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)

November 9, 2007                      Le 9 novembre 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)

November 9, 2007                  Le 9 novembre 2007

- iv -

           TABLE DES MATIÈRES / TABLE OF CONTENTS

                                                 PAGE / PARA

Argument by The Competition Bureau              2891 /17947

Argument by The Companies                       2921 /18090

Argument by Rogers                              2961 /18297

Argument by TELUS                               2992 /18452

Argument by MTS Allstream                       3024 /18594

Argument by Primus                              3057 /18743

Argument by Cybersurf                           3084 /18881

Argument by Yak Communications                  3106 /18982

Argument by Xittel                              3119 /19053

- v -

              EXHIBITS / PIÈCES JUSTIFICATIVES

No.                                              PAGE / PARA

BUREAU-8      Response to CRTC request in       3145 /19179

              Exhibit CRTC-4

- vi -

                      ERRATA / ADDENDA

The paragraph numbering for the soft and hard copies of the transcripts from the Essential Services hearing are incorrect, beginning with the 16 October transcript.  The paragraph numbers in the 16 October transcript should have been consecutive, following the 15 October transcript.

La numérotation des paragraphes de la version électronique et de la version papier des transcriptions de l'audience traitant des services essentiels n'est pas correcte, commençant avec la transcription du 16 octobre.  La numérotation des paragraphes dans la transcription du 16 octobre aurait dû être consécutive, après la transcription du 15 octobre.

                 Gatineau, Quebec / Gatineau (Québec)PRIVATE

‑‑‑ Upon resuming on Friday, November 9, 2007

    at 0844 / L'audience reprend le vendredi

    9 novembre 2007 à 0844

1LISTNUM 1 \l 1 \s 79417941            THE SECRETARY:  Please be seated.

1LISTNUM 1 \l 17942            THE CHAIRPERSON:  Good morning.

1LISTNUM 1 \l 17943            As you can see, it is a much‑reduced Commission.  My colleagues commissioners Cram and Noël, unfortunately, are no longer colleagues but we had the benefit of their advice before they left and we had extensive discussions.

1LISTNUM 1 \l 17944            I am looking forward to this morning's argument.  I guess the Competition Bureau is first.

1LISTNUM 1 \l 17945            MS PALUMBO:  That is right.

1LISTNUM 1 \l 17946            THE CHAIRPERSON:  Go ahead.

ARGUMENT / PLAIDOIRIE

1LISTNUM 1 \l 17947            MS PALUMBO:  Thank you.

1LISTNUM 1 \l 17948            Good morning, Mr. Chairman and commissioners Duncan and del Val.

1LISTNUM 1 \l 17949            Today, I will be representing the Competition Bureau, Josephine Palumbo with the Department of Justice.

1LISTNUM 1 \l 17950            I am joined by my colleague and the Bureau's outside counsel, Mr. Lorne Abugov.

1LISTNUM 1 \l 17951            The Bureau has a long history, Mr. Chairman, members of the Commission, of engaging itself in the debate on telecommunications regulatory reform, and as you are well aware, under section 125 of the Competition Act, the Commissioner of Competition can indeed make representations and call evidence before federal boards, commissions or tribunals in respect of competition.

1LISTNUM 1 \l 17952            The Bureau has used this ability of intervention in a number of industries but none more extensively than telecommunications, and indeed, since 1990, the Bureau has made more than 65 interventions before the Commission, including a full participation in the 2005 local forbearance proceeding.

1LISTNUM 1 \l 17953            Our participation in this proceeding, as in the many past proceedings, is as an amicus curiae, to offer our assistance and expertise to the Commission on issues of broader scope, unlike the immediate commercial concerns of the other parties to this proceeding.

1LISTNUM 1 \l 17954            The Bureau's sole motivation is to assist the Commission in facilitating the development of a regulatory framework for wholesale services that will promote effective and efficient competition in telecommunication markets for the benefit of Canadian consumers.

1LISTNUM 1 \l 17955            During the next 30 minutes we will canvass three main areas of interest in the final oral phase of this most important proceeding and I wish to outline those three main areas to you now.

1LISTNUM 1 \l 17956            First, we will review with you the Bureau's specific proposals regarding our suggested definition of essential facilities and the objectives that, in our view, must underlie the regulatory framework governing mandated access.

1LISTNUM 1 \l 17957            The second area that we will cover is how best to implement these objectives through the proper operationalization of the appropriate definition of an essential facility, an area over which there is still significant debate among the parties to this proceeding.

1LISTNUM 1 \l 17958            Several parties have downplayed the operational differences between their definitions and that proposed by the Bureau.  They argue that their proposals are also based on competition principles and will achieve competitive objectives.

1LISTNUM 1 \l 17959            With respect, we do not agree and in fact their definitions are often inconsistent with competition principles.  Consequently, they are much less likely to advance the general competition objectives that we all agree should be the cornerstone of an effective wholesale access regime.  In our second area of discussion we will explain why this is so.

1LISTNUM 1 \l 17960            Thirdly and lastly, we will address claims by some parties that their definitions are easier and more practical to apply than that of the Bureau.  You will see that they are not necessarily simpler to apply, and where they are, they achieve that simplicity at significant cost.

1LISTNUM 1 \l 17961            In contrast, The Bureau's definition is based on tested and objective standards that are employed by regulators and competition authorities the world over and we are confident that our proposal can be practically applied by this Commission.

1LISTNUM 1 \l 17962            I will turn now to the first main area that we will canvass with you this morning, The Bureau's definition of an essential facility and the objectives underlying that definition.

1LISTNUM 1 \l 17963            The Bureau's definition of "an essential facility" is indeed rooted in competition policy principles, which is to say it is focused directly on identifying market power where it exists and controlling the exercise or abuse of that market power.  That is the most appropriate way to ensure that competition is sufficient to protect the interest of consumers.

1LISTNUM 1 \l 17964            Mr. Chairman, Members of the Commission, you will recall that the Bureau initially proposed a definition for an essential facility that could be applied prospectively, that is when the Commission determines whether or not to mandate access to a facility.

1LISTNUM 1 \l 17965            And at your request, Mr. Chairman, during our panel's appearance at the hearing we undertook to provide a definition that could be applied retrospectively, that is when the Commission examines the list of services to which access is currently mandated, to determine whether or not that access should be withdrawn.

1LISTNUM 1 \l 17966            Our retrospective definition is as follows:

"A facility, a function or service can be considered to be essential and therefore mandatory access to that facility can be justified if the following three conditions are satisfied.

First, the firm controlling the facility in question is vertically integrated and dominant in two markets.

The first relevant market is the upstream market for wholesale market for the facility.

The second relevant market is the downstream market or retail market in which the facility is an input.

A necessary condition for concluding that there is dominance in the upstream market is that it is not practical or feasible for competitors to duplicate the facility in question.

Second, withdrawing mandated access to the facility is likely to result in competitors exiting from or contracting in the downstream market.

Finally, such exit or contraction is likely to result in a substantial lessening of competition in the downstream market."

1LISTNUM 1 \l 17967            The first condition of The Bureau's definition which requires a finding that the owner of the facility in a properly defined product and geographic market is dominant both upstream and downstream identifies where market power exists and where incumbents can exercise that market power to harm consumers.

1LISTNUM 1 \l 17968            This is a relevant consideration in both the upstream and downstream market.

1LISTNUM 1 \l 17969            Upstream, a firm may exercise its market power to the detriment of competitors and eventually consumers.

1LISTNUM 1 \l 17970            Downstream market power may be exercised directly to harm consumers.

1LISTNUM 1 \l 17971            The Bureau's two‑market test provides a useful screen for the Commission.  If a firm is not dominant downstream in a particular market, then consumers have alternatives that can control the market power inherent in a firm's upstream facility.  If a firm is not dominant upstream, competitors have similar alternatives to provide downstream services, again to the benefit of consumers.

1LISTNUM 1 \l 17972            In either case, Mr. Chairman, Members of the Commission, the facility in question should not be considered essential and the analysis is concluded.

1LISTNUM 1 \l 17973            Ignoring upstream and downstream market power when defining an essential facility is to focus more on the interests of individual competitors than on the effects of competition and ultimately consumers.

1LISTNUM 1 \l 17974            The only appropriate method to adopt and to pinpoint and assess market power comes from competition policy where market definition tools and market power analysis have been carefully refined through time and experience.

1LISTNUM 1 \l 17975            The Bureau's second condition is a simple question:  Without access to a given facility or service will competitors exit or contract from a given downstream market?

1LISTNUM 1 \l 17976            This concern seems to be the primary focus of the parties to this proceeding.  However, this condition alone does not, Mr. Chairman, answer the fundamental question:  What is the effect of mandating access on competition and ultimately consumers?

1LISTNUM 1 \l 17977            The Bureau's third condition which asks whether there is a substantial lessening of competition in a downstream market focuses on the effects on consumers, indeed where the focus should be, and asks whether the exit or contraction of individual competitors will result in higher prices, in lower quality or less innovation.

1LISTNUM 1 \l 17978            If the answer is no, then mandating access may in fact generate more costs then benefits by focusing on the costs and benefits to competition and hence consumers and not on individual competitors.  The Bureau's definition avoids either an under inclusive or an over inclusive wholesale access regime.

1LISTNUM 1 \l 17979            The fundamental issue in this proceeding is the proper role of mandated access in the development of efficient and effective competition which will ultimately prove most beneficial for consumers.

1LISTNUM 1 \l 17980            And when it comes to controlling the market power of the ILECs, two types of competition are possible, that created by mandating the access and that created by investment in competing facilities.

1LISTNUM 1 \l 17981            The Commission should strive, it is our respectful submission, to establish a wholesale regime that implements each when appropriate.

1LISTNUM 1 \l 17982            MR. ABUGOV:  Almost all parties to this proceeding endorse the development of a regulatory framework for wholesale services and a definition of an essential facility that will ultimately result in effective and efficient competition.  However, parties have very different notions of what constitutes effective and efficient competition.

1LISTNUM 1 \l 17983            The Bureau submits that consistent with competition principles effective and efficient competition is most likely to come from independent end‑to‑end facilities‑based providers that control their own networks.

1LISTNUM 1 \l 17984            Under The Bureau's definition, where competition of this kind is possible the right incentives are put in place for its development.  Where it is not possible, access would be mandated.

1LISTNUM 1 \l 17985            We have heard from experts at this hearing who agree strongly that competition at the network layer is preferable to competition at the applications layer alone, which is not likely to be effective in disciplining incumbent market power.

1LISTNUM 1 \l 17986            In the Bureau's view, settling on competition at the application layer would deter technological innovation in this country and ultimately prove detrimental to Canadian consumers.

1LISTNUM 1 \l 17987            We heard Dr. Church, one of the Bureau's expert witnesses, explain that two independent networks would allow for much more intense competition than only one network with sharing.  He explained that where there are two networks all of the possible parameters on which they can compete are available because they share nothing in common.

