'est tout pour aujourd'hui?
14579 LE PRÉSIDENT: Oui.
14580 M. BRUNEAU: Okay. Bonne journée.
14581 LE PRÉSIDENT: Oui.
14582 Mr. Secretary.
14583 MR. SPENCER: Mr. Chairman, we were unable to reach Mr. McConnell and Mr. Bueno, which were the last participants.
14584 THE CHAIRPERSON: Okay. So we will return to cross-examination then of the TELUS panel 1. While they are taking their positions, just a couple of notes.
14585 Tomorrow, when we are sitting, Saturday, the only entrance to the building will be the main entrance over here. I think it's 150. In any event, it's the main entrance to the building, which most of you have probably been using anyway.
14586 Since the shops in here are closed, we will provide some coffee and Tim-Bits, or whatever, for the parties. We end up charging you for it when we send our bill out for the fees anyway, right? So we will provide some coffee for tomorrow.
14587 Also, I would like to note that apparently beginning on Monday, October 15, there is going to be new security measures being implemented for all federal government buildings. So any person wanting to be admitted to the hearing room will be required to produce a photo identification. And I guess, as it's probably going to be the rule, henceforth, for entering federal government buildings to show a photo ID. I guess that's a consequence of the new environment we are living in.
14588 Mr. Secretary, I believe you have a number of exhibits.
14589 MR. SPENCER: Yes. I have about 17 documents, Mr. Chairman.
14590 The first document, The Companies response to undertaking requested by Commissioner Langford, transcript reference Volume No. 4, paragraph 7225, will be introduced as The Companies Exhibit No. 34.
EXHIBIT NO. THE COMPANIES-34: The Companies response to undertaking requested by Commissioner Langford, Transcript reference Volume No. 4, paragraph 7225
14591 MR. SPENCER: Response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 4, paragraph 6710, will be introduced as The Companies Exhibit No. 35.
EXHIBIT NO. THE COMPANIES-35: Response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 4, paragraph 6710
14592 MR. SPENCER: Response to Question No. 2 to CRTC Exhibit No. 6 will be The Companies Exhibit No. 36.
EXHIBIT NO. THE COMPANIES-36: Response Question No. 2 to CRTC Exhibit No. 6
14593 MR. SPENCER: Response to Question No. 3 of CRTC Exhibit No. 6 will be The Companies Exhibit No. 37.
EXHIBIT NO. THE COMPANIES-37: Response to Question No. 3 of CRTC Exhibit No. 6
14594 MR. SPENCER: Response to Question No. 4 of CRTC Exhibit No. 6 will be The Companies Exhibit No. 38.
EXHIBIT NO. THE COMPANIES-38: Response to Question No. 4 of CRTC Exhibit No. 6
14595 MR. SPENCER: Response to undertaking requested by CRTC, transcript reference Volume 4, paragraph 6979, will be The Companies Exhibit No. 39.
EXHIBIT NO. THE COMPANIES-39: Response to undertaking requested by CRTC, transcript reference Volume 4, paragraph 6979
14596 MR. SPENCER: Response to undertaking requested by Commission Counsel, Ms Moore, Transcript reference Volume No. 7, paragraph 11275, will be The Companies Exhibit No. 40.
EXHIBIT NO. THE COMPANIES-40: Response to undertaking requested by Commission Counsel, Ms Moore, transcript reference Volume No. 7, paragraph 11275
14597 MR. SPENCER: Response to undertaking requested by AT&T Corp. and AT&T Canada Telecom Services Company, transcript reference Volume No. 6, paragraph 10487, will be The Companies Exhibit No. 41.
EXHIBIT NO. THE COMPANIES-41: Response to undertaking requested by AT&T Corp and AT&T Canada Telecom Services Company, transcript reference Volume No. 6, paragraph 10487
14598 MR. SPENCER: Response to undertaking requested by AT&T Canada Corp and AT&T Canada Telecom Services Company, transcript reference Volume No. 6, paragraph 10522, will be The Companies Exhibit No. 42.
EXHIBIT NO. THE COMPANIES-42: Response to undertaking requested by AT&T Canada Corp. and AT&T Canada Telecom Services Company, transcript reference Volume No. 6, paragraph 10522
14599 MR. SPENCER: Response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume 7, paragraph 11275, will be The Companies Exhibit No. 43.
EXHIBIT NO. THE COMPANIES-43: Response to undertaking requested by Commission Counsel Ms Moore, transcript reference Volume 7, paragraph 11275
14600 MR. SPENCER: Response to undertaking requested by GT Group Telecom Services Corp, transcript reference Volume 7, paragraph 11887, will be The Companies Exhibit No. 44.
EXHIBIT NO. THE COMPANIES-44: Response to undertaking requested by GT Group Telecom Services Corp., transcript reference Volume 7, paragraph 11887
14601 MR. SPENCER: We have a CRTC undertaking for TELUS to provide for each year of TELUS proposed SIP roll-out separately for Alberta and B.C. and separately by high cost and non-high cost areas, the rate increase to residents, local service, in each of those categories which would be required to recover the SIP PWAC amounts shown in the response to Interrogatory TELUS(CRTC)26June01-1704, will be introduced as CRTC Exhibit 28.
EXHIBIT NO. CRTC-28: CRTC undertaking for TELUS to provide for each year of TELUS proposed SIP roll-out separately for Alberta and B.C. and separately by high cost and non-high cost areas, the rate increase to residents, local service, in each of those categories which would be required to recover the SIP PWAC amounts shown in the response to Interrogatory TELUS(CRTC)26June01-1704
14602 MR. SPENCER: CRTC undertaking for TELUS regarding forecast inflation will be CRTC Exhibit No. 29.
EXHIBIT NO. CRTC-29: CRTC undertaking for TELUS regarding forecast inflation
14603 MR. SPENCER: CRTC undertaking for The Companies regarding forecast inflation will be CRTC Exhibit No. 30.
EXHIBIT NO. CRTC-30: CRTC undertaking for The Companies regarding forecast inflation
14604 MR. SPENCER: CRTC undertaking for The Companies regarding productivity factors will be CRTC Exhibit No. 31.
EXHIBIT NO. CRTC-31: CRTC undertaking for The Companies regarding productivity factors
14605 MR. SPENCER: CRTC undertaking for The Companies to provide the information in respect of each of the 220 contracts to which Bell Nexxia is a party will be CRTC Exhibit No. 32.
EXHIBIT NO. CRTC-32: CRTC undertaking for The Companies to provide the information in respect of each of the 220 contracts to which Bell Nexxia is a party
14606 MR. SPENCER: Response to CRTC Exhibit No. 23 for undertaking to provide The Companies financial statements, including statement of cash flows for the six months ending 30 June 2001 will be introduced as AT&T Exhibit No. 20.
EXHIBIT NO. AT&T-20: Response to CRTC Exhibit No. 23 for undertaking to provide The Companies financial statements, including statement of cash flows for the six months ending 30 June 2001
14607 MR. SPENCER: Response to undertaking requested by Commission counsel, Ms Moore, transcript reference Volume No. 7, paragraph 11197, will be SaskTel Exhibit No. 1.
EXHIBIT NO. SASKTEL-1: Response to undertaking requested by Commission Counsel, Ms Moore, Transcript reference Volume No. 7, paragraph 11197
14608 MR. SPENCER: I would also like note that I distributed this morning the Commission's 12 October 2001 letter regarding a request for a disclosure and for further responses to interrogatories.
14609 Thank you, Mr. Chair.
14610 THE CHAIRPERSON: Thank you, Mr. Secretary.
14611 So with that, then, we will turn back to cross-examination of TELUS panel No. 1 by the City or Calgary, Mr. Inlow.
14612 MR. INLOW: Thank you, Mr. Chairman.
EXAMINATION / INTERROGATOIRE
14613 MR. INLOW: On the issue of accommodative entry, just to summarize what I thought I heard earlier, I take it TELUS' position is, with respect to retail prices, that those should be examined in terms of the criteria of affordability and accommodative entry, rather than with respect to their underlying prices -- costs. Correct?
14614 MR. GRIEVE: With respect to the retail rates, what we are doing is capping or, you know, limiting the amount of the residential rate increases to $3 a year and $35 in total. The role of accommodative entry is that it allows competitors to enter, and through that entry, the prices will find their market levels.
14615 MR. INLOW: I wanted to address for a moment the lemonade analogy, if I can put it that way, that was made. Let me see if I understand this.
14616 That is that the basic premise that TELUS is putting forward is that the regulator should only regulate essential service prices, provided that the remaining inputs of production are available competitively. Correct?
14617 DR. WEISMAN: When the Commission controls the prices of essential facilities and the other inputs are available competitively, then the market will be capable of finding market levels of prices, that's correct.
14618 MR. INLOW: Now, in terms of that latter part, in other words the remaining inputs of production are available competitively, does it make a difference that they are available competitively or do they simply have to be available to potential competitors all at the same price?
14619 In other words, to come back to your lemonade analogy, you are saying the regulator should regulate the price of lemons and, if water is available competitively, and that's the only other input, then that will accommodate competitive entry?
14620 If I said to you, let's assume in that analogy that water was a monopoly service that was regulated, would that not equally allow accommodative entry because everyone was paying the same price for water even though it wasn't available competitively?
14621 DR. WEISMAN: I believe that your analogy mixes up what would be available competitively and what is an essential facility. The idea was, as I understand it, when the Commission established its accommodative entry policies it looked at what facilities would have to be provided by the ILEC, limited and extended that a little bit beyond essential facilities, as I understand it, and presumed that policy would make sure that a large part of the sum costs of entry were essentially eliminated.
14622 So if you are then saying there are other monopoly services then it violates, as I understand it, the distinction between essential and other inputs.
14623 MR. INLOW: No, I wasn't trying to make that point. I was saying, when you say that the theory is that the remaining inputs of production that are other than the essential facility have to be available competitively, is it that they have to be competitively available or is it simply that they have to be available at the same price to everybody who needs to buy that?
14624 In other words, the competition really has nothing to do with it. It is a matter of saying the remaining inputs of production have to be available to everyone at the same price -- not the essential ones, the non-essential ones?
14625 DR. WEISMAN: I believe the key point would be that there are alternative sources of supply available for those other inputs.
14626 MR. INLOW: Are you saying that it would not -- but is the underlying premise not that everyone can access them at the same price, so that the combination of the essential price, the price for the essential good, and the price for the remaining inputs of production, are the same for everybody who might wish to compete? Am I understanding that correctly?
14627 DR. LEVIN: No, I don't think so.
14628 In your example, if I understand it, it takes lemons and water to make lemonade, and what you are saying is that the lemons are an essential facility, water is supplied by a monopoly, which I think makes it an essential facility if nobody can compete, there is nothing left, there is no competition, there is nothing that anyone else can bring to that process.
14629 So it is important to make the distinction between the essential facilities, which are made available to anyone who wants to buy them at a cost-based price, and then everything else that you need, which you either buy from someone or you put it together yourself and then you can provide a competitive service at the retail level. Our point is that if you correctly regulate the price of the essential facilities, you don't need to regulate the retail prices because competition will ensure that those prices go to a competitive market level.
14630 MR. INLOW: All right, then. What I am trying to challenge here is whether the fact that there is competition in the non-essential facility is important in the point that you are trying to make here.
14631 And let me come at it another way. I take it what you are trying to say is in the end result the regulator wants to make sure that lemonade is available at -- that each competitor in the lemonade industry has the ability to produce lemonade for the same price.
14632 MR. GRIEVE: I think that, Mr. Inlow, the objective is to ensure that the regulator provide -- make sure the essential facilities are provided so that competitors not necessarily will charge the same price, but they will charge a market price, an efficient price, and some may charge a little more and a little less, put a little more sugar in there or whatever, but t doesn't mean the same prices for everyone.
14633 MR. INLOW: No. And I believe what I said was that they would be capable of charging the same price, not that they would.
14634 MR. GRIEVE: They would have the opportunity to compete using their own best efficiencies in marketing and all of that.
14635 DR. LEVIN: Whether they are capable of doing it depends on whether they are as efficient as everybody else. So there is no guarantee that any company -- just because the essential facilities are made available, there is no guarantee that any company is going to be successful.
14636 MR. INLOW: But in terms of efficiency if all you are saying is you want the remaining inputs of production to be available competitively, are you talking about saying that the competing firms could go out and purchase that non-essential facility at some specified price and that specified price was the same for everybody, so they are on equal footing?
14637 DR. LEVIN: No, it doesn't mean that. Everybody doesn't pay the same price in a competitive market. People buy different quality services, different volumes, they have different conditions that they place on the sale. What it means is that it is possible to go into the market and buy what you need or to create it yourself. The only thing standing in your way from being in the market for the retail market would be access to this essential facility. Once the access to the essential facility is made available by the regulators any efficient firm has the same opportunity as any other efficient firm to succeed in the market.
14638 MR. INLOW: But underlying what you just said is the assumption that any person who desires to be a competitor could reproduce the cost of the non-essential components at the same price as somebody who is already in the industry. If they can't, then how does somebody get into the industry?
14639 DR. LEVIN: They can do that if they are efficient. There are no guarantees in a competitive market that everyone will be successful.
14640 So if it is an efficient company and they know how to run the business then, yes, they should be able to succeed. But there is no guarantees.
14641 MR. INLOW: Well, let me take one example then to see if this supposition works that you are putting forward.
14642 If there are -- if in order to get into a market a competitor has to be able to duplicate the incumbent's per unit price, and those factors of production were available on the market, how would a competitor be able to duplicate the incumbent's per unit cost structure when in fact the incumbent may have economies of scale that the competitor can't have?
14643 DR. WEISMAN: For the essential facility, Mr. Inlow, there is a levelling, if you will, that essentially takes away the scope and the scale attribute of the ILEC and makes that available to all competitors on equal terms with that which the ILEC could provide to itself. The other inputs are available competitively and, based on their ability to combine those inputs with their overall efficiencies, they will either succeed or fail in the marketplace.
14644 The Commission has determined what is essential and separated that out from the other inputs necessary for downstream or retail production.
14645 MR. INLOW: So is it your evidence that in defining the essential facilities, that has been done on a basis that essential facility, basically, is the -- has been disaggregated to the sense that if I only wanted to compete in one area in the market, my cost of those essential facilities would be the same, relative to the number of customers I wanted to serve? Or are you saying there is one price for essential facilities throughout the marketplace, if you want to serve two customers or two million, here is the price?
14646 DR. LEVIN: I think if you take an example of buying an unbundled loop, they are priced at so much per loop in each band. When Dr. Weisman says that everyone gets the advantage of whatever economies of scale and scope there are, that is what he means, that you pay a certain price per loop. And you could buy one, I suppose, if you wanted.
14647 MR. INLOW: Now, if a competitor is looking to purchase on the market and install the balance of the non-essential facilities in order to access their customers, how would they be able to compete in that sense of the new infrastructure that they had to put in place, which they have had to purchase at current prices with, for example, a well-depreciated system that is already in place for the incumbent -- not the essential portion but the non-essential portion. If you are assuming that the competitor and the incumbent are duplicating the non-essential facilities in the field, how does that new entrant end up being competitive if they have to buy a new system and the incumbent has, for example, a fully depreciated system?
14648 DR. LEVIN: In competitive markets, people enter at various times and they buy -- people are always buying new facilities. If you have old facilities, you have to upgrade them and improve them and keep them up to date. That's why market prices are so important. Competitive market prices are important because they cover the cost and provide for a normal return for a typical efficient business that is operating in that market.
14649 It doesn't really make any difference whether the company entered five years ago or 10 ten years ago or yesterday. Everyone has the same costs over the longer term for all those non-essential facilities. Indeed, and specifically in telecommunications, there probably is an advantage for people who are entering recently, as opposed to people who have been in the business for a long time, because the technology has changed so rapidly that everybody that could would want the latest technology and not to be stuck with the old stuff.
