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TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TELECOMMUNICATIONS COMMISSION
TRANSCRIPTION DES AUDIENCES DEVANT
LE CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
Review of regulatory framework for wholesale
services and definition of essential service /
Examen du cadre de réglementation concernant les services
de gros et la définition de service essentiel
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
October 10, 2007 Le 10 octobre 2007
Transcripts
In order to meet the requirements of the Official Languages
Act, transcripts of proceedings before the Commission will be
bilingual as to their covers, the listing of the CRTC members
and staff attending the public hearings, and the Table of
Contents.
However, the aforementioned publication is the recorded
verbatim transcript and, as such, is taped and transcribed in
either of the official languages, depending on the language
spoken by the participant at the public hearing.
Transcription
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès‑verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Canadian Radio‑television and
Telecommunications Commission
Conseil de la radiodiffusion et des
télécommunications canadiennes
Transcript / Transcription
Review of regulatory framework for wholesale
services and definition of essential service /
Examen du cadre de réglementation concernant les services
de gros et la définition de service essentiel
BEFORE / DEVANT:
Konrad von Finckenstein Chairperson / Président
Barbara Cram Commissioner / Conseillère
Andrée Noël Commissioner / Conseillère
Elizabeth Duncan Commissioner / Conseillère
Helen del Val Commissioner / Conseillère
ALSO PRESENT / AUSSI PRÉSENTS:
Marielle Giroux-Girard Secretary / Secrétaire
Robert Martin Staff Team Leader /
Chef d'équipe du personnel
Peter McCallum Legal Counsel /
Amy Hanley Conseillers juridiques
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
October 10, 2007 Le 10 octobre 2007
- iv -
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
RESUMED: GEORGE HARITON 321 / 2189
RESUMED: PATRICK HUGHES
RESUMED: JEFFREY CHURCH
Cross-examination by PIAC 330 / 2263
Cross-examination by Cybersurf 387 / 2587
Cross-examination by Xittel 437 / 2878
AFFIRMED: SALVATORE IACONO 447 / 2957
AFFIRMED: WILLIAM TAYLOR
AFFIRMED: PAUL ANDERSON
AFFIRMED: DENIS HENRY
AFFIRMED: MIRKO BIBIC
AFFIRMED: SERGE BABIN
AFFIRMED: MARGARET SANDERSON
AFFIRMED: PETER WATERS
Examination-in-chief by The Companies 448 / 2960
Cross-examination by Rogers 452 / 3002
Cross-examination by MTS Allstream 604 / 3908
- v -
EXHIBITS / PIÈCES JUSTIFICATIVES
No. PAGE / PARA
CYBERSURF-1 Competition Bureau's report 398 / 2644
entitled Merger Enforcement
Guidelines September 2004
MTS-3 Information Bulletin of Merger 410 / 2728
Remedies in Canada Competition
Bureau September 22, 2006
CRTC-1 U.S. ILEC data aggregate source 411 / 2739
FCC ARMIS database report 43-02
CRTC-2 Document entitled "The 412 / 2740
Communications Market, 2007",
with excerpt from Section 4,
"Telecommunication"
CRTC-3 Information bulletin of Mergers, 412 / 2742
Remedies in Canada Competition
Bureau, September 22, 2006
BUREAU-1 Document from LECG Entitled: 444 / 2926
Access Regulation and
Infrastructure Investment in the
Telecommunications Sector: An
Empirical Investigation
ROGERS-2 Bell Canada's second round 479 / 3162
submission to the
Telecommunications Policy Review
Panel - Regulatory Policy -
September 15, 2005
Gatineau, Quebec / Gatineau (Québec)PRIVATE
‑‑‑ Upon resuming on Wednesday, October 10, 2007
at 0830 / L'audience reprend le mercredi
10 octobre 2007 à 0830
RESUMED: PATRICK HUGHES
RESUMED: JEFFREY R. CHURCH
RESUMED: GEORGE HARITON
listnum "WP List 3" \l 12189 THE CHAIRPERSON: Good morning.
listnum "WP List 3" \l 12190 Before we resume, may I remind the parties that we would appreciate everybody, to the extent that questions have already been asked by your colleagues, to take them out of your cross‑examination since we are under considerable time pressure and we want to make sure we can finish on time.
listnum "WP List 3" \l 12191 Secondly, Dr. Church, I wonder whether you could help me. It struck me last night upon going home that the test that you have set out and that we discussed all day yesterday is really prospective, it is whether to designate somebody or to mandate some service or not.
listnum "WP List 3" \l 12192 Our exercise here is retrospective. We are reviewing things and really what it is all about is are there some services that should be unmandated which are presently mandated.
listnum "WP List 3" \l 12193 So do me a favour and take your test and write it retrospectively because I tried it last night and I get ‑‑ you remember you and I had an exchange on downstream markets.
listnum "WP List 3" \l 12194 So when we start off, you say you have to have a market where there is dominance in the upstream market. You have a downstream market that is also dominant. However, that market has already been mandated, access has been mandated.
listnum "WP List 3" \l 12195 So therefore, the question is now should that mandating remain, should it be phased out or should it stay there forever, and in order to do that, you do what? How do you rewrite point number 3 of your test when you apply it retrospectively?
listnum "WP List 3" \l 12196 MR. CHURCH: Good morning, Mr. Commissioner.
listnum "WP List 3" \l 12197 I guess there are two aspects. I mean you are right, the way we wrote the test was as if you were starting in a situation where there was no mandated access and then you would consider whether mandating access would be a good thing or a bad thing.
listnum "WP List 3" \l 12198 THE CHAIRPERSON: Mm‑hmm.
listnum "WP List 3" \l 12199 MR. CHURCH: Then to try and ‑‑ because we thought that starting with a principled approach was the right thing to do.
listnum "WP List 3" \l 12200 THE CHAIRPERSON: Yes.
listnum "WP List 3" \l 12201 MR. CHURCH: Then we recognized that, in fact, we are in an environment where there has been mandated access.
listnum "WP List 3" \l 12202 So I think that the way to go about that ‑‑ there are two things that you have to be very careful of when you look at our test. The first is the dominance downstream, as you point out.
listnum "WP List 3" \l 12203 THE CHAIRPERSON: Mm‑hmm.
listnum "WP List 3" \l 12204 MR. CHURCH: It may not look like you have dominance downstream because you may have competition from service providers who are using unbundled loops.
listnum "WP List 3" \l 12205 We talked about this in our evidence when we say what you have to do is a but‑for analysis. You have to say: Would the firm be dominant downstream but for the access? So if there was no access, would the firm be dominant downstream? Would the incumbent be dominant downstream?
listnum "WP List 3" \l 12206 THE CHAIRPERSON: Right.
listnum "WP List 3" \l 12207 MR. CHURCH: So that is one way to do it.
listnum "WP List 3" \l 12208 THE CHAIRPERSON: So far I am with you.
listnum "WP List 3" \l 12209 MR. CHURCH: Okay.
listnum "WP List 3" \l 12210 THE CHAIRPERSON: Now, come to point 3.
listnum "WP List 3" \l 12211 MR. CHURCH: Now, point 3 is a substantial increase in competition.
listnum "WP List 3" \l 12212 If we went back to principled approach, what you would be doing is you would be saying, all right, no one else has access to the unbundled loops, so then it would be a pure prospective analysis ‑‑
listnum "WP List 3" \l 12213 THE CHAIRPERSON: Right.
listnum "WP List 3" \l 12214 MR. CHURCH: ‑‑ that you would be looking forward to.
listnum "WP List 3" \l 12215 In some sense, it is easier now because you have some idea about what the impact is on competition because you have mandated access, so you can go look and see what the impact on the market has been by the presence of those competitors. So it is less of a prospective approach and you can inform what the reality has been under the current regime.
listnum "WP List 3" \l 12216 So I think you are right, is that our principles are on the prospective approach to kind of adjust it to the reality that we have had mandated access.
listnum "WP List 3" \l 12217 THE CHAIRPERSON: Okay, revert number 3 to me retrospectively.
listnum "WP List 3" \l 12218 MR. CHURCH: I guess what I am saying is I would want to know the way ‑‑ given that I have mandated access, do I think the presence of those competitors has resulted in a substantial increase in competition? So that is a judgment about how effective that they have been.
listnum "WP List 3" \l 12219 THE CHAIRPERSON: Okay. Assume the answer is yes, but surely then the second question is: Is that mandated access still necessary or not?
listnum "WP List 3" \l 12220 It has resulted, to use your words, in a substantial increase in competition ‑‑
listnum "WP List 3" \l 12221 MR. CHURCH: Mm‑hmm.
listnum "WP List 3" \l 12222 THE CHAIRPERSON: ‑‑ five years ago when we mandated it.
listnum "WP List 3" \l 12223 MR. CHURCH: Yes.
listnum "WP List 3" \l 12224 THE CHAIRPERSON: Do we still require it today or not or can we now turn it off because of advances in technology and other entrants or whatever? I don't know. So what test do I apply at that point? Just as simple as I put it now: Will it continue on this basis if we turn the mandating off? Is that what we are supposed to apply?
listnum "WP List 3" \l 12225 MR. CHURCH: No. I think that is a very good point.
listnum "WP List 3" \l 12226 We didn't say that you could just look at what had happened. You kind of have to have a combination because you have to ask yourself, if we turn it off, what will happen, and that is going to be informed in part by what has happened.
listnum "WP List 3" \l 12227 I don't think that there is a silver bullet that you can get out of not doing the prospective analysis because you point out, you know, if you turn it off, you are going to have to ask what is the nature of competition now, what could happen, how could the market evolve without this mandated access.
listnum "WP List 3" \l 12228 And so you are going to have to do a little bit of this analysis and a little bit of that analysis to come to an appropriate judgment on what the effect would be.
listnum "WP List 3" \l 12229 THE CHAIRPERSON: You are giving me what is really an analytical framework but on this point now when you apply the test retrospectively, everything so far was very clear with known concepts but now you say you have to look at all sorts of factors, et cetera.
