ARCHIVED - Transcript, Hearing 5 October 2011
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Volume 2, 5 October 2011
TRANSCRIPTION OF PROCEEDINGS BEFORE THE CANADIAN RADIO-TELEVISION AND TELECOMMUNICATIONS COMMISSION
Review of price cap regulatory framework for NorthwesTel Inc. and related matters
The Yellowknife Inn
5010 49th street
Yellowknife, Northwest Territories
5 October 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 price cap regulatory framework for NorthwesTel Inc. and related matters
Anthony McIntyreLegal Counsel
John MacriDirector, Telecommunications Policy
Christine BaileyHearing Manager and Manager, Telecommunications Policy
The Yellowknife Inn
5010 49th street
Yellowknife, Northwest Territories
5 October 2011
- iv -
TABLE OF CONTENTS
PAGE / PARA
1. Government of the Northwest Territories403 / 2258
3. Government of Yukon428 / 2416
4. TELUS Communications Company458 / 2598
5. Utilities Consumers’ Group478 / 2701
6. PIAC/CAC (Public Interest Advocacy Centre (PIAC) and the Consumers Association of Canada (CAC))482 / 2738
7. SSi Micro Ltd.491 / 2779
8. NorthwesTel Inc.535 / 3007
- v -
PAGE / PARA
Undertaking419 / 2351
Undertaking517 / 2908
Undertaking570 / 3188
Undertaking584 / 3286
Yellowknife, Northwest Territories
--- Upon resuming on Wednesday, October 5, 2011 at 0902
2247 THE CHAIRPERSON: Good morning, ladies and gentlemen, and welcome to this public hearing.
2248 THE SECRETARY: Good morning, Mr. Chairman, everyone. Are we ready to start?
2249 So we will now proceed with Phase II of the hearing, where parties will present their oral rebuttal argument in the order set out in the agenda.
2250 Before we start, I would like to go over a few housekeeping matters to ensure the proper conduct of the rebuttal phase.
2251 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.
2252 We would ask that you please turn off, and not only put on vibration mode, your smartphones and beepers as they cause interference in the internal communication systems used by our interpreters and translators.
2253 During this phase, regardless of whether they are presenting oral rebuttal argument, participants may be called upon at any time to answer questions from Members of the Panel in light of another participant's submission.
2254 For technical reasons and in order to facilitate the work of the court reporter and interpreters, we would ask that those participants who are not sitting at the front presentation table identify themselves every time they are asked to respond to questions from Commissioners.
2255 It is also important that you turn off your microphone when you are not speaking to the Commission in order to avoid interference in the audio system. We appreciate your collaboration in this matter.
2256 Now, Mr. Chairman, we will proceed with the presentation of the Government of the Northwest Territories.
2257 I would ask that you please reintroduce yourselves for the record and you have 10 minutes for your oral rebuttal.
2258 MR. HEFFERNAN: Thank you. It's Dave Heffernan from the Northwest Territories, CIO.
2259 With me I have Laurie Gault, our Director or Technology, and Linda Maljan, our Corporate ICT Policy Analyst.
2260 Good morning. To start our rebuttal, Mr. Chairman, Commissioners, I would like to point out that in many cases opposition voiced yesterday or in the parties' September 2nd submissions to particular positions taken by the GNWT originate from a desire to limit the size of any subsidy paid to NorthwesTel.
2261 I would like to say that we certainly share in the view that any subsidy payments should serve a valid purpose and should not be excessive.
2262 We do not think, however, that the current or proposed size of the subsidy is so large as to warrant inordinate concerns simply on that account.
2263 I'm told that in the 1980s the size of the subsidy from toll to local service was in the billions of dollars and that today that subsidy has been largely eliminated and has been replaced by the National Contribution Fund subsidy, which today totals around $200 million or in the order of one-tenth of the former subsidy amount.
2264 This is funded through a levy of less than one percent on telecommunications revenues. And, of course, only about one-tenth of the total subsidy amount flows to NorthwesTel.
2265 We do not feel that the ask is excessive in this context given the unique requirements of operating in this high-cost serving area. The questions should not focus on the size of the subsidy but on whether the proposals achieve the broad policy objectives of the Telecommunications Act.
2266 We would suggest, however, that when considering whether increased subsidies or higher local rates to northern consumers are necessary the Commission should also examine NorthwesTel's financial situation and ask whether such increases are in fact necessary.
2267 We do not have access to the detailed financial information necessary to answer this question but we did find the exchange between Mr. Flaherty and Chairman Katz that occurred yesterday very informative and would agree that to the extent NorthwesTel's unregulated businesses are reliant upon its network that those businesses should be expected to defray a portion of its costs, rather than requiring that such costs automatically be recovered through higher rates and increased subsidies.
2268 This is particularly true given that for one of the major unregulated services offered by NorthwesTel, that being broadband service, competitive options are extremely limited.
2269 Let me now move to the issue of local competition.
2270 I'm glad to see that there has been unanimity among all parties, other than NorthwesTel, that local competition must be permitted in the North.
2271 Only NorthwesTel has taken a contrary position and the main reasons it has given are that it would be extremely costly to implement and that it would threaten the existing cross-subsidy -- stated yesterday by Mr. Flaherty to be in the order of $10 million per year -- from Whitehorse and Yellowknife to other communities.
2272 Mr. Flaherty went on to say that if the cross-subsidy issue could be dealt with, then he would welcome competition in Whitehorse and Yellowknife.
2273 With regard to the cross-subsidy issue, let me just say that the $10-million figure quoted by Mr. Flaherty is one that we don't recall seeing before and have seen no evidence in support of.
2274 Neither have we seen any quantitative evidence as to how much of this cross-subsidy would be threatened by local competition.
2275 Our understanding was that for residential local service in Yellowknife and Whitehorse rates are pretty close to costs and that much of the purported subsidy relates to toll or data services for which competition is already permitted.
2276 For Whitehorse and Yellowknife, and possibly several other of the larger northern communities, the costs of modifying NorthwesTel's network are also fairly limited. Our view has not changed: Local competition with local number portability should be permitted in these centres at once.
2277 We also believe that competition in smaller centres should be permitted immediately, though we accept that special conditions may, at least initially, need to be put in place for this purpose.
2278 We are not in a position to specify exactly what those conditions should be but have noted SSi's proposal to initially forego local number portability and the Commission's approach in the South for certain SILECs, requiring that they absorb a portion of the start-up costs the incumbent telco must incur to allow local competition. We are confident that approaches which work for the North can indeed be found.
2279 Regarding the argument raised by Mr. Flaherty that customers of competitive local service providers might not receive caller ID services from the competitor, the SSi representatives suggested this might not be accurate.
2280 Even if it were true, however, the GNWT notes that no customer would be required to move to a competitor and could clearly choose not to if the competitor's service offerings did not meet their particular needs. As was mentioned yesterday, when there is choice, consumers can vote with their feet.
2281 On the subject of residential local rates, there was also broad agreement that it would be inappropriate to increase rates beyond the thresholds that have been established for all other Canadians, meaning that at this time no rate increases should be allowed.
