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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 29, 2007 Le 29 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 29, 2007 Le 29 octobre 2007
- iv -
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
RESUMED: BRENT MOONEY 2380 /14397
RESUMED: JOHN MACDONALD
RESUMED: TERESA GRIFFIN-MUIR
RESUMED: KELVIN SHEPPARD
RESUMED: RON ROUT
RESUMED: PAUL BRISBY
RESUMED: LEE SELWYN
Cross-examination by TELUS 2381 /14404
AFFIRMED: DR. DEBRA ARON 2466 /14962
AFFIRMED: DR. DENNIS WEISMAN
AFFIRMED: PROF. GLEN ROBINSON
AFFIRMED: DR. ROBERT CRANDALL
Examination-in-chief by TELUS 2466 /14966
Cross-examination by The Competition Bureau 2470 /15006
Cross-examination by MTS Allstream 2496 /15220
Cross-examination by Primus 2567 /15717
Cross-examination by PIAC 2593 /15914
Cross-examination by MTS Allstream 2614 /16049
Cross-examination by Cybersurf 2648 /16272
Cross-examination by Xittel 2684 /16484
SEQ CHAPTER \h \r 1AFFIRMED: DR. KEVIN HICKEY 2697 /16556
AFFIRMED: TED CHISLETT
AFFIRMED: JOE BOUTROS
RESUMED: DR. LEE SELWYN
Examination-in-chief by Primus 2697 /16560
Cross-examination by The Companies 2698 /16577
- v -
EXHIBITS / PIÈCES JUSTIFICATIVES
No. PAGE / PARA
TELUS-5 Ofcom - Valuing copper access - 2382 /14418
Final Statement - Date of
publication: 18 August 2005
MTS-15 List re: (Facilities-Based) 2459 /14913
Parties' pre-hearing evidence on
the Impact of the CDN Decision
on Facilities Construction
Construction or Capital
Expenditure Programs
CRTC-6A CRTC Undertaking register of 2459 /14913
CRTC version updated 29-10-2007
BUREAU‑6 Article by Robert W. Crandall 2496 /15210
entitled: Competition and Chaos,
U.S. Telecommunications since
the 1996 Telecom
BUREAU‑7 Topics in Economic Analysis & 2496 /15210
Policy, Volume 4, Issue 1, 2004,
Article 14 re: Do Unbundling
Policies Discourage CLEC
Facilities-Based Investment
MTS‑16 Alternate Scenario 1 re: 2518 /15396
Significant Price Increase -
Modest Demand Increase due to
reduced ILEC incentives to
innovate & Alternate Scenario 2
re: Price Decrease - Demand
Increase due to increased
competition and innovation
CYBERSURF-7 Excerpt from the Communications 2638 /16204
Act of 1934
Gatineau, Quebec / Gatineau (Québec)
‑‑‑ Upon resuming on Monday, October 29, 2007
at 0805 / L'audience reprendre le lundi
29 octobre 2007 à 0805
1LISTNUM 1 \l 1 \s 43964396 THE CHAIRPERSON: Madam Secretary, who do we have this morning?
1LISTNUM 1 \l 14397 THE SECRETARY: We have this morning the TELUS Panel cross‑examining MTS.
RESUMED: BRENT MOONEY
RESUMED: JOHN MACDONALD
RESUMED: TERESA GRIFFIN‑MUIR
RESUMED: KELVIN SHEPPARD
RESUMED: RON ROUT
RESUMED: PAUL BRISBY
RESUMED: LEE SELWYN
1LISTNUM 1 \l 14398 THE CHAIRPERSON: Go ahead.
1LISTNUM 1 \l 14399 MR. LOWE: Thank you, sir.
1LISTNUM 1 \l 14400 John Lowe on for TELUS. With me is Dr. Levine.
1LISTNUM 1 \l 14401 Mr. Chairman, I have no questions for Dr. Selwyn today. I would like to reserve the right to talk to him on the Primus Panel.
1LISTNUM 1 \l 14402 THE CHAIRPERSON: Okay.
1LISTNUM 1 \l 14403 MR. LOWE: We will move along a little quicker than I originally thought when I provided my time estimates.
EXAMINATION / INTERROGATOIRE
1LISTNUM 1 \l 14404 MR. LOWE: Mr. Brisby, you assisted MTS Allstream in its telecom policy review submission, didn't you?
1LISTNUM 1 \l 14405 MR. BRISBY: That's correct, yes.
1LISTNUM 1 \l 14406 MR. LOWE: And that was on August 15, 2005, subject to check?
1LISTNUM 1 \l 14407 MR. BRISBY: That sounds correct, yes.
1LISTNUM 1 \l 14408 MR. LOWE: And that was right around the time of the Ofcom strategic review, wasn't it?
1LISTNUM 1 \l 14409 MR. BRISBY: The Ofcom review was ongoing at that time, yes.
1LISTNUM 1 \l 14410 MR. LOWE: Sorry, was what?
1LISTNUM 1 \l 14411 MR. BRISBY: The Ofcom review was ongoing at that time, yes.
1LISTNUM 1 \l 14412 MR. LOWE: Thank you.
1LISTNUM 1 \l 14413 Perhaps we could turn to Tab 11 of the book of documents, which you should have. This is a document from Ofcom, entitled "Valuing Copper Access". It is dated August 18, 2005.
1LISTNUM 1 \l 14414 Do you have that?
1LISTNUM 1 \l 14415 MR. BRISBY: I have that, yes.
1LISTNUM 1 \l 14416 MR. LOWE: I would like to turn to paragraph 1.3 of the Summary.
1LISTNUM 1 \l 14417 THE SECRETARY: Please record this document as Exhibit No. 5 for TELUS.
1LISTNUM 1 \l 14418 MR. LOWE: Thank you.
EXHIBIT TELUS‑5: Ofcom ‑ Valuing copper access ‑ Final Statement ‑ Date of publication: 18 August 2005
1LISTNUM 1 \l 14419 MR. LOWE: In the last part of paragraph 1.3 it says:
"Ofcom does not believe the cable companies will significantly increase their coverage in the near future. This means that for a large number of U.K. homes and businesses, BT is the only provider of local access to them and that this is unlikely to change in the near future. This lack of effective competition means that it is important to ensure that the price that other companies, and ultimately consumers, pay for using BT's network is not too high."
1LISTNUM 1 \l 14420 Was the cable coverage in the U.K. at the time this was written about 45 per cent?
1LISTNUM 1 \l 14421 MR. BRISBY: At this time digital broadband enabled cable was approximately 45 per cent and non‑digital solely TV enabled cable would have covered an extra 5 per cent.
1LISTNUM 1 \l 14422 So yes, 45 to 50 per cent sounds about right.
1LISTNUM 1 \l 14423 MR. LOWE: Thank you.
1LISTNUM 1 \l 14424 Then turning to Tab 14, sir ‑‑ and this is an Ofcom 2007 report. Do you have it?
1LISTNUM 1 \l 14425 MR. BRISBY: I have that.
1LISTNUM 1 \l 14426 MR. LOWE: We have extracted page 51 from this report. In the second paragraph under the heading "Digital Cable" it says ‑‑ and this is the second sentence:
"The cable platform has less extensive coverage than either satellite or terrestrial television; 45 per cent versus 98 per cent and 73 per cent."
1LISTNUM 1 \l 14427 Do you see that?
1LISTNUM 1 \l 14428 MR. BRISBY: Yes.
1LISTNUM 1 \l 14429 MR. LOWE: So we are still looking at about 45 per cent coverage in the U.K.?
1LISTNUM 1 \l 14430 MR. BRISBY: Yes, the data are pretty much unchanged. So Ofcom's view that further network build was unlikely has in fact transpired at this time, yes.
1LISTNUM 1 \l 14431 MR. LOWE: Thank you.
1LISTNUM 1 \l 14432 Then further in the paragraph it says:
"It was the first to pioneer dual play services which bundled fixed line telephony and television subscription services."
1LISTNUM 1 \l 14433 Do you see that?
1LISTNUM 1 \l 14434 MR. BRISBY: Yes, I see that.
1LISTNUM 1 \l 14435 MR. LOWE: Is it the case that some U.K. cable companies that pass homes only provide telephony service and don't also provide broadcasting service?
1LISTNUM 1 \l 14436 MR. BRISBY: Some customers will choose only to buy telephony services from the cable company. Some will choose to buy a bundle and indeed some will choose just to buy cable TV.
1LISTNUM 1 \l 14437 MR. LOWE: What are the rough percentages of people who would just buy telephony?
1LISTNUM 1 \l 14438 MR. BRISBY: I don't have those data, I'm afraid.
1LISTNUM 1 \l 14439 MR. LOWE: Picking up on your observation ‑‑ and I think you said it's trite that what works in one market might not work in another ‑‑ perhaps we could turn to Tab 10.
1LISTNUM 1 \l 14440 This is a press release entitled "EU Considers Telecom Super Regulator". I would like to turn you to the second page, if I could.