listnum "WP List 3" \l 12230 Anyway, I thank you for your answer. I just wonder whether you and your colleagues could do us a favour and actually rewrite your analytical framework that you suggest in a retrospective way because that is going to be the principal application that we are going to have.
listnum "WP List 3" \l 12231 Obviously, we want to use it prospectively too but the first task right now is to review the existing mandated services, and so therefore, it would be very helpful if, rather than just this informal exchange, you had some time to reflect exactly what one should look at and how one should go about it.
listnum "WP List 3" \l 12232 MR. HUGHES: We would be happy to do that, Mr. Chairman.
listnum "WP List 3" \l 12233 THE CHAIRPERSON: Thank you.
listnum "WP List 3" \l 12234 Then, Madame Giroux‑Girard, let us turn to our first business.
listnum "WP List 3" \l 12235 I am sorry, Helen, did you have a question?
listnum "WP List 3" \l 12236 THE SECRETARY: Thank you, Mr. Chairman. Good morning, everybody.
listnum "WP List 3" \l 12237 THE CHAIRPERSON: Just a second, Commissioner del Val has a question.
listnum "WP List 3" \l 12238 COMMISSIONER del VAL: Just to follow up. Then is the third point of the test really in the negative, that by denying, it would substantially decrease?
listnum "WP List 3" \l 12239 MR. CHURCH: I mean the answer is in some sense yes, right, is that they are ‑‑ you can look at this either as: If you have access and we deny it, would there be a substantial lessening of competition? Alternatively, if we have never mandated access and we grant it, will there be a substantial increase in competition?
listnum "WP List 3" \l 12240 As I tried to explain yesterday, in the Bureau's estimation, that substantial increase in competition and the substantial lessening in competition are the same thing, it is just a question of direction, where you started from.
listnum "WP List 3" \l 12241 MR. HUGHES: If I may add, it is not as much in the negative. As Mr. Chairman said, it is retrospective, and Mr. Chairman can, I am sure, remember that our abuse guidelines are very much retrospective as well. So in some ways this fits better into our traditional abuse provisions and our traditional substantial lessening of competition than the prospective test.
listnum "WP List 3" \l 12242 THE CHAIRPERSON: Okay. Then, Madame Giroux‑Girard ‑‑ sorry.
listnum "WP List 3" \l 12243 COMMISSIONER CRAM: So just to put reality to this, and it is that same interrogatory too from Primus to yourselves, you say that the non‑ILEC, non‑cable service providers have not captured a significant share.
listnum "WP List 3" \l 12244 And so if I follow your analysis through, then we would not at the residential level order mandated local unbundling? Have I got it right?
listnum "WP List 3" \l 12245 MR. CHURCH: I don't think that is quite right in the sense that Primus too, it talks about non‑cable and non‑ILEC.
listnum "WP List 3" \l 12246 COMMISSIONER CRAM: Yes.
listnum "WP List 3" \l 12247 MR. CHURCH: So that means it does not include MTS and does not include Rogers outside. We have included them. MTS Allstream is included in ILECs.
listnum "WP List 3" \l 12248 COMMISSIONER CRAM: Yes.
listnum "WP List 3" \l 12249 MR. CHURCH: Rogers non‑cable telephony customers are still included with the cable guys. So it is referring to truly independent people like Primus ‑‑
listnum "WP List 3" \l 12250 COMMISSIONER CRAM: Mm‑hmm.
listnum "WP List 3" \l 12251 MR. CHURCH: ‑‑ and saying that they are a very small thing.
listnum "WP List 3" \l 12252 I might add that, unfortunately, 38, which is the paragraph that is referred to in that interrogatory, is from the Sone Report, which, of course, we have withdrawn, but I think we all understand what the facts are even without that.
listnum "WP List 3" \l 12253 COMMISSIONER CRAM: Okay. So we would have to put into the analysis the fact that there is also Rogers and MTS ‑‑
listnum "WP List 3" \l 12254 MR. CHURCH: Yes.
listnum "WP List 3" \l 12255 COMMISSIONER CRAM: ‑‑ leasing local loops in residential?
listnum "WP List 3" \l 12256 MR. CHURCH: That is right.
listnum "WP List 3" \l 12257 COMMISSIONER CRAM: Okay.
listnum "WP List 3" \l 12258 MR. CHURCH: And business for MTS.
listnum "WP List 3" \l 12259 COMMISSIONER CRAM: Yes, of course. Yes. Thank you.
listnum "WP List 3" \l 12260 THE CHAIRPERSON: Maybe third time lucky, Madame Girard‑Giroux.
‑‑‑ Laughter / Rires
listnum "WP List 3" \l 12261 THE SECRETARY: We will pick up where we left last night. So the Bureau of Competition will be cross‑examined by counsel Michael Janigan from the PIAC Advisory Committee, known as PIAC.
listnum "WP List 3" \l 12262 Please proceed, Mr. Janigan, with your cross‑examination.
EXAMINATION / INTERROGATOIRE
listnum "WP List 3" \l 12263 MR. JANIGAN: Thank you, Madam Secretary.
listnum "WP List 3" \l 12264 Good morning, Mr. Chair and commissioners. Good morning, panel.
listnum "WP List 3" \l 12265 We seek in this proceeding to represent the interests of residential consumers and in particular low‑volume residential consumers of telecommunication services, and in that light I am going to be putting you some questions to try to establish what the costs and benefits or the bottom line will be for those residential consumers.
listnum "WP List 3" \l 12266 First, I would like to briefly retrace the steps that were taken to get to this point in time through the various proceedings of the CRTC.
listnum "WP List 3" \l 12267 I would first of all like to start with Telecom Decision 94‑19. That came about as a result of Public Notice 92‑78, which was started by the Commission to review the regulatory framework for telecom.
listnum "WP List 3" \l 12268 Is that correct?
listnum "WP List 3" \l 12269 MR. HARITON: That's correct.
listnum "WP List 3" \l 12270 MR. JANIGAN: All right.
listnum "WP List 3" \l 12271 And it started out with a number of objectives from the Public Notice and then the Telecommunications Act was passed and effectively those objectives formed the basis on which the regulatory framework was reviewed?
listnum "WP List 3" \l 12272 MR. HARITON: That's my understanding.
listnum "WP List 3" \l 12273 MR. JANIGAN: All right.
listnum "WP List 3" \l 12274 CRTC Decision 94‑19 concluded that the objectives set out in the Telecom Act were best achieved by reliance on market forces.
listnum "WP List 3" \l 12275 Isn't that correct?
listnum "WP List 3" \l 12276 MR. HARITON: I don't have the ‑‑ I should get a copy of the decision.
listnum "WP List 3" \l 12277 I take your word for it. That sounds right.
listnum "WP List 3" \l 12278 MR. JANIGAN: All right.
listnum "WP List 3" \l 12279 In that proceeding they indicated that to do so would require unbundling.
listnum "WP List 3" \l 12280 MR. HARITON: Yes. Well, they reviewed which facilities should be essential and which facilities should not be essential.
listnum "WP List 3" \l 12281 MR. JANIGAN: I'm sorry?
listnum "WP List 3" \l 12282 MR. HARITON: Sorry, wrong decision.
listnum "WP List 3" \l 12283 MR. JANIGAN: Yes. I'm getting there. I'm getting there.
listnum "WP List 3" \l 12284 MR. HARITON: Decision 94‑19. Sorry, wrong decision. I was referring to 97‑8 of course.
listnum "WP List 3" \l 12285 MR. JANIGAN: Yes.
listnum "WP List 3" \l 12286 MR. HARITON: Yes.
listnum "WP List 3" \l 12287 MR. JANIGAN: But in this case they said that effectively they would require unbundling, and while there was general support for the concept of unbundling there were differences about how it would be implemented and therefore another proceeding would be necessary to sort out those differences.
listnum "WP List 3" \l 12288 MR. HARITON: That's correct.
listnum "WP List 3" \l 12289 MR. JANIGAN: In Decision 97‑8 the Commission sorted out these differences with respect to implementation and came up with a criteria for essential facilities?
listnum "WP List 3" \l 12290 MR. HARITON: That's correct.
listnum "WP List 3" \l 12291 Do I need to turn to the specific criteria?
listnum "WP List 3" \l 12292 MR. JANIGAN: No, we don't.
listnum "WP List 3" \l 12293 Once again the decision was designed to carry out and to create the conditions where market forces would protect consumers in the delivery of services and to deliver on the objectives of the Telecom Act?
listnum "WP List 3" \l 12294 MR. HARITON: That was my understanding, yes.
listnum "WP List 3" \l 12295 MR. JANIGAN: All right.
listnum "WP List 3" \l 12296 Now, let's push ahead some years to the policy, what is called the policy direction, which is the Order in Council, the order issuing the direction to the CRTC implementing the Canadian Telecommunications policy objectives of December 14, 2006, and which I will refer to as "the policy direction".
listnum "WP List 3" \l 12297 MR. HARITON: Yes, I am aware of it.
listnum "WP List 3" \l 12298 MR. JANIGAN: Now, you would agree that the policy direction was not intended to take precedence over the objectives that are set out in the Act?
listnum "WP List 3" \l 12299 MR. HARITON: My understanding is the Act can only be amended by Parliament.
listnum "WP List 3" \l 12300 MR. JANIGAN: All right. And if the objectives of the Act are frustrated or impeded by this direction in any fashion, then the direction effectively is ineffective?
listnum "WP List 3" \l 12301 MR. HARITON: I'm being careful here. I'm not here to speak as a lawyer or to give you legal opinion.
listnum "WP List 3" \l 12302 As a commonsense principle I think what you are saying makes sense.
listnum "WP List 3" \l 12303 MR. JANIGAN: All right.
listnum "WP List 3" \l 12304 Now, as I understand it, the TPR Report recommended amending the objective section of the Telecommunications Act to establish more clear lines of responsibility in hierarchy of decision‑making.
listnum "WP List 3" \l 12305 MR. HARITON: It did another thing. What it did, it tried to sort out what were true objectives and what were instruments to reach those objectives.
listnum "WP List 3" \l 12306 MR. JANIGAN: All right.
listnum "WP List 3" \l 12307 MR. HARITON: Which was something that was not done in the '93 Act.