2282 Contrary positions were taken only by NorthwesTel and TELUS, neither of whom have given an explanation of why the local rate threshold established in the South, including for high-cost areas, should be abandoned for northern subscribers.
2283 The fact cited by Mr. Flaherty of NorthwesTel that TELUS charges a slightly higher rate in some locations is irrelevant. The TELUS rate, in excess of NorthwesTel's rate of $31.33 per month, was in place prior to the issuance of Telecom Regulatory Policy 2011-291 and pursuant to 2011-291 may not now be increased prior to 2014.
2284 One of the cornerstones of Decision 2011-291 was to deal with just such instances and to prohibit any further increases in those rates, such as NorthwesTel's, which have already exceeded the $30 threshold.
2285 The GNWT strongly opposes any increases to residential local rates at this time and would continue to do so even if, as suggested by Commissioner Simpson, some guarantees with respect to service quality were to be made.
2286 With respect to business local rates, again it was only TELUS and NorthwesTel that argued in support of any rate increase at this time and we have yet to see any convincing evidence that such an increase is either justified or necessary.
2287 By contrast, the presentation of the Yukon Territorial Government made a persuasive case that such increases would negatively affect business users.
2288 Regarding satellite toll connect costs, only PIAC/CAC opposed removing residential satellite toll connect costs from the Carrier Access Tariff and instead recovering them through the residential local rate subsidy process.
2289 PIAC/CAC's position, as set out in its September 2nd submission, is that:
"Toll connect costs are not access related costs and, as such, should not be funded to the residential PES subsidy requirement." (As read)
2290 PIAC/CAC repeated this argument yesterday but, in our view, it is simply wrong. The Commission has already found that these facilities are a natural extension of the local network and their costs should, contrary to PIAC's position, be assigned to the access category. As such, they should logically be included in the calculation of local costs and not recovered from the Carrier Access Tariff and ultimately from long distance rates. Our only question is why the Commission has not already made the required adjustments.
2291 TELUS was also alone in suggesting a phasing out of the SIP1 subsidy and in arguing that no funding should be provided for a further SIP2 program.
2292 With regard to TELUS' SIP1 argument, we would assume that when TELUS makes an investment it does not cease charging for the service the investment provides when equipment is fully depreciated, but continues to try to recoup maintenance operating and other expenses in an amount sufficient to fund any replacement equipment it may require.
2293 Similarly, there are ongoing costs associated with the service improvements embodied in SIP1 and ongoing subsidies will be required until such time as technological and service developments arise that obviate them.
2294 With regard to SIP2, we believe subsidy funding for the extension of enhanced services is appropriate, given that such services are basic.
2295 At the same time, we do understand TELUS' position that this program could be funded through NorthwesTel's capital investment program and note that this is consistent with our recommendation that even if no subsidy is provided NorthwesTel should be directed to extend the provision of enhanced features to all communities.
2296 There are number of other issues on which we intend to provide comments in our final written arguments. For now, however, Mr. Chairman, Commissioners, those are our comments.
2297 We thank you for your attention and would like to extend the gratitude of the Government of the Northwest Territories for your decision to provide us with this opportunity to present our views.
2298 Thank you.
2299 THE CHAIRPERSON: Thank you very much.
2300 A question for NorthwesTel.
2301 Are you at liberty to expand upon the $10 million estimate that you referred to in your opening remarks yesterday? Can you provide some insight as to what that comes from and where it goes?
2302 MR. FLAHERTY: Yes, Mr. Chairman.
2303 Just very briefly I will just give you a quick overview.
2304 So we have identified a minimum of 10. We believe there's more than 10, but the 10 that we have identified to support services in high-cost serving areas are $2.8 million for residential satellite toll connect links, as we have talked about previously; $3.9 million to support the business side of satellite toll links; and $3.4 million to support the business in Band H1. So again, Band H1 the business rates are not compensatory with costs in that band. So those numbers would come up to approximately $10 million.
2305 THE CHAIRPERSON: So what would happen if we accept NorthwesTel's proposal to reduce the satellite toll connect charges for res or even for bus? Where would that money go?
2306 MR. FLAHERTY: The proposal that we put on -- particularly with res, we propose that we would reduce the CAT by an equivalent amount. So the money would come from this National Contribution Fund to support those services, an explicit subsidy as Commissioner Simpson was talking about yesterday, and then the offset would be a reduction in CAT.
2307 THE CHAIRPERSON: And that's the $10 million cross subsidy that you were referring to?
2308 MR. FLAHERTY: Yes. Just to be clear again, the $10 million, where it comes from, this is the need for subsidy, so the need comes $2.8 million res satellite toll connect; $3.9 million satellite business toll connect, so that's $6.7 million I think; and then the business band access services $3.4 million.
2309 THE CHAIRPERSON: Okay.
2310 Do any of my fellow Commissioners have any questions?
2311 Commissioner Simpson?
2312 COMMISSIONER SIMPSON: With respect to your statement regarding local competition I have two questions, one for you and one for our presenters at SSi.
2313 In analyzing the expenditures of the respective governments in the north, it seems that the Government of Nunavut is moving toward the system that's being -- or the competition that is being provided by SSi, but my question to you is that -- and I would like clarification on this from SSi afterwards -- the competitive system that's being proposed by SSi is largely a voice over internet system and do you think that that is a viable alternative to what's being offered now by NorthwesTel?
2314 MR. HEFFERNAN: I would say yes.
2315 COMMISSIONER SIMPSON: Because of costs? Is it technologically satisfactory? What's the...?
2316 MS GAULT: Laurie Gault, Government of the Northwest Territories.
2317 I'm not sure if the question is in relation to the services we receive today, which is a centric service through NorthwesTel.
2318 We have not had the opportunity to explore the voice over IP services so I'm not sure we could fairly comment on the relative capabilities, if that is your question.
2319 COMMISSIONER SIMPSON: It is. I'm trying to probe the depth of understanding of the comparative values and reliabilities of each system because when we talk about competition as a concept it's one thing, when we talk about the viability of alternative systems it's another and I'm just trying to explore the depth of understanding as to whether you have any -- anyone such as yourself has a satisfactory landing spot in looking at voice over internet as an alternate to their needs?
2320 MS GAULT: It is something that we are going to be looking at, but the assessment has not been done.
2321 I will see if one of my colleagues would like to add to that.
2322 Thank you.
2323 COMMISSIONER SIMPSON: Thank you. I will be asking that question again to the other governments.
2324 Mr. Philipp, the build-out of your system right now -- is it 51 markets that you're serving?
2325 MR. PHILIPP: Fifty-six.
2326 COMMISSIONER SIMPSON: Fifty-six.
2327 With respect to telephony they are all being served by VoIP?
2328 MR. PHILIPP: Correct.
2329 But just to maybe clarify for everyone that's here, really when we talk about voice over IP we are not really referring to voice over internet, although that is the most common implementation simply because most internet service providers weren't afforded the ability to get into the carrier space and offer competitive voice services.
2330 So when voice over IP came out most people interpret that as voice over internet, but really what we're talking about is an advanced IP network, terrestrial and satellite, no different than what NorthwesTel is running right now, and really technologically all we're doing is talking about converting the voice from an audio signal in the community to a digital IP signal and then routing it via the most efficient means possible, whether that is terrestrial or satellite, having nothing to do with the internet.