1LISTNUM 1 \l 14441 MR. BRISBY: I see the document. I'm not exactly sure what the source of the document is.
1LISTNUM 1 \l 14442 Is it a press release or a press article?
1LISTNUM 1 \l 14443 MR. LOWE: It's a press article.
1LISTNUM 1 \l 14444 MR. BRISBY: Okay. And I wasn't sure what it was a press article from.
1LISTNUM 1 \l 14445 MR. LOWE: The publication?
1LISTNUM 1 \l 14446 MR. BRISBY: Yes. I saw the exhibit and I read it, but I couldn't exactly see where it was sourced from.
1LISTNUM 1 \l 14447 I'm happy to answer questions about it. I was just interested.
1LISTNUM 1 \l 14448 MR. LOWE: No, that's fair enough. I just don't have that information handy, but we can probably get that and put it on the record as part of the exhibit list, if it's helpful.
1LISTNUM 1 \l 14449 On page 2 what I was interested in was this quote from the European Commissioner of Telecommunications, Viviane Reding. This is the fourth‑last paragraph and she is reported to say:
"Functional separation will be out of the question in companies where effective competition for infrastructure already exists."
1LISTNUM 1 \l 14450 Do you see that?
1LISTNUM 1 \l 14451 MR. BRISBY: I do see that, yes.
1LISTNUM 1 \l 14452 MR. LOWE: "But where effective
infrastructural competition has little prospect of taking root over the medium to long term, national regulators could, in close agreements with the Commission, make use of this new remedial measure."
1LISTNUM 1 \l 14453 Do you see that?
1LISTNUM 1 \l 14454 MR. BRISBY: I see that as well. I think it is an interesting quotation, isn't it.
1LISTNUM 1 \l 14455 MR. LOWE: Does that sound like something that the European Commissioner might say?
1LISTNUM 1 \l 14456 MR. BRISBY: I don't know. I'm seeing her on Wednesday. I'll ask her.
‑‑‑ Laughter / Rires
1LISTNUM 1 \l 14457 MR. BRISBY: I think the interesting piece here is what this phrase "effective competition for infrastructure" means.
1LISTNUM 1 \l 14458 In the countries that have looked at functional separation, it has obviously been looked at in the U.K. and it has been implemented in the U.K. The U.K. by European standards has fairly high levels of cable penetration, levels of homes passed by digitally enabled cable; other countries in Europe not so much.
1LISTNUM 1 \l 14459 A country like The Netherlands, for example, is unusual. It has more cable coverage than the U.K.
1LISTNUM 1 \l 14460 In The Netherlands they looked very hard at functional separation ‑‑ well, they looked at functional separation and ultimately decided not to go for it.
1LISTNUM 1 \l 14461 They have done it in New Zealand as well, which is a country without much cable coverage.
1LISTNUM 1 \l 14462 But the U.K. is kind of in the middle and, of course, it is important to note that functional separation and the Offcom measures applied equally in areas with cable coverage and in areas without.
1LISTNUM 1 \l 14463 MR. LOWE: Well, maybe we could flip to Tab 13, which is a press release of the European Commission, and it is entitled "Two‑speed broadband: Europe underlines regulatory problems to be addressed through reform."
1LISTNUM 1 \l 14464 Do you see that?
1LISTNUM 1 \l 14465 MR. BRISBY: I see that, yes.
1LISTNUM 1 \l 14466 MR. LOWE: And it starts out in the bolded headnote, second sentence:
"Lack of competition and regulatory weaknesses are cited as the main obstacles to broadband growth." (As read)
1LISTNUM 1 \l 14467 And then it goes down, I think, to your point in the third last paragraph, last sentence:
"In the best performing countries, Denmark (37.2 percent) and the Netherlands (31 percent), roughly one‑third or more of the population has broadband with a substantial proportion using an infrastructure other than the incumbents." (As read)
1LISTNUM 1 \l 14468 And that is your point, that the Netherlands has more cable coverage than the U.K. and they have that head‑to‑head infrastructure competition?
1LISTNUM 1 \l 14469 MR. BRISBY: Well, that is not my point exactly. The Netherlands, of course, has benefited from regulation of local loop unbundling as well. In fact, they have benefited from ‑‑ so they have therefore benefited from multi‑platform competition.
1LISTNUM 1 \l 14470 I think everyone thinks that lots and lots of competing access networks is a great idea. It is a question of how realistic it is to expect people to build them.
1LISTNUM 1 \l 14471 So the Netherlands, for example, which has pretty high population density, I think certainly substantially higher than Canada, probably quite a lot higher than the U.K., does have quite high cable coverage but it has benefited also from competition through local loop unbundling as well.
1LISTNUM 1 \l 14472 MR. LOWE: Well, in the U.K., has BT made any movements towards bringing fiber to the home yet?
1LISTNUM 1 \l 14473 MR. BRISBY: Yes, they have built out in Ebbsfleet and Kent, which will deliver fiber to the premises to something like ‑‑ I am talking off the top of my head but I think it is something like 20,000 premises there.
1LISTNUM 1 \l 14474 MR. LOWE: And those are new areas, not existing areas?
1LISTNUM 1 \l 14475 MR. BRISBY: That is a new development, yes.
1LISTNUM 1 \l 14476 MR. LOWE: Yes.
1LISTNUM 1 \l 14477 And then perhaps you could turn to Tab 12, which is Dr. Crandall's evidence.
‑‑‑ Pause
1LISTNUM 1 \l 14478 MR. BRISBY: This is the TELUS supplementary material; is that right?
1LISTNUM 1 \l 14479 MR. LOWE: That is right and it is page 13 I was interested in.
1LISTNUM 1 \l 14480 MR. BRISBY: Just bear with me while I rearrange my papers slightly.
1LISTNUM 1 \l 14481 Page ‑‑ which one, sorry?
1LISTNUM 1 \l 14482 MR. LOWE: Thirteen.
1LISTNUM 1 \l 14483 MR. BRISBY: Yes, I have that.
1LISTNUM 1 \l 14484 MR. LOWE: And paragraph 28:
"Rather than increase its spending on its network significantly, BT has recently announced a $2.5 billion pound buyback of its stock over the next two years." (As read)
1LISTNUM 1 \l 14485 Do you see that?
1LISTNUM 1 \l 14486 MR. BRISBY: Yes, I see that.
1LISTNUM 1 \l 14487 MR. LOWE: And is that stock buyback program of BT still going on?
1LISTNUM 1 \l 14488 MR. BRISBY: I don't know about the stock buyback program, I am afraid.
1LISTNUM 1 \l 14489 MR. LOWE: All right. Well then, in your evidence on page 12, and this is your original evidence, and it is the second sentence, and I am just trying to clarify something. It says:
"We understand that in Canadian price‑setting exercises an allowance is made for a 'profit' at 15 percent." (As read)
1LISTNUM 1 \l 14490 I was wondering where you gained that understanding, that under the Canadian price‑setting exercise there is a profit at 15 percent.
1LISTNUM 1 \l 14491 MR. BRISBY: Well, I certainly don't claim to be an expert on Canadian regulation directly. I gained that knowledge through my discussions with MTS Allstream.
1LISTNUM 1 \l 14492 MR. LOWE: Oh! So the company would have provided you with that information?
1LISTNUM 1 \l 14493 MR. BRISBY: That is right.
1LISTNUM 1 \l 14494 MR. LOWE: Thank you.
1LISTNUM 1 \l 14495 Well, with that, perhaps I could turn to the company witnesses. Thank you, Mr. Brisby.
1LISTNUM 1 \l 14496 MR. BRISBY: Thank you.
1LISTNUM 1 \l 14497 MR. LOWE: Good morning, panel. We will start with some meet‑and‑greet questions.
1LISTNUM 1 \l 14498 I provided with you under Tab 15 some equity research on MTS.
1LISTNUM 1 \l 14499 Do you have that?
1LISTNUM 1 \l 14500 MR. MOONEY: Yes.
1LISTNUM 1 \l 14501 MR. LOWE: Just to kind of get a sense of who you are, MTS has a market cap of about $3.2 billion; is that right?
1LISTNUM 1 \l 14502 MR. MOONEY: Yes.
1LISTNUM 1 \l 14503 MR. LOWE: And then the enterprise business is about a quarter of that amount?
1LISTNUM 1 \l 14504 MR. MOONEY: In terms of value, that could be right. I am not sure.
1LISTNUM 1 \l 14505 MR. LOWE: Okay. Well, if we turn to page 22 of the document, Exhibit 17 ‑‑ this isn't a CRTC exhibit, it is just entitled Exhibit 17 in the document ‑‑ it has the consumer less wireless value at $1.7 billion, enterprise at $850 million and wireless at $1.239 billion.
1LISTNUM 1 \l 14506 Do you see that?