listnum "WP List 3" \l 12308 MR. JANIGAN: Yes. There have been no amendments to the Telecommunications Act along the lines of the recommendations in the TPR Report?
listnum "WP List 3" \l 12309 MR. HARITON: No, there haven't been.
listnum "WP List 3" \l 12310 MR. JANIGAN: All right. So the full list of non‑prioritized objectives in section 7 remain?
listnum "WP List 3" \l 12311 MR. HARITON: Yes.
listnum "WP List 3" \l 12312 MR. JANIGAN: All right.
listnum "WP List 3" \l 12313 Now, the policy direction contemplates the current examination of whether mandated access to wholesale services should be phased out for services not considered to be essential.
listnum "WP List 3" \l 12314 Is that correct?
listnum "WP List 3" \l 12315 MR. HARITON: That's correct.
listnum "WP List 3" \l 12316 MR. JANIGAN: All right. A note in the evidence, the supplementary evidence of the Bureau, on page 14 and paragraph 37, it notes that:
"In the Bureau's view the ultimate objective of end‑to‑end facilities‑based competition is implicit in the Order in Council." (As read)
listnum "WP List 3" \l 12317 MR. HARITON: I see that.
listnum "WP List 3" \l 12318 THE CHAIRPERSON: What paragraph was that?
listnum "WP List 3" \l 12319 MR. JANIGAN: I'm sorry. It's page 14 of the supplementary evidence, which is the July evidence, and paragraph 37, at the end of that paragraph.
listnum "WP List 3" \l 12320 THE CHAIRPERSON: All right. Thank you.
listnum "WP List 3" \l 12321 MR. JANIGAN: Clearly, if more competition providing, say, accessible and affordable service can be obtained by mandating the sharing of essential services, effectively because such course of action would be in furtherance of the objectives in the Telecom Act, that would likely trump the provisions of the policy direction and their implicit instruction?
listnum "WP List 3" \l 12322 MR. HARITON: Again, and not giving you legal opinion of any kind, I think that what we would have to see is the policy direction as being an interpretation or a more precise set of instructions on how to interpret the Telecommunications Act.
listnum "WP List 3" \l 12323 MR. JANIGAN: But if the objectives, if for example the Commission found that the objectives of providing more competition, which would provide more affordable service to Canadians, would be best pursued by mandating access, clearly pursuit of that objective would trump whatever implicit direction that the Competition Bureau sees in the policy direction?
listnum "WP List 3" \l 12324 MR. HARITON: Yes. My difficulty is, I don't see the policy direction so much as a list of objectives but as a list of instruments, the distinction I made a few minutes ago.
listnum "WP List 3" \l 12325 MR. JANIGAN: Yes.
listnum "WP List 3" \l 12326 MR. HARITON: So it's not really ‑‑ it's really going to how do you do things rather than what things you have to do.
listnum "WP List 3" \l 12327 So again, the legalities of how you sort that out I'm not here to comment on.
listnum "WP List 3" \l 12328 MR. CHURCH: Excuse me, Counsel, if I might?
listnum "WP List 3" \l 12329 What the Bureau has proposed here with our "essential facilities" definition recognizes that there may be instances where there is a substantial increase in competition from mandated access and in those circumstances access should be mandated.
listnum "WP List 3" \l 12330 On the other hand, the Bureau's definition also respects and appreciates the fact that the best kind of competition that can happen for consumers of all income levels is that there is competition between networks.
listnum "WP List 3" \l 12331 So it's trying to determine what the balance should be between these two types of competition. It's not saying that the mandated access type of competition should never be engaged in. That's not what the Bureau's test says.
listnum "WP List 3" \l 12332 It says, in the third bullet, if there is a substantial increase in competition, then mandated access, given the other two bullets are also met, is the preferred direction.
listnum "WP List 3" \l 12333 MR. JANIGAN: Dr. Church, what I was seeking to do was to try to qualify the comment with respect to the ultimate objective ‑‑
listnum "WP List 3" \l 12334 MR. CHURCH: Right.
listnum "WP List 3" \l 12335 MR. JANIGAN: ‑‑ as found by the Bureau in the policy direction and to make the point, of course, that the Telecom Act objectives reign supreme with respect to the pursuit of that objective.
listnum "WP List 3" \l 12336 MR. HARITON: Obviously the legislation is what the telecommunications industry is governed under.
listnum "WP List 3" \l 12337 That said, I think there is enough room within the objectives in section 7 of the Telecommunications Act to adopt a variety of approaches. The policy direction is merely saying we should focus on a certain approach rather than other approaches.
listnum "WP List 3" \l 12338 Now, that said, I think once again when you are looking at instruments of how you actually achieve objectives, you have to look at which ones are going to give you the best outcome, as Mr. Church has said and, again, if you can get competition in both the facilities and the services, i.e., the network and the services riding on the network, that will bring you appreciably closer, it seems to me, to whatever objective you have than if you are going to have a competition in just one layer, i.e., the service layer.
listnum "WP List 3" \l 12339 THE CHAIRPERSON: Mr. Janigan, can you tell me where you are going with this, because this really more in the nature of submissions rather than cross‑examination. These are not legal experts as to whether the objectives are supreme to the order or not.
listnum "WP List 3" \l 12340 I have no problem hearing from you in great length on submission, but even if you get a concession out of these witnesses it is not going to be of any use because they are not legal experts in any way.
listnum "WP List 3" \l 12341 MR. JANIGAN: I recognize. The point I'm attempting to make is that, effectively, the analytical framework that has been used with respect to their evidence, effectively, is qualified or is modified, of course, by any particular finding that the Commission may make with respect to the objectives of the Telecommunications Act.
listnum "WP List 3" \l 12342 THE CHAIRPERSON: Okay, I think you have established that point.
listnum "WP List 3" \l 12343 MR. JANIGAN: Okay.
listnum "WP List 3" \l 12344 Moving forward to the essential conclusions of the Bureau, the Bureau believes that effective competition at a retail level is most likely to come from facilities‑based providers, which would provide greater incentives for investment, innovation and cost efficiency?
listnum "WP List 3" \l 12345 MR. HARITON: That's correct.
listnum "WP List 3" \l 12346 MR. JANIGAN: Okay. Now, in doing your retrospective analysis, and in terms of your assessment of the competition that's come as a result of the stepping‑stone approach, is it your belief that approach ‑‑ or let me put this in general.
listnum "WP List 3" \l 12347 Why is it that you believe that wireline competitors to the incumbent telephone companies, the ones that required mandated essential facilities, did not succeed?
listnum "WP List 3" \l 12348 MR. HARITON: You are asking for an analysis of what happened in the industry. I think there were a number of factors of why they did not succeed.
listnum "WP List 3" \l 12349 Partly, it may be that the market wasn't ready for them, I don't know. Partly it was that shortly after '96, when the new entrants came in, there was something of a bubble in the telecommunications sector and it may be that there was over‑investment.
listnum "WP List 3" \l 12350 I know that certain equipment manufacturers financed equipment for new entrants on very easy terms and, as a result, some carriers may have set up that shouldn't have.
listnum "WP List 3" \l 12351 I think in some cases it may have been business plans that were not properly thought out. And the other point, I guess, is that it may be that the technology wasn't quite ready.
listnum "WP List 3" \l 12352 So through that list, it's not clear which would get priority.
listnum "WP List 3" \l 12353 MR. JANIGAN: Okay.
listnum "WP List 3" \l 12354 MR. CHURCH: Yes, if I just might add that the Bureau's evidence of March 15th, at paragraph 46, we have a discussion about rationales for why this particular entry model may not have worked, and there are additional sites, I think, later on in our evidence, as well, regarding why the hybrid model may not have been as successful as first appreciated ‑‑ as was planned for.
listnum "WP List 3" \l 12355 MR. JANIGAN: That is on page 18. You have the lack of regulatory incentives for entrants to move from unbundled facilities to their own. So that, in itself, would have been a reason why they would fail?
listnum "WP List 3" \l 12356 MR. CHURCH: I think that the answer, you know, Hausman and Sidack, the people who have carried out this analysis, say, that it's a combination of those three things and they don't try and distinguish, as I recall, and I may be subject to check here. They have those three hypotheses which they claim are reasons for why this model may not have worked very well.
listnum "WP List 3" \l 12357 In addition, in the Bureau's evidence, if you go back to an earlier paragraph, there's some paragraph we talk about all the things that had to be in place for this to work and that, you know, in retrospect, maybe is going to be a very difficult thing to have happen, because it was basically based on regulatory arbitrage.
listnum "WP List 3" \l 12358 MR. JANIGAN: How is it they eventually get squeezed in this analysis that you have on page 18? What happens that suddenly makes their costs increase or their revenues go down because they haven't got their own facilities?
listnum "WP List 3" \l 12359 MR. CHURCH: You know, I don't think that's exactly what it says in that paragraph. I think it says that there are three reasons where there may be difficulties. You know, and the stepping stone didn't happen, because the way the incentives were set up the prices for the wholesale access were very low, as both this article makes reference to, and also the Crandall and Waverman article that's referred to earlier ‑‑ or sorry, later in the piece, which came out in, sorry, 2006, called "The Failure of Competitive Entry into Fixed‑Line Telecommunication: Who is at Fault?".
listnum "WP List 3" \l 12360 There's a discussion in there about how this was an arbitrage play between low wholesale rates and retail rates, without recognizing that, if you had increased competition at retail, that those rates were going to fall. So it's not a very good entry plan to be based on arbitrage between retail and wholesale rates when competition's going to affect the retail rates.
listnum "WP List 3" \l 12361 And, you know, it just may have been that the entrants' costs were too high, that there were other impediments to competition. That would be the third bullet.
listnum "WP List 3" \l 12362 MR. JANIGAN: Well, I'm confused. Presumably, these entrants would have adopted a route of obtaining their facilities from the incumbent because of cost considerations.
listnum "WP List 3" \l 12363 MR. CHURCH: Yes, but the costs that we are talking about there are also implied in why we have the third bullet, which is looking for a substantial increase in competition, is that, besides access to the essential facility, there may be other barriers to entry: they may have been inefficient, there might be other reasons which suggest that they are not going to be very effective competitors, which means that their viability is going to be an issue.
