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Volume 1, 11 July 2011
TRANSCRIPTION OF PROCEEDINGS BEFORE THE CANADIAN RADIO-TELEVISION AND TELECOMMUNICATIONS COMMISSION
Review of billing practices for wholesale residential high speed access services. Notice of Consultation CRTC 2011-77, 2011-77-1 and 2011-77-2
140 Promenade du Portage
11 July 2011
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.
Canadian Radio-television and Telecommunications Commission
Review of billing practices for wholesale residential high speed access services. Notice of Consultation CRTC 2011-77, 2011-77-1 and 2011-77-2
Konrad von FinckensteinChairperson
Crystal HulleyLegal Counsel
James WilsonLegal Counsel
Tom VilmansenHearing Manager and Manager, Costing Methods and Tariffs
140 Promenade du Portage
11 July 2011
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TABLE OF CONTENTS
PAGE / PARA
1. Bell Aliant Regional Communications, Limited Partnership and Bell Canada (collectively, the Companies) 8 / 50
3. TELUS Communications Company 144 / 874
CONSUMER PANEL (PROVINCE OF ONTARIO)
4. Mark Coatsworth 181 / 1103
6. Grayden Laing 185 / 1130
8. British Columbia Broadband Association 207 / 1268
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PAGE / PARA
Undertaking 82 / 484
Undertaking 93 / 552
Undertaking 124 / 741
Undertaking 127 / 762
Undertaking 131 / 799
Undertaking 142 / 959
--- Upon commencing on Monday, July 11, 2011 at 0904
1 THE CHAIRPERSON: Good morning. Bonjour. Ladies and gentlemen, welcome to this public hearing.
2 Je veux vous présenter maintenant les membres du comité d'audition :
3 - Len Katz, vice-président des Télécommunications;
4 - Tom Pentefountas, vice-président de la Radiodiffusion;
5 - Timothy Denton, conseiller national;
6 - Candice Molnar, conseillère régionale du Manitoba et de la Saskatchewan;
7 - Michel Morin, conseiller national;
8 - Marc Patrone, conseiller national; et
9 - moi-même, Konrad von Finckenstein, président. Je présiderai l'audience.
10 L'équipe du Conseil qui nous assiste comprend :
11 - Tom Vilmansen coordonnateur de l'audience et gestionnaire, Méthodes d'établissement des coûts et tarifs;
12 - Crystal Hulley et James Wilson, conseillers juridiques; et
13 - Lynda Roy, la secrétaire de l'audience.
14 Le Conseil tient cette audience afin d'examiner les pratiques de facturation des grandes entreprises de téléphonie et de cablôdistribution à l'endroit de leur clientèle de gros, soit les fournisseurs des services Internet, les FSI indépendants pour l'utilisation de leurs réseaux.
15 The market for Internet services has evolved significantly over the last decade. Canadians can access the Internet in many ways and use innovative online services and applications. Maintaining a competitive marketplace in which Canadians have a choice of ISP is one of the Commission's primary objectives.
16 For this reason, the large companies are currently required to share their networks with independent ISPs under rates and terms and conditions approved by the Commission. This allows independent ISPs to offer alternative services to Canadians.
17 Last year, after considering the issue on two separate occasions, we determined that large telephone companies must make their wholesale high-speed access services available to independent ISPs at the same speeds as those offered to their own retail customers. This covers all speeds, including the most recent ISP options.
18 At the same time we imposed a more stringent obligation on cable companies to ensure their third-party Internet services are an acceptable equivalent to the wholesale services offered by telecommunication companies.
19 In 2009 the Bell companies applied for permission to impose additional charges to independent ISPs when their individual customers exceed monthly download limits.
20 Some of the cable companies already had usage-based billing in place for their wholesale customers. Bell wanted to adopt a similar pricing model as an incentive for users to stay within their limits and to help manage traffic on its network.
21 We approved Bell's request at the end of a lengthy process that included several decisions. This past February the Commission announced it would review its decision in light of the public concerns expressed.
22 Dans le cadre de cette instance, les parties ont proposé des nouveaux modèles de tarification pour les services d'accès à haute vitesse de résidence en gros qui tiennent compte de la bande passante totale utilisée par les clients des FSI indépendants.
23 Selon la compréhension que nous en avons, ces propositions ne forcent pas les FSI indépendants à instaurer une limite de téléchargement ou à inclure des frais additionnels en fonction de l'utilisation de leurs clients.
24 Let me repeat this in English.
25 As we understand them, the proposals before us do not force independent ISPs to implement download limits or include additional charges based on the usage of their individual customers.
26 The pricing model for wholesale high-speed access services should drive large companies and independent ISPs to invest in their respective networks and to maximize innovation.
27 In addition, we will examine the proposals with a view of providing independent ISPs the flexibility to offer innovative services and pricing.
28 Dans le cadre de cette instance, le Conseil rendra une décision définitive au sujet des tarifs des services d'accès à haute vitesse de résidence en gros. Les tarifs provisoires que nous avons fixés récemment demeureront en vigueur jusqu'à ce que le Conseil rende sa décision, laquelle pourrait comprendre des réajustements rétroactifs.
29 Il convient de noter que nous avons publié les tarifs provisoires dans le but de garantir que les concurrents aient accès aux services dont ils ont besoin. Tout délai aurait affecté leur capacité d'offrir aux consommateurs un choix accru.
30 Comme indiqué auparavant, les parties ne doivent tirer aucune conclusion de cette étape provisoire, étant donné sa nature brève et transitoire.
31 Again, for emphasis, I am going to repeat in English.
32 As we frequently indicated, parties should not draw any inference from this interim step given its short and transitory nature.
33 Lastly, let me repeat that this hearing only deals with wholesale rates. We believe that resale rates, i.e. the prices charged by ISPs to consumers, are best set by the market. The issue has not and will not be part of the Commission's consideration. We are not considering retail rates.
34 I would now invite the Hearing Secretary, Lynda Roy, to explain the procedure we will be following.
35 Madame Roy.
36 LA SECRÉTAIRE : Merci, Monsieur le Président, et bonjour à tous. Good morning and welcome to everyone.
37 Before beginning, I would like to go over a few housekeeping matters to ensure the proper conduct of the hearing.
38 When you are in the hearing room, we would ask that you please turn off your smartphones and beepers as they are an unwelcome distraction and they cause interference on the internal communication systems used by our translators. We would appreciate your cooperation in this regard throughout the hearing.
39 The hearing is expected to last approximately five days in Phase I and approximately two days in Phase II. Please note that the Rebuttal Phase will begin on Monday, July 18.
40 We will begin each morning at 9:00 a.m. We will advise you of any scheduling changes as they occur.
41 Please note that there are extra seats in the Examination Room, where it is now possible for the public to view the hearing on a television screen. The Examination Room is located at the entrance of the Centre, to your right.
42 Please note that the Commission members may ask questions in either English or French. Simultaneous interpretation is available during the hearing. The English interpretation is on channel 1. You can obtain an interpretation receiver from the commissionaire at the entrance of the Conference Centre.
43 We would like to remind participants that during their oral presentation they should provide for a reasonable delay for the interpretation, while respecting their allocated presentation time.
44 Veuillez noter que les membres du Conseil peuvent poser des questions en français ou en anglais. Le service d'interprétation simultanée est disponible durant l'audience, et l'interprétation en français se trouve au canal 2. Vous pouvez vous procurer des récepteurs d'interprétation auprès du commissionnaire à l'entrée du Centre.
45 Nous désirons rappeler aux participants d'allouer un délai raisonnable pour la traduction lors de leur présentation à vive voix, tout en respectant le temps alloué pour leur présentation.
46 There is also a verbatim transcript of this hearing being taken by the Court Reporter sitting at the table to my right, which will be posted daily on the Commission's website. If you have any questions on how to obtain all or part of this transcript, please approach the Court Reporter during a break.
47 For the record, Mr. Chairman, I would like to inform you that the Commission has been advised that CAIP, the Canadian Association of Internet Providers, listed on the agenda, will not be appearing at the hearing.
48 We will now proceed with the presentations in the order of appearance set out in the agenda and we will start with the presentation of Bell Aliant Regional Communications, Limited Partnership, and Bell Canada, collectively The Companies.
49 Please introduce your colleagues for the record, after which you will have 20 minutes to make your presentation.
50 MR. BIBIC: Thank you, Madam Secretary.
51 Mr. Chairman, Commissioners, for the record I am Mirko Bibic, Senior Vice-President of Regulatory and Government Affairs at BCE.
52 Joining me today:
53 - to my immediate left is Tom Little, Executive Vice-President and President of Bell Wholesale;
54 - to my immediate right, Jonathan Daniels, Vice-President, Regulatory Law; and
55 - to Jonathan's right, Carl Condon, Vice-President of Network Technology and Planning.
56 In the back row we have with us, starting from my right, James Gilmore from Network Technology; Denise Potvin and Phil Gauvin from Regulatory; and Michel Bourque and Jean Lamoureux from Bell Wholesale.
57 Earlier this year, we withdrew our usage-based billing (UBB) tariff and filed in this proceeding our Aggregated Volume Pricing (AVP) proposal.
58 AVP is designed to ensure an adequate return on our network investments; to create incentives to limit congestion; and to allow our wholesale ISPs to differentiate their product offerings.
59 So, Mr. Chairman, referring to your opening statement, certainly AVP and we believe the other models on the table do not force ISPs to adopt Bell bandwidth caps.
60 The goal is to ensure that Canadians continue to have access to the most modern, best performing and most highly used Internet networks in the world.
61 We know that you, as well as the participants in this room, share that same goal. Some of us just differ on how best to achieve it, and even then, the differences have narrowed.
62 At this point, almost all parties acknowledge that wholesale pricing for Internet services should have a usage-based component. The question is no longer whether economic Internet Traffic Management Practices (ITMPs) are appropriate at all for wholesale services but how economic ITMPs should be implemented.
63 In this opening statement we specifically answer the questions that the Commission asked. Given the high profile and sometimes controversial nature of this debate, we also provide some context and additional information at the beginning to assist the Commission in understanding why we developed AVP.
64 This hearing could not come soon enough as we are at a significant disadvantage in the marketplace. We are not able to charge for usage to our wholesale ISP customers, even though:
65 (a) The retail Internet market has had economic ITMPs in place for several years, in our case, since 2006. What's more, many wholesale ISPs making use of our Gateway Access Service (GAS) -- that's the label of the wholesale Inernet service that we provide -- many of these wholesale ISPs who use GAS have implemented retail UBB even though we do not currently charge them for usage of the shared network.
66 (b) Cable carriers have had the regulatory authority to implement wholesale UBB for over a decade and have done so in our operating territory at both the wholesale and retail levels.
67 (c) We have been ordered to launch FTTN matching speeds without usage pricing, allowing wholesale ISPs to market their services with unlimited plans but without having to pay for usage.
68 For all of these reasons, we urge the Commission to issue its decision as quickly as possible.
69 This hearing is also a welcome opportunity to set the record straight on a number of key facts, given that the public campaign against our original UBB tariff was characterized by what we feel to be harmful misinformation.
70 One myth is that there is no evidence of network congestion. This is completely false. Over the past three years, we provided detailed evidence showing how congestion is measured on our network and the actual levels of congestion. We continue to make massive investments every year to relieve that congestion.
71 A second myth is that wholesale ISPs are not significant contributors to congestion. Wholesale ISPs serve 17 percent of end users on our network and drive 29 percent of total traffic on our network in Ontario and Quebec. This is significant. No single user or wholesale customer is the cause of congestion, of course, but clearly, wholesale users do contribute a disproportionate share of total traffic, and by extension, congestion.
72 A third myth is that IPTV contributes to congestion on the shared network. Our Fibe TV product is not Internet TV and does not transit over the shared network like an over-the-top video service. Rather, IPTV operates over a separate network. The only place where IPTV shares capacity is in the last mile, where congestion is not an issue.
73 As I mentioned at the outset, almost all parties agree that wholesale pricing should have a usage-based component. That is exactly what we have proposed in this proceeding.
74 Under AVP, wholesale Internet pricing for both legacy GAS and GAS-FTTN -- or the Fibre Next Generation Network -- comprises two components: (1) a flat-rated access fee by speed and (2) the AVP.
75 The AVP can be pre-purchased in blocks of single terabytes for $200 per terabyte. Should the ISP's actual usage of the network exceed what the ISP purchased for the month, the ISP will be charged $0.295 per GB for any extra GB needed to accommodate the overall usage of all its end users in that month.
76 So in answer to the Commission's first question, we continue to believe that AVP is the billing model the Commission should approve.
77 We also wish to outline certain key principles we believe the Commission should use in evaluating the alternative billing models, and which guided us in developing AVP.
78 They are:
79 - First and foremost, flexibility. The economic ITMP must not be linked to individual user thresholds and should allow each ISP to devise its own business models that allow it to differentiate itself.
80 - We also believe that the economic ITMP must ensure that those who use the most pay the most and are not subsidized by those who use the least.
81 - We feel that the economic ITMP should be predictable and that it should be designed to ensure that ISPs have an incentive to manage usage of the shared network.
82 - And, of course, promoting investments. The economic ITMP must be designed to incent our investments in building and augmenting access networks.
83 So now I turn it over to Tom Little.
84 MR. LITTLE: Thank you, Mirko, and good morning, Commissioners.
85 I am the person at Bell Canada responsible for working with wholesale customers. As part of that, I manage a significant portfolio of both regulated and forborne services.
86 First, I want to assure you that the wholesale GAS customers are an important part of that business and a valuable segment of it and we do seek to supply them with the best possible services.
87 We have demonstrated our commitment to them by offering value-added services for GAS, without being mandated by the Commission. We have offered optional installation on our legacy GAS, the optional provision of ADSL2+ modems, and also provisions waiving and discounting dry loop charges and offering other incentives to encourage subscriber growth.
88 We have tried in earnest to engage wholesale GAS customers in commercial discussions. I would tell you it is hard to develop meaningful commercial partnerships when the regulatory arena is parallel and alternate to those negotiations.
89 A key strategic imperative at Bell is to continue to invest in our broadband networks. We have to keep pace with the cable companies, the Internet market share leaders, and for Bell alone that involves investments totalling billions of dollars.
90 The business case for these investments is strained. Last year and again this year, Bell Canada's capital expenditures on Internet exceeded the Company's total Internet revenues. That translates to a capital intensity ratio in excess of 100 percent, whereas BCE's overall capital intensity ratio -- and that of the telecom industry in general -- is closer to 16 percent. On top of that, revenues and subscribers have remained relatively flat while network traffic and user expectations have exploded.
91 There is nothing inherently wrong with those investment requirements but the model for recovering those costs is broken. The solution is to ensure that those who use the most pay the most. That makes economic sense and our AVP proposal is the best means of achieving that objective. It is a reasonable and feasible approach to wholesale billing.
92 I would now like to turn it over to Jonathan.
93 MR. DANIELS: Thank you, Tom.
94 Before you are two competing models for levying a wholesale usage charge: one based on total traffic volume; the other based on peak period usage.
95 Our AVP proposal -- similar to that of the cablecos' model -- is based on total traffic volume. Specifically, it would bill ISPs based on the total volume of Internet traffic their end users send and receive in a given month.
96 By contrast, CNOC's "95th percentile" model is based on peak traffic. CNOC proposes that snapshots of an ISP's network usage be taken on a sample basis to determine its peak. The 95th percentile measurement is then used to bill the ISP for its peak traffic throughput.
97 As an economic ITMP, AVP is clearly superior to 95th percentile.
98 AVP measures all usage across the shared network, recognizing that congestion can occur anywhere, and closely tracks usage with pricing.
99 It meets the four principles outlined by Mirko a few moments ago. It ensures that incumbents receive an appropriate return on their investments in building networks and relieving congestion, and it sends the right economic signals to wholesale users by incenting them to manage their networks in a manner that diminishes congestion.
100 In contrast, 95th percentile has some serious limitations, including the following:
101 - Congestion.
102 First, 95th percentile does not provide proper incentives to reduce network congestion over a shared network. Rather, it provides an incentive for wholesale ISPs to maximize their usage to their 95th peak percentile.
103 Now, let me explain why I say that by asking you turn -- we handed out Figure 1, which is an Attachment to our opening statement. So this is a figure that just sets out Bell's network in terms of from the end users on the left all the way to where the ISP connects to us on the right-hand side.
104 The aggregation portion of our networks, where we face congestion, is shared. Traffic cannot be distinguished at this point between wholesale and retail users. What I am talking about there is indicated as points 1, 2 and 3. Those are the points on that diagram where we face congestion, the aggregation where it's the shared network.
105 Now, the fact that -- this is an important point in evaluating the two models. 95th centile only measures traffic and, by extension, congestion where the ISP connects to our network. That's on the right-hand side of that diagram right at the end where we have indicated with V-AHSSPI. That's where the ISP connects.
106 But that's not where we have the congestion problem, it's in 1, 2 and 3 in the shared network. The peak at the point of interconnection is not necessarily the same as across the shared network. It is practically impossible for all network components of the shared network to be congested at exactly the same moment in time. Although 95th percentile would still bill to a certain peak at the ISPs point of interconnection, it would do nothing to reduce congestion anywhere else in the network.
107 Now, to further illustrate this could I ask you to turn to the next diagram, Figure 2. This diagram shows you two different wholesale ISPs that could have the same 95th percentile throughput but have completely different usage patterns and hence markedly different impacts on our network.
108 ISP-1 -- that's on the chart on the left-hand, you see the two ISPs there, ISP-1 is indicated in the blue in the bottom -- has a traffic pattern that peaks during prime time hours and then drops off in the early hours of the morning. ISP-2 -- the red line -- maintains a fairly constant throughput throughout the day.
109 Now, if we assume these usage patterns repeats throughout the month, the total volume of data sent on the shared network is very different for these two ISPs and you can see that in the chart on the right. ISP-1 would only generate 93 TB of data as compared to 151 TB that ISP-2 would generate. That's up 39 percent difference in total peak usage, yet both ISPs would have the same usage costs based on the 95th percentile billing.
110 With 95th percentile an ISP may have an incentive to reduce its peak usage, but once it reduces to the level it finds acceptable -- which in our diagram here is just assumed to be 600 Mb per second -- at that point it has no incentive to reduce its overall usage below that level at any other time of day, even though that ISP may be contributing to congestion on our network at those other times. That is not fair, nor is that an effective ITMP.
111 In contrast, since AVP is based on total traffic volumes in a given month which transits through all network components, it does provide an incentive to wholesale ISPs to manage their overall usage across all network components.
112 Second, it is no secret that we already use 95th percentile billing for a limited set of other services. However, the existing 95th percentile solution was developed assuming there would be few customers for those services. It is not robust enough to handle the number of wholesale GAS customers we have. Adopting the 95th percentile to bill for wholesale GAS usage would cause significant implementation issues as outlined in response to requests for information. For instance, we would not technically be able to measure the 95th percentile peak on almost one-half of the ISP interconnection points as they exist today.
113 To make it work, all ISP interfaces using legacy ATM technology would have to be migrated to IP interfaces. In contrast, we can apply AVP irrespective of the ISP's interconnection technology and can even do so retroactively from the launch of our GAS FTTN service.
114 Third, 65 percent of our wholesale gas customers have less than 1,000 end-users. These are very small ISPs that frequently need the support of our technical staff. AVP comes with the tools to allow wholesale ISPs to see their total traffic volume and network usage at an end-user level. This provides wholesale ISPs greater network intelligence to manage their networks as they see fit. That is not possible with the 95th percentile.
115 Further, we expect the smaller ISPs will not be able to control unexpected temporary spikes in traffic demands which may cause their 95th percentile fees to increase greatly. This will lead to extra costs for small ISPs and potentially billing disputes.
116 In contrast, it will be relatively straightforward for a smaller ISP to implement and understand AVP and limit its traffic.
117 Fourth, as CNOC pointed out in an interrogatory response, there is no mechanism for us to differentiate between business and other non-usage paying traffic in contrast to GAS residential traffic, which would be usage based. The only way to separate the charges is for each ISP to separate its traffic into pipes that are only used for residential services as distinct pipes used for non-usage paying traffic. As such, wholesale ISPs who want to reduce their 95th percentile charges may be incented to send residential traffic to their business pipe to avoid the usage billing model.
118 A fifth flaw with 95th percentile is that it would be more difficult to reconcile amounts to be billed, given the measures are unlikely to be made at exactly the same moment in time by the wholesale ISP and the network provider. For example, if the network provider measures throughput at 8:00 p.m. for a given wholesale ISP and that ISP takes its own measure at 8:01 p.m., the measured throughputs may vary significantly, even if they are measured at the exact same location.
119 For all these reasons, 95th percentile is inferior to AVP as an ITMP.
120 Turning next to the next two questions. Usage should be measured on a total monthly volume rather than the samples on ISP's peak traffic volumes for all reasons I just described.
121 Further, because AVP better aligns the wholesale ISP's incentive to reduce congestion throughout the month, and not just at the instant it peaks during the month, AVP will better incent ISPs to manage their traffic. Because AVP results in network providers being paid for the aggregate volume of traffic on their networks, appropriate incentives to invest will be provided, so long as prices are set at an acceptable level.
122 As for the fourth question, the Commission determined in last year's speed matching decision that there should be one mark-up for ILEC legacy GAS and a higher mark-up for the GAS provided on FTTN networks. That is appropriate and we have no issue with that being applied symmetrically to all network providers.
123 As for the level of mark-up to be specifically charged for usage, whatever mark-up the Commission decides is appropriate in this proceeding should apply to all network providers.
124 In response to the Commission's fifth question, the mark-up for access and usage rates should not be the same. Mandatory access to our network -- and that's the mandated mark-up for access -- reflects the Commission's policy objective to increase real competition through traditional wholesale regulation. Monthly access rates are not designed to be ITMPs.
125 In contrast, AVP is designed to be an economic ITMP and thus serves additional policy objectives. There is no reason for usage charges to be constrained by mandated mark-ups associated with network access.
126 Finally, you have asked whether principles determined in this proceeding should apply equally to legacy services or whether legacy services should be treated differently.
127 The same principle should apply to both legacy and FTTN, but with important distinctions in how those principles are implemented.
128 Unlike GAS FTTN, for which our proposed monthly access rates exclude usage costs, legacy GAS access rates have always included a certain amount of assumed usage. For legacy GAS we therefore propose to give wholesale ISPs a credit for the assumed usage that is already covered by the monthly access rate. This does not apply different principles to legacy, it recognizes that our proposed GAS FTTN access rates exclude all usage driven costs, but our legacy services do not.
129 To do otherwise would be highly disruptive. The current price levels for legacy GAS have been in the market for some time. Changes to those rates would affect over 100 wholesale ISPs by repricing services used by hundreds of thousands of their end users. Material changes to legacy GAS price structure and/or rate levels would lead to billing disruptions and significant revenue impacts for us. We are comfortable with the existing price structure for legacy GAS, as we believe most ISPs are.
130 This concludes our remarks. We welcome your questions.
131 THE CHAIRPERSON: Thank you for a very clear presentation.
132 I appreciate, Mr. Bibic, that you said at the outset that there is no cap that you are asking that ISPs impose who buy traffic from you; right?
133 MR. BIBIC: That's correct.
134 THE CHAIRPERSON: Let's get this out of the way, there are no caps that you demand or that you want us to impose, because that's what caused the whole furor about UPB in the past.
135 Now, if I look at your model and I compare it to the cable model, either the Rogers or the slight variation on the Shaw, what is the inherent advantage of AVP over the cable model? It seems to me they are fairly close to each other.
136 Unless I misunderstood, in your model of the usage of the ISP has to sort of make an estimated guess and buy accordingly and hopefully buys right, while in the model of the cable companies the usage is calculated on a tier-by-tier -- on the various speed tiers using the average consumption of users and billed accordingly. If they need more, they buy more.
137 So what is exactly that distinction here?
138 MR. BIBIC: So the cable model and the Bell model are kind of in principle very similar.
139 THE CHAIRPERSON: Yes.
140 MR. BIBIC: In implementation they do differ and let me try to go through how.
141 So in implementation the cable model follows very closely the model we are proposing for our legacy services. So put legacy aside for a second --
142 THE CHAIRPERSON: Yes.
143 MR. BIBIC: -- on FTTN, because it's a brand-new service that's not yet in the market, it's imminent.
144 What we did is, we filed proposed monthly access rates -- which you will determine as final at some point -- without usage included in the cost model that derives those access rates.
145 THE CHAIRPERSON: Right.
146 MR. BIBIC: And then, over and above that, the ISP would have to buy usage at the rates that we suggest.
147 That has nothing with -- so that is one model.
148 For legacy, this is where Bell's legacy model or legacy AVP tracks very closely to cable. What we said there is: Okay, we have had access rates for legacy GAS in the market for over 10 years and the price was derived using traditional --
149 THE CHAIRPERSON: Can you leave out legacy for a second. Let's put that aside.
150 MR. BIBIC: Okay.
151 THE CHAIRPERSON: I just want it for FTTN, your model versus the cable model. I'm not quite sure --
152 MR. BIBIC: Okay.
153 THE CHAIRPERSON: -- I see the inherent advantages of your approach over the cable one.
154 MR. BIBIC: Okay. So for FTTN what we have done again is our access rates do not include usage. Our proposed access rates do not include any assumed usage.
155 THE CHAIRPERSON: Yes.
156 MR. BIBIC: And then usage is billed completely separately. Whereas in the cable model, the access rate does include a certain amount of assumed usage by year.
157 THE CHAIRPERSON: Right.
158 MR. BIBIC: And if the ISP in a particular month --
159 THE CHAIRPERSON: Yes.
160 MR. BIBIC: -- uses more than is assumed in the cost model, the ISP would have to buy over and above that.
161 THE CHAIRPERSON: Yes, that's exactly my understanding. But where is the advantage?
162 I mean, since the cable model is based on the historical average use of users for that speed, et cetera, in terms of rough justice wouldn't it come out exactly more or less the same way where your model comes out?
163 MR. BIBIC: In terms of rough justice, yes. But since for us FTTN access was a brand new service, we decided to keep it completely clean and say we are not going to assume any usage at all in the cost model, zero usage in access rates, and this way we will track the exact usage on a given month and charge for that exact usage. So this there is no rough justice, it's done precisely.
164 THE CHAIRPERSON: Right.
165 MR. BIBIC: That would be inherent advantage.
166 THE CHAIRPERSON: Is that it, or is it that you want it just to work as an economic ITMP and that by you segregating usage and focusing on it, you are in effect forcing the ISP to focus on usage and therefore, however they manage their network, trying to make sure that they limit the capacity they buy from you to the minimum and thus in effect reduce congestion on the network.
167 MR. BIBIC: That is the exact objective and I'm sure cable has the same objective and then it's a question of how do you implement it.
168 THE CHAIRPERSON: Well, hence my question.
169 MR. BIBIC: Yes.
170 THE CHAIRPERSON: Which one is -- you are both talking about economic ITMPs, which one is better? Why is yours more superior, as you make out, than the cable one?
171 MR. BIBIC: Okay. So I will turn it over to Jonathan or Tom in a second, but for FTTN --
172 THE CHAIRPERSON: Yes...?
173 MR. BIBIC: -- I would say ours is -- my view is ours is better because with the goal of managing congestion ours is better because we are actually charging precisely for every single gigabyte of usage that's used on the network in that month. So there is no assumed cost model and assumed usage based on historical patterns; what you use is what you pay for, for FTTN.