2331 So our voice calls from customer to customer anywhere on our network in any one of 56 communities is a single hop prioritized terrestrial and satellite IP link that happens to be carrying voice packets as well as video packets.
2332 So voice over IP or voice over LTE, VoLTE, which is coming with 4G, is really just voice and its packet. It's packets of data that have been identified to require prioritization.
2333 So any enterprise consumer these days building PBX's in a large enterprise markets, look at all of Cisco's voice, it's all voice over IP.
2334 So really the question is not whether voice over IP is where things are going, it's where things are now, the only question is: How quickly can the telcos catch up with switch circuit-based voice systems and make them more efficient in terms of satellite and terrestrial distribution, and that's really what our voice over IP solution does.
2335 COMMISSIONER SIMPSON: And if at some point in the immediate or distant future, through upgrades at the NorthwesTel and your present system would be able to access the prefix with any exchange?
2336 MR. PHILIPP: Correct. And I'm certain NorthwesTel is not new to voice over IP. I would imagine what has been deployed in high level is probably voice over IP and it would be wise for them to switch all of their switches to media gateways that handle IP and really the cost to do this is insignificant compared to the funding being received.
2337 COMMISSIONER SIMPSON: Thank you very much, Mr. Philipp.
2338 I think those are my questions, Mr. Chair.
2339 THE CHAIRPERSON: Thank you.
2340 Commissioner Molnar...?
2341 COMMISSIONER MOLNAR: No.
2342 THE CHAIRPERSON: No?
2343 Commissioner Duncan?
2344 COMMISSIONER DUNCAN: I do have two questions.
2345 First of all, Mr. Flaherty, on the the minimum $10.1 million that you are looking at, and if I understand your suggestion is that those funds would come from the National Contribution Fund, and it's my understanding that the National Contribution Fund is only used for residential rates.
2346 So can you just clarify that for me, how that would work?
2347 MR. FLAHERTY: So, to be clear, I don't think we specified where it would come from necessarily.
2348 So the residential piece we have definitely suggested it would come from the National Contribution Fund.
2349 The residential toll connect piece, there has been suggestions by some parties to this proceeding about the bus toll connect piece. I don't believe anyone suggested that the bus NAS piece be addressed from the fund.
2350 COMMISSIONER DUNCAN: Okay, so I misunderstood what you were saying. Where would you see that coming from, then?
2351 MR. FLAHERTY: That's a good question. I don't think we have an immediate answer to it. It's something I will think about, and I can come back later.
2352 COMMISSIONER DUNCAN: Okay. That's fine, thank you.
2353 The other question -- and I may have the answer here. Just let me have a look and see what my e-mail says.
2354 COMMISSIONER DUNCAN: Okay. What you are proposing, then, is that the toll connect links -- that would reduce the CAT rates, which are tariffed, so the long distance carriers would benefit, and not necessarily the users, the callers, but we would be relying on competition, I guess. You would be out bidding TELUS or whoever else is providing long distance services. Is that --
2355 MR. FLAHERTY: That is exactly correct. I think you heard TELUS talk about the fact that the CAT would come down significantly, and that would allow for different pricing in the market, potentially.
2356 COMMISSIONER DUNCAN: I think that was a concern for the Government of the Northwest Territories, an incentive to encourage business development.
2357 Is that correct?
2358 MR. HEFFERNAN: Yes, that is correct.
2359 COMMISSIONER DUNCAN: Thank you.
2360 MS MALJAN: I have just one more thing to add to that, if you don't mind. We actually asked in our written comments that a report be filed, just to make sure that those savings had been passed on to consumers, if the CAT rate was lowered.
2361 COMMISSIONER DUNCAN: I do remember reading that, and I wonder how doable that is, given that it's unregulated. I don't know, it's a --
2362 MS MALJAN: We have just put it forward as a suggestion.
2363 COMMISSIONER DUNCAN: Yes. It may be something you might want to consider in your final comments, how that might be addressed.
2364 MS MALJAN: Yes.
2365 COMMISSIONER DUNCAN: Thank you.
2366 THE CHAIRPERSON: I think that Commissioner Molnar has a follow-up question.
2367 COMMISSIONER MOLNAR: I do, and it just carries on from the discussion of the toll connect fees, just following up with what Commissioner Duncan said, as to whether or not this practically flows through to any consumers.
2368 We heard, for example, TELUS tell us yesterday that there is not an impact on consumers, this is a carrier-to-carrier cost.
2369 Having said that, I do want to follow up -- and thank you for bringing up the issue of the $10 million, and some of what NorthwesTel has said to us here about that $10 million being $2.8 million for RES toll connect and $3.9 million for the business satellite toll connect fees.
2370 Help me understand, if you would, why you are saying that those cross-subsidies are at risk, based upon a decision on local competition.
2371 How does that link to a decision on local competition?
2372 MR. FLAHERTY: The issue is back to our major centres. We talked about the CAT, for example, and the greatest proportion of minutes that are in the CAT, which is set at a rate to fund the satellite toll connect links, are minutes that don't touch the toll connect links at all. They come out of Whitehorse and Yellowknife.
2373 So, to the degree that there is competition in Whitehorse and Yellowknife, we have made the assumption that the competitor would take the toll services, too. So then there is no longer -- the CAT is reduced, the toll is eliminated, there is no longer the subsidy to then support the small communities and the satellite links to those communities.
2374 COMMISSIONER MOLNAR: So you have taken the full cost of the satellite toll connect and assumed that you would lose that amount of money by losing toll traffic in Whitehorse and Yellowknife.
2375 You say that all of that money is at risk. Surely you will keep some portion of the long distance -- you are not going to lose 100 percent of those markets, so how will you lose 100 percent of your Carrier Access Tariff?
2376 MR. FLAHERTY: To your point, we wouldn't lose 100 percent. But, again, we are essentially looking at a restructuring of how things occur.
2377 Today there is an explicit amount of money -- I used the term "explicit". Internally within the CAT there is funding that is specifically used to support these satellite toll connect links. So we would reduce the CAT significantly.
2378 I think TELUS talked about the fact that, if you actually included the terrestrial piece, which we haven't talked about doing, the CAT goes from 4.1 cents to .8 cents.
2379 So it's a significant decline that occurs on that side of the ledger, and then the piece in the high cost areas is funded explicitly.
2380 But you are right, if you were looking at just the portion that would be lost to local competition, that would be something less. We estimate that it could be, maybe, 30 percent of the market share.
2381 But I think that TELUS was highlighting the bigger issue of this whole need to address -- to have a CAT that is really cost-based, and not otherwise.
2382 I would like to, at least, challenge TELUS just a little bit, in that on their website they do indicate that they do charge a differential rate for calls to NorthwesTel's operating territory. So I do think there probably would be a reduction to TELUS customers, as well, because I would assume that they would remove that surcharge, but I will let them comment on that.
2383 COMMISSIONER MOLNAR: Fair enough, and they will be coming forward.
2384 At this point I just wanted to make sure that I was properly understanding. So while you stated that there is $10 million in cross-subsidies that would be at risk if we were to open the markets to local competition, in fact, that $10 million is not the number, it is something significantly less, because that $10 million is made up of $6.5 million of toll connect, which is not fully at risk.