14650 MR. INLOW: Now, in terms of the pricing of essential facilities, I take it we are agreed that your proposal is that they be priced at Phase 2 cost plus the mark-up. Correct?
14651 MR. GRIEVE: Yes.
14652 DR. LEVIN: I was just going to clarify that they should be priced at the company's actual Phase 2 costs, plus a mark-up that is designed to recover fixed common costs and allow for the recovery of the embedded costs. I don't want to have to say that every time, it's a mouthful. But I would like to be clear about that.
14653 MR. INLOW: Sir, I understood that as well.
14654 And that obviously has a complete link to actual costs, correct? In other words, Phase 2 plus a mark-up is based on actual costs incurred by the company?
14655 MR. GRIEVE: That's right.
14656 MR. INLOW: Okay. Now, TELUS is proposing that retail prices not be linked to actual costs, in an effort to accommodate entry, and they have also looked at it in terms of affordability. What is it about essential facilities that says that a regulator should not take the same approach there and say: well, let's look at, actually, the wholesale prices and consider the factors of accommodative entry at that level, rather than at the retail level?
14657 MR. GRIEVE: The difference is that essential facilities are natural monopoly supplied. The rest of the prices can be determined in the market place, they cannot be determined by regulators.
14658 MR. INLOW: Well, in this particular case, you would be talking about, essentially, a transfer price, right, between the incumbent and the competitor, in terms of what they are going to pay for an essential facility access?
14659 MR. GRIEVE: I know the expression "transfer price" has a meaning in a couple of other regulated industries and the meaning now escapes me. So, maybe you could use another words.
14660 MR. INLOW: Sorry, I am not trying to trick you with that. I am simply saying that it's not a price established in a market.
14661 MR. GRIEVE: That's right. The only market for an essential facility, which is natural monopoly supplied, is a natural monopoly market.
14662 MR. INLOW: Now, in terms of -- finally, on this issue of competitive entry, has TELUS performed or undertaken any studies to determine empirically what consumer prices or price points would, in fact, enable competitive entry?
14663 MR. BROOKES: No, we can't say precisely what the competitive market levels will be. We do believe that the $35 rate proposal they have made will provide for competitive market levels throughout much of our territory, but the very nature of competition is that it does determine those prices for you.
14664 MR. INLOW: Let me just touch for a moment on exogenous factors, then. TELUS, in their proposal, as I understand it, is essentially adding another criterion to the three specified by the Commission Decision 97-9 as to what qualified as an exogenous factor, and that is the notion that the costs would be otherwise recoverable in the absence of price regulation. Correct?
14665 DR. WEISMAN: That is correct.
14666 MR. INLOW: And if I can understand the underlying premise behind that, would that be so that you would be on a more explicit footing with competitors who might not be regulated in terms of prices?
14667 MR. GRIEVE: No. Mr. Inlow, we didn't look at it that way. Maybe I can just explain the fourth criterion to you, the reason for it.
14668 What our concern was was that because we were capping such a small basket of services, we were concerned that perhaps, if an exogenous factor arose, that the method of allocation of that between the price cap services, the bands E, F and G residential, and the other services, that because some of it would be allocated to the other services that were not under an I minus X and would have individual pricing rules, such as $3 or 10 per cent, that we might find ourselves in a situation where we wouldn't be able to actually that exogenous factor. So, that was the only reason for that at the time.
14669 Now, I suppose that, you know, you can question whether or not we need that fourth criterion in those words or not, but that was our concern, is that we would have to deal with these other price restrictions when applying an exogenous factor.
14670 MR. INLOW: And am I correct in assuming that your position is that, in adding that criterion, that there's a cemetery about it in the sense that, if there was an exogenous event that reduced your costs, that that would be passed through.
14671 MR. GRIEVE: Yes.
14672 MR. INLOW: And how would you propose to implement that? Would you report those to the Commission or what --
14673 MR. GRIEVE: Just a minute. Well, we propose no changes to the way the Commission does it now. I suppose that there is a question about what the rule should be and I would think that it's our responsibility to report an exogenous change like that to the Commission.
14674 MR. INLOW: Okay. Would it be fair to say that, notwithstanding the theory that we are in price cap -- delinking price and cost -- that this addition, as an exogenous factor, is in fact a recognition that, in some circumstances, there continues to be links between prices and costs?
14675 MR. GRIEVE: Well, Mr. Inlow, there are links between prices and costs in the market. If there is an exogenous factor that occurs in a market place, it's completely unregulated, such as an industry-specific tax. You can bet that it's going to be reflected in prices.
14676 MR. INLOW: Now, in your evidence, in paragraph 1550, you made a very specific reference that you wanted any charges for access to public rights-of-ways to qualify as an exogenous event. Is that correct.
14677 MR. GRIEVE: That's correct.
14678 MR. INLOW: Good. Was that precipitated by the current proceeding previously before the Commission, and now in the Federal Court of Appeal, relating to the led core in Vancouver dispute?
14679 MR. GRIEVE: Yes, the reason for pointing it out specifically was that we know that, despite the Commission's decision, this is still up in the air. We wanted some consideration of this in this proceedings.
14680 MR. INLOW: Now, I notice that one of the factors that defines an exogenous factor is that it's a legislative judicial or administrative action that's addressed specifically to the telecommunications industry. Is that correct?
14681 MR. GRIEVE: That's one of the criteria, yes.
14682 MR. INLOW: Is it your position before the Commission that occupancy fees relating to the installation of infrastructure and public rights-of-way is only being sought by municipalities from telecommunications providers and not other companies that might be seeking to install facilities and municipal rights-of-way?
14683 MR. GRIEVE: No, that's not our position.
14684 MR. INLOW: All right. Then how would you qualify it in that circumstance as an exogenous factor?
14685 MR. GRIEVE: Well, municipal access fees are a little bit different than other exogenous factors. While they are not targeted specifically at the telecommunications industry alone, necessarily, they are targeted mostly at network industries like that. So, it's not the kind of thing that would be picked up in the normal inflation rate that we could then rely on an inflation factor for. So, that was issue one.
14686 The second thing is, of course, that with municipal access fees, if the Federal Court -- and perhaps the Supreme Court -- decides that the municipalities should be allowed to charge whatever they like, then we are in a situation where there is no regulatory mechanism to control that and we were looking for a way to make sure that we could be protected from those kinds of fees in that case.
14687 MR. INLOW: Mr. Chairman, I will let that stand as my questions for this panel. Thank you.
14688 THE CHAIRPERSON: Thank you, Mr. Inlow.
14689 So, I believe the next party is BCOAPO et al, Ms MacDonald.
EXAMINATION / INTERROGATOIRE
14690 MS MacDONALD: Good afternoon, Mr. Chairman, commissioners and panel members.
14691 I handed around the local pay telephone competition decision earlier in the room and, when I had done my cross of Bell on this issue, I had handed it out as well but there was a page missing. So, it never did get entered as an exhibit because I was going to provide the page. The page is here now, the beginning portion is there. So, if you have two copies of it, the second one is the complete one.
14692 At page 4 of 26 of that document, the second paragraph states that:
"ILECs are directed to file information within 45 days of this decision." (As read)
Oh, pardon me, the first paragraph:
"ILECs are directed to file reports within 45 days of this decision indicating where pay telephones are located as of July 1, and then directed to file annual reports indicating locations where pay telephones were removed and the reasons why." (As read)
14693 Can I ask, are those reports being filed, these annual reports?
14694 MR. BROOKES: Yes, they are.
14695 MS MacDONALD: Are they available? Can I have a copy?
14696 MR. BROOKES: I believe they are filed in confidence, but I will check to verify that.
14697 MS MacDONALD: If they are not filed in confidence, I would like to have a copy. Thank you.
14698 MR. BROOKES: Yes, indeed.
14699 MS MacDONALD: Mr. Brookes, I think this would be towards you.
14700 I am not sure if you have any of the company -- the company -- (Bell)The Companies filings with you up there.
14701 MR. BROOKES: We have a copy of their interrogatories, if that's what you are referring to?
14702 MS MacDONALD: Yes, please.
14703 If you could have their interrogatory from The Companies(ARC et al)305.
14704 MR. BROOKES: Yes, I have it.
14705 MS MacDONALD: Mr. Brookes, could I have an undertaking from TELUS, in order to provide us with the information outlined in A to E?
14706 MR. BROOKES: Yes, we will undertake, to the best of our ability, to answer this. And I am not sure if there's any confidentiality issue here or not, but we will make that case if there is.
14707 MS MacDONALD: And you can certainly use Bell's answer in order to provide some guidance to you on that.
14708 With respect to the information, in order to provide a totality of information for us, I had asked for, and have now received, totals corresponding to this information at A to E. It was The Companies Exhibit 28. They provided that information to me in a table.
14709 I'm not sure if you have The Companies Exhibit 28 available to you.
14710 MR. BROOKES: I'm sorry, we don't seem to have that here.
14711 MS MacDONALD: That's all right.
14712 In that information Bell has laid out an easy-to-read table with respect to the total numbers. After you have had an opportunity to look at it, I would like to have your undertaking that you could also provide us with the totals in an easy-to-read format, as Bell has done.
14713 MR. BROOKES: Yes. We will certainly do our best.
14714 MS MacDONALD: If you still have The Companies interrogatories from ARC in front of you, if you could turn to 308.
14715 MR. BROOKES: Yes, we have it.
14716 MS MacDONALD: Could I have an undertaking that the company -- pardon me, TELUS could provide the information in A and B, although for B, I would like to change that to the estimated share of total payphone revenues lost to competitors, as opposed to going to competitors.
14717 MR. BROOKES: Well, I'm afraid I can give you all the information we have on this issue right now. And we do not track payphone market share. We have a sense of where we are losing payphones, in terms of talking to our sales force, and, judgmentally, I have been advised that the 5 per cent share loss number that Bell has reported is consistent with our expectations of what we have probably lost, but we do not have a tracking mechanism for payphone market share.
14718 MS MacDONALD: Thank you. Then I will withdraw my request for an undertaking on that matter.
14719 I know you don't have The Companies' exhibits in front of you, but Bell Exhibit 31 provided the percentage of payphones withdrawn from service each year of the price cap period, as shown below. Again, it was laid out in an easy-to-read format.
14720 I would like an undertaking from the company to provide the same information.
14721 MR. BROOKES: Yes. We will undertake to do that.
14722 Now, may I just clarify one issue? As a regular course of business, we do withdraw payphones, but as a regular course of business we add payphones. Really, it's the net of the two that tells you the most important information: is what has happened to the total number.
14723 So, by way of an example, this year to date, we have withdrawn payphones and we have added payphones. The net is almost a negligible change, a very small drop in the number. But are you looking to just having -- understand the payphones that are being pulled out and not the ones being put back in? Or is it, indeed, the net that you are interested in?
14724 MS MacDONALD: I will ask for two undertakings. The first one will be as I have already stated: if you could provide the same information from Bell.
14725 MR. BROOKES: Right.
14726 MS MacDONALD: The second undertaking, if you could provide information in an easy-to-read format with respect to the net. And you may want to split that out. I'm uncertain about what kind of information you have, but if you would like to split it out, that's fine with me.
14727 MR. BROOKES: Yes. We will do our best.
14728 MS MacDONALD: In The Companies Exhibit 39, the market share loss for payphones, as of August 2000 and May 2001, was provided by The Companies. Can I have an undertaking from the company to provide that same information?
14729 MR. BROOKES: Are you asking me for the estimate of payphone loss?
14730 MS MacDONALD: Yes, it would be the estimate. In my understanding, it would be the estimate because you don't have actual figures.
14731 MR. BROOKES: Yes. So really the best I can do is to tell you that, judgmentally, we felt the 5 per cent was a reasonable number and we don't have a tracking system beyond that.
14732 MS MacDONALD: Thank you.
14733 Mr. Brookes, is it the position of TELUS that the payphone market is in decline in the Alberta and B.C. areas?
14734 MR. BROOKES: Yes. It is in decline in the sense that the number of calls made over the payphones is reducing. We do see that. And it's for the reasons that have been discussed, you know, the impact of the mobility market.
14735 MS MacDONALD: Mr. Brookes, earlier you had a discussion with Mr. Inlow. He had asked you about the benefits to the customer from the day before an increase is made and the day after. You had said that although local rates have increased significantly over the last few years, when looking at the long distance savings and the local rates together, there have been substantial savings to the customers. I believe I got your information right. Would you agree with that?
14736 MR. BROOKES: Yes. That's right.
14737 MS MacDONALD: Well, along with that, there was an Exhibit 29 from The Companies that was filed. In that -- and I know you don't have it in front of you -- there was a table -- there was actually three tables filed by the company.
14738 The last table provided, from the period from January to June of 2001, some information. I would like an undertaking from the company for that information and exactly the same table as set out by Bell.
14739 If you don't have it in front of you, I can read these categories out to assist you whether or not you would be able to give that undertaking.
14740 MR. BROOKES: We will find it and certainly do our best to answer this. And I can tell you that we have gone and looked at the average minutes of long distance calling and we find that the minutes of calling, in B.C.'s case, is somewhat higher than what -- the average assumed by the Commission. But we have also done a calculation of the median. Now, perhaps not for quite the same period you are asking, but we will certainly do our best to respond to the format that is in that exhibit.
14741 MS MacDONALD: And for clarity, you did say that you did have B.C. If I could have the numbers for B.C. and Alberta. Is it easy to separate them out? If not, combined is fine.
14742 MR. BROOKES: We will separate them out, if we can.
14743 MS MacDONALD: Thank you.
14744 Mr. Chairman, these are my questions for this panel.
14745 THE CHAIRPERSON: Thank you, Ms MacDonald.
14746 The next party -- I think there has been some change in order here -- I believe, is CallNet. Mr. Koch.
14747 MR. KOCH: Thank you, Mr. Chairman.
EXAMINATION / INTERROGATOIRE
14748 MR. KOCH: Good afternoon, Mr. Grieve, Mr. Brookes, Doctors.
14749 I have to say I am tempted to ask at the outset who is teaching economics to university students in America this week?
14750 Dr. Levin, I would first like to clarify some matter of what your role is on this panel in the preparation of the evidence. I take it you are here as a witness as to economic matters, to provide opinion evidence on economic matters. Is that correct?
14751 DR. LEVIN: Yes.
14752 MR. KOCH: Okay. And that's consistent with your qualifications as a distinguished economist. Correct?
14753 DR. LEVIN: I guess so.
14754 MR. KOCH: But I didn't see -- unlike Dr. Weisman, who I believe is here under the same capacity, I didn't see any documents with you listed as an author. Can you just clarify that for me?
14755 DR. LEVIN: Well, as you know, I have been working with TELUS on their various regulatory plans for more than 10 years, and so I participated, for instance, in the first price cap plan that TELUS put forward and I have been involved in this one from its inception. So I have been involved in a lot of meetings and deliberations and drafting and discussions of the plan that has been put forward.
14756 MR. KOCH: So you have provided, I take it then, economic expertise into the TELUS process. Is that right?
14757 DR. LEVIN: I try.
14758 MR. KOCH: Okay.
14759 And, Dr. Weisman, your role is a little clearer. You have actually produced an expert report, which I would actually like to ask you to turn to.
14760 Now, this is the report you submitted, dated May 31, 2001. It forms Appendix A to TELUS evidence.
14761 As I understand this report, it makes six key observations or identifies six key principles. Is that correct?
14762 DR. WEISMAN: Are you referring to a particular page?
14763 MR. KOCH: Sure. I can take you to the summary of key principles, which, again, is at page 25.
14764 DR. WEISMAN: Yes, that is correct.
14765 MR. KOCH: So I take it to begin with, again, this deals with your assessment of the economic efficiency of TELUS' price cap proposal. Is that correct?
14766 DR. WEISMAN: The main purpose of Appendix A is to draw the linkage between price cap regulation and accommodative competitive entry policies and the implications from TELUS' price regulation plans.