174 THE CHAIRPERSON: Yes.
175 MR. BIBIC: Do you have anything to add?
176 THE CHAIRPERSON: Okay. Now, assuming we adopt this AVP model -- or we let you adopt it, to put it precisely -- explain to me something. There seems to be sort of an element of "got you" in here that, you know, you guessed wrong, hence you have to pay more. Why is that way?
177 First of all, why is done on a monthly basis? Nobody can -- why don't you do it on a quarterly or semi-annual basis?
178 Second, why isn't there an ability for the ISP, if they guess wrong, to have a credit for the next month, because after all they paid for it, or else if they underestimated that during that period they can come back to you and say, "Bell, I'm sorry, I need more, I underestimated." Why is it only on a monthly basis and so basically if you guessed wrong and you bought too much, too bad; and if you guessed too little, I'm going to bill you."
179 MR. BIBIC: So we think monthly is the best way. Traffic patterns are seasonal and it's quite well-known that it's seasonal, so in the summer there is less usage than in the winter. In September, when students are back at school, there is more usage than in August. So monthly is the best way to go, we think.
180 Tom, you can jump in on why monthly.
181 THE CHAIRPERSON: But you can plan on a monthly basis. You surely don't adjust your network on a monthly basis. If all your ISPs come in and say, "We want 500 TB more", you are either capable of doing it or not. You can't adjust your network on a monthly basis, that's why I don't understand why you use such a short timeframe. If the timeframe would reflect, in some way, your ability to respond to that excess demand, I could understand it, but on a monthly basis there is something I'm missing here.
182 MR. BIBIC: Well, Mr. Chairman, just before I go further, I just want to understand, is your -- I'm not sure the monthly is the issue, perhaps the bigger issue you are asking about is why can't you carry forward --
183 THE CHAIRPERSON: That is two separate issues.
184 MR. BIBIC: -- because if you can carry forward monthly is irrelevant I suppose.
185 THE CHAIRPERSON: Yes.
186 MR. BIBIC: The second part of your question is: Why is the rate different when you have to buy more at the end of the month. So maybe -- I don't think much turns on monthly, I think --
187 THE CHAIRPERSON: Okay, let's go at it sequentially.
188 You are not married to monthly, you could easily do it quarterly or something, if I understand you. That's not the issue?
189 MR. LITTLE: I don't think it's a problem, Commissioner, I suspect that if we move the timeframe it's a compromise. If I had to pick far in advance I might not know when certain events that drove internet traffic were going to be. So I think there might be a compromise back and forth,depending on the timing.
190 THE CHAIRPERSON: Okay.
191 Second, the whole issue of no credits. Why, if somebody overestimated actually usage, since you are measuring usage, should that person not be allowed to carry the credit over to the next --
192 MR. BIBIC: Okay.
193 THE CHAIRPERSON: -- whether it's monthly or quarterly it doesn't make a difference, why can't you carry it over?
194 MR. BIBIC: I will answer that in a second, but just the last point on monthly.
195 THE CHAIRPERSON: Yes...?
196 MR. BIBIC: While we could implement quarterly, for example, we do bill monthly for access. So also one of the practical reasons is not to get usage billing out of sequence with monthly access billing.
197 THE CHAIRPERSON: Okay.
198 MR. BIBIC: So that would be one other reason.
199 THE CHAIRPERSON: Yes.
200 MR. LITTLE: I think when we looked at the AVP and tried to come up with these things, Commission, there is a balance and compromise in all of these things.
201 You point out the timing, you also pointed out the post-pay. The few questions there, just to go back, I think that the idea was that there would be an incentive for someone to accurately predict traffic. We actually thought it would be easier to predict the closer you were to it, so there are events and things but, as I said, we could have some -- I don't think we are married to the monthly and there could maybe be some different compromises there.
202 In terms of the credit issue, we really designed that as a bucket of use for someone to accurately predict, to have an incentive to manage the traffic and to have an incentive to manage it down and to have a more attractive rate to purchase it at the accurate representation.
203 So I guess in our mind we saw it as an incentive, not a penalty to accurately predict usage and to try to accurately give an incentive to people to control the usage, too.
204 MR. BIBIC: Mr. Chairman, I would like to reemphasize that last point.
205 So our AVP says: Buy in advance for the month at a price of $200 per terabyte, which actually turns out to be around $0.19 per gigabyte. If you have used more than what you bought in advance, you have to make up the shortfall obviously, but then their rate is 29 1/2 cents per gigabyte, obviously higher.
206 So one of your questions of why is that the case. To us it is clearly justifiable as an economic ITMP for this reason, if you have bought in advance a certain block of traffic at a lower rate, now you have an incentive to manage to the amount you bought. If you can make up the shortfall after at the same price, then you have no incentive -- no greater incentive to manage usage, because what you want to do is take advantage of the lower rates where you are going to buy and then try to manage overall usage to what you bought.
207 It's not an unheard of billing technique in many industries, including this one. In wireless, retail wireless, you have in-bucket minutes and if you go over you pay out-of-bucket minutes, which tend to be higher, obviously.
208 THE CHAIRPERSON: What if I am an ISP, I bought from you and I realize half way through the month I underestimated, is there any ability to buy additional at that point in time or do I know I'm going to go over and I'm going to be hit with $0.29 and there's nothing I can do?
209 MR. BIBIC: It would be the latter.
210 But through experience -- I mean all ISPs take historical trend patterns so they should able to come pretty close.
211 MR. DANIELS: Can I just add here that in terms of it is our plan that the ISP would be able to make that determination up to the day before the actual month starts, so we are not talking about having to predict wildly in advance.
212 I guess that's the same sort of concern that we have in terms of doing it on a monthly basis when you talked about it, is that we are trying to align as well the ISP's incentives, but also for their billing to their end users in terms of they figure out what kind of data they need. If we only do it on a quarterly basis I think it may have impact with them, so I think that's something you could explore with them as well.
213 THE CHAIRPERSON: I thought I understood you, but then you made a loop at the end.
214 So the bottom line is yes, he can purchase or no, he can't purchase additional during that month?
215 MR. DANIELS: No, during the month he cannot, but the ISP is able to purchase it, what I'm saying, right up to the day before that month starts they can make the determination.
216 And in our view the ISPs, as taking responsibility for their traffic, they should be able to accurately predict what is going to happen over the next month.
217 MR. BIBIC: I might add, Commissioner, if you change that timeframe you may have to look at a reasonable suggestion like you just made. In other words, these decisions are all interrelated. If you ask someone to do it quarterly in advance, that's an awful long time, you may have to come back and look at a solution like you just said that allows them to adjust it closer to.
218 THE CHAIRPERSON: So basically all of this whole AVP, the way you have structured it for FTTN is essentially a way of disciplining ISPs, saying know your business, know exactly what you want and you can get whatever you get at the $0.19; if you guess wrong, you are going to pay more and if you underestimate, so you know, you get penalized, I don't know why, but otherwise the incentive to estimate properly next month is gone because you can't carry a credit forward.
219 MR. BIBIC: So I mean all these tie to --
220 THE CHAIRPERSON: That's really what -- indirectly you are wanting to make sure that ISPs only use as much as they need and they pay for it.
221 MR. BIBIC: Correct. Although we don't say "Got ya" in the sense that if you go over we are shutting your service off.
222 THE CHAIRPERSON: No, no.
223 MR. BIBIC: You obviously get to buy more, but now you have to pay a higher rate and, as Tom says, they are all interrelated. In fact, the way we designed -- and it's another reason why monthly is more reasonable, because it's not like if you did it quarterly and we said "Got ya", you are half way through the quarter and now you are out of gigabytes. We are not saying: Okay, now for the rest of the quarter you have to buy at this higher rate. It's on a monthly basis so the impact should be muted.
224 THE CHAIRPERSON: No, I understand that point.
225 MR. BIBIC: Yes.
226 THE CHAIRPERSON: You minimize the penalty impact by doing it monthly.
227 MR. BIBIC: Correct.
228 THE CHAIRPERSON: Now, the 95th percentile, Mr. Daniels, you gave a very eloquent explanation of why it doesn't work.
229 I am looking at Figure 2, which is pretty self-explanatory. The only thing is, again, this is all in terms of economic IMP. If I understand it correctly, there is no incremental cost for you. You have to be able to deliver up to the 95th percentile, regardless of whether it's for ISP 1 or ISP 2.
230 The fact that ISP 1 actually uses far less has no economic consequences for you. It has, under your model, because you --
231 I'm sorry, from a cost point of view it's the same for you. You have to deliver capacity up to the 95th percentile, don't you?
232 Let me start over again. I switched my thought halfway through.
233 I look at this and I see what you are saying, your point being that, under the 95th percentile, they both have to pay the same, notwithstanding that ISP 1 uses far less than ISP 2. That's fine.
234 But for you, as a provider, from a cost point of view, presumably servicing ISP 1 or ISP 2 for you is the same cost, because you have to have the capacity to go to the 95th percentile.
235 Or, am I wrong here?
236 MR. DANIELS: With respect, I actually think that you are correct on one point, but not correct overall, and for that, could I get you to turn back to Figure 1?
237 THE CHAIRPERSON: Sure.
238 MR. DANIELS: I think you have accurately described Figure 2, and I think you understand our point there.
239 To your question as to whether there is more cost under Figure 2 from one ISP to the other --
240 THE CHAIRPERSON: Yes.
241 MR. DANIELS: -- the answer is: Yes, there are greater costs. We are not indifferent.
242 The reason I say that comes back to the point I was trying to make before -- and it is hard to do it in a quick opening statement -- in terms of: Where does congestion occur, and how often does it occur?
243 This map shows, again, from our end users all the way to the wholesale ISP's point of interconnection. The congestion that we have takes place at Points 1, 2 and 3, which is our shared network. The 95th percentile, as I mentioned before, is measuring where the ISP interconnects to us.
244 So you are correct when you say to me: Wait a minute, there is no difference between ISP 1 and ISP 2, because you only have to build a pipe to connect ISP 1 to you, and whether it uses more or less, there is no difference in cost to you, because you built to the peak for that interconnection point.
245 That's correct, but our issue is that our congestion doesn't just occur at that point. In fact, that's not really where we have congestion problems. Our congestion occurs in the shared network at Points 1, 2 and 3.
246 So, if the ISP, for example, peaks and hits its 95th percentile at a certain time of day that doesn't correspond to where we have congestion elsewhere in our network, it doesn't have to worry, as long as for the rest of the day it can continue to send traffic, as long as it doesn't need to exceed its peak.
247 To put the two diagrams together, in Figure 2, we show you there that the red ISP has decided that it is going to make sure it doesn't peak beyond 600 megabytes per second. It has determined that and, to an extent, that's an ITMP. It said: I am only going to go up to that level.
248 But -- and this is the key point -- once it makes that determination, it has no incentive to worry about any traffic that happens up to that 600 megabytes per second, despite the fact that, at other times of the day, when it, under AVP, would have an incentive to control its volume, it is causing congestion.
249 Why do I say that? Because, where are our costs? Our costs could be at Point 1 in our network, going back to Figure 1, for Houses A and B, connected to the Central Office. That may be where the congestion is happening at 4:57, based on the usage patterns driven by that ISP's end user.
250 Not entirely. I don't want to be suggesting that it is only wholesale ISPs, but it's a shared network, and they do cause their portion of congestion, even though that's not when that ISP is peaking.
251 So the reason we think AVP works better is because it actually incents them to keep levels down, which saves us cost in how much we have to provision at Point 1 in the network at 4 o'clock.
252 THE CHAIRPERSON: Okay. I understand that, but isn't it ironic, if you look at Figure 2, if you talked only in terms -- not in terms of incenting use, but in terms of revenue, wouldn't the 95th percentile actually generate more money for you than your usage-based?
253 MR. DANIELS: The way we have costed our model -- and we had to make assumptions in terms of what the --
254 THE CHAIRPERSON: Right.
255 MR. DANIELS: So, ultimately, underlying the cost model, and therefore the rate, is an assumed -- the same traffic pattern between the 95th percentile and the AVP.
256 So, under the same traffic assumption models, it doesn't result in any extra revenue, because, remember, what happens is, we don't just pick a figure, we work from the cost upwards. So assuming the same traffic patterns, we set our rates. The rates that we have proposed have been set to match each other, in terms of the same amount of revenue.
257 What we actually say is, the difference between AVP and 95th percentile is that, from a revenue perspective, they should be identical, but from a cost perspective, because we don't think 95th percentile is going to be as effective as an ITMP, it is actually going to increase our congestion and our network costs.
258 MR. BIBIC: Mr. Chairman, I would like to really emphasize the point that Jonathan just ended with, and I am going to keep answering questions from the perspective of our viewpoint on what is most effective as an ITMP.
259 When I look at Figure 2, on the right-hand side, to me, intuitively, ISP 2 should pay more for usage than ISP 1. Yet, under 95th percentile, they are both paying exactly the same because they both hit the peak.
260 So, if you are there as an ISP, and you are the blue ISP at 93, you are not indifferent any more. You might as well get your traffic up to 150 terabytes, if you are just going to pay the same thing as the ISP on the right. But we are not indifferent, because we are managing the network.
261 So to say that there is no extra cost to an extra gigabyte, once you have built to the peak at one point in the network --
262 THE CHAIRPERSON: Your colleague explained that. I understand that.
263 MR. BIBIC: Right. We want to create incentives to get your usage profile down to the blue line, rather than get the blue guy up to the usage profile of the red line.
264 THE CHAIRPERSON: Okay. You have explained the 95th percentile, that not only does it not deal with congestion, but, also, the implementation would be very difficult for you.
265 On page 9 of your presentation, maybe you could translate the last sentence for me. You say:
"For instance, we would nottechnically be able to measure the 95th percentile peak on almost one-half of the ISP interconnection points. To make it work, all ISP interfaces using legacy ATM technology would have to be migrated to IP interfaces."
267 For a poor, non-technical lawyer, could you put that in normal English?
268 MR. DANIELS: Sure. Or I can try, at least.
269 Today, ISPs who want to interconnect with Bell have a choice in the technology they use.
270 I am not talking about FTTN or legacy, because, as you know, today we only provide legacy.
271 So, an ISP that wants to interconnect with us today, at their point of interconnection they order something called the AHSSPI. When they order that, they determine the type of technology. We offer them an ATM interconnection and we offer them an IP interconnection.
272 Basically, the larger ISPs, for the most part, choose IP, and as you grow you use IP. But about half of the ISPs, which are much smaller, only use the ATM technology, and we are not able, if we move to the 95th percentile, to come up with a solution to be able to measure the traffic on the 95th percentile on the ATM basis.
273 One of the criteria that we would have to do is, we would have to force-migrate everyone to IP, and we couldn't start --
274 THE CHAIRPERSON: So, in effect, you would be imposing costs on the smaller ISPs.
275 MR. DANIELS: It would be imposing costs, because it's not just the cost of the installation and so on, they themselves would have to purchase new equipment.
276 As I say, for the larger players, they are probably IP already. It's the smaller ones, who have an ATM interconnection, that this would pose a problem for.
277 Plus, there is the timing. We can't do -- this is not an overnight switch. That takes a long time. So that is a further delay to implementation.
278 THE CHAIRPERSON: In your written submission you suggest that it would take up to a year to do that?
279 MR. DANIELS: No, I don't think we have given a time for the actual migration. We have talked about that it would take up to a year to build the systems, to figure out how to do all of this, but then, on top of that, you have to have the migration as well.
280 THE CHAIRPERSON: Your gaming point -- you are sending business through residential pipes. That's the way you put it. Why would that not apply in your AVP solution? Why couldn't they game the same way?
281 MR. DANIELS: Because in the AVP solution what we do is, we are able to, ultimately, when we do our records, actually look at how -- we are able to actually identify where we measure -- identify what the customer is, and therefore what product they purchased from us.
282 So we are already set up to distinguish between business and residential, and therefore we can measure it.
283 THE CHAIRPERSON: I hear you.
284 MR. DANIELS: But in the 95th percentile, we don't know -- you are just measuring the packets, so you don't know whose is what at that point. That's why they would have to be separated.
285 THE CHAIRPERSON: But you are, right now, set up to distinguish between business and residential?
286 MR. DANIELS: For AVP purposes, yes.
287 THE CHAIRPERSON: Now, if I understood you right, Mr. Bibic, for legacy, you basically say that it would be too much disruption to adopt the AVP model for them, that there is an existing model, it works, and people know how it works, et cetera. It is slightly based on different principles, but migrating it through the FTTN makes no sense at this point in time.
288 Is that the substance of your submission?
289 MR. BIBIC: Yes and no. To be very clear, for legacy it is AVP, and they are the same principles.
290 But because our access rate has been in place for a long time, and it is derived on a cost model that had assumed usage, what we are saying is: Okay, it's still AVP. You still pay your monthly access rate and pay usage over and above the monthly access rate, but we will only charge you for usage once, in aggregate, your end users have used more bandwidth than the bandwidth we assumed in the cost model.
291 THE CHAIRPERSON: Yes, I understand that, but if we said, "Okay, Bell, go ahead, do the AVP, it sounds sensible to us," why couldn't we say, for consistency, also apply it to legacy?
292 You have a usage component right now, and that would mean that we would have to change the rates, obviously, to take that usage component out, but from a logical point of view, I don't see that there is anything preventing you from doing it. It's just what you said this morning, that you already have legacy there, it is working, and it would cause considerable disruption.
293 MR. BIBIC: Yes, it could be done. It would have a huge impact on us, and the single biggest impact would be the following. The Commission would be saying: Okay, do AVP the same way for legacy as for FTTN. Yank usage out of the cost model.
294 So, philosophically, the view would be: Bell can charge for usage and, hence, allow for proper signals to be sent in the marketplace to manage congestion, and generate a return on investment through usage, which is good.
295 So, hopefully, revenues would go up to achieve those goals, but then, by the same token, the Commission would be dropping the bottom out of the access revenues significantly, and that would completely undermine the incentives to invest, because now, while we would be able to charge a bit more for usage, the bottom would drop out of our revenues and we would be back in the same dilemma, where there is no way to monetize.
296 THE CHAIRPERSON: Surely you would compensate. What you take out of the access you would have to put in the usage. That would give you the same yield at the end of the day.
297 But since you are saying that the big advantage of AVP is to discipline the ISP and focus them on trying to manage their usage as much as possible, in order to reduce congestion, presumably if you used the AVP model for your legacy services, it would have that additional disciplinary impact.
298 MR. BIBIC: In theory, but the real, practical effects of being disrupted --
299 THE CHAIRPERSON: You are living the reality, that's why I wanted --
300 If I understood your colleague correctly, it would create a major upheaval for a small gain. That's what I took as the bottom line. If I misinterpreted you, please correct me.
301 MR. LITTLE: No, that's correct, Mr. Chairman.
302 THE CHAIRPERSON: Now, you made the statement today and in your submission, categorically, saying that people are making a mistake by talking about IPTV and saying that "We, Bell, are only interested in disciplining internet use because we want to free up a lot for IPTV."
303 You point to the diagram that is in your written reply, on page 4, which shows IPTV as a totally separate network, and only joining at the Central Office with the whole internet access.
304 But isn't it, at that point in time, at the Central Office -- aren't the same servers serving both and separating what goes into IPTV and what goes into internet access?
305 MR. BIBIC: Yes, Mr. Chairman.
306 We actually have, as well, in the package, what Jonathan referred to, Figure 1 and Figure 2. If you look at Figure 3 --
307 THE CHAIRPERSON: Figure 3, that's the same one.
308 MR. BIBIC: It's the same one, yes.
309 Once you hit the Central Office, it all merges together, but that's in the last mile. There is no congestion issue in the last mile.
310 In other words, the copper loop, there is no congestion there. The congestion is in the aggregation network, but in the aggregation network IPTV traffic doesn't get shared with other traffic.
311 MR. CONDON: Mr. Chairman, the traffic actually enters the DSLAM on different ports. The internet comes in on one port, and the TV comes in on a different port on the DSLAM.
312 So they don't share a network at all.
313 THE CHAIRPERSON: They don't share a network. I see.
314 But as for the end use -- you have now said for the second time that there is no congestion on the last mile.
315 MR. DANIELS: Just so we are clear, let's take it from an end user's house.
316 From an end user's house to the node -- right -- that is the copper portion.
317 It is true that, on that portion, they would be shared, IPTV and internet, but that's dedicated to that end user at that point in time.
318 We don't consider that congestion, to the extent that the customer decides what internet speed they are buying and so on. But once it hits the --
319 THE CHAIRPERSON: Stop right there. If I understand your thought correctly, it doesn't make a difference whether that person subscribes to Bell or to an ISP for his internet service, they both have to travel over the same copper wire, the IPTV and the internet access, at whatever speed you can push both of them through.
320 So there is no advantage to you whether it is you as the internet service supplier or whether it is an ISP.
321 MR. DANIELS: I'm sorry, I guess we are answering two different questions at the same time.
322 In terms of the comment that you just made, the ability to have both us provide internet -- excuse me -- an ISP to provide internet and us to provide IPTV over that very same copper wire was an issue we had in the last proceeding, and you may remember that the determination, ultimately, is because of the two modems at the end, that that's not required.
323 So there is no sharing between the internet of a wholesale ISP and our IPTV that happens on that wire today.
324 MR. CONDON: That would require a second copper wire, Mr. Chairman.
325 THE CHAIRPERSON: I see.
326 MR. DANIELS: So technically that is -- I think where this debate -- at least, when I hear this debate come up, it's about the fact that somehow, by us not charging for IPTV, and it's on the shared network, we are given an advantage, and the point we are trying to say is, technically speaking, the IPTV traffic, other than that last mile, where it is dedicated to that end user -- and when I mean last mile, I mean just on that copper portion, when no one else is sharing it other than the end user -- that IPTV traffic is never on the same network as the internet.
327 So there is no advantage being given to IPTV. That is really what we are emphasizing here in terms of the difference in the network.
328 THE CHAIRPERSON: Okay. Thank you for reminding me that we did deal with the other issue in a previous hearing.
329 Now, with respect to rates, you are suggesting 19 cents per gigabyte, if they did the estimate correctly, and then it would go up to 29 for the additional.
330 Why this increase from .0195 to .0295?
331 On what basis did you come up with this extra charge?
332 MR. BIBIC: In terms of the philosophy underlying why the higher price, we have dealt with that. It's just to make sure that you --
333 THE CHAIRPERSON: No, I understand that.
334 MR. BIBIC: You are asking about the specific number?
335 THE CHAIRPERSON: Why does it go from 19 to 29? You could have gone from 19 to 25, or you could have gone from 19 to 35, or whatever.
336 You must have had some rationale for picking this particular number. I know it's supposed to work as an incentive, to properly estimate, but is there any relation to cost, is there any relation to extra effort, et cetera, or is it just picked out of the blue because we think this is sort of an appropriate figure under the circumstances?
337 MR. LITTLE: Just an appropriate incentive, Mr. Chairman.
338 THE CHAIRPERSON: Presumably, others would say: No, it's too high.
339 MR. LITTLE: Presumably.
340 THE CHAIRPERSON: But it's a fair guess, right?
341 MR. LITTLE: Just wait.
342 THE CHAIRPERSON: If I said, "Look, 25, rather than 29, strikes me as appropriate --" I have to have some reference point to understand your thinking, why you picked this particular figure.
343 MR. LITTLE: It was chosen to be an incentive, and it was chosen to be significantly, or materially higher than the pre-purchase rate, to drive that incentive.
344 MR. DANIELS: Mr. Chairman, ultimately, as Mr. Little said; but the actual number itself was just 50 percent of the prepaid. That was the basis upon which -- in order to send the right incentive.
345 There is no greater formula behind it than that.
346 THE CHAIRPERSON: Did I understand correctly your submission that everything we have talked about on AVP so far is Bell, that your sister company, Bell Aliant, would not adopt this model?
347 MR. DANIELS: Yes and no, as the famous lawyer answer goes.
348 Yes, in terms of Bell Aliant Atlantic, so the four provinces, but no in terms of Ontario and Quebec. Bell Aliant is also a provider and we have the same tariff in Ontario and Quebec.
349 THE CHAIRPERSON: Let's talk about Bell Aliant Atlantic. Everything you have explained to me now sort of makes sense in terms of logic, as a major internet service provider who is mandated to sell FTTN. Why would that same logic not apply to Bell Aliant Atlantic? Why is it different? Why can't they live with what is, basically, a flat rate model; and they don't want to adopt the AVP?
350 As I understand it, Bell Aliant, to the extent that they operate in Quebec and Ontario, area adopting the AVP. Why, in their home territory, are they not?
351 MR. DANIELS: Right now Bell Aliant -- our starting point was that we weren't charging -- Bell Aliant, at least, was not charging retail rates, did not have a usage-based component.
352 So the first standpoint is, we worked from the supposition, when we created our proposals, that you have to -- from the CRTC's requirement, you have to be charging it at wholesale -- retail to have it at wholesale.
353 Also, Bell Aliant Atlantic doesn't necessarily have all the tools in place, because they haven't developed it for retail in order to develop it for wholesale.
354 That's the starting point, but that doesn't mean that they don't have congestion issues.
355 THE CHAIRPERSON: But the whole hearing started from you making the original application, saying: There is congestion on our network. We need to build in an economic incentive to deal with it.
356 You originally came up with the UBB. You have now dropped that and come up with the AVP. You have spent the last hour explaining to me the rationale underlying it, et cetera.
357 If I buy into it, why would I say, "Yes, that makes sense for Bell, but it doesn't make sense for Bell Aliant," given that it's a sister company which you control?
358 MR. BIBIC: Mr. Chairman, Bell Aliant supports AVP; and there is a difference between seeking the flexibility to do something and then actually doing it, once you have the regulatory authority or the flexibility to do it.
359 So, Bell Aliant supports it, supports the concept, and the regulatory authority for ILECs to impose AVP when they are ready. So that is one. We are completely aligned on that.
360 What is different about Ontario and Quebec for both Bell and Bell Aliant is keep in mind that Bell and Bell Aliant in Ontario and Quebec have by far the most wholesale ISP customers of any ILECs in the country, and this is by an exponential factor.
361 And in Ontario and Quebec we also compete against cablecos who have implemented usage-based pricing at both retail and wholesale.
362 So Bell and Bell Aliant, as we sit here today, in Ontario and Quebec, given the congestion issues, given the competitive issues at retail and wholesale, must go forward with AVP or some other usage-based billing model.
363 In the Atlantic the congestion issues are there -- and this is not to say that Bell Aliant won't end up there -- they do support the flexibility to do it, but there are other factors including, as Jonathan said, the fact that right now as we sit here they haven't implemented it for retail.
364 So if they came forward and said, we don't have it at retail but we want it at wholesale, it would be a whole different set of issues we would have to deal with.
365 THE CHAIRPERSON: You are telling me they adopt it in the future, they haven't done it yet. And they haven't done it because they don't have as many ISP customers as you have in Ontario and Quebec, so therefore there is no necessity for them at this point in time to do it?
366 MR. BIBIC: First of all, it is driven mostly from the retail competitive dynamic. So they have made a decision at retail not to do it right now. We will see what they do in the future. And if they don't do it at retail, it was our judgment that the Commission wouldn't allow them to implement it at wholesale. But they have come forward and they have asked for the regulatory flexibility to do that at the right time, so they support AVP.