listnum "WP List 3" \l 12364 The Crandall and Waverman study that I just referred to, "The Failure of Competitive Entry into Fixed‑Line Telecommunications: Who's at Fault?", you know, their conclusion is that, under this model, plain old telephone service is not going to be very viable, that the entrants require in this new world, have to have a wide variety of services and just providing narrow broadband ‑‑ or narrow services is not going to be ‑‑ it's not a viable business plan, in the sense that it doesn't provide enough value to consumers to allow you to compete and survive. That's their conclusion.
listnum "WP List 3" \l 12365 So, you know, there are a variety of things that seem to have gone wrong with this model. You know, I think that you should look at the marketshares and the competitive effect of the non‑cable, non‑ILEC companies who adopted this model. I think it tells you something about their competitive significance.
listnum "WP List 3" \l 12366 MR. JANIGAN: But if it was a rough go for companies that chose the low‑cost route, mainly getting facilities from the incumbent, how would it have been better for a company that actually had invested in its facilities, presumably the higher cost route, in light of increased competition?
listnum "WP List 3" \l 12367 MR. HARITON: I would point out, Mr. Janigan, that the one entrant who seems to have done very well, who went in in the nineties, was EastLink, and they didn't go in with unbundled facilities, they went in with their own facilities. So it may be that using your own facilities gives you a certain advantage.
listnum "WP List 3" \l 12368 The other one who lasted a long time, who also went in in the nineties, was Futureway, north of Toronto, who started by building their own facilities. I don't know their history intimately, but I believe at some point afterwards they started using other people's facilities and they are no longer an independent company.
listnum "WP List 3" \l 12369 So, you know, it is interesting that the ones who survive, who tend to do well, are the ones who use their own facilities.
listnum "WP List 3" \l 12370 And just in passing, I noticed that we are talking about wireline, the same thing is true is wireless. We have had some very successful entrants using their own facilities, and so there may be a lesson there for us.
listnum "WP List 3" \l 12371 MR. JANIGAN: Okay. And I note, Dr. Hariton, that your example with respect to the EastLink involves a cable company which, presumably, had a network in place prior to establishing its telephony service.
listnum "WP List 3" \l 12372 MR. HARITON: It had a network in place, but it certainly had to modify it to be able to offer telephony.
listnum "WP List 3" \l 12373 MR. JANIGAN: Okay. And is it the belief of the Bureau that winnowing down occasions of access to incumbent service will encourage the establishment of end‑to‑end facilities?
listnum "WP List 3" \l 12374 MR. CHURCH: I think that what the Bureau's perspective is, in terms of its "essential facilities" definition, is to, you know ‑‑ and we went through some of this yesterday ‑‑ say that there are costs of mandating access to facilities which are not essential. Those costs show up in terms of incentives for investment and the potential for competition between networks.
listnum "WP List 3" \l 12375 There are also costs associated with not mandating access to facilities which are essential. Those costs are the reduction in potential competition that you might have had downstream if you had mandated access to those facilities.
listnum "WP List 3" \l 12376 And then if you look at those relative costs and benefits, then you come to the conclusion that ‑‑ and this isn't the only conclusion that the Bureau comes to on those bases ‑‑ is that, you know, the costs of mandating access to things which are not essential appears to be much greater than the costs of not mandating access.
listnum "WP List 3" \l 12377 So therefore, you should have a bias towards ‑‑ in a statistical sense or a decision‑making sense, your tests should be slanted towards increasing facilities‑based competition. But that doesn't mean that the Bureau's test won't find an essential facility in stances where an essential facility results in a substantial increase in competition.
listnum "WP List 3" \l 12378 MR. JANIGAN: Okay. Well, let us take a look at that evidence concerning the costs. I believe in paragraph 9 of your supplementary evidence you cite the costs and risks associated with the overly broad wholesale access regime is a substantial consideration in your view that the current conditions for mandating access should be circumscribed. Is that correct?
listnum "WP List 3" \l 12379 DR. CHURCH: Yes.
listnum "WP List 3" \l 12380 MR. JANIGAN: And if we look on page 5 of your supplementary evidence, in paragraph 14, you indicate that the costs of mandating access to facilities that are non‑essential arise if mandated access undermines the incentives of the competitors to enter with their own facilities and/or incentives of the ILECs to upgrade and maintain their networks. And that is part and parcel of that analysis?
listnum "WP List 3" \l 12381 DR. CHURCH: Yes.
listnum "WP List 3" \l 12382 MR. JANIGAN: Okay. Now, in terms of the listing of the individual components, which make up your weighing of whether it is better to mandate access or to refrain from doing so, that is contained I believe in your evidence on page 6, on the top of page 6?
listnum "WP List 3" \l 12383 DR. CHURCH: Yes.
listnum "WP List 3" \l 12384 MR. JANIGAN: And in paragraphs 14 and 15. And you set out four reasons here why you believe that not mandating access is a preferable course of action or presents a preferable policy bias.
listnum "WP List 3" \l 12385 DR. CHURCH: I think what we do in that paragraph was four things; identify the nature of the costs that if you inadvertently didn't end up with competition between two networks, if you offered other things, these would be the kinds of things that you would be foregoing, so it identifies the nature of those costs. And then what we have to do later on is think about what the magnitude of those costs might be. There is nothing here that says anything about magnitude.
listnum "WP List 3" \l 12386 MR. JANIGAN: Okay. And so, for example, your first consideration; the Commission will have to continue to regulate the price in terms of access to the facility. There is no, obviously, any quantification of what that is going to cost over time for the industry or if it is going to be passed on.
listnum "WP List 3" \l 12387 DR. CHURCH: Yes, I mean, it will be passed on, industry doesn't pay these costs, consumers pay the costs of regulation. But the point that is being made here is that if we had competition between two competing networks and that competition is effective, then you have competition at both retail and wholesale and therefore you could forego regulation at both retail and at wholesale.
listnum "WP List 3" \l 12388 Whereas, if you continue to have mandated access, rely on that for your competition, you might be able to deregulate at retail, but you would still have to regulate at the wholesale level.
listnum "WP List 3" \l 12389 MR. JANIGAN: Of course, those regulatory costs would have to be set off against any advantages that may come about as a result of competition arising from mandated access?
listnum "WP List 3" \l 12390 DR. CHURCH: Right, and that would be what we discuss in paragraph 15.
listnum "WP List 3" \l 12391 MR. JANIGAN: Okay. The second point, the benefits of competition are restricted to the downstream markets for which the essential facility is an input and the nature of the competition is restricted since the firms in that market share a common input in costs. Now, is this essentially another elaboration of your point that effectively the innovations and efficiencies will come only from the incumbent?
listnum "WP List 3" \l 12392 DR. CHURCH: No, it doesn't say it would come only from the incumbent. We have not said that at all. It says that if you have competition that is only downstream, which is on the same network, then some of that competition is going to be restricted in the sense that all of the firms downstream are going to have a similar cost structure to the extent they are all using the same network and paying the same costs.
listnum "WP List 3" \l 12393 And the scope for product differentiation is going to be limited and the scope to independently innovate is going to be limited, because you are all running on the same network. And so it is just saying, if you had competition between two networks, as Mr. Hariton has pointed out earlier this morning, then you could have competition on both a network level and at the applications level.
listnum "WP List 3" \l 12394 If you have competition between, and we would expect that, both the entrant and the ILEC competing with their own networks would have incentives to innovate and invest. And in fact, you know, that is what competition is about. They are going to respond to each other and you are going to have, you know, races to increase capacity and provide interesting applications for the benefit of consumers.
listnum "WP List 3" \l 12395 MR. JANIGAN: You are not suggesting that in that circumstance that the ILEC would stop innovating or stop bringing efficiencies to the network it is providing those facilities to competitors in the case of mandated access?
listnum "WP List 3" \l 12396 DR. CHURCH: There is, with mandated access, where you have a shared access to the network, then the incentives for the incumbent to innovate and upgrade and invest in its network to the extent that those investments and those innovations end up being shared with its competitors, there certainly is a reduction in its incentives to engage in innovation and investment.
listnum "WP List 3" \l 12397 MR. JANIGAN: The incumbent, presumably in your analysis, would also have to be aware of the risk of market entry from a facilities‑based competitor, so it would continue to try to innovate and bring efficiencies into its network, would it not?
listnum "WP List 3" \l 12398 DR. CHURCH: Well, in some sense that depends on what the price of access is and what the terms of access are. If you are giving access to this network to facilities which are non‑essential, then presumably the entrants are using those facilities because that is a cheaper option for them than to build their own facilities.
listnum "WP List 3" \l 12399 We had a discussion yesterday about the implications of mandated access to DNA and what it did to various firms' incentives to build their own facilities in business markets as an example of that.
listnum "WP List 3" \l 12400 MR. JANIGAN: But these competitors that require access, these are presumably less able competitors in your analysis and the incumbent would always be aware of the threat of competitive entry from a facilities‑based competitor, would it not?
listnum "WP List 3" \l 12401 DR. CHURCH: All right, I think that you have to understand the nature of my earlier statement. It is a statement about incentives at the margin. So if you hold everything else constant, whether there be a threat of competitors or not a threat of competitors, and you say to the incumbent that we are going to make you share some of your investment or some of your innovation, his incentives will go down.
listnum "WP List 3" \l 12402 MR. JANIGAN: Now, in part 3 of your disadvantages of mandated access you indicate that the Commission has to be concerned about the potential for vertically integrated owners of essential facilities to engage in anti‑competitive practices. Presumably, this is another restatement of your first point with respect to regulation?
listnum "WP List 3" \l 12403 DR. CHURCH: Actually, in some sense it is just pointing out that it is not only a problem that you have to regulate the price of the wholesale facilities, but you create a system under which you are controlling if there is market power at the wholesale level.
listnum "WP List 3" \l 12404 In those situations where there is market power at the wholesale level and you are regulating and you are controlling the margin, so it is effective regulation, then we know that there are incentives for the incumbent to engage in, in particular the relevant one would be anti‑competitive what we call tying or discrimination, to favour its own operations downstream and to disadvantage its competitors.