1LISTNUM 1 \l 17988            Dr. Church noted that this is particularly true in a broadband world with two broadband networks competing against one another.  In that context, it is likely that consumers at any given location are only going to subscribe to one of the two networks, creating a winner‑take‑all situation.

1LISTNUM 1 \l 17989            The result is very vigorous competition and more than ample incentives for investment and innovation in each network in response to the other network.

1LISTNUM 1 \l 17990            We also heard from Dr. Taylor, one of The Companies expert witnesses, that true competition takes place in the portions of the network that are unshared.  Dr. Taylor acknowledged that there may still be competition at the applications layer where providers are sharing the network and reselling services, in that resellers can offer value‑added features, compete on customer service and provide different bundles.

1LISTNUM 1 \l 17991            He noted, however, that resell competition will not produce fundamental changes or enhancements in technology or in the network.  In his view, resell competition could not compare in that regard to the competition that we see between the two near end‑to‑end networks today in Canada, the cable network and the telephone network.  From those networks, he remarked, we see high‑end and high‑speed services, internet services, many new broadband services and video services.

1LISTNUM 1 \l 17992            The key point is that competition from competing networks is much better for consumers than competition only at the applications layer on a common network.

1LISTNUM 1 \l 17993            To the extent that effective competition between networks is possible, it should not be inadvertently precluded by an overly permissive access regime.

1LISTNUM 1 \l 17994            This would be especially disappointing in the Canadian context, given that, as we heard from another of The Companies expert witnesses, Dr. Waters, the fact that we in Canada have a second network in residential markets is envied the world over.  As he put it, and I quote:

"The rest of us are using a ladder of investment to climb to where you are, so I must admit it's a little strange when I come here and I see one of the world's most complete ladders of investment in a market that actually already is where the rest of us are struggling to get to."  (As read)

1LISTNUM 1 \l 17995            It has been The Bureau's position throughout this proceeding that the goal of any wholesale access regime must be the development of efficient and effective competition, that is competition between networks.

1LISTNUM 1 \l 17996            In The Bureau's view, the policy direction clearly recognizes that goal.  It directs the Commission to undertake the instant review:

"... with a view to increasing incentives for innovation and investment in and construction of competing telecommunications network facilities".  (As read)

1LISTNUM 1 \l 17997            The Bureau's definition of an essential facility is designed to do just that.  It is intended to ensure that the proper incentives for network investment are in place.

1LISTNUM 1 \l 17998            If these incentives for network investment are not embodied in the core of the wholesale access regime, and indeed if the regime instead disincents investment by mandating access to an overly broad set of facilities, the Commission will have adopted, and thereby accepted, an inferior form of competition and one that, in The Bureau's view, is far less effective.

1LISTNUM 1 \l 17999            In the Bureau's view, the objectives of efficient and effective competition, that is end‑to‑end facilities‑based competition where possible, can only be achieved through a definition of an essential facility that is firmly rooted in competition principles.

1LISTNUM 1 \l 18000            Although most parties to this proceeding claim that their definitions reflect competition principles, when viewed operationally they do not.  These operational issues are the second main area that we will discuss with you this morning.

1LISTNUM 1 \l 18001            The operational differences between the Bureau's definition and those of other parties must be understood and assessed carefully by the Commission since while other parties' proposals appear at first blush to involve less effort to apply, they do so at the cost of significant mis‑classification of facilities.  These mis‑classifications result in either uncontrolled market power in many markets or the discouragement of effective and efficient competition between competing networks.

1LISTNUM 1 \l 18002            THE CHAIRPERSON:  Mr. Abugov, do you mind if I interrupt you here before we go to the operational and just ask you a couple of questions on the theoretical?

1LISTNUM 1 \l 18003            MR. ABUGOV:  Mr. Chairman, I can't guarantee that we can provide you with an answer, but we will certainly undertake to provide you with one in writing.

1LISTNUM 1 \l 18004            THE CHAIRPERSON:  Just so that I understand, you used or Mrs. Palumbo used the words "near end‑to‑end facilities competition".

1LISTNUM 1 \l 18005            What, in your view, is near end‑to‑end?

1LISTNUM 1 \l 18006            MR. ABUGOV:  Mr. Chairman, I believe I made the remark in the sense that the end‑to‑end facilities‑based providers definition includes both owning one's own facilities and sharing facilities to a given extent.  And the word "near" simply indicates that the existing networks are not ubiquitous at this time.

1LISTNUM 1 \l 18007            THE CHAIRPERSON:  So there is no idea of preponderance on majority facility owned or something like that inherent in that expression.

1LISTNUM 1 \l 18008            MR. ABUGOV:  That's correct.

1LISTNUM 1 \l 18009            THE CHAIRPERSON:  On the first part where you insist on a dominance in the downstream market, why do you need to have that since you are starting off with the assumption that there is dominance in the upstream market and access to that upstream market is necessary in order to compete in the downstream market?

1LISTNUM 1 \l 18010            I just don't understand.  Does your definition work if we do not require dominance in the downstream market?

1LISTNUM 1 \l 18011            MS PALUMBO:  Our test has always proposed dominance in both markets, and our experts have explained that our test, our definition presented before this Commission, requires dominance in both markets.

1LISTNUM 1 \l 18012            THE CHAIRPERSON:  So your answer is no.

1LISTNUM 1 \l 18013            MS PALUMBO:  No.

1LISTNUM 1 \l 18014            THE CHAIRPERSON:  Would your test also work if I don't delete the requirement of dominance in the downstream market?

1LISTNUM 1 \l 18015            Looking at your test and applying it, it seems to me the outcome would be the same regardless of whether there is a requirement for dominance in the downstream market or not.

1LISTNUM 1 \l 18016            If I have misunderstood it, please explain it to me.

1LISTNUM 1 \l 18017            MS PALUMBO:  Our position has been that dominance needs to be in both markets.  However, what the Bureau can do is take an undertaking and we can respond to this issue that you have raised, Mr. Chairman, in our formal written arguments.

1LISTNUM 1 \l 18018            THE CHAIRPERSON:  Okay, thank you.

1LISTNUM 1 \l 18019            Sorry, Mr. Abugov.  Please go ahead.

1LISTNUM 1 \l 18020            MR. ABUGOV:  Are we back on the clock, Mr. Chairman?

1LISTNUM 1 \l 18021            THE CHAIRPERSON:  This doesn't count on your clock.  Don't worry.

1LISTNUM 1 \l 18022            MR. ABUGOV:  Just checking.

‑‑‑ Laughter / Rires

1LISTNUM 1 \l 18023            MR. ABUGOV:  So I had said that the misclassifications that can arise through the proposals put forward by other parties, which appear at first blush to involve less effort to apply, can result in either uncontrolled market power in many markets or the discouragement of efficient and effective competition between the two operating networks.

1LISTNUM 1 \l 18024            For example, Mr. Chairman and Commissioners, TELUS' definition requires 100 per cent monopoly control in the relevant upstream market as opposed to the Bureau's requirement for dominance.

1LISTNUM 1 \l 18025            The TELUS definition would not find a facility essential if there is any competing supply in the upstream market.  Conversely, the Bureau's definition might classify that same facility as essential if to do so would result in a substantial increase in competition sufficient to make consumers better off in the long run.

1LISTNUM 1 \l 18026            TELUS' approach does not recognize that it may well be more beneficial to consumers for the Commission to control the market power of the ILEC by mandating wholesale access than by relying on entry that has very little competitive effect.

1LISTNUM 1 \l 18027            MTS Allstream, on the other hand, has neither a competitive effects test nor a requirement for dominance downstream.  As a result, the definition proposed by MTS is too expansive.  It would mandate access to facilities with the resulting costs even if there is competition downstream from facilities‑based carriers and even if mandated access does not have a substantial effect on competition in the downstream market.

1LISTNUM 1 \l 18028            In addition, several parties claim that proper geographical market definition is an unnecessary burden in assessing whether or not a facility is essential.

1LISTNUM 1 \l 18029            For example, TELUS' definition assesses upstream monopoly in terms of potential and not actual duplication.  Key to the TELUS definition is the notion that if a facility or a functionality of that facility has been duplicated in some similar geographic area ‑‑ TELUS suggests rate bands, for instance ‑‑ then it must be feasible to duplicate it in every similar geographic area, regardless of whether or not it has in fact been duplicated.

1LISTNUM 1 \l 18030            In such case, according to TELUS, the facility should be considered non‑essential.

1LISTNUM 1 \l 18031            While the Bureau would agree that a proxy approach to geographic markets is practical for the Commission to adopt over time, the Bureau questions whether there is truly enough geographical homogeneity within rate bands to make such a test meaningful.

1LISTNUM 1 \l 18032            Despite claims to the contrary, the TELUS criteria run the very real risk of abandoning certain exchanges and locations and consumers where duplication may in fact not be possible and where forbearance, particularly in business markets, may have been granted based on competitor access to facilities.

1LISTNUM 1 \l 18033            In this case, the potential benefits of competition from mandated access may dramatically outweigh the potential costs of that access.

1LISTNUM 1 \l 18034            The Bureau's definition seeks to identify these particular markets by using the principles of competition policy to identify relevant markets rather than forcing Canadian consumers to fend for themselves in the face of incumbent market power.

1LISTNUM 1 \l 18035            Certain parties to this proceeding, such as MTS Allstream and Rogers, have argued that where the Commission has forborne from retail regulation based on competitor access to leased facilities, it necessarily follows that those facilities must be found to be essential.

1LISTNUM 1 \l 18036            This logic, while simple and seductive, is ultimately incorrect.

1LISTNUM 1 \l 18037            Wholesale regulation is not an equivalent substitute for retail regulation.  Contorting the wholesale access regime by broadening its scope to fit the retail forbearance regime may have the cost of precluding the entry of true end‑to‑end facilities‑based competition most notably in business markets.

1LISTNUM 1 \l 18038            The Bureau's definition of an essential facility does not run this risk.  It will hold regardless of whether or not there is regulation at the retail level.

1LISTNUM 1 \l 18039            It is important, therefore, that the Commission use the proper definition of essential facility, which we submit is the Bureau's definition in the first instance, to enable or to increase competition in downstream markets where the benefits of that competition outweigh the potential costs of mandating access.

1LISTNUM 1 \l 18040            If at the end of a transition period with a hard stop facilities which have been properly declared to be non‑essential have not been replaced and market power issues have arisen downstream, the Commission should at that point address those issues directly by revisiting whether retail regulation is necessary.  Widening the wholesale access regime inappropriately is not an efficient alternative.

1LISTNUM 1 \l 18041            MS PALUMBO:  Finally, many of the parties' definitions fail to recognize that the Commission's ultimate concern in this proceeding must be the control of market power.

1LISTNUM 1 \l 18042            Allowing the exercise of market power harms consumers through higher prices, lower quality of service and fewer incentives for firms to offer new and better services.

1LISTNUM 1 \l 18043            In developing an effective wholesale access regime, the Commission's primary focus should be to streamline access where competition is sufficient to control the exercise of market power, most residential markets, for example, and to continue to mandate access where it is not, which may be the case in some business markets.