367 THE CHAIRPERSON: Okay, well if we get at it the other way.
368 The others who will be coming before us will say you don't need to go as the AVP model or the cable model, you can just use a flat-rate model. And they will point to Bell Atlantic, and think Bell Atlantic is doing it themselves, you know, part of Bell is doing it, not the other. The rest of it just really an undue economic game. There is no underlying rationale for it.
369 Why could you not use a flat-rate model then for Bell?
370 MR. BIBIC: I can't speak for the other ILECs, but Bell is in this scenario, this situation where again 17 per cent of end users on our network are wholesale end users and they are driving 29 per cent of traffic.
371 So we have the very real situation in Ontario and Quebec given the investments we are making and how many end user wholesale customers we have and the proportion of traffic that they are generating that we are in a spot.
372 And you have see in our opening statement, our capital intensity ratio is over 100 per cent, that is astronomical. So we face a particular dynamic in Ontario and Quebec that requires this now.
373 And my judgment, and I am not giving you any insights from Bell Aliant boardrooms, every ILEC is going to have to go this way sooner rather than later.
374 THE CHAIRPERSON: So the fact that TELUS also proposes a flat rate and can be explained by the fact that they don't have sufficient ISPs buying from them. Once they come into the neighbourhood of clientele to the extent that you have they will be forced to go the same way?
375 MR. BIBIC: Well TELUS will speak for themselves. But in my mind, undoubtedly if any ILEC who faced the user profiles we have would be before you saying the exact same things as we are.
376 THE CHAIRPERSON: So the interim rate that we implemented and which are now on a flat rate basis, I gather you can live with it on the interim, but you can't live with it as a permanent solution?
377 MR. BIBIC: Correct. We can't live on -- well, as you know, we had significant concerns about being forced to launch FTTN with only monthly access prices and no usage. We are where we are. But, correct, we strongly feel that usage-based component needs to be incorporated in wholesale GAS service pricing.
378 THE CHAIRPERSON: Now this whole thing got really sparked by your original request, where you basically came forward and just said we have caps which we impose on our retail end users in order to have control over our network, so up to 30 per cent we sell to ISPs. They should impose a similar cap on their end users. And that caused a whole spark, and then now you have your much more sophisticated AVP model.
379 Does that mean you will not impose caps on your retail users?
380 MR. BIBIC: No. Our retail users currently do have caps since 2006, and those will remain in place.
381 THE CHAIRPERSON: So those will remain in place?
382 MR. BIBIC: Absolutely.
383 THE CHAIRPERSON: So what you have basically said is -- I just want to understand, you said you will continue to do what you did, you are not going to impose your model on the ISPs. You said your ISPs managed it, however you want. But I am trying to bring discipline into the system through the AVP route. Now, is that sort of your overall approach?
384 MR. LITTLE: Yes, Mr. Chairman, except that I would add to that.
385 The retail side will respond to competitive dynamics. So and just as we talked about them, why one company would implement and why another company wouldn't, there is competitive dynamics. So the retail side will respond to competitive dynamics.
386 The AVP proposal was born out of a specific objective to give the ISPs flexibility to price however they want. We all heard in great length that they are innovative and that they differentiate and that they need the freedom to create their own pricing models.
387 And that is what AVP allows them, completely uncorrelated to whatever any retail group does. So I don't think it is a surprise. You see some retail groups with caps, some without, and a variety of pricing models.
388 I presume ISPs may charge caps and not charge caps, depending on their individual competitive dynamics of the pricing strategy they develop. That is why AVP was put in place, they have the freedom to charge a cap -- or, pardon me, to implement a cap, or not, as they see fit, and to create any pricing model that they see fit.
389 And I think the retail arm will continue to do the same.
390 THE CHAIRPERSON: Yes. You are similar, you have the freedom to raise prices, abolish them, raise caps, abolish them or whatever. I just asked because I wanted to understand the whole -- figure out what your current plans are.
391 And if I understand Mr. Bibic, current plans are not -- this is AVP, it's totally separate on what you plan to do with your cap.
392 MR. LITTLE: It doesn't have any impact on what Bell retail intends to do with its caps at all, you are correct.
393 THE CHAIRPERSON: Okay. I am sure my colleagues have a lot of questions. We have been at it now an hour and 20 minutes. Let's take a 10-minute break before we go on.
--- Upon recessing at 1019
--- Upon resuming at 1034
394 THE SECRETARY: Order please. A l'ordre, s'il vous plait.
395 THE CHAIRPERSON: Okay. Len, I believe you have some questions?
396 COMMISSIONER KATZ: Yes, I do, Mr. Chairman. Good morning.
397 I think after reading a number of the submissions in reply it is pretty clear that everybody sort of agrees that cost-based rates are an appropriate recovery mechanism, as long as it has a reasonable return.
398 The issue is what are the costs and what is the return, simply put.
399 But I want to follow-up on that issue as it relates to economic ITMPs and your discussion this morning with the Chairman about the 29 cents, which you indicate is a number that you believe is appropriate, but isn't founded in any solid policy or rationalization.
400 To the extent that the Commission comes up with recovery of costs and a reasonable return, this 29 cents, or whatever the number ends up being, if it is more than the 19 cents you have asked for or whatever we come up with, there is a premium on there, doesn't that give you what I will call extraordinary profits?
401 Because it is not something that is going to be forecast. The forecast is going to be whatever the usage is, times the utilization, times the rate, and then suddenly someone on the 30th of the month doesn't forecast appropriately next month and has to pay a premium, doesn't that equate to a higher return for you?
402 And, if I can take it to an extreme, doesn't it almost become like an AMP, it becomes punitive, something even this Commission doesn't have the authority to do? And yet you are imposing a premium on these wholesalers?
403 MR. BIBIC: Well, Mr. Vice-Chair, you indicate that we came up with 29 without any rationalization or policy, but I think that is not right.
404 I mean, we came up with a higher number on a post-paid basis for the economic ITMP rationale of creating a further incentive for an ISP to manage its usage within the bucket of gigabytes that it purchased.
405 Now, is there science in the 29? No, it is kind of a market-based judgment that it should be higher, and in this case we said 50 per cent.
406 Now, you get to make the decision, not us. So if you decide that it is 22 cents or 25 cents or 28 cents, I guess all I can do is do my best to try to convince you that having a post-paid price that is higher than a pre-paid price does have a rational connection to managing congestion.
407 And then it becomes a question of what you judge to be the appropriate gap between the prepaid and the post-paid price.
408 COMMISSIONER KATZ: But do you see that gap, whatever that is, being included in the full recovery of cost, so that it is not additive to your recovery and your return, but it is part of that cost as well?
409 MR. BIBIC: Well, I will turn it over to Jonathan in a second. But I just want to re-emphasize again that -- you said that all parties agree that it should be cost-based rates. I actually don't -- I struggle with what that actually means.
410 If it means there is a cost and there is going to be a price, and clearly there is a mark-up over costs, and if that is what you mean by cost-based, then we are in agreement. But if you are suggesting that rates should be cost-based in the same way that they are cost-based for access, for the same reason, then I disagree.
411 Because, you know, the access rate is designed for one purpose which, in the Commission's view -- not that I agree with it, but it doesn't matter -- in the Commission's view create more retail competition, this economic ITMP's achieve or is designed for a completely different purpose. And the one paragraph that I think is the most important in our opening statement is paragraph 41.
412 But I will turn it over to Jonathan, who will probably do a better job of answering your very specific question.
413 MR. DANIELS: In terms of the specifics, I would just say that our expectation is the amount of post-paid that will actually be purchased will be very minimal. We don't know exactly, to be quite honest. I mean, obviously because we haven't introduced this and had this in wholesale, but we expect that ISPs know their business, in the words of the Chairman, and would be able to predict it. So we don't expect a lot of revenue from the post-paid.
414 So to adjust, if you made that adjustment, to have an overall mark-up of what, you know, determine the matches and have one higher, move one lower, it would be not a very large difference that you would actually end up with because we really don't expect to sell much post-paid. It is not --
415 COMMISSIONER KATZ: But in principle, if we came to a conclusion that there would be a 10 per cent or a 5 per cent premium imposed upon the wholesale purchasers, then we would take that revenue and spread that back into the base and lower the per unit cost.
416 MR. BIBIC: So are you suggesting that one way of approaching this is make an assumption about how much a typical ISP would have to typically buy on a typically post-paid basis because it forecasted wrong, and then let's just blend that assumption into the overall rate and come up with one price?
417 COMMISSIONER KATZ: Well, this is your proposal, and we either blend it if we follow that proposal, or we allow you to make extraordinary profits. It is one or the other.
418 MR. DANIELS: I guess what I am trying -- I mean, I understand what you are saying in terms of the way it would calculate -- but I guess I am saying we expect so little revenue from it that it is not really about -- for us it is not about the extra revenue, it is about the incentives associated with it.
419 And but what you are talking about is making sure -- then we have to start accurately predicting what the amount of revenue is. And if we get that revenue wrong, for example, that we underestimate what that revenue is, therefore that would be built in and everyone would be paying less than what would be occurring.
420 So our supposition is it is better to set the rate based on the 19.5 cents and then have a higher rate from thereafter, rather than adjusting, and if I follow you correctly, adjusting the 19.5 cents down to based on the assumption of how much overage we are going to sell, which is what I think you are suggesting.
421 COMMISSIONER KATZ: Yes. I mean, it is your proposal, but if we go with your proposal, whatever number we strike, if there is going to be an overage charged, then there has got to be a blending of that as well.
422 If not, as small as it might be, and I hear what you are saying, there will be an additional profit that you are going to be benefitting from, an economic ITMP over and above recover your costs, whatever those are, and we will get to that in a minute, as well as a reasonable return on your investment and risk and whatever else.
423 MR. BIBIC: I mean, seeing the numbers as you do from the record, and much of it is confidential in terms of the actual number, you know, the notion of an extraordinary profit in this segment of the business is a bit of a stretch.
424 And you also have the costs on the record. And you can see the gap between the proposed rates and the costs, and I venture to say that it is not unreasonable in either the pre-paid or the post-paid versions in terms of their relationship to costs.
425 And we didn't file -- you know, we do make a few submissions or we do have some references in our submissions to the proposed pricing bearing a reasonable relationship to costs, we do say that. But in no way were we intended -- you know, we didn't think we'd be interpreted as agreeing that somehow this has got to be cost-based rates.
426 It is an economic ITMP, it actually should be a market-based rate.
427 COMMISSIONER KATZ: Okay. Well, I think I have made my point and you have made yours.
428 I would like to move on. There was a study that was filed by the cable carriers, coincidentally, but it refers to the fact that the initial study was commissioned by Bell Canada and TELUS November 2010. It is called Mandated Access in Canada: Is "Regulation Forever" the Best Way Forward? by Waverman and Dasgupta of Berkeley Research Group.
429 And what it says in there is, "Wholesale access regulation has imposed burdens and created additional risks to ambitious investments in next-generation networks while achieving little in terms of market impact." It also claims that, the former regulation failed to adequately account for some costs and for uncertain faced by investors.
430 I don't know if I should be asking you these questions or the cable company. I will ask you first since you commissioned the study.
431 What additional risks are there from the creation of a wholesale access regulation regime? And what sunk costs have not been included that should have been included in the costing exercise?
432 MR. BIBIC: I will answer the first part of that even though, you know, we had that battle multiple times right up until 2010 on whether or not there was a need to mandate access, especially to our fibre networks.
433 You know, we filed that report, as I recall or I think, in the context of those previous proceedings, the scope of which was to determine should there be mandated access. That has been decided. We are not here to debate that with you. But we are here to debate the appropriateness of usage-based wholesale GAS pricing and the model to adopt and what the price should be.
434 But I think at a very high principled level the cost that it imposes on us and the disincentives to investment is that as an ILEC we are sitting here making billions of dollars in internet investments, and in Bell's case, over three years $3 billion to build fibre networks in order to catch up to cable who are the market leaders.
435 And now the Commission turns around and says, this brand new network that you built and spent $3 billion to build, you have to give access to wholesale competitors who don't build their own. And now, we built this to compete with cable, and now we have to give access at a mandated rate, which creates a regulatory point of arbitrage.
436 And now, you know, we made these investments thinking we will derive this much market share and that will pay off. And then we will catch up to cable.
437 But now there is this regulatory arbitrage coming into the marketplace, which is taking away some portion of the customers we were banking on getting in order to make a return on the investment. I mean, that is the point that we are trying to support with the Waverman and the Dasgupta report.
438 And as for which sunk costs aren't factored into the regulatory pricing, do you have --
439 COMMISSIONER KATZ: Well, hang on, before you get to the sunk costs.
440 So you are saying that the fact that there is a wholesale regime will reduce your ability to compete effectively with the cable company rather than saying perhaps you could use these wholesale service providers to go after the cable company and actually acquire their market share to you?
441 I am just trying to understand. You see them as a threat as opposed to an opportunity I guess.
442 MR. BIBIC: But here is why, here is why. With the regulatory model as it exists today, if we offer one thing to one party, we have to offer it to everybody else. So if you make it a regulatory decision that says access has to be mandated at this price, everyone gets access to that.
443 So if we could choose -- and this is what we said in 2010, we came before you and we said, we see wholesale as a very important channel to market and we wish to use wholesalers in order to compete against cable and others in very surgical ways like we have, you know, commercial partnerships in other sectors of our industry and in other industries.
444 But we can't do that in the regulatory model as it is, because the CRTC sets a default tariff and everyone gets access to it.
445 So our room to manoeuvre and setup these interesting commercial partnerships to attack one competitor or another is kind of -- that is diminished because of the regulatory model we have today.
446 COMMISSIONER KATZ: Well, it is probably a bit of a chicken and egg.
447 But I would put to you, that if you came in with an agreement with a party where both of you agreed to terms, conditions, branding and everything else as well, why would we not approve it if both parties agree to it?
448 And if you came in with a different one from somebody else with different terms and conditions, it would obviously augment towards different rates as well. And why would we turn that one down?
449 And just because they are different, these are business deals that are going on in the marketplace, no different than as you say, distribution deals with, I don't know, Virgin Mobile or President's Choice Mobile on the wireless side.
450 MR. LITTLE: Commissioner, pardon me, but I think it's almost delusional to think that that can happen in the current environment.
451 Potentially I misunderstand your question, but we don't get to choose partners. We don't get to have and choose and negotiate commercial terms or prices or agreements. We don't get to align strategies. To talk about these wholesale ISPs as an alternate channel I'm sorry, it's just delusional in the current environment.
452 I can tell you I have made a serious arsenal effort since taking over Bell Wholesale to achieve exactly that just as have many of the ISPs to achieve something of that nature. But we don't choose our partners. We are completely mandated to offer this access.
453 As Mr. Bibic has said, if you think of another business, I don't know how a car manufacturer would look at his dealerships. He chooses dealerships and they have negotiations and they set prices. They align strategies. That's a completely different environment than what we are in today.
454 We tried the commercial negotiations with great earnest, as I mentioned, but it's extremely difficult running in parallel with a regulatory process. So there isn't a process that says, "Go and make a commercial deal and come back if you fail". The processes run in parallel.
455 There isn't a process that says: Choose commercial partners, align business strategies, make a negotiation and then bring that to the CRTC, and I'm sure you would approve it.
456 Those don't exist.
457 COMMISSIONER KATZ: How does Bell BCE do it with Virgin Mobile? I don't think it's Rogers -- I'm not sure anymore -- do it with President's Choice because Virgin --
458 MR. LITTLE: But those are completely -- those are completely commercial negotiations. Someone rang the front bell and said, "I'm Virgin. I would like to make a deal" and Bell decided yes or no whether they would like to try to make a deal and sat down and did that. Those conditions don't exist here.
459 Everyone I'm talking to has the Alternative B to wait and take the Commission's decision and have mandated access.
460 MR. BIBIC: The short answer is --
461 MR. LITTLE: So every proposal that we make intuitively -- and I would do the same if I was any one of the heads of those ISPs -- I would say, "Well, do you think this is better than what I will get out of the Commission or not?" That's a completely different environment.
462 Virgin Mobile had no such environment. They rang the bell and said, "We would like to make a deal" and we thought about it and as business people came together free of any other alternative or imposition.
463 COMMISSIONER KATZ: Okay. Let me move on to --
464 MR. LITTLE: That is the risk. That is the risk.
465 And when we make those arbitrary decisions arbitrage exists and that arbitrage could go both ways, sir. You might do something the ISPs is punitive to them or back to Bell, but that arbitrage exists and that is the risk.
466 The risk is that we don't have commercial arrangements in place. Therefore, strategies aren't aligned and therefore we have to change our own business decisions because that arbitrage exists on the wholesale side.
467 COMMISSIONER KATZ: I will just end by making one comment. The argument you made about the other party waiting if they can get a better deal or not from the Commission, is something that needs to be weighed by yourselves as well as to whether you will get a worse decision if you wait for us as opposed to negotiating.
468 So it works both ways and --
469 MR. LITTLE: Yes.
470 COMMISSIONER KATZ: -- and one would have hoped that business people can come together naturally without having necessarily every single time a regulator to interject into the process and make a decision. But it is --
471 MR. BIBIC: That point is well taken. So we have a perspective. The other party in the negotiations has their perspective and it's not -- don't take from our answers that we are only blaming one side and not both sides.
472 But the point is while there is an alternative, you know, regulatory process in place it makes it very difficult. Both sides have, though, tried.
473 MR. LITTLE: Both sides have tried, Commissioner, I would say, and I recognize that both sides would be making that same decision.
474 COMMISSIONER KATZ: Okay. I want to move on to the issue of usage, heavy usage versus peak usage.
475 I have read a lot about it from all sides. Have you or are you aware of anybody who has actually run a regression analysis to see how correlated peak usage is to total heavy usage?
476 You have put in here an example, and I understand the example very well, but somewhere in there, there is an opportunity for a smart economist to figure out and run a regression analysis to find out just how statistically valid that assumption is or is not.
477 Have you done it? Have you commissioned one? Are you aware of one?
478 MR. DANIELS: So we have not run that analysis in this starting point which is today that we are not able to measure wholesale ISPs on the 95th percentile. We are not set up to do it today.
479 We had the same problem when we came to do our cost study in terms of making the assumption to align it when we were told and directed by the Commission to actually come up with a cost for 95th percentile and file it.
480 We don't have the information to be able to directly measure 95th percentile today on the AHSSPIs. So I don't have that information to be able to run the type of model that you are talking about. In order to do that we would have to build a whole system, which is the chicken-and-egg issue.
481 COMMISSIONER KATZ: You can't even do it on an aggregated basis?
482 THE CHAIRPERSON: Why don't you ask them to come back with it?
483 COMMISSIONER KATZ: If they have it.
484 MR. DANIELS: So I would like to take an undertaking to find out what we can. I'm not saying that we can do something on that but let me -- I just --
485 COMMISSIONER KATZ: Well, you are back in a couple of days
486 MR. DANIELS: Yeah.
487 COMMISSIONER KATZ: Okay. So perhaps those would --
488 MR. DANIELS: Yeah. So when we are back in reply we will address that.
489 COMMISSIONER KATZ: Okay. There was some evidence filed by the CNOC group saying there is no concept of an occasion to charge higher rates for higher speeds once usage is stripped out. You have different rates for different speeds once -- even with the usage being stripped out.
490 Can you comment on their views that it should be the same access rates throughout and your view that it should differ by speed?
491 MR. DANIELS: So it doesn't always differ by speed. In our proposal it only differs if there is actually a different cost on the speed. So there is different cost elements that apply between some higher speeds and lower speeds that aren't related directly to usage.
492 COMMISSIONER KATZ: And what are those costs? Do you know what those costs --
493 MR. BIBIC: Just give me a minute.
494 COMMISSIONER KATZ: You can file them. I don't need them right now but I think it's important to put it onto the record for evidence.
495 MR. BIBIC: Yeah, if you will just give me one second I will just turn to my thing and pull it.
496 In the meantime --
497 MR. BIBIC: -- going back to your first question to me which is about, you know, the incentives to invest and the costs imposed on us as a result of mandated access you just have to look at -- it's no secret that in the retail marketplace ISPs charge more for higher speeds.
498 So now if you are giving mandated access at one standard monthly wholesale access rate regardless of the speed, you just created a huge regulatory arbitrage between the wholesale price and the retail price at the high speeds. Now, you are compounding the impact on Bell.
499 So Jon will give, you know, a traditional regulatory costing answer which is merited by your question, but if you take a step back and you actually think of the impacts on the marketplace that's what it would do. It would be devastating to Bell to say, "You get wholesale access at $20 a month" which is the price we pay.
500 We charge for a 2 meg or 5 meg service but now you can offer us 75, 50 meg, 7,500 meg service that you just bought at wholesale for $20. Every single ISP in the country is charging $80 to $120 for and have at it.
501 Now, our return on investment is going to go like that.
502 COMMISSIONER KATZ: So you are saying that we shouldn't be looking solely at a cost-based model.
503 MR. BIBIC: That's not what I'm saying. I am saying Jon will give you the costing answer. I'm just saying let's --
504 COMMISSIONER KATZ: What you are saying at the end of the day, the decision the Commission should be making should recognize the fact that we would be impacting the marketplace dramatically at the end-user level if we chose to go with a strict cost-based rate, assuming that what Jonathan is going to tell me is there is little tweaks here and there on costs but, really, usage aside there isn't that much of a difference.
505 MR. BIBIC: In my view ideally, yes, but we have the model we have.
506 COMMISSIONER KATZ: Okay.
507 MR. DANIELS: So just to give you a sense let me -- and now for the traditional costing -- if you look at the rates that we have proposed now, of course, FTTN and legacy have different costs associated based on the amount of fibre that you actually deploy. So the legacy costs are clearly different from the FTTN in many different ways.
508 But I think your question is, "Why are we charging for different rates or have different costs within the same FTTN speeds?"
509 And so the big difference -- and as you can see, it's not very large. For example, between the FTTN-16 and FTTN-25 our difference is 3 cents of cost. What is the difference in cost? It has to do with our assumption of how often you have to put a pot splitter in.
510 So what's a pot splitter? For most of you I'm using some jargon. I apologize.
511 When you go to the house and we install in the house in most cases, especially for the higher speed, we actually have to put in a device in the house that splits the internet from your voice traffic. So within the house it doesn't cause any traffic interference. That's really important we do that.
512 I can't remember the exact statistic, but I think it's in almost all the cases if you are at 25 megabits. But if you are at a 10 megabit speed, for example, we don't necessarily need to put in a pot splitter.
513 So there is an assumption as to how often we will put in a pot splitter and that varies by speed. That is the driving force as to why FTTN-12 has a charge of $38.06 for access whereas the FTTN-16 and 25 has a much higher price of $47.69 and $47.72.
514 So the largest discrepancy is the pot splitter and the assumption of how often we actually have to do it.
515 COMMISSIONER KATZ: Okay. Thank you.
516 I have got a couple of what I call short snappers from your morning presentation here, just a couple to clean up some issues.
517 In paragraph 6(a) you indicate that:
"...many wholesale ISPs making use of our Gateway Access...have implemented retail UBB..."
519 Can you tell me who they are to your knowledge?
520 MR. DANIELS: I don't have a list of every single one of them but I do have examples of it, right now just TekSavvy, Execulink, Cybernet and Uniserv. These are four ISPs that we pulled off the website that charge -- at least have some -- they may also have a limit but they also have some offers that have usage components to it.
521 I'm sure there is many more. I didn't ask. I just said, "Get me a couple of examples" and that's what they provided.
522 COMMISSIONER KATZ: Okay. In paragraph 10 you indicate that there is a disproportionate amount of usage by wholesale ISPs who serve 17 percent of the end-users, 29 percent in total traffic.
523 Do you know whether the traffic that they carry is distinct and different? Do they do something innovative?
524 I mean, one of the things we have all heard everywhere in Canada is that there are things that independent ISPs bring in the way of innovation that ILECs and cable companies perhaps lag behind.
525 I'm not going to argue with that one way or the other. Don't comment on it.
526 But is there something to your knowledge that drives that distinction?
527 MR. DANIELS: I mean, I don't know of any particular innovation or so on. I'm not trying to say that there isn't but what I can say is that there is -- that within the ISP communities themselves there is great differences in terms of how much usage they drive on our network. So we imagine that some of it is due towards the marketing aspect in terms of some of them focus on high usage customers and right now there is unlimited charges so there is no cost to them.
528 So we see that discrepancy in that we have a large amount of -- a small amount of our ISPs actually have a lot higher usage overall on our network on a monthly basis.
529 MR. LITTLE: But the answer to the question is no. There is nothing that we know of distinguishing that traffic other than its disproportionately high level.
530 COMMISSIONER KATZ: Okay. And in paragraph 18 you talk about user expectations having exploded. It's your last words on page 6.
531 You say user expectations have exploded, network traffic growth has exploded. Yet, when I took a look at your forecasts over the next five years in your costing analysis, growth seems to have curtailed and, in fact, it's becoming normalized and it's double digit and it's in the teens, if I remember correctly.
532 Am I missing something here? On the one hand you are saying that network traffic growth is exponential. On the other hand, when I look at your costing analysis it seems to imply that it's very, very restrained as the market gets more mature, that there seems to be a flattening out of growth.
533 What am I missing?
534 MR. DANIELS: One of the advantages of going towards the FTTN where we have usage separated is that we are not tied into the actual assumption of what the costing usage is going to be in an area where we haven't had -- you know there is issues with trying to predict the future.
535 So I think the short answer to that is when we do our costing models we have to be conservative in terms of the usage assumption because otherwise in our experience we just get knocked down in making it.
536 So if you are talking about on the basis of what our model and what we have predicted here, we have made some best guesses. We keep it on the conservative level in order to try to defend it.
537 But part of our thinking behind the FTTN icing in pulling usage out is that in fact it doesn't really matter what we predict. What matters is what actually happens and ISPs will pay for what they use so that the market will solve -- you know, will fund whatever congestion relief needs to take place on a going-forward basis.
538 COMMISSIONER KATZ: They will pay for what they use, but it's divided by the costs as well. So presumably the cost, if you double or triple the usage the cost goes down somewhat proportionate as well if all things remain equal.
539 MR. DANIELS: I mean, because in the end when we are doing a costing it's a Phase II costing -- and I'm not expert on Phase II. I'm no expert on Phase II but ultimately it's the extra incremental costs.
540 I think what you are suggesting is shouldn't there be some economies of scale and scope in terms of on your costing if your traffic grows that much. Ultimately, I mean we are a large company. We are already getting those economies of scale and scope and they are built into the per-unit cost.
541 So if traffic doubles or triples it wouldn't be that -- you wouldn't see that kind of actual economy -- you know further increases of the economies of scale or scope that would make the kind of difference in the costing perspective.
542 So really what I'm saying the Phase II assumption, it's a per-unit cost based on a large company already and extra traffic growth is not going to actually change that cost, reduce it. I don't want to say at all but, realistically, it wouldn't have a material impact.
543 COMMISSIONER KATZ: Okay. My last question, paragraph 41 in response to question 5 of the Commission's letter, you say towards the end of the paragraph:
"In contrast, AVP is designedto be an economic ITMP, and thus serves additional policy objectives."
545 Can you expand upon which policy objectives you are referring to specifically there?
546 MR. BIBIC: Creating -- making sure that the proper incentives to invest remain in place, making sure that low users don't subsidize heavy users, making sure that there is an incentive on the wholesale ISPs to manage congestion on the network, balanced with finding the right price that allows small ISPs to continue to differentiate themselves.