1LISTNUM 1 \l 14507 MR. MOONEY: Yes, but just to be clear, this is an analyst document, it is not a document that is put out by our company. It is based on whoever the author of the report's views are relative to our financial performance and what we do and what their prospects or their view of the prospects of the company going forward.
1LISTNUM 1 \l 14508 So I am not in a position to say that I agree or disagree with what this individual's views are on our valuation.
1LISTNUM 1 \l 14509 MR. LOWE: No, and I am not trying to get it down to the penny but just rough and ready about a quarter of the asset value of MTS Allstream is the enterprise business; is that reasonable?
1LISTNUM 1 \l 14510 MR. MOONEY: Well, I just said I am not sure I am prepared to say that. That is what this report is saying. I am prepared to say that that is what is on that page 22.
1LISTNUM 1 \l 14511 But in terms of the value, we look at it ‑‑ perhaps we look at it differently, that is all I am saying.
1LISTNUM 1 \l 14512 MR. LOWE: Perhaps we could turn to page 2 of the document then and this is under the heading "Investment Thesis."
1LISTNUM 1 \l 14513 The heading is "FCF..." ‑‑ that is free cash flow, I take it ‑‑ "...generation and a hefty dividend."
1LISTNUM 1 \l 14514 Do you see that?
1LISTNUM 1 \l 14515 MR. MOONEY: Sorry, just ‑‑ yes, on page ‑‑ sorry, which page?
1LISTNUM 1 \l 14516 MR. LOWE: Page 2.
1LISTNUM 1 \l 14517 MR. MOONEY: Page 2, yes.
1LISTNUM 1 \l 14518 MR. LOWE: Right at the top of the page.
1LISTNUM 1 \l 14519 MR. MOONEY: Yes.
1LISTNUM 1 \l 14520 MR. LOWE: And is that still essentially the investment story in MTS or are you saying this is just the view of the analyst?
1LISTNUM 1 \l 14521 MR. MOONEY: Yes. I don't use the word "hefty" whenever I talk about our company under any sense. That is this person's view of our dividend.
1LISTNUM 1 \l 14522 I would like to think that our dividend is reasonable and I would suggest if you want a good definition of our dividend you should talk to our shareholders.
1LISTNUM 1 \l 14523 MR. LOWE: Thank you.
1LISTNUM 1 \l 14524 MR. MOONEY: They would probably tell you it is very reasonable as well.
1LISTNUM 1 \l 14525 MR. LOWE: Thanks.
1LISTNUM 1 \l 14526 And then maybe we could turn to page 12 and that has a bit of an analysis of Allstream.
1LISTNUM 1 \l 14527 Under the heading "Allstream was acquired in 2004 for $1.6 billion," do you see that?
1LISTNUM 1 \l 14528 MR. MOONEY: Yes.
1LISTNUM 1 \l 14529 MR. LOWE: And then it says that:
"MTS amalgamated three operating divisions, MTS Communications, MTS Media and Allstream Corp., to form a new company under the name MTS Allstream Inc." (As read)
1LISTNUM 1 \l 14530 And then below that:
"The Enterprise Solution Division operates under the Allstream brands nationally and is a leader in business and wholesale markets." (As read)
1LISTNUM 1 \l 14531 Do you see that?
1LISTNUM 1 \l 14532 MR. MOONEY: Yes, I see that.
1LISTNUM 1 \l 14533 MR. LOWE: I would like to just focus in on the Enterprise Solutions Division for a moment.
1LISTNUM 1 \l 14534 I take it that is ‑‑ the space the Enterprise Solutions Business is in is wholesale and enterprise?
1LISTNUM 1 \l 14535 MR. MOONEY: Yes, wholesale, enterprise mid‑market.
1LISTNUM 1 \l 14536 MR. LOWE: Okay. And then it says in the paragraph above:
"Allstream continues to transition from legacy business issues." (As read)
1LISTNUM 1 \l 14537 It says:
"The company currently has a roughly 8‑10 percent market share across Canada but with a larger concentration of this in Toronto, roughly a 20 percent share." (As read)
1LISTNUM 1 \l 14538 Do you see that?
1LISTNUM 1 \l 14539 MR. MOONEY: Yes, I see that.
1LISTNUM 1 \l 14540 MR. LOWE: Does that sound about right or...?
1LISTNUM 1 \l 14541 MR. MOONEY: Yes, that sounds about right.
1LISTNUM 1 \l 14542 MR. LOWE: And the analysis probably would have gained that understanding through discussions with the company?
1LISTNUM 1 \l 14543 MR. MOONEY: Yes or on our quarterly investor call, something like that, sure.
1LISTNUM 1 \l 14544 MR. LOWE: Okay.
1LISTNUM 1 \l 14545 And then under this heading, the second last paragraph on the page:
"The strategy going forward..." (As read)
1LISTNUM 1 \l 14546 And again, this is the enterprise business, I take it.
"...is for a more market‑focused strategy that highlights Allstream's high capacity network..." (As read
1LISTNUM 1 \l 14547 And that is this 24,000‑kilometre network, I take it.
"...and also its superior customer focus." (As read)
1LISTNUM 1 \l 14548 Do you see that?
1LISTNUM 1 \l 14549 MR. MOONEY: Yes.
1LISTNUM 1 \l 14550 MR. LOWE: And so the value proposition that you have is your network and your customer focus, right?
1LISTNUM 1 \l 14551 MR. MacDONALD: It is much more than that. I mean, certainly we would say it is a mix that includes the fact that we have we believe a very competitive service offering. For example, we believe that we have got the best MPLS service offering in Canada which, in large measure, is due to the fact that we have been able to use CDN and other alternative access arrangements that actually support access to that network.
1LISTNUM 1 \l 14552 Along with that, we think we are more of a human scale company relative to the competition. So we think that we can move a little bit more quickly in terms of responding to the various needs in the marketplace. And at the end of the day, we like to use our people as probably the best measure in terms of differentiation. And we measure and we ask our customers about that, and they think that we do have people that actually listen to what their problems are and develop solutions for those problems.
1LISTNUM 1 \l 14553 MR. LOWE: Thank you. And then turning the page to page 13, and the third last paragraph from the bottom it says:
"On December 13, 2006 MTS announced the completion of a strategic review and related business plans. As part of this review, MTS announced a key priority going forward will be to increase cash distributions to shareholders. More specifically, MTS plans to distribute 70 to 80 per cent of its annual distributable cash flow." (As Read)
1LISTNUM 1 \l 14554 Do you see that?
1LISTNUM 1 \l 14555 MR. MOONEY: Yes.
1LISTNUM 1 \l 14556 MR. LOWE: Now, this is clearly the analyst's view, but is that still the company's strategic plan?
1LISTNUM 1 \l 14557 MR. MOONEY: As far as I know, it is, yes.
1LISTNUM 1 \l 14558 MR. LOWE: Thank you. And turning to page 14, this is the second paragraph from the bottom:
"Tax yields through to 2014 has a value in DCF."
And it says:
"With the acquisition of Allstream in June 2004 MTS has eliminated cash taxes on earnings as a result of utilizing tax losses from Allstream." (As Read)
1LISTNUM 1 \l 14559 And I take it that tax yield will be effective until 2014, is the current thinking in any event? Is that right?
1LISTNUM 1 \l 14560 MR. MOONEY: Well, I don't know if there is anything that has changed since recently on that. But to my knowledge, yes, it was somewhere in the 2013, 2014 timeframe.
1LISTNUM 1 \l 14561 MR. LOWE: Okay. And ‑‑
1LISTNUM 1 \l 14562 MR. MOONEY: I am sorry, what was that?
1LISTNUM 1 \l 14563 MR. LOWE: No, that is fine, I was just waiting for you.
1LISTNUM 1 \l 14564 And all other things being equal, if you are not taxable you are less sensitive to the incentives in the income tax system to invest, isn't that right?
1LISTNUM 1 \l 14565 MR. MOONEY: I wouldn't say that at all. In fact, we are very aware of what is available under the Income Tax Act and we take advantage of it. Specifically, if you are talking about R&D tax credits, we invest in a lot of things that are eligible for those tax credits, irrespective of our cash tax position.
1LISTNUM 1 \l 14566 MR. MacDONALD: The other thing too, is when you look at the return to shareholders, either via dividends or share buybacks. The share buybacks are actually funded through discreet transactions such as the sale of our directory business, et cetera.
1LISTNUM 1 \l 14567 It has no impact on our capital expenditures relative to ‑‑ so, for example, running the enterprise operating division, if anything, my Cap‑ex over the past few years has gone up. So there is nothing to do with saying that what we are doing is returning this money to the shareholders and starving for capital. I don't see that at all. As a matter of fact, we continue to invest in our core network in terms of new services.
1LISTNUM 1 \l 14568 And once again to reiterate, a large part of that investment is actually fuelled by virtue of the fact that we have cost effective access to our customers. And as far as dividend policy, the dividend policy is dictated, to a large measure, by exactly what our shareholders expect relative to the risk profile of our company compared to alternative investment opportunities that they might have.