14767 MR. KOCH: But you do that from the perspective of your expertise, again, as a distinguished economist, which is in economic efficiency. Correct?
14768 DR. WEISMAN: Yes.
14769 MR. KOCH: You are not providing a different perspective. That's what you are being called to provide expert evidence on.
14770 DR. WEISMAN: The guiding principle is the emulation of a competitive market outcome.
14771 MR. KOCH: Right. If I could take you through the summary of key principles, which start at page 25, paragraph 60, of this Appendix A, the first key principle is that PCR, being price cap regulation, is a superior regulatory regime. Correct?
14772 MR. KOCH: I'm sorry, do you have the passage?
14773 DR. WEISMAN: That is correct.
14774 MR. KOCH: Okay. And the second being that it provides, in your expert opinion, an opportunity for all parties to be made better off vis-à-vis traditional rate of return regulation?
14775 DR. WEISMAN: If implemented correctly, yes.
14776 MR. KOCH: And, third, that the PCR should be limited to essential services not yet subject to the discipline of competitive market forces? There you have the additional qualification that it should be limited to essential services for which the prices of essential inputs to downstream production are not subject to any regulatory prescription?
14777 DR. WEISMAN: That is correct.
14778 MR. KOCH: And then the fourth principle, and fifth, actually, both deal with earnings sharings. Correct?
14779 DR. WEISMAN: Correct.
14780 MR. KOCH: Okay. And then the sixth principle is this business about the link between accommodative competitive entry policies in the input market, which is the wholesale market for facilities. Correct?
14781 DR. WEISMAN: Correct.
14782 MR. KOCH: And how that renders, which is, I guess, the point of this exercise for TELUS, the regulation of the retail prices unnecessary and potentially harmful?
14783 DR. WEISMAN: That is correct.
14784 MR. KOCH: Okay. So that was the evidence you filed in May.
14785 Now, Dr. Weisman, do you know Dr. Taylor, The Companies economic witness?
14786 DR. WEISMAN: Yes, I do.
14787 MR. KOCH: And I take it you wouldn't disagree with me that he is a distinguished economist like yourself?
14788 DR. WEISMAN: I recall that Dr. Taylor had a catchy answer for that and I don't have one, but Dr. Taylor is a distinguished economist.
14789 MR. KOCH: It was one of my favourite answers that he gave me. I think we were talking about Dr. Harris in Berkeley and I said, "He's a distinguished economist like yourself." and he said, "No, he's a distinguished economist, unlike myself."
14790 So, gain, you and Dr. Taylor may be different people, but you are both distinguished economists and you agree with that.
14791 And, Dr. Levin, I take it you agree with Dr. Weisman's assessment of Dr. Taylor?
14792 DR. LEVIN: Yes.
14793 MR. KOCH: Now, I also take it that you reviewed the rebuttal evidence that The Companies filed that was prepared by Dr. Taylor?
14794 DR. WEISMAN: I believe I read through it, yes.
14795 MR. KOCH: And you read it as well, Dr. Levin?
14796 DR. LEVIN: Yes.
14797 MR. KOCH: And you will agree with me that that rebuttal evidence consisted of opinion evidence regarding the economic efficiency criticisms of the proposals filed by AT&T Canada and CallNet, correct?
14798 DR. WEISMAN: That is my recollection of that testimony.
14799 MR. KOCH: That's a long sentence. I apologize for that.
14800 Now, I wonder if I could ask you to turn to interrogatory response TELUS 4200.
14801 MR. KOCH: Do you have that, sir?
14802 DR. WEISMAN: Yes.
14803 MR. KOCH: Okay. Now, the answer I guess consists of several parts. This was an interrogatory response where TELUS was asked to comment on proposals put forward by RCI, CallNet and AT&T Canada in this proceeding. And this answer is in several parts.
14804 The first part is a background which, I guess, provides the context of the answer against the existing regime.
14805 And then, I take it, there are parts that deal from page 3 of 13 through to where you comment on the specific questions asked by the Commission, which starts at page 9. I take it you will agree with me that this discussion, similar to Dr. Taylor's rebuttal evidence, deals with a critique of some of the proposals being put forward by competitors from the point of view of economic efficiency, correct?
14806 DR. LEVIN: Yes.
14807 MR. KOCH: Now, Mr. Grieve, could I ask you to turn to the -- and forgive me, Mr. Chairman, I know it's a CRTC exhibit and I don't know what number it was given.
14808 MR. GRIEVE: Number 5.
14809 MR. KOCH: Number 5, it's the report to the Governor in Council on the status of competition in Canada.
14810 MR. GRIEVE: The page number?
14811 MR. KOCH: Page 22.
14812 MR. GRIEVE: Thank you.
14813 MR. KOCH: I take it you will agree with me, Mr. Grieve, that your proposal is founded on the proposition that the markets in Canada for local and long distance telecommunications are competitive, correct?
14814 MR. GRIEVE: That they are open to competition? Certainly the long distance market is competitive and the local market is open to competition with accommodative entry policies and the level of the retail pricing is the only thing that's preventing it from taking off.
14815 MR. KOCH: At page 22, there is a discussion of the incumbent market share in long distance. I take it you will agree with me what the Commission has observed here is that the development of long distance competition has not been uniform and, in effect, although Bell Canada's market share of the minutes has declined to 61 per cent, TELUS' market share has not declined as far and remains at 71 per cent, correct?
14816 MR. GRIEVE: That's right.
14817 MR. KOCH: Okay. And then on the local side -- I don't believe this report takes the local market and distinguishes between TELUS and Bell as a whole but, in table 4.6 at page 25, which shows the CLEC share of business lines and ILEC wire centres with co-location, certainly, one can see that the competitive penetration in a city like Toronto is considerably higher than CLEC penetration in the largest cities within TELUS' serving area. Do you see that, Mr. Grieve?
14818 MR. GRIEVE: Yes.
14819 MR. KOCH: And I take it from that we can also assume, can we not, that on the 4 per cent overall number reflecting competitive inroads across Canada in the local market, that the number would be lower in TELUS' territory and higher in Bell's territory, leading to that average of 4 per cent.
14820 MR. BROOKES: I'm going to take over here, Mr. Koch, on the issue of market share.
14821 I'm not sure I would draw that assumption. And it does depend somewhat on what you are including in the measure. And we have an interrogatory whose number escapes me right now, but where we include facilities-based resale and single source agreement, levels of competition where the overall market share is higher than the 4 per cent that you referred to.
14822 MR. KOCH: Thank you, Mr. Chairman. Those are my questions.
14823 THE CHAIRPERSON: Thank you, Mr. Koch.
14824 The next party, then, would be AT&T, Mr. Ryan. You are looking rather pensive there.
14825 MR. RYAN: I will have no questions for this panel. Thank you, Mr. Chairman.
14826 THE CHAIRPERSON: Thank you, Mr. Ryan.
14827 I believe that then takes us to RCI, Mr. Engelhart.
14828 You will just be getting into your stride when we will be wanting to take a break in the next ten or 15 minutes. I will leave it to --
EXAMINATION / INTERROGATOIRE
14829 MR. ENGELHART: Thank you, Mr. Chairman. Good afternoon, panel.
14830 Dr. Jackson, I wanted to ask you about something this morning when you were talking about the substitution of wireless service for wire-line service.
14831 I believe I heard you say that you believe that 2 to 3 per cent of Canadian homes had cancelled their wire-line service and substituted wireless service. Did I hear you correctly?
14832 DR. JACKSON: No. I didn't say "cancelled". I said used wireless instead of wire line. My feeling is that those are predominantly younger people, say people who just got out of college or something like that, who chose -- the single person households, they chose a wireless phone and they just didn't get around to getting a wire-line phone.
14833 So I would think that would be the bulk of such people in Canada.
14834 MR. ENGELHART: So 2 to 3 per cent of Canadian households have a wireless phone instead of a wire-line phone. That's your opinion.
14835 MR. BROOKES: Mr. Engelhart, I could perhaps provide some insight to this, in terms of the Canadian situation.
14836 MR. ENGELHART: Well, I will come to you in a moment, Mr. Brookes, but I do just want to follow up with Dr. Jackson.
14837 Dr. Jackson, your evidence this morning was that in Canadian homes, 2 to 3 per cent of those homes had wireless service and not wire-line service. Is that correct?
14838 DR. JACKSON: Well, I believe I used the term "households", not "homes". And I'm not referring to -- I mean the household is the Census type term and you know, they could be people living in apartment buildings rather than detached homes or trailers or something like that.
14839 Mr. ENGELHART: Right.
14840 So your evidence is that 2 to 3 per cent of Canadian households have wireless service and do not have wire-line service. Is that correct?
14841 DR. JACKSON: That is my belief, yes.
14842 MR. ENGELHART: Okay. Mr. Brookes, do you share Dr. Jackson's belief?
14843 MR. BROOKES: Yes, I do. And you know, this is one area where market share admittedly is difficult to track because we do believe that we have lost market share or lines as a result of substitution to wireless.
14844 And really, it happens in two ways. One is where you have households that only have a wireless phone and, of course, the other is where they might substitute for an additional line.
14845 But we have come to this conclusion that probably a 3 per cent impact is reasonable because if we look at our historical growth rate in residential lines, it's a little over 3 per cent on average over a long period of time. If we look over the last three or four years, it's then less than 1.5 per cent.
14846 Now, there is no obvious reason why the economy is causing this to happen. We believe it is substitution to wireless and perhaps to some limited degree as well, to high speed internet.
14847 MR. ENGELHART: So Mr. Brookes, you share Dr. Jackson's view that 2 to 3 per cent of Canadian households have wireless service and do not have wire-line service. Is that right?
14848 MR. BROOKES: The part that is a little difficult for me to break down, I would have to say, Mr. Engelhart, is there is no question that the impact is in that magnitude. Indeed, it could be more than 3 per cent when we look at how our growth rate has fallen off significantly in the last three or four years.
14849 How much of it is due to additional lines versus having just only one phone is a little hard to disentangle, but I wouldn't find it unreasonable to think that it would be in that 3 per cent range.
14850 MR. ENGELHART: And in Canada, how many homes would have no phone, not wire-line, not wireless? Would it be about 1 per cent?
14851 MR. BROOKES: Well, we have that information, of course, in the tracking results and it varies a little bit by location, but that's pretty close.
14852 MR. ENGELHART: So if we add up the folks that have no phone and the folks that are using their cell phone, we would expect to see about 96 to 97 per cent of the homes that have a wire-line phone, is that right?
14853 MR. BROOKES: I suppose that would be right if there was indeed 3 per cent, that you would be down around 96 per cent. I think that's fair. Again, the issue is how much of this falls out between impact on additional lines and the first line.
14854 MR. ENGELHART: That's what you would expect, Dr. Jackson. You would expect 96 to 97 per cent of Canadian households would have a wire-line phone?
14855 DR. JACKSON: If I understood how you presented that correctly, yes, I think it would be.
14856 MR. ENGELHART: Well, gentlemen, could you turn please to The Companies' evidence in this proceeding, page 57, paragraph 619.
14857 DR. LEVIN: Mr. Engelhart, while they are looking for that, I would just like to point out that as Mr. Brookes has said, there is this issue of people -- of households having more than one phone --
14858 MR. ENGELHART: I know and I'm less interested in the second line issue right now because I was sort of struck by Dr. Jackson's view that we actually had substitution of the primary line phones.
14859 DR. LEVIN: Yes. But my point --
14860 MR. ENGELHART: So that's really the issue I want to key in on.
14861 DR. LEVIN: I understand, but my point is that if the second line is wired which it would likely be if it was used for internet access, then it is not mathematically correct to add the 1 per cent of households that don't have a phone to the 3 per cent that are using wireless phones and say that 96 per cent of homes, households have -- only 96 per cent have a wired phone. It may be more than that because there may be many of those households where primary phone is wireless and the second phone is wired.
14862 MR. ENGELHART: No, but Dr. Levin, I think I was pretty clear that we were talking about 1 per cent of the households that had no phone and 2 to 3 per cent of the households that had a wireless phone and no wire-line phone.
14863 I agree with you there is somewhere in the other 96, 97 per cent, there are households that may be substituting a second wire line for a wireless for this. But I think I was pretty clear that the evidence we heard this morning was 2 to 3 per cent with no wire-line phone and then it does have to add up. It does have to be 96 to 97 per cent with a wire-line phone.
14864 DR. LEVIN: I'm sorry, but I did not understand that, because I thought you asked about using a wireless phone for the primary phone, and that is different.
14865 MR. ENGELHART: We can look at the transcript and see if I was as clear as I seem to be in my own mind.
14866 If we can look at paragraph 619, it says -- in The Companies' evidence, as well:
"Penetration rates, which are at 98.7 per cent in November 2000 for Canada as a whole, are not expected to be adversely affected by the proposed rate increases." (As read)
14867 Let's have a look also, if we could, at TELUS CAC (Alberta) 16.
14868 If we look at TELUS CAC (Alberta) 16, and I am looking about in the third sentence:
"Penetration rates for basic residential service in Canada and in Alberta are consistently above 98 per cent"
Which is very high by international standards.
14869 If we are at about 98.7 per cent that have a wire line phone, and if 1 per cent have no phone, you would have to agree with me that it would be a vanishingly small group of households that have opted for wireless phones instead of wire line phone, wouldn't you, Mr. Brookes?
14870 MR. BROOKES: Mr. Engelhart, my understanding is that the penetration tracking study that is being quoted here, doesn't, in fact, include wireless and wire-line vocal access. Therefore, the penetration results that are being reported include both forms of access.
14871 MR. ENGELHART: So your evidence today is that these Statistics Canada reports measure not wire-line telephone service but wire-line telephone service plus wireless. Is that right?
14872 MR. BROOKES: That is my understanding. I would be happy to validate that for you.
14873 MR. ENGELHART: Yes, I would like that undertaking, please and, Mr. Chairman, I think this is a good time for break.
14874 THE CHAIRPERSON: Just when we were starting to be entertained!
--- Upon recessing at 1530 / Suspension à 1530
--- Upon resuming at 1550 / Reprise à 1550
14875 THE CHAIRPERSON: We will return to our proceeding, and turn the microphone back to Mr. Engelhart.
14876 MR. ENGELHART: Thank you, Mr. Chairman.
14877 My next question I suspect is for you, Mr. Grieve. I wonder if you could turn to TELUS CRTC 1402.
14878 MR. GRIEVE: I have it.
14879 MR. ENGELHART: Let me read to you from part of question and part of your response:
"Refer to TELUS evidence, section 22.214.171.124, in which the Company proposed to raise rates for basic residence, local exchange service in non-high cost bands by up to $3 per month. Refer also to paragraph 13 of Price Cap Review and related issues, Public Notice CRTC 2001-37, 13 March 2001, which indicated that a revenue requirement assessment of the Company's utility segment results would be warranted if a company proposed rate increases at the outset of the next regime, other than those which would reduce the subsidy requirement in HCSAs.
Explain why TELUS proposed rate increases would not be considered essentially equivalent to an annual re-initialization of rates during the next price cap period, which should accordingly be dealt with in the context of a revenue requirement assessment." (As read)
14880 You response states, in part:
"TELUS carefully considered paragraph 13 of PN 2001-37 when it prepared its proposal. Paragraph 13 says that there would not be a need for a revenue requirement unless the telephone company proposed rate increases to be effective at the outset of the next price regulation regime. Nowhere in paragraph 13 does it state expressly or impliedly that there is to be a price freeze for rates over the price cap period unless a revenue requirement assessment is undertaken. Indeed, in paragraph 14 of PN 2001-37 the Commission states that 'rate changes over the course of the price cap period would be acceptable so long as the rate changes meet the pricing rules."
14881 Mr. Grieve, why do you think that the Commission wanted revenue requirement evidence if the price increases were to be effective at the outset of the next regime?
14882 MR. GRIEVE: I don't know, Mr. Engelhart.
14883 MR. ENGELHART: Mr. Grieve, do you believe that revenue requirement proceedings generally determine the appropriate profitability of a regulated company?