1LISTNUM 1 \l 18044            Many parties have failed to acknowledge this fundamental point, primarily because it is not in their commercial interest to do so.  Rogers' definition, for example, concludes that unbundled loops in residential markets should be classified as essential facilities, despite the presence of facilities‑based competitors in the form of cable companies, including Rogers itself in some areas.

1LISTNUM 1 \l 18045            Under the Bureau's test, downstream market power is a screen.  If there is no dominance downstream as a result of control of a particular facility, the facility is not essential.

1LISTNUM 1 \l 18046            In the case of residential telephony, the presence of a cable company offering local telephony is likely sufficient to reach this conclusion, and thus in most residential markets under the Bureau's definition there should not be mandated access to unbundled local loops.

1LISTNUM 1 \l 18047            Furthermore, the empirical record suggests that after ten years of unbundling, the competitive significance of residential loops has been minimal and it is unlikely to generate benefits to consumers significant to cover its costs.  It is evident to the Bureau that these purportedly more practical and operationally simpler proposals will result in significant errors.

1LISTNUM 1 \l 18048            Furthermore, it is not at all clear that these proposals are in fact simpler to operationalize.  Both TELUS and Rogers, among others, have asserted at this hearing that their definitions will be easier for the Commission to apply than that of the Bureau.

1LISTNUM 1 \l 18049            Indeed, it appears to be relatively simple to count to one in order to assess a monopoly or to count to four to tally up the number of competitors operating within a wire centre.  In fact, these criteria or definitions are not as simple as they may appear since they do not employ tested and measurable competition law principles.

1LISTNUM 1 \l 18050            TELUS, for example, suggests that relevant product market definition in both upstream and downstream markets is overly complex and unnecessary.  It is sufficient, they argue, to identify, one, a single substitute of comparable functionality to establish that duplication of a particular facility is possible, and, thus, that there is some form of alternative for consumers in a downstream market.

1LISTNUM 1 \l 18051            This is simply too simple to be true and TELUS has never firmly set out how the Commission should actually assess comparable functionality, nor the extent to which it must exert competitive discipline sufficient to control any exercise of incumbent market power, which is the key concern.

1LISTNUM 1 \l 18052            Market definition tools used by the Bureau and competition authorities around the world have well‑established thresholds for these criteria to assess market power and the extent to which competition can control market power.  In practice, for the Commission to assess and apply meaningful benchmarks of functionality, it would have to turn to competition law principles.

1LISTNUM 1 \l 18053            This brings us to our third area of discussion.  We have seen that definitions proposed by other parties either offer no real guidance on fundamental issues of implementation, and so are not as simply as they may appear, and/or that they are in fact simple to implement, but to achieve that simplicity at great, great costs of precision.

1LISTNUM 1 \l 18054            These parties might say that costs are worth it when compared to the effort that they claim would be involved in implementing the Bureau's definition.  In fact, Mr. Chairman, members of the Commission, the Bureau's test is not nearly as complex and difficult to apply as other parties would have you believe, precisely because it is based on well‑established competition policy principles that properly recognize and balance the potential benefits and costs of mandating wholesale access.  Indeed, competition law authorities and regulators worldwide routinely perform these market power assessments.

1LISTNUM 1 \l 18055            The Bureau's retrospective definition is akin to the approach in assessing abuse of dominance outlined in the Bureau's Enforcement Guidelines on the Abuse of Dominance Provisions.  This approach has been endorsed by the Competition Tribunal and provides an objective standard that can be applied in the context of this proceeding, it is our submission.

1LISTNUM 1 \l 18056            Put simply, the competition policy principles and jurisprudence that underlie the Bureau's definition are the best guarantee that our definition, the Bureau's definition, can, in fact, be properly and successfully applied by the Commission going forward.

1LISTNUM 1 \l 18057            More importantly, whatever effort the Commission may expend in applying the Bureau's definition will be more than worthwhile from the standpoint of achieving the fundamental objective of promoting effective and efficient competition and avoiding ‑‑ avoiding ‑‑ the significant errors that we have identified is inherent in the other definitions that are before you.

1LISTNUM 1 \l 18058            MR. ABUGOV:  Mr. Chairman, Commissioners, we understand well that you are seeking pragmatic and workable solutions to deal with the issues before you in this proceeding.  With this in mind, you have posed interrogatories to the parties, you have proposed a possible regulatory framework of categories of services and you have circulated a list of specific services for categorization based upon the possible regulatory framework.

1LISTNUM 1 \l 18059            The Bureau recognizes the attempts by the Commission to streamline your review of services and agrees that there is merit in identifying and categorizing the services over which there is little disagreement and singling out those services that are more contentious.

1LISTNUM 1 \l 18060            However, for each of the contentious services, once they are identified, the Bureau would emphasize that it will still be very important for the Commission to use and apply the correct definition in order to determine whether or not the services in question are essential.  To do otherwise would bypass the necessary analysis to identify essential services and would create the potential for serious errors, for instance by failing to incorporate and analyze specific geographic markets.

1LISTNUM 1 \l 18061            Still, as the Bureau's panel explained at the hearing, once the Commission considers in depth whether specific facilities are essential, you will no doubt develop insight and understanding that can be applied more broadly.  The Bureau expects that the Commission could at that point develop its own accurate and "Made in Canada" proxy rules.

1LISTNUM 1 \l 18062            In conclusion, Mr. Chairman and Commissioners, the Bureau's proposal in this proceeding is indeed an operational approach.  It is based on a competition framework that the Commission has itself adopted in the past and has been able to use with success.

1LISTNUM 1 \l 18063            To oversimplify the Bureau's approach, as some parties have aimed to do in this proceeding, and to substitute proposals that deviate from competition policies and principles is to ask the wrong questions and, more importantly, for Canadian consumers and for Canada to obtain the wrong answers.

1LISTNUM 1 \l 18064            Mr. Chairman and Commissioners, on behalf of the Competition Bureau, we thank you for hearing our views this morning in this most important proceeding, and that concludes our oral argument.

1LISTNUM 1 \l 18065            THE CHAIRPERSON:  Thank you.

1LISTNUM 1 \l 18066            Just a couple of questions to make sure I understood you correctly.

1LISTNUM 1 \l 18067            You don't like the proxies offered by TELUS, but if I understand it you don't offer any alternative proxies.  You are tell us, "Develop the proxy test".

1LISTNUM 1 \l 18068            MR. ABUGOV:  Our experts indicated in the evidence, and we have indicated this morning, Mr. Chairman, that we believe the Commission can, indeed, develop its own proxies over time, based on its analysis of cases that come before it.

1LISTNUM 1 \l 18069            The Commission has done this in the past, and we believe that's a more appropriate route to take than to adopt proxies put forward before you during this proceeding that are either imported from another jurisdiction or that have not been tested in the Canadian context, that's correct.

1LISTNUM 1 \l 18070            THE CHAIRPERSON:  Okay.

1LISTNUM 1 \l 18071            On page 11, you suggest that after a transition period with a hard stop, if things haven't developed as we expected, we should hold another hearing and, if necessary, adopt retail regulation.

1LISTNUM 1 \l 18072            I gather implicit in that is that you ‑‑ what you have called type I and type II errors ‑‑ you think we should at all costs avoid making type I error, and therefore deregulate or take away mandating wherever possible, and then revisit if ‑‑ in terms ‑‑ if made an error, rather than being overly protective, so, in effect, to avoid a type I error.  Is that correct?

1LISTNUM 1 \l 18073            MS PALUMBO:  That is correct.

1LISTNUM 1 \l 18074            THE CHAIRPERSON:  Okay.  And we have heard noting from you on a phaseout, so I gather you have no comment on what's the appropriate phaseout period?

1LISTNUM 1 \l 18075            MS PALUMBO:  We will be addressing this more fully in the write oral argument, however, in terms of the transition period, the Bureau's position has been that a transitional period would be somewhere between the three years and the five years.

1LISTNUM 1 \l 18076            THE CHAIRPERSON:  Okay.  Thank you.

1LISTNUM 1 \l 18077            Commissioner del Val.

1LISTNUM 1 \l 18078            COMMISSIONER del VAL:  Thank you.

1LISTNUM 1 \l 18079            Just one question.  Referring to the direction where there's been ‑‑ the competitor presence test set out for the residential and the business market, do you see those tests playing any role in, say, helping define "market power" in the Bureau's proposed definition of "essential services"?

1LISTNUM 1 \l 18080            MR. ABUGOV:  Commissioner del Val, it would be our preference to take an undertaking and respond to that question in writing.

1LISTNUM 1 \l 18081            Thank you.

1LISTNUM 1 \l 18082            COMMISSIONER del VAL:  Thank you, Mr. Abugov.

1LISTNUM 1 \l 18083            THE CHAIRPERSON:  Okay, thank you very much for your presentation.

1LISTNUM 1 \l 18084            Madam Secretary, who's next?

1LISTNUM 1 \l 18085            THE SECRETARY:  For the record, Mr. Abugov, just note that the undertaking from Mr. von Finckenstein is CRTC‑8, and the last one is CRTC‑9.

1LISTNUM 1 \l 18086            Thank you.

1LISTNUM 1 \l 18087            THE SECRETARY:  Our next panel, The Companies, please come forward, Counsel Hofley and Mr. Bibic.

‑‑‑ Pause

1LISTNUM 1 \l 18088            MR. HOFLEY:  With your permission, Mr. Chairman.

1LISTNUM 1 \l 18089            THE CHAIRPERSON:  Mr. Hofley, good morning.  Please begin.

ARGUMENT / PLAIDOIRIE

1LISTNUM 1 \l 18090            MR. HOFLEY:  Good morning, Mr. Chairman, good morning, Commissioners.

1LISTNUM 1 \l 18091            You will hear from me, Randall Hofley, for our radio listeners, followed by Mr. Bibic.

1LISTNUM 1 \l 18092            Mr. Chairman, Commissioners, this Commission has undertaken an assessment of a wholesale regulatory regime that has broad implications for the development of telecommunications markets, residential and business, in Canada.  It has done so in a particular context that cannot be ignored:  at the direction of the government, following a comprehensive review of telecommunications policy by independent experts, the TPR.  This independent expert panel's conclusions could not be more clear.

1LISTNUM 1 \l 18093            The panel concluded that the scope of wholesale access currently required by the Commission is too broad, that it undermines incentives for parties to be efficient, to invest, including building of alternative facilities, and to innovate, and that, quote, "the scope of such mandated wholesale access should be narrowed", end quote.

1LISTNUM 1 \l 18094            It is clear, in our submission, Mr. Chairman, Commissioners, that these conclusions not only inform the policy direction, but provide the foundation for the policy direction's instruction that the Commission complete this very review process.

1LISTNUM 1 \l 18095            Above all else, the policy direction requires that the Commission, quote, "rely on market forces to the maximum extent feasible", end quote.  In our submissions, these words plainly mean that wholesale regulation can only be maintained where regulation is absolutely necessary to address a real and sustained market failure in a properly defined product and geographic market.