1LISTNUM 1 \l 14569 But to suggest that we are not spending money on network is not the reality. And to suggest that we would take the money that was going to dividends or share buybacks and invest in network that was uneconomic, I mean, that does just doesn't hunt. I mean, to take money that is being generated by the business and investing it in uneconomic approaches is not going to work. I mean, we have tried that, we have invested $4 billion in our history in trying to do that and trying to replicate the incumbent networks and that doesn't happen.
1LISTNUM 1 \l 14570 MR. LOWE: All right. Well, you see the tax‑free status until 2014 as an advantage then, it gives you more cash flow and you have more spending money, is that what you are saying?
1LISTNUM 1 \l 14571 MR. MacDONALD: I wasn't commenting directly in terms of the tax status of the company. It is part of the overall investment profile of the company in terms of whether we are paying taxes or not. In terms of whether it constrains, we think it constrains our ability to invest in capital, absolutely not the case.
1LISTNUM 1 \l 14572 As a matter of fact, one of the things as we continue to invest in capital, we do generate the capital cost allowance and capital cost allowances, you know, we can actually use in terms of deferring taxes in the future as well, like everybody else does, like our competitors.
1LISTNUM 1 \l 14573 MR. LOWE: Oh sure, sure. And the depreciation, the CCA that you get from investing you can use it, but you can't use it until after 2014, right, so you ‑‑
1LISTNUM 1 \l 14574 MR. MacDONALD: Yes, but you can use it though.
1LISTNUM 1 \l 14575 MR. LOWE: You can use it eventually. So it is not as sharp as an incentive?
1LISTNUM 1 \l 14576 MR. MacDONALD: It is not as sharp. But it doesn't, in terms of our decision to deploy capital and investing in network, I can't recall any decision that we have taken in terms of putting together a profile in terms of capital investment that would take that directly into account.
1LISTNUM 1 \l 14577 MR. LOWE: So the tax tail doesn't wag the business in other words?
1LISTNUM 1 \l 14578 MR. MOONEY: No, not at all, because basically the metric that everybody looks at in the telecommunications industry is the EBITDA metric, which is your operating cash flow before tax. And it is out of that operating cash flow that you find your capital program. So tax doesn't even come into the calculation.
1LISTNUM 1 \l 14579 MR. LOWE: All right. And so these ‑‑
1LISTNUM 1 \l 14580 MR. MOONEY: Which is really one of the inconsistencies or one of the issues when you read a report like this. You know, as Mr. MacDonald pointed out previously, the buyback program that is referred to in here was the result of a business review that was conducted by ‑‑ MTS started a couple of years ago that lead to the disposal of some non‑core assets that the company no longer needed and the decision was made to return that money to shareholders.
1LISTNUM 1 \l 14581 To my knowledge, it has been done at Bell and it has been done at TELUS in the past as well. So I don't understand why it plays into this discussion at all.
1LISTNUM 1 \l 14582 MR. LOWE: Well, on page 21 of the document, in the second‑last paragraph or even the middle of the paragraph, it says:
"Second, we value the Allstream EBITDA.."
as you say, that is the major metric for telecom investors,
"..at five times, which is a slight premium to valuations in the enterprise telco space which appear to be closer to 4.5 times currently. However, we believe that MTS has some room on executing its strategy with Allstream to argue that a conservative multiple on 2008 EBITDA might not adequately reflect value." (As Read)
1LISTNUM 1 \l 14583 Do you see that?
1LISTNUM 1 \l 14584 MR. MacDONALD: One of the issues, of course, when I read this is, and this is this analyst's opinion, as Mr. Mooney has said, I don't know who else they are referring to to end up with a comparable, because there is very few of us actually in this space.
1LISTNUM 1 \l 14585 You know, when I look at the number of folks outside from Bell and TELUS that actually could justify this kind of multiple I don't know who it would be.
1LISTNUM 1 \l 14586 MR. LOWE: Well, first, does that multiple sound about right for this kind of business?
1LISTNUM 1 \l 14587 MR. MOONEY: I would say that this multiple is this person's opinion. I don't really want to comment on whether I agree with it or not, I don't know. It is his opinion, I would have to understand how this person came up with that multiple.
1LISTNUM 1 \l 14588 MR. LOWE: And then could you comment on whether it is a premium to others in the space or do you just say that you just don't know, you don't know what the comparables are ‑‑
1LISTNUM 1 \l 14589 MR. MOONEY: You know, I don't know the basis that this individual who wrote this report came up with this multiple. You know, perhaps if I sat and talked to the person then I could understand where they are coming from, but right now I don't.
1LISTNUM 1 \l 14590 MR. LOWE: All right, that is fair enough.
1LISTNUM 1 \l 14591 MR. MacDONALD: And it is somewhat speculative, because if you could find a pure play I suppose of the enterprise space you might have something that you could benchmark against. But once again, there is not many of us left in the enterprise space.
1LISTNUM 1 \l 14592 MR. SHEPPARD: I think I would suggest as well this is one analyst. There is probably a dozen analysts and they all have their own views and a range, I am not sure what the range on the enterprise valuation is, but you would have to look at the full range and then probably some are high and some are low and you would have to form your own conclusion as an investor.
1LISTNUM 1 \l 14593 MR. LOWE: All right. Now, turning to tab 16, and this is moving onto the discussion of that Newfoundland cable facility that has been raised a couple of times in the proceeding. And tab 16 is Decision 2005‑16, it is a CRTC decision issued back in March of 2005 before the TPR report came out, before the policy direction was issued. And one of the main issues in that case was whether Aliant's submarine fibre optics line from Halifax to St. John's was an essential facility under the 97‑8 test.
1LISTNUM 1 \l 14594 And if you look at paragraph 29 of the decision it says:
"Call‑Net argued that Aliant Telecom's IX digital transport facility between Halifax and St. John's met all the conditions of an essential facility.." (As Read)
and then it goes on and it cites the three requirements. Do you see that?
1LISTNUM 1 \l 14595 MR. MacDONALD: Yes, we do.
1LISTNUM 1 \l 14596 MR. LOWE: And that test set out by Call‑Net is essentially the test established by Commission in Decision 97‑8?
1LISTNUM 1 \l 14597 MS GRIFFIN‑MUIR: Yes, that is correct.
1LISTNUM 1 \l 14598 MR. LOWE: In paragraph 23 of the decision:
"MTS Allstream supported Call‑Net's position that competitors would be unable to economically duplicate the facility in question, given the significant costs of construction and limited demand." (As Read)
1LISTNUM 1 \l 14599 Do you see that?
1LISTNUM 1 \l 14600 MR. MacDONALD: Yes.
1LISTNUM 1 \l 14601 MR. LOWE: And then paragraphs 48 and 49, the CRTC denied the application, they looked at other submarine builds and took the view that a new IX line would be economically feasible and they said that it is not an essential facility. Do you see that?
1LISTNUM 1 \l 14602 MR. MacDONALD: Yes, we do. And, by the way, I still hold to the comments that we made in terms of it being not economic.
1LISTNUM 1 \l 14603 The circumstance under which the facility was built was unusual, insofar as you ended up with a situation where three companies actually came together along with a government subsidy that was quite significant to basically justify the expenditure.
1LISTNUM 1 \l 14604 MR. LOWE: All right. Well, let's flash forward then to 2007, today.
1LISTNUM 1 \l 14605 And I take it that a consortium of carriers and the Government of Newfoundland are going to pay some, what is it, $53‑million to build the line?
1LISTNUM 1 \l 14606 MR. MacDONALD: The actual total ‑‑ the total build I believe is on the ‑‑ just through public documents. Ron, maybe I can hand it over to you.
1LISTNUM 1 \l 14607 MR. ROUT: Yeah. The entire build, both the submarine cable and the terrestrial portions we understand is $82‑million of which 52‑, 53‑million was for the submarine portion alone.
1LISTNUM 1 \l 14608 MR. LOWE: And then the Government of Newfoundland is buying an indefeasible right of use for 15‑million; is that the way the deal works on the submarine part of it?
1LISTNUM 1 \l 14609 MR. MacDONALD: The government contributed to the tune of about $15‑million to that construction and in return for that, one of the benefits they get is I believe an IRU.
1LISTNUM 1 \l 14610 MR. ROUT: Yes, that's right.
1LISTNUM 1 \l 14611 MR. LOWE: All right. And then do you have that press release, it's Tab 17, the Government of Newfoundland press release?
1LISTNUM 1 \l 14612 MR. MacDONALD: Yes, we have it.
1LISTNUM 1 \l 14613 MR. LOWE: And let me ask you first, is this an economic project for MTS Allstream?
1LISTNUM 1 \l 14614 MR. MacDONALD: Relative to the prices we were paying to Aliant for leasing that facility, absolutely.
1LISTNUM 1 \l 14615 And, by the way, it gives you some indication of some of the difficulties that we're faced with in terms of looking at, you know, a more cost effective reach to 'The Rock', as we call it.