2385 Do you agree with my statement?
2386 MR. FLAHERTY: Yes and no. If you were only considering local competition, absolutely. There is the other reality, though. We talked earlier about VoIP minutes.
2387 For example, in the last two years we have lost 16 percent of our toll minutes.
2388 So structurally, independent of local competition whatsoever, that subsidy is disappearing as we speak today, and we expect that to continue.
2389 The two ways that it could reduce -- one is, as people use alternative VoIP methods like Skype and things of that nature. I think I said yesterday that we have seen those numbers go from almost zero minutes in 2006 to 32 million, which is our estimate for this year.
2390 So that is a real significant reduction.
2391 The other thing is, some of the intertoll carriers are looking at options to actually bypass the CAT using an IP interconnection instead.
2392 So both of those areas are actually the bigger concern with the reduction of the cross-subsidies.
2393 Local competition will add another component to it, as well. But you throw it all together and you say: There is not going to be any subsidy here if we are not careful.
2394 So it's not just related to local competition, it is also very much associated with the substitution of technology, either by consumers or other carriers, as well.
2395 COMMISSIONER MOLNAR: Thank you. That's my question.
2396 THE CHAIRPERSON: Thank you very much.
2397 I would just like to ask Mr. Philipp to confirm that your IP network is a fully managed network, distinct from Skype, which works over the internet. So that we all understand, your network is a private dedicated network that just uses IP technology, but is fully managed?
2398 MR. PHILIPP: Absolutely correct.
2399 In fact, we have various queues within our network that handle everything from best effort internet, where there is no guaranteed capacity or CIR --
2400 It's a burst best effort basis, and we have specific -- both satellite and terrestrial pipes for things like voice and video conferencing that require guaranteed capacity, and we prioritize that both on the last mile wireless, as well as on the satellite link, in full mesh.
2401 THE CHAIRPERSON: If you were to provide a Centrex-type service, it would be a fully managed network.
2402 MR. PHILIPP: Absolutely.
2403 THE CHAIRPERSON: Thank you.
2404 If there are no other questions, I would like to thank --
2405 Go ahead, Mr. Heffernan.
2406 MR. HEFFERNAN: Is it possible that we could go back to Commissioner Simpson's question for a moment?
2407 THE CHAIRPERSON: Certainly.
2408 MR. HEFFERNAN: One of the main reasons that we make a recommendation on local competition is because we are in a situation today where we have a system in place today, which we have had in place forever. We have no choice, so we would like to see a system where we have an option to choose additional services, if possible.
2409 The system we have in place today is lacking in some of the features that we would like to see, so that is why we would like to have some additional choice; not just for the GNWT, but also for the citizens of the Northwest Territories.
2410 THE CHAIRPERSON: Great. Thank you.
2411 On behalf of the Commission, I would like to thank the Government of the Northwest Territories for participating. Thank you, all three of you, for being here with your candid views and your input to this -- challenging views from all parties, but we will hopefully get through it all.
2412 Thank you again.
2413 MR. HEFFERNAN: Thank you, Mr. Chairman, and thank you, Commissioners.
2414 THE SECRETARY: I would now invite the Government of Yukon to take their places at the presentation table, please.
2415 THE SECRETARY: I would ask that you please reintroduce yourselves for the record, and then you may proceed.
2416 MR. PRATT: Thank you.
2417 Mr. Chairman and Commissioners, I am Jim Pratt. I am a consultant to the Government of Yukon.
2418 With me is Lisa Badenhorst, who is a senior policy advisor with Economic Development in the Government of Yukon.
2419 In these comments we would like to address a selected number of topical issues and concerns that were raised in Phase I of the hearing.
2420 Our positions on all of the issues within the scope of the proceeding, together with our recommendations, will be addressed in the written final argument. So, if there is anything that is left out here today, it is not intentional, we will get to it.
2421 The purpose of this proceeding is to review NorthwesTel's price cap framework, but it appears from positions in written materials, and from the testimony given by the company in the hearing, that NorthwesTel may not have fully bought into the idea of incentive-based regulation.
2422 The company has consistently taken the stance that it must remain whole, from a revenue perspective, referring again and again to the need for subsidies, internal cross-subsidies, or increased rates to make up for their increased costs or anticipated revenue losses.
2423 On the cost side there has been no productivity dividend for customers and no suggestion that customers will ever benefit from the incentive framework, absent competition.
2424 So it seemed ironic for Mr. Flaherty to suggest, in response to questions from the Chairman, that an inference was being made that the company should look back to rate of return regulation when much of the presentation included discussion of internal cross-subsidies, the balancing of subsidy impacts, the need to rebalance rates before competition is allowed.
2425 And even the mention of bypass in the context of high CAT charges to competitors. This all sounds very much like the language of rate-based rate of return regulation that some of us remember from years gone by.
2426 The positions taken by the company in this price cap proposal raise a question as to whether NorthwesTel has accepted the responsibilities that go along with the benefits of more pricing flexibility and less regulatory oversight that it has been given in the price cap regime.
2427 NorthwesTel customers did not benefit from a productivity dividend during the initial price cap term and are now faced with the prospect of escalating prices through proposed inflation adjustments on top of the proposed $2 per month rate increase.
2428 Going forward, the company's proposal would provide it with more pricing flexibility, but with no additional offsetting benefits to consumers.
2429 Furthermore, NorthwesTel is apparently unmoved by its incentive-based regulatory framework to invest beyond what is minimally necessary to maintain service.
2430 In discussing the proposed SIP for the extension of enhanced calling features, the panel's responses to the Commission indicated that the company seems to believe that the Commission should be responsible for funding measures to achieve that aspect of the BSO in NorthwesTel's operating territory.
2431 The Yukon Government noted yesterday that the Commission chose the incentive-based approach of price caps over revenue requirement approach of split rate base with the objectives of improving the company's efficiency and providing adequate protection for consumers.
2432 It is not practical or realistic of course to revert to the cost plus world of rate of return. However, it is necessary to move forward through a legitimate application of price cap regulation, balancing the benefits and the obligations to a future where market forces ensure efficient operators and provide the protection of choice for consumers.
2433 Much has been heard on the subject of local competition for NorthwesTel, and the issue now would seem to be how best to make that happen. The company suggests that, first, it must eliminate cross-subsidies and be held harmless from implementation costs and perhaps even future revenue losses.
2434 The Yukon Government suggests that removing obstacles to competition is not a threat to NorthwesTel or for its customers, because it will provide the company with incentives for improvement which appear not to have operated as effectively in the current price cap regime.
2435 While it is axiomatic that the introduction of competition will cause NorthwesTel to lose market share, there couldn't be competition without that. The discipline of the market will not only improve things for consumers, it will also benefit NorthwesTel.
2436 Competition makes better competitors, requiring improvements that generate customer satisfaction, better focusing investment, and improving cost efficiency, all of which are good for the companies as well as for their customers. It is for this reason that the Yukon Government views it is appropriate that each competitor bear its own cost of entry, because each of the competitors and their customers stand to benefit.