1LISTNUM 1 \l 18096            Indeed, it is our submission that this fundamental direction requires that the Commission be convinced that the benefit to society of mandating access to a facility will exceed the cost.  If, and only if, the Commission reaches this conclusion, the policy direction requires that the Commission use regulatory measures that are efficient and proportionate to their purpose and that interfere with the operation of competitive market forces to the minimum extent necessary.

1LISTNUM 1 \l 18097            The policy direction's specific provisions related to the regulation of wholesale services must be interpreted within this important and undeniable context.  The policy direction gives the Commission an important mandate.  It indicates that this review is to result in an approach which, again I quote:

"Increases the incentives for innovation and investment in, and construction of, competing telecommunications network facilities." (As Read)

1LISTNUM 1 \l 18098            It directs the Commission to determine the extent to which mandated access to wholesale services that are nonessential should be phased out and the appropriate pricing of any remaining regulated services.

1LISTNUM 1 \l 18099            Clearly, Mr. Chairman, commissioners, the mandate the Commission has been given directs change.  It requires a determination of the extent to which mandated access should be phased out.  It doesn't say the extent, if any, to which mandated access should be phased out.

1LISTNUM 1 \l 18100            It clearly focuses on incentives, not only for incremental investment in existing facilities, but on incentives for the construction of network facilities to compete with those in existence.  The Commission is not to be satisfied with the status quo or even with incremental investment at the margins, but rather investment in facilities that will, like cable telephony, bring what the Bureau's Mr. Hariton describes as "the vast bulk of the benefits of competition."

1LISTNUM 1 \l 18101            Now, MTS Allstream suggests that the policy direction favours competition that includes a mixture of leased and owned facilities on the grounds that the policy direction instructs the Commission to encourage facilities‑based competition.  And that facilities‑based competition was defined in the government's forbearance variation order to include competition from parties who use a mix of leased and owned facilities.

1LISTNUM 1 \l 18102            At its simplest level, the acceptance of this proposition would mean that the status quo meets the government's policy objectives and that, quite simply, this review has been a waste of time.  It would amount, in our submission, to a serious misreading of the government's policy pronouncements.

1LISTNUM 1 \l 18103            Of course, it is true that the retail forbearance test embodied in the forbearance variation order can be satisfied with competition, is based on a party that uses a combination of its owned and leased facilities.  This policy outcome simply recognizes the fact that service providers will inevitably rely, to some extent, on leased facilities, particularly in the provision of business services.

1LISTNUM 1 \l 18104            There is no ubiquitous carrier that covers the entirety of Canada, nor is there likely ever to be.  This fact does not mean that the provision of leased facilities should be regulated as a matter of policy.  What should be regulated at the wholesale level is a very different question than the question which was resolved in the government's forbearance variation order.  What should be regulated at the wholesale level is answered by the policy direction.

1LISTNUM 1 \l 18105            The policy direction does not use the term "promote facilities‑based competition."  What it does say, Mr. Chairman, commissioner is:

"Increase incentives for investment in and construction of competing telecommunications network facilities." (As Read)

1LISTNUM 1 \l 18106            These words, I say, leave no doubt or ambiguity as to their meaning.

1LISTNUM 1 \l 18107            As the Bureau's Mr. Hariton stated, innovation and competition does occur and must occur at the physical or network level, not simply the application level.  This is clear from Verizon's fibre to the home and Bell and Bell Aliant's fibre‑to‑the‑node programs.  The government's objective is more construction of network facilities as end to end facilities‑based competition fosters the greatest reliance on market forces.

1LISTNUM 1 \l 18108            Now, as for the definition of essential facilities, a review of the record reveals that, perhaps not surprisingly, the more a party relies or hopes to continue to rely on facilities owned by another the broader the definition of essential facilities that party proposes, the greater the number and complexity of the hoops that party would require the facility owner to jump through in order to have the facility declared nonessential, and the further the definition strays from both the ordinary and competition law meaning of essential.

1LISTNUM 1 \l 18109            At one end of the spectrum is MTS Allstream who would have a facility declared essential where it is required by any competitor to provide any service downstream.  And a facility is required by a competitor unless it is capable of self‑supply and is available from a vigorous, sustained third‑party market with alternative sources of supply.  Notwithstanding that it acknowledges that the concern is competition downstream, MTS and its expert insist that there is no need to assess if there is market power downstream whether in the absence or the presence of mandated access.

1LISTNUM 1 \l 18110            Under this definition, Mr. Chairman, commissioners, nearly every wholesale service mandated today, and a couple of new ones, will continue to be mandated.  This will provide MTS with the certainty of cost structure it desires to continue along the path of resale competition.  This is the everything I want is essential definition.  MTS's approach is, of course, premised on the continuation of the open network access model, a model that would see most parts of the incumbent's network opened up to competitors in the hopes it will lead to retail forbearance.  This model envisaging wholesale regulation in perpetuity has been discredited, notably by the TPR panel and most recently by this Commission in Telecom Decision 2007‑35, the retail DNA decision.

1LISTNUM 1 \l 18111            At paragraph 100 of the decision the Commission stated and I quote:

"In order for forbearance of retail hi‑speed DNA services to be appropriate the competitor should be able to independently and reasonably offer customers an alternative to ILEC's hi‑speed DNA services over their own facilities, that is competitors should own and operate the underlying transmission facilities." (As Read)

1LISTNUM 1 \l 18112            Now, other parties, like Rogers, who have an interest in buying as much time as possible to expand their facilities‑based network to serve business as extensively as they serve residential customers propose a definition of essential facility that comes closer to the ordinary and competition law meaning.  But, to be mandated as essential, Rogers would only require that the party controlling the facility possess enough power upstream to prevent or lessen competition in a downstream market in a nontrivial manner.

1LISTNUM 1 \l 18113            As for duplicability, Rogers proposes the use of arbitrary proxies, at least arbitrary in the Canadian context, which Rogers is well aware will not be met anytime soon.  This is what you may recall I coined "the Rogers don't rush me approach."  Rogers' approach is, of course, premised on the steppingstone model, a model the CDN experience demonstrates has not worked in Canada, again, as recently recognized by this very Commission in the same paragraph 100 of the same Decision 2007‑35.  And again, I am going to quote.  The decision says:

"Forbearance for hi‑speed DNA service should not be predicated on the availability of ILEC CDN services within a wire centre.  The Commissions considers the ILEC‑supplied CDN service would not contribute towards a sustainability of hi‑speed DNA market because it would perpetuate competitors' dependency on ILEC hi‑speed DNA facilities and continued regulation of underlying facilities for the provision of hi‑speed DNA services." (As Read)

1LISTNUM 1 \l 18114            At the other end of the spectrum of course, Mr. Chairman, commissioners, is the definition proposed by TELUS.

1LISTNUM 1 \l 18115            Now, for their part, the Companies have unwaveringly taken an approach that is grounded in Canadian competition law principles so much so that it has adopted the definition proposed by the Competition Bureau and effectively Mr. Osborne.

1LISTNUM 1 \l 18116            The Companies' definition requires that the Commission consider whether the facility owner has market power downstream that access to the facility may redress.  Absent such market power, there can be no principled basis upon which wholesale regulation can be maintained or imposed. Market power over a facility upstream does not necessarily mean there is market power downstream if there is a party or parties who compete downstream without any need for an ILEC's facilities.  For example, using an alternative platform or wire.

1LISTNUM 1 \l 18117            From there, we say the Commission must conclude that the facility owner has market power in the supply of that facility because it cannot be duplicated and that mandating access will materially preserve or enhance, as the case may be, competition in the downstream market such that the benefits of regulation outweigh the considerable costs of regulation.

1LISTNUM 1 \l 18118            The Companies' definition, I suggest, is practical, principled and, most importantly, consistent with the policy direction.

1LISTNUM 1 \l 18119            Now, Mr. Chairman, I have appeared before a number of federal tribunals charged with the important task of regulating business conduct over many years.  And with that experience I believe that it is important to note that the Commission is in a unique position in these proceedings.  It has the benefit of detailed and expert advice from three independent sources; the TPR, the Bureau and Mr. Osborne, each of whose sole constituency is the public interest.

1LISTNUM 1 \l 18120            Moreover, this independent advice addresses the fundamental issues before the Commission, including the government's intention in this policy direction, the definition of an essential facility, the incentive to invest and whether if, and I say if, only two competitors emerge they will provide sufficient competition.  Each of these independent sources have made submissions consistent with that of the Companies on these fundamental issues.

1LISTNUM 1 \l 18121            In respect of the policy direction Mr. Osborne stated that, and I quote:

"The regulatory goal of the policy direction is to increase incentives for innovation and development of new facilities.  Any ambiguity in the particulars in subsections 1(b) and (c)..."

1LISTNUM 1 \l 18122            ‑‑ those are the factors ‑‑

"...should be resolved in favour of the general principles articulated in subsection 1(a), being reliance on market forces to the maximum extent feasible." (As Read)

1LISTNUM 1 \l 18123            In respect of the definition of essential facilities, as already indicated, the Competition Bureau's and Mr. Osborne's proposed definitions are inline with that of the Companies or should I say the Companies support those definitions.

1LISTNUM 1 \l 18124            On incentives to invest, you have heard from the TPR, from the Bureau and the overwhelming majority of the academic evidence that mandated wholesale regulation undermines the incentive to invest in constructing network facilities.

1LISTNUM 1 \l 18125            Indeed, the record of this proceeding has confirmed that this is not merely a theoretical conclusion, but is a practical reality in Canada, the case CDN confirms that.  Bell West, TELUS in the east, Vid,otron and five utelcos all indicated in interrogatory responses that they cutback on their building of new facilities as a result of the CDN decision.

1LISTNUM 1 \l 18126            Of all the companies in this proceeding that are building access facilities, MTS is the only company that claimed that CDN incented it to build.  Everyone else stated it either had no impact or it undermined their access construction programs.

1LISTNUM 1 \l 18127            Of course, MTS evidence on the issue must be considered carefully.  Under cross‑examination, MTS could not explain why in 2002 they had access to approximately 3,300 buildings using their own facilities but in 2007 they were down to approximately 2,300.  Regardless of why the numbers went down, Mr. Chairman, commissioners, what is clear is that they did not go up.

1LISTNUM 1 \l 18128            Such evidence is not isolated.  Take the case of Shaw, a company that has advocated the need for mandated CDN access but under cross‑examination admitted they were only seeking mandated access for low‑speed services.

1LISTNUM 1 \l 18129            Even in that case, Shaw admitted that they viewed CDN as an essential service, in contrast to Vidéotron, because they had not been building their network over the last few years like Vidéotron.

1LISTNUM 1 \l 18130            As for whether two facilities‑based competitors can provide sufficient competition, the Competition Bureau has concluded that given the nature of the industry, coordinated conduct or joint dominant behaviour is, to use Dr. Church's words, "very highly unlikely."