1LISTNUM 1 \l 14616 And I only wish, if you look at generalizing this kind of approach to the rest of the marketplace, that we would end up with a situation that in servicing the needs of our customers we coincidentally would have two other partners as well as government money to assist in the deployment of network.
1LISTNUM 1 \l 14617 MR. LOWE: Well, let's talk about the government money for a moment. And in the press release, this is a news release of the Government of Newfoundland dated August 27th, 2007, the third last paragraph:
"Based on an external independent assessment by EWA, it is conservatively estimated that the Province will recover its investment within five years through cost savings on current and future telecommunications contracts." (As read)
1LISTNUM 1 \l 14618 Do you see that?
1LISTNUM 1 \l 14619 MR. MacDONALD: Yeah.
1LISTNUM 1 \l 14620 MR. LOWE: And so I don't think the Government of Newfoundland would agree with you that this was a subsidy?
1LISTNUM 1 \l 14621 MR. MacDONALD: The government had a complex mix in terms of looking at their participation in this. One of the issues that they had was a survivability issue, like a diversity in terms of there was some incidents that had occurred, unfortunately, in terms of the existing networks that was driving this.
1LISTNUM 1 \l 14622 There was also a concern that, you know, perhaps the prices were too high relative to the cost of accessing Newfoundland and perhaps that was constraining economic development.
1LISTNUM 1 \l 14623 They were getting a fair bit of pressure in terms of various services and about how they were priced in Newfoundland versus other areas.
1LISTNUM 1 \l 14624 And from our standpoint, we looked at simply the costs that we were paying to Aliant versus the opportunity to participate.
1LISTNUM 1 \l 14625 Now, if we were doing this individually, or Persona was doing it individually ‑‑ now East Link ‑‑ or Rogers was doing it individually, this would not have happened.
1LISTNUM 1 \l 14626 But it just so happened that we had the unique alignment to the stars that allowed us to actually participate, all four parties, in terms of getting it constructed.
1LISTNUM 1 \l 14627 And the interesting thing is that it seems that since it was constructed, in our just some recent negotiations with Aliant that the price points magically seem to have dropped on what the cost to get to Newfoundland actually has been.
1LISTNUM 1 \l 14628 Ron, maybe you could talk to that.
1LISTNUM 1 \l 14629 MR. ROUT: Yeah, that's right.
1LISTNUM 1 \l 14630 You know, post ‑‑ even before the build is complete we've seen action that would suggest at least 20 per cent drop in the price for that route.
1LISTNUM 1 \l 14631 The other thing that's really important to us, I mean, the Newfoundland build for us was sort of, from our perspective, a bold and significant investment.
1LISTNUM 1 \l 14632 But I want to highlight another factor which is the importance for us going forward with this build for the people of Newfoundland and those, and the cities that we can now get much closer to is, again, the requirement for us to be able to get Ethernet and other accesses at the right cost point, because even with this investment we still need to be able to get access to Ethernet in order to provide service to these customers.
1LISTNUM 1 \l 14633 MR. LOWE: Okay. Well, just back to the Government of Newfoundland's perspective, Mr. MacDonald.
1LISTNUM 1 \l 14634 And I accept that there were these other considerations that they had about economic development, but still they looked at what the pay back was and they said, "Look, we're going to get a five‑year pay back over this, it's economic", didn't they?
1LISTNUM 1 \l 14635 MR. MacDONALD: They expect that the existence of a competing build, and as I mentioned earlier is actually turning out to be the case, will result in lower prices on that particular route.
1LISTNUM 1 \l 14636 MR. LOWE: All right.
1LISTNUM 1 \l 14637 MR. MacDONALD: Now, but at the end of the day, when you look at the total volume of traffic that is actually originating and terminating in Newfoundland, is that this basically was an uneconomic build. I mean I was involved, I worked at Aliant at the time when the link went in. I mean, there was no additional requirement for capacity to the Island.
1LISTNUM 1 \l 14638 So, of the 50‑million bucks on the submarine cable in particular and the $80‑million in total, as to whether that represented a good economic deployment of investment resources, I'm not so sure that would have been the case.
1LISTNUM 1 \l 14639 The government on the other hand has a different set of requirements. They anticipate that there is going to be lower pricing in terms of accessing Newfoundland and that will have all sorts of positive economic development benefits from their standpoint, perhaps more in terms of survivability, an alternative route to the Island.
1LISTNUM 1 \l 14640 All of those went into their decision, but I can't speak directly in terms of what their expectations are, I can only assume based on their particular quote.
1LISTNUM 1 \l 14641 MR. LOWE: All right. And, but what happened was a bunch of carriers got together and on the circumstances of the Aliant prices that were being charged, it was an economic investment with the Government of Newfoundland?
1LISTNUM 1 \l 14642 MR. MacDONALD: Only in the context of looking at what we were paying.
1LISTNUM 1 \l 14643 MR. LOWE: Yes, yes, yes. Agreed.
1LISTNUM 1 \l 14644 And then, of course, now that there are two lines there, it's easier for other folks to get over to 'The Rock' too; isn't it?
1LISTNUM 1 \l 14645 MR. MacDONALD: When you say easier, I'm not sure what you mean.
1LISTNUM 1 \l 14646 MR. LOWE: Less expensive perhaps.
1LISTNUM 1 \l 14647 MR. MacDONALD: Well, at the end of the day this is typically what happens, is that you end up with ‑‑ basically you price to the market. So, a lot depends on upon how this ‑‑ it's still early days, actually the service I don't believe, Ron, is actually in operation quite yet.
1LISTNUM 1 \l 14648 MR. LOWE: All right. Now, I don't know if I really want to get mired down in this particular question, I'm just going to put it to you that if the CRTC had applied your test for an essential facility back in 2005, they probably would have declared the Aliant line to be an essential facility; right?
1LISTNUM 1 \l 14649 MR. MacDONALD: Yeah, I think it was an essential facility and it is an essential facility. It's not going to when the second route goes in place, but that's an uneconomic deployment of resources.
1LISTNUM 1 \l 14650 I don't know what it's bringing, aside from the fact that we now have a competitive route there that can result in lower prices in terms of developing a different array of network services, et cetera.
1LISTNUM 1 \l 14651 And this is our point, is that when we're looking at innovation in the telecom market space, I don't think this is moving the ball forward.
1LISTNUM 1 \l 14652 MR. LOWE: Well, let's just go through the big picture, the steps here.
1LISTNUM 1 \l 14653 Step one, the CRTC is asked to declare the Aliant line an essential facility on the grounds that it's uneconomic to duplicate. Step two, the CRTC denies the application. Step three, the market comes forward with a build; right?
1LISTNUM 1 \l 14654 MR. MacDONALD: That is ‑‑ well, I'm not sure that it all follows that particular way, but at the end of the day this is an uneconomic build and you have the convergence of four parties, including public money, to subsidize the deployment of an uneconomic facility that's driven by high prices.
1LISTNUM 1 \l 14655 MR. LOWE: All right. Well, you say it's an uneconomic facility, but it's economic for all the investors; isn't it?
1LISTNUM 1 \l 14656 MR. MacDONALD: Only relative to the extremely high prices, exorbitant prices that were being charged by the incumbent.
1LISTNUM 1 \l 14657 MR. LOWE: All right. Well, I'm going to ‑‑
1LISTNUM 1 \l 14658 MR. MacDONALD: That I used to work for, by the way, but...
1LISTNUM 1 \l 14659 MR. LOWE: I'm going to end up doing it. Did you price it?
‑‑‑ Laughter / Rires
1LISTNUM 1 \l 14660 MR. LOWE: The CRTC holds true to the essential facilities test, the market finds a solution, plans get built, there's more opportunities for other folks to get in on the wholesale market.
1LISTNUM 1 \l 14661 Isn't the future friendly, Mr. MacDonald?
1LISTNUM 1 \l 14662 MR. MacDONALD: But I wish ‑‑ I kind of wish you could generalize this. I mean, if it turned out that for, you know, all of the various ‑‑ our access requirements across the country that there happened to be, you know, in going to, you know, whether it's retail outlets or bank branches, whether we happen to have, you know, multiple investors and government money that was supporting the deployment of last mile access into those facilities, I don't think I'd be sitting here.
1LISTNUM 1 \l 14663 MR. LOWE: All right. So, there's only so far we can take the parable of Newfoundland you say. That's fair enough.
1LISTNUM 1 \l 14664 THE CHAIRPERSON: If I understand you correctly, the Government of Newfoundland investment was incremental. Without that 50‑million the line would not have been built?
1LISTNUM 1 \l 14665 MR. MacDONALD: Well, the line was primed by Persona.
1LISTNUM 1 \l 14666 THE CHAIRPERSON: Yes.
1LISTNUM 1 \l 14667 MR. MacDONALD: And Rogers and ourselves were participants in this.