listnum "WP List 3" \l 12405 And that is, you know, presumably why we have quality of service standards and a bunch of other things that the Commission has put into place in the existing regime to try and control that behaviour, but it is difficult to control without some sort of deterrence mechanism.
listnum "WP List 3" \l 12406 MR. JANIGAN: So more work for the Competition Bureau, that is what you are saying?
listnum "WP List 3" \l 12407 DR. CHURCH: Well, I am not an expert on regulated conduct, so I will turn that over to Mr. Hughes.
listnum "WP List 3" \l 12408 MR. HUGHES: Ordinarily, that would be the mandate of the CRTC and not the Bureau.
listnum "WP List 3" \l 12409 MR. JANIGAN: And I think we have covered item 4 about the incentives for investment and innovation.
listnum "WP List 3" \l 12410 Now, I turn to the cost of non‑mandating access. And you indicate that it is the limitation or elimination of competition in the downstream market. Presumably, that means potentially higher prices for consumers in the downstream market?
listnum "WP List 3" \l 12411 DR. CHURCH: It potentially means that.
listnum "WP List 3" \l 12412 MR. JANIGAN: Thus choice?
listnum "WP List 3" \l 12413 DR. CHURCH: Yes, it does.
listnum "WP List 3" \l 12414 MR. JANIGAN: And, as well, you indicated that regulation of retail rates would have to continue to protect consumers in the downstream market from the exercise of market power. Now, what about the circumstance where consumers are in a forborne market, would that still be the case?
listnum "WP List 3" \l 12415 DR. CHURCH: Well in fact, I mean, the timeline is such that when this was originally written, we did not know exactly what was going to happen in terms of the forbearance decisions, so that is one of the reasons why we have changed our third bullet, is that the costs of not mandating access in some sense have gone up, prospective costs have gone up because, in fact, the lost benefits from competition are no longer constrained or limited by the backstop of retail regulation in many markets.
listnum "WP List 3" \l 12416 So, that is one of the reasons why the bureau has adjusted its third bullet instead of being the increase in competition has to be sufficient to remove economic regulation, now it is the mandating access has to lead to a significant increase in competition.
listnum "WP List 3" \l 12417 MR. JANIGAN: Effectively, if the regime is so circumscribed that it mandates the construction of facilities, but may or may not have been necessary to bring those services and options to consumers, won't consumers be paying an additional price for the construction of facilities that may not have needed to be duplicated? That is another risk there, is it not, Dr. Church?
listnum "WP List 3" \l 12418 MR. CHURCH: No, and actually I want to clarify something. When I talked about a third bullet in my preceding remarks, I want to say the third bullet says a substantial increase in competition, not a significant increase in competition, and I apologize for that. We had a discussion about that yesterday.
listnum "WP List 3" \l 12419 Coming back to this, I think that the way that the bureau's approach works is different than the way that you are interpreting it in the sense that the bureau's approach looks first to see if the incentives are there for duplication of the facilities and what the effect of those duplication of those facilities would be on competition.
listnum "WP List 3" \l 12420 So, it doesn't mandate anything in advance. Instead, it looks and says what is the potential for competition between facilities‑based competitors. If there is dominance downstream, dominance upstream and not much chance for competition between facilities‑based competitors, then it looks and asks if we mandated access, would we have an increase in competition that would be good for consumers.
listnum "WP List 3" \l 12421 It doesn't mandate construction of facilities. It goes and looks and sees if there are incentives and if competition between facilities‑based networks is going to be possible because competition involves firms duplicating facilities and competing against each other, and we think that in that process, in most markets, you end up with consumers benefitting from investment and duplication of facilities because it brings about competition. So the benefits of production get passed on to consumers in terms of lower prices.
listnum "WP List 3" \l 12422 MR. JANIGAN: Or a competitor who has had to build needlessly duplicable facilities may in fact have to pass those costs on to consumers?
listnum "WP List 3" \l 12423 MR. CHURCH: In fact, in competitive markets, which is what we are talking about here, firms don't pass costs on to consumers in the way that you are thinking about it.
listnum "WP List 3" \l 12424 In fact, what happens is the firms are forced to compete for business and if everyone's costs are higher, then it might be the case that prices would go up in a market, but it's really a function of demand and supply determine prices in these markets. So you have both demand considerations and cost considerations that determine prices.
listnum "WP List 3" \l 12425 It is not like a regulated industry, if my costs go up, then automatically prices downstream go up because the regulator passes them on in a regulated price. That is not what is going on here at all.
listnum "WP List 3" \l 12426 MR. JANIGAN: Presumably, though, the investors in any new entrant competitor are looking to recover their costs of any facilities they build to compete?
listnum "WP List 3" \l 12427 MR. CHURCH: They look to recover those costs and the way they recover those costs is by giving consumers a better deal than what they are getting from other people because they have to induce consumers to buy from them, which means they have to offer prices and qualities and services which would allow them to recover their costs.
listnum "WP List 3" \l 12428 Consumers are only going to take that deal from them if it is a better deal than they can get from other suppliers. So, there's gains from trade here. That is why the firms incur the costs, because they think they have a better deal for consumers. If consumers can get a better deal, they will take that deal.
listnum "WP List 3" \l 12429 If you bet wrong on that, which is one of the problems that we talked about earlier with the unbundled local loop experience, as is explained in the Crandall and Waverman article, in the United States the damage was $60 billion was invested by public companies in this adventure, and at the end of it, that $60 billion was down to $5 billion. That was investors who lost that money, not consumers.
listnum "WP List 3" \l 12430 MR. JANIGAN: So, you don't believe there is any risk that consumers may be paying higher prices as a result of a strategy which winnows down with opportunities for competitive entry by way of mandated access?
listnum "WP List 3" \l 12431 MR. CHURCH: As I explained earlier, the way our test works is that we go through the analysis to see at both the dominant step and the duplicability step, and then the third bullet is asking what is happening to consumers.
listnum "WP List 3" \l 12432 Our whole test is driven by the implications of mandating access or not mandating access on the welfare of consumers.
listnum "WP List 3" \l 12433 MR. JANIGAN: So, using your analysis, your position would be, no, there is no risk associated with that?
listnum "WP List 3" \l 12434 MR. CHURCH: As we talked about yesterday, the Commission is in a situation where they are making a decision under conditions of uncertainty and asymmetric information. They have to look at the probabilities of these errors and the costs of these errors and, on the basis of that, recognize that there are good things that can happen and bad things that can happen and they should try and maximize the potential for the good things and minimize the potential for the bad things. But it doesn't mean that bad things won't happen for sure.
listnum "WP List 3" \l 12435 MR. JANIGAN: Obviously in circumstances where, for example, new entrant competitors are blocked from entry because they have to have facilities or they don't enter, the costs of that particular exercise may be borne by consumers in the short term, at least, in terms of the higher competitive prices and additional costs, I would assume?
listnum "WP List 3" \l 12436 MR. CHURCH: I'm sorry, I lost you. Would you please repeat that question?
listnum "WP List 3" \l 12437 MR. JANIGAN: Yes. In circumstances where you have the policy developed, as has in fact circumscribed access to or blocked access by a competitor that wishes to use access to mandated facilities for his entry, presumably the benefits that would have been brought to consumers by that exercise would not be able to be realized by the consumers, and they may end up paying a price which may be not competitive for at least a short period of time?
listnum "WP List 3" \l 12438 MR. CHURCH: To respond to that, our third bullet says, if you're thinking about denial of access and they already have access to the facilities, then we are in a substantial lessening of competition situation, so we would ask would the termination of access to those facilities result in a substantial lessening of competition, and that substantial lessening of competition is based on an assessment of what happens to the welfare of consumers.
listnum "WP List 3" \l 12439 I think that the other part of what you are asking me is to say if there are non‑essential facilities and we no longer mandate access to them, then what happens.
listnum "WP List 3" \l 12440 I think the answer to that is that if there are non‑essential facilities which we terminate access to, that there is a transition period that occurs and we would expect that if they are non‑essential and the definition has been applied, that means that competitors have the incentives and the ability to duplicate them and the effectiveness of that duplication on the market has been established.
listnum "WP List 3" \l 12441 MR. HARITON: If I may just add, Mr. Janigan, yes, there is some duplication when you build a second network, but, again, as Dr. Church has said, this is something that investors tend to cover up front. This is why they have to raise so much money up front to be able to get into the market.
listnum "WP List 3" \l 12442 In fact, they have to be able to give prices that are as good or better or quality that is higher or better than the incumbent if they expect to be successful in the market.
listnum "WP List 3" \l 12443 Over the long term, the incumbent and the new entrant will each try to win customers by giving better service and lower prices by getting the cost down. So that in that sense, the investor hopes to get his money back down the road. A lot of these things are what in the jargon we call a button hook, i.e. a very significant negative cash flow for a number of years, and only turning up towards the end.
listnum "WP List 3" \l 12444 So, in that kind of situation, a lot of the risk is being borne by the investors, as we have seen, rather than by the consumer. The consumer actually wins from this kind of thing because if things go well, he or she are going to get better prices and better quality. If things go badly, by and large it is the investor that takes the loss.
listnum "WP List 3" \l 12445 So, in that sense, while there is always a risk of everything in this life, in this situation the chances are very strong that consumers will likely be better off.
listnum "WP List 3" \l 12446 THE CHAIRPERSON: Just to make sure I understand your answer, Mr. Hariton, you are really talking about type 1 and type 2 errors?
listnum "WP List 3" \l 12447 MR. HARITON: Yes, that is right.
listnum "WP List 3" \l 12448 THE CHAIRPERSON: And you are biased as to what is type 1 errors because they are cost free for the consumer, while type 2 errors will cost the consumer in the long run?
listnum "WP List 3" \l 12449 MR. HARITON: Not entirely cost free, but largely. It is not black and white.
listnum "WP List 3" \l 12450 THE CHAIRPERSON: Thanks.
listnum "WP List 3" \l 12451 MR. JANIGAN: Thank you.