1LISTNUM 1 \l 18131            Only the Bureau and Dr. Taylor and Ms Sanderson for The Companies conducted the well‑recognized competition law analysis of whether a duopoly, again, if it occurs, would be likely to result in a coordinated anticompetitive outcome in these circumstances.

1LISTNUM 1 \l 18132            They all concluded it would not, much like the government must have concluded in the forbearance variation order.

1LISTNUM 1 \l 18133            For his part, Mr. Osborne opined in the residential broadband internet context that "the numbers suggest that a cableco‑telco duopoly can result in strong facilities‑based competition."

1LISTNUM 1 \l 18134            In short, Mr. Chairman, commissioners, on these fundamental issues, the Commission need not be concerned about weighing the submissions in light of the parties' self‑interest.  It has three independent public interest sources to assist in this process.

1LISTNUM 1 \l 18135            As the independent TPR panel concluded, the current wholesale policies of the Commission have distorted the behaviour and incentives of new entrants in Canadian telecommunications markets.  No less than a fundamental change to these policies is required to achieve the outcome envisaged by the policy direction.

1LISTNUM 1 \l 18136            I turn it over to Mr. Bibic to provide The Companies' specific recommendations as regards this fundamental change.

1LISTNUM 1 \l 18137            MR. BIBIC:  Mr. Chairman, commissioners, from my vantage point there seem to be two conflicting concerns of the Commission at the heart of this proceeding.

1LISTNUM 1 \l 18138            First, the evidence shows that too much wholesale regulation undermines the construction of competing telecom network facilities.

1LISTNUM 1 \l 18139            Second, there is the view put forward by some that the removal of most wholesale regulation or its removal too quickly will undermine competition.

1LISTNUM 1 \l 18140            Now, of course, you won't be surprised to hear me say that we believe that the proposal we put forward during our testimony when we were on the panel, relying as it does on market forces and ex post regulation, is the best way to achieve the objectives in the Policy Direction.

1LISTNUM 1 \l 18141            That being said, we believe that it is possible to meet the Policy Direction's objectives and reconcile these two conflicting concerns using the ex ante framework set out in the Commission's October 3rd letter if the Commission feels compelled to do so, which brings me to our proposal, Mr. Chairman.

1LISTNUM 1 \l 18142            Contrary to likely expectations, we are not proposing to classify all services as non‑essential and I am not referring here only to public goods services and interconnection services.

1LISTNUM 1 \l 18143            We have therefore developed an alternative proposal which takes into account the two conflicting concerns and recognizes that the Commission is strongly considering some form of ex ante model consistent with that October 3rd letter.

1LISTNUM 1 \l 18144            In my remaining time this morning, I will briefly highlight the key parts of our alternative proposal, in particular which services should be considered as conditional essential, which should be non‑essential subject to phase‑out, and which should be conditional mandated non‑essential, and the reasons why.

1LISTNUM 1 \l 18145            I will also briefly touch upon the transition period and what should transpire at the end of that transition period.

1LISTNUM 1 \l 18146            Mr. Chairman, you may recall that on October 10th, the first day our panel appeared, you pointed out that The Companies say everything should be ex post.  You also asked me if it is absolutely necessary to take this black and white approach.

1LISTNUM 1 \l 18147            My answer back then basically was that if I were in your shoes I would focus on low‑capacity access.  We have thought about this some more and I have a more fully developed answer for you this morning.

1LISTNUM 1 \l 18148            The Companies still believe that the Commission should focus its regulation on low‑capacity access services, and by that I mean unbundled copper loops and low‑capacity CDNA, DS‑0s and DS‑1s.  This means that access services at DS‑3 and above and transport services would be classified as non‑essential services subject to phase‑out.

1LISTNUM 1 \l 18149            Competitors have already built or are prepared to build these higher‑capacity access and transport facilities largely due to the high revenue potential of the many and varied existing and reasonably foreseeable retail services which utilize these facilities.  Such facilities are duplicable and this has been clearly established in the marketplace and on the record, even by those who call for continued regulation of CDN.

1LISTNUM 1 \l 18150            With respect to high‑capacity DS‑3 and above access, I provide the following examples from the record.

1LISTNUM 1 \l 18151            First, as Mr. Hofley just mentioned, Shaw stated during Mr. Daniels' cross‑examination that DS‑3 access should not be mandated.

1LISTNUM 1 \l 18152            Primus also conceded when they were on the stand that DS‑3 and above access can be economically justifiable for competitors to build, including themselves via Globility.

1LISTNUM 1 \l 18153            And Rogers admitted that it has access to a much greater number of buildings than it otherwise would have had the Commission believe.  In fact, in the downtown core of Ottawa, an area where one is most likely to sell high‑speed business services, Rogers has admitted that it already has access to 78 percent of the major buildings in the downtown core.

1LISTNUM 1 \l 18154            Mr. Chairman, when I was on the stand I pointed out that based on our surveys we thought they had access to 90 percent of the buildings in the downtown core.  There was an undertaking.  Rogers came back, did their own search and the 78 percent comes from their answer.

1LISTNUM 1 \l 18155            Now, of course, when a cableco has fiber into a building, it obviously can offer all the sophisticated business services at issue in this proceeding.  Some of the access they have is via coax.  Now, when they have coax access, they can obviously offer basic voice service and internet service but more importantly, as Mr. Babin of Bell pointed out, with that access one can pull in fiber using existing conduits.

1LISTNUM 1 \l 18156            So those are my examples, Mr. Chairman, for DS‑3 and above access.

1LISTNUM 1 \l 18157            Turning now quickly to transport services, these have by and large already been duplicated.  For example, Bell, TELUS, Rogers and MTS all operate their own national fiber backbone networks, not to mention the existence, of course, of you telco networks.

1LISTNUM 1 \l 18158            So under our alternative proposal, unbundled local loops and low‑capacity access would continue to be regulated as either conditional essential or conditional mandated non‑essential in areas where the retail service which uses these access facilities is regulated or where retail forbearance has been secured based on such mandated access.

1LISTNUM 1 \l 18159            Conversely, such facilities would be or become non‑essential at wholesale when the corresponding retail service is or would become forborne at retail based on the presence of competitors that do not require mandated access.

1LISTNUM 1 \l 18160            And this is an important point, Mr. Chairman.  Unbundled local loops, DS‑0s and DS‑1s, would not become non‑essential at wholesale until retail forbearance had been secured as a result of end‑to‑end competition.

1LISTNUM 1 \l 18161            I am going to proceed now to highlight our alternative proposal using residential and business voice ‑‑ actually, I am going to go through now and explain the model.  I am going to use residential and business voice and data services as examples just to highlight it.  So let's start with residential and business voice.

1LISTNUM 1 \l 18162            In exchanges where an incumbent's retail residential or business local voice services have been forborne based on the presence of end‑to‑end facilities‑based competition from competitors who use their own access ‑‑ so we can take Vidéotron in Montreal, for example, where we are forborne already for residential voice ‑‑ unbundled local loops would be classified as non‑essential and subject to phase‑out.

1LISTNUM 1 \l 18163            Clearly, in those exchanges like Montreal, loops have been duplicated ‑‑ Vidéotron is there ‑‑ and they should not be regulated at wholesale.

1LISTNUM 1 \l 18164            So now taking another example, in exchanges where an incumbent's retail residential or business voice services have been forborne on the basis of mandated access to unbundled loops ‑‑ so now we can take Bell's business voice services in Toronto where MTS and TELUS are co‑located and use our loops ‑‑ those loops would be classified as conditional mandated non‑essential.

1LISTNUM 1 \l 18165            They would remain so classified until such time as the incumbent were able to demonstrate to the Commission that were it not already forborne, it could be forborne at the retail level either on the basis of the presence of a competitor that does not require mandated access or on the basis of the Competition Bureau's structured rule of reason test which it developed in a local forbearance proceeding.

1LISTNUM 1 \l 18166            So going back to my example, Toronto exchange were forborne today for business voice on the basis that some competitors co‑locate and use our loops, if in the future we see a cable company like Rogers start offering those business voice services using not its Call‑Net network but its own end‑to‑end network, we would come back to the Commission and say:  We know we are forborne but we could be forborne now on the basis of Rogers with its network.  Then those loops would move from conditional mandated non‑essential to non‑essential.

1LISTNUM 1 \l 18167            And then the third example using business voice is we need to take exchanges where the incumbent continues to be regulated today.  We are not forborne, we are regulated.  Unbundled loops in those areas would be classified as conditional essential.

1LISTNUM 1 \l 18168            Over time, should the incumbent become forborne at retail on the basis either of a competitor using its own access facilities or the Bureau's structured rule of reason test, which fundamentally depends on a competitor being present with its own facilities, then the loops would become non‑essential.

1LISTNUM 1 \l 18169            Alternatively, should we become forborne in that area on the basis of a competitor who leases loops, then the loops would become classified as conditional mandated non‑essential.  So this would address areas where today we are regulated because there is no competition.

1LISTNUM 1 \l 18170            So those were my examples using retail residential and business voice.

1LISTNUM 1 \l 18171            I would just like to spend a moment, Mr. Chairman, on retail data services.  Many of these require low‑capacity DNA to function, and the regulatory treatment of low‑capacity CDNA, the wholesale version, which is at issue obviously in this proceeding, would follow the same principles.  So in a wire centre where low‑capacity retail DNA is regulated, the corresponding wholesale CDNA version would be classified as conditional essential.

1LISTNUM 1 \l 18172            Now, I recognize that to date there has been no forbearance of low capacity retail DNA, which means under our proposal DS‑0s and DS‑1s at wholesale would not be non‑essential but, in the future, as low capacity retail DNA becomes forborne based on the presence of alternative low capacity access services, the corresponding wholesale version, the low‑speed CDNA, would also be forborne.

1LISTNUM 1 \l 18173            Mr. Chairman, this of course means that you should expect to soon receive from us a forbearance application to be forborne for retail, low‑speed DNA services.

1LISTNUM 1 \l 18174            So at its core our alternative model recognizes that once an incumbent has been forborne at retail on the presence of the end‑to‑end facilities‑based competition for residential and for voice and low‑speed accesses, the relevant public policy and regulatory objectives espoused in the policy direction have been met and wholesale regulation becomes redundant and should be removed.

1LISTNUM 1 \l 18175            I'm going to move now to my comments on the transition period.

1LISTNUM 1 \l 18176            In this proceeding there has been much discussion concerning the length of the transition period.  The Companies initially proposed one year and many others proposed three to five.

1LISTNUM 1 \l 18177            Now, the transition period must reflect the entire regulatory scheme adopted.  It should not be selected in isolation from other elements of the regime.

1LISTNUM 1 \l 18178            Our alternative approach is in fact very conservative.  With the adoption of a conservative approach to the application of the definition of "essential facilities" it is important not to strike a transition period that is too long.  Thus, should the Commission opt for our alternative approach, it is critical that the transition period should not be unduly lengthy.

1LISTNUM 1 \l 18179            It would be a serious mistake, in our view, to opt for a generous application of a definition of "essential facilities" as well as a generous transition period.