547 Those are the additional policy objectives that aren't in place when you are talking about the access rate where the policy was designed to say, "Let's ensure that the wholesale ISPs get access to compete in the retail marketplace".
548 COMMISSIONER KATZ: Okay.
549 MR. BIBIC: Without regard to the other issues.
550 COMMISSIONER KATZ: Okay. And I never did get an answer on sunk costs so you may want to file something within that regard as well, regarding the study and the fact that it failed to consider adequately some sunk costs.
551 So I will leave it to you to give us that information.
552 MR. BIBIC: Okay.
553 COMMISSIONER KATZ: Thank you.
554 THE CHAIRPERSON: Thank you.
555 Mr. Katz's question raised the issue, what does AVP do for consumers?
556 MR. BIBIC: Well, what AVP does for consumers -- it does a number of things.
557 First of all, by making sure that the incentives to invest remain in place for us. We continue to build out fibre, the very best fibre networks.
558 Two, the way it's been designed where there is total flexibility on the wholesale ISPs to design their pricing packages the way they see fit. It allows those ISPs to provide different packages that we may not. That's up to them to decide, but to the extent they do something different then consumers benefit from that.
559 So those would be two benefits.
560 Keeping in mind that of course we have had -- you know, take Ontario and Quebec cable and the telcos in Ontario and Quebec have had retail usage-based billing plans in place since '06 and of course the usage on an average or medium basis is below our caps.
561 So, some do pay. Of course the heavy users and most don't but it hasn't constrained internet growth, certainly not in Canada as you know studies show that we are the heaviest users. So that's how consumers benefit as well.
562 THE CHAIRPERSON: So basically the consumer gets the benefit of competition in terms of price and innovation.
563 MR. BIBIC: We think that everyone benefits. Consumers benefit. We certainly benefit more than we do today.
564 THE CHAIRPERSON: Purely, in terms of consumers, it's all indirect benefit. It is indirect benefit that comes from having ISPs having access to your services and being able to structure the offering as they want, thereby giving an alternative supply to them, right?
565 MR. BIBIC: Right. In the way it's designed, yes.
566 THE CHAIRPERSON: Okay, thank you.
567 MR. DANIELS: And can I just add that the one other benefit -- I would just add -- is that both our retail consumers and wholesale consumers, they are sharing the same network. So they are all -- to the extent that we have aligned incentives investment congestion, everyone is going to get a better internet experience.
568 MR. BIBIC: Yeah, the one I forgot, Mr. Chairman, probably the most important one, is the vast majority of users who are the average low to medium user, they now get the benefit of no longer having to subsidize the heavy user.
569 THE CHAIRPERSON: Thank you.
570 Tom, you have some questions?
571 CONSEILLER PENTEFOUNTAS : Merci, Monsieur le Président.
572 Monsieur Bibic, vous avez le don de nous rendre la vie facile des fois. Si on peut retourner à la deuxième page de votre attachement qui suit votre déclaration d'ouverture.
573 Si on regarde le petit monsieur bleu et le petit monsieur rouge dont vous parliez tantôt, est-ce que j'ai bien compris que ça ne vous dérangerait pas que le petit monsieur bleu arrive à 151 térabytes tant et aussi longtemps qu'il vous paie 200 dollars par térabyte ou est-ce que ça serait votre préférence que le petit monsieur rouge descende au taux du petit monsieur bleu? Quelle serait la préférence de Bell, autrement dit?
574 M. BIBIC : D'accord. Monsieur le Vice-président, je vais répondre en anglais pour faciliter la tâche de mes collègues.
575 Both principles apply. Ideally, I suppose, from a network congestion point of view the model probably the preference would be to get the red ISP down, recognizing that it's up to the ISP to decide who they want to market to and what prices and plans they want in place. So if the red is not going to go down and, rather, the blue is going to go up at least -- then they are going to be targeting heavier users and they should pay for that.
576 So either way, either they come down and pay less but if they are going to have an incentive to have higher volume users as their customers because that's who they are going to target and they want to go up, then they are going to have to pay for it.
577 So the AVP addresses -- at least it solves it either way. Whereas with 95th peak now, if the blue ISP is going to end up having to pay exactly the same amount as the red, you might as well just target to the higher volume user. He is not going to pay any more at the end of the day.
578 COMMISSIONER PENTEFOUNTAS: But would Bell prefer an ISP to resemble the red model or the blue model?
579 MR. BIBIC: What we are primarily trying to do is manage congestion here and you manage congestion by either creating incentives for less usage but if that's not going to happen then people should pay for the higher usage.
580 So I guess -- Tom, do you have a view as to which you prefer?
581 MR. LITTLE: It isn't a preference. It's a preference that if you consume more you have a higher cost and you make a determination to -- pardon, je parle un petit peu français.
582 COMMISSIONER PENTEFOUNTAS: No, don't worry about it.
583 MR. LITTLE: We would want to make sure that if you consume more you have a higher cost structure accordingly and, therefore, you either pass that onto the customer in some form or pricing model you have.
584 So it's not a preference that the user be someone's grandmother who uses nothing or a very, very high user. That isn't the preference. The preference is usage and costs vary and you pass that on in your pricing model.
585 COMMISSIONER PENTEFOUNTAS: Yes, but as long as they are paying $200 per terabyte you are happy with the example, the red example, let's say?
586 MR. LITTLE: Yes. Yes.
587 COMMISSIONER PENTEFOUNTAS: If they buy a block? If they buy a block, that's fine for you?
588 MR. LITTLE: Yes.
589 COMMISSIONER PENTEFOUNTAS: Okay.
590 Maybe a technical question: Would an independent ISP be in a position to manage their clientele so that they can come in just beneath peak traffic level of 95 percent? I don't think they could do 94, but can they manage their traffic in such a way that it would be immensely advantageous towards them to come in just under 95 percent? Is that technically feasible?
591 MR. DANIELS: I think it may just help, every ISP will have a 95th percentile, whatever, because it's a measure of whatever it uses. It won't come up to 94 because 94 would be its new 100, if you will. So the 95th percentile is its measure of its traffic.
592 But if your question is to me: Could an ISP determine the level that is acceptable to it, for example in the graph I gave her, 600 megabytes --
593 COMMISSIONER PENTEFOUNTAS: Yes.
594 MR. DANIELS: -- and control it to come in at that level.
595 COMMISSIONER PENTEFOUNTAS: Yes, maximize their volume and minimize -- and just come in just beneath in terms of the peak.
596 MR. DANIELS: Right. We do believe that ISPs are able to manage that, at least especially the larger ISPs and that's one of our distinctions. We think the small ISPs, which represent half of our ISPs that are on our network, very small guys, probably don't have the tools and sophistication to be able to do that and that they are probably going to peak above that level.
597 If you are more sophisticated, larger, you are able to do that, you are able to manage. Now, it could be through economic or it could be through technical means or a combination of both.
598 COMMISSIONER PENTEFOUNTAS: That would be highly advantageous towards them under the CNOC model.
599 Is that your contention?
600 MR. DANIELS: Yes. We actually think that the reason -- everyone has motive, but if I was an ISP looking at this, from a large one who is able to do it, I would say, "Hey, this is great because I get to send more traffic and without paying for more of it." So I think that's the attraction to the 95th percentile.
601 COMMISSIONER PENTEFOUNTAS: Would you also agree with me that the independent ISPs control about 5 or 6 percent of the global market?
602 MR. DANIELS: I think that's based on CRTC data, so yes. But just keep in mind, for Bell, Ontario and Quebec, they are 17 percent of our end users and a third of our --
603 COMMISSIONER PENTEFOUNTAS: And 30 percent of peak.
604 MR. DANIELS: Yes.
605 COMMISSIONER PENTEFOUNTAS: I understand that.
606 MR. DANIELS: Yes.
607 COMMISSIONER PENTEFOUNTAS: What prohibits them, in your view, from gaining 10 percent market share or even 20 percent market share?
608 MR. LITTLE: Today you mean?
609 MR. BIBIC: Tom is going to jump in here, but they have grown and it's a segment of the internet market that is growing. So in '09 they were 14 percent of the users on our network, now they are 17. It is a market, certainly in Ontario and Quebec, on our network that is growing.
610 MR. LITTLE: Going forward, Commissioner, nothing.
611 COMMISSIONER PENTEFOUNTAS: What would the impact be on Bell's network if they were to control 20 percent of the market?
612 Globally, not Bell's. I know you are 17.
613 MR. LITTLE: On the assumption that the usage is in place and that the AVP is in place?
614 COMMISSIONER PENTEFOUNTAS: Yes.
615 MR. LITTLE: I don't -- I would have to take that away and think about it, but I don't think that would be unsatisfactory.
616 I guess I'm trying to think what inhibits them from getting market share and shortly they will have access to the higher speeds.
617 COMMISSIONER PENTEFOUNTAS: Yes.
618 MR. LITTLE: With the AVP they would have flexibility to create all the pricing models they want, so I don't know anything that would inhibit their success.
619 COMMISSIONER PENTEFOUNTAS: Well, given that they are so creative and innovative, according to some of the statements we have heard, what impedes them of prohibits them from getting to a much higher percentage of market share?
620 MR. LITTLE: After those two conditions are met I don't know anything.
621 COMMISSIONER PENTEFOUNTAS: Is Bell actively pursuing independent ISPs in terms of getting their business?
622 MR. LITTLE: Yes, we actively pursue the ISPs. As I said, we actively pursued commercial agreements and did try to negotiate in good faith, as have they, as I said.
623 We actively pursue their business, we run promotions, we have tried to launch some initiatives that the ISPs previously felt were impeding their business, so we had installation challenges that we didn't do very well, we have launched a full install now that Bell and independent contractors will go in and completely install the service turnkey. We previously had a situation where the ISPs would deliver the modem to the client. We ran some promotions reducing costs of dry loops which were an impediment to their business.
624 So I think if I reflect over the last year we have tried to listen to the impediments they faced and remove them. I think they would answer -- and you could ask them -- that they faced an impediment of not having higher speeds, that has been removed.
625 MR. BIBIC: None of the examples, other than mandated access to higher speeds that Tom just ended with, none of those other examples were mandated by the CRTC.
626 MR. LITTLE: Yes. They are small items, but they are raised in the commercial discourse of items that inhibited their success and we want them to be successful and we resolve them.
627 THE CHAIRPERSON: Excuse me, but I find it hard to listen to you who did not want to have mandated access for higher speeds.
628 MR. LITTLE: Completely understood. Completely understood, Mr. Chairman.
629 THE CHAIRPERSON: Yes, but obviously the key is what your customers want in the future is higher speeds --
630 MR. LITTLE: Yes.
631 THE CHAIRPERSON: -- so don't tell me you are the great benefactor of ISPs. You tried to resist serving the high speed access. We had to have two hearings before we finally --
632 MR. BIBIC: Mr. Chairman, with all --
633 MR. LITTLE: Well, hang on. I believe Bell is on record as saying they wanted commercially negotiated access to FTTN and I wasn't suggesting otherwise. The lack of FTTN was a significant impediment to their business and was my hypothesis, which I agreed with.
634 The other issues that we resolved were smaller issues. I think they are indicative of the point that we are trying to work with them and have an ongoing commercial relationship and respect them as customers, admitting we have differences when we come to mandated access.
635 Completely agree, Mr. Chairman.,
636 COMMISSIONER PENTEFOUNTAS: Well, if you had your choice would you rather sell a gigabyte to a retail client or a wholesale independent ISP?
637 MR. LITTLE: Well, if you had your choice you would rather sell it to a retail client, it's a higher price. But you don't have your choice, we can't sell to all retail clients, we have to have alternatives.
638 COMMISSIONER PENTEFOUNTAS: Well, you can compete. You are free to compete with the independent ISPs; right?
639 MR. LITTLE: Yes. Yes.
640 COMMISSIONER PENTEFOUNTAS: Okay. Thank you.
641 THE CHAIRPERSON: Candice...?
642 COMMISSIONER MOLNAR: Thank you.
643 As was said there, there is general consensus or significant consensus that the new wholesale rating structure should include both an access component and a usage component and I think I heard you say that for the usage component the impact to Bell from a revenue perspective in theory could be the same between a usage component that's based on a 95th percentile or some kind of a congestion basis versus a volume basis; correct? So it's not necessarily about --
644 MR. LITTLE: I don't think we said that. I have --
645 COMMISSIONER MOLNAR: I thought I heard you say that to the Chair.
646 MR. LITTLE: Who said it was revenue neutral?
647 MR. DANIELS: Okay. I think what I said is that underlying the cost study associated we have to make a cost and we have to make some sort of assumption as to what revenues would be generated between the two in order to work backwards. So we use the same -- when we set the rate we had to set it to be the same -- that's how we went about it in terms of we said it's going to be the same, here are the traffic assumptions, and then when we set the rate we used the cost to work that way. So from a cost study perspective the two are -- the same traffic assumptions are designed to be revenue neutral.
648 However, what the key difference is, that we actually think traffic patterns won't be the same under 95th percentile and the costs will be greater under 95th percentile.
649 MR. LITTLE: Commissioner, I would add I have grave concerns that the 95th percentile would be gamed and that we would not end up at all revenue neutral, we would end up with significant usage and not significant economic benefit.
650 COMMISSIONER MOLNAR: When you say "gamed" you are talking about gamed as it relates to the difference in residence versus business or gamed from a different perspective?
651 MR. LITTLE: No, gamed in that I believe that an independent ISP would have quite a motivation to manage their peak and not total usage and we would end up with low peaks and massive total usage.
652 COMMISSIONER MOLNAR: Okay.
653 So just to be clear, if we go to your Figure 1, with your new FTTN network and the $3 billion investment that you have made, you still submit that there are congestion issues at points 1, 2 and 3?
654 MR. CONDON: Yes, that's correct, Commissioner.
655 COMMISSIONER MOLNAR: So when you put in the new FTTN and you augmented the fibre and extended your fibre and everything, there is still congestion at point 1?
656 MR. CONDON: Generally not on FTTN. The congestion on the FTTN network would be more on point 2, point 3.
657 COMMISSIONER MOLNAR: Okay. It did seem to be you have focused quite significantly on the issue that the usage component would be an economic ITMP and the key is to focus on managing congestion on the network. That is both your new FTTN there as continued between 2 and 3 as the congestion and so that is the important element to manage?
658 MR. BIBIC: But, Commissioner Molnar, I think if one takes a snapshot in time and freezes the world as it exists today, then clearly congestion is acute on the legacy network, for a bunch of obvious reasons. It is a legacy network, it's not a fibre network. Most of the users are on it, fibre is new. But that is not to say that just because congestion is acute unlike you see and less acute on fibre that we can blissfully hope that forever that is going to be the case.
659 Clearly as users migrate to the fibre network, which we haven't even finished building, usage is going to explode on that fibre network as well and the same principles that apply for legacy ought to apply to fibre in terms of making sure that the proper signals are sent in the marketplace to manage congestion, to make sure that high users pay more than low users, to make sure we have the incentives to invest. So the same principles apply.
660 As a snapshot in time, there is a difference in degree, but that is going to shift over time as folks move over to the fibre network.
661 COMMISSIONER MOLNAR: Okay.
662 I'm looking at paragraph 22 down as to when you speak about AVP as clearly superior to 95th percentile and you focus on it as a means of managing congestion and you are stating that the AVP -- which is a volume, is a usage-based model, it's a cumulative volume -- better manages congestion than a capacity-based system, a capacity-based measure, I'm hopeful we can all agree that you augment based on capacity and not on cumulative volume.
663 Do you agree?
664 MR. DANIELS: Absolutely, we augment based on capacity, but again the difference is that 95th percentile is not measuring all the various different points of where congestion happens in the shared network. So if you are trying to say what kind of incentive does it create, is we were only focused on the point of interconnection from the ISP, 95th percentile would definitely be accurate, because then you would be measuring strictly on where they interconnect, how much traffic they need and how big do you have to build the pipe for them at that point.
665 But we are not, we are focused, as you know, on points 1, 2 and 3 and therefore our concern is that although you might build it big enough in terms of from a capacity standpoint for their pipe, once you do that they have no incentive to worry about how much they send over as long as they don't exceed their peak, what they have determined as their peak.
666 But our congestion that we have to augment capacity happens all throughout our network at different times, different points in the month, which have nothing to do with the ISP's peak, but doesn't mean -- and this is the key point -- that their traffic isn't causing those congestions where we have to augment capacity at other times of day. So that ISP's users could be part of the reason that we are having -- well, will be part of the reason we are having to augment capacity at other points in the network. That's why AVP we think is more aligned to control those incentives.
667 COMMISSIONER MOLNAR: But AVP, you would agree, is an incentive to reduce total volume and not to reduce volume at peak periods?
668 MR. DANIELS: AVP, that's correct in terms of overall to watch, but it's not -- when you say "at peak periods" I would say as opposed to at one particular peak, at one spot in the month, because that is all 95th percentile is.
669 AVP we think is more effective at reducing over the larger peak period, if you will, of in the evenings, and so on, because they are not worried about just their ultimate peak, they are worried about controlling their volume throughout the day, including at the longer -- you know, if you can use as opposed to the ISP's peak period, the heavy use period of our network.
670 MR. BIBIC: Commissioner, can I go back to Figure 1 I guess.
671 The point is that we have to build to multiple peaks multiple time, different times of day. So if we assume that all the houses here "A" to "F" all belong to one wholesale ISP, if User "A" is causing a peak at 1:00 in the morning, then we may have a congestion at the link at point 1 in this diagram and we have to build to that peak, whereas when they are all going full bore at 8:00 p.m., then that might be causing a peak at points 2 and 3 and that will be reflected in the peak capacity that they need at the point of interconnection, but that doesn't remove the fact that we had to build to a particular peak for house "A" that may be -- obviously this is simplistic, but that may be operating himself at peak at a user at a different time of day.
672 That's the point, we have to build all these different links to the peak that they need, not just build the connection between Bell and the ISP at the HSSPI at peak. That's all that 95th percentile is measuring and it is ignoring all the other facts.
673 COMMISSIONER MOLNAR: I hear what you're saying, but unless you are building your network and measuring the peak for each individual end customer, you know, at the end of this we have to do something that makes sense at an aggregate basis.
674 MR. BIBIC: Commissioner Molnar, it's not going to do very much for us to build the world's biggest pipe at the A-HSSPI to accommodate the biggest theoretical peak one has ever seen if we don't build a pipe at point 1 that's large enough to accommodate what the end users "A" and "B" want to do at that point.
675 So we have to monetize the fact that we want to build to a peak to accommodate the usage that houses "A" and "B" want to make of the internet. It won't do anybody any good if we build the world's biggest pipe at the A-HSSPI and do nothing else at points 1, 2 and 3.
676 COMMISSIONER MOLNAR: Okay. Fair enough.
677 So maybe just help me understand. You are talking about customer "A" is peaking at 1:00 in the morning and you are building that. So he peaks like Sunday, or maybe Saturday night at 1:00 in the morning because he's doing whatever he's doing --
678 COMMISSIONER MOLNAR: But your proposal in order to manage this best is to charge for the cumulative volume of that customer for the entire month, so how is that better?
679 Like cumulative volume is not what you are building to, so how is it better? How is that better to drive down usage through the entire month because you need to build peaks? You still need to build peaks.
680 MR. BIBIC: Back to the Vice-Chair's question, it's not jut about driving down usage, if people want to use the internet we hope they do, but then there ought to be monetization of that, especially the heaviest users paying for their usage of the network.
681 The point is -- Carl, jump in when you feel comfortable here -- we do measure congestion on every single link and we relieve congestion issues on every single link because we are monitoring each and every one. If one of those links becomes hot, we go in there and we fix it and that requires us to spend money and that's driven by the usage of customers, ours and wholesale ISP's end users.
682 MR. CONDON: There are tens of thousands of links on 1, 2 and 3 in the network, Commissioner, and each of those we measure, each of those are relieved as necessary. Each of those has a different peak based upon whatever profile is found in the region it serves. So what we are saying is, measuring one connection at the far right of that diagram doesn't do justice to the job we have at hand.
683 COMMISSIONER MOLNAR: I understand there are multiple connections, I'm just trying to understand why measuring aggregated volumes somehow better addresses the congestion at those multiple connections than measuring on a capacity-based system. I'm having a hard time trying to understand how the cumulative volume of a customer is a better way of managing the congestion than a capacity-based system.
684 You are saying the capacity-based system is limited because you are measuring one point in the network and you have hundreds of them, but aggregated volume does not address peak periods as far as I can tell.
685 So help me understand that.
686 MR. DANIELS: I guess what we are saying what we are saying in that really goes down to it the incentives associated that are illustrated in Figure 2. I think you understood when we take you through that, but I can take you through it again, but it's really about -- the problem with 95th percentile is it doesn't create the incentives for ISP-1 to actually reduce its traffic -- excuse me, ISP-2 to reduce its traffic, whereas the AVP does.
687 So you are asking what is the connection, what is the correlation, why isn't it perfectly aligned to where we peak. If we could we would have a thing that said, "Oh, here, your customer here at 1:00 a.m. in the morning caused us to actually have a new peak for connection point 1 and it was your responsibility and therefore we are going to charge you." No, that is unmanageable, it's not possible.
688 So it's a question of what kind of system do you design that will send overall the right incentives and this system that we are talking about designing allows the ISP to determine if it wants to bother with the incentives and how to do it, but it will, we think, the incented to look at it and say, "Hey, to the extent I can I'm going to control my overall volume, which will, when it makes sense -- you know, because I either pay for it or I will have an incentive to make sure that that ISP doesn't cause -- that I'm not having my end-users cause peak." Is it perfect? Is it perfectly related, no; but is it better related? Is it better aligned in terms of incentives? We believe so because of the fallout of the alternative, which is the 95th percentile which doesn't really solve the problem. That's like theoretically capacity should, but practically when you look at Figure 2 you can see that it's not as effective.
689 That's where were coming from, it's the incentive-based regime.
690 COMMISSIONER MOLNAR: I guess that's a bit of the problem. The incentive to reduce overall volume where that volume may not be creating peaks and therefore causing you to augment your network simply reduces the ability to maximize the use of the network for no discernible cost benefit, as I can tell.
691 So that's where I'm having trouble with what has been proposed here.
692 MR. DANIELS: I mean, everything --
693 COMMISSIONER MOLNAR: We all, I think, can hopefully agree that there is no marginal cost to using the network when you are not causing augmentation.
694 MR. DANIELS: No, I agree with that, but again we can't have a pure price that is purely for when you cause specific augmentation because there is no ability to measure it.
695 COMMISSIONER MOLNAR: Right. It's difficult.
696 MR. DANIELS: So everything is done on averages, right.
697 COMMISSIONER MOLNAR: Right.
698 MR. DANIELS: Everything is done in the aggregate, everything is done on averages and so even the 95th percentile still, you know, is a measure of capacity on average on the assumption it's perfect for that actual link, but when you are trying to connect it to ISP behaviour, which hopefully extends to user behaviour, we need something more -- I don't want to say sophisticated because I don't think AVP is that much more complicated, it's actually simpler.
699 I understand the proposition. We don't have a perfect solution, but clearly we see that AVP is superior and more effective at aligning the incentives with the interests.
700 MR. CONDON: Just to add to what Jonathan said, I think you are right, but it could lead, falsely, to the assumption that there is one peak and every link in the network peaks at the same time, which is not true.
701 So going back to diagram 2, driving up traffic rival rates across the network off the peak will drive up investment across the network for us because it will drive up some of those links that need relief off peak -- off the big peak, because the individual peaks will require augmentation.
702 MR. BIBIC: Commissioner, the paragraph 13 of the Notice of Consultation that kick-started this proceeding says that parties should come forward showing how their model respects the principle that ordinary consumers served by small ISPs should not fund the bandwidth used by the heaviest users.
703 If you look at Figure 2 on the right-hand side, under "95th Percentile", ISP 1 and ISP 2 are paying the same, even though ISP 1's use 39 less capacity.
704 I would submit that ISP 1 users are subsidizing ISP 2 users, because 95th percentile has the same net effect on cost, whereas one ISP has driven far more usage.
705 It's one of multiple models on the table. For all the reasons we have stated, we think that ours is better. Probably none is perfect.
706 COMMISSIONER MOLNAR: I will let somebody else address the statement you just made.
707 I would like to go on to paragraph 33 of your statement, where you are talking about another benefit of yours being that smaller ISPs will not be able to control unexpected temporary spikes in traffic demands, so the 95th percentile causes them greater costs than the AVP model.
708 I found that confusing, as well. I thought the point of the 95th percentile was, where there are unexpected spikes, true spikes, that are kind of an aberration to normal traffic patterns, that is what the 95th percentile addresses. But with an AVP model, you are going to pay for all of it.
709 MR. DANIELS: It's true that the 95th percentile is designed so that you can have a 5 percentile spike that doesn't get counted. It doesn't hit you. What we are saying is, what happens if that spike lasts longer than the 5 percent.
710 We think that with small ISPs, if a major, traffic-driven incident happens, such as a major news event, and people run to their internet and so on, they don't have the tools in place to be able to monitor and say: Oh, oh, I am about to go --
711 This isn't just the one aberration of the 1 percentile, this is going to take me into my 95th.
712 AVP would say: Sure, that extra traffic is going to drive a little bit of extra usage on our network. But that aberration is shared over the course of the whole month, so it is not going to cause extra huge expenses. It is only going to pay for the actual extra usage that it generated, because it is going to be a per-gig charge.
713 Again, for larger ISPs, they can manage this and probably make sure that their 95th percentile doesn't peak beyond what they are comfortable with. The smaller guys --
714 And we didn't say "would", we said "may", depending on the situation -- you know, a royal wedding, a major news event. A couple of things happen in the same month, unexpected -- boom -- they are over and they are getting hit with a lot higher fee than they expected.
715 COMMISSIONER MOLNAR: Could I also confirm, based on the situation that you are talking about, that the small ISPs, who have a regular amount of traffic, so purchase a regular amount of gigabytes, sort of their standard gigabytes, this aberration wouldn't cause them the additional fees because they would be over their normal, and under your model, then, they would be using the higher fees.
716 They would be paying for this aberration based on the higher fee, because it's not anticipated.
717 MR. DANIELS: Yes, I take your point, but they would only be paying -- they would only be paying for the extra gigabytes they are over. With the 95th percentile, they are going to pay as if that was their whole month's usage.
718 So the actual cost differences between them are quite different, and I mean rate differences in terms of the actual ISP.
719 I take your point, yes, but they should pay in that case, from that aberration, to the extent that they actually used the extra usage.
720 Again, we are trying to align it, but should that result in them having to pay a huge extra amount of money because that is the assumed usage for the whole month? That's what we think would be unfair to them.
721 COMMISSIONER MOLNAR: I am going to change, significantly, my line of questioning.
722 At the end we are setting tariffs, and there is an access, a usage and a service charge that are all being approved through this proceeding. There are a couple of questions related to the tariffs that have been filed.
723 I will start with questions on the monthly access rate. You have already talked to Commissioner Katz about what are the cost differences that would cause the rate to change by speed.
724 MR. DANIELS: Could I interrupt, because I have been passed a note that will help clarify. I said that the only difference in costing is related to the pot splitter, and I am going to use your opportunity to segue to correct one other difference.