listnum "WP List 3" \l 12452 I want to return to the position of the bureau, particularly in light of the change resulting from orders for forbearance that have recently issued. I just want to make sure that I am clear on the bureau's position.
listnum "WP List 3" \l 12453 Is the bureau's position that there still can be mandated access to essential facilities in a forborne market if it will effect a substantial increase in competition?
listnum "WP List 3" \l 12454 MR. HUGHES: Yes.
listnum "WP List 3" \l 12455 MR. JANIGAN: Is it the view of the bureau that a substantial increase in competition can come about by other than facilities‑based competition?
listnum "WP List 3" \l 12456 MR. CHURCH: Yes, that is our third bullet.
listnum "WP List 3" \l 12457 MR. JANIGAN: I just wanted to make sure that wasn't a catch 22 there.
listnum "WP List 3" \l 12458 In terms of consumers who may desire or may be willing to take up a new entrant's service that is provided but mandated access, presumably for those consumers that would take it up, the competition itself is substantial for them?
listnum "WP List 3" \l 12459 MR. CHURCH: I think you have to be careful here. When they make their decisions and they are comparing their decisions across all the possible alternatives that are available to them, and so it is competition in the market which determines the choices that are available to them, they have decided that that is the best choice for them in the market, but that doesn't mean that if you were to eliminate that choice they would be made worse off, because if there is competition in the market, there is likely to be lots of other alternatives. That is what a substantial, in this case, decrease in competition or substantial lessening in competition would mean, would be to say that consumers are harmed by removing that competitive alternative because there is not sufficient competition in the market to protect them.
listnum "WP List 3" \l 12460 MR. JANIGAN: I thought your test for substantial was based on ability to enforce a price increase, was price‑related, is it not?
listnum "WP List 3" \l 12461 MR. CHURCH: Substantial lessening of competition would mean that as a result of some conduct or some behaviour there would be an increase in market power, and if costs remain the same, then an increase in market power, given the same cost, would result in an increase in prices.
listnum "WP List 3" \l 12462 MR. JANIGAN: So, a flip around on that one, I guess, is that in order to be substantial, you have to, to some extent, decrease the market power of the incumbent?
listnum "WP List 3" \l 12463 MR. CHURCH: That is right. By mandating access to the facility, you reduce the market power of the incumbent. Given the costs stay the same, reduction in the market power means that prices in the market should fall.
listnum "WP List 3" \l 12464 MR. JANIGAN: What about competitive offerings that are not so sizeable as to effect the market power of the incumbent but may still be desirable?
listnum "WP List 3" \l 12465 MR. CHURCH: In the whole context of these things there may be these things that at the margin are desirable, but there are costs and benefits to any decision. There is always the chance of various types of errors. So, before we decide to intervene in things, we want to make sure that the effect of our intervention is something that is substantial.
listnum "WP List 3" \l 12466 MR. JANIGAN: Let me give you an example. Let's say a municipality in a forborne region decides that the big players have been gouging their residents and failing to provide good service, and they may also have some social objectives that they are meeting under the Telecom Act, 7(h) in providing the service. But to do so, they need access to some component facilities to compete. What happens then? Will they still get the opportunity to come into the market even if they are not going to be affecting the market power of the incumbents?
listnum "WP List 3" \l 12467 MR. CHURCH: The answer to that is if you go through the bullets, the three bullets of the bureau's test and you find that mandating access to that municipality or whoever does not result in a substantial increase in competition, then the answer would be no, mandated access is not appropriate under the bureau's test.
listnum "WP List 3" \l 12468 MR. JANIGAN: What about if, for example, that entry was in furtherance of some other objectives under the Telecom Act, namely, meeting the economic or social requirements of Canadians, would it still fall?
listnum "WP List 3" \l 12469 MR. HUGHES: Can we take a moment, please?
‑‑‑ Pause
listnum "WP List 3" \l 12470 MR. HARITON: Mr. Janigan, again it goes back to objectives versus instruments. If you have certain social instruments, I believe that the suggestion is that you should achieve them in the most competitively neutral ‑‑ well, in the best manner you can and rely on competition to the degree you can.
listnum "WP List 3" \l 12471 But there are other techniques. One of the objectives that the system, the Canadian system has is affordable service in high cost serving areas. There, what we have is we have a high cost serving area fund which will subsidize both entrants and incumbents to the degree that they serve customers up there. That is competitively neutral, technologically neutral, and, more importantly, it is sufficient.
listnum "WP List 3" \l 12472 Another way of doing it is to try to distort the entire price system for local, which is what used to be done back in the seventies and eighties and early nineties, and that was a relatively inefficient way.
listnum "WP List 3" \l 12473 So, I think that there are many ways of reaching the objectives. It is a question of trying to figure out which one is going to be least distorting of the market forces.
listnum "WP List 3" \l 12474 MR. JANIGAN: Dr. Hariton, I was looking beyond the affordability question to other sorts of objectives that, for example, a municipality may wish to reach by way of their construction or of the assemblage of their network of mandated access.
listnum "WP List 3" \l 12475 MR. HARITON: Did you want to give me an example?
listnum "WP List 3" \l 12476 MR. JANIGAN: For example, it may be that they want to provide better security.
listnum "WP List 3" \l 12477 MR. HARITON: Yes, so they will build their own network. Is that the suggestion?
listnum "WP List 3" \l 12478 MR. JANIGAN: Well, let's say that it is not a doable project unless they require access, unless they obtain access.
listnum "WP List 3" \l 12479 MR. CHURCH: I think, Mr. Counsel, the kinds of things that you are talking about here, I mean, you are talking about another level of government deciding that they have some sort of policy objective that they want to meet.
listnum "WP List 3" \l 12480 I guess what we are saying here is that our test is designed for competitors, is for private firms who want to enter.
listnum "WP List 3" \l 12481 This discussion about the other objectives is interesting, but I think it is not really what our test is about and it is kind of about, you know, some other kind of rationales for why things should be mandated. If the Commission, the CRTC, decides that those objectives are for some other level of government to achieve some sort of social objectives that you have in mind, I think that that is not something that the bureau's evidence is about at all.
listnum "WP List 3" \l 12482 It is about entry by competing firms, and when does mandating access make sense in terms of enabling competition and making the right choice between competition between networks versus mandated access. If there are other social objectives for certain very unique and particular suppliers who ask for mandated access, like a municipality, like another level of government, I think that is another kind of discussion. It is interesting, but it is not something that the bureau's test is really about.
listnum "WP List 3" \l 12483 MR. JANIGAN: It is something, of course, that the CRTC has to take into consideration under its telecom objectives though.
listnum "WP List 3" \l 12484 MR. CHURCH: That is up to the Commission to decide.
listnum "WP List 3" \l 12485 MR. HARITON: If I may, Mr. Janigan, the Commission circulated a possible framework just before the hearing where they categorized ‑‑ they had an attachment to a letter of October 3 and here they categorized possible mandated access.
listnum "WP List 3" \l 12486 The fifth category was public good, which would include functionalities that would not meet the criteria of the Commission's definition of essential facility but there would be general agreement that the functionalities should continue to be made available to competitors via mandatory unbundling for reasons of public benefit such as access to 9‑1‑1 call routing services.
listnum "WP List 3" \l 12487 In our comments on that we said yes, that that was certainly acceptable.
listnum "WP List 3" \l 12488 MR. JANIGAN: And presumably that may fall within the example that I have taken?
listnum "WP List 3" \l 12489 MR. HARITON: I think that is ‑‑ as I understand it now, that would be it.
listnum "WP List 3" \l 12490 MR. JANIGAN: Ex ante or ex post?
listnum "WP List 3" \l 12491 MR. HARITON: That is a good question.
listnum "WP List 3" \l 12492 I think that a lot of these things have already been established. I can well see that a municipality might come in front or propose to the Commission a certain treatment which would reach some kind of ‑‑ or attempt to reach some kind of municipal objective and that would be open.
listnum "WP List 3" \l 12493 But I mean a lot of these things such as, for example, not breaking the pavement more than once every five years and therefore having to coordinate the build of facilities, which is something that happens north of Toronto now, would be something that would be ordered and it would be in place.
listnum "WP List 3" \l 12494 MR. CHURCH: And of course, if I might add, if we are talking about a municipality doing something that has social objectives, it might be very much the case that the ILEC is quite willing to provide access to their facilities.
listnum "WP List 3" \l 12495 MR. HUGHES: Just to clarify, let me note that we are coming here from a competition policy perspective and I don't think we have a position on whether those public goods should be mandated ex post or ex ante. We really haven't considered that issue. That is really not part of our area.
listnum "WP List 3" \l 12496 MR. JANIGAN: Okay. And it may well be that the public goods within the meaning of that section may not be exhaustive of all the objectives contained in the Telecom Act. You would agree with that, Dr. Hariton?
listnum "WP List 3" \l 12497 MR. HARITON: I believe the category is open.
listnum "WP List 3" \l 12498 MR. JANIGAN: I just have some questions in terms of understanding some of the Bureau evidence.
listnum "WP List 3" \l 12499 On the Supplementary Evidence at page 21, paragraph 53, it is noted here:
"The record of competition shows that while entry by the cable companies is likely sufficient to control the market power of ILECs with respect to residential customers..." (As read)
listnum "WP List 3" \l 12500 What is the evidence that is in support of that statement that in fact the cable company entry is sufficient to control the market power?
listnum "WP List 3" \l 12501 MR. CHURCH: I think we have an interrogatory response, Bell No. 9, and you will find the evidence is listed there.
listnum "WP List 3" \l 12502 MR. JANIGAN: Okay.
listnum "WP List 3" \l 12503 Move on to paragraph 28, pages 10 and 11, and you have the sentence:
"If there is competition from the cable companies for retail telephone that is effective, then the elasticity of derived demand will be large and the input supplier of copper loops will not have significant market power. If the analysis begins and ends by looking only at substitution alternatives of firms that demand access to the purportedly essential facility, this avenue of substitution will be missed."