1LISTNUM 1 \l 18180            Frankly, Mr. Chairman, in an industry as dynamic and as competitive as ours five years is an awfully long time.  Such a long period of time will not incent industry participants to modify their current behaviours in an effort to reach an optimal balance between building, negotiating market‑based arrangements and relying on regulation where a facility really is essential.

1LISTNUM 1 \l 18181            This actually brings me back to the words from the policy direction which Mr. Hofley mentioned:

"... the reliance on market forces, to the maximum extent feasible, and interference with market forces to the minimum extent necessary."  (As read)

1LISTNUM 1 \l 18182            Those words mean something and, in my view, they don't contemplate a wholesale regime that continues the way it is today for a lengthy period of time when that wholesale regime was actually developed when there weren't any market forces or when the Commission didn't rely on them.  All that is going to do, in my submission, Mr. Chairman and Commissioners, is keep us all in this comfortable state of suspended animation where there is no incentive to modify behaviours.

1LISTNUM 1 \l 18183            Because of that, and in an effort to address the conflicting concerns I mentioned at the very beginning of my remarks, The Companies have revised their transition period proposal as follows:

1LISTNUM 1 \l 18184            A three‑year transition period would apply for all access services, whether high‑speed or low‑speed.  For example, residential unbundled local loops in Ottawa ‑‑ we can use Montréal which was my earlier example ‑‑ where we are already forborne on the basis of cableco presence would continue to be regulated for a full three‑year period.

1LISTNUM 1 \l 18185            A two‑year transition period would apply for transport, given the general recognition that transport can be more quickly duplicated and in fact has been.

1LISTNUM 1 \l 18186            A one‑year transition period would apply for all those services for which competitors already have developed competing alternatives.  We heard about some of them during the cross examinations but they would include LRN‑absent, LNP and billing and collections services, all of which have been shown to have many competitive alternatives.

1LISTNUM 1 \l 18187            So our transition proposal also includes the following elements:  the flexibility for periodic price increases; allowing parties to negotiate commercial agreements during the transition period and beyond; and no obligation to make applicable services available on a mandated basis to new customers or to permit existing customers to augment capacity at specified intervals during the transition period.  We will of course flush this out in more detail in our final written materials.

1LISTNUM 1 \l 18188            Commissioners and Mr. Chairman, certain parties have questioned the real motivation behind our proposal and as I sit here this morning in closing argument I can sincerely say that our end goal is not to exit the wholesale business.

1LISTNUM 1 \l 18189            In fact, we spoke earlier this week to my counterpart who heads up Bell's wholesale business and his desire.  He reaffirmed his desire that he wants to enter into long‑term business partnerships with his wholesale customers where possible.

1LISTNUM 1 \l 18190            So ours is not a trust me or a trust us approach, it is a trust the market approach, which brings me to the regulatory treatment at the end of the transition period.

1LISTNUM 1 \l 18191            In our view,the Commission must send a strong signal to the industry that at the end of the transition period services already found by the Commission to be non‑essential will no longer be regulated.

1LISTNUM 1 \l 18192            It would be highly inappropriate and wasteful of regulatory resources for the Commission to require incumbents after that period to again apply to be forborne from regulation of wholesale services which have already found to be non‑essential.

1LISTNUM 1 \l 18193            It would also be inappropriate for the Commission to signal that it would be open to considering an extension of a transition period.  This would perpetuate competitors' existing behaviour and again would do nothing to incent industry participants to modify their business behaviour.

1LISTNUM 1 \l 18194            Ten years ago the Commission in fact established a five‑year sunset regime for loops and other services which many actually anticipated would eventually be extended and of course competitors acted accordingly.

1LISTNUM 1 \l 18195            Instead, the Commission must implement a hard stop to the continued regulation of non‑essential services, recognizing that following the transition period it would still be possible to address anti‑competitive behaviour on an ex post basis.

1LISTNUM 1 \l 18196            As a closing note, and recognizing the Commission's legitimate concerns with incenting investment without diminishing competition, I believe it is important for the Commission to note that it is not being asked in these proceedings to deregulate on a leap of faith that an alternative ubiquitous network will be built.

1LISTNUM 1 \l 18197            Cable is already present, wireless is also here and continues to develop and who knows what else will come down the pike.

1LISTNUM 1 \l 18198            Now, we heard Mr. Abugov in representing The Bureau earlier this morning refer to the words of Mr. Waters, an independent ‑‑ not an independent, a well‑known expert in telecom regulation internationally.  You may recall that Mr. Abugov referred to the words of Mr. Waters who had said that it's a little strange when he comes here to see one of the world's most complete ladders of investment and how in other countries they want to get to where we are.

1LISTNUM 1 \l 18199            What Mr. Abugov didn't mention was the next part of Mr. Waters' statement when he put to the Commission that he thinks the basic question is:  How do we make what we have got work harder, faster and better?  Mr. Waters believes that is the essential question.

1LISTNUM 1 \l 18200            And we believe, Commissioners, that our proposal today will accomplish just that.

1LISTNUM 1 \l 18201            So we wish you well in your deliberations and on behalf of The Companies I would like to thank the Commissioners, I would like to thank the Hearing Secretary and the counsel and all staff for the time that you have put into this proceeding.  They are important issues that are being decided upon and we certainly appreciate the opportunity we have been given to put our case forward.

1LISTNUM 1 \l 18202            THE CHAIRPERSON:  Thank you very much.

1LISTNUM 1 \l 18203            I must say, I very much appreciate you coming forward with an alternative proposal.  You obviously listened very carefully to our question and looked at our framework.  What you have put forward is a very interesting variation which we will study carefully.

1LISTNUM 1 \l 18204            Just a couple of questions.  Is anything that's going to fall in the bucket essential?

1LISTNUM 1 \l 18205            MR. BIBIC:  The first bucket?

1LISTNUM 1 \l 18206            THE CHAIRPERSON:  Yes.

1LISTNUM 1 \l 18207            MR. BIBIC:  Do you know which one?

1LISTNUM 1 \l 18208            The Commission's October 3rd letter had an example "BLIF", "Basic Listing Information", I think, and that's what we would put in that category.

1LISTNUM 1 \l 18209            THE CHAIRPERSON:  I thought during questioning of you particularly something came up which you mentioned here that actually would fall in essential, if memory serves me correctly.

1LISTNUM 1 \l 18210            Counsel, do you remember what it was?

1LISTNUM 1 \l 18211            MR. McCALLUM:  Subscriber listings perhaps?

1LISTNUM 1 \l 18212            MR. BIBIC:  That's the same service.

1LISTNUM 1 \l 18213            THE CHAIRPERSON:  I see.  All right.

1LISTNUM 1 \l 18214            Second, you mentioned during the phase‑out periodic price increases.

1LISTNUM 1 \l 18215            I presume you will outline that in your written submissions?

1LISTNUM 1 \l 18216            MR. BIBIC:  Yes.

1LISTNUM 1 \l 18217            THE CHAIRPERSON:  Can you share with us what you have in mind?

1LISTNUM 1 \l 18218            MR. BIBIC:  Well, I haven't landed on what we would recommend in terms of the level of the price increase, but I could offer this:  Ms Cram asked a number of questions of a number of parties where she posited a price increase from cost plus 15 to cost plus 20, over time to cost plus 25, and of course that presupposes that the price increases would apply to Category 1 services or essential services.

1LISTNUM 1 \l 18219            Our proposal will suggest price increases not only for Category 1 services, but services that fall in conditional mandated non‑essential as well.

1LISTNUM 1 \l 18220            THE CHAIRPERSON:  You suggest three‑year phase‑out for certain services.  If I understand you correctly, you are saying we would say mandated prices and at the end of year one or at the end of year two you may increase the prices by "X" and "X" will be at a formula or an amount or whatever?

1LISTNUM 1 \l 18221            MR. BIBIC:  That's absolutely correct.

1LISTNUM 1 \l 18222            Actually, I can develop that a little bit further.

1LISTNUM 1 \l 18223            Let's take access services where we propose a three‑year transition period.  Probably I would say that we will come forward and we will say after the first year price increases would be permissible and over certain intervals for the remaining period as well.

1LISTNUM 1 \l 18224            But also, one element that you haven't asked me about but it is tied into this, is this notion of not having, on the mandated basis, the obligation to augment capacity.

1LISTNUM 1 \l 18225            So take the three‑year transition period after year two.  So after the second year we would say that there would be no further obligation on the incumbents to sell on a mandated basis ‑‑ and those are important words ‑‑ to competitors further capacity.

1LISTNUM 1 \l 18226            So starting from the date of the decision the competitors could buy more services at mandated prices.  After year two they could continue with what they have at mandated prices, but the rest would have to be negotiated commercially.

1LISTNUM 1 \l 18227            THE CHAIRPERSON:  You anticipated where I was going, exactly that.

1LISTNUM 1 \l 18228            MR. BIBIC:  All right.

1LISTNUM 1 \l 18229            THE CHAIRPERSON:  I can see that you don't want to increase the mandated service to existing, but why are you punishing new ones as well?  I mean, that is three years.  If somebody enters the market during that three years, why should that company not be able to take advantage of the mandated services?  They are still in existence for that period.

1LISTNUM 1 \l 18230            On page 18 ‑‑

1LISTNUM 1 \l 18231            MR. BIBIC:  Yes, yes.

1LISTNUM 1 \l 18232            THE CHAIRPERSON:  Top paragraph (iii) you say:

"... on a mandated basis to new customers or to make existing customers' to augment."  (As read)

1LISTNUM 1 \l 18233            MR. BIBIC:  It's a question of as a new competitor enters, it will enter knowing what the rules of the game clearly are and we will have bene two years down the road.

1LISTNUM 1 \l 18234            Again, what we didn't specify in here are the words "at specified intervals during the transition period".  I didn't want to spend too much time on that because there are different definitions.

1LISTNUM 1 \l 18235            THE CHAIRPERSON:  Yes.

1LISTNUM 1 \l 18236            MR. BIBIC:  Taking the three‑year one, after two years or two years down the road the competitor would know when it enters that, if it wants to enter on the basis of access it should do so on a commercially negotiated basis with the incumbent.

1LISTNUM 1 \l 18237            Now if it turns out ‑‑ and this is where we go back to our ex post model that we presented during our testimony.

1LISTNUM 1 \l 18238            If it turns out that we are denying access, which I don't think we are going to do, the Commission could step in.

1LISTNUM 1 \l 18239            THE CHAIRPERSON:  Right.

1LISTNUM 1 \l 18240            Finally, what is a strong signal?  You want us to send a strong signal that this is a hard stop and there will be no extension.

1LISTNUM 1 \l 18241            I agree with you, as you have heard me speak many times in terms of predictability, et cetera.  I would just like to know what, in your view, is a strong signal.

1LISTNUM 1 \l 18242            MR. BIBIC:  The strong signal would actually be a statement from the Commission that says that at the end of the transition period, those services are forborne.