725 COMMISSIONER MOLNAR: That was an expensive pot splitter, by the way.
726 MR. DANIELS: Exactly.
727 One other key difference that explains -- I'm sorry, I should have used the pot splitter as an explanation between the 16 and the 25, but as between the lower speeds, and 16 to 25 also, the other big cost driver is network conditioning.
728 Network conditioning is us going and getting all of the unbundled -- like the copper, to the point that we still use copper in the network for that last mile of FTTN -- removing bridge taps and cleaning up the copper. We have that cost as a whole, but we allocate a greater percentage of that cost to the higher speeds, because it matters more at the higher speeds to do that.
729 So there is an allocation of our network conditioning costs which spreads more of those costs onto the 16 and 25 megabytes than it does for the 6, 7, 10 and 12.
730 So there are two cost drivers that explain the difference in access. One is the pot splitter, which I mentioned, and the one that I neglected to mention before, which I apologize for, is the network conditioning cost.
731 THE CHAIRPERSON: Mr. Daniels, we are terribly conscious of time. You are way over time. Now, you are important and I am giving you extra time, but please try to keep your answers short. And no more free interjections, just answer the question. Otherwise, we are not going to get this thing done.
732 COMMISSIONER MOLNAR: I will try to keep my questions short, as well.
733 Just because you brought up the issue of line conditioning -- and that's a bit confusing, because it is also a key element within the service charges, and I thought it was contained in your service charges. I thought that was one of the assumptions, that you needed to condition all your lines within your service charging.
734 MR. DANIELS: No, line conditioning is part of the access, it's not part of our service charge.
735 COMMISSIONER MOLNAR: Okay. Could you also confirm quickly, before I leave the service charge, the number of truck rolls that are required to fulfil on a wholesale internet order?
736 MR. DANIELS: With our FTTN, we are assuming that in every case we send a truck out for a full install. As well, the truck will go to the remote, to where the actual node is, in many cases.
737 So there is an assumption as to the amount of time it actually has to go to the node, but then, in every case, it is assumed to actually go with the full install to the actual house itself to do the installation.
738 COMMISSIONER MOLNAR: So it's the same truck, with two stops. There are not two truck rolls.
739 I mean, it's only, what, 600 metres or something. You wouldn't run it twice from the CO.
740 MR. BIBIC: Why don't we come back on that?
741 We will get back to you next Monday or Tuesday on that.
742 COMMISSIONER MOLNAR: Please do. These are questions that we just needed to complete the file, so that we can come out with decisions on a timely basis.
743 MR. BIBIC: I know, but it's just tough to get the details right.
744 COMMISSIONER MOLNAR: Of course, but I will ask the questions, and if you can't answer some of them, please come back with the answers, if that's okay.
745 MR. BIBIC: Absolutely.
746 COMMISSIONER MOLNAR: The other one on access relates to the DSLAM costs. The DSLAM costs in the FTTN build are significantly, significantly higher than the legacy DSLAMs, and we would like some confirmation that these DSLAMs support internet and that there are no costs associated with the IPTV delivery on these DSLAMs that would cause these costs to increase.
747 MR. CONDON: That's correct. There is just one port used for both.
748 COMMISSIONER MOLNAR: And you are going to use this for the wholesale --
749 MR. CONDON: That's correct, yes. It's the same DSLAM for wholesale.
750 COMMISSIONER MOLNAR: And you use it 100 percent of the time? You don't use more than one DSLAM, dependent on the customer's service configuration?
751 MR. CONDON: Are you asking, do we have a different DSLAM for wholesale and retail?
752 COMMISSIONER MOLNAR: Or for certain customers versus others, dependent on their bundle of services.
753 MR. CONDON: No, we --
754 COMMISSIONER MOLNAR: There is just one, and it will be used --
755 MR. CONDON: It's too expensive, Commissioner. We put one in the field and we use the heck out of it.
756 COMMISSIONER MOLNAR: Okay. So if you have a retail customer and all they have done is subscribed to a 5 or maybe a 7 megabyte, whatever it takes to get into your FTTN, you will put them onto that DSLAM, use a port on that DSLAM for that customer, even if they are taking no other IP services from you?
757 MR. CONDON: All of the five services are on the DSLAMs, yes.
758 COMMISSIONER MOLNAR: I have just one more costing related question, and then I will turn it over to others.
759 Over the course of this study, as you know, there have been assumptions made as to how capital unit costs can change over time and grow within the study, and when we look at the results and compare what has been forecast for changes to the capital unit costs -- and maybe just starting with the capital unit costs -- the assumption as to how those costs will change is significantly less than historical results. Capital costs have declined on a per unit basis. I am sure you are well aware that they have declined on a per unit basis over time.
760 Looking forward, the forecasts don't in any way appear to resemble historical reductions in the capital unit cost, and I wonder if you could tell us why that is.
761 What is it going forward that is so different from the past?
762 MR. DANIELS: I don't have that answer right now, so I will take that away, but just so I am clear, you are talking about the productivity assumption associated with the capital unit costs.
763 COMMISSIONER MOLNAR: Essentially.
764 MR. DANIELS: Yes, okay.
765 COMMISSIONER MOLNAR: Capital costs --
766 MR. DANIELS: Something to look forward to next week.
767 COMMISSIONER MOLNAR: So it comes to a per unit, but, you know, ultimately, it is a significant cost driver, and as costs have declined over time, it doesn't appear that you are assuming the same kind of costing improvements going forward. So we would like to hear the rationale for that.
768 MR. DANIELS: No problem.
769 COMMISSIONER MOLNAR: Those are my questions.
770 THE CHAIRPERSON: Thank you.
772 COMMISSIONER DENTON: Good morning, gentlemen.
773 You have all heard of cloud computing, right?
774 MR. CONDON: Yes.
775 COMMISSIONER DENTON: Basically, it's the transfer of the location of computer processing from terminals to somewhere inside the network.
776 Is that a rough approximation of the truth here?
777 MR. CONDON: Yes, I would agree.
778 COMMISSIONER DENTON: Okay. In the evolution of computer usage, we have, basically, costs for storage, we have costs for computation, and we have costs for transport, and under the influence of declining costs for transport, computer computation can move from the terminal to someplace outside the person's premises. That would be cloud computing.
779 COMMISSIONER DENTON: Self-evidently.
780 Answer if you like, but...
781 So if costs of computation are continuously declining, but the costs of bandwidth are going down even more, then computation will shift from inside people's computers to someplace outside the premise.
782 That seems evident.
783 So the question before us today is, what is the most socially and economically efficient way to price transport, so that people can use computers most efficiently?
784 MR. BIBIC: AVP.
785 COMMISSIONER DENTON: Well, that's the question at issue. I'm glad you are behind your message, Mr. Bibic, because that's important.
786 But it seems to me, then, that what we are dealing with here is: Where is computation going to take place, and how can it be most efficiently measured.
787 Now, the congestion problem, which is acknowledged to be real, is your objection to the 95th percentile method based on the notion that it doesn't measure congestion at the right place, that it doesn't measure it at the right places, or is your objection to it on some other grounds, that it's an inefficient measure of where congestion occurs?
788 MR. BIBIC: I think it's the five points in the opening statement, including that it measures at the wrong place.
789 COMMISSIONER DENTON: It measures at the wrong place.
790 MR. BIBIC: Yes, at one point in time, whereas there are peaks that occur and congestion that occurs at multiple points and multiple times of the day.
791 COMMISSIONER DENTON: So you are saying that it measures the wrong thing, or does it measure the right thing, but at the wrong place?
792 It measures congestion, but at the wrong place.
793 MR. BIBIC: Well, it is certainly measuring one thing, but not at all the right places.
794 And your other question was: Do you believe that the 95th percentile is an appropriate way to measure congestion.
795 Put aside where it is measured, does the concept of the 95th percentile appropriately measure congestion?
796 That's the question, ultimately, isn't it?
797 COMMISSIONER DENTON: That is, ultimately, one of them, yes. So give me an answer to that one.
798 THE CHAIRPERSON: Maybe they want to give us the answer when they come back.
799 MR. BIBIC: I think we will give that one more thought. We certainly don't think it is appropriate for the wrong measurements -- measuring at the wrong places. As to whether or not we think it's an adequate, in principle, method of measuring congestion, I think I will need to get back to you on that.
800 COMMISSIONER DENTON: It's an important question, because it sort of goes to the heart of what you are asking us to decide. So we would benefit from your views on this.
801 MR. DANIELS: The only thing I can say is, part of where we are coming from is to align the incentives, which we have talked about. You could perfectly -- if you could -- perfectly measure where congestion actually happened and attribute the person who caused that congestion at that moment in time and charge them accordingly, whoever the end users be, retail or wholesale.
802 You could come up with a methodology for that, but that also wouldn't serve the public policy perspective of, you know, basically saying: If you used the internet at 7:33, at this particular link, it turns out that you are the one who caused us to augment it. Therefore, even though you are not a heavy user and you don't use it at any other time, or barely use it the rest of the month, we are going to hit you up with the actual fee, because it was actually your download of that movie at that particular time that caused it.
803 I guess what I am trying to be careful of as we think about how to answer this is, partly, that there is the conceptual, and then there is also the practical. And where we come from with the AVP is trying to marry the two to align it toward incentives.
804 And our concern with 95th percentile, besides the location, is, could we measure 95th percentile at all of the various different links. Conceptually, that would be perfect, but practically, how would you translate that into charges that would be fair to end users?
805 COMMISSIONER DENTON: Particularly as we have found that most users don't like usage-based billing, they like a steady amount per month.
806 One of the things that is intriguing --
807 MR. BIBIC: I think that is a very, very broad statement.
808 COMMISSIONER DENTON: Yes, it is.
809 MR. BIBIC: We have the most users in Ontario and Quebec, and the number of complaints we get regarding our plans is very small.
810 Now, of course, there was a firestorm of controversy in February --
811 COMMISSIONER DENTON: We noticed.
812 MR. BIBIC: -- and numbers thrown about with petitions, but I don't think that's indicative of users broadly having a problem with the retail plans that we have in the marketplace.
813 So I'm sorry to --
814 COMMISSIONER DENTON: That's a debate between --
815 MR. BIBIC: It was a point of high sensitivity in February and March, that's the only reason I couldn't let it go.
816 COMMISSIONER DENTON: It's a debate between you and Andrew Odlyzko, which would be very interesting to entertain.
817 Now, on the subject of your Figure 2, where you have the blue bar and the red bar -- and I heard you saying something to the effect, Mr. Bibic, that the preference would be to get the red ISP down. With the 95th percentile peak, the incentive is to target the higher consumers and fill up the network.
818 MR. LITTLE: No, Commissioner, sorry, but I don't believe that anyone said that the preference was to get red down. What we said specifically was that the preference was to make sure that those who use the most pay the most.
819 In the 95th percentile, the costs allocated to those two ISPs would be identical. That we have an issue with, because we want the cost of ISP 2 to be higher than the cost of ISP 1 because of that aggregate usage.
820 COMMISSIONER DENTON: That is precisely what is at issue. I have the same sort of reflex in relation to this as, I think, Commissioner Molnar does: Why on earth would we be trying to get bandwidth usage down, which is a proxy for computer usage, in any sense other than just to make sure that the carriers are paid properly to handle the congestion caused by network usage?
821 We have no other incentive in this. We only want to make sure that people are able to use computers freely and cheaply, while, at the same time, carriers get the best possible price for their services under competitive conditions.
822 MR. BIBIC: I did make one -- I did answer, initially, the Vice-Chairman's question in a way that could have reasonably led you to believe that that was our preference, but then Tom did step in and say: It's either that usage goes down in order to allow us to manage congestion, or use as you wish, but those who use more pay more, which allows us to generate the return on the investment, that allows us to continue to invest, so that everyone can continue to use.
823 As long as one or the other takes place, we are okay.
824 COMMISSIONER DENTON: I guess the question, then, is the relative efficiency of the pricing models of AVP versus 95th usage, in terms of getting the users who use most to pay most. That is the question on which we need to be persuaded.
825 I think I will leave it at that. Thank you very much.
826 LE PRÉSIDENT : Michel...
827 CONSEILLER MORIN : Merci, Monsieur le Président.
828 J'ai quelques commentaires que j'aimerais obtenir de vous, mais c'est sous la forme d'un tableau, et j'aimerais... Peut-être, Madame la Secrétaire, si vous pourriez... Je ne m'attends pas à ce que vous répondiez ce matin. Lundi prochain pourrait faire mon affaire.
829 J'ai comparé un service de Bell avec le modèle de MTS Allstream, et j'ai pris un certain nombre d'hypothèses, dont un client gros consommateur puisqu'on est tourné vers l'avenir, et j'ai détaillé tous les différents points, sauf peut-être les frais de service, et je comprends que les frais de service par utilisateur, par consommateur, ce n'est peut-être pas le point le plus important.
830 Ce qui me frappe dans ce tableau, c'est que, évidemment, le prix que vous offrez à vos clients par rapport au modèle de MTS est environ 25 pour cent supérieur à celui de MTS. Évidemment, vous avez peut-être plus d'options, mais au final, il y a quand même une différence de prix remarquable.
831 Avec le système de MTS, les gens loueraient, contrairement au modèle de CNOC, loueraient le tuyau, le "pipe," et c'est à eux, les petits fournisseurs d'Internet, de prendre la décision s'ils ont besoin de telle ou telle capacité par mois.
832 Autrement dit, si vous louez une autoroute, bien, il y aura peut-être 4 000 autos qui vont passer dans l'autoroute, et s'il y en a seulement 200, bien, vous allez peut-être avoir de la difficulté à faire vos frais.
833 Mais ce qui m'apparaît intéressant dans le modèle de MTS, c'est que la responsabilité de faire l'acte de louer incombe finalement au petit fournisseur de service Internet, et toutes les questions qu'on a eues ce matin sur l'utilisation, sur les mesures, bien, avec ce système-là, c'est relativement simple, et je pense personnellement que la facturation pour vous, comme pour les petits fournisseurs d'Internet, serait également beaucoup plus simple.
834 Autrement dit, avec ce modèle-là, on éviterait peut-être, pour l'avenir, pas mal de nids de chicane. Il y a moins de mesures à faire, c'est tout simple.
835 Alors, donc, je vous soumets ces chiffres-là. J'aimerais obtenir vos commentaires lundi prochain. Peut-être manque-t-il quelque chose. Peut-être avez-vous des explications à donner sur le fait que vos prix semblent, pour des grands usagers, supérieurs de 27 à 24 pour cent, suivant qu'on a 100 clients ou 1 000 clients.
836 C'est, pour le moment, mes questions, Monsieur le Président.
837 Je m'excuse. Ce document de deux pages va être mis sur le site du CRTC. Je pense qu'on en a un certain nombre de copies, et j'aimerais aussi que les intervenants puissent en prendre connaissance.
838 Je sais, par exemple, qu'au cours des prochains jours, certains petits fournisseurs d'Internet ont dit, si le modèle CNOC ne fonctionne pas, nous, on opterait pour le modèle MTS.
839 M. BIBIC : Monsieur Morin et Monsieur le Président, on va certainement vous donner une analyse détaillée la semaine prochaine, mais si vous nous permettez de faire des commentaires préliminaires rapidement.
840 THE CHAIRPERSON: I think you should take the time to -- is it clear to you what Commissioner Morin wants? He's not just asking for clarification. Give us the answer the next time and we will really save a lot of time.
841 MR. BIBIC: Yes. I am mindful of time but the reason we would like to, if you would indulge us, make a few preliminary comments is that I suspect this may end up being a point of discussion throughout the week and we would like to get some preliminary comments on so at least the whole discussion for a whole week doesn't happen without you having the benefit of some views from us.
842 THE CHAIRPERSON: Go ahead.
843 MR. LITTLE: Sorry. Mr. Chairman, you asked if it was clear what Commissioner Morin would like and I just want to make sure it is. He would like us to take this away and come back and comment on the analysis, in particular why the pricing, this hypothetical Bell pricing is 24.7 percent higher than MTSA. Is that correct?
844 THE CHAIRPERSON: That is what I understand is the issue, but, Michel, speak for yourself.
845 COMMISSIONER MORIN: The MTS results are lower than those proposed by Bell.
846 MR. BIBIC: But I also take it that you would like our views as to why the MTS model is or is not appropriate, in addition to explaining the price discrepancy?
847 M. LITTLE : Commissioner Morin, je m'excuse, je parle un petit peu le français, mais c'est difficile de répondre en français à une question difficile.
848 I would like to make a few comments though, particularly, Mr. Chairman, because the math will set you free but it's full of assumptions sometimes and --
849 THE CHAIRPERSON: This is Commissioner Morin's question and he puts it forward. This is not a sort of Commission question like the five that we gave you prior to the hearing, okay. So go ahead.
850 MR. LITTLE: Yes. I would just like to say that when we look at mathematical analysis, I think we need to make sure that we incorporate a number of assumptions that I think, in particular two, that get lost sometimes in analysis and those are the following.
851 We enter a new era now where we are talking about on the wholesale side -- at Bell anyway, not for all of our competitors -- of having some usage or AVP charges monetized in the usage.
852 There are two assumptions that have to be made in any financial model.
853 One is the breakage around the usage. So many people come and say, well, I have assumed 100-gig user and I have calculated AVP. But that is not the case. A pricing plan is designed and there is a cap and there is an average user and that is what you are paying on.
854 So caps and usage are very different and the breakage is consumed by the ISP. It has been passed on in this case.
855 So any analysis has to indicate the pricing model of an ISP and it has to indicate what breakage they assume because a cap times an AVP rate is not correct. A cap isn't fully used. The average users are well below it, we know that, in our base. So the AVP cost has to have a breakage assumption.
856 The second assumption that has to go in any model is that when people put together a price plan, as in any case, there are charges for excess or out-of-bucket usage and that revenue has to be assumed as well.
857 So any proper analysis has to deal with all sources of revenue, which is not only the sale of the service but the collection of out-of-bucket usage, and any cost has to deal with not only the access charge but the AVP charge based on usage, including breakage.
858 So I would just like to point out those two issues are often forgotten. They were never relevant in the past, Mr. Chairman.
859 MR. BIBIC: As far as a more detailed response, we will provide it next time.
860 THE CHAIRPERSON: Okay, thank you very much. Those are your questions.
861 Now, we are seriously out of time, which is not surprising because, you know, all of this, as I mentioned, was started by an original Bell application.
862 I am also consciously aware that this afternoon we have scheduled a lot of consumers to intervene by way of videoconference and they will come to our various regional offices. I don't necessarily want to put those people off.
863 So I was wondering, our next intervener is CIPPIC/OpenMedia. That will also be a very lengthy one given that this is essentially the other alternative proposal. And we also have TELUS in between.
864 Would CIPPIC/OpenMedia be averse to being done tomorrow? We will just quickly do TELUS now, then break for lunch, and then this afternoon do the consumers.
865 Who is here for CIPPIC/OpenMedia?
866 MR. FEWER: Yes, we are okay with that.
867 THE CHAIRPERSON: You are okay with that?
868 MR. FEWER: Yes.
869 THE CHAIRPERSON: Okay. Then let's take a very short five-minute break and TELUS can come forward. Thank you.
--- Upon recessing at 1207
--- Upon resuming at 1218
870 LE PRÉSIDENT : Commençons, Madame la Secrétaire.
871 LA SECRÉTAIRE : A l'ordre, s'il vous plaît. Order, please.
872 THE SECRETARY: Mr. Chairman, we will now hear TELUS Communications Company.
873 Please introduce your colleagues for the record and you will have 20 minutes for your presentation.
874 MR. HENNESSY: Thank you, Madam Secretary.
875 Mr. Chairman, just a quick housekeeping matter, just apologies. We scrambled on that and as we sat down here we realized we hadn't put on paragraph numbers yet, so we apologize for any struggle that creates.
876 So, good morning, Mr. Chairman and Commissioners. I am Michael Hennessy, Senior Vice-President, Regulatory and Government Affairs for TELUS.
877 With me on the panel are:
878 - on my immediate right, Brent Allison, Vice-President of TELUS' Partner Solutions;
879 - on my left, Zouheir Mansourati, Vice-President, Network Technology and Planning;
880 - Ted Woodhead, further to the right, our Telecom Policy and Regulatory Affairs VP; and
881 - on my far left, Orest Romaniuk, Vice-President and Controller, Finance.
882 So thank you very much for the opportunity to present at this proceeding.
883 Just before I read from the text, I thought it might be a good idea to quickly summarize what our key position is before we address your questions.
884 So just for the record, currently we do not apply UBB to our wholesale customers. In our view, to date, proactive investments of hundreds of millions of dollars since 2008 have permitted us to offer services on a flat-rate basis, and in fact in the retail market today such new investments have permitted offers, tiers of up to 125, 250 and 500 gigabytes per month depending on speed.
885 So while our investments have allowed us to manage congestion proactively to date, that doesn't mean in our view that volume-based pricing is a valid model. It is a valid model but in our market we think that, you know, the economic and competitive circumstances have not yet required us to adopt an explicit usage model.
886 So into the text.
887 This proceeding was launched to review the manner in which ILECs and cable companies may offer UBB to their ISP customers for residential high-speed Internet access.
888 As you noted, the proceeding originated as a result of a tariff change requested by Bell. We also understand and appreciate the Commission's guidance here that this is about usage-based billing for retail Internet services we provide -- or the wholesale services we provide to our retail Internet customers, and that business wholesale services are not within the scope of this proceeding.
889 So, as I said, it is important to recognize that, to date, we haven't proposed to apply UBB for our wholesale customers. The only tariffs we currently have before the Commission are our proposals for ADSL speed matching, and those are to be offered on a flat-rate basis.
890 So in that context we are acting under the assumption that should the Commission approve a specific UBB tariff for Bell or any other carrier, TELUS will still have the right to continue to offer services on a flat-rate basis if that is what the market in our territory demands.
891 The fundamental principle, though, for any regulated service is that the tariffed rate must recover the costs of providing that service, including a mark-up to recover fixed and common costs and to provide a return on investment commensurate with risk and the requirements of the Commission's Essential Services framework or within the requirements of that framework.
892 So we do not oppose the principle of UBB and we actually reserve the right to adopt UBB if bandwidth demand requires it. UBB is certainly an economically rational way to recover traffic-sensitive costs from the customers that cause them. In fact, UBB has been in place for many telecom services such as long distance and wireless for many years.
893 However, to reiterate again, in a competitive market, applying the most rational pricing model may not be the most commercially viable strategy, depending upon consumer demand and the pricing strategies employed by other competitors.
894 This leads us to the first three questions that the Commission has asked us to comment on and they ask about our position on the appropriate billing model the Commission should adopt for UBB.
895 At the outset, it is our position that an ILEC or cable network provider should be able to choose whether or not to apply UBB for its wholesale Internet customers, provided that the carrier itself has applied such billing for its retail Internet customers, as required by the Commission.
896 Regarding the specific model for UBB, from a carrier's perspective, I think one can be somewhat indifferent to the model chosen for cost recovery as long as any model allows the carrier to fully recover its costs and associated risks. That said, we think some models may be more complex to impose than others.
897 In our view, the choice of a usage-based billing model does not affect the build-out of networks as long as each model fully recovers costs and does not artificially favour certain competitors.
898 However, it is also our view that a peak model may be more complex to manage. We think a peak model can more directly affect back-office system and service requirements such as usage data gathering, billing, customer support systems and records.
899 These system changes would also be very costly and complex, particularly if the recommended approach for residential wholesale customers is ultimately different from future billing practices for business wholesale Internet customers.
900 If one model is to be chosen over the other, the volume-based model, in our opinion, provides a simpler approach and is easier to implement. It requires only the measurement of total usage by the ISP without the added variable of tracking an ISP's usage by time of day.
901 We believe that a peak model may not justify the additional costs of implementation. In fact, in our view, current Internet usage has evolved such that it doesn't really exhibit true peaks that were displayed in the past.
902 In fact, while in the past, Internet usage displayed peak periods that were limited to a two- to four-hour evening period, I think currently all carriers are experiencing a much more continuous or extended period of steady high Internet usage.
903 There are two implications from this data usage profile.
904 First, if the objective of a peak period usage model is to smooth usage such that traffic moves to off-peak times, that objective might be unachievable given that there really isn't any period in the day to which usage will move.
905 In fact, if video is the key driver of increased traffic, it is very unlikely that Internet customers will delay video streaming to the early hours of the morning. The nature of an on-demand Internet service is that people will use their service to consume applications when they want to use them.
906 Consequently, the second implication is that if peak periods don't actually exist, billing ISPs for peak usage will be very similar to billing ISPs for total volume usage. At some point, given that data usage is consistent and high for long periods in a day, a very large portion of usage occurs during a long and sustained period.
908 MR. MANSOURATI: You might ask why some parties are adamant that they require usage-based billing while TELUS does not.
909 The reason in part is a technical one. Not all networks are constructed the same and not all network providers experience congestion to the same extent.
910 Bell has indicated throughout this proceeding that it requires usage-based billing in order to manage congestion that it experiences on its network.
911 To date, TELUS' proactive investments in advanced networks undertaken to respond to competition and to address increased bandwidth demand have made it unnecessary to implement either economic or technical Internet traffic management practices.
912 Having said that, network congestion is certainly a concern. TELUS is experiencing a dramatic increase in data usage by its wireline Internet customers. Our data shows that current retail Internet usage per user is growing by almost 2.5 percent a month, while wholesale traffic is growing by over 3 percent a month. This represents an annual growth rate of 30-40 percent per year.
913 TELUS' evidence in this proceeding shows that the average usage per retail user on our legacy speed tiers has gone from 8 GB per month in January 2008 to over 16 GB per month by the end of 2010.
914 It costs money to respond to this continual increase in demand. However, imposing usage-based billing is not a pressing issue for our company today because proactive investment in network upgrades has allowed us to keep ahead of the growth in usage and demand for the most part. In fact, TELUS has invested over $700 million in our network since 2008.
915 We believe that current growth patterns will continue, with customers increasing their usage of data services and given the plans of many ISPs to pursue variations of IPTV. Therefore, TELUS anticipates the need to continue to invest in network build to address this usage growth, and it is in this context that the need to adopt usage-based billing may arise.
917 MR. HENNESSY: The Commission has asked whether adoption of one model rather than another has any impact on incentives to build out networks.
918 We would say not necessarily. If each model allows the same opportunity to fully recover costs, then the impact on willingness to continue to invest is probably not significant.
919 However, if the objective of any model is to create significant margin opportunities for wholesale ISPs by constraining costs or mark-ups, then all providers, including facilities-based competitors, may shift more traffic to leased networks.
920 With respect to the Commission's questions regarding mark-ups, TELUS is concerned that the Commission may be contemplating changes in pricing principles for wholesale Internet services, all of which were classified as conditional mandated non-essential under the Essential Services decision framework.
921 The Essential Services decision in 2008 separated wholesale services between those that are essential -- meaning that cannot be replicated by competitors -- and those that are not, with different pricing principles associated with each.
922 Only those services that were considered essential and those that are categorized as interconnection facilities were priced at Phase II costs plus a defined mark-up. The other services, because they are not essential and capable of replication, were to have different pricing principles and not subject to a defined mark-up.
923 Forcing down wholesale rates for services that are not essential, in our view, jeopardizes the return on investments made by all network providers and will directly affect the build versus lease decision, depending on the margins created.
924 Further, the problem with reducing mark-ups for non-essential services in a dynamic environment like the provision of Internet services is that adjustments to margins can increase risks associated with recovering investment over time and it is that scenario, in our view, that can undermine investment.