14884 MR. GRIEVE: When it is a regulated public utility, that is usually what they do -- monopoly public utility.
14885 MR. ENGELHART: When you have a revenue requirement proceeding, you tally up the expected revenues and you tally up the expected costs, and you determine an appropriate rate of return and you determine whether, for the forecast period, the projected returns will be higher or lower than the deemed allowed rate of return.
14886 Is that a fair summary of a revenue requirement proceeding?
14887 MR. GRIEVE: Yes. Often they are done with an historic test year, using the current year in which the case is being considered instead of a future test year.
14888 MR. ENGELHART: Right. So, do you think it is a reasonable inference, then, that in the public notice that initiated this proceeding the Commission wanted a revenue requirement proceeding to ensure that a company seeking rate increases at the outset of the next regime is not making excess profits?
14889 MR. GRIEVE: The way I read that was that the Commission was giving companies an opportunity, if they thought they needed it, to come in for a rate case, and I suppose they certainly weren't asking, on the other side -- they weren't asking for rate of return information unless the companies thought they need it to come in.
14890 MR. ENGELHART: Sorry. Unless the companies...what?
14891 MR. GRIEVE: I'm sorry. They were not asking for revenue requirement information unless the companies thought they needed to come in for a revenue requirement.
14892 MR. ENGELHART: Let me read to you from paragraph 13 of the Public Notice initiating this proceeding:
"The Commission does not intend to conduct a revenue requirement assessment of utility segment results unless a telephone company proposes rate increases to be effective at the outset of the next price regulation regime, other than those that would reduce the subsidy requirement and high cost serving areas."
14893 Doesn't that say to you: If you are going to propose rate increases at the outset of the next price regulation regime, we are going to want to review your profitability to ensure that those rate increases are appropriate.
14894 MR. GRIEVE: I suppose so, if we were applying for rates at the outset of the next price cap regime.
14895 MR. ENGELHART: So your position at TELUS is that if you don't propose rate increases on the first week of the regime but you only propose them for the second week, or the second month, then the Commission is no longer concerned about your profitability. Is that right?
14896 MR. GRIEVE: I believe the Commission gave us an opportunity, all of the ILECs to come in if we thought that the results of a couple of regulatory decisions would warrant it.
14897 From our perspective, our position is that once you start a new price regulation plan, that whatever the rules are that are in place happen to be in the new price regulation plan, that is what you proceed with.
14898 MR. ENGELHART: I would like to next discuss exogenous factors with you, in a similar fashion to my discussion with Mr. Farmer regarding Bell Canada's exogenous factors. I wonder if you could refer to TELUS CallNet 204, Attachment 1.
14899 MR. GRIEVE: Do I still need this binder?
14900 MR. ENGELHART: No.
14901 TELUS CallNet 204, Attachment 1, page 2 of 3.
14902 MR. GRIEVE: Okay.
14903 MR. ENGELHART: Would you agree that TELUS TCI received three exogenous increases in the first price cap period, and these were for local competition and LNP costs, the reduction in the direct connect rate, and for the contribution revenue percentage charge, and that TELUS B.C. received these three same exogenous increases and also received an increase for the Greater Vancouver Region common local calling area.
14904 MR. GRIEVE: Yes. Just give me a second, Mr. Engelhart. We have two references to LNP. I just want to makes sure --
14905 That's right.
14906 MR. ENGELHART: So just looking at this very helpful chart, we see that for local competition and start-up LNP costs, that in 1999 B.C. got 1.88 per cent, which was worth 57.8 million; Alberta got 2.79 per cent, which is worth 65.3 million; and that there were some adjustments in the following year, which added a very tiny amount to B.C., took 1.02 per cent off Alberta and lowered Alberta down to 49 million. Is that right?
14907 MR. GRIEVE: I don't have the arithmetic that gets me the 49.
14908 MR. ENGELHART: I am just reading from it, actually. It's all right there.
14909 MR. GRIEVE: Okay. I'm sorry. Yes.
14910 MR. ENGELHART: It is in the column.
14911 MR. GRIEVE: Sorry.
14912 MR. ENGELHART: Could you have a look, please, at TELUS(CRTC)1106.
14913 MR. GRIEVE: I did need that binder!
14914 MR. ENGELHART: Sorry. Sorry. It may come in handy later too. Keep it close at hand.
--- Pause / Pause
14915 MR. GRIEVE: I have it.
14916 MR. ENGELHART: It says, in 1106:
"In each of Alberta and British Columbia, there will be no unrecovered start-up in LNP cost remaining by the end of the current price cap period."
14917 So my question to you, Mr. Grieve, is, does TELUS plan to reduce your prices at the beginning of the next price cap plan to reflect the fact that you have already recovered the local competition start-up in LNP costs?
14918 MR. GRIEVE: We did not anticipate that that would be a requirement, going from one price cap plan to the next, and under our proposal, of course, what we are doing is trying to get prices to market rates. It would seem a little bit weird for us to expect that the Commission, when it had prices that residential and business prices that are not at market levels now, to reduce them and then -- according to the exogenous factors, and then turn around and allow them to rise again.
14919 MR. ENGELHART: So I think I heard you say you didn't think that those exogenous adjustments should be carried from one plan to the next. Is that right?
14920 MR. GRIEVE: No. It was not our anticipation -- we didn't anticipate that we would lower any rates at the start of the next price cap period, because of the exogenous adjustments. The reason for that was that we expected that the Commission would continue with its policy of trying to get rates to levels that reflect the market instead of lowering them in a situation where competitors have been complaining about them not being high enough.
14921 MR. ENGELHART: Well, perhaps you could turn for me to paragraph 49 of your evidence.
14922 MR. GRIEVE: Do I need this binder with CallNet 204 in it?
14923 MR. ENGELHART: No.
14924 MR. GRIEVE: Are you sure? I will keep going until you can't see me here.
14925 MR. ENGELHART: If I'm wrong, I will blame Mr. Briggs.
14926 MR. GRIEVE: Which page and paragraph was it?
14927 MR. ENGELHART: Sorry, paragraph 49 of your evidence.
14928 MR. GRIEVE: Okay.
14929 MR. ENGELHART: You state there:
"Exogenous adjustments should be carried through from one price regulation plan to the next without a revenue requirement determination. The fact that a particular event entitling the company to an exogenous adjustment occurs late in a plan ought not to result in the company only recovering part of the costs associated with the event. If the costs associated with an event extend beyond a given plan, the ability to recover those costs should also extend into the next price regulation plan." (As read)
14930 Well, Mr. Grieve, if you go from one plan to the next whenever you are owed money, shouldn't you also go from one plan to the next when you owe money back?
14931 MR. GRIEVE: Well, Mr. Engelhart, I would agree with you that that would be the normal expectation. What we are asking the Commission to do is look at its policies and decide whether it is going to continue to allow prices to find their market levels or whether it is going to make an adjustment down first and then go up.
14932 Our position, as you know, is that we need to let our prices find their market levels. It would seem, as I said before, a little odd to be lowering them just to raise them again.
14933 MR. ENGELHART: So if this LNP and local start-up adjustment is about 2 per cent, then what you are really asking for in the first year of your plan is 2 per cent plus 10 per cent for biz and 2 per cent plus $3 for res. Is that right?
14934 MR. GRIEVE: Well, we are not asking for any -- well, I suppose -- let's see -- 2 per cent --
14935 MR. GRIEVE: Mr. Engelhart, we are not asking for any changes to those rates at the outset of the price cap plan. We are just asking for -- we are suggesting that the exogenous adjustment should be carried over, this exogenous adjustment should be left in place.
14936 One of the advantages of this, of course, is that to the extent that the competitors also had some of these costs, their costs will be reduced.
14937 MR. ENGELHART: Let's turn, if we can, please, to TELUS(CRTC)-1105 and have a look at the other issue of the contribution charge.
14938 MR. GRIEVE: Yes, I have it.
14939 MR. ENGELHART: In this interrogatory, the Commission asks you about the -- well, let me read it to you in the second last sentence in the question:
"Provide The Companies views as to how a reduction in the revenue percentage chart to 1.5 per cent should be reflected in the new regulatory regime."
14940 And your response is:
"In order 2001-278 the Commission approved changes to selected Bell Canada residential primary exchange rates for the purposes of recovering the revenue charge imposed by decision 2000-745. At paragraph 11 of the order the Commission determined that rate increases occasioned by the introduction of the 4.5 per cent revenue charge would not be reduced in 2002. The Commission does not expect the rates approved in this order will be reduced when a lower revenue charge is approved effective January 1, 2002. In TELUS' submission, the Commission has already established an approach to the reflection of changes in the level of revenue charge. It is appropriate to continue with the exogenous adjustment approach authorized by decision 2000-745 and given operational specificity by order 2001-278."
14941 So we have --
14942 MR. GRIEVE: Yes, I have it.
14943 MR. ENGELHART: We have circulated that as an exhibit, order CRTC 2001-278, and you have it there.
14944 MR. GRIEVE: Yes.
14945 MR. ENGELHART: I will read from paragraph 11 of that decision:
"The Commission does not expect the rates approved in this order will be reduced when a lower revenue charge is approved effective 1 January 2002. Therefore, the revenues generated by the rate increases approved in this order will continue to flow to the company at the level set to recover the interim revenue charge for 2001 accordingly. With an exogenous factor of 4.5 per cent, the company will have a reasonable opportunity to recover an appropriate amount with respect to the 2001 interim revenue charge and the 2002 revenue charge applicable to cap services --"
14946 This I think should be emphasized:
"-- in the period from now until the new price regulatory regime is implemented." (As read)
14947 Now, Mr. Grieve, is it your interpretation of that entire paragraph that the Commission is saying that you can leave that 4.5 per cent increase in effect for the entire second price cap period even if the new revenue charge goes down to 1.5 per cent?
14948 MR. GRIEVE: Well, Mr. Engelhart, upon reading this exhibit, and you were kind enough to give it to us in advance so I can understand that your view would be somewhat different from ours. I can read the paragraph the same way you can, but once again for us it's the same answer. We are looking at a price regulation plan going forward that is trying to get rates to their levels in the marketplace, to their competitive market levels.
14949 Once again, I don't think it would be worthwhile to lower them to raise them again, but I get your point on this. Of course, the new price regulation regime would start on a specific date at a specific level with new rules.
14950 MR. ENGELHART: So just to tie it down. Your interpretation of paragraph 11 is the same as mine, that what the Commission was saying there is we will leave the 4.5 per cent in place until April 1, 2002, or whatever the date of the new regime commences on. Is that your interpretation of it too?
14951 MR. GRIEVE: Yes, but it does not say that the Commission would not consider in this proceeding just leaving that exogenous adjustment in place if the rules for the new price cap regime were such.
14952 MR. ENGELHART: And just to finish this particular line, if you could look back again at TELUS(CRTC)1105, page 1 of 1 at the bottom of the page:
"Using this information, the utilities segment contribution expense --"
14953 This is if you went from 4.5 down to 1.5.
"-- would decrease from $105.4 million to $35.1 million."
14954 So the amount of money that TELUS gets if they don't go down to 1.5 per cent, if they don't reduce the price cap index, is just a little bit more than $70 million. Is that right?
14955 MR. GRIEVE: Mr. Engelhart, that seemed to be a reasonable interpretation. I'm just not sure how this calculation was done exactly because of the way the banding was done. It seems to be a reasonable interpretation, but perhaps I could ask -- I will check and get back to you.
14956 MR. ENGELHART: Okay.
14957 MR. GRIEVE: Or you can ask Ms Hale.
14958 MR. ENGELHART: Okay. Could you have a look, please, at TELUS(CRTC)1304.
14959 MR. GRIEVE: I have it.
14960 MR. ENGELHART: This is a question about when it's appropriate to remove upward pricing constraints. You say:
"TELUS agrees with The Companies that when there is evidence of competition for a tariff service in a band with an upward pricing constraint, the upward pricing constraint should be removed for the band. While the relevant market for this determination from an anti-trust perspective may be broader than a band, for the purpose of changing the regulatory treatment of a tariff service, TELUS submits that making this change by band is a reasonable approach. If a competitor can provide service in one part of the band, it should be possible for competitors to provide service throughout the band. As the cost and revenue characteristics are similar throughout each band, an upward pricing constraint on the ILEC service price is no longer necessary in this circumstance." (As read)
14961 Are you saying, Mr. Grieve, that if there's competitive entry in a community that the upward pricing constraint should be removed for all communities in that band?
14962 MR. GRIEVE: Yes, and I can add a little bit to that, Mr. Engelhart. We looked at this interrogatory response and we considered this particular test quite carefully in the last week or so while we have been waiting to come on the stand.
14963 The evidence of entry test is one that we thought needed to be refined a little bit to say not only is there evidence of entry of a competitor in a band, say, offering local business services, but also that it has to be more than just someone entering with co-located space in one part of the band to serve one customer, for example a branch office of a national customer.
14964 We are aware of a couple of places in Alberta where we have that kind of entry, so what we would suggest is that a test like this be modified so that it had to be someone who had entered in the band and was actively marketing services and offering services in that band for a year before we would apply to have the upward pricing constraint removed.
14965 MR. ENGELHART: Okay. Let's say that somebody enters in Medicine Hat and actively markets services in Medicine Hat for a year. Are you saying that you should therefor completely deregulate prices in Nanaimo?
14966 MR. GRIEVE: It's not a question of completely deregulating them. They would still be tariffed and the prices would still be subject to the imputation test, but it's the upward pricing constraint, yes, that would be removed if Nanaimo and Medicine Hat, which I assume are in the same band for the purposes of your question, if that's possible and the bands are properly done and there is no reason why you should expect that we would need upward pricing constraints.
14967 MR. ENGELHART: So, if you are a customer in Nanaimo, the phone company can raise your rates to whatever level they want because there is competitive entry in Medicine Hat, across the water, across the mountains, in a different province. Aren't we just hanging those customers in Nanaimo out to dry? I mean what possible protection do they have if there is some competitive entry in Medicine Hat?
14968 MR. GRIEVE: Well, Mr. Engelhart, I think that the cable industry could answer this quite well with the way they reacted to the possibility of entry by competitors using satellite dishes, but I will ask Mr. Brookes to respond to this as well.
14969 MR. BROOKES: Mr. Engelhart, the point that I might make is that when we do look at the entry that has occurred in the business market, it has been somewhat uniform across the bands. We do see that, dealing with the business market, band A, there has been entry throughout the band. Band B as well, there has been a facility-based entry throughout the vast majority of band B, and that is consistent with the fact that, you know, the market characteristics are different.
14970 We are seeing the start of facility-based entry beyond that for the business market, largely resale competition at that time -- at this time beyond band B, but we are seeing that pretty consistently, as well.
14971 So I would suggest that it is the natural path of competition to start in the urban areas and to expand in a fairly consistent fashion.
14972 MR. ENGELHART: Well, Mr. Brookes, if there is entry in the business market, do we remove the upward pricing constraints for the res market too?
14973 MR. BROOKES: The entry restraints are going to be differentiated by the residential and the business market, Mr. Engelhart.
14974 MR. ENGELHART: So we need an entrant marketing services for a year in the res market before we remove the upward pricing constraints in the res market?
14975 MR. BROOKES: Yes, that's right.
14976 MR. ENGELHART: So let's say that the cable company in Medicine Hat, which happens to be Monarch Cable, goes into the residential telephony business, you are still going to remove the upward pricing constraints in Nanaimo, where Shaw is the cable company? Is that correct?
14977 MR. GRIEVE: I believe if it's possible to enter in one part of the band, it's possible to enter throughout the band.
14978 MR. ENGELHART: So we say to the customers in Nanaimo: "Don't worry, Monarch Cable is going to come here and provide you a service"? That doesn't seem very realistic, does it?