(As read)
listnum "WP List 3" \l 12504 I am afraid I don't understand those sentences. Could you dumb it down for me?
listnum "WP List 3" \l 12505 MR. CHURCH: Yes. So if you are asking if an owner of a facility, your telecom facility, has market power, there are two sources of substitution that can discipline its attempt to exercise market power.
listnum "WP List 3" \l 12506 So when it goes to exercise market power, that means it is raising its price above competitive levels.
listnum "WP List 3" \l 12507 What stops any firm from raising the price above competitive levels is that its consumers say or its customers say: Sorry, I am not going to pay that higher price, I am going to go buy from some competitor, I am going to find some substitution, some substitution possibility, some sort of substitute.
listnum "WP List 3" \l 12508 So if you are looking for the market power potential for a facility upstream, there are two sources of substitution that can discipline the owner of that facility's attempt to exercise market power.
listnum "WP List 3" \l 12509 Upstream substitution occurs when suppliers in downstream markets are willing and able to easily substitute other inputs. So I have got the upstream firm here and I have got a bunch of firms downstream that buy from him. So when he goes to raise his price, these firms at the retail level can substitute other suppliers of the upstream input. That is what we call upstream substitution.
listnum "WP List 3" \l 12510 Downstream substitution occurs if consumers in retail markets can easily substitute to alternative telecommunications service providers who do not use that input. So when a downstream substitution is sufficient, then any exercise of market power upstream based on limited substitution upstream will have very limited, if any, effects on customers downstream.
listnum "WP List 3" \l 12511 So it is essentially saying ‑‑ the upstream substitution, everyone understands. They say if there are other substitutes available upstream, then when one supplier upstream tries to raise their price, all of the firms who use that as an input will substitute to some other supplier.
listnum "WP List 3" \l 12512 But that is not the only source of substitution and potential discipline for market power on an upstream input supplier. Perhaps the most significant one is the extent of competition in the downstream market.
listnum "WP List 3" \l 12513 So if the copper loop supplier goes to raise the price of copper loops, then the firms that use that copper loop as an input, their costs go up. They try and pass those costs on to consumers in the downstream market.
listnum "WP List 3" \l 12514 If those downstream markets have alternatives where they can go and get their local telephony service from the cable company which doesn't use the copper loops, they can substitute that way.
listnum "WP List 3" \l 12515 Then that initial increase in market power by the copper loop supplier is going to be circumvented by the fact that he loses all of his customers downstream. He loses all of his customers downstream because when they have higher costs and try and pass it on, they lose their customers to a competing supplier, in this case the cable company.
listnum "WP List 3" \l 12516 So that is what that paragraph is about, is saying that there are two sources of substitution and you have to consider both of them when you are looking at the market power of an upstream input supplier and that is why we have a requirement for dominance downstream.
listnum "WP List 3" \l 12517 MR. JANIGAN: Thank you very much.
listnum "WP List 3" \l 12518 Finally, I wonder if you could, Dr. Church, touch upon the notion of joint dominance that was set out in the case of ‑‑ the Bank of Montreal case involving a consent order of the Competition Tribunal.
listnum "WP List 3" \l 12519 I think it was an essential facilities case where an electronic ‑‑ where the Interac network had to revise its governance structure and the Bureau dealt with the issue of ‑‑ or the agreement dealt with the issue of joint dominance.
listnum "WP List 3" \l 12520 I was wondering if you could comment upon the concept from that case in terms of its relevance in a market where there are two providers, cable and an ILEC.
listnum "WP List 3" \l 12521 MR. HUGHES: Could you perhaps be a little more specific? I understand you are addressing Interac and you are addressing the issue of joint dominance.
listnum "WP List 3" \l 12522 MR. JANIGAN: Well, I am curious whether or not the concept of joint dominance as expressed in that decision has any relevance for us today in looking at the position of cable and ILECs in a market.
listnum "WP List 3" \l 12523 MR. HUGHES: Thanks. I think that is a little easier.
listnum "WP List 3" \l 12524 MR. CHURCH: Under the Competition Act, it is possible for joint dominance, which means that the firms are coordinating their activities and it is a coordinated exercise of market power, so it is a joint control of the market.
listnum "WP List 3" \l 12525 When we talked about yesterday the unilateral versus the coordinated exercise of market power, this would be a coordinated exercise of market power.
listnum "WP List 3" \l 12526 One of the things I think you have to recognize in the Interac case ‑‑ and there are other witnesses who are going to be available to you over the course of this proceeding who are experts in the Interac case and have written extensively about the Interac case, which would be a better source to ask the relationship between joint dominance and the specifics of the Interac case than me. But in that case you had a joint venture, a very simple level. Interac involved the joint venture, as far as I know.
listnum "WP List 3" \l 12527 In this industry we are not talking about a joint venture where there are contractual restrictions between cable companies and incumbent local telephone carriers. So that would be one of the ways that I would distinguish between the Interac case and what is going on here.
listnum "WP List 3" \l 12528 THE CHAIRPERSON: Let's stay away from the Interac case. You are not a legal expert and you are being asked a very specific question, where they kind of joint dominance between an ILEC and a cable company. That's really what the question is.
listnum "WP List 3" \l 12529 MR. CHURCH: That question, I think what you are really asking is what is the potential for coordinating effects. What is the potential for them ‑‑ not with any contractual instrument or anything else ‑‑ to engage in what we would call tacit collusion or to be able to ‑‑ that is a nasty word to use the "collusion" word, but say that they can coordinate by observing how their rivals respond to what they do. Are they able to move closer to a monopoly pricing level than when they compete against each other?
listnum "WP List 3" \l 12530 So again, if we go back to Bell Interrog No. 9 we list five characteristics in this industry and on the basis of those characteristics, along with some additional features, the Bureau would argue it makes it very unlikely that forbearance, when we have just the two competitors ‑‑ and we have forborne so we are not regulating, otherwise this discussion doesn't make any sense, but we are assuming that we have forborne what can happen ‑‑ will there be a coordinated effect?
listnum "WP List 3" \l 12531 So to understand the potential for coordinated effect, the two firms have to reach an agreement. So they have to decide what ‑‑ they have coordinate. That means that they have to agree to what it is that they are trying to do.
listnum "WP List 3" \l 12532 And they can't do it explicitly because they will run into problems with section 45 under the Competition Act, that is illegal, criminally illegal, and so they have to do this in a way which, you know, it's a wink‑wink, nudge‑nudge kind of thing where they communicate through their prices and it may be very difficult for them to reach a consensus on what that coordinated outcome can be. If they can't reach a consensus on what the coordinated outcome can be, they are not going to be able to coordinate.
listnum "WP List 3" \l 12533 There are a number of reasons that the Bureau has pointed out in the local forbearance proceeding, and I think Bell in its evidence of CRA lists a bunch or reasons as well based on what the Bureau's analysis was in local forbearance which indicates why this kind of coordination would be difficult.
listnum "WP List 3" \l 12534 So I give you those references on the record and I will summarize them here.
listnum "WP List 3" \l 12535 The first this is, the cable companies and the new entrants have much smaller market shares than the incumbents and, consequently, they are not interested in cooperating, they are interested in acquiring market share and growing the customer base.
listnum "WP List 3" \l 12536 The cable companies use a very different technology and have different costs. The cable companies have different bundles than the ILECs do. So all of those things are going to make reaching an agreement complicated.
listnum "WP List 3" \l 12537 In addition, this is an industry where we have technological change and we have innovation occurring. There are new products and new services being introduced. Product innovation and reductions in costs result in market disruptions since the innovating firm is trying to make significant gains at the expense of its rival. Those kinds of things make it very difficult to coordinate and have a nice, cosy duopoly.
listnum "WP List 3" \l 12538 Second, the focus of competition between the cable company and the ILEC will not just be one the price of local exchange services. Right? The world we are evolving to is that the cable company and the ILEC are going to be competing to provide broadband access. If I get access to a particular location, then I get to provide all the services that go down the broadband pipe, right, digital telephony, television services and other kinds of things.
listnum "WP List 3" \l 12539 So you are going to have intense competition to be the provider of the pipe into a particular business or residential locations. Again, that is going to make ‑‑
listnum "WP List 3" \l 12540 And competition to do that is going to be on many dimensions, service, reliability, quality, applications and price. All of that is going to set up a situation where it is going to be very difficult to have coordination.
listnum "WP List 3" \l 12541 Third, I think that this is true that the cable companies and the ILECs have historically been rivals in the public policy arena. They are not natural allies. They don't belong to the same trade associations and the same lobby groups, so the industry structure is not naturally conducive to cooperative outcomes.
listnum "WP List 3" \l 12542 Fourth, and I think this is important, the ability to coordinate depends on is it truly a duopoly or in fact do we have other sources of competition which can disrupt that in any kind of coordinated outcome among the two?
listnum "WP List 3" \l 12543 Clearly the access independent VoIP suppliers are out there on the broadband pipes ‑‑ they could easily disrupt this ‑‑ and we have wireless as other options.
listnum "WP List 3" \l 12544 So if you put all those things together, I don't think that the concern of the Bureau is going to be about a coordinated outcome.
listnum "WP List 3" \l 12545 In fact, going back to a paper that was introduced yesterday, "Is Two Enough?" paper, if you read that paper carefully at the end of it they say that the potential for coordination is a very low risk with the two competitors in the Netherlands.
listnum "WP List 3" \l 12546 THE CHAIRPERSON: Could I summarize it by saying theoretically possible, but highly unlikely?
listnum "WP List 3" \l 12547 MR. CHURCH: Very highly unlikely.
listnum "WP List 3" \l 12548 MR. JANIGAN: Is it the Bureau's belief that there has been intense price competition between cable and ILECs with respect to the delivery of broadband services to date?
listnum "WP List 3" \l 12549 MR. CHURCH: I'm not sure that we would necessarily have a view in terms of the way that you have stated that question.
listnum "WP List 3" \l 12550 I guess our view would be to say, as in the Osborne Report, that he points to competition between the broadband as being in a situation where it looks like the duopoly outcome is acceptable compared to alternatives.
listnum "WP List 3" \l 12551 MR. JANIGAN: The state of price competition between the two suppliers is satisfactory from the Bureau's standpoint?