1LISTNUM 1 \l 18243            In fact, I have to say it is partly a reaction to the October 3rd letter wherein Category 3, non‑essential subject of phase‑out, the last sentence of that says that we would have to re‑apply for forbearance.  So that is a related point as well.

1LISTNUM 1 \l 18244            Saying that they are forborne actually sends that strong signal that the transition period won't be extended.

1LISTNUM 1 \l 18245            THE CHAIRPERSON:  You made that already in your submission.

1LISTNUM 1 \l 18246            MR. BIBIC:  Right.

1LISTNUM 1 \l 18247            THE CHAIRPERSON:  That sentence is superfluous: once it's over, it should be over.  I understand that.

1LISTNUM 1 \l 18248            MR. BIBIC:  That's correct.

1LISTNUM 1 \l 18249            THE CHAIRPERSON:  I just wanted to know what you meant.  By strong signal, you want a definitive statement from us.

1LISTNUM 1 \l 18250            MR. BIBIC:  Correct.

1LISTNUM 1 \l 18251            THE CHAIRPERSON:  All right; thank you.

1LISTNUM 1 \l 18252            Commissioner de Val, did you have a question?

1LISTNUM 1 \l 18253            COMMISSIONER del VAL:  Thank you, Mr. Bibic and Mr. Hofley.

1LISTNUM 1 \l 18254            I believe that when you were having the exchange with the Chairman, wasn't it 1‑800 service that you had agreed in testimony would be essential?

1LISTNUM 1 \l 18255            MR. MARTIN:  That was considered.  I think it was Mr. Denis Henry who indicated that 1‑800, this was the question of access tandem interconnection service, as to whether it would be continued to be mandated for 1‑800 versus normal ‑‑

1LISTNUM 1 \l 18256            MR. BIBIC:  Yes, Mr. Martin is correct.

1LISTNUM 1 \l 18257            We have classified those as interconnection services, and by definition those are mandated.

1LISTNUM 1 \l 18258            COMMISSIONER del VAL:  Thank you very much.

1LISTNUM 1 \l 18259            MR. BIBIC:  You are welcome.

1LISTNUM 1 \l 18260            THE CHAIRPERSON:  Commissioner Duncan?

1LISTNUM 1 \l 18261            COMMISSIONER DUNCAN:  I'm just wondering, am I to understand then that these comments are in addition to the definition that you proposed on October 3rd?

1LISTNUM 1 \l 18262            MR. BIBIC:  Yes.  The definition of essential facilities we proposed remains as it is.

1LISTNUM 1 \l 18263            COMMISSIONER DUNCAN:  So I did have a concern, when I read that, with your reference to "potential competitors".

1LISTNUM 1 \l 18264            It says, unless I have it incorrectly ‑‑ this is your October 4th opening statement:

"The facility is required as an input by all competitors or potential competitors."

1LISTNUM 1 \l 18265            MR. BIBIC:  That goes back to the transition period.  It is a related question to the one that the Chairman just asked me.

1LISTNUM 1 \l 18266            Again, this transition period applies to services which are, by definition, non essential.  So the definition of essential facilities has already determined that the service in question is not essential.

1LISTNUM 1 \l 18267            What we are saying is that at the end of the second year of the three‑year transition period no new customers should be able to come on board and say I want access to a non essential facility at mandated prices.

1LISTNUM 1 \l 18268            COMMISSIONER DUNCAN:  You also said in that, in your third point, that it is not practical or feasible for any competitor existing or potential.

1LISTNUM 1 \l 18269            I just have a problem with the "potential".

1LISTNUM 1 \l 18270            MR. BIBIC:  The use of the words is ‑‑

1LISTNUM 1 \l 18271            THE CHAIRPERSON:  I think Commissioner Duncan is going back to your definition of essential services.

1LISTNUM 1 \l 18272            MR. HOFLEY:  I'm going to try to answer your question.

1LISTNUM 1 \l 18273            The point is duplicability by a competitor.  Obviously you are going to have to in the real world look at kind of actual or existing competitors.  But you also, frankly, have to look at whether it is duplicable by a reasonably efficient competitor.  You have that framework.

1LISTNUM 1 \l 18274            What we are suggesting is that you can't just take as a given that because it's not duplicable by an existing competitor, that it would not be duplicable by a potential competitor.

1LISTNUM 1 \l 18275            And why potential is important, Commissioner Duncan, is because competition is driven both by actual competition and the threat of competition.  And that's why the word "potential" is used there.

1LISTNUM 1 \l 18276            COMMISSIONER DUNCAN:  Okay.  I guess I'm still troubled by it.

1LISTNUM 1 \l 18277            Is there another word that I could substitute that would make it easier for me to read?

1LISTNUM 1 \l 18278            I didn't want to say a reasonably efficient competitor, because it's difficult to predict.  I just don't understand how we would assess potential in the context of what you just said, that it is existing, and then we have to take into consideration what would be I guess humanly possible.  I don't know how we would be able to assess that.

1LISTNUM 1 \l 18279            MR. BIBIC:  Again, I think I'm back to the standard kind of competition law analysis.  This would be an analysis that would be done by, for example, the Competition Bureau in considering a merger case, for example.

1LISTNUM 1 \l 18280            As you know very well, Mr. Commissioner, it's not just simply whether or not it is duplicable by an actual competitor; it is whether it is duplicable by a potential competitor.

1LISTNUM 1 \l 18281            If it is, market power is disciplined by virtue of that threat.  So that's what we are trying to say there.

1LISTNUM 1 \l 18282            COMMISSIONER DUNCAN:  Thank you very much.

1LISTNUM 1 \l 18283            Thank you, Mr. Chairman.

1LISTNUM 1 \l 18284            THE CHAIRPERSON:  We asked the Competition Bureau and they suggested a proxy approach of bands put forward by TELUS is already simplistic and suggested we should develop other proxies.

1LISTNUM 1 \l 18285            Of course, we can do that and we will, but it is an awful lot of work and also you are the experts, et cetera.

1LISTNUM 1 \l 18286            Are you going to make in your submission some suggestion as to what viable proxies we should be using?

1LISTNUM 1 \l 18287            MR. BIBIC:  I think, Mr. Chairman, we already have.  We are proposing that you focus on low capacity access.  And our proxy actually is once we are forborne at retail, we are forborne at wholesale.

1LISTNUM 1 \l 18288            It is actually the most conservative proxy that could be developed, for those services, mind you, low capacity access.

1LISTNUM 1 \l 18289            We could have put forward a proxy that was less conservative by saying if a competitor enters a wire centre and connects with DS‑0 or DS‑1 equivalent networks, two buildings, ten buildings, 20 per cent of the buildings then were forborne, but we went all the way to retail forbearance, equates to wholesale forbearance.  That's our proxy.

1LISTNUM 1 \l 18290            THE CHAIRPERSON:  Okay.  Thank you very much.

1LISTNUM 1 \l 18291            I see it is 10 o'clock.  Let's take a 15‑minute break.

1LISTNUM 1 \l 18292            Thank you.

‑‑‑ Upon recessing at 1006 / Suspension à 1006

‑‑‑ Upon resuming at 1024 / Reprise à 1024

1LISTNUM 1 \l 18293            THE SECRETARY:  Be seated please.

1LISTNUM 1 \l 18294            THE CHAIRPERSON:  Okay, Madam Secretary, go ahead.

1LISTNUM 1 \l 18295            THE SECRETARY:  Thank you, Mr. Chairman.

1LISTNUM 1 \l 18296            We will now proceed with Rogers Communications, Mr. Englehart.

ARGUMENT / PLAIDOIRIE

1LISTNUM 1 \l 18297            MR. ENGLEHART:  Thank you very much.

1LISTNUM 1 \l 18298            Mr. Chairman, with me today are Suzanne Blackwell and Lori Dunbar.

1LISTNUM 1 \l 18299            Most of the parties to this proceeding are in agreement that the ultimate objective should be facilities‑based competition, that facilities‑based competition is the objective that we are trying to achieve.  And in the residential market you could argue you are already there, you have the competition between cable and telephone.  If you want to rely on facilities‑based competition in the residential market, you can.

1LISTNUM 1 \l 18300            But there is a problem in the business market, a huge problem, and that is that most buildings have only one company's wires into that building, so you just don't have anything like the residential market in the business market.  And you have sporadic pockets of buildings that have two companies' wires or sometimes even three companies' wires into a building, but they really are sporadic pockets.

1LISTNUM 1 \l 18301            This is not a uniquely Canadian problem.  It is not as though this is some failing of the Canadian system.  It is true in virtually every country in the world.  In the United States it is true where the general accounting office found that in the downtown cores of the really big American cities like New York and Los Angeles only 6 per cent of small business and 25 per cent of large business buildings have competitive wires going into them.  So that is the problem, that is what we are here to solve.

1LISTNUM 1 \l 18302            What is the cause of the problem? How does this come about?  People presented to you maps and diagrams showing that there were fairly extensive metropolitan area networks owned by competitors in some cities.  The problem is getting from those metropolitan are networks into the buildings, the high cost of the laterals.  That is the evidence that has been presented to you in this proceeding.

1LISTNUM 1 \l 18303            And building those laterals is very expensive for competitors.  For the incumbent, first of all, the cost of getting into that building is somewhat lower but, more importantly, they have got all the customers, they are the incumbent.  You can pay for those facilities when you have got 100 per cent of the revenue.  I am not saying there is no risk, I am saying the risk is fairly low.

1LISTNUM 1 \l 18304            But if you are a new entrant you have to build that expensive lateral.  Maybe you only have one customer, maybe you spend $100,000 on a fibre lateral, you have got one customer, you are never going to recoup your investment unless you get other customers in the building, and you might not.  So there is a lot more risk, that is the cause of the problem and that is what we are here to solve.

1LISTNUM 1 \l 18305            So what are the solutions to the problem?  Some parties seem to feel that technology can solve all of our problems.  We have got Inukshuk, we have got new technologies coming on cable networks and these new technologies are going to solve all of our problems if we only let them.  This is, in our submission, wishful thinking.

1LISTNUM 1 \l 18306            Competitors have been building facilities in business locations in Canada for at least the past 17 years.  And there has been lots of new wireless technologies that have come and gone, there have been lots of new ideas and still, for the most part, those access facilities are fibre or copper.  So counting on technology to bail us out is highly speculative.

1LISTNUM 1 \l 18307            Second, we can just assume the problem away.  The phone companies argue that, well, Rogers is already in all of these buildings, the competitors are already in all of these buildings.  There is no problem, if they are not in them they are right beside them.  This is not solving the problem, this is assuming the problem away.  You have the information from the DNA proceeding, from the forbearance applications.  You know how many of these buildings have competitive facilities in them.

1LISTNUM 1 \l 18308            The pattern of distribution of competitive facilities is based on engineering economics.  If you have got a big building with lots of customers that have lots of expensive high‑bandwidth services a competitor can afford to building a facility into that building.  In most buildings you don't, so in most buildings there is no second wire.