1LISTNUM 1 \l 14668 But, you know, thinking back to some of the deliberations ‑‑
1LISTNUM 1 \l 14669 THE CHAIRPERSON: No, but as a former government lawyer, you know, normally government doesn't put in money unless it determines to its own satisfaction that this will not go forward without the government contribution.
1LISTNUM 1 \l 14670 MR. MacDONALD: And I think that's a fair assessment.
1LISTNUM 1 \l 14671 THE CHAIRPERSON: On its own it's not economic, and that is what you are saying here, that is what happened here.
1LISTNUM 1 \l 14672 MR. MacDONALD: Yes, I think that's a fair assessment.
1LISTNUM 1 \l 14673 THE CHAIRPERSON: Thank you.
1LISTNUM 1 \l 14674 MR. LOWE: Well, on that point, did you ask TELUS if they wanted to invest in the line?
1LISTNUM 1 \l 14675 MR. MacDONALD: It wasn't up to us to do the asking because Persona actually owns the facility, and so...
1LISTNUM 1 \l 14676 MR. LOWE: Because they're the operator?
1LISTNUM 1 \l 14677 MR. MacDONALD: Pardon me?
1LISTNUM 1 \l 14678 MR. LOWE: They're the operator?
1LISTNUM 1 \l 14679 MR. MacDONALD: That's correct.
1LISTNUM 1 \l 14680 MR. LOWE: And do you know if TELUS was asked?
1LISTNUM 1 \l 14681 MR. MacDONALD: I honestly don't know. I know that TELUS was in that cross‑section obviously, but I'm not sure whether TELUS specifically was asked.
1LISTNUM 1 \l 14682 MR. LOWE: All right. Now, I'd like to turn now ‑‑
1LISTNUM 1 \l 14683 MS GRIFFIN‑MUIR: But just in respect of that, the SFT referred to in this decision, that generates some million annually, TELUS actually got a different SFT because we did actually ask TELUS if they wanted to sublease on this SFT and Aliant offered them something better.
1LISTNUM 1 \l 14684 So, I think that had a lot to do with whether TELUS participated or not.
1LISTNUM 1 \l 14685 MR. LOWE: And, so, are you saying you saw this SFT that TELUS got and you got miffed and you didn't invite them at the table ‑‑
1LISTNUM 1 \l 14686 MS GRIFFIN‑MUIR: No, no, no, no.
1LISTNUM 1 \l 14687 MR. LOWE: ‑‑ and they were on the other side of the candy store looking in, is that ‑‑
1LISTNUM 1 \l 14688 MS GRIFFIN‑MUIR: No, actually what I'm saying is that when we ‑‑ because we are the company that was actually leasing the facilities under the SFT ‑‑ what we had decided to make it economic for us to lease was to sublease, which we did to Call‑Net, subsequently Rogers, but in the instance where we were actually negotiating with TELUS, Aliant approached them to make sure they did not sublease from us but leased from Aliant instead, so offered them something better.
1LISTNUM 1 \l 14689 MR. LOWE: This is before the line was built?
1LISTNUM 1 \l 14690 MS GRIFFIN‑MUIR: Absolutely, because it became less economic for us to continue if Aliant wasn't going to allow us to sublease as well.
1LISTNUM 1 \l 14691 MR. LOWE: Well, it's a different story now, and if TELUS comes and wants to get on your new line, you are not going to say no, are you? You are not going to hold it against TELUS, are you?
1LISTNUM 1 \l 14692 MR. MacDONALD: Oh, no, no, absolutely. I mean, one of the issues we have got is that TELUS buys precious little from us and we buy a huge amount from them. If they were only willing to buy something from us, we would be more than willing to sell it.
1LISTNUM 1 \l 14693 MR. LOWE: Well, you got something now.
1LISTNUM 1 \l 14694 So I would like to turn now to the direction, and it's Tabs 18, 19 and 20 of the binder, and also if you have handy your opening statement. And I don't know if we will get into it, but a copy of the direction might come in handy, as well, and there is one in PIAC Exhibit No. 2.
‑‑‑ Pause
1LISTNUM 1 \l 14695 MR. LOWE: Now, MTS Allstream was a major participant in the Telecom Policy Review process, right?
1LISTNUM 1 \l 14696 MS GRIFFIN‑MUIR: Well, we were a participant, but it's nice to think we were major.
1LISTNUM 1 \l 14697 MR. LOWE: Well, you filed a comprehensive submission and reply and you had expert evidence from Towerhouse Consulting and you had, I think, a Washington D.C. Lawyer to provide views on U.S. regulation.
1LISTNUM 1 \l 14698 Does that sound about right?
1LISTNUM 1 \l 14699 MS GRIFFIN‑MUIR: Yes, that's correct.
1LISTNUM 1 \l 14700 MR. LOWE: Thanks. And that was May 15th, 2007 those submissions were filed...or I'm sorry, 2005 those submissions were filed.
1LISTNUM 1 \l 14701 MS GRIFFIN‑MUIR: Right, okay. Yes.
1LISTNUM 1 \l 14702 MR. LOWE: Now, turning to Tab 19...and this is page 81 of your August 15th, 2005 submission to the Telecom Policy Review Panel, do you have that?
1LISTNUM 1 \l 14703 MS GRIFFIN‑MUIR: Yes.
1LISTNUM 1 \l 14704 MR. LOWE: You set out three objectives, and the second objective (b) was:
"To create and maintain conditions under which market forces can govern the provision of telecommunication services by fostering all forms of competition." (As read)
1LISTNUM 1 \l 14705 Do you see that?
1LISTNUM 1 \l 14706 MS GRIFFIN‑MUIR: Yes.
1LISTNUM 1 \l 14707 MR. LOWE: And then at the bottom of the page, you say:
"In addition, the government should use its powers of direction to require the CRTC to adopt a policy that proactively and boldly implements these objectives without fear for what form competition will take as a result." (As read)
1LISTNUM 1 \l 14708 Do you see that?
1LISTNUM 1 \l 14709 MS GRIFFIN‑MUIR: Yes. I think that's in reference to the fact that "form" meaning not only facilities‑based or end‑to‑end facilities based, not to try predetermine the nature that choice has brought to customers and innovation has brought to the market.
1LISTNUM 1 \l 14710 MR. LOWE: And so you wanted the direction to say, "To create and maintain conditions under which market forces can govern by fostering all forms of competition", that's what you wanted to see in the direction?
1LISTNUM 1 \l 14711 MS GRIFFIN‑MUIR: Well, that's what we proposed, yes.
1LISTNUM 1 \l 14712 MR. LOWE: All right. And it's fair to say that's not what came out of the Telecom Policy Review recommendations?
1LISTNUM 1 \l 14713 MS GRIFFIN‑MUIR: Well, I'm not sure that's not what came out. That's a little bit of a generalization. There's a lot that came out. Some of it we agreed with and some of it we didn't.
1LISTNUM 1 \l 14714 Certainly, the government wants to encourage competition and innovation, and certainly that's what the policy direction also says. I guess the government also came out in the policy direction that was derived from the Telecom Panel Review they want a reliance on market forces, and I guess it's, in our opinion, a question of those market forces being competitive.
1LISTNUM 1 \l 14715 So it goes to the interpretation of what is meant by "market forces", and, in our view, that's competitive market forces. So I wouldn't say in its totality that the panel report didn't ‑‑ the government didn't adopt recommendations that don't agree with what we are saying here.
1LISTNUM 1 \l 14716 MR. LOWE: All right. We can talk about this tomorrow, but it's just this "create and maintain conditions" part, I didn't see that in the TPR's proposed direction and I don't see that in the direction that was actually issued.
1LISTNUM 1 \l 14717 MS GRIFFIN‑MUIR: The precise wording, no, but obviously the direction that was issued is meant to offer choice to consumers and promote competition.
1LISTNUM 1 \l 14718 In fact, if you read the wording in the analysis and if you read some of the press releases of the industry minister at the time, I mean that's precisely what he wanted to encourage: innovation, investment and choice for customers.
1LISTNUM 1 \l 14719 MR. LOWE: Well, maybe we could turn to Tab 20, which is an excerpt from the Telecom Policy Review final report.
‑‑‑ Pause
1LISTNUM 1 \l 14720 MR. LOWE: On the first page, second‑last paragraph, there's discussion of the two objectives, "foster increased reliance on market force" and "to enhance the competitiveness and efficiency of Canadian telecommunications"; and then the last paragraph on the page, they talk about "conflicting interpretations are frequently presented in submissions to the CRTC"; and then I want to flip over to the next page, and it says:
"The two objectives have been used to justify both a laissez‑faire approach to economic regulation and an interventionist approach to support the increased regulation of essential facilities." (As read)
1LISTNUM 1 \l 14721 Do you see that?
1LISTNUM 1 \l 14722 MS GRIFFIN‑MUIR: Actually, no, I don't. Can you tell me exactly where you are on the page?