14979 MR. GRIEVE: I would not expect Monarch Cable to go to Nanaimo.
14980 MR. ENGELHART: Those are my questions. Thank you, Mr. Chairman.
14981 THE CHAIRPERSON: Thank you, Mr. Engelhart.
14982 So now, we will turn to questions from the Commission. Counsel Moore.
14983 MS MOORE: Thank you, Mr. Chairman.
EXAMINATION / INTERROGATOIRE
14984 MS MOORE: Good afternoon.
14985 MR. GRIEVE: Good afternoon.
14986 MS MOORE: I would like to start just with a couple of questions regarding TELUS' SIP proposal.
14987 MR. GRIEVE: That would be Mr. Brookes.
14988 MS MOORE: Thank you.
14989 Mr. Brookes, in your proposal, you state that seasonal dwellings will not be eligible for services under TCI's SIP. Could you please discuss how TELUS identifies whether a dwelling is seasonal or permanent?
14990 MR. BROOKES: Yes. It would be based on occupancy.
14991 And just to be clear, our proposals at the eligibility criteria to look at communities would not include seasonal residence, but, of course, once service has been extended to a community, there is no prohibition from them to obtain service, but they would do so under the SIP or other service extension plans that are in place today in B.C. and Alberta.
14992 MS MOORE: So if there is a dwelling that pays for telephone service throughout the year, is that enough to characterize it as permanent?
14993 MR. BROOKES: No, strictly speaking, it would not be. It would be based on occupancy -- that's someone who occupies the residence for the majority of the year.
14994 MS MOORE: I would like you to consider a particular scenario. I would like you to assume that currently a community is unserved and it doesn't qualify for the SIP, based on your formula.
Suppose, then, that there is growth in that community in the future, such that the community would qualify under the SIP. So I wonder if TELUS proposes to provide services to such a locality; and, in other words, does the company propose to reevaluate unserved areas on an annual basis or some other basis?
14995 MR. BROOKES: Yes, indeed. I thought we addressed this in one of the interrogatories. But we would look at communities as we went through the SIP program, and if there had been people moving into an area that now qualified, they would be eligible.
14996 We also pointed out that if there was a situation where the payment had to go beyond the $1,000 and the households were prepared to take that, again, we would show that flexibility.
14997 MS MOORE: Okay. Just to make sure we are talking about the same thing. You said if someone moved into a community, then they would be eligible. Okay, I'm talking about a community that currently wouldn't qualify, but there is enough growth that it would change the numbers.
14998 MR. BROOKES: Yes. That's exactly what I was referring to.
14999 MS MOORE: Okay. And how often were you planning on reevaluating that?
15000 MR. BROOKES: We would look at this on an annual basis.
15001 MS MOORE: Thank you.
15002 I would like to turn now to exogenous adjustments. I think you have largely covered this with Mr. Engelhart, but just to be clear -- this is, again, covering paragraph 49 of your evidence, at page 18, where you talk about costs of an event extending beyond a plan, in your view, should extend into the next plan -- so are there adjustments other than the recovery of the revenue percentage charged that you have discussed now? Are there other exogenous adjustments that, in your view, should be carrying on into the next price cap plan?
15003 MR. GRIEVE: I haven't turned my mind to that. I'm not sure. I would have to go back and look at that. If I could take an undertaking, I will do that.
15004 MS MOORE: That will be fine.
15005 MR. GRIEVE: Okay, thanks.
15006 MS MOORE: Now, with respect to Interrogatory TELUS(CRTC)1102 -- and I don't think you need to turn this up -- you note that only in rare circumstances should exceptions should be granted to the criteria that you have put forward for exogenous adjustments.
15007 And one of the exceptions that you mention at the end of that is building access fees. You state that "in certain circumstances," is the phrase you used, those should be acknowledged. I'm just wondering if you can elaborate on what those circumstances might be.
15008 MR. GRIEVE: Well, as you know, there are two sort of issues. There is the municipal right-of-way issue and then there is the building access fees.
15009 We believe that there should be some sort of an adjustment made for building access fees. Exactly how that would be made is not always the most equitable. If you were, for example, to take either municipal access fees or building access fees and just spread them over all the customers, I think that that would be quite unfair.
15010 So what we would really be looking for is some sort of -- the ability to have a building-specific charge on the bill for those buildings or, for municipal access fees, the charge on the bill for people living in those municipalities, and then that would depend a great deal on how those charges were levied.
15011 Sorry, I don't know if I answered your question.
15012 MS MOORE: Well, when you mention the possibility of a bill-specific charge, are you then still making your point about an exogenous adjustment or are you really making a different point?
15013 MR. GRIEVE: Well, I can -- an exogenous adjustment is one that's usually applied under the normal -- sort of normal rules to capped and non-capped services in some proportion, and it's normally based on revenue or something like that.
15014 Here, it would be applied as an exogenous adjustment to a portion of the revenues, but just that building, and we would want to put it on as a building-specific charge or a municipal-specific charge.
15015 MS MOORE: And why do you consider that appropriate under the criteria that you have proposed?
15016 MR. GRIEVE: Well, you mean to put it on the bill?
15017 MS MOORE: Well, to make any kind of exogenous adjustment in respect of building access fees.
15018 MR. GRIEVE: If I could just --
15019 MR. GRIEVE: Well, first of all, with respect to municipal access fees, they are legislative, judicial or administrative actions. They are certainly beyond the control of the company.
15020 One of the difficulties, and the reason that we wanted to specifically identify municipal access fees, is because no single charging of a municipal access fee by a municipality might be enough to take you over the threshold of having a material financial impact.
15021 But certainly, a number of municipalities, I think Bell or The Companies, suggested you have to claim for an exogenous adjustment within 30 days. Well, if every 31st day a municipality put on a charge and you ended up with a huge sum on top of that, then I think that there should be some sort of ability to get that.
15022 So, you know, we specifically mention municipal access fees because of that particular problem. The building access fees issue is one that perhaps wouldn't have a material financial impact on the firm, but it might very well have an impact on the ability of the firm to serve a particular building economically, and we wanted to make sure that there was some way of dealing with that issue.
15023 MS MOORE: Thank you.
15024 If you could refer to paragraph 3-23 of AT&T's evidence, please.
15025 MS MOORE: So in this paragraph, AT&T submits that the ILECs not only benefited considerably from pricing flexibility accorded under the current regime, but also from a variety of exogenous factor adjustments. They suggest that, collectively, these adjustments have added in the order of $750 million in annual revenues, contributing significantly to what they characterize as "the ILECs' super normal earnings performance."
15026 Do you have any comment on this position?
15027 MR. GRIEVE: Well, one of the difficulties we always have in TELUS is that people tend to put numbers out that are national and we do have different ILECs in the country.
15028 Secondly, whether these contributed significantly to "the ILECs' super normal earnings," as they call it, is a question that I guess the Commission would have to answer because, if the Commission approved those and approved the fact that the costs were there and reviewed them, so if the costs increased and the company was -- the company got the exogenous factor for it, I don't see how it could contribute to any kind of earnings.
15029 MS MOORE: Putting aside the aspect with relation to earnings performance, do you have any reason to consider that the figure that they have put forward is incorrect? Would you wish to undertake to provide your own figure that is TELUS-specific, in terms of exogenous adjustments, during the last plan?
15030 MR. GRIEVE: Yes, I could do that. When I see a national number like that, I usually don't break it down.
15031 MS MOORE: Thank you.
15032 I would like to explore a little further some comments that you made this morning, Mr. Grieve, with respect to facilities-based competition.
15033 I'm reading from the draft transcript at page 2161. You were speaking with Ms Lawson. And you stated that:
"It's important to understand that all that's required to become what I call a facilities-based entrant is you don't have to have all of your own facilities. In fact, you are going to have a mix of your own facilities.
You know, it was revealed yesterday that we buy more from Group Telecom than Group Telecom buys from us. People will buy facilities from each other. The wholesale market will be a vibrant wholesale market, quite independent, I think, in some ways from the retail market." (As read)
15034 Now, in the context of that statement, could you just clarify what you mean by "facilities-based competition"? When that phrase is used, what types of activities could that encompass?
15035 MR. GRIEVE: I tend to be a little lawyerly on this one, so when I say "facilities-based competition," I'm usually looking at transmission facilities, something that would make someone a Canadian carrier. If you included switching in facilities-based competition, you would have lots of people out there today. But I think what we are looking at is transmission facilities.
15036 Let's use an example of four facilities-based carriers, four Canadian carriers in any geographic market. My view is that you don't need to have all four of them provide their own loops, switches and local transport. What you need is, for them to be CLECs, obviously, they need to have facilities of some sort, some sort of transport facility somewhere, but all you need to have competition is the assurance that there is the ability of these companies to construct their own facilities and where there isn't, or where no other facilities are available, they are essential facilities.
15037 Where they are not essential facilities, there is the opportunity for them to self-supply. They can choose to self-supply or they can choose to buy from someone else their transport and things like that, but that doesn't make them a non-facilities-based carrier because they have made that choice. They have made the conscious decision.
15038 So, for example, when we enter in Ontario, we are building facilities now in Toronto, but we are also leasing facilities from other carriers, and that, to me, still makes us a facilities-based carrier because we have the choice.
15039 MS MOORE: So if, for example, a CLEC were leasing 100 per cent of its local loops, would you consider this to be a facilities-based CLEC?
15040 MR. GRIEVE: Well, if a CLEC is leasing 100 per cent of its local loops, then the CLEC has made the decision to lease all of the local loops.
15041 The CLEC in this case, I presume, would have some of its own transport facilities, but if it's leasing loops 100 per cent then it has made the choice to do that, except, of course, in areas where loops are essential facilities, where, if it is going to be a wire-line CLEC, then it pretty well has to get them from the telephone company, at least until the cable company's in the business.
15042 MS MOORE: I wonder if you could just elaborate on what facilities TELUS does have in Ontario and Québec when it is operating as a CLEC.
15043 MR. BROOKES: I can give you a sense of that, Ms Moore.
15044 We have put in place switching, quite a number of collocations, and we have done fibre builds. Now, if this is an ongoing process, and while I'm sure I would not be popular at TELUS if I gave out the confidential data, I can assure you that we do have an aggressive plan to add more co-locations and to continue to build out our fibre -- rebuild out our fibre to connect to points of presence and to co-locations and we build it out to connect into buildings. And this is a typical way that other facility-based providers extend their networks.
15045 I might just close and say that we cooperate with other facility based providers, as well, because one of the things we find when we go into buildings is that, typically, it is not popular to dig up the streets too many times. So when one carrier is going into a building, the option is made available for others to go in and share the civil work.
15046 So quite a number of our fibre builds into buildings are being done in a cooperative way, where other carriers are also putting their fibre into those very buildings.
15047 MS MOORE: I wonder if you could estimate, in terms of a percentage, what percentage of customers in Ontario and Quebec does TELUS serve with its own local loops?
15048 MR. BROOKES: We don't have that right now. And, just to be clear, as most carriers, where we have a combination of our own fibre-based facilities, we lease loops through co-locations, and we use Centrex resale, as well. I don't have the numbers as to what that may be. I presume you are thinking of the fibre-based coverage, where we have facilities into buildings?
15049 MS MOORE: I am asking for a percentage of customers that are served by TELUS using loops that it owns.
15050 So could you undertake to provide that information to me?
15051 MR. BROOKES: We will do our best.
15052 MS MOORE: Thank you.
15053 I am just wondering, in general terms, when TELUS, as a CLEC, is considering where to construct, does it tend to focus on major centres for constructing its own local loops or in smaller centres? Is there some pattern?
15054 MR. BROOKES: Yes. I would say we follow a very similar pattern to what we see other competitors, both in the eastern markets, where we are entering, but in the western markets, where people are entering our territory. You do assessments of the opportunity and you tend to go where the opportunity is the greatest, initially.
15055 So that's no surprise that we would look at, therefore, Toronto as a natural market to enter, but we have built facilities in a number of other cities, as well. It is a process where you continue to expand your footprint.
15056 MS MOORE: Thank you.
15057 I would like to turn now to some questions regarding possible pricing constraints for the next price cut period. I appreciate that you have made a specific proposal, but I will ask you to just assume certain things might occur, for the sake of discussion.
15058 So TELUS proposes that there be no overall price cap constraint. Others question to what extent competition has or will develop in the near term. In light of this, the Commission may determine that various overall constraints are required.
15059 So I would like you to assume that an overall price cap constraint equal to inflation minus a productivity offset is applied to total utility segment revenues. I wonder if you could comment on whether this would be an appropriate regime, understanding of course that that is not your proposal.
15060 MR. GRIEVE: I understand.
15061 First of all, that's not something that we think is either necessary or would be a good thing.
15062 Let's take a look at the prices. Prices are what counts in a market where you are trying to ensure that competition can arise. We know that the business prices are below what the Commission -- or what competitors say is a competitive level. We know that the residential rates are low. We know that there are some other services that, during the last price regime, if we had not had the exogenous adjustment, we would have been coming pretty close to Phase 2 plus 25 on those, which was of course the threshold before you went in to reducing contribution. We know, as well, that we have options and features.
15063 So of all of those services, the ones that are really making the margins here is just options and features. The rest of it is contribution, which of course has declined in -- with the combination of the contribution decision and the rebanding decision has declined about just under $400 million annually in Alberta, between 2000 and 2001. That would be the effect.
15064 So then you would be putting a price cap mechanism on top of rates that are already too low. And I just cannot -- and then, of course, you have taken, from the options and features, pretty well all of the margins to reduce the contribution requirement under the new regime. Then you are in a situation where all the rates are too low, and you are going to put an overall price cap on that, it just doesn't seem to make any sense that you would lower rates in that kind of a situation.
15065 MS MOORE: So what if we were to assume a slightly different scenario, where, again, an overall constraint is imposed in terms of inflation minus productivity, but this is applied to total utility segment revenues plus competitive segment revenues that are derived from services that continue to be regulated under a CRTC approved tariff.
15066 MR. GRIEVE: I'm sorry. Could you give me an example of one of those?
15067 MS MOORE: Analog private line, forborne digital lines -- or non-forborne digital lines, pardon me.
15068 MR. GRIEVE: Okay, can you give me the example again? I am still not very clear on this.
15069 MS MOORE: In this scenario, we are adding an overall price cap constraint not just to total utility segment revenues, but now we are also adding the constraint to competitive segment revenues that are derived from services that continue to be regulated under our tariff.
15070 MR. GRIEVE: That's just about all of them, isn't it? Would toll be included in that?
15071 MS MOORE: Toll is forborne.
15072 MR. BROOKES: Basic toll is not, actually.
15073 MR. GRIEVE: So it's just that the last part of your example, "derived from," I'm not sure what that means. Are you talking about services that are in the competitive segment that is still tariffed?
15074 MS MOORE: That's correct.
15075 MR. GRIEVE: Okay, then now I understand what you are saying.
15076 Well, I mean, we have the same issue. We have the issue that prices are too low for many of these different service categories. And, you know, if the Commission wants to move ahead with competition, the Commission has to let the competitive market work. If the Commission wants to constrain prices for other purposes and sort of turn its back on competition, or say, "We're not going to worry about competition for another five years, we don't care," then the Commission can do that.
15077 But, in my view, putting a price cap, an I minus X, on all of those services is not going to help you achieve competitive market prices.
15078 MS MOORE: Assuming that an overall price cut constraint is imposed on total utility segment revenues, do you have any comment on what appropriate sub-basket structure and any additional pricing constraints that should be imposed?
15079 For example, I wonder if, in that scenario, you would propose to maintain the pricing constraints on individual baskets that you have already proposed in your evidence, in addition to this overall cap.
15080 MR. GRIEVE: Those constraints could probably stay in place. I might want to think about this one a little bit. But those constraints could probably stay in place, but none of them would have any effect, because if you put an overall I minus X on the utility segment, you are going to have to get it somewhere, and I don't know where you are going to get it. You are going to be bottoming out, as I say, on business prices, on residential prices. You will probably bottom out, if you are not already there. I don't know where you are going to get it.