926 MR. ROMANIUK: Thank you, Michael.
927 The Commission has also asked about whether mark-ups should be symmetrical across network providers and whether mark-ups should be changed for legacy ADSL services.
928 These questions ignore the fact that rates for these services have been in place for many years and were found to be just and reasonable.
929 These questions also ignore the fact that regulated mark-ups aren't just profit margins. They represent, for the most part, recovery of fixed and common costs for regulated services and reflect the past and current level of investments demanded by the market conditions in the service provider's operating territories.
930 For monopoly services, a cost plus defined mark-up is justified because the network provider operates facilities that cannot be economically duplicated, i.e. the service is essential. However, the services at issue in this proceeding, wholesale Internet services, are not traditional monopoly telephone services by any stretch of the imagination.
931 Internet services were only made possible by significant capital and labour investments in new facilities and are services for which there are other facilities-based competitors. As a result, these are inherently risky investments in competitive services, services for which TELUS and other network providers are not guaranteed returns.
932 In our view, a symmetrical mark-up removes the flexibility intended for the recovery of costs for a non-essential service. In effect, a symmetrical mark-up would require the Commission to set a specific percentage cap for all carriers, regardless of their underlying costs and market dynamics.
933 Thus, a symmetrical mark-up reduces the flexibility granted to recover costs for non-essential services and results in competitive carriers receiving different revenue streams for these services when they have different costs.
934 Both the retail and wholesale Internet markets are competitive. The Commission has recognized higher mark-ups on competitive services to reflect higher risk. The higher mark-ups for wholesale Internet services, relative to the mark-ups for essential services, take these risks into account.
935 Accordingly, TELUS believes that all of the above factors require that mark-ups be different among service providers.
936 The CRTC has also asked if the same mark-up should apply to monthly access rates and usage rates.
937 While TELUS does not differentiate in this fashion, the Company believes that it could be appropriate to have higher mark-ups for traffic-sensitive components that are difficult to predict, drive incremental investments in capacity and represent a higher risk of investment.
939 MR. MANSOURATI: Thank you, Orest.
940 We would also like to comment on the costs of facilities.
941 Parties have argued that cost studies are inaccurate in that actual costs are always falling because network components and equipment get cheaper and provide higher capacity.
942 This may be the fact for the initial capital cost component. However, due to the rapid change in technology and explosive volume growth pattern, equipment has a much shorter life. In other terms, we have to replace components at a faster rate than before.
943 Additionally, network architectures evolve, which means that the nature of our network investment changes quickly too.
944 We now deploy DSLAMs deeper in the access network and considerably closer to the end customer. The engineering, furnishing and installation share of the overall cost is much higher than when DSLAMs were being installed in central offices. These new costs offset the fact that DSLAMs are less expensive per GB than they were five years ago.
945 We also commented earlier on the growth rates that we are experiencing with data services. These growth rates imply accelerated capital deployments to deal with increased demand.
946 As an example, some ISPs have signalled an interest in using wholesale services to provide BDU video services. If that were the case, it is likely that the amount of traffic-sensitive costs in the wholesale network could see exponential growth relative to current services being offered to end users. In such circumstances, some type of aggregated volume-based pricing may become the fairest way to allocate and recover costs.
948 MR. ALLISON: The tariff we have before the CRTC maintains the flat-rate model that no ISP, to our knowledge, has ever objected to.
949 Wholesale ADSL services have been available via regulated tariff since 2006. Prior to that time, TELUS worked actively with its ISP partners to develop custom and managed solutions so that they could provide downstream products to their end customers.
950 We value their business and have worked collaboratively with them, even before mandatory tariffs.
951 TELUS's proposed wholesale ADSL tariff does not impose any particular business model upon our independent ISPs. For now, our proactive investments have meant that we do not need to apply usage-based billing at this time. And we hope that, in turn, this creates competitive advantage.
952 TELUS has not proposed usage-based billing to date for its wholesale tariff, but it acknowledges that network providers need flexibility to do so, if required.
953 While it is certainly true that competitor ISPs should not be forced to use the same business model as the network provider, they should not impose unlimited style business models upon the network without compensating for the costs of unlimited usage if that requires significant investment to support.
954 That is why TELUS wishes to reserve the right to adopt usage-based billing in the future even though we have no plans to apply this model on our wholesale customers today.
955 MR. HENNESSY: That completes our opening statement. Mr. Chairman, we would be pleased to entertain questions from the panel.
956 THE CHAIRPERSON: First of all, in the second paragraph I think there is a typo there, last sentence: "TELUS understands from the -- that usage-based billing for.." I think it should say residential wholesale internet service. Oh, sorry, my apologies, I just finally understood the sentence. I read it three times. I think you have it right.
957 So that is off the table, you are saying retail is off the table and business is off the table. We are only talking about residential wholesale?
958 MR. HENNESSY: Correct.
959 THE CHAIRPERSON: When you use the expression "usage-based billing," you are using it in the generic original term. It has become sort of associated with the model that Bell put forward and which we approved, which allowed them to impose -- it demands their wholesale customers to impose caps similar as they imposed on their residential customers. That is not what you are using.
960 When you talk usage-based billing, is you are really using it in generic terms if I understand?
961 MR. HENNESSY: We are using it very generically, so it could -- you know, it is basically recovering, it is the idea of recovering traffic, sensitive costs from users, whether that is on a direct usage basis or on some form of volume basis.
962 THE CHAIRPERSON: Now, I noticed you said in your opening statement you don't as yet have the wholesale traffic that demands that you employ some kind of usage-based billing, and but you reserve the right.
963 Now, if you were in the lucky position of Bell, that 17 per cent of your end users and 29 per cent of total traffic of your network was wholesale customers, surely your position would change?
964 MR. HENNESSY: Yes, that is quite possible. The way we laid it out, right, I mean, when we look at that and it is really -- you drive out from the retail market, because if you are not doing something in the retail market you can't do it in the wholesale to begin with.
965 But, you know, you have to determine first is your network at the current point in time sufficiently provisioned so that you can manage congestion, as we are doing today? Because, you know, I would assume that whether or not we have a small percentage of wholesale customers or a large percentage, that the actual internet usage in the market is more or less the same.
966 THE CHAIRPERSON: What are the comparable numbers for you? What percentage of wholesale ISPs and your network serve end users and what percentage of total traffic is it? Do you have those figures?
967 MR. HENNESSY: I will pass that to Brent.
968 MR. ALLISON: Sure. As a percentage of our total HSI it is 4 per cent as compared to Bell's 17.
969 THE CHAIRPERSON: And how much of total traffic does that represent?
970 MR. ALLISON: That is a good question.
971 Zouheir, do you know?
972 MR. MANSOURATI: I don't have a specific number as to how much traffic it represents at this point.
973 THE CHAIRPERSON: Okay.
974 Tim, you had some questions?
975 Sorry, before -- you mentioned there is no more peak and that in effect if you tried to do it on the basis of -- as the SYNOC suggests. You know, you couldn't actually, through incremental pricing, drive from one time period to another because everything is peak.
976 Do you have any numbers for that or some basis for the research?
977 MR. ROMANIUK: We were referring to -- there was an interrog filed in this proceeding. It was the company's 29-April-2011-06, so in reference to that. And I believe our traffic patterns that we have found are very similar to that.
979 MR. MANSOURATI: That is correct. The notion of a limited in time peak is slowly becoming a thing of the past and we are seeing high traffic lasting for an extended period of time, therefore changing the approach that you would take in dealing with it.
980 THE CHAIRPERSON: We as regulators sort of banned from our thinking the idea of peak periods, et cetera. Given that OTT or whatever the usage is by now, as there are no more peaks, it is roughly even distribution across the time periods?
981 MR. MANSOURATI: There are various reasons for it. One is OTT obviously, but there are also services that, in our case, we offer and that are driving also the bandwidth demand higher. But that is correct, yes.
982 THE CHAIRPERSON: Thank you.
984 COMMISSIONER DENTON: Good morning, gents.
985 This is a very simple and comprehensible presentation. First, you are telling us don't impose usage-based billing on us. Secondly, you are saying don't mess with our margins. Thirdly, you are saying we anticipate big growth. And that you need higher profits for traffic-sensitive portions of your network.
986 Am I missing anything?
987 MR. HENNESSY: I don't think so. And the last point, we need higher profits for -- you are talking about the margins, so --
988 COMMISSIONER DENTON: Yes, it says here, "Higher mark-up for traffic sensitive components."
989 MR. HENNESSY: -- I think it is important to point out, right, that your margin isn't simply profit.
990 COMMISSIONER DENTON: Okay.
991 MR. HENNESSY: That it is, you know, the first chunk of your margin is the contribution affixed and common costs. But, yes, we are saying that to the extent that, you know, volume ultimately or capacity is what drives your decisions to invest, whether it is proactively or reactively.
992 COMMISSIONER DENTON: Now, there was two interesting sort of assertions. One the Chairman covered, which is basically the notion that peak periods are somewhat -- well, getting obsolescent given video traffic, which we will explore.
993 And the other one was that the higher replacement costs, the higher turnover of equipment you are now facing overcomes the fact that DSLAMs are now cheaper. Can you get into that for a moment please?
994 MR. HENNESSY: Yes. I will let Zouheir answer that second question.
995 MR. MANSOURATI: Yes. First, from the number of devices that are being introduced in the network.
996 And second, the main meaning really for this statement is to say that if you look at the total cost of deploying a DSLAM we are finding that the electronics contribution to the overall cost is coming down and the amount of labour that is used to deploy those and to service or to deploy the service is increasing overtime.
997 That happens not just in the first implementation or the first deployment, it continues with the fact that we have to consistently and in a much frequent manner go back to upgrade those DSLAMs in order to be able to provide higher and higher services.
998 COMMISSIONER DENTON: Now, you said, "Some ISPs have signalled interest in using wholesale services to provide BDU video services. And if that were the case, it is like the amount of traffic-sensitive costs in the wholesale network could see exponential growth."
999 This was at page 7, about the second paragraph.
1000 And you said, "In such circumstances some type of aggregated volume-based pricing may become the fairest way to allocate and recover costs."
1001 You are not making it easier for us in the sense that as between aggregated volume pricing and 95th percentile peak pricing to make a determination. You seem to be rather mild, not opinionated on that issue.
1002 MR. HENNESSY: Well, the problem is -- I mean, we have discussed it and we have an opinion that would bias towards the volume-based model because of what we said on peak and the fact that there is additional operational cost involved in using the peak model.
1003 But, you know, part of the problem I guess is when you are not actually planning to do something yourself you don't have as much expert opinion as say the Bell panel that came before us that is.
1004 COMMISSIONER DENTON: Fair enough.
1005 So the interesting thing, in a way, is that you are still on a flat-rate model. You say you are making investments to deal with the increase of volume, that there is not merely increase of volume, but maybe even an increased rate of growth of volume.
1006 So do you anticipate that you will be able to keep your flat-rate model going for an indefinite future or do you have a considered opinion on this?
1007 MR. HENNESSY: Well, I will pass it to Zouheir.
1008 You know, we are estimating right now that the growth rate is about 30 per cent, so obviously that is compounded and your investments get bigger and bigger to keep up with that.
1009 I mean indefinitely, I guess -- you know, you go back to the first principle, right? Can you fully recover all your costs if you never did UBB or volume-based pricing? Because if you can continue to fully recover all your costs without doing that, then you don't necessarily have to do it, right?
1010 The only reason you would do that is because you feel that as you continually recover these costs from your customer base, wholesale and retail, that your prices are going up for everybody when maybe only a smaller group is causing it. So, you know, that is where the issue of fairness comes in.
1011 But, you know, pricing is not just about fairness. I think many customers would say, you know, if it is a bit of win/lose, but it is, you know, it is at the margins and we have a flat rate and we are happy with that. We don't mind so much if the guy next door uses more than we do.
1012 And so you have to go back to first principles, right? And in the market we operate in we have massive sized tiers and caps compared to Eastern Canada. I mean, we are at 125, 250 and 500 now, right? That is what your market is about.
1013 So it is -- you know, in some of the tiers it is an order of magnitude greater, right? So that is what drive us, right, is what does the customer want? How do we shrink the gap right now that we have with our major cable competitor in our market?
1014 So the market drives ultimately the decision more than anything else. And as long as you are flat-rating your costs that is fine. It is just at some point because, you know, you are looking at a compounded growth of investment, you may not be able to do that as much.
1015 And then you do have to think about are there trade-offs to be made in terms of customer satisfaction and competitiveness just to manage your costs?
1016 COMMISSIONER DENTON: So you have hit on the basic point. You have massive bandwidth caps and they are large, and you are seeing no problem with that, as I understand. I mean, you have a business model that you say is you are essentially aiming at competing with cable and you have bandwidth bans, price bans, appropriate --
1017 MR. HENNESSY: We have had to make these hundreds of millions of dollars of investment in new plant because the cable companies had a significant lead, you know, a 60 to 40 share lead in the internet marketplace. So we had to make those kind of investments to compete.
1018 Having made those investments, that moved us ahead in terms of the responding to capacity curve.
1019 MR. MANSOURATI: I think I can simplify the picture with three factors. The three of them are external or exogenous.
1020 One is competition. Obviously what the competition is doing will drive what we need in order to maintain or increase our market share. The second has to do with the consumer behaviour. The third has to do with the wholesale service provider behaviour.
1021 On the consumer side they may very well choose to go more and more towards over-the-top content or over-the-top services, they could be cloud-based or otherwise. On the wholesale side they may choose, as we said in our opening remarks, to go towards some type of IPTV service, which will drive a higher usage of bandwidth.
1022 So for these three reasons, and they are different in nature, we would basically reconsider and we would be tracking over time the demand that is coming our way and therefore decide if UBB is necessary or not.
1023 At this point we don't feel it is necessary. But certainly, if you see the trend at a certain point I would say there will be a need to introduce UBB.
1024 COMMISSIONER DENTON: Thank you, Mr. Chairman. That completes my questions.
1025 THE CHAIRPERSON: Marc?
1026 COMMISSIONER PATRONE: Thank you, Mr. Chairman, and good afternoon.
1027 I would like you to address something that came up during Bell's presentation in their comparisons between the AVP model and the CNOC model.
1028 Specifically on the issue of network congestion, which you have discussed a little bit in your own presentation as well, I would like you to address the idea that it is necessary to discipline usage throughout the day rather than simply during peak periods, in other words to address costs.
1029 Because if I go back to Bell's presentation, and they talk about the CNOC model, the peak usage model, that once it reduces that to a level it finds acceptable it has no incentive to reduce its overall usage below that level at any other time of the day.
1030 Do you see a rationale for Bell's argument relative to disciplining usage at other points of the day, other than the points we normally associate with peak?
1031 I hope that question makes sense.
1032 MR. HENNESSY: Yes, I think the question is fine.
1033 You know, our perspective is that, you know, one of the way you try to discipline usage is to try to flatten it and move it out a bit, you know, that is one of the ways. That is less likely of you being able to do that, because I think what is driving a lot of the peak right now or the larger peak is video traffic and people want to watch when they want to watch.
1034 So, you know, arguably you could go to the CNOC model and say, you know, there is no need to charge for off-peak traffic. At the same time, I guess if you got volume-based pricing you are probably saying you are going to put all the costs on the peak users.
1035 So, you know, there is a disproportionately higher -- I don't think it is a greater disproportionately higher, because most of the traffic is peak use. But you put more of the costs on the peak user because you are not putting them on the other user.
1036 Does that make sense or..? I may have...
1037 MR. MANSOURATI: Yes. I could try to address -- hopefully, I will be able to address your question.
1038 Ultimately, our objective is not necessarily to discourage or to push people off using the internet. Our objective obviously is to make sure that their experience is the best they could have.
1039 Having said that, when you look at the behaviour that is taking place neither model is really perfect, so neither 95 percentile nor the AVP are perfect. And in my opinion it is a question of time lag.
1040 For example, in the case of the AVP the argument that was used earlier was that how could you actually correlate the AVP with the peak? Well, you don't have to. What you need to do is ensure that it is leaning to the right behaviour in a sense.
1041 So if the intent of the 95 percentile is to actually drive the right behaviour, which in some cases could be to flatten the profile and therefore allow for a graceful recovery from any congestion in a sense, then so be it.
1042 But in my opinion, the two models are imperfect. And in an imperfect world, we believe that the volume-based model would be easier and simple to implement and allows us to recover on any investment we would have made.
1043 COMMISSIONER PATRONE: Does the peak model, CNOC model, do a good enough job, in your view, to discipline usage?
1044 MR. MANSOURATI: The reason I am saying that the 95 percentile is imperfect in its own right also is that if you were to follow the picture that was introduced earlier by Bell and you looked at points 1 to 3 and then you see the peering point, translating a peak usage by User A at the access of network into a peak usage on the peering point side would be very difficult. It may not result in a peak there, nor could it result in a peak in points 2 or 3 of the...
1045 So therefore, relying on a peak driven by a single user would be difficult to establish.
1046 Now, if you take it to the other side of the network, on the interface between the wholesaler and ourselves, that is where the peak would have to be tracked and measured.
1047 Now, it is easy to say that you could measure and, therefore, you could apply a certain billing mechanism to do so. However, it is very complex to do so, and for that reason we are opting for the volume-based one.
1048 COMMISSIONER PATRONE: Is it justifiable from Bell's -- well, from your perspective, when you look at Bell's proposal in terms of disciplining usage throughout the say rather than simply during certain periods, is that justifiable in your view? Can you make a strong enough case?
1049 MR. MANSOURATI: I believe you could and I would like to make sure that we separate accounting and billing from network engineering. Expecting that using the AVP model or a volume-based model to have a very immediate and direct effect on the way you manage the network, that would not be the case. It is simply a billing mechanism.
1050 There is a different context for managing network and ensuring that you are recovering gracefully from any congestion period.
1051 COMMISSIONER PATRONE: Those are my questions, Mr. Chairman.
1052 THE CHAIRPERSON: Thank you.
1054 COMMISSIONER MOLNAR: Just to follow-up. I was trying to listen carefully, but you were a little quiet, and I want to make sure that I can understand what you have said.
1055 So if I understand what you said, and tell me if I misunderstood. Your proposal should you wish to adopt a usage-base in the future would be the AVP because of the billing efficiency and not because it aligns with your networking requirements in anyway. Is that what I heard?
1056 MR. MANSOURATI: Well, I wouldn't say it this way. What I am saying is that these are two separate topics. Yes, I am advocating volume-based because it is simpler and less complicated to implement and would lead to the same result ultimately.
1057 I would not like to correlate this finding with how we manage our network. And the fact that we are planning, we are proactively observing the network and determining where we need to deploy capacity before hopefully the congestion takes place.
1058 Now, there are certain mechanisms we can apply. If there is a sudden onset of congestion, then we have mechanisms to deal with it in order to protect essential services and others.
1059 Does this address your question?
1060 COMMISSIONER MOLNAR: I think so. It is just I guess, you know, an underlying concern that billing efficiency shouldn't be the key driver, in my view at least, as to why we would implement a system that has direct impacts, or potentially -- perhaps not direct, but potentially impacts consumers' usage of the internet.
1061 MR. MANSOURATI: No, what I am saying is that you could achieve the same result in an imperfect world while using a simpler and more doable approach to billing and accounting. I am not suggesting that it will not achieve your objective.
1062 I can assure you that you can correlate a volume-based mechanism to effectively what is happening in the network. It is not necessarily hiding in anyway behaviour that is taking place --
1063 COMMISSIONER MOLNAR: We have a volume-based mechanism proposed to us today that would do that?
1064 MR. MANSOURATI: We have not necessarily invested the time in developing our views on this particular subject and how we would do it. But I am willing to --
1065 COMMISSIONER MOLNAR: But you have one that you could provide that would not retard or in anyway disincent usage of the network and could be based on AVP?
1066 MR. MANSOURATI: Yes, that is what I believe.
1067 COMMISSIONER MOLNAR: But we haven't seen it on this record.
1068 MR. HENNESSY: Now, do you have a model you could share?
1069 MR. MANSOURATI: No, I don't have a model at this point that I could share. But what I am indicating is that I can -- mathematically speaking, I can see how we can correlate the volume-based mechanism with network behaviour and usage.
1070 COMMISSIONER MOLNAR: Just one more question, perhaps you have answered this. But you don't have usage-based billing at this time.
1071 So while you have said AVP is easier to implement from a billing perspective, given you would be creating usage-based tools first off, how much more significant would be the costs for you to implement a capacity-based system versus a volume-based system? Is it significant?
1072 I mean you are building, you are going to be building, right?
1073 MR. MANSOURATI: Making a guess right now based on my experience in developing various services and the billing related to them, I would say it would take us months, over a year definitely, and it would be in the millions of dollars simply because of the complexity of billing systems.
1074 COMMISSIONER MOLNAR: Thank you. Those are my questions.
1075 THE CHAIRPERSON: Thank you.
1076 Before I let you go, Bell gave us this submission. And figure 3 shows their IPTV network and suggested it is a totally separate one. And really only comes together as a DSLAM on an IPTV. Is your network laid out the same way or is it different?
1077 MR. HENNESSY: I will let Zouheir answer that.
1078 MR. MANSOURATI: Yes, it is essentially the same approach in the sense that we separate internet traffic from TV traffic because of mechanisms that we use to manage the signal through the network. That separation does take place at the aggregation point or the -- what we refer to as the distribution edge, yes.
1079 THE CHAIRPERSON: You use words like "essentially the same," I never know what that means.
1080 MR. MANSOURATI: Pardon?
1081 THE CHAIRPERSON: This chart here-- you said "essentially the same," I don't know what that means.
1082 But in this chart here, could I apply it equally to TELUS as I apply it to Bell or not?
1083 MR. MANSOURATI: What I am saying, yes -- the reason I mean essentially, is that the products are different and the mechanisms that are used within those products to manage subscribers could be different. But from a physical connectivity perspective, yes.
1084 THE CHAIRPERSON: So Bell's point being that whatever they do for internet has nothing to do with IPTV, it is two separate -- we should not be misguided by people who suggested all of this is a ploy by Bell to have sufficient space for the IPTV? You share that view?
1085 MR. MANSOURATI: Yes, I do.
1086 THE CHAIRPERSON: Okay, thank you.
1087 That is all. Thank you very much. We will now take a break and we will come back this afternoon at 2:35.
1088 Madame le Secrétaire, when are the IPTV --
1089 THE SECRETARY: Did you say 2:30, Mr. Chairman?
1090 THE CHAIRPERSON: Yes.
1091 THE SECRETARY: Yes, that is fine.
1092 THE CHAIRPERSON: Okay, thank you.
--- Upon recessing at 1303
--- Resumed at 1437
1093 THE CHAIRPERSON: Madame la Secrétaire, est-ce qu'on peut commencer?
1094 THE SECRETARY: Yes, Mr. Chairman.
1095 Just before we start I would just like to make an announcement for the record.
1096 I mentioned this morning in my opening remarks that Phase I would last five days and, in fact, the Commission anticipates Phase I taking approximately four days and not five, okay.
1097 Also, for the record, the order of appearances has now been amended. So we will proceed this afternoon with the Consumer Panel from our Toronto Regional Office which will be followed by the presentation of BCBA from our Vancouver office.
1098 We will start tomorrow morning with CIPPIC, followed by the Cable Carriers.
1099 THE CHAIRPERSON: Okay.
1100 THE SECRETARY: And we will now proceed with the Panel of Consumers from Ontario. One of them is appearing in person here, Mark Coatsworth, and we have a panel of three persons in Toronto that I will present later.
1101 We will hear each presentation which will then be followed by questions for the Commission to the panel. Each intervenor has five minutes for their presentation.
1102 We will start with the presentation of Mr. Mark Coatsworth. You may now proceed with your presentation. You have five minutes.
1103 MR. COATSWORTH: Hi, everyone, Commissioners, Mr. Chairman.
1104 THE SECRETARY: Can you please turn the mike on?
1105 MR. COATSWORTH: Oh, sorry.
1106 THE CHAIRPERSON: It's on.
1107 MR. COATSWORTH: My name is Mark Coatsworth and I run a small technology services business in Toronto called "Built by Giants". We deal in online-based software and online-based web services.
1108 So I want to present to you today from the standpoint of a small business owner working in the Canadian technology sector.
1109 My main argument is going to be that UBB/AVP fundamentally cripples Canadian businesses and the Canadian digital economy. It does this because it makes us as businesses unable to compete in a rapidly expanding online services market and, as a result, consumers and businesses are turning to the USA for their online services.
1110 So my first argument is that Canadian businesses in the technology services market are already not competitive due to high operating costs. Canadians already pay, according to the latest OECD Communications Outlook among the top-third in the world for internet access.
1111 Now, there is a major shift going on right now in the digital economy. We are experiencing a shift away from traditional retail and cable services, television, telephone and movies and music and we are shifting towards online-based services like Netflix and Amazon, iTunes, iCloud and Skype and such. All these services depend on consumers and businesses having access to affordable high-speed internet.
1112 This shift that I'm describing is going on in the industry right now whether we like it or not. This is a very fundamental thing. Amazon is leading the charge. Microsoft is leading the charge. Apple is leading the charge.
1113 Canada basically has to choose whether we want to take part in this and profit from it or not. I mean from the point of a small business owner, as I mentioned before, UBB/AVP drives up my costs significantly higher. It makes it impossible for me to compete in this online-based services market.
1114 Bell and Rogers have been pushing forward an argument that you should pay for what you use and that they are trying to use UBB/AVP to meet their costs. I consider this a null argument for two different reasons:
1115 First of all, I'm a consumer of TekSavvy ISP. They are a great company. According to UBB and the implementation that was proposed by Bell and Rogers, TekSavvy would have had to charge me an overage fee of $1.90 a gigabyte for excess bandwidth usage, $1.90 a gigabyte.
1116 Now, I want to compare this to my American-based hosting service where I run a lot of my infrastructure. They charge me 8 cents a gigabyte. This is a resold service. They are reselling me their service at 8 cents a gigabyte. This is compared to $1.90 that Bell and Rogers want to charge me for excess bandwidth usage.
1117 Another argument that I just want to make is that even without UBB/AVP implemented, BCE paid a 1.37 percent dividend last quarter. That is higher than all the banks and higher than all the oil companies.
1118 So I do not buy the argument that they need these measures to match their costs. UBB/AVP is fundamentally a gratuitous surcharge. And, as a result, Canadian businesses which are forced to already pay high internet costs and then, as proposed by Bell and Rogers, pay UBB.
1119 We can't compete locally or in the global market. The simplest example of this is that there are no Canadian companies in the online services market. Everything is Amazon, Apple; Google. Canada does not have a single company competing in the space.
1120 Why don't we? We have the PhDs. We have the venture capital. We have the money. We have the economy. We are being fundamentally held back by incredibly high operating costs for internet usage.
1121 My company used to work with an Ottawa-based company called Sibername for our physical hosting and we have since moved to Texas because the Texans are charging us 30 bucks a quarter for what we were paying 90 bucks a quarter for in Canada.
1122 So to conclude my argument, UBB/AVP as proposed by Bell and Rogers, fundamentally cripples Canadian businesses. It makes us non-competitive locally and globally and Canada needs to choose whether we want to be leaders or whether we want to pay America to service us through the digital age.
1123 Thank you.
1124 THE SECRETARY: Thank you very much for your presentation.
1125 Now, Mr. Chairman, we have -- we were supposed to have three other persons at the Toronto office but I believe right now there is only one, and it's Mr. Grayden Laing.