2437 A dramatic example of the progress that can be generated by competition was offered during yesterday's comparison or comparing the two approaches yesterday of NorthwesTel and SSi Micro to the problem of maintaining technical support personnel in small isolated communities.
2438 Mr. Flaherty testified that despite additional training of local service reps that turnover was still a problem and was considering introducing even more training.
2439 On the other hand, SSi's approach is to share revenues with the local representatives, providing an incentive to maintain service levels leading to a stable and engaged workforce. The point here being that innovation, entry, allows for new ideas not just in technology, but in the way the business is run.
2440 Some considerable discussion took place regarding the right approach or right terms and conditions for competition, including a reference to the term "destructive competition."
2441 The Yukon Government believes these concerns about the risks of allowing competition are misplaced. Competition must necessarily be a messy business; for the benefits of competition to be realized, there must be risk-taking and there will be failures.
2442 Creative destruction is an essential element of a healthy competitive marketplace, and experience has shown that intervention to protect or shelter a competitor from risk only serves to produce weaker competitors or to create artificially competitive markets.
2443 It is not possible to know how markets, technology or customer needs will combine to shape the business propositions of future competitor. Indeed, it may be hubris to attempt to forecast the future evolution of telecommunications competition in the north to that extent.
2444 The historical premise of local competition has been that local number portability is a prerequisite. SSi Micro is compared to compete now without the benefit of LNP. And the Yukon Government agrees with suggestions made during Phase 1, that LNP may not be as critical to effective local competition as it was once thought to be.
2445 The Commission should act to enable competitive entry now while continuing to develop terms and conditions for northern markets that will allow for sustainable competition in the future. SSi Micro has, we believe, made a compelling case for competitive entry and should be allowed the opportunity to test their mettle in the marketplace.
2446 A considerable amount of discussion surrounded the distinction between regulated and unregulated services of NorthwesTel. The company has consistently maintained the position that its unrelated services like internet access and cellular are outside the scope of this proceeding. From the perspective of NorthwesTel's customers, this may be a distinction that makes no difference.
2447 Several parties identified that unregulated services like broadband generate more customer dissatisfaction. Mr. Flaherty was only able to say that he had had no complaints from his customers about regulated service.
2448 There are several reasons why the CRTC can and, in our view, should consider how to address this concern, particularly in Yukon.
2449 At the retail level there is an effective broadband monopoly in Yukon. A Whitehorse customer may choose between NorthwesTel DSL and NorthwesTel cable. There are no other providers.
2450 As observed in response to questions by the Chairman, NorthwesTel DSL customers must also be customers of the regulated local-access service.
2451 And thirdly, whether the internet access in Whitehorse is initiated through DSL, cable or even a cellular data call, it is inevitably NorthwesTel's backbone network which delivers the traffic to the internet server.
2452 When the network connection to the south goes down, all services are affected, whether those services are designated, regulated or unregulated. Hence, from the customer's perspective, it makes no difference.
2453 Testimony made clear that neither present nor future needs for bandwidth are being satisfactorily met. The requirement is for access to capacity at comparable prices and customers have no way of knowing if they are getting the most for their money, particularly in the Yukon, where there are no competitive choices.
2454 The importance of access to reliable and affordable broadband services cannot be overstated, which is why the CRTC should consider looking more closely at NorthwesTel's provision of this service in Yukon.
2455 NorthwesTel's Phase 1 presentation did not, in our view, strengthen the case for local rate increases and, in fact, may have weakened it.
2456 In response to Commission questions, Mr. Flaherty indicated that the company did not consider the issue of affordability, rather leaving the issues to the Commission and pointing to local rates approved for TELUS as the justification. The Yukon Government remains unconvinced that NorthwesTel has made a sufficient case for local rate increases.
2457 In response to Commissioner Simpson yesterday, we indicated that the issue of service quality penalty incentives had been addressed in our July, 2006 final argument, and wanted to put on the record a brief summary of our position in that regard:
"The Yukon Government recommends that a quality of service rebate plan be established and that the construction program continue to be monitored. While there is no reason to expect that the company will intentionally degrade service quality, it is important that there be regulatory protections for consumers in the absence of competitive forces." (As Read)
2458 Five years later, not uncomfortable using those words again.
2459 It seems very clear from the submissions of various parties, including NorthwesTel, that investment in telecommunications infrastructure in the north is a critical issue. Opening the market for local competition would seem to be one immediate and positive step to take based on the example of the investment already made by SSi.
2460 In fact, as Mr. Philipp testified yesterday, SSi has invested in broadband capabilities in some communities before NorthwesTel. Perhaps the prospect of competition served as a spur for investment by NorthwesTel, exactly the sort of behaviour that competition does inspire.
2461 The Commission has effectively used the SIP mechanism. Yukon continues to support the use of subsidy funds for SIP purposes. But the magnitude of the overall need for infrastructure support is greater than the scale of what SIP investment projects like these are likely to accomplish.
2462 The Yukon Government recommends that the Commission consider using additional means at its disposal to address the need for northern telecom infrastructure investment.
2463 In the BSO decision the Commission considered and then defined a broadband standard, leaving aside the responsibility and the means of funding for achieving that standard. We suggest that the Commission can take a parallel approach here by recommending a comprehensive investment strategy requiring input from all northern stakeholders. Perhaps the Commission could serve as a catalyst to make this happen.
2464 The Yukon Government very much appreciates the opportunity to participate in this proceeding and thanks the Commissioners and Staff for all of their consideration and engagement. We certainly look forward to seeing the results of all of our collective efforts.
2465 THE CHAIRPERSON: Thank you very much.
2466 I have one quick question, it is clarification I think. In paragraph 11 where you layout the Yukon Government's view regarding the cost of LNP and other services. You say it is the Yukon Government's view that each competitor bear its own cost of entry.
2467 Should I interpret that to be its own cost of entry to itself or does the new entrant pay for the cost of entry borne by the incumbent?
2468 MR. PRATT: Not the latter, Mr. Chairman. Each company -- NorthwesTel would bear the necessary costs to implement competition, the competitors would likewise bear their own costs.
2469 THE CHAIRPERSON: Okay. So subject to whether it's phased in or not phased in -- but the evidence to date by NorthwesTel is there's a $31-million cost to opening it up for them -- you're suggesting that they bear the entire cost if in fact we open it up immediately?
2470 MR. PRATT: Well, Mr. Chairman, if I were to make recommendations about how that were to unfold, I don't think necessarily that it needs to be a $31-million investment. Phasing it in is one option.
2471 I think it's clear from the record that LNP is not a -- shouldn't be considered an obstacle. That can be -- alternatives can be looked at.
2472 Certainly the technology has changed sufficiently and, as we suggested yesterday, it may well be that user preferences have changed, have -- user preferences may have changed sufficiently to allow us to revisit the assumption that LNP is a vital prerequisite.
2473 THE CHAIRPERSON: So subject to the what and the when, it all should be borne by the incumbent for their own costs?
2474 MR. PRATT: Yes.
2475 THE CHAIRPERSON: Thank you.
2476 Any other -- Commissioner Simpson.
2477 COMMISSIONER SIMPSON: Thank you very much for your supplementary presentation.
2478 I'm just taking advantage of a great opportunity here, with everyone in the room, to ask for some opinions to clarify the Commission and the staff's understanding of the differential between Yellowknife and Whitehorse.