15081 You will actually have the Commission pricing at predatory levels by its own test.
15082 MS MOORE: Do you wish to give it some further thought and undertake to provide me with any further thoughts on an appropriate sub-basket structure, in case an overall pricing constraint is imposed?
15083 MR. GRIEVE: I could, sure. I will turn my mind to it.
15084 MS MOORE: Thank you.
15085 Now, assuming that an overall constraint is applied, in terms of inflation less productivity, and applied to total utilities segment, in any year where productivity exceeds inflation, capped revenues would have to be reduced in some way.
And I would like your comments on whether you consider it to be appropriate for ILECs to achieve these revenue reductions through reductions to contribution.
15086 MR. GRIEVE: The short answer is, yes and no. To the extent that resident -- let me back up a little bit.
15087 What we have is a system now where we move to Phase 2 plus a mark-up to determine the contribution requirement. But the whole idea of that was to target the subsidy to where it's needed. It was not to identify the subsidy where it's needed and then wipe it out with productivity gains from somewhere else.
15088 The objective was to have prices, say, in band E, F or G, the sum of the price and the contribution be equivalent to a fully rebalanced rate. That was the assumption that we used going into our evidence. It does not make any sense to me, if the Commission has any desire, to have the opportunity for competitors to enter in high-cost areas using our loops, which is really where the shortfall arises, to then turn around and say: "Well, we are going to charge you this price for a loop, but we are not going to give you any opportunity for the revenue there."
15089 So, to me, the I minus X should be applied to contribution only to the extent of those revenues -- of sum of the rate that is charged is paid by customers and the contribution on a band by band basis, which is what we have proposed.
15090 Taking contribution from somewhere else and loading it over there and moving things around, I just -- I mean, if you want to go ahead with competition, then that's not what you do, but if you are trying to find other ways just to move money around, then, you know, we are going to be back here a lot.
15091 MS MOORE: Some parties in their evidence -- and I don't think you need to turn to this, but I am thinking of AT&T and CallNet, respectively, at paragraphs 4, 8, and page 20 -- suggest that the development of facilities-based competition is a process. And an important part of this process requires that a competitor build its customer base through reselling ILEC services. And, with a customer and revenue base in place, a competitor may then attract the investment required to finance the extension of its network.
15092 Do you have any comment on this type of thinking?
15093 MR. GRIEVE: Well, I think that is exactly right. Of course, with the long-distance carriers, they also had the opportunity to use revenues from their long distance services before they introduced flat rate pricing, so they, of course, ran into financial difficulties as a result of that. But that is certainly the pattern that you use, and it is the pattern that we are using in Ontario, as well.
15094 MS MOORE: I would ask you to turn to your response to Interrogatory TELUS(CRTC)4200. And if you could turn to page 5, please.
15095 At the bottom of page 5, you state that:
"In the case of local telecommunication services, retail prices are either competitive at this time or the Commission's accommodative entry policies are sufficient so that the regulatory oversight of retail prices can be relaxed, and the market can find the competitive margins." (As read)
15096 I wonder what criteria you are thinking of to determine that some local retail prices are competitive at this time.
15097 DR. LEVIN: What we were thinking of at that point were some of the business services where there is a substantial amount of competition that exists already, particularly in some of the core areas. I believe that some of that information has been submitted to the Commission in confidence.
15098 MS MOORE: Now, also at the bottom of page 5, as I have remarked, you talk about:
"The Commission's accommodative entry policies are sufficient so that regulatory oversight of retail prices can be relaxed and the market can find the competitive margins." (As read)
15099 Again, this may touch on your discussion with Mr. Engelhart earlier, but when you say that the Commission can relax the regulatory oversight of prices, are you referring to forbearance or the removal of an upward pricing constraint or some combination?
15100 MR. GRIEVE: No. We were referring to the removal of the upward pricing constraint, except to the extent of course that we have proposed upward pricing constraints for residential and annual constraints for business, but that's what we were referring to.
15101 I think I referred to it this morning as the need for the Commission to allow a very unhealthy rate structure that has been developed over years of regulation to now finally start to move toward market levels. There has to be some bold step taken by the Commission to allow it to do that.
15102 I guess the Commission really has two choices. It can try to predetermine what it thinks those market levels should be and try to move the rates there or it can allow the market to do it. Our preference is to allow the market to find those levels.
15103 MS MOORE: Now, if you turn to the next page, at the top of page 6, after noting that the transition from current regulated prices to competitive prices is already under way, you state that the faster this transition is allowed by regulation to proceed, the greater the likelihood of avoiding either inefficient entry or foreclosing efficient competitors in either or both of the retail and wholesale markets during the transition.
15104 It strikes me that elsewhere, for example, on that page you argue that inefficient entry is related to inappropriate retail or wholesale price signals.
15105 I wonder if you could elaborate on the nature of the relationship between the speed of the transition to competitive markets and inefficient entry or failure of efficient competitors. In other words, why is there less likelihood of these things happening if the transition is faster?
15106 DR. LEVIN: Well, we have gone on in this answer to cover the inefficient consequences or inefficient outcomes if wholesale prices are not set at competitive levels and if retail prices are not set at competitive levels or if the margin between them is not a competitive margin.
15107 What we know is that some of those things are not at the competitive levels right now. As long as they are not -- the prices are too high or the margins are too high or too low -- you could get inefficient entry. In fact, you are likely to get inefficient entry.
15108 The faster that we can make that adjustment from where we are to where we need to be to have an efficient competitive industry, the fewer distortions that we are going to introduce.
15109 Now, there's a trade-off there because there are some changes that may be unpalatable to customers or even to the company itself because of the substantial price changes. That's partly what's responsible for some of the pricing rules that are in our price regulation plan. We recognize that we are not going to make all these changes overnight.
15110 The other side of that is when the transition is slow, we get inefficient entrants into the market. They tend to join the regulatory process and it tends to be difficult to undo some of that inefficient entry. People will say well, I'm not making any money and I need some regulatory protection.
15111 There is clearly a trade-off. This is a very difficult issue to balance the speed of the adjustment against the threat of inefficient entry. I certainly don't know the way to balance that off, but I think that we need to be aware that there is that trade-off.
15112 MS MOORE: Thank you. Now, as you know, certain parties to the proceeding suggest that the ILEC services that it would assign to a proposed competitor services basket include current competitor services as well as all other ILEC utility segment services that are relied on by entrants in the provision of competitive services.
15113 Now, on page 4 of you response to 4200 you state:
"Wholesale services include but are not limited to essential facilities that are purchased from ILECs by competing retail service providers to use in the provision of their retail services." (As read)
15114 So in view of your definition of wholesale services, if a wholesale service is an ILEC service used by a competing retail service provider to provide its own retail services, do you consider that all the ILEC services that are listed, for example, by AT&T in its interrogatory response 3200 to be wholesale services?
15115 Perhaps you want to undertake to respond to this or maybe you have already given it some thought.
15116 MR. GRIEVE: We will undertake to respond to it. I would just say as a general comment that the pricing of the wholesale services that are truly wholesale services should be done by the market as best as it can.
15117 One of the concerns in general with the lists put forward is that they are really retail services. Any change to those prices requires not only a look at the retail rate structure and perhaps moving some things around, but it also has an effect on the retail price.
15118 It's not clear to me what the Commission might have in mind in asking a question like that. It seems to me that what the competitors have asked for is more unbundling.
15119 If you recall back to the local competition case, in that case one of the things that the Commission unbundled that was a non-essential facility was transport from the local exchange to an EAS area. That service was available at a tariff to retail rate.
15120 The Commission unbundled that, even though it was not physically unbundling it. They provided that tariffed service rate now to specific competitors for a specific amount for a specific purpose.
15121 What the competitors are asking here for some of these services is that the price be reduced and in some cases it is clear that it is just for them and somehow I assume that they would say there would have to be a revenue neutral kind of adjustment to other rates.
15122 I am going to give you -- I know there is an ice cream example of this that Dr. Emerson will talk to. I am going to give you a much simpler one.
15123 Imagine I am selling ice cream for $10 a litre. This is really good ice cream. The cost of the ice cream is $5, the cost of everything is $5 and a competitor says "I want the ice cream for $5 because it is an essential facility. I can't produce it, but $5 is too much because I just can't compete at that". Then you say "Okay, we will give it to you for $2 because we want the appearance of entry. We want people to think we have got lots of competitors".
15124 Then you turn around and say to the incumbent ice cream company "Don't worry, we will keep you whole. You can charge $13". That's pretty well asking what be done here. That's the difficulty we have if you are going to start doing those things. Then you have huge problems throughout the rest of the pricing structure.
15125 Dr. Weisman would like to add something.
15126 DR. WEISMAN: It's more just a couple of observations. I know that the Commission has expressed an interest in moving forward with the competition and an increased reliance on market forces. There have been a number of proposals before the Commission with regard to pricing of competitor services.
15127 I just wanted to add that what the latest economic research suggests is that, for example, in the United States when you look at States with low unbundled loop prices, they clearly have less facilities-based entry and there is no evidence from the States that low UNE prices have a positive effect on non-facilities based entry.
15128 That is the latest research with proprietary data available only to the FCC, suggesting that there are some problems with reducing these prices and it could undermine the very policies the Commission is committed to.
15129 MR. GRIEVE: Dr. Weisman used the expression "UNE". That's UNE for unbundled network element.
15130 MS MOORE: Yes. I also go to Washington to attend telecom policy research conferences from time to time.
15131 MR. GRIEVE: It's for the benefit of the transcript.
15132 DR. LEVIN: Let me just point out that while we are undertaking our undertaking, the thrust of this analysis in 4200 is that inefficiencies result when wholesale prices are not priced at competitive levels and retail -- I'm sorry, wholesale services are not priced at competitive levels and retail services are not priced at competitive levels and when essential facilities are not priced at cost plus the appropriate mark-up.
15133 It is important to understand what on AT&T's list is wholesale and what is retail. Aside from the general point that whatever they are, we need to try to get prices to market levels.
15134 MS MOORE: Thank you. Now, going back to page 6 of your interrogatory response to 4200, you say:
"If wholesale services can be supplied competitively, then allowing the competitive market to find competitive wholesale prices will ensure efficient competition." (As read)
15135 In your view, who are the current competitor suppliers of wholesale local telecom services in Canada?
15136 MR. BROOKES: If I could just give an example, and it would be the other carriers, such as Group Telecom and AT&T, Sprint, but one service that has been the subject of some discussion is DNA. This is a retail service. It is also a service that there is a competitive marketplace for.
15137 We do see facility based entry to provide DNA in TELUS' territory, but TELUS when it goes into eastern Canada needs to buy DNA as well and we do buy DNA from Bell Canada, but we also buy DNA from two other carriers in Ontario and Quebec.
15138 This I think is a good example of the competitive supply of these services.
15139 MR. GRIEVE: I might add I think Rogers Network Services or some more recent version of that is still providing telecommunications services at a wholesale level to customers in Toronto.
15140 MR. BROOKES: Yes, and I didn't mean that list to be an extensive list. In fact, one of the companies we buy DNA from -- I'm not sure if I will mention them, but they are not any of the companies mentioned. There definitely is a competitive supply from a number of suppliers.
15141 MS MOORE: Now, you mentioned when you buy DNA. That's when TELUS is acting as a CLEC.
15142 MR. BROOKES: Yes.
15143 MS MOORE: And so I wonder from your perspective both as a CLEC and an ILEC, is there any potential with services like DNA to further tailor them to offer them on a wholesale as opposed to a retail basis?
15144 MR. BROOKES: I believe there is opportunity in the DNA tariff today for tailoring. There are volume discounts as an example to reflect the term and amount of DNA that is purchased.
15145 There is flexibility inherent in DNA for channelizing or not channelizing, so there is a significant amount of inherent flexibility built into the product itself, but to go beyond that and to come up with a lower price for DNA that is going to be just made available to CLECs in the marketplace will fundamentally undermine the developing marketplace for selling these wholesale DNA services.
15146 It will also undermine the retail market that DNA services currently supply.
15147 MS MOORE: So in your view I take it that there really isn't any need to consider whether there are current retail offerings that would be of interest to competitors, or CLECs on a wholesale basis. In your view the market will take care of all of these issues.
15148 MR. BROOKES: Yes. That is right. Just to be clear, we certainly are prepared to talk to customers, our wholesale customers and, you know, based upon their requirements, if there is a way that we can put together a special assembly or come up with a unique way of meeting our needs, we will, but that's in the competitive marketplace.
15149 MS MOORE: Do you know if TELUS' carrier services group has had, to date, any discussions with any CLEC competitors with respect to developing a competitor specific service for DNA or megalink, for example?
15150 MR. BROOKES: Not that I'm aware of, but again the very nature of DNA service allows it to be offered in a way that does best meet the needs. You know, there is pricing flexibility built in with these term contracts, so there is an opportunity, as we do with all of our customers, retail or wholesale, to look at their needs and tailor the service within its current configurations and pricing levels.
15151 MR. GRIEVE: TELUS has as well had arranged with one of the CLECs to provide to that CLEC optional -- a certain package of optional local calling features that CLEC could take from TELUS and provide to residential or business customers.
15152 We filed a tariff for that and after a while -- the tariff was taking a while -- the CLEC informed us that they were no longer interested in taking it, it was taking too long and the tariff for these discounts on these particular retail services was subsequently denied by the Commission, so the wholesale service that we wanted to provide that actually was not a percentage discount from the rate, it was actually a set rate for groups of these optional services that was put forward as a tariff by us and denied.
15153 MS MOORE: I would like to discuss a scenario that you probably heard me discuss already with The Companies where a CLEC is co-locating in an ILEC switch and, because of various difficulties relating perhaps to inability to get access to rights of way, is unable to provide its own facilities or trunk to get back to its own switch.
15154 Do you agree in that context that the competitor has little choice but to use the ILEC's facility?
15155 MR. GRIEVE: Yes.
15156 MS MOORE: Do you think that --
15157 MR. GRIEVE: Unless there is somebody already there in the right of way who also has a facility somewhere else.
15158 MS MOORE: Right, but assuming that there isn't.
15159 Do you think there is any potential with respect to that particular type of scenario to develop some kind of competitor wholesale service offering?
15160 MR. GRIEVE: I think these things have to be done on a location-by-location basis. These things have to be looked at and you know, as Mr. Brookes mentioned, you have to be careful about the effects of any of these things on retail prices.
15161 So there may be a call for that. Hopefully, the courts will get around to dealing with the rights of way thing soon. It seems to me that would be a temporary thing, but it would -- each municipality is different, although most of them are pretty cooperative these days. Each one presents its own challenges.
15162 MS MOORE: I have one last question in this area before we turn to my final area, just to assure the room that we are nearly done.
15163 If you refer to page 13 of your response to 4200 -- this is towards the end of the page, towards the end of the first full paragraph -- you state that:
"Adoption of any of these alternatives in whole or in part will also require reexamination and possible redesign of TELUS' price regulation proposal." (As read)
15164 Could you indicate in general terms how you would propose to redesign your price regulation proposal should any of the alternatives that were addressed there be adopted? What changes would be required?
15165 MR. GRIEVE: Well, maybe I could back up and give you what our concern is in general terms because I think the short answer to your question -- and I don't want to give you the short answer only -- the short answer is we have no idea what would happen to retail prices other than there is no price cap constraint that you could put on that would be binding in any way if, for example, the AT&T proposal were adopted or something like that.
15166 The difficulty here is -- and it's explained in the introduction to this, the background to this interrogatory -- that you build a retail price cap or price regulation plan on the assumption that the underlying prices for wholesale services or essential facilities are established at a certain level. And the level they would be established at here under our plan is the level the Commission has established essential facilities at under its rules in 97-8. That's phase 2 plus a mark-up sufficient to recover -- to allow an opportunity to recover embedded costs.