1LISTNUM 1 \l 14723 MR. LOWE: It's page 10‑7, at the top. Tab ‑‑
1LISTNUM 1 \l 14724 MS GRIFFIN‑MUIR: In item (f)?
1LISTNUM 1 \l 14725 MR. LOWE: Item (f) is the next page. It's the page before.
1LISTNUM 1 \l 14726 MS GRIFFIN‑MUIR: Oh, okay.
1LISTNUM 1 \l 14727 MR. LOWE: It's not the text of the direction, this is just the discussion as they introduced the direction.
1LISTNUM 1 \l 14728 Do you see it?
1LISTNUM 1 \l 14729 MS GRIFFIN‑MUIR: Yes.
1LISTNUM 1 \l 14730 MR. LOWE: And so the panel is saying, Well, look, there's these objectives in the act and people have used them to justify a laissez‑faire approach to economic regulation and an interventionist approach, which supports the increased regulation of essential facilities and the deregulation of them.
1LISTNUM 1 \l 14731 And then in the next paragraph it says:
"As discussed in Chapters 2 and 3, the panel is recommending a separation of the policy objectives from the consideration of the means that can be used to achieve them. A greater reliance on market forces is the means to achieving these policy objectives and reliance on regulation only when market forces are unlikely to achieve the telecommunications policy objective within a reasonable timeframe." (As read)
And then it says:
"The panel is also recommending a decreased reliance on mandated wholesale rates for essential facilities and a decreased use of ex ante regulation of retail telecommunications' market prices and service conditions." (As read)
1LISTNUM 1 \l 14732 Do you see that?
1LISTNUM 1 \l 14733 MS GRIFFIN‑MUIR: Yes, I see that, but I think between this and the final policy direction certain amendments were made.
1LISTNUM 1 \l 14734 First, at the behest of many competitors who intervened in the consultation process that led to the ultimate policy direction, the wording of the policy direction was changed for that particular part of it that dealt precisely with this proceeding to include other considerations, in particular to look at exactly what prompts innovation and investment and to make a determination on that basis.
1LISTNUM 1 \l 14735 So between the issuance of the panel's report and the actual ultimate policy direction, there was a lot of discussion and consultation that came about and, then, ultimately, ended up in a different recommendation.
1LISTNUM 1 \l 14736 MR. LOWE: Okay, okay. Well, that kind of takes me where I was trying to get to.
1LISTNUM 1 \l 14737 The TPR Report, and I'm going to put it to you ‑‑ and I'm just talking about the TPR report, we will get to the direction later ‑‑ but the TPR report looks at the two paths you could take, an interventionist approach with increased mandated unbundling or a more laissez‑faire free‑market approach, and they unequivocally took the right path, the way I'm sitting, in any event, and said, We are going to rely on market forces to the maximum extent feasible and we are going to see a phase‑out of mandated facilities.
1LISTNUM 1 \l 14738 I hear what you are saying about that's not how you read the direction, but at least that's what the TPR report found.
1LISTNUM 1 \l 14739 MR. MacDONALD: Yes, the TPR said other things in other areas that I'm not sure everybody agrees with either, in terms of wireless competition, et cetera, but to pick and choose specifically as an input to the formulation of government policy, the TPR says what the TPR says.
1LISTNUM 1 \l 14740 What's really relevant, though, is what the ultimate policy direction that came out through the Order‑in‑Council, in terms of going forward, which is the result of other inputs to the process, as well. Respecting, of course, that we had an esteemed panel that actually came up with these recommendations, it is just one input.
1LISTNUM 1 \l 14741 MR. LOWE: All right. And then turning to your opening statement, then...and I suspect through this line of cross we will disagree on the weight that should be given the TPR recommendations in interpreting the direction, but, in any event, in your opening statement, in the fourth line, you say:
"The government's goal is to create a competitive telecommunications market in Canada." (As read)
1LISTNUM 1 \l 14742 Do you see that?
1LISTNUM 1 \l 14743 MS GRIFFIN‑MUIR: Yes.
1LISTNUM 1 \l 14744 MR. LOWE: And this "creationism" business, this seems to harken back to the objective that you had in the Telecom Policy Review submission, isn't it? I mean, aren't you talking about the same thing?
1LISTNUM 1 \l 14745 MS GRIFFIN‑MUIR: Yes, and also the policy direction speaks of creating ‑‑ or increasing incentives for innovation and investment and increasing reliance on market forces, where "market forces" can only be interpreted as competitive market forces. So that, obviously, the overriding goal has to be to have competition.
1LISTNUM 1 \l 14746 MR. LOWE: Yes, okay. Then on your opening statement still, the next paragraph, the second sentence ‑‑ this is after the words "almost 15 years ago" ‑‑ it says:
"The government's recent policy direction affirms the desire to rely as much as possible on market forces to regulate a..."
1LISTNUM 1 \l 14747 And then I didn't know "a what"? Is it regulate an ILEC, a cable company?
1LISTNUM 1 \l 14748 MS GRIFFIN‑MUIR: Actually, that's a typo but thanks for pointing that out.
1LISTNUM 1 \l 14749 It should just say "in the least interventionist manner".
1LISTNUM 1 \l 14750 MR. LOWE: Okay.
1LISTNUM 1 \l 14751 MS GRIFFIN‑MUIR: And then when it is taking into account the consideration of what is the least interventionist manner, it has to take into consideration the principles of technological and competitive neutrality, the potential for incumbents to exercise market power in the wholesale and retail markets for the services in the absence of mandated access to wholesale services and the impediments faced by new and existing carriers seeking to develop competing network facilities.
1LISTNUM 1 \l 14752 MR. LOWE: Okay. Getting back to the sentence:
"The government's recent policy direction affirms the desire to rely as much as possible on market forces to regulate..."
1LISTNUM 1 \l 14753 I mean, really, isn't the direction saying that we want to rely on market forces to the maximum extent feasible? It is not relying on market forces to regulate, is it?
1LISTNUM 1 \l 14754 MS GRIFFIN‑MUIR: Well, I think actually they say the same thing. You are talking about regulating market power to the maximum extent feasible. So to the extent that we can rely on market forces, and in particular in the downstream or retail market, because there are competing alternatives for customers, then it would regulate the market power of the incumbent service providers.
1LISTNUM 1 \l 14755 MR. LOWE: So you interpret the direction to say rely on market forces to the maximum extent feasible to regulate, in order to achieve competition.
1LISTNUM 1 \l 14756 Is that right?
1LISTNUM 1 \l 14757 MS GRIFFIN‑MUIR: Yes ‑‑ well, to regulate market forces as opposed to having the Commission regulate in the downstream.
1LISTNUM 1 \l 14758 So what we are suggesting is that if you have a robust essential facilities or wholesale regime coming out of this proceeding, that regime will be able to discipline market forces to the extent possible, such that in the downstream or retail market customers will have choice. There will be the proper incentives for continuing investment from competitors.
1LISTNUM 1 \l 14759 THE CHAIRPERSON: You mentioned before that there was typo in the sentence.
1LISTNUM 1 \l 14760 I actually thought the sentence was supposed to read "to rely as much as possible on market forces and" ‑‑ the word "and" is missing ‑‑ "and to regulate in a least interventionist manner".
1LISTNUM 1 \l 14761 Isn't that what you meant to say?
1LISTNUM 1 \l 14762 MS GRIFFIN‑MUIR: Yes.
1LISTNUM 1 \l 14763 THE CHAIRPERSON: As counsel pointed out, market forces don't regulate. The sentence doesn't make sense then.
1LISTNUM 1 \l 14764 Therefore, I assumed there was an "and" missing between those two words.
1LISTNUM 1 \l 14765 MS GRIFFIN‑MUIR: Yes, you could read it that way.
1LISTNUM 1 \l 14766 MR. LOWE: Let's go back to the Telecommunications Policy Review Panel Final Report, Tab 20, page 3‑36.
1LISTNUM 1 \l 14767 This is this Recommendation 3‑19 made by the panel.
1LISTNUM 1 \l 14768 It says:
"The regulatory framework should continue to require owners of essential wholesale facilities to make them available to competitors at regulated wholesale rates. Regulatory requirements to provide non essential wholesale services or facilities should be phased out in order to provide increased incentives for innovation, investment and more widespread construction of competing network facilities."
1LISTNUM 1 \l 14769 Do you see that?
1LISTNUM 1 \l 14770 MS GRIFFIN‑MUIR: Yes.
1LISTNUM 1 \l 14771 MR. LOWE: In the context here, the TPR panel is talking about essential facilities as defined in Decision 97‑8.
1LISTNUM 1 \l 14772 Is that how you read that part?
1LISTNUM 1 \l 14773 MS GRIFFIN‑MUIR: Just beneath there, yes.
1LISTNUM 1 \l 14774 MR. LOWE: I would like to get your views on the top paragraph on page 3‑36. This is where they introduce this recommendation to phase out non essential facilities, phase out the mandated access to non essential facilities.