listnum "WP List 3" \l 12552 MR. HUGHES: Ordinarily we are not in the business of assessing the price competitiveness of a market unless we have a particular issue before us. So we don't have any particular view and we don't have particular evidence, except for what we have for this proceeding.
listnum "WP List 3" \l 12553 MR. JANIGAN: Thank you, Mr. Chair. Those are all the questions from my panel.
listnum "WP List 3" \l 12554 I may add that it is not my intention to sit through all of this hearing when I don't have an occasion to cross‑examine. I mean no disrespect to the panel or the witnesses. I find that I can effectively monitor the other through the streaming broadcast or through the transcripts and will try to be available in a timely fashion when it is my turn to cross‑examine.
listnum "WP List 3" \l 12555 So I ask the Chair's indulgence for my absence.
listnum "WP List 3" \l 12556 THE CHAIRPERSON: All right. Thank you.
listnum "WP List 3" \l 12557 Madam Giroux‑Girard, who is next?
listnum "WP List 3" \l 12558 COMMISSIONER CRAM: I have a question.
listnum "WP List 3" \l 12559 THE CHAIRPERSON: Oh, did you have a question for Mr. Janigan?
listnum "WP List 3" \l 12560 COMMISSIONER CRAM: No, no.
listnum "WP List 3" \l 12561 THE CHAIRPERSON: We don't need Mr. Janigan for that?
listnum "WP List 3" \l 12562 COMMISSIONER CRAM: Oh, no. No.
listnum "WP List 3" \l 12563 THE CHAIRPERSON: Go ahead. If you want to follow up on something that came up during the cross‑examination, by all means, do.
listnum "WP List 3" \l 12564 COMMISSIONER CRAM: Back to joint dominance.
listnum "WP List 3" \l 12565 What we have seen here, what's happened, at least my view of what has happened in terms of the cable entrants, is that there is competition for ‑‑ aside from Vidéotron, there is competition only for the high‑end customer and sort of the cherry‑picking.
listnum "WP List 3" \l 12566 I think Shaw was charging $60 when they first went into Alberta, somewhat less in Manitoba. So it's not really ‑‑ it's only competition for the higher level.
listnum "WP List 3" \l 12567 Can we ever expect that ‑‑ and they are doing very well. So if they are doing very well, can you ever expect that they would get to the point where there would be competition for local service alone or anything like that?
listnum "WP List 3" \l 12568 MR. CHURCH: I think this is a very interesting question. It is really a question about the cable company's entry strategy and you would expect that they would go after customers where they could make the most money first.
listnum "WP List 3" \l 12569 But the economics are right, I mean their costs are very low. They have all the sunk costs in the network, they have the sunk costs in the ability to upgrade the network to provide broadband, they have the sunk costs in the ability to provide the telephony, the actual costs associated with actually hooking up a particular location to simple POTS is, given that the location is already wired for the cable company, is actually fairly small. It's the truck roll out and the modem, but ‑‑
listnum "WP List 3" \l 12570 COMMISSIONER CRAM: Actually, they didn't even come to my home.
listnum "WP List 3" \l 12571 MR. CHURCH: Yes. You have broadband, I take it.
listnum "WP List 3" \l 12572 COMMISSIONER CRAM: Yes.
listnum "WP List 3" \l 12573 MR. CHURCH: Yes. So then they can just unplug you. The existing modem has a bunch of places that you can plug things into. Right?
listnum "WP List 3" \l 12574 COMMISSIONER CRAM: Yes.
listnum "WP List 3" \l 12575 MR. CHURCH: So as long as the revenues that they expect to get from people who just want POTS is above the cost of providing them, we would expect that would eventually happen.
listnum "WP List 3" \l 12576 One of the things ‑‑ I'm not quite sure about this and so maybe I shouldn't comment, but I think that Shaw actually has an option to just get local service without long distance bundled into it.
listnum "WP List 3" \l 12577 COMMISSIONER CRAM: We can find out.
listnum "WP List 3" \l 12578 MR. CHURCH: You can find that out.
listnum "WP List 3" \l 12579 COMMISSIONER CRAM: Yes.
listnum "WP List 3" \l 12580 MR. CHURCH: Certainly one of the phones in my house has that option and it's only $25.
listnum "WP List 3" \l 12581 COMMISSIONER CRAM: All right. Thank you.
listnum "WP List 3" \l 12582 THE CHAIRPERSON: All right. Madam Giroux‑Girard...?
listnum "WP List 3" \l 12583 THE SECRETARY: Thank you, Mr. Chairman.
listnum "WP List 3" \l 12584 I will now ask counsel Tacit to proceed on behalf of Cybersurf.
listnum "WP List 3" \l 12585 Thank you.
listnum "WP List 3" \l 12586 MR. TACIT: Thank you.
EXAMINATION / INTERROGATOIRE
listnum "WP List 3" \l 12587 MR. TACIT: Mr. Chairman, Commissioners, panel members, my name is Chris Tacit. I represent Cybersurf Corporation in this proceeding.
listnum "WP List 3" \l 12588 Seated beside me is Mr. Marcel Mercia, Chief Operations Officer of the company.
listnum "WP List 3" \l 12589 In your evidence the Bureau indicated that the competitive significance of mandated access to unbundled loops may not be that significant and perhaps even minimal. Is that right?
listnum "WP List 3" \l 12590 MR. HUGHES: Could you point us somewhere, please?
listnum "WP List 3" \l 12591 MR. TACIT: Yes, paragraph 40 of your main evidence, the last sentence of the paragraph.
listnum "WP List 3" \l 12592 MR. CHURCH: Paragraph 40 has been withdrawn because it was based on the Sone Report.
listnum "WP List 3" \l 12593 MR. TACIT: Well, fair enough, but would you still agree with that conclusion, whether it's based on the Sone Report or anything else on the record?
listnum "WP List 3" \l 12594 MR. CHURCH: I think the general nature of our evidence is, in fact, that we think the competitive significance of the non‑ILEC/non‑cable company people who use unbundled loops has been small.
listnum "WP List 3" \l 12595 MR. TACIT: Okay. Could it have been the case that part of the reason for that reduced significance is that prices for the loops were, in fact, too high, therefore blunting the use of those resources as an input? Is it possible?
listnum "WP List 3" \l 12596 MR. CHURCH: It's possible. In theory, it's possible.
listnum "WP List 3" \l 12597 You know, the Bureau has pointed out earlier in its evidence that there are five requirements, as I recall, to make sure that this model works effectively. One of them is getting the price of these things correct. Another point in the Bureau's evidence is that is it really, really difficult to get the price correct.
listnum "WP List 3" \l 12598 MR. TACIT: Thank you.
listnum "WP List 3" \l 12599 Can you turn to paragraph 45 of your first‑round evidence, please? Page 17, I believe.
listnum "WP List 3" \l 12600 In there, the Bureau states:
"Apart from the entry of the cable companies, the competitive landscape has changed in two other important ways that have implications for the competitive significance of competitors that make extensive use of ILEC network facilities to provide service. The first is the development of broadband services in competition between cable and telecom networks to provide broadband access; the second is the increase in the availability and importance of bundling of voice telecommunication services, including local and long distance service, broadband and video services. Under these circumstances, the competitive significance of entrants that provide only narrow‑band local service using unbundled ILEC network elements is unclear." (As read)
Is that still the Bureau's evidence?
listnum "WP List 3" \l 12601 MR. CHURCH: Yes.
listnum "WP List 3" \l 12602 MR. TACIT: Now, does the Bureau agree that facilities‑based broadband platforms of the ILECs and cable companies are now the predominant means by which bundles of retail, voice, Internet and video services can be delivered to consumers?
listnum "WP List 3" \l 12603 MR. HARITON: Yes.
listnum "WP List 3" \l 12604 MR. TACIT: Thank you.
listnum "WP List 3" \l 12605 I want to now just briefly deal...well, perhaps not so briefly, but deal a little bit more with this notion of joint conduct and coordination, and I want to do it from a couple of different perspectives than have been discussed so far.
listnum "WP List 3" \l 12606 First of all, my understanding is that a group of firms in an industry can profitably coordinate their behaviour if they are capable of accommodating the reactions to the conduct of the other. Is that correct?
listnum "WP List 3" \l 12607 MR. CHURCH: So, in theory, right, we know that if they competed against each other, even in an oligopoly situation, if they just engaged in unilateral exercise of market power, so they make their best choice for them, given their anticipation of how their rivals are going to choose things, that will not lead to monopoly pricing and monopoly profits.
listnum "WP List 3" \l 12608 If, instead, they try to coordinate their thing so that they all agree that we have to move to these prices and it's only profitable for one of them to move to that higher price, if they all move to that higher price that's a coordinated exercise in market power. That's possible. As we have discussed earlier today, there are a great deal of difficulties involved in doing that.
listnum "WP List 3" \l 12609 MR. TACIT: Okay, but I will get into that, so I would appreciate it if you would just give me the answers to the specific questions I'm asking. I will give you ample opportunity to discuss the issue with me.
listnum "WP List 3" \l 12610 Can you also agree with me that this kind of coordination can be either explicit or implied?
listnum "WP List 3" \l 12611 MR. CHURCH: Sorry, did you say implicit and implied?
listnum "WP List 3" \l 12612 MR. TACIT: No, explicit or implied?
listnum "WP List 3" \l 12613 MR. CHURCH: Explicit or tacit is the term I would usually ‑‑
listnum "WP List 3" \l 12614 MR. TACIT: Yes, I was trying to avoid that word.
‑‑‑ Laughter / Rires
listnum "WP List 3" \l 12615 MR. TACIT: Now, can you also agree that it can involve price levels, allocation of customers or territories or any other dimension of competition?
listnum "WP List 3" \l 12616 MR. CHURCH: Can.
listnum "WP List 3" \l 12617 MR. TACIT: Okay.
listnum "WP List 3" \l 12618 Can you please refer to Cybersurf/TELUS‑2, page 1 of 2?
listnum "WP List 3" \l 12619 MR. HUGHES: That will take a moment. Do you have a copy?
listnum "WP List 3" \l 12620 MR. TACIT: We did provide copies.
listnum "WP List 3" \l 12621 THE