15167 If you depart from that and start to drop that, then you are -- it's not a question of saying well, if there are 1,000 loops today being purchased, then -- I think there was an interrogatory from the Commission, how many loops were purchased or how many competitor services were purchased in 2001 and what would have been the revenue reduction if the mark-up had been 15 per cent. We gave the number, but then we went on to say that it's not enough just to take that number and then transfer it over and make it revenue neutral.
15168 This is not a question of moving money from basket to basket. When you are dealing with competitor services, you are dealing with the foundation of the whole system. If you allow the foundation to crumble, then the retail prices are going to tumble. There is a little poetry.
15169 So the difficulty that we have with this whole notion is that there is no way that we can see that we would have, if some of these proposals were adopted, that the Commission would be giving us a reasonable opportunity to recover our costs that we are -- have and are -- incurring under the obligation to serve.
15170 This is not a revenue requirement test. It's a test of whether the Commission is establishing a regulatory structure that allows the company a reasonable opportunity to move forward and we believe that if those competitor service rates are reduced to a level below a level that allows us to recover -- allows us an opportunity to recover those costs, the retail rates will follow down.
15171 And it's not a one-to-one relationship. If you drop competitor services by $1, $1,000 for 1,000 loops, that all of a sudden, you can just transfer $1,000 to the retail side because, of course, more loops will be purchased and the retail prices will come down.
15172 MS MOORE: Thank you.
15173 I just have a couple of questions regarding your pay phone proposal. So if you could turn to page 44 of your evidence.
15174 MR. BROOKES: Was that page 44 or paragraph 44?
15175 MS MOORE: Paragraph 44.
15176 MR. BROOKES: Yes, we have it.
15177 MS MOORE: In that paragraph, you state that:
"There has not yet been entry in all bands." (As read)
15178 You note that competition was introduced in 1998 by the Commission. You state that your proposal is that:
"...the local message rate paid by claim or prepaid card for public telephone in bands where there is no evidence of competitive entry, be limited to a maximum price of 50 cents." (As read)
15179 I wonder if you could provide some further rationale as to why you are seeking the flexibility to increase this local message rate to 50 cents in bands where there is no competitive entry.
15180 MR. BROOKES: Yes. And just to be clear, we went on to say in another interrogatory that we didn't see that the rate would go above 50 cents where there had been entry and we are fine with 50 cents being the maximum overall level regardless of whether there had been entry.
15181 So if I understand your question, it's really why is the 50-cent rate appropriate for the pay phone market. And the viability of the pay phone market is a real issue for us.
15182 As it stands today, the local pay phone rate does not recover the local pay phone costs and we have a situation where we have declining usage and where the very viability of the pay phone market is challenged.
15183 And so we believe that a 50-cent rate will allow us to have the pay phone business on a stable footing. We believe 50 cents is also affordable. And finally, by having the rate at 50 cents and the business more viable, we think we are going to be in a better position to ensure the availability of pay phone service in the next price cap period.
15184 MS MOORE: Thank you. Those are my questions, Mr. Chairman.
15185 THE CHAIRPERSON: Thank you, Counsel Moore.
15186 Commissioner Cram.
15187 COMMISSIONER CRAM: Thank you, gentlemen.
15188 I want to talk about boulders and theories. I know you see the connection with Bell.
15189 I read your article, Dr. Jackson, and was going to ask you some questions about people nibbling away until they bite up the whole. But my thought, when you were speaking, was the whole issue of in Canada, we have one tenth of the population. We don't have the capital structures. We don't have the same size to give us a critical mass at times to have that many, in my view, competitors.
15190 And coincidentally, Mr. Grieve, then I read your quote from a 1956 Canadian Economic History, talking about:
"The practical and financial challenges posed by infrastructure development appear in magnified form in the Canadian context." (As read)
15191 And that was in your R.A.V.
15192 And I guess what I would really like to see is a Canadian context to the issue of competition in terms of the access to capital, in terms of the issue that we are one tenth the size of the United States, maybe, maybe not one tenth. I'm, you know -- certainly, a heck of a lot smaller than a half.
15193 Is there any data that would give us the confidence that we would be able to build the kind of theoretical competitive structure that our two doctor economists have been talking about?
15194 MR. GRIEVE: I haven't -- I don't give a lot of consideration or I haven't given a lot of consideration to the capital, capital markets other than observing that a number of the competitors have complained about the foreign ownership rules restricting their access to foreign capital.
15195 First of all, I should say that our plan doesn't depend on competitive entry. It depends on accommodative entry policies that make competitive entry possible.
15196 I should say that also with respect to the size of Canada and the geographic dispersion, I mean other countries have those difficulties too or those challenges as well. In Canada, we have, you know, a number of large cities, larger cities and we have some small or medium size cities as well. The United States has those too. Is there enough scale there for someone to be able to enter? Yes, there is enough scale in those -- there is enough potential scale of operation to enter in those places whether you are in Canada or in the United States.
15197 The trick for us is that we have many places that are far away and we have in Alberta, in particular, many loops that are very long. But you know, we unbundle those loops and the transport to many of these locations is available through Commission policies, you know, back in the local competition case. The transport from the toll switch to the local switch was established by the Commission, was unbundled in that case by the Commission. Even though transport would have been available at a tariffed rate, it was unbundled, provided at a price just for IXCs.
15198 So I think that you might -- you know, the size of the country is not -- or the size of the population in and of itself, the size of the geography in and of itself is not really the issue except to the extent that you have to go beyond the urban centres. And when you get out farther than that, and certainly along major routes -- and I'm thinking Winnipeg-Brandon-Regina -- you are going to have entry in Brandon, you are going to have it in Winnipeg, you are going to have it in Regina and many of the customers served outside of those areas can be served by remotes and maybe they will get service, maybe they won't. And that's -- you know, we have put -- that's why we have put a limit on the increases.
15199 COMMISSIONER CRAM: Of course, we are talking about God's country, I know that.
15200 Dr. Weisman, you were talking about if all firms have financial outcomes that are inconsistent with the regime, it may be a problem with the X-factor. And could you look at, I call it our monitoring report, it's Exhibit CRTC-5. If I could take you to page 16.
15201 Now, I asked this question before, so I don't think anybody will be surprised by it.
15202 Look at figure 4.4. I'm looking -- and this is only for two years. I have to say there are trends there that, at least in my mind, appear troubling, and at least in my mind, absent any other cause -- and I take your point, Dr. Levin, about inefficiencies and inefficient competitors, but the ILECs' net income is increasing. The wire-line competitors' net losses is increasing. To me, that trend, going away from each other, is inconsistent with the regime or what I would want to see in the regime in any event.
15203 MR. GRIEVE: I will start, and then I will ask Dr. Weisman.
15204 I think we have to realize that we are looking at 1999 and 2000. In 2001, of course, the Commission made some significant changes to the contribution regime, which significantly reduced the costs of the competitors. The long distance competitors, as you know, who would be a major portion of this wire-line competitors figure here, the long distance competitors had gone to flat rate calling, in, I believe, it was July 1998, in a regime where we had a frozen contribution rate and we had a number of other permanent charges.
15205 Just simply the change in that for them gave them an opportunity -- if they did not drive their prices down after getting it -- and opportunity of $187 million. In total, the number of changes the Commission has made for the wire-line competitors in the last year or so is about $320 million of improvement directly to their bottom line as a result of regulation, as a result of the change to some of these regimes.
15206 Now, of course there is a small portion of that is currently in dispute, but, nevertheless, there is a large portion that regulation has already turned its mind to helping the competitors in a way. Now, of course, the difficulty with that is that you can't control the competitors's prices -- I suppose you could, but that would be a little bit strange. You never know what they are going to do with those savings, but one would think that because they had already given the price decreases before they had the cost decreases that perhaps they would not pass it all through.
15207 But the fact of the matter is, looking only at 1999 and 2000 and not considering the significant changes that the Commission has made to the contribution regime, which, you know, was problematic and that is why we at TELUS were supporters, and are supporters, of the revenue mechanism, looking at these like that, I think you are getting the wrong trend line here.
15208 Things are changing for the competitors, and the frozen contribution rate was a problem. Whether they turn around and, pardon the expression, shoot themselves in the foot, is yet to be seen.
15209 Perhaps Dr. Weisman --
15210 COMMISSIONER CRAM: Okay, so I can --oh, sorry, I can discount, then, the bottom part of the line.
15211 MR. GRIEVE: Yes. I don't know about discounting it. I mean, we will probably have some cross-examination for the competitors on this. I hate to give them notice of that in advance, but I don't think that is going to come as a big surprise to them.
15212 I don't think you can look at 1999 and 2000 like this without understanding that there were significant changes for both the incumbents and the wire-line companies as a result of Commission decisions.
15213 COMMISSIONER CRAM: Sorry, I think one of the doctors wanted to say something.
15214 DR. WEISMAN: I'm not sure how I feel being lumped together but --
--- Laughter / Rires
15215 DR. WEISMAN: I just wanted to add, Commissioner Cram, that what I was referring to this morning was identical ILECs, and that if all of the ILECs were failing that may be an indication of a problem with the X-factor.
15216 With regard to the issue with regard to CLECs, again I would just point out or reiterate something that I mentioned to Ms Moore earlier, and that is there is no evidence from the States that, if you were to lower these unbundled loop rates, it either increases entry -- non-facility based entry, the evidence is that it does not, and, in fact, the evidence does suggest that when you do so, it reduces facilities-based entry.
15217 So I would see a move in that direction as being contrary to the Commission's objective of moving toward an increased reliance on market forces.
15218 COMMISSIONER CRAM: And I'm now I really at the "boulder and theory". I thank you again, Dr. Weisman, for two things that you said today.
15219 In theory, of course, if price cap was working, fewer your applications to the regulator, and you said it with a smile, because I know you are talking about theory. But you also said, in your perfect world, imperfect competitive messy world, that if consumers were properly informed, the consumer has no downside in a competitive market.
15220 And I want to talk about the issue of consumers being informed about competition. And in terms of -- to put it in the context of what I consider to be huge barriers from being an ILEC, the barriers of course being price inelasticity, and then the lack of inertia, and when you look at those two items, it reminds me of having to really push the boulder or, as my colleague said, with Bell, it looks likes, you know, we are going to have to push the boulder up ahead before it starts to roll.
15221 And so I am wondering if, as a counterweight to the inelasticity and the inertia, if part of the answer is consumer information of the fact of competition.
15222 MR. BROOKES: Ms Cram, if I might be allowed to provide an answer -- and I have actually testified at former CRTC proceedings on these issues of both elasticity and inertia -- and let me start with elasticity, if I may.
15223 It is the case for local service that the price elasticity is very low. What that means is that if the price increases, the likelihood that someone will discontinue service is very low. What it does not mean is that there is a low probability of moving to another supplier. That is not the same issue at all, and the inelasticity of local service does not reflect on this shifting idea. And that is what --
15224 COMMISSIONER CRAM: But in high-cost areas, there are no alternatives. The prices you claim will go up, at least your proposal is, so my point is, you are not going to lose very many people there. Correct?
15225 MR. BROOKES: Yes. If there is not a competitive alternative, I grant your point. But I guess the point I am making is that the inelasticity of local demand does not bear on the issue of whether someone, if given an alternative, is going to be interested in that alternative. That is actually what is known as the cross-elasticity of demand, and it's quite a different issue.
15226 COMMISSIONER CRAM: Yes. And the issue where there is a competitor is the issue of inertia. Correct?
15227 MR. BROOKES: Yes, and --
15228 COMMISSIONER CRAM: So the double I's that the ILECs have on their side, because we have areas where they are near monopoly or wholly monopoly --
15229 MR. BROOKES: Yes.
15230 COMMISSIONER CRAM: -and areas where it's competitive.
15231 MR. BROOKES: If I might just be allowed to comment on the issue of inertia, Inertia is an issue that every company faces. It is not an undue issue that a company entering the market faces; it's an issue that any company marketing any service in the marketplace is going to face some degree of inertia.
15232 By way of example, if there weren't inertia, you would look at the fact that maybe 40 or 50 per cent of households, if there is a certain price discount for a service, might be interested in that alternative. Well, of course you never see 40 or 50 per cent of people go out and take a service.
15233 It is, indeed, this issue of providing information, doing good marketing. That's the issue that overcomes inertia. But in no way should it be construed that, because an entrant has to do good marketing and has to provide information to customers in order to sign them up, that that's a barrier that they have to deal with that. Any company would not.
15234 COMMISSIONER CRAM: But, that's my point. My point is, in the interim, while your rates are going up -- and you have inertia and inelasticity on your side and 75 years as an ILEC -- in order to overcome those issues, in particular the inertia, because that's the only place we can, people need information and --
15235 DR. LEVIN: Yes. Can I try this one?
15236 COMMISSIONER CRAM: Yes, wait --
15237 DR. LEVIN: Okay.
15238 COMMISSIONER CRAM: -- because I haven't gotten to the question yet. And I know about inelasticity, I know about -- I mean, that's not my point.
15239 In that period of time, the ILECs are going to be making a fair bit of money, until competition happens. And some of your bands are already compensatory, the ones that aren't, you will be getting the subsidy, so you will be making money.
15240 The question comes down to: who should bear the responsibility of information? And I look at the rational for information overcome the advantages that the ILECs have and I look at what has happened in the States. In Pennsylvania, in deregulation of, I think it was natural gas, that commission had $94 million to advertise to people about the fact of competition. In California, the commission -- I'm not sure if it was natural gas or electricity -- didn't have the money, but ordered the incumbents to inform people of the fact of competition, how to shop, how to find impartial information.
15241 And so I am saying, given that you are going to be getting some money from this that has no basis in cost from these increases in rates, shouldn't you bear some of the costs of informing consumers in order to overcome the very advantages that you have?
15242 MR. BROOKES: We do communicate with our customers. I really do feel it's --
15243 COMMISSIONER CRAM: No, no. Inform. Impartial informing about competition.
15244 Mr. Brookes, don't misapprehend what I am saying. I am talking about us telling you what to say to your customers. It will be done nicely, it will be dressed up, but that's what it is.
15245 MR. BROOKES: Yes, I understand that.
15246 I guess the issue I wanted to really point out is that I think it is the issue you are pointing to, of there being competitive entry. And, you know, informing customers about competition, if there is not yet competitive entry, isn't going to help them because there isn't an alternative. The key issue, in our view, is that prices need to be allowed to go to levels that encourage that competitive entry.
15247 Now, yes, indeed, TELUS could be part of an informational program, as you would suggest, but I would also suggest that that is the very nature of competition, to then go out and inform customers as well about their alternatives. And we can see that competitive markets do work when we do have, you know, the underpinnings, right, where prices do go to competitive levels.
15248 COMMISSIONER CRAM: Well, I mean that's not -- you know, the point is, you are going to be -- by virtue of your wish to raise rates in order to lower them, for a period of time there will be income that is not reflected in the costs.
15249 My point is, shouldn't that money be shared, in terms of informing people, just like they do in the States?
15250 And I really do want to hear from Doctors Weisman and Levin on this.
15251 MR. GRIEVE: But I would like to say one thing first.
15252 You said that it was only the high-cost serving areas that are not compensatory, and, of course, we are not so sure that is correct. And that makes a really big difference to how you look at this whole issue of price caps and how we move forward.
15253 So I just didn't want to leave the impression on the record that we think that only our designated high-cost serving areas are the ones that are not compensatory.
15254 I will hand it over to the good doctors.
15255 DR. LEVIN: I sort of agree with your conclusion, but I would like to explain a little bit to you as to how I get there.
15256 I think that -- well, first of all, we have said today a couple of times that we don't subscribe to this idea that prices go up so they can go down. From my point of view, prices need to rise to market levels. I don't think that generates any unusual profits for a company. Charging the market level price gives you a market level return. So I'm not sure there is a pot of money.
15257 I would say that the -- we have agreed that the demand for local telephone service is inelastic, but we have also agreed that the demand for any individual companies could be very elastic, as it is for long distance. Now, that works in favour of the entrants because they can come in and offer maybe just a slightly lower price or a slightly different service and get a lot of people to switch.