1LISTNUM 1 \l 14775 It says:
"The panel recognizes that a broader scope of mandated wholesale access may reduce barriers to entry in the market for services or applications. This may result in more innovation at the service and applications layer by allowing for more market participants and by creating pressure for the timely introduction of new technologies."
1LISTNUM 1 \l 14776 And then it goes on:
"However, these benefits may be outweighed by the dramatic reduction in competition at the physical and network layers. Further, in the long run, innovation at the service or application layers may depend on capabilities and innovations at the physical or network layers and continuation of significant market power at these levels may impede innovation at higher layers as well. A broad scope of mandated wholesale access may thus undermine long run opportunities and incentives for innovation at all levels."
1LISTNUM 1 \l 14777 Do you see that?
1LISTNUM 1 \l 14778 MR. MacDONALD: I see it but I disagree with it.
1LISTNUM 1 \l 14779 One of the issues that we are faced with is it's kind of a theoretical discussion. I think I understand the argument that is being used here, but the practical reality of the situation is to suggest that in many cases, particularly for not just the existing definition of essential services but for next generation essential services that are required to deploy services into the Enterprise space, that competing networks are going to be built or alternative sources of supply will exist is ludicrous.
1LISTNUM 1 \l 14780 The situation ‑‑ and I will use the example of last week where we had a financial institution with a thousand branches, and just the cost to deploy ‑‑
1LISTNUM 1 \l 14781 MR. LOWE: Was that CIBC, by the way?
1LISTNUM 1 \l 14782 MR. MacDONALD: Don't I wish. Don't I wish.
1LISTNUM 1 \l 14783 No. It's a much more enlightened financial institution that selected us as the service provider.
1LISTNUM 1 \l 14784 When we looked at the cost to actually deploy to all of those 1,050 branches, it was $2.3 billion in a 236‑year payback interval at the market based rates.
1LISTNUM 1 \l 14785 And do you know what I'm really concerned about? The next time that contract comes up for renewal, where the customer is going to be looking for higher and higher speed services, is that we are not going to be able to participate in that particular piece of business.
1LISTNUM 1 \l 14786 Now this academic argument that we are going to magically be able to justify the deployment of uneconomic facilities across the country, it ain't going to happen.
1LISTNUM 1 \l 14787 We tried that: at least $4 billion worth of assets in terms of trying to replicate the local access network that our company has spent, having gone through a CCAA and restructuring and managed to survive that and come out of it quite strong.
1LISTNUM 1 \l 14788 But what really fuels investment ‑‑ and the TPR report is talking about at the application and service level. Ultimately, that is going to be the real source of innovation for Enterprise customers. But it is a necessary condition that we have cost effective access to all of the various serving points within that network.
1LISTNUM 1 \l 14789 MR. LOWE: Well, I see you had a productive weekend.
1LISTNUM 1 \l 14790 Back to your opening statement, on page 2 you set out the facts. As I read through these facts, there is the 97‑8 experience, there is the dot.com bubble. All of these facts were before the Telecommunications Policy Review, weren't they?
1LISTNUM 1 \l 14791 Essentially, this is all history, isn't it?
1LISTNUM 1 \l 14792 And the Telecom Policy Review is saying no, we have to look forward. We have to take the long run view forward for Canada.
1LISTNUM 1 \l 14793 MS GRIFFIN‑MUIR: Again, I think you keep missing the actual purpose of this proceeding.
1LISTNUM 1 \l 14794 I mean, there was the Policy Review Panel and that was followed by a preliminary proposed Order in Council that had certain suggestions with respect to essential facilities, which was subsequently revised and finalized to take into consideration a wider array of factors, such as the dominance of the incumbents in the wholesale and retail markets, as well as other factors that would affect competitors in terms of how and when they can make investment.
1LISTNUM 1 \l 14795 So I'm not entirely sure what facts actually the TPRP considered at the time. It's not apparent from any of the panel report.
1LISTNUM 1 \l 14796 But even if they did take them into consideration, subsequently the government issued a policy direction that outlined precisely what we should be looking at in terms of this proceeding.
1LISTNUM 1 \l 14797 The fact is in making a decision as to what essential facilities or wholesale regime should prevail, it's a little naive to ignore what has gone on before and what we have learned from our experience of the last 15 years in trying to get competition into the market, particularly the business market.
1LISTNUM 1 \l 14798 MR. LOWE: So what you are saying is: Look, the TPR had this history before them and they made a determination that you disagree with. And you are saying but that's okay because it's the direction that we should look at. The TPR is an exercise that we kind of went through and we all made submissions, and the panel went and talked to other regulators and made some recommendations. But that's all in the past and now you just look at the direction in isolation.
1LISTNUM 1 \l 14799 Is that right?
1LISTNUM 1 \l 14800 MR. MacDONALD: It was an input to a process. There were other inputs to that particular process.
1LISTNUM 1 \l 14801 What is germane to this particular discussion is the final policy direction from the government, however.
1LISTNUM 1 \l 14802 MR. LOWE: You asked for a policy direction based on your recommendations in the TPR report, didn't you?
1LISTNUM 1 \l 14803 We have established that already. Right?
1LISTNUM 1 \l 14804 MS GRIFFIN‑MUIR: I can't recall if we asked for a policy direction. We asked that they recommend a revision, I guess, to the objectives.
1LISTNUM 1 \l 14805 MR. LOWE: Well, if you did ask for a policy direction in line with your directives, if you did say that in your submission, you meant to live with it, didn't you?
1LISTNUM 1 \l 14806 MS GRIFFIN‑MUIR: Well, we, I guess, have no alternative but to live even with this policy direction.
1LISTNUM 1 \l 14807 So again, I mean the policy direction has come down and the proceeding is under way, and as Mr. MacDonald was saying, there is one input ‑‑ I mean if you are suggesting we didn't get everything we wanted or the government didn't do everything we wanted or say everything we wanted, that is entirely true. They also didn't say everything other parties wanted either, including TELUS.
1LISTNUM 1 \l 14808 MR. LOWE: No, I think that is probably true, nobody got everything they wanted and it is one of these processes where the review panel looks at everything and comes out with something that they think is the best move for Canada going forward and then that is implemented into a policy direction and then in turn, the Commission is called upon to implement that policy set by the Government of Canada and, in fact, I think you say at page 4 of your opening statement that the CRTC should be implementing an essential facilities regime which you say should be robust.
1LISTNUM 1 \l 14809 So my question to you is: Is the CRTC's role to implement government policy as set out in the Policy Direction and in the context of the Telecom Policy Review or rather are we on to a free ranging review here to see what is the right path for Canada?
1LISTNUM 1 \l 14810 MR. MacDONALD: I don't know why you keep on going back to the TPR as an input to the process, a valuable input that I think ultimately led to the Policy Direction but the Policy Direction is what the Policy Direction is, regardless of the TPR.
1LISTNUM 1 \l 14811 MR. LOWE: Don't you think that it is wrong to ignore the Policy Direction when you are trying to interpret ‑‑ or wrong to ignore the Telecom Policy Review Report recommendations when you are trying to interpret the direction?
1LISTNUM 1 \l 14812 And I am just asking. If you say it is totally irrelevant and we put it aside ‑‑
1LISTNUM 1 \l 14813 MR. MacDONALD: I didn't say it was totally irrelevant, I said it was an input amongst other inputs to it that ultimately led to the Policy Direction. That is what is relevant, is the Policy Direction.
1LISTNUM 1 \l 14814 MR. LOWE: And inputs can be ignored, can't they?
1LISTNUM 1 \l 14815 MR. MacDONALD: I am not suggesting it should be ignored, I am saying it is an input, it is what it is.
1LISTNUM 1 \l 14816 MR. LOWE: All right. An input that should be given significant weight?
‑‑‑ Laughter / Rires
1LISTNUM 1 \l 14817 MR. LOWE: Perhaps we are getting into argument. Those are my questions, Mr. Chairman, and thank you, panel.
1LISTNUM 1 \l 14818 THE CHAIRPERSON: Thank you very much.
1LISTNUM 1 \l 14819 Who is next, Madam Secretary?
1LISTNUM 1 \l 14820 THE SECRETARY: It is supposed to be PIAC but I haven't seen Mr. Janigan yet.
1LISTNUM 1 \l 14821 MR. LOWE: They are up.
1LISTNUM 1 \l 14822 THE SECRETARY: They are up? Okay, so it will be PIAC.
1LISTNUM 1 \l 14823 THE CHAIRPERSON: Okay, Mr. Janigan.
1LISTNUM 1 \l 14824 COMMISSIONER CRAM: I have a question.
1LISTNUM 1 \l 14825 THE CHAIRPERSON: Yes, sure. Okay. So go ahead, Commissioner Cram.
1LISTNUM 1 \l 14826 MR. SCHMIDT: No, PIAC is not examining. I spoke to them this morning. They are not examining this panel.
1LISTNUM 1 \l 14827