2479 Where I'm going with this is that since I started coming to the North, which was a long time ago but more recently with the Commission, I've come to appreciate the significant economic, structural, geographic differences between the three territories, and as this Commission hearing has unfolded, a nagging question prevails in my mind in terms of the difference between Whitehorse and Yellowknife.
2480 Whitehorse has always enjoyed -- I don't want to say a lion's share, but a good proportion of the commercial success of northern development. It's been a very commercially active jumping off point for the Territory.
2481 That said, my question is this. Why is competition not in its present form existing within Whitehorse?
2482 I would like to go back and again ask SSi where the Yukon is fitting into their agenda prior to this hearing, as to why they're not in there now, because it seems to be a sweet spot or a commercial market they could be making a living in.
2483 I would like to ask the Yukon Government and also ask for some insight from NorthwesTel.
2484 Also, Ice Mobile made an entry into the market and withdrew, and it seems to be doing well within the Yellowknife market but not in Whitehorse. I'm curious, with such a robust commercial market, why in Whitehorse particularly there seems to be a withdrawal or an absence of competition compared to the other markets.
2485 MR. PRATT: Who would you like to have go first?
2486 COMMISSIONER SIMPSON: Take your pick. You're up first, so...
2487 MR. PRATT: Well, I'll ask Lisa to opine on this as well.
2488 During the time that I've been involved in these activities in Yukon, there has been a seeming consolidation by NorthwesTel, as we've identified, the cable, the telecom network and through affiliates the wireless network.
2489 The other observation that is necessary to make is the reduction in the number of independent ISPs. It was dating back a number of years ago. I think we referred in our initial evidence to a 1998 quote where there was a vibrant ISP market, where NorthwesTel was not the dominant player. Over time, I think it's a reflection of NorthwesTel's success and the extent of the -- or perhaps the absence of alternatives.
2490 Do you want to comment further on the Ice?
2491 MR. PRATT: Sorry, that's it from us, at least for now.
2492 COMMISSIONER SIMPSON: Thank you.
2493 Mr. Flaherty.
2494 MR. FLAHERTY: I think you were specifically asking about Ice Wireless.
2495 I might remind the Yukon Government that in 2006 they issued an RFP to have cellular service provided throughout the Yukon. NorthwesTel, in partner with the Champagne and Aishihik First Nations, bid on that against Ice Wireless, and Yukon Government chose NorthwesTel.
2496 So the existence of, shall we say, NorthwesTel in particular -- I can't comment on Bell, they make their decisions. But the existence of NorthwesTel in the cellular market in the Yukon is a result of an RFP that the Yukon Government issued.
2497 COMMISSIONER SIMPSON: So that was the prime driver behind the creation of Latitude then; is that correct?
2498 MR. FLAHERTY: That's the only driver behind the creation of Latitude.
2499 COMMISSIONER SIMPSON: Thank you. I appreciate that.
2500 Mr. Philipp, I know that you --
2501 THE CHAIRPERSON: Can I just ask a follow-up question on that issue?
2502 COMMISSIONER SIMPSON: Yes.
2503 THE CHAIRPERSON: Mr. Flaherty, does NorthwesTel and Bell compete in the NorthwesTel territory?
2504 MR. FLAHERTY: We do, sir.
2505 THE CHAIRPERSON: Do you have overlapping towers?
2506 MR. FLAHERTY: No. We share. Much like TELUS and Bell share towers and have roaming agreements between them, NorthwesTel does the same thing with Bell.
2507 THE CHAIRPERSON: So you don't have duplicate networks, you just sort of have an alliance between them?
2508 MR. FLAHERTY: That's right, as exists with all of the major roaming carriers in the country.
2509 So, for example, in Whitehorse, Bell has all of the infrastructure for cellular service.
2510 Outside of Whitehorse, again, through the arrangement with the Yukon Government, which we think was a good arrangement, NorthwesTel -- Latitude, I should say, owns all of the cell towers, and then there's roaming agreements that allow each party, including TELUS and Manitoba Tel, SaskTel, all of those companies make use of those through the roaming agreements that exist nationally.
2511 THE CHAIRPERSON: Thank you.
2512 COMMISSIONER SIMPSON: Mr. Philipp --
2513 MR. RONDEAU: Good day. Roger Rondeau from the Utilities Consumers' Group.
2514 I would like to suggest that NorthwesTel has stifled any of the competitors in the Yukon by charging such high rates for their bandwidth, et cetera, that no one can compete.
2515 COMMISSIONER SIMPSON: Thank you very much.
2516 Mr. Philipp, I know that you touched on this point yesterday, but one more time with feeling, if you could tell me what your view is on why you're not in the Yukon now. Just illuminate me, please.
2517 MR. PHILIPP: Certainly, Commissioner.
2518 I have great experience actually in Whitehorse as we do have a little bit of -- we have spent a little bit of time in the market, in looking at the market, and Whitehorse is certainly on our radar and is a market that, as you pointed out, would be advantageous for us to expand services into.
2519 For us it's really a matter of where do we place our investment and where can we get fair access or access to a fair and competitive playing field.
2520 Obviously, the Yukon has invested or NorthwesTel. Canada has invested a lot of money in building fibre and terrestrial networks into the Yukon and the Northwest Territories. Unfortunately, those networks are not viable for any competitor to run across because the cost of those networks at the wholesale level is exorbitant.
2521 In fact, that is the basis of our Part 1 application, is that it is impossible for us or any other ISP -- and we are the largest ISP -- to compete with NorthwesTel when forced to pay their exorbitant backbone pricing. And it is exorbitant, as you will see in the Part 1.
2522 In the case of the Yukon, we have worked with Polarcom and Whitehorse TV before they were acquired by NorthwesTel, and I believe in the case of Polarcom there was also a Part 1 application filed by them years ago in -- what's the word -- Part VII at the time, I guess, in complaint of the backbone pricing then.
2523 So I will say that it would be impossible for us or anyone else to compete in the Yukon either in voice because there's no local competition services or in Internet or voice over IP because the backbone pricing (a) is exorbitant and (b) comes with no quality of service guarantees, therefore making it impossible for even a small VoIP provider to be able to offer some competitive service.
2524 So the Yukon, we would love to be there and all we ask for is a fair and level playing field to be able to access that network and that customer base on equal terms that NorthwesTel have, and that currently is not possible.
2525 COMMISSIONER SIMPSON: Thank you.
2526 THE CHAIRPERSON: Commissioner Menzies?
2527 COMMISSIONER MENZIES: Thank you.
2528 I just wanted to get your advice, if I could, or your thoughts on paragraph 14 in your presentation today.
2529 You talk about "creative destruction" being an essential element of a healthy, competitive marketplace, and I have no issue with that, it's a very sensible approach.
2530 But it does -- you do need a marketplace, right, for it to take place, and the concern would be if we go forward with competition, is how do we make sure we don't creatively destruct Sachs Harbour in the process?