1126 Am I right? Can you hear me well?
1127 MR. LAING: Yes. Can you hear me?
1128 THE SECRETARY: Yes, very well.
1129 So you may now proceed with your presentation. You have five minutes.
1130 MR. LAING: Okay. Thank you, all right.
1131 My first presentation or my presentation is about my business which is an online video business that I set up to market to a Canadian audience.
1132 With user-based billing what I foresee in the economy is that Canadians are going to stop using online video as much as they do now. They will return back to standard practices for viewing such as television, which is okay except for with television you have a lot of areas in the entertainment industry that aren't covered, especially niche markets.
1133 The standard television system is set up to kind of to a general audience because the general audience appeals to the most amount of people and that appeals to the advertisers that want to hit the largest target market. I mean, you can turn on the television and you can see that it is applicable in any situation.
1134 And what I'm doing is I'm creating a business that creates videos that market to niche markets, particularly the markets that I'm interested in seeing, such as animation and artistic-type events because these aren't really covered by Canadians or Canadian media which is sad.
1135 Like, for example, the Ottawa International Animation Festival I didn't really see many media from Canada there. I mean I was there and I did a short little piece on it but I'm just doing it on my own because I'm an animator and I want to promote my own stuff as well as other Canadians that are being kind of curtailed by the system that we have set up in Canada.
1136 Now, I'm going to move on to the section where I see if we keep our internet as it is or improve it but without increasing the costs significantly, we have got a lot of different areas in this world that we can change. The key one is innovation. There are a lot of different innovative ideas that are going on across Canada.
1137 One example is the company I work for and it's called Storewell. What we created was a situation where we stopped materials from being sent to the dump. Because you got into the storage business you have got situations where units will be abandoned by the people that have them and then that material then is left with the storage company and they have got to deal with it. The most effective way of dealing with it is sending it to the dump and just, you know, hiring a bin, throwing it all in and getting rid of it.
1138 They didn't want to do that anymore. So what they created was an online auction system where they would produce videos, post them online and people would bid on the contents and then pick them up.
1139 So you have got a situation where the videos go online, people look at them out of interest because you are always interested in like well, what's going on? What are in these units? And then someone will see it who is interested in it and then they will purchase that unit, clear out the unit and those materials will be back in the Canadian economy.
1140 It's a very creative solution and online videos through YouTube made that happen.
1141 Now, if it's an increased cost to online video production and people viewing the videos, less people are likely to view them, those videos don't get seen. Those containers don't get bought and then it goes back to the dump.
1142 So that's a situation or innovation that I was involved with.
1143 The next one is investment. Businesses are currently hiring production companies like my own, Interstitial Entertainment, to produce online videos for them for people to watch.
1144 If the increased cost of watching videos is prohibitive for people watching videos online, which looks like it will likely happen with the situation that we have set up, then that business will dry up and these productions will go ahead in the States and other countries but Canada will be left behind and I will have to change the direction of my business.
1145 And I think it's a very exciting field because I think videos are very powerful. I mean you don't really hear about like things going viral in text. But videos definitely go viral and a lot of people see them as a great tool for getting information out to people. We all have seen that through our past election how the content was distributed through videos and had a fairly large effect on the outcome.
1146 And then third would be original content. The internet the way it's set up right now where it's affordable, allows people to produce original content and distribute it to an audience that's interested in watching it. If these prices go up, people are going to be less likely to watch original content and they will return to the things that they know.
1147 They may not be as good as what's previously been created but it will be something that they are willing to watch because they know, okay, you know, Brad Pitt is in this film. I know Brad Pitt. I know I like him. That's great. Or Julia Andrews or whoever it is, like it's -- these are the people that will go back to that content and original content will be left behind in Canada.
1148 A great example is somebody who has actually used internet to do this is Patrick Gauvin in Montreal. He has certainly been an inspiration for me in the way that I set up my business because he took online videos and he has created his own company out of it and is now making videos for Disney and Pixar and Lego. That was his last one.
1149 It's very exciting, very innovative, really cool, wouldn't happen if we had the situation that is potentially going to occur.
1150 Okay. Then we move on to dissuasion. People are likely going to stop the internet to do original work if user-based billing is enacted. It's based on psychology. If things are going to cost a little bit more, people are more worried about it than if they were already paid for and it's unlimited. I expect they will stick with content they are already familiar with because they know what they are getting.
1151 General audiences will likely be less inclined to take chances with material that is more difficult or expensive to have access to if people are at a party and watching videos. They can do that easily now. It's not going to cost anybody money.
1152 However, they are more likely to do that when it isn't going to cost money. If it is then they are not going to do it.
1153 Like having a situation where you have already paid for a month and you can watch a clip one time versus 10 allows people to be more interested in videos, watch them again and show their friends. If it's going to cost them extra money to watch each clip again -- and videos are very expensive to watch. We all know this because it takes up a lot of bandwidth or more so than a text document.
1154 However, there will also be -- even if you go back to the month-based billing where you set up a set fee, there are people that are going to stop using the internet altogether. I already have an aunt and uncle who are considering that with the increased costs of the internet as it is, let alone if it increases across the board with this new legislation.
1155 And again, you know, you would have to do a poll to see if this calculation is correct. It's an assumption but I know that it is correct for my friends and my family in Ontario.
1156 And then it is my assumption that also even the minimal view per charge would psychologically dissuade people from watching random clips. Even if they watch one clip they definitely would be dissuaded from watching multiple times or showing people at an expense to themselves.
1157 I'm basing this on the way I would operate in this situation but, again, an organization like the CRTC would have the ability to do a study to see if this applied to the Canadian demographic. If it doesn't then you know my business can go ahead and that's okay. I'm just making an assumption that it wouldn't based on my own understanding of how people work.
1158 THE SECRETARY: I am sorry. I am sorry, sir. Can you please conclude your presentation? Your time is up.
1159 MR. LAING: Sure. Okay.
1160 So in conclusion, if this new legislation goes ahead and wholesale residential high-speed internet fees are increased, then an exciting new media frontier and Canadians' online access to information is going to be limited.
1161 Video production and promotion that is affordable to small businesses and individuals is an exciting new field and I would like to see it supported by the CRTC. This new legislation appears to jeopardize that due to increased costs to internet users who watch online videos.
1162 So please take the time to make changes to the bill so that not only will Canadians who are currently watching online videos continue to do so, but that other Canadians will also be able to afford to watch online content if they choose to do so.
1163 Thank you.
1164 THE SECRETARY: Thank you very much for your presentation.
1165 Just for the record, Mr. Chairman, Mr. Zared Bernstein and Mr. Christopher New are not present obviously, so therefore will not be appearing.
1166 THE CHAIRPERSON: Okay. Thank you very much.
1167 Mr. Coatsworth, you say consumers and businesses alike will turn to U.S.-based providers. I understand it if you are talking in terms of providers of content like YouTube, Google, Amazon, et cetera, but in terms of internet access is that even possible?
1168 MR. COATSWORTH: (Off microphone) Is this thing on? There we go.
1169 In terms of residential internet access presently, no, it's not possible.
1170 THE CHAIRPERSON: So you really are talking about the whole internet economy wanting to make sure that it's accessible at a reasonable price in Canada so therefore it also will then spawn a content industry?
1171 MR. COATSWORTH: I want Canada to have a presence in the online economy.
1172 THE CHAIRPERSON: Okay.
1173 Now, both of you, I presume, are accessing it via Bell or via -- in your case, TekSavvy which is buying its content -- its access from Bell.
1174 And Mr. Grayden, how do you access it right now? Who is your provider?
1175 MR. LAING: I had -- my provider was actually Rogers.
1176 THE CHAIRPERSON: Yes.
1177 MR. LAING: However, I switched over to TekSavvy on account of this whole business.
1178 And what's interesting is the kind of passive-aggressive nature that was taken on by Rogers during that situation in which we are actually using Rogers as a provider for the content but when we switched over to TekSavvy they are subleasing it. But Rogers decided that because they are subleasing it they are not going to pay attention to the memo that TekSavvy sent them that we are actually still on their account. So they sent someone around a month later to actually take away our internet access which was down for a month over the long weekend and Rogers wouldn't send somebody out to fix it.
1179 THE CHAIRPERSON: But this is part of another sub-issue here, is that the ISPs by and large buy from Bell and do not buy from the cable companies. The cable companies are mandated to sell them through something which we call TPIA which we have reformed substantially in the last decision so as to make it much more accessible and much more user-friendly than it was before, before the TekSavvys of this world, et cetera.
1180 I'm trying to make sure that all the various ILECs, whether they be ILECs or cable companies, basically that the load of providing wholesale suppliers should be easily shifted. It isn't.
1181 Have you ever -- I guess what I'm coming to, Mr. Laing, your experience is that you didn't get from the cable companies the kind of service and the kinds of conditions that you wanted and that's why you switched to TekSavvy, because the ISPs are providing you the type of service that you need. Is that what's happening here?
1182 MR. LAING: Yeah, like the user service wasn't very friendly, and then that was a bit sketchy.
1183 Then when this whole user-based billing went through where they were trying to charge more money for a service that wasn't -- I didn't feel it was up to par -- then I don't -- I decided to switch.
1184 THE CHAIRPERSON: But you both seem to be against the principle of user-based billing which in essence means, you know, you pay for what you use. Are you against the principle or are you against the modalities here?
1185 I mean I know you didn't like the UBB that you originally authorized which are now under review but we have different proposals, one by CNOC which is based on peak time and 95th percentile. You heard of the AVP that Bell put forward. We have a cable variation too, et cetera.
1186 Mr. Coatsworth and Mr. Laing, are you opposed to the principle that people pay by what they use or are you opposed to the modalities that are being put forward?
1187 Push the button in front of you.
1188 MR. COATSWORTH: I understand that Bell and Rogers have to maintain a network. That makes complete sense and I'm quite fine with that.
1189 I'm opposed to charges. I'm opposed to the highly excessive charges that they want us to pay for access to that network. So as you were saying, yes, I'm opposed to the modality.
1190 I would like to see a world in which there is no UBB whatsoever. I think that would make the online market a lot more accessible to Canadian business.
1191 But if I were to compromise I would be happy to see some form of billing come in priced proportionally to the cost of delivering service, which is not happening right now.
1192 THE CHAIRPERSON: Okay, thank you.
1193 Mr. Laing?
1194 MR. LAING: For me it depends on how you go about it. If people are willing to pay a larger amount for internet and they are willing to do that, then my business is not affected.
1195 So if it's user-based billing and people are willing to watch as many videos as they were before and people didn't -- companies can continue to reduce video content and all Canadians are able to afford that content, then it doesn't really affect freedom of speech and it doesn't affect my business which I think that you have got two situations going on that I am concerned about.
1196 One is my business but, more importantly, it's freedom of speech and access to information.
1197 I'm more worried about the fact that with these costs increasing the majority of Canadians are not going to be able to access online video content which is important on a business side and a political side.
1198 THE CHAIRPERSON: Freedom of speech and access to information is not exactly the same thing.
1199 MR. LAING: Well, if you assert how people are allowed to say things then I believe you are restricting freedom of speech. I think videos are very important and I think they are a lot more powerful in our society than a written document.
1200 For example, if you look at written documents going viral, I don't think you are going to see an instance of it. If you look at our last election and you see the different political videos that went quote/unquote viral, I think you can see the value for this in our society.
1201 THE CHAIRPERSON: I don't question the value but freedom of speech basically normally is restricted to allowing you to say what you want and nobody here is in any way dealing with freedom of speech. You are talking about the cost of producing videos and the cost of accessing videos which is the same as the cost of accessing newspapers or something like that.
1202 It's not a freedom of speech issue. It's an economic issue. It may be very vital but let's not mix apples and oranges here. We are not talking about freedom of speech.
1203 MR. LAING: But I think if you increase -- like if you are talking about increasing the costs and I don't think anyone is going to argue that the cost of a newspaper is affordable, but I think that they would argue that with the increased costs here people have restricted access to video content.
1204 THE CHAIRPERSON: Yeah, okay, but it's an affordability issue, not freedom of speech.
1205 Anyway, you made your point. Thank you.
1206 Marc -- Marc Patrone, you have some questions?
1207 COMMISSIONER PATRONE: Just a few, Mr. Chairman. Thank you.
1208 As the Chairman mentioned from the get go, of course, this is about wholesale rates set by the regulator. And I do appreciate your views on this and I'm most interested in the degree to which you feel our proceeding is going to have a direct impact on what you do. You have spoken a little bit about that and I will begin with you, Mr. Coatsworth, you run a small business.
1209 I was a little unclear as to whether you were against the basic premise behind paying for what you use. At one point I thought you weren't and then in answering a question to the Chairman I thought maybe you were kind of shifting a little bit.
1210 Do you want to clarify that for me?
1211 MR. COATSWORTH: I believe that the implementation of UBB/ABB that is being pushed forward by Bell and Rogers will fundamentally hurt the Canadian digital economy. I don't like it; I don't want it. I think it holds us back. I think we have a lot of talent that we are not using and that we could use if we had much more affordable access to internet. I also accept that we live in a real world and they have costs of maintaining a network.
1212 So my point of view is I want it gone. I don't think it's good. I think that the cost -- I think that while Bell and Rogers will make a little bit of extra money off of it, it will hold back hundreds or thousands of other businesses and hold back Canada in the global digital market. But like I said, in the real world what I really want to see is I want to see us paying fair price for our internet and not -- and as I pointed out in my cost comparison with the Americans, we are being heinously marked up.
1213 COMMISSIONER PATRONE: What about the concept of managing the network, congestion, all these issues that were raised by presenters beforehand?
1214 I think I will throw that one to you, Mr. Laing, both of you.
1215 Have you run into issues around congestion that you think, "Boy, you know, the networks aren't managing their networks as well as they could be" and that that might lead you to a place where UBB, or something close to it, might helpful in doing that?
1216 MR. COATSWORTH: When I was previously a Bell Sympatico customer I had all kinds of problems, all kinds of problems. Since shifting to Teksavvy I have literally never experienced an issue. I have never experienced any problems and I have been with them for almost 4 years now.
1217 COMMISSIONER PATRONE: So it's an issue of your service provider more so than the network?
1218 MR. COATSWORTH: Well, they are running on the same network.
1219 MR. LAING: Yes, I would say I have the same situation, where you have Rogers who definitely curtail the speed of the Internet during certain times, but now that I'm on Teksavvy, which is actually running on the Rogers network, those feeds aren't being curtailed.
1220 So if it was based on an issue where they were having congestion with the network, then by switching to Teksavvy I should have had congestion at the same time periods and I didn't, therefore they are controlling that network and essentially making an issue out of this that doesn't exist.
1221 COMMISSIONER PATRONE: Mr. Laing, if you are ready to accept the premise that you should pay for what you use and that there should be an element of fairness, is it practical to argue that independent ISPs can realistically offer flat-rate service -- in other words these all-you-can-eat offerings -- and not expect that light users will end up subsidizing heavy ones?
1222 Is that a practical outcome do you think?
1223 MR. LAING: I think what we are also talking about in this issue is the amount of mark-up that Rogers and Bell are putting on this that has already been brought up. I don't understand why in Canada that mark-up has to be so large.
1224 So you are bringing a situation in here, if the numbers that they were giving me and the rest of the Canadian populace were reasonable, I would be willing to consider this. Because those numbers don't seem to be reasonable or based on anything that I have actually seen a number on, then I can't just blanketly accept that.
1225 COMMISSIONER PATRONE: The mark-ups you are referring to?
1226 MR. LAING: That's correct.
1227 So in principle what you are saying would be correct, but because of the way it's being dealt with I don't trust that it's being handled to the best of my interest or anyone else's interest in Canada. I believe it's being handled in the interest of the corporations.
1228 COMMISSIONER PATRONE: Right.
1229 Where do you stand on the issue of disciplining usage in order to mitigate congestion, Mr. Laing?
1230 MR. LAING: I think that if congestion is actually an issue, then I think mitigating usage is a fair way to go about it.
1231 COMMISSIONER PATRONE: But you don't think UBB is the hammer that should be used as far as that's concerned?
1232 MR. LAING: No, I don't believe so, because I believe it's a psychological issue with the way people will perceive it.
1233 COMMISSIONER PATRONE: What's the alternative, Mr. Laing, or is there one that you could think up? Because, if I hear you correctly, you accept the premise that alleviating congestion issues is desirable, but you don't think that pricing is a way to do it.
1234 MR. LAING: I think it's a trust issue, because I don't believe that Bell and Rogers are being honest with us.
1235 COMMISSIONER PATRONE: Mr. Coatsworth...?
1236 MR. LAING: So if I could trust them, then I would be more willing to go along with it and say "Okay, that's okay", but I don't feel I can and I don't feel that all the letters we have been getting over this entire process have been honest with us either.
1237 MR. COATSWORTH: Can you repeat the question, please?
1238 COMMISSIONER PATRONE: No. I can't.
1239 MR. COATSWORTH: Okay, sorry. We just sort of got off track a little bit there.
1240 So we are talking in regards to whether --
1241 COMMISSIONER PATRONE: We are talking about alleviating congestion, because you have both come out and said no UBB.
1242 MR. COATSWORTH: Yes.
1243 COMMISSIONER PATRONE: Yet I think you both say: But congestion is a potential issue that is worthy of addressing.
1244 MR. COATSWORTH: Yes.
1245 MR. LAING: I think it's worthy of addressing if it exists and I don't know that it does.
1246 COMMISSIONER PATRONE: Okay. Well, that's what I asked you earlier, which is do you accept the fact that this exists and that it's a problem?
1247 MR. LAING: I said that based on my experience with Rogers and Teksavvy recently it would make me believe that it doesn't exist.
1248 COMMISSIONER PATRONE: Okay.
1249 MR. COATSWORTH: I agree with Mr. Laing and I would like to just forward the point that if BCE is already posting a 1.37 percent dividend without UBB, then why are they going to charge us more money to alleviate congestion, if it even is an issue? I think they are just hammering consumers.
1250 COMMISSIONER PATRONE: Okay.
1251 MR. COATSWORTH: I believe Bell and Rogers can address those issues within a very comfortable profit margin.
1252 COMMISSIONER PATRONE: Without UBBs.
1253 MR. COATSWORTH: Correct.
1254 COMMISSIONER PATRONE: Okay.
1255 Those are my questions.
1256 Thank you both very much.
1257 MR. COATSWORTH: Thank you.
1258 MR. LAING: Thank you.
1259 THE CHAIRPERSON: Thank you. Those were our questions.
1260 Madam la Secrétaire, let's go on to the next intervenor.
1261 THE SECRETARY: We will now proceed with British Columbia Broadband Association, who will be appearing by video conference from our Vancouver Regional Office.
1262 It is Mr. Bob Allen and Mr. Chris Allen.
1263 Hi to you both. Can you hear me well?
1264 MR. BOB ALLEN: Yes, we can.
1265 MR. CHRIS ALLEN: Yes.
1266 THE SECRETARY: All right.
1267 So you may now proceed with your presentation. You have 20 minutes.
1268 MR. BOB ALLEN: Thank you very much.
1269 Good afternoon, Commissioners. Thank you for giving the B.C. Broadband Association the opportunity to present via teleconference. This is a huge benefit to our small organization of small businesses here in B.C.
1270 My name is Bob Allen, I am the President of the B.C. Broadband Association and the CEO of ABC Communications, one of B.C.'s larger independent ISPs. Our Association consists of about 28 members who are involved in both reselling DSL and in rural wireless broadband situations.
1271 We hope to use this opportunity to express our challenges and issues within the marketplace and assist the Commission -- sorry, am I breaking up here? Is my voice okay?
1272 Can you hear me all right?
1273 THE CHAIRPERSON: I hear you fine, thank you. Go on.
1274 MR. BOB ALLEN: Fine. Good.
1275 The Commission asked us to look at six issues that challenged the Commission in terms of its rulings and so we are presenting along the level of those questions rather than trying to address the consumer perspective.
1276 I would like to add before I start, though, that in British Columbia most of the rural broadband service is provided by our members and our members often charge for the traffic consumed by our consumers once they reach a minimum point. That's because of the economics of world broadband, we don't have the kind of investment that would allow us to offer unlimited systems.
1277 The first issue that was brought forward by the Commission is the issue of a billing model that might improve the regulatory process and allow symmetry between the telephone company systems and the cable company systems.
1278 We have supported the model that was proposed by the Canadian Network Operators Consortium, CNOC. This model proposes service fees based on costing three distinct components within the system, access, aggregation and interface. Such a model for billing and metering separates the broadband components for copper-based broadband access and its associated traffic into these three unique costable areas.
1279 The first component is the physical data port that is delivered at the customer premises. It's provided either by a cable modem or an ADSL splitter and is the consumer and small-business interface to the internet.
1280 The second component is the traffic that has to cross the incumbent's network to be supplied to the consumer. As the Commission is aware, internet access is actually not part of this discussion. Internet access is purchased on the open market, potentially from your incumbent partner, but also from American companies and other suppliers within British Columbia. So we have to pay for our internet traffic to present it to our customers. The only traffic component we are considering here is the traffic across the incumbent's network.
1281 The third piece is connecting to the incumbent's network, which takes a variety of models today, but we would hope that it would move forward to a single connection point model such as is presented to us through our relationship with TELUS here in B.C. So we can reach any of TELUS' network in B.C. and Alberta from our single connection point in Prince George, British Columbia.
1282 There is well established pricing for all three of these components and it's important that if we are going to add a new component, because today we are not charged for traffic across the incumbent's network, we are going to introduce this component, it has to be taken away from the cost of our ports where today it's bundled into the price of the port here in British Columbia, so you buy the port and you buy the interface, you don't buy traffic across the network.
1283 It's fair to say in British Columbia and Alberta it's not the practice of TELUS or Shaw to invoice their customers for the traffic they are consuming. Although they do show traffic caps and limitations, it is not their practice to bill consumers. This creates a difficult situation for the ISP who has to pay for his traffic and who may have to pay for traffic across the network and cannot recover those costs from the end-user.
1284 The second issue that the Commission raised is the usage component and what should be the methods for billing that usage component. Should we be billed for a per-gigabyte transitted across the incumbent network, or should we pay using the 95th percentile system which addresses peak usage?
1285 We favour the 95th percentile method because it encourages the ISP to manage his consumption. Since the issue of network capacity is really addressing the issue of peak consumption and peak traffic areas in the latter part of the day when the consumers begin to arrive home and use the internet, that's the time when capacity has to be built out. If we are given an opportunity to manage those costs ourselves and try to pass usage-based billing based on rate of day or other similar models, then we can hopefully be incented to assist our incumbent partners in managing the network. So we are a supporter of that model.
1286 There are a number of benefits of peak billing versus volume billing that would incent us to be creative and to take advantage of different time of day, different slots and different billing packages. Some of the negative aspects of volume billing is that we would pay an unduly large amount for traffic that was crossing the incumbent networks during off-peak hours when there really is no issue in terms of traffic on the network.
1287 The third issue I would like to address as presented by the Commission is the impact on how we build out our networks and manage traffic.
1288 I would like to say that because of the uncertainty in the business market today, and the uncertainty of the rates and the business models, our members have largely invested in their own rural infrastructure and their own wireless broadband networks as opposed to their urban and retail residential networks. These markets have been in decline in British Columbia for some years as our members have been -- you know, we have not been able to access the speeds available to the incumbents to present to our customers and our retail margins have really not been sufficient to operate a business.
1289 The only significant opportunity we have had has been in the business marketplace and I think Chris is going to address some of the issues that we have with the different rates for business and residential use.
1290 So the model that we would like to see would evolve to a consistent port price that would provide the ISP with sufficient margin to operate and would provide him with business certainty that he could actually begin to invest in these markets.
1291 There are very few B.C. companies that actually advertise into the retail market through various retail marketing models because they really are not active or successful in these markets.
1292 I'm going to pass my presentation over to Chris, who is also a member of the B.C. Broadband Association, and a Director, and he will address some of the other points that the Commission has sought input on.
1293 MR. CHRIS ALLEN: Good afternoon, guys.
1294 Like Bob said here, I'm Chris Allen and I'm President of ABC Communications and one of the Directors of the B.C. Broadband Association.
1295 Just continuing along on some of the questions that the CRTC had asked us to address, the next question was about symmetry with respect to the mark-up costs for all network providers?
1296 I would like to say that we are in favour of regulatory symmetry amongst the providers and, more importantly, regulatory symmetry across wholesale products by adopting the true cost-plus reasonable mark-up type of a model.
1297 Concepts such as the interim pricing that was recently introduced for some of the newer speeds, that reflects a retail-minus type of approach. Those are difficult to administer. You have ever changing retail rates to deal with, there is bundling and promotional things going on that really kind of hide the actual true cost of the internet portion. So we are not in favour of retail-minus, we are definitely in favour of a cost-plus type of scenario.
1298 The cost-plus fair mark-up produces a margin for the incumbent which is set by the Commission so there is no situation where the incumbent wouldn't be making fair profit on this, but it also would guarantee the independent ISPs would be able to purchase those wholesale ports at a rate less than retail.
1299 In a lot of cases today if you really do the math on what an ISP pays for an ADSL port for example, by the time it's delivered to the customer, our costs are, in many cases, more than a retail person off the street walking up, or more likely phoning a call centre, and buying that same port at retail, right. So that's what has really hurt opportunities for ISPs.
1300 Without a margin, we can't, as Bob said, invest in our businesses and we can't grow our customer bases, they will continue to shrink in the retail marketplace.
1301 On that note really, one of the really concerning things that was brought up in this proceeding so far in the tariff application, specifically by TELUS -- our membership of course being B.C.-based we buy our services on the ADSL front wholesale from TELUS, we don't buy anything from Bell in B.C. -- but one of the main points here is the concept of a different price structure for business ports versus residential ports.
1302 Historically those ports have been the same price, the concept being that the actual cost of these ports, whether they are being delivered to a business or residential end-user on our network is identical for the ILEC. So to introduce a different rate for business versus residential creates a situation where you are ignoring a sort of cost-plus, a fixed mark-up scenario.
1303 One of the concepts that was brought about here by that tariff application 391, "A" and "B" and "C" versions of it, was this idea of an extra value perception on a business port.
1304 While I would agree that to an end business user his internet may be more important than a residential user, the actual value that's being imparted onto that business user is being delivered by the ISP itself. We don't get any higher uptime service guarantees, provisioning windows for a business port versus a residential port. That port is 100 percent identical in today's market to the residential or the business, it's only the service address that differs.
1305 The ISP is adding that value to the end-user by providing better call support, more IP addresses for example, more e-mail addresses and more traffic for example in a package to a business person. So that extra value that is being kind of brought about here -- and TELUS' specific tariff application is one we feel that the ISP itself is imparting, so to create a two-tier system where business pays more for -- well, I guess the wholesale ISP or independent ISP would be buying that business wholesale port for more than a residential port doesn't fit within the cost-plus mark-up model.
1306 Business services really have been the one area where ISPs have been able to have a bit of margin. The residential market has been really -- in most markets you will find has been reduced, in major cities anyways, to a duopoly type of a scenario with the cableco and the telco residential retail wholesale ADSL ports are not on the rise. It's very difficult to compete with some of the pricing going on. Like I say, oftentimes it's less than what the wholesale price for the same port is.
1307 So the concept that we might take that away from ISPs and increase their business ports would cause some serious harm to the industry immediately, as that's the only real area where we have been able to grow a bit and find some margins to grow our business.