15258 And then I will point out to you, from my point of view, that inertia works for them, too. Once they capture the customer, then inertia's on their side. So it benefits everybody in the market. And, in fact, it's a fact of marketplaces. A lot of them have inertia. That does not mean that they are not competitive; it just means that customers don't switch every minute.
15259 It benefits everybody in the market and it's in fact -- it's a fact of marketplaces. A lot of them have inertia. That doesn't mean that they are not competitive. It just means that customers don't switch every minute.
15260 So I look at those things as actually in a way helping an entrant, that it's easy to attract customers and once you get them, it's easier to keep them.
15261 Now, having said all of that, there could possibly be a role here for regulators to provide information. I think I heard you mention this a couple of days ago. I think, for instance, of the care labels that are on clothing. It tells you what it's made of and how to take care of it.
15262 That actually is a result in the United States of the Federal Trade Commission requirement that manufacturers that wanted to sell clothing in the United States tell where it came from, what it was made out of and how to take care of it so you didn't -- I can remember shopping when you had to kind of guess whether something was washable or not.
15263 You know, there was a market value there. The market was simply not providing customers with the information that they need.
15264 If it turns out that customers aren't getting the information that they need about local competition, then I think that it's a role for the regulators to step in and make sure that they get it. I think your example, I believe, was Pennsylvania and California.
15265 In the gas and electric industries, customers are really not very familiar with competition. This was something that was new for retail competition. I will point out that telecommunications customers are a little bit more familiar with competition from long distance and competition for the telephone equipment itself and competition for wireless carriers.
15266 It may be a little easier for the entrants to say "Oh, now you get competition for local service too", but I will agree with you that if it turns out that the market is not providing that information, then there is a role for regulators to step in, but I would give the market a chance to work first.
15267 COMMISSIONER CRAM: After four years, what would we do?
15268 DR. LEVIN: Well, I mean clearly it depends on what's happening.
15269 COMMISSIONER CRAM: Because we actually think we gave the market four years.
15270 DR. LEVIN: Well, we haven't yet I don't believe. I mean in other words, in my count this is the third year. The business market seems to be going pretty well. The residential market, I think we have to give it a chance. I think we have to let prices go up and give it a chance.
15271 If there is a problem in the marketplace and the problem seems to be that customers don't have information, then I would encourage you to take some action, but I don't think we are there yet.
15272 MR. GRIEVE: I might add that we had customer letters and one of the themes of the customer letters was that if we raised our rates, they would switch when they had an opportunity and that they would switch toll and they would switch Internet and all these other services.
15273 I think customers in the telecommunications industry are very well aware of where they have choices and where they don't. I'm not sure there is any need for any kind of a program like that, but as Dr. Levin says, if you could find that there was an information problem that was not being met by the marketplace, then that's certainly a place that the Commission could step in.
15274 DR. WEISMAN: Is it my turn to speak on this? I just wanted to follow up. Of course there's the old saying if you build a better mousetrap, people will beat a path to your door.
15275 Yesterday I spoke to the quality issue that allowing the CLECs a choice in the wholesale market to differentiate their product and if they sufficiently differentiated and come up with a better price, quality, feature, functionality mix, customers will in fact choose and that will provide the requisite level of discipline at the retail level.
15276 I would just like to relate this story to you because it follows upon our lemonade example.
15277 About two years I was taking a different route home from the university. I stopped at this one street corner in my town which is Manhattan, Kansas. What struck me as interesting about this street corner was that there were lemonade stands on each corner, which is not something you see every day. The prices were 10 cents, 15 cents and 25 cents and there were cars at all four corners.
15278 As an economist we are interested in these things. Most people wouldn't think twice about it. It was fascinating in the sense that here you had essentially different price, quality combinations, all of which existing side by side. That is kind of the idea here.
15279 If we allow this choice of each CLEC to come in and say I would like to provide this way or that way, they can differentiate their product and if they do so, they provide the superior price, quality, feature, functionality mix, customers will find out about it. They will have an incentive to inform customers about it and I think the market will work.
15280 COMMISSIONER CRAM: One last question. Is anybody aware of any empirical data about the knowledge of competition, particularly in local markets in Canada?
15281 MR. BROOKES: We will check that and get back to you.
15282 COMMISSIONER CRAM: I don't think anything exists, but if you are aware of any, if you could please provide a copy of it.
15283 MR. BROOKES: Yes, we will be happy to do that.
15284 COMMISSIONER CRAM: Thank you, Mr. Chairman.
15285 THE CHAIRPERSON: I just have a couple of quick questions. The questions may be quick. I don't know whether the answers are or not.
15286 I must say at the outset I am a bit taken aback at the suggestion that if we didn't adopt TELUS' proposal and allow prices to arrive at what are characterized as market based prices that we somehow or other would be turning our back on competition.
15287 MR. GRIEVE: I don't think we said that. I don't think it was meant to come out exactly like that.
15288 THE CHAIRPERSON: I'm interested in what you mean by a market based price. As I understand it, your proposal is that in non-high cost areas we should not cap local residence prices -- they would still be tariffed though -- and let them rise to a market based price.
15289 I guess I'm curious to know as to how one would judge what a market based price is.
15290 MR. GRIEVE: I will probably ask one of the other panel members to address this as well, but my conception of it is that the price would rise until we either had sufficient pressure from customers for other services or we found that there was entry occurring and that we could not raise prices any further.
15291 A market price would be where we thought that was as high as we could raise them and then as entry continued, then we might find our price would stay where it is, we might find it might continue to rise.
15292 It would be difficult to know, but it would be some sort of indication that entry was occurring and constraining our ability entry -- constraining our ability as well as all of the other products and services which competitors might very well bundle with their local services, as one of our competitors in Calgary in the residential market does, bundles basic local service. In fact, I think it only provides it bundled, basic local service and options and features.
15293 THE CHAIRPERSON: Now, the issue was noted last week that in my home town of Halifax we have local residence competition. In fact, there is more residence competition there than there is business. The cable operator has managed to capture about 12 per cent, if I'm not mistaken, of the market where it is able to provide service.
15294 Cable operators are providing local residence telephone service at about $20 and the local ILEC is providing telephone service at about $25. What would you say is the market based price in Halifax?
15295 DR. LEVIN: I would say it's probably too early to know. My understanding of the way that consumers look at telephone service over cable is because it's new, they are not sure it is the same quality that the telephone company provides.
15296 My guess -- I would put out as a hypothesis that in Halifax, from the customer's point of view, there is one product with a higher price and higher quality and another product with lower price and lower quality.
15297 As consumers gain experience with cable, they may find it has the same quality as the ILEC and the prices will converge. I think you will probably get more entrants than just two.
15298 THE CHAIRPERSON: It would appear though that the market based price isn't anywhere near $35.
15299 DR. LEVIN: I think it's too early to know. I don't know whether the cable company is making any money at $20.
15300 THE CHAIRPERSON: They claim --
15301 DR. LEVIN: If they are --
15302 THE CHAIRPERSON: They claim they are.
15303 DR. LEVIN: Well, you know, if they are, we may find that the market price is $20 or $25. You know, I don't know. There is no way that I know of to know what a competitive market price is in advance. It's not something that we can calculate like phase two costs.
15304 THE CHAIRPERSON: But, Dr. Levin, we are being asked to be in a position to approve a tariff on cap, but approve a tariff that meets some market based price test.
15305 DR. LEVIN: Fine.
15306 THE CHAIRPERSON: I'm having difficulty as the person who combined with my colleagues here is going to be put into a position to approve that tariff. It used to be that it was just and reasonable under rate of return days. Now it is going to be under your proposal a market based price.
15307 I'm having difficulty coming to grips with how I am going to judge the approval or non-approval of a particular tariff based on criteria that is somehow a market based price.
15308 Let me add this. If I think about the discussion that you had with Mr. Engelhart today and that using the competitiveness test we could eliminate certain regulatory constraints in Nanaimo if there was some competition in Red Deer on the grounds that they were both in band B.
15309 Let's assume that Halifax was in band B and I assumed that somewhere between $20 and $25 was a market based price, couldn't I assume that anywhere in Canada that could be the market based price?
15310 MR. GRIEVE: I think within -- well, first of all, each ILEC has its own cost structure, so you can't use --
15311 THE CHAIRPERSON: TELUS in Alberta and TELUS in B.C. each had their own cost.
15312 MR. GRIEVE: Well, I was assuming in Mr. Engelhart's example that we had merged the bands together which is something we had asked to do and that was assuming that the bands were merged together so that these bands had similar cost characteristics in Nanaimo and Medicine Hat.
15313 Each company has its own costs, so I wouldn't suggest that you say that band B necessarily in Halifax would have the same cost characteristics as band B in Alberta. It's of course important to have company-specific costs for all of these things.
15314 I understand your concern about the competitiveness test. You know, from our perspective if the rules are established, the accommodative entry rules are established, there is the possibility of competition. If we see that competition actually does occur somewhere in a band with those same rules, we are going to be taking notice of that.
15315 We are looking for a way for the Commission -- a test for the Commission where the Commission could say okay, now we know these rules are working in this particular band. Obviously I think The Companies had another test of applying on a market basis and the market might be different in each particular example. That was what we thought would be the best approach was that kind of a test.
15316 I would also like to address the just and reasonable rates with you. Yes, just and reasonable rates used to be a natural monopoly public utility kind of revenue requirement, rates equal revenue kind of test.
15317 Just and reasonable rates are also rates that are by definition -- just and reasonable rates are produced in a market. When you get to a market level, that's a just and reasonable rate for that service.
15318 What we have is -- we also have the concern for affordability and so, as we have said before, it's the sum of the rate, the affordable rate and the subsidy in those bands, in the high cost bands that will give you the equivalent of a regulated just and reasonable rate, the sum of the rate and the subsidy.
15319 From our point of view, a competitive market rate is a just and reasonable rate by definition, so customers are paying for that service.
15320 THE CHAIRPERSON: I wasn't trying to raise the just and reasonable issue.
15321 MR. GRIEVE: Okay.
15322 THE CHAIRPERSON: I was just saying under rate of return our regulators had a test, just and reasonable. We went through the whole rate of return exercise. That's gone as you have noted in discussion earlier today.
15323 R. LEVIN: Can I just say that I have some sympathy with your position, having been a Commissioner in Illinois. Actually, I'm not asking you to do anything that I didn't already do.
15324 When I was on the Illinois Commission, we effectively abandoned rate of return regulation for Ameritech Illinois. That was done in the early 1980s. We approved when I was on the Commission substantial rate overhaul and rate increases for Ameritech Illinois to get every one of their rate elements or equivalent by band for access and usage above cost. That was done in 1985.
15325 THE CHAIRPERSON: But you have been very careful to avoid cost in the discussion we had today.
15326 DR. LEVIN: What did you say?
15327 THE CHAIRPERSON: You have been very careful to avoid cost today.
15328 DR. LEVIN: Yes. What we did -- I mean that was the first step, to get up to cost. I mean this proposal is even sort of modest compared to that because it won't necessarily get to cost.
15329 Then you see where the market price is. What's happened in Illinois is it has turned out that there is a great deal of competition for local service in many parts of the State. Now, that didn't happen in 1985. There wasn't any local competition in 1985.
15330 The fact that those rates had covered costs, got them closer to a market level, and there have been adjustments of course since then. You know when you are at the market level because you see competition. You put in place these policies which make it possible for anyone to come in and provide telephone service as long as the retail price is at a market level.
15331 Anything that they need that they might not be able to provide themselves because it's an essential facility is available.
15332 THE CHAIRPERSON: But, Dr. Levin, I can understand what the economic cost would be in terms of services. I have no idea what the market level is.
15333 DR. LEVIN: I don't either, but I think we have to find out.
15334 THE CHAIRPERSON: But you are asking us to approve a tariff that is at a market based price.
15335 DR. LEVIN: I think the proposal is to allow prices to rise to a market level. I don't know where that is. We have put a cap on the rate, so there is some security, for instance, residential rates wouldn't go more than $35 -- to a level more than $35.
15336 I think that you have heard from Mr. Brookes that he believes that the market price in most of the bands is not higher than that, but if we don't -- I guess I don't see that there's a whole lot of choice here because once the forces of competition are unleashed, it becomes very difficult to generate subsidies for rates that are not at competitive market levels.
15337 It's the question of getting this transition under way. This is one piece of the puzzle or the package, where some rates have to go up because they are below market levels, others have been steadily falling like, long distance.
15338 And unfortunately, we can't pick and choose the parts of that that we like. I would like to pick all the places where rates are going down and then forget about the places where they have to go up and it's just an impossibility.
15339 MR. GRIEVE: Mr. Chairman, I would like to address your comment about us not addressing costs.
15340 We didn't get a lot of questions about the pricing of unbundled facilities and about the just and reasonable rate standard. From our perspective it is critical to get those rates based on costs plus the mark-up that would allow us an opportunity to recover our embedded costs and that way you establish a strong foundation for whatever the market level is going to be.
15341 If you had essential facilities priced at something higher than that, that would be patently unfair for competitors. And if you had it priced lower than that, it would be something that would not allow for a strong foundation for competition and would eventually not allow us to sustain retail prices that would allow us to recover our costs over time.
15342 What the precise rates, competitive level rates, would be for any individual service once the foundation is established really depends on a lot of things -- not just our costs, the costs of others as well and their ability to market. So that's why this is so difficult. And I'm with Dr. Levin. This is not an easy exercise. We have proposed $3 a month per year. The Companies proposed the rate of inflation. I believe some of the competitors have also proposed the rate of inflation, some with a 10 per cent limit.
15343 Commissioner Cram had a discussion with Mr. Nicholson about the rate of inflation: is that going up quickly enough to get competition quickly enough? And if you raised them more quickly, would competition arrive more quickly? And Mr. Nicholson said, "Yes."
15344 Well, you know, we are at -- you have three from us and rate of inflation from The Companies and it's one of those things where, you know, it's a judgment call that you have to make.
15345 THE CHAIRPERSON: Well, I thank you for acknowledging we have a difficult task. And we don't intend to turn our back on competition.
15346 MR. GRIEVE: Well, I'm sorry that you took that. I wasn't suggesting that our proposal was the only one that would keep you on the road to competition, Mr. Chairman. My concern is that we not try to return to micro-managing rate levels in a market opened to competition, where implicit subsidies can't be sustained.
15347 THE CHAIRPERSON: Okay. Thank you.
15348 Thank you very much, Ms Bowen, gentlemen.
15349 That then will conclude our work for today. We will be back here tomorrow then at nine o'clock and -- oh, I'm sorry, Mr. Ryan.
15350 MR. RYAN: I have just one matter in concluding, Mr. Chairman, if I may.
15351 An undertaking was given by Mr. Grieve to Ms Moore concerning wholesale services and the status of services listed in AT&T 3200. No time frame was put on when that would be delivered, but it would be perhaps important that we had an answer to that before the AT&T panel left the stand. They will be taking the stand on Monday. Time will tell when they get off the stand. But I wonder if we can make an arrangement as to when that will be delivered.
15352 MR. GRIEVE: We can -- well, I think we have to go back and make some phone calls to find out when that might be delivered. Perhaps we could have -- we could have some contact with Mr. Ryan off the record here to keep him informed about this, and perhaps we can reach some sort of an accommodation. We will let the Commission know about that.
15353 THE CHAIRPERSON: Okay. I will leave it to you to work out. But you will endeavour to try and get the answer before AT&T is finished.
15354 Okay, anything else?
15355 So I just remind you again, nine o'clock tomorrow. You have to enter from the main entrance to the building over here. And dress maybe casual for tomorrow and we will provide the coffee. See you in the morning.
--- Whereupon the hearing adjourned at 1755 to resume
on Saturday, October 13, 2001 at 0900 / L'audience
est ajournée à 1755, pour reprendre le samedi 13
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