2531 There are places that are too small really to be called markets. They can't function as markets in that sense. What sort of protections or suggestions do you have on how to create a creative marketplace without throwing that baby out with the bathwater, so to speak?
2532 MR. PRATT: Indeed, clearly, there is an ongoing need for the foreseeable future to maintain subsidy support in those communities. So that's where the basic service obligation, the obligation to serve and the local service subsidy all come into play to ensure that happens.
2533 What I think is a cause for hope in there being some limit to that foreseeable future of subsidies is right here in this hearing where SSi has indicated that they have been able to, in Nunavut, enter every one of the communities.
2534 So the positive message that I'm able to take from this is that there may well be opportunities we have not yet thought of by allowing competitive entry to tackle some of these problems, that the wisdom of the great mass of entrepreneurs that are out there and people that have ideas they want to explore and identify needs and problems to solve is going to be infinitely greater than what any of us with excellent training and good intentions are able to forecast or predict.
2535 So to just wrap that up, in order to address the concern about small communities like Sachs Harbour, we would want to maintain the subsidy regime and the obligation to serve that the Commission has adopted, but let's be wide open to considering alternatives and allowing people to challenge those assumptions through their own ingenuity.
2536 THE CHAIRPERSON: Mr. Rogers...?
2537 MR. ROGERS: Mr. Chairman, I didn't want to interrupt the flow of the Commissioner's questions, if you are finished I wanted to go back to a point that you raised, Mr. Chairman, during your discussion with Mr. Pratt.
2538 You had a discussion about recovery of costs and, as I recall, that discussion I think Mr. Pratt and the Yukon government said that each party shall bear its own costs, in other words there should be no contribution by the new entrant.
2539 Then there was a follow-up discussion that the number could be whatever it is and it could be $3 million or $4 million or it could be $32 million, we are not sure, but in any case it should be borne by NorthwesTel.
2540 I don't think we heard him explain how he would suggest that amount be recovered by NorthwesTel. Ultimately it would have to be recovered of course through rates of some kind from the customer base. That's the only way any cost is recovered.
2541 But I don't think we heard him offer a comment or suggestion as to how it should be recovered.
2542 THE CHAIRPERSON: Mr. Pratt, do you have any further words?
2543 MR. PRATT: Having been out of the business of rate setting for some time I will do my best.
2544 Certainly the quantum dictates the approach and, as I suggested earlier, the span of time also allows for a distribution of those obligations.
2545 From a policy perspective, we would, the Yukon government would, not like to see those costs show up in consumer rates, that there are other rating strategies that can be applied.
2546 Given some more time I might come up with specific suggestions, but there are a myriad of ways that can be done without having to directly put the burden on consumers.
2547 THE CHAIRPERSON: You are going to be filing written argument by October 17th so you may want to give it a bit of thought. We would appreciate it.
2548 MR. PRATT: Thank you, we will.
2549 THE CHAIRPERSON: Thank you.
2550 I have one other -- sorry.
2551 COMMISSIONER DUNCAN: Can I just make a comment on that point?
2552 THE CHAIRPERSON: Go ahead.
2553 COMMISSIONER DUNCAN: Mr. Rogers, isn't one of the main things that we would hope that would come out of this, out of opening up competition, innovation, and so NorthwesTel's opportunity would not only be to increase prices, but also to innovate and introduce new services which would bring more revenue and recoup those costs.
2554 MR. ROGERS: Mr. Flaherty may want to add to my comments.
2555 I wouldn't disagree at all with what you said, Commissioner, my only point is that the costs would be whatever they are under some scenario. They would probably have to be incurred upfront because entry is when it is and the company is then immediately faced with the prospects of recovery of those costs, assuming there is continued rate regulation on local rates -- we are assuming that -- so there are limits to where there are opportunities for immediate recovery.
2556 I don't dispute your general thesis, but I just say that there would be clearly limits.
2557 COMMISSIONER DUNCAN: Thank you.
2558 THE CHAIRPERSON: I have a question, Mr. Pratt.
2559 In your remarks on paragraphs 19 and 20 you basically -- and I guess you are focusing on the Yukon, that at the retail level there is an effective broadband monopoly and you go on to cite the situations, and you end in paragraph 20 saying that in the Yukon there are no competitive choices.
2560 As you are well aware, the CRTC does not regulate the internet at the retail level particularly.
2561 What we are hearing is there is less of a competitive environment, if there is one, in the north relative to what it is in the south.
2562 If you were sitting on this side of the table what would be going through your mind and how would you try and address what we are hearing?
2563 And I would like your views from the perspective of the Yukon government, not yours.
2564 MR. PRATT: Thank you, Mr. Chairman.
2565 That's sort of a tall order.
2566 Clearly the first focus has to be on those things that you have direct jurisdiction over and those would be by definition the regulated services.
2567 As Mr. Philipp observed, the backbone costs or pricing is such that it operates as a deterrent to entry. I think there are some other areas where obstacles to entry might be addressed.
2568 I apologize for coming up with so little in the way of specific examples, but it just seems to me that what needs to be done is a closer examination of where those roadblocks are to competition.
2569 As Commissioner Simpson observed, Whitehorse does seem to be lacking in those kinds of options so it would maybe behove us all to try and figure out exactly why and those things that may be within the Commission's purview for us to recommend some specific solutions on those items.
2570 THE CHAIRPERSON: The reason I asked the question is, yesterday we heard from the Government of Nunavut, Ms Hollis was talking as well and I made a point of noting something she said about needing to plan holistically and looking at the north as well and looking at voice and data in a different way then perhaps has been looked at in the south and the rest of Canada.
2571 MR. PRATT: Exactly. And that is really implicit in our other suggestion that the Commission consider serving as a catalyst for a broader discussion.
2572 We have talked about infrastructure and the need for improving infrastructure, but I see no reason why that wouldn't extend to the use and access to telecom infrastructure in the north, all of which are issues that affect competition and the delivery of service.
2573 THE CHAIRPERSON: I believe that this Commission would welcome comments from all the parties that participated here in their final argument with regard to recognizing our mandate is limited to the regulated services, recognizing what we have heard so far and what we will continue to hear in the north as well, to what extent can the CRTC look at the north and how to make sure that residents in the north are served properly, again recognizing our mandate is limited and we do have a policy direction as well issued by the government.
2574 Mr. Rogers...
2575 MR. ROGERS: Very quickly, Mr. Chairman, just to follow-up the point that you just raised in your discussion with Mr. Pratt.
2576 Certainly the Commission recalls this because it's so recent, but I will just remind everyone for the record.
2577 The Commission only a year ago was invited to go into this very line of inquiry, namely to add broadband to the basic service objective in the BSO proceeding and you heard mountains of testimony and weeks and weeks of evidence and you considered it very carefully and you know what the cost -- the figures were $7 to $14 billion to do it nationally. The Commission, having considered all those options, said we are not going to go there. It's not where we want to go as a Commission for a host of reasons, which you recall.
2578 So it's not that long ago that you considered the very issue.
2579 THE CHAIRPERSON: No, and I respect that as well, Mr. Rogers. The fact is, though, that we did carve out NorthwesTel and the north separately from that proceeding as well and said that we would deal with all the issues that relate to the north in this proceeding.