1308 The next question that was posed to us was should the mark-up apply to monthly rates and usage rates, the same mark-up apply whether billed jointly or separately.
1309 This is an issue I guess what we were talking about here is now that we are breaking the port out and looking at transit across the network, you know, should the same mark-up apply to the basic port as to the wholesale traffic across the incumbent network.
1310 You know, we are okay with the same rate being applied in terms of picking a percentage and applying that, the port versus the traffic. It can be the same because we feel that the actual cost of that transit across the network is such a very small amount, especially if you are looking at it in non-peak hours, that you can add 15 percent to it and it's not going to produce an expensive amount for our cost because the actual cost is so negligible. It's a very small input amount.
1311 So yes, we would be okay with the same percentage provided that, again, it's not going to increase our costs heavily.
1312 The last question that we were asked to talk on was should the principles determined by the Commission in this proceeding, including principles regarding the billing models and the mark-ups apply equally to legacy services or should the legacy services be treated differently?
1313 This is very important to us. The legacy port pricing on the ADSL side has been in effect for, I believe the last four or five years unchanged. It has not shown a great margin for us, especially -- well, specifically in the residential side of things, but it has allowed us to continue our businesses and there have been margins, like I say, on the business side that have allowed us to grow on the business side and to offer some innovative services that way to business.
1314 Anything that's being done to legacy port praising right now that would cause an increase could cause serious implications to the industry. There are many ISPs that are barely hanging on. I think it's pretty easy to argue that there hasn't been growth in the residential, specifically wholesale ADSL market, so to increase those costs to our businesses would cause some serious harm.
1315 For example, if they were to introduce business rates on the existing legacies, you could see an example where a 3 megabyte port sold to an end business -- our cost on that, for business, right now hovers around $20 for the port. If that were to move up into the $40 range, you could see that an increase like that -- you just couldn't sustain that in your business model.
1316 As well, most of our customers we have contracts with, for example, and we have based those on the existing legacy port pricing. Increasing those port prices by a large amount could put us into the situation where we would be, in fact, losing money each month on our customer base, and that, of course, wouldn't be tenable.
1317 So, really, looking at legacy ports, at worst they should stay the same. Really, they probably should go. The infrastructure in place to provision those ports was long ago paid off. They are not, in some cases, really competitive port speeds, in light of the new port speeds that are out there.
1318 So, really, if anything, they should be looked at as coming down lower, especially, as Bob mentioned, if we are looking at charging for the traffic across the network, as well as the port pricing itself. The unbundling effect should reduce the actual port portion of the cost to a lower amount.
1319 That kind of wraps it up. I would just really like to thank you for letting us speak our opinions on this. I think it is a very big moment in time, in terms of whether we decide to increase competition in these markets or whether we want to really move, like I say, more toward a duopoly system, which, I don't think, really serves the Canadian consumers' best interests.
1320 So thanks again, and any questions you have for us, we would be happy to answer.
1321 THE CHAIRPERSON: Thank you for your submission.
1322 MR. BOB ALLEN: If I could make one additional comment, which I think is very, very important, and that is with respect to the loss of existing speeds, which has been considered and contemplated.
1323 Today the 3 megabyte ADSL port is the most common port sold by the competitors here in British Columbia, and were that product to be removed from the marketplace, it would throw us into a serious business challenge, because our customers would not accept the price increase that would be necessary to move them up to a 6 megabyte, and, in many cases, due to the nature of ADSL, they wouldn't actually get 6 megabyte, they would still only get 3 megabyte, but would be faced with a higher increase, and it would be just a mess for small business.
1324 So please do not cancel the 3 megabyte service. Thank you.
1325 THE CHAIRPERSON: Did we suggest in our notice that we were going to do that?
1326 Why are you raising this point? How does this fit into this notice, your last point?
1327 I am not aware that in any of our documentation we talked about doing away with the ADSL service you were talking about.
1328 Has this come up from some of the other intervenors?
1329 MR. CHRIS ALLEN: TELUS proposed removing it in one of its tariff submissions. That's where our concern comes from.
1330 THE CHAIRPERSON: Okay. That's where your concern comes from.
1331 MR. CHRIS ALLEN: Yes.
1332 THE CHAIRPERSON: Okay. Thank you. I wasn't aware of that.
1333 You are buying, mostly, your access from TELUS, I gather. You are not using TPIA at all?
1334 MR. BOB ALLEN: No, but TPIA has -- and, I think, as a result of these proceedings, TPIA has suddenly become more attractive and interesting to our marketplace.
1335 But we must see these proceedings reach their conclusion and see some certainty in the marketplace before we would be interested in taking that up.
1336 But, certainly, there have been some positive moves made by Shaw toward the ISP community in British Columbia, which we think we can attribute to these proceedings, since we really hadn't heard from them since 2004.
1337 THE CHAIRPERSON: But we also changed the terms of TPIA. In our last decision, we made significant changes to a mandated TPIA offering to make it comparable to what you are getting from the ILECs.
1338 MR. BOB ALLEN: And that has definitely made it more attractive as a potential product, but in engaging the relationship, buying the interconnection points, and then proceeding to do the marketing, and attempting to earn enough market share to pay off those costs, one wants to see a bit of certainty, and we are awaiting the rulings on the port pricings that will come out of these proceedings, we assume, and that will be both for ADSL and for TPIA. At that point, our members will then decide whether they wish to make that significant investment.
1339 THE CHAIRPERSON: That takes me to our Question No. 5: Should there be regulatory symmetry.
1340 You said, unequivocally, yes, you want it.
1341 MR. BOB ALLEN: Yes.
1342 THE CHAIRPERSON: I would have thought that you would want to see asymmetry, so that, in effect, you would have better access to TPIA than you have had in the past.
1343 Right now you are, essentially, dependent on TELUS, in your area of the country, and to have a meaningful alternative, you need to have, first of all, a liberated TPIA, or a liberalized TPIA, which hopefully we have done through our rulings. But you want to have, at least, the same rates, or hopefully lower rates than you get from TELUS, so that you have more margin of manoeuvrability.
1344 So I am surprised that you said you wanted to have regulatory symmetry between the wholesale providers.
1345 Can you explain that to me?
1346 MR. BOB ALLEN: Yes. We do agree with the idea of regulatory symmetry, because we think that it allows the Commission to better manage the industry, and that, if there isn't regulatory symmetry, such as before your recent work to try to achieve a better balance, the added costs of working with the cable companies really meant that very few people worked with them.
1347 THE CHAIRPERSON: Yes, but I meant regulatory symmetry in terms of prices. Are you saying that you want regulatory symmetry on prices or not?
1348 MR. CHRIS ALLEN: I think what we are trying to say is, in a cost-plus-markup scenario, if everybody is really showing their cards honestly and they are looking at the port costs for a TPIA service or an ADSL service, a fair margin markup for the ILEC or the cableco on that should still produce a port price to us where both options are valid and have margins that we could market to the public with.
1349 THE CHAIRPERSON: Your basic assumption is that it is going to be a cost-plus situation, so that there would be no UBB in there.
1350 MR. BOB ALLEN: We think that the idea that some component be added to the regulatory model for transit costs across the network -- this was raised by the incumbents as a major issue. We, ourselves, wonder just how important that issue is, but we are willing to address that it does cost something to build the network, so therefore it is not unreasonable to have some portion of the cost attributed to it, but it would be very small.
1351 The average IPTV consumer will use more traffic watching two HD streams than a small ISP during his peak traffic for the day. So, given that the incumbents can supply the video content to their consumers at the peak time of news hour during the day, we do question just exactly how big an issue this network capacity issue is, but there has to be some cost, of course, for building the network, and bearing it in the port price may be inappropriate.
1352 I should also like to point out that one of the things we are facing looking forward, as businesspeople into the marketplace, is the difference between the network designs and the fact that the cable companies' networks can actually achieve higher speeds to the residential marketplace. For our members, we really need to consider improving our relationship with the cable companies, for that single fact.
1353 And, no, we wouldn't expect to pay the same price for a higher speed port from a cable company than from a telephone supplier, but we would think that, roughly, if you were buying a 25 megabyte port, they would be pretty similar. But, in fact, if you are looking at a cost-based scenario, they might not be identical.
1354 Now, the Commission may simply choose to make them identical, and we would not have an issue with that. That would be regulatory symmetry right down to the pennies, and that would make things very easy.
1355 But all of this goes back to that key thing, in terms of having enough margin to buy the internet traffic to apply to it, do your billing, do your marketing, and these other things.
1356 The recent 15 percent less than retail pricing for business on the ADSL ports here in British Columbia does not make a business case. There would be totally insufficient margin there to provide traffic onto that circuit. We would have to go to the open internet and purchase the customer's 100 or 200 gigabytes to put into that business service, and 15 percent would be inadequate. And it is far above what the actual costs are for the incumbent.
1357 THE CHAIRPERSON: Marc, do you have some questions?
1358 COMMISSIONER PATRONE: Yes, thank you, Mr. Chairman; and thank you, Mr. Allen and Mr. Allen, for your presentations this afternoon on behalf of your membership.
1359 The panel here, of course, is obviously tasked with the job of determining which billing model or models should be available to independent ISPs, and you have come out and you have said that you favour the CNOC model. I want to ask you a couple of questions about that.
1360 What do you make of the notion that the CNOC model of measuring peak pricing would be cumbersome and expensive to implement?
1361 Do you have any thoughts about that?
1362 MR. BOB ALLEN: The 95th percentile model is a relatively simple model for billing and often used within the business community in Canada, so I do not think that this is an unusual request.
1363 I think that in order to ask the incumbent carriers to build network infrastructure specifically for the wholesale marketplace does create a bit of a difficult situation, in that the Commission, in order to create a business model, may be asking the incumbents to create infrastructure on which they will lose money, which is perhaps going too far in our requests.
1364 Whereas, if we take a look at how both the incumbent cableco and telco service their customer base, these practices of billing for traffic, and allowing fixed IPs, and managed networks, dLANs -- these are all commercial products that the Canadian business marketplace demands of both of the entities. And they are not building any special models or traffic routing in their network for ISPs, they are simply seeing the ISP as a very large business customer, and a valuable business customer, one would hope, and they are receiving a fair return on their business activities with that customer.
1365 And we would like to move towards a healthy business relationship with these business partners.
1366 COMMISSIONER PATRONE: Well actually, they have come out and said that they have attempted to try and establish relationships with groups like yours as well.
1367 I would like to ask you about whether or not you think if you take them at their word and the CNOC model is implemented and it is more expensive, and ultimately those costs will be passed on to your members and then to your customers, whether or not you think that that type of burden, added burden, might offset any differences that there might be between that model versus another model from your vantage point.
1368 Do you see -- do you want to take that one or --
1369 MR. BOB ALLEN: Well, I think that the issue is that if the costs are presented to the Commission and the Commission accepts, well, these are the costs and therefore we're going to apply a fair business mark-up to these costs, and the end result of that is insufficient margin to make a business case, then we will have all failed at what we set out to do.
1370 So I think it's extremely important to look for models that the incumbents find acceptable, that we find acceptable, that allow them to serve us without losing money on us as customers. We will never be considered to be valuable business partners if we are a constant drain on their resources.
1371 So, you know, I would find it difficult to believe that it would cost my business partner TELUS a serious amount of money to apply 95th percentile business on my network-to-network interface.
1372 This is simply a network port that's provided to them. They can easily measure the traffic on it and present a bill to a business customer. Why would there be special costs associated with me?
1373 COMMISSIONER PATRONE: Okay. What about the argument --
1374 MR. BOB ALLEN: I mean --
1375 COMMISSIONER PATRONE: I'm sorry, finish your thought.
1376 MR. BOB ALLEN: No, well, I'm just pouring passion into it. I don't know if I'm adding any content.
1377 COMMISSIONER PATRONE: Okay.
1378 What about the argument that the 95th percentile provides no incentive to reduce overall usage below a certain level at other points throughout the day as we heard in Bell's presentation? Do you buy the idea that it's important to discipline usage throughout what one would term as non-peak periods?
1379 MR. BOB ALLEN: No. Why would there be a need to manage the traffic on an underutilized network? That's not the particular issue.
1380 And again, I think there's a bit of a red herring out here in terms of what this is as a component of the monthly service.
1381 You know, the traffic, the open Internet traffic plus the transit across the network for both Shaw and TELUS in British Columbia is so insignificant that they don't bill for it to their end users. We can't be talking about a lot of money here.
1382 You know, we pay a significant cost for our Internet access. All we are really talking about is transit across their network and if they feel that there's some issue that, you know, we, the small percentage of the traffic that's going on is impacting their costs significantly, well then, okay, then let's have some 95th percentile billing so that they can encourage us to move to our customers to encourage them to, you know, do their Netflix viewing in off-peak hours.
1383 COMMISSIONER PATRONE: What about
1384 MR. BOB ALLEN: I think
1385 COMMISSIONER PATRONE: Okay. You're familiar with the AVP model. Would block --
1386 MR. BOB ALLEN: That's the model currently used by TELUS here in British Columbia today. It's considered to be megabit-sustained, is the model that's used in B.C. today.
1387 COMMISSIONER PATRONE: What about the concept of block pre-purchasing, which is part of the AVP model, would that be problematic for your members?
1388 MR. BOB ALLEN: I think it's a cash grab by the incumbent if you ask me. Why would we have to throw money onto the table? These are all things that damage the business model. You know, we already use an established amount of traffic.
1389 Our company, for example, pulls about 80 megabits continuously from our provider -- sorry, 80 gigabytes, I should say -- gigabits per second from our provider, and they're aware of our usage. They are not troubled by that usage.
1390 We have to buy increased capacity on that incoming circuit if we wish to go beyond that. So we purchased a gigabit circuit so that we have that capacity and they have the additional revenue from that gigabit circuit that they provided to us.
1391 So I don't -- these block billing things or other issues that get thrown in, they hurt the smaller providers, they stop start-ups, they're really negative for business.
1392 It's very good if you're trying to sit on the top of the hill and push the others off, but I don't see them as something that's actually needed or in fact employed in British Columbia and Alberta.
1393 MR. CHRIS ALLEN: And as well I would add that it is also charging you for those non-peak gigabytes of traffic that are really negligible costs.
1394 COMMISSIONER PATRONE: Do any of the other models, cableco or AVP, allow, in your view, your members to differentiate their products adequately from those of the network operators?
1395 And if the answer is no, I would like you to elaborate on that, because obviously that's a major part of what your members' business cases happen to be, to be able to offer products to customers that perhaps they couldn't get elsewhere.
1396 MR. CHRIS ALLEN: What where the other models, sorry, that you were comparing it to?
1397 COMMISSIONER PATRONE: Well, the AVP model, for instance. I mean you favour the CNOC model presumably because you feel that that provides for you maximum flexibility to differentiate products from others, and I guess I was looking for your comments regarding the other models that were on the table.
1398 MR. BOB ALLEN: I could say that in British Columbia it's very difficult for us to differentiate ourselves from the incumbents in the retail marketplace. We have to pay more for our traffic than they do and we have to match their posted traffic amounts, but we do bill for traffic beyond those amounts because we have to.
1399 So if we are differentiating ourselves, it's by delivering an inferior product. We don't have the business metrics to allow us to provide unlimited traffic, which is in fact the practice of the incumbents. So, you know, allowing large traffic allotments and not applying UBB billing is really not an option for ISPs here in B.C. That will not differentiate you from the incumbents.
1400 The only thing you can differentiate yourself from the incumbents on is a few additional services to business. You can be more timely in your response time to get them going. You can provide backup and redundancy services to differentiate yourself.
1401 But you can't differentiate yourself in speed or in traffic allotments here under any of the models proposed or under the current regime.
1402 COMMISSIONER PATRONE: Including the CNOC model.
1403 MR. BOB ALLEN: And we're not hopeful -- yes. The CNOC model, we support it because we think it gives regulatory symmetry to the Commission and we know that the Commission has struggled trying to deal with a solution for the cablecos and then a solution for the telcos and then try to bring it all to market in real time and have it have an impact, and that's a real struggle.
1404 So one of the consequences of that is these long drawn-out proceedings where -- with no business certainty. You know, we have no investment and the investors in our industry start to look at other places they could put their money.
1405 COMMISSIONER PATRONE: Okay.
1406 MR. BOB ALLEN: So we think it helps the eastern providers and we think it helps the CRTC, but regulatory symmetry is not a major thing.
1407 What has been helpful has been these recent changes, the TPIA model, and the encouragement of the CRTC to the incumbents to show a little more wholesale business has warmed up both TELUS and Shaw towards working with ISPs in British Columbia.
1408 So we do see a positive benefit here, but we won't see the ISPs move forward until this round of discussions has taken place and a final ruling takes place.
1409 And, you know, we're very hopeful that it doesn't actually hurt the existing delicate situation but that it actually, you know, gives business stability and perhaps some small margins by adding voice and by adding other support or redundancy or Web services that we can create business packages that will win us -- actually help us sustain and maybe grow our business markets in retail.
1410 You know, the only way that we can re-enter the retail marketplace is by having an attractive price.
1411 COMMISSIONER PATRONE: Okay. Thank you.
1412 MR. BOB ALLEN: I'm sorry, but that's not me.
1413 COMMISSIONER PATRONE: Thank you, Mr. Allen and Mr. Allen.
1414 THE CHAIRPERSON: Len.
1415 COMMISSIONER KATZ: Thank you, and good afternoon.
1416 I have a couple of questions. I want to pursue a comment you made early on, Mr. Allen, as well as just now, and that is that TPIA is becoming more of an opportunity now for you, but I think you mentioned early on that there's a cost associated with it and you've got to wait for the economics.
1417 Can you expand upon that? What would it take for any one of your 28 members, who I gather are all reselling DSL, to convert over either on a hybrid basis or on an exclusive basis to TPIA? What investments do you need to make? Do you have some costs that you have to write off? How does all that sort of evolve?
1418 MR. BOB ALLEN: Do you want me to take a go at this?
1419 MR. CHRIS ALLEN: Yes, sure, go ahead.
1420 MR. BOB ALLEN: I think that one of the huge costs -- it's not that expensive to purchase the interface to the carrier and to sign the wholesale agreements, and sometimes there's volume commitments in them and that's a bit of a challenge because you're going to have to get to a certain volume of customers in order to keep your costs where you expect them to be.
1421 But it's actually the marketing costs to go out into the marketplace and win customers away from the incumbents towards yourself, and you really have to go to the consumer with a significantly compelling offer in order to swing them away.
1422 The typical compelling offer, of course, is price. Sell everything at cost for a while until you get your customer base up.
1423 But it is actually those marketing dollars which can really harm -- if you have a slim margin, if you're making $3.00 a port on the customer and you're incurring a Vonage-like customer acquisition cost of, say, $300 acquisition, I mean your recovery of your marketing costs on your customer is just way off in the distance. You would never recover your marketing costs. So that's the challenge.
1424 In the early days of the Internet when there was a bit of a greenfield gold rush, whoever got there first could acquire the customer and I really think that's why we have a customer base today, because we were able to convert some of our dial-up customers to ADSL in 2000 and we have managed to keep some of those customers over the last 10 years.
1425 Most of them are -- you know, the account though has declined by about 40 per cent in the last three or four years as the market became saturated and the incumbents began competing against each other, not contract, you know, $60 a month for voice, video and tel. and these kind of things.
1426 They have eroded our market share. And we really don't -- we would have to put significant capital dollars into an enterprise to win that back. And frankly, you know, we have been previously more comfortable to go into the rural marketplaces and build broadband infrastructure on our own facilities where we can recapture -- once the equipment is paid off we actually start to make some pretty good margin.
1427 In the case of DSL, you know, you never pay off the port, you never pay down those capital costs. You know, you just pay and pay and pay. So it is not a very exciting opportunity and you are really have to have some business certainty to go take $50,000 or $100,000 and throw it at the market and see how far you go.
1428 And that is why the outcome of these proceedings is very important, that they do achieve a bit of a margin. They have already done a lot of good.
1429 I have to say these proceedings, even though they have been rolling along for a while, they have been successful, they have kept things from getting worse and they have brought some small improvements and they have sent a signal to the incumbents that they really shouldn't be out there with no wholesale business.
1430 So there is some good things coming out of these proceedings. But the final one, before anyone is going to start to invest, is your final ruling on port prices for both the cablecos and the ILECs.
1431 COMMISSIONER KATZ: So are you saying that if you are a DSL reseller your target market is existing DSL customers and your proposition is lower price and perhaps better service levels at the customer service level? And if you were to move over to being a TPIA house your target market would be existing TPIA customers with the same business case, lower price, better customer service?
1432 MR. CHRIS ALLEN: I don't think there is really a differentiation in the marketplace itself, whether you are a cable or a DSL customer or you are an internet customer. And most consumers I think in Canada would consider themselves internet customers first, whether they were getting it ADSL or cable. So that wouldn't really impact who you would be marketing towards I don't think.
1433 I think there is some costs -- Bob talked about the marketing costs of switching a TPIA. But there would also be a lot of costs where you would be taking on a whole new head-end network infrastructure for the cableco. So if you are only going to pick-up 50 or 100 customers to try to pay off that new portion, new cost to your overall head-end operating costs, that makes it tough.
1434 I mean, to switch our network as it is built right now, which is focused towards ADSL, to start offering TPIA services, we would end up with redundant pieces. So we would be paying for now a new head-end ADSL, head-end cable, and unless there was enough customers coming through in on this new cable infrastructure to offset those costs, then that would be another difficult switch to make.
1435 But like he was saying, you know, I mean the cablecos have been warming up to the idea of starting to do more wholesale business here. So if they have to incent us by lowering their prices further, than that could be a good thing for competition.
1436 COMMISSIONER KATZ: So Chris, throw out a number, what size cheque would you have to write if you wanted to go into the TPIA business?
1437 MR. CHRIS ALLEN: If we were to today go over and sign a new deal with Shaw to start offering TPIA ports in B.C., you know, if we looked at all the labour costs and marketing costs and new fixed monthly costs, there would be ongoing re-occurring costs. I don't think $25,000 would be at all out of ordinary, maybe higher. It would be basically ongoing costs, probably the head-end and your traffic through their network, that piece of it.
1438 I mean, I don't have a quote from Shaw, but guessing that you would be paying at least $5,000 to $10,000 a month on a small operation in new costs each month just to do that.
1439 COMMISSIONER KATZ: Okay, those are my questions, Mr. Chair.
1440 THE CHAIRPERSON: Thank you.
1441 Tim, last question?
1442 MR. BOB ALLEN: Could I make one comment which hasn't really come forward yet here in this whole process? Would that be appropriate?
1443 THE CHAIRPERSON: Go ahead.
1444 MR. BOB ALLEN: One of the things that was considered prior to us reaching the more intense portion of these discussions is that the incumbents would be allowed to produce carrier-specific agreements with their business partners, which may offer below tariff pricing.
1445 And that was actually being discussed and contemplated by some parties within the industry prior to the uncertainty of awaiting this decision.
1446 And I believe that that is an important aspect towards a healthy industry going forward, is that the carriers be allowed to do that with their business partners as a piece of this final ruling, that we still be allowed to come back to the Commission having forged a carrier-specific agreement with one of the incumbents and have permission to --
1447 THE CHAIRPERSON: Let me stop you right there.
1448 You are talking about business, right? You are talking about business. This hearing is only residential wholesale. Business wholesale will be done on a separate track in writing and you can make those submissions there.
1449 MR. BOB ALLEN: That is right, okay.
1450 THE CHAIRPERSON: But here, for today, and the whole discussion it is really residential wholesale.
1451 MR. BOB ALLEN: Sorry, I did bring it up. But I think that residential ports can also be marked down below tariff by the incumbents under certain regulatory arrangements with the Commission. And I believe that that is really how we would get to where there is significant penetration by the wholesale market, would be by allowing those incumbents to offer us residential ports below tariff.
1452 THE CHAIRPERSON: I see. So you would like to see a ruling that at the end of the day we set -- whatever model we do, and we set the rates and we also allow people to opt out and make separate arrangements? Is that what you are saying?
1453 MR. BOB ALLEN: I am saying that. And I think that the Commission has contemplated that previously, and that that is possibly a very good tool that will take the business from minimal participation to significant participation.
1454 THE CHAIRPERSON: Okay, thank you.
1456 COMMISSIONER DENTON: So good afternoon, gents, I am back at the vexed question of whether the best way to deal with congestion is some sort of measure based on 95th percentile or someway of pricing based on average aggregate volume.
1457 And the Bell objections to 95th percentile were essentially that it was either the wrong measure or, if measured in a certain place, didn't measure congestion at all the points in the network at which it occurs.
1458 You may not have heard this morning's testimony, but essentially their concern was that where the congestion would be measured, which is the interface between -- well, at the interface where it was measured was not an adequate basis for understanding the impact of their traffic on the network.
1459 Now, do you have a comment on this?
1460 MR. BOB ALLEN: I think that that is a legitimate argument, that when they look at where they have a problem, where they have to go and write a cheque to fix a congestion problem, it may be quite well-removed from where the ISP is located.
1461 However, at the same time, I don't see that the AVP model addresses that in any particular way either, it just allows them to potentially raise more revenue from the ISP.
1462 And, you know, I am envisioning, you know, fractions of a penny per gigabyte as a fee for these types of services. As you know, you can buy traffic on the open internet in certain places for 8 cents a gigabyte. You know, we would be talking very very small amounts of money for what it costs to move it across the incumbent's network.
1463 Again, I go back to, you know, the traffic consumption on the incumbent's network is caused by IPTV viewers to standard user is not paying additional amount this month to have two HD streams going to his house.
1464 And at the end of the evening, if you add up his traffic it is far more than the 50 or 60 gigabytes that we would be giving our customer. And the 50 or 60 gigabytes might cost us 6 cents or 8 cents to move across their network.
1465 So, you know, trying to get this in proportion in terms of what it really costs an incumbent to move the ISP traffic across the network has to be held in relationship to what the incumbent is actually trying to do with its own network for its own purposes, which is competing in the video marketplace.
1466 And while they are all legitimate arguments, I think they are blown out of proportion.
1467 COMMISSIONER DENTON: Blown out of proportion in your view because essentially given the uses they are making of their network to transfer large amounts for IPTV that we are losing sight of this important fact.
1468 Is that the concern you would have?
1469 MR. BOB ALLEN: Yes. We are loosing sight of the fact that this is a tiny cost. Yes, there is an issue. Yes, there is congestion. But who is really causing the congestion, the IPTV consumer with the two HD streams or the one tech savvy customer, you know, who is reading his email?
1470 COMMISSIONER DENTON: Good, got it. Thank you.
1471 THE CHAIRPERSON: Okay. Thank you very much.
1472 Those are our questions for you. Thank you for participating. I think it has been very useful for us to hear from an umbrella association like yours representing the ISPs and what your concerns are.
1473 Madame le Secrétaire, I think that is it for today?
1474 THE SECRETARY: That is it for today, Mr. Chairman.
1475 Just for the record, I would like to say the panel of Primus and Distributel will be appearing on Wednesday morning instead of supposedly tomorrow.
1476 So the order of appearance for tomorrow should be: CIPPIC Cable Carriers, CNOC, and the consumer panel from the Western provinces.
1477 We will resume tomorrow at 9:00 a.m.
--- Whereupon the hearing adjourned at 1600, to resume on Tuesday, July 12, 2011 at 0900