1LISTNUM 1 \l 18309            Rogers, in our operating territory, has 1,850 buildings served by fibre and about 1,400 of those came with the recent Group Telecom acquisition.  That is pretty good, we are making progress and we are, you know, committed to driving our facilities as much as we can into buildings.  But it still doesn't solve the problem, we are still a long way away.  As Mr. Hatfield said, you cannot repeal the law of economies of scale.

1LISTNUM 1 \l 18310            Bell argues, well maybe Rogers doesn't have a lot of fibre in the buildings, but it has coax and new technologies are going to enable that coax to do wonderful things.  We estimate that we have coax into about 5 per cent of the building locations.  Now, Bell has stated during their cross‑examination of the Rogers panel that Rogers was present in 90 per cent of 187 large downtown Ottawa office buildings with coax. In fact, 26 of these buildings were apartment buildings or hotels.  In the remainder we had fibre in 11 of the buildings and coax in 75 per cent.

1LISTNUM 1 \l 18311            But those facts don't change the fundamental problem of the expensive lateral.  For example, in one of the buildings where the coax went in most recently we checked our records and there the landlord paid us a $50,000 installation fee to put our coax into the building so that the landlord's tenants could subscribe to our cable and internet services.  And these expensive installation charges for cable television in business buildings are not uncommon, either paid for by the landlord or paid for by the first tenant that wants the cable television service.

1LISTNUM 1 \l 18312            Even once we have coax into the buildings it doesn't help us that much for providing telecom services.  If you have a $10,000 lateral for coax, because the coax laterals, as you know from the evidence filed before you, are much cheaper than the fibre laterals, you know, you might be able to support three or four internet services, a couple of phone lines, that is not going to pay for the cost of that lateral.

1LISTNUM 1 \l 18313            And the sort of troubling thing is a lot of the buildings where we do get someone to pay because they want cable TV in these large office buildings, many of the tenants are large and medium businesses and the coax really doesn't do much for those businesses on telecom services. It is really a way of providing internet service today, it is really a way of providing single line phone service.

1LISTNUM 1 \l 18314            There are some technologies underway for multi‑line hunting, so we hope in the near future that coax can be used to provide service for small business and even some medium businesses.  But it will be a long time before it can provide services for big business or large or medium businesses.

1LISTNUM 1 \l 18315            As Mr. Watt explained on the stand, the T1 emulation on coax may never be cost effective.  So coax, although it will help, although it is in some of the buildings, although it will nibble away at the problem, it is not the solution of the problem.

1LISTNUM 1 \l 18316            So there is no technology fix, we can't assume the problem away, we have to look at some regulatory solutions.  What are those regulatory solutions?

1LISTNUM 1 \l 18317            Well, one solution is what I call hope for the best.  If a facility is duplicable the Commission should walk away and hope for the best.  And by duplicable, in their evidence before this proceeding, the incumbents meant, well Bell meant, if you can build a wire into a building in a market it is duplicable in the whole market. If you can build a wire into the Toronto‑Dominion Centre, it is duplicable for an industrial park in Etobicoke.

1LISTNUM 1 \l 18318            TELUS goes farther.  They say if you can build a wire anywhere in the band, in the entire band, then it is duplicable throughout the entire band.  That is an attractive position if you are the incumbent.  You want market forces to rule, you want the Commission to walk away because you will have the whole market to yourself.

1LISTNUM 1 \l 18319            And particularly for voice services, which have been deregulated, you can price largely in an unrestrained fashion.  So when you say that everything is in the nonessential bucket it is not a realistic proposal, it is not a solution of the problem.

1LISTNUM 1 \l 18320            The second thing you could do is what the Bureau has suggested, which is regulate retail rates.  And for voice, that option has been taken away from you by the government.  They have clearly said that they are going to deregulate based on leased facilities.  You could do it for data.

1LISTNUM 1 \l 18321            We think the government has sent you a powerful message.  You know, the direction really doesn't, despite what everyone says, the direction is really very unbiased in what it says to the Commission.  The direction says to you, take a look at those essential facilities and figure out what you think is best.

1LISTNUM 1 \l 18322            And people say, well, you should be in formed by other words in the direction.  Well, we think you should also be informed by the forbearance decision.  In the forbearance decision the government said, given a choice between retail regulation and the continuance of unbundled facilities, we would prefer the unbundled facilities.  That is what the government said to you in the forbearance decision.  We think you should take some guidance from that.

1LISTNUM 1 \l 18323            Now, one possibility that arises from the fact that the voice market has been forborne based on those essential facilities is that you could classify the facilities as mandated conditional non‑essential, which is your bucket four in CRTC Exhibit 4.

1LISTNUM 1 \l 18324            We don't think that is the right approach because the facilities were deregulated ‑‑ or the services that were deregulated were voice services, so someone is going to say:  Well, we have got the restriction on use doctrine, the restriction on use concept, and that means if you lease those facilities, you can only use them for voice.

1LISTNUM 1 \l 18325            So classifying them as mandated conditional non‑essential is a problem.  It will mean, I suspect, that competitors can't use them for data and that will take a very difficult business case and make it even more dreary.

1LISTNUM 1 \l 18326            A better way to look at it is that if the facilities are needed by competitors in order to protect retail customers, that is a pretty strong indication that they are not really duplicable and they should be classified as essential or, in our view, conditional essential.

1LISTNUM 1 \l 18327            With that classification, competitors can use them for both voice and data.  So we think that is an approach that is more consistent with the government's forbearance order and that the government considers competition using these unbundled facilities to be legitimate.

1LISTNUM 1 \l 18328            So now we get really to the heart of this proceeding, which is:  How would unbundled facilities regulation work?

1LISTNUM 1 \l 18329            There are really three ways of doing it.  You can have ex ante tariffs with a review hearing, you can have an ex post process or you can have proxy rules.  Proxy rules say that the tariffs will exist until certain observable, verifiable criteria have been met.

1LISTNUM 1 \l 18330            So what are the problems with ex ante?  The problem with ex ante is really the review hearing.  It creates too much uncertainty.  Competitors can't build a business knowing that in three years there will be a review hearing.  In three years the tariffs might go away.

1LISTNUM 1 \l 18331            Primus said in their evidence that just the fact of this hearing has caused them to put their activities on hold.  Markets can't tolerate that sort of uncertainty.  You need to impose a set of rules and walk away and let the market come to grip with those rules or you are never going to have a market.

1LISTNUM 1 \l 18332            The other thing you could do is ex post regulation.  There, no facilities would be mandated up front but the Commission will have an ex post process if the ILEC and the competitors cannot agree on a rate.

1LISTNUM 1 \l 18333            Bell, at least in their evidence before today, recommended this approach, although they did say on the stand that there really were no essential facilities, so I thought it was a bit of a hollow offer.  But they also go on to say that whether a facility is essential or not, they will always have an incentive to offer it to competitors.

1LISTNUM 1 \l 18334            Dr. Taylor actually said in his evidence that it would be irrational for a supplier, a wholesaler, to cut off their wholesale customers, but after a long, slightly painful cross‑examination, he admitted that it was perfectly rational for a supplier that had upstream and downstream dominance to deny access to wholesale customers.

1LISTNUM 1 \l 18335            And Bell says:  Well, we are really good to our wholesale customers in the long distance market.  Yes, but there are already multiple facilities‑based long distance competitors.  So that example isn't very relevant.

1LISTNUM 1 \l 18336            The fact is if you have a huge retail share in the local market, it is perfectly rational to deny your facilities to wholesale customers because you will then pick up the end users as your retail customers.  There is no rationale, there is no reason why a rationally behaving wholesaler would behave otherwise.

1LISTNUM 1 \l 18337            The final problem with the ex post solution is it is the same problem as the review hearing.  It injects too much uncertainly into the process to allow a competitive market to develop.  You don't know what you are going to get and even when you get it, you don't know if it is going to be renewed.

1LISTNUM 1 \l 18338            In our submission, the only practical solution is the imposition of proxy rules.

1LISTNUM 1 \l 18339            The Competition Bureau agreed that imposing proxy rules was the best approach.  Here is what they said:

"The best outcome for this proceeding would be the development of accurate proxy rules that identify when certain facilities, for example, access‑differentiated by capacity and transport, are likely to be essential.  These proxy rules would base the determination of whether a facility is essential ex ante on easily observable and verifiable structural characteristics.  These structural characteristics would encompass variables that measure or are correlated with relevant factors such as demand and cost as well as indicating the markets, product and geographic, in which they are applicable." (As read)

1LISTNUM 1 \l 18340            Now, the Bureau said that they didn't have the data to effectively set proxy rules but you do.

1LISTNUM 1 \l 18341            Proxy rules would assign the mandated facilities into your bucket two.  So the facilities are mandated at regulated rates until observable, verifiable conditions are met.  Proxy rules give the market participants certainty and allow the essential facilities regime to deregulate itself.

1LISTNUM 1 \l 18342            So we have modelled our proposal on the FCC's proxy rules.  What did the FCC look at?

1LISTNUM 1 \l 18343            They looked at two things:  the number of lines in each wire centre and the number of competitive suppliers of facilities.

1LISTNUM 1 \l 18344            The number of lines is a proxy for the density of business customers.  With sufficient density, there are revenue opportunities to construct lateral facilities.

1LISTNUM 1 \l 18345            The number of competitors shows two things.  It shows that competitors have been able to cost‑effectively build those laterals and it shows that there is a viable market for wholesale services without Commission involvement, so the Commission can walk away in those wire centres.

1LISTNUM 1 \l 18346            One of the questions that the Rogers panel received was:  Well, why do you need four competitors, why not two?

1LISTNUM 1 \l 18347            The difference is that in the business markets, unlike the residential markets, it is not ubiquitous, every competitor doesn't go into every building.  You might have 1,000 buildings and four competitors each going into 40 buildings.  So now with four you have got a better chance that you are going to have someone prepared to build a lateral into a building.

1LISTNUM 1 \l 18348            Why co‑located?  The FCC said co‑located.  Well, that is to show that they can really provide access and transport services.

1LISTNUM 1 \l 18349            In the Canadian context, insisting on co‑location may be unnecessary.  The point is that that competitor has to be able to provide access and transport services.  If they have wired up a few public schools out in the suburbs, they are probably not really helpful as a provider of access and transport services.  If it is a hydroelectric utility with a telecom arm that has a metropolitan area network and laterals into big buildings, they probably should count whether they are co‑located or not.

1LISTNUM 1 \l 18350            So that is the FCC rule.  What are the facilities that the FCC applies that rule to?  It is unbundled loops, it is DS‑1s and it is DS‑3s.  They also included dark fiber for transport in small wire centres.  But it is our submission that those are the right facilities.  Those are the facilities that competitors need to get into the buildings.

1LISTNUM 1 \l 18351            Mr. Hatfield's evidence explained the protocol stack model.  If you have got the DS‑1s, if you have got the DS‑3s, if you have got the unbundled loops, competitors can add their own Ethernet, they can add their own IP.  We don't need that from the incumbents.

1LISTNUM 1 \l 18352            It means that the incumbents don't have to provide nextR