2580 So there is a vehicle there, I'm not suggesting at all that we are going to do anything different, but I think all I'm saying is on behalf of the Commission we would welcome views as to whether there needs to be something done differently.
2581 MR. ROGERS: I accept that.
2582 THE CHAIRPERSON: Thank you.
2583 MR. PRATT: Mr. Chairman, without prolonging this discussion unduly, our view would be that the challenge that Mr. Rogers has identified is yet one more thing to be included in the broader debate, that it has been determined that as a matter of the basic service obligation broadband is a bridge too far, but there may be other ways of achieving those objectives and it would certainly be beneficial for all of us, and we know for our users, to have that discussion.
2584 THE CHAIRPERSON: Thank you.
2585 Any final word from the panel?
2586 Again on behalf of the Commission, thank you very much for participating and we welcome your views and those to come as well as we continue on.
2587 Thanks again.
2588 Can we go on to the next government group?
2589 THE SECRETARY: Actually, Mrs. Hollis has informed the Commission the Government of Nunavut doesn't have a rebuttal. They will not present in oral rebuttal argument, so I will invite TELUS now.
2590 THE CHAIRPERSON: Well, before we do that, let's take a break for 10 minutes and let me -- I think Ms Hollis is still here.
2591 Thank you very much for participating on behalf of the Government of Nunavut, we do appreciate it. As I have said, I take some of your words to heart and I have written them down here as well.
2592 Thanks again.
2593 Let's take a break for 10 minutes.
2594 Thank you.
2595 THE SECRETARY: Thank you.
--- Upon recessing at 1012
--- Upon resuming at 1027
2596 THE SECRETARY: We are now ready to proceed with TELUS.
2597 I would ask that you please reintroduce yourselves for the record, and then you will have ten minutes for your oral rebuttal.
2598 MR. SCHMIDT: Steven Schmidt, for TELUS.
2599 MR. REIRSON: Hal Reirson, for TELUS.
2600 MR. SCHMIDT: Good morning. That's a lot better than saying good evening yesterday.
2601 MR. SCHMIDT: The parties to this proceeding have expressed a spectrum of approaches to the question of rate increases for residential service. Some, like the consumer groups and the territorial governments, oppose rate increases altogether and urge a freeze, at least until 2014.
2602 NorthwesTel urged a $2 increase in residential rates and further increases at the rate of inflation beginning in 2014.
2603 TELUS, for its part, proposed a series of three $2 per month rate increases over a period of three years to bring rates into better alignment with costs in this most expensive of serving environments.
2604 Commissioner Duncan raised the question of affordability in connection with the TELUS proposal. TELUS responds here to those concerns.
2605 We note that the Commission has already approved a rate of $36.20 per month for residential local service in Télébec's serving territory. This rate was approved about three years ago, in July of 2008. This is the highest approved residential service rate in Canada.
2606 By way of contrast, NorthwesTel's current residential rate is $31.33 a month, and this rate has been frozen since 2007.
2607 Upon reflection and after dialogue with Commissioner Duncan yesterday, TELUS is now suggesting a series of sequential rate increases, ultimately totalling $4 per month, which could be implemented in a series of steps, which would ultimately result in a residential rate of $35.33 per month, to give better recognition of the very high average costs of providing service in NorthwesTel's territory, while still keeping the rate below that already approved at a threshold of reasonableness, namely, the $36.20 rate approved for Télébec in 2008.
2608 Télébec's approved residential maximum rate represents a classic public utility balancing of interests, namely, of the consumer's interest in being served as cheaply as possible, and of the provider's interest in achieving a return on and of capital equivalent to that for enterprises of equivalent risk and attractiveness.
2609 TELUS submits that raising NorthwesTel's local residential rate to $35.33 over time strikes a balance between consumer and provider interests, minimizes the extent to which Canadians in the rest of the country will be called on to fund BCE's telephone operations in the north via the National Contribution Fund, and still keeps the rate in question below the ceiling that the Commission has already determined to be just and reasonable for Télébec customers.
2610 In short, the $35.33 rate finds you still on conservative terrain, in the sense that you are not at the highest rate in Canada, notwithstanding the fact that you are dealing with the environment with, presumably, the highest average operating costs.
2611 MR. REIRSON: In this proceeding, NorthwesTel has proposed moving the residential portion of the satellite toll connect links associated with the local access network from the CAT to the residential high cost serving area subsidy requirement for Band H. TELUS and the Government of the Northwest Territories supported this proposal. PIAC/CAC opposed this proposal, while other parties were silent on this issue.
2612 However, if the residential portion of the satellite toll connect links belongs in the access network, then the business portion of these costs, and also the terrestrial toll connect link costs, should be removed from the CAT to eliminate these cross-subsidies as well.
2613 TELUS has proposed that NorthwesTel recover the revenues associated with the business portion of the satellite toll connect links and the terrestrial toll connect links in the CAT through a single, revenue-neutral adjustment to the business price cap basket. This adjustment could also be apportioned between the business services basket and the other capped services basket.
2614 TELUS has also suggested that this transition could be completed over a few years, to soften the impact that it would have on the rates for services in the business services and other capped services baskets.
2615 TELUS has put its proposed adjustments to NorthwesTel's CAT into the following table to help explain its proposal. This is based on information that was filed on the record of this proceeding.
2616 As I noted yesterday, a fair bit of information was filed in confidence, so we have had to calculate some of these numbers.
2617 NorthwesTel's current CAT is 4.15 cents. Based on updated information filed by NorthwesTel in this proceeding, their current proposed CAT rate going forward would be 3.8 cents per minute.
2618 TELUS has determined the components of that on a Phase II cost basis, linked toward the residential portion of the satellite toll connect links, the business portion, as well as the terrestrial toll connect links, showing a total toll connect cost of 2.39 cents.
2619 Now, that is Phase II cost, without the 25 percent markup.
2620 This leaves the portion that we are targeting for the cost-based CAT. It would be the .007 number, plus the .001 markup on the switching component of that, for the total cost-based CAT of .8 cents that you see at the bottom of the table.
2621 On the right-hand side we have shown the revenues that are associated with these amounts. The $2.8 million and the $3.9 million were discussed earlier today, the components of the satellite toll connect links, and then we have calculated the amount that would be related to the terrestrial toll connect links, based on the ratio provided by NorthwesTel.
2622 The $2.8 million would be recovered through the National Contribution Fund, as part of the subsidy for residential service in high cost areas. The $3.9 million and $2 million would be recovered through adjustments to the business and other capped services basket.
2623 MR. SCHMIDT: We would add that, in our submission, ultimately the movement to a cost-based CAT is not, at bottom, a policy choice; it is, in fact, a legal requirement to implement Canada's trade law commitments, particularly in terms of the commitment to implement cost-based interconnection for major suppliers under the GATT.
2624 The final thing we would like to make submissions on this morning concerns the adaptations, or not, to the regulatory framework that applies to other incumbents in the case of NorthwesTel.
2625 The Commission was confronted yesterday with a spectrum of responses as to how the regulatory framework that applies to incumbents in other parts of Canada should or should not apply to NorthwesTel.
2626 Some parties, like TELUS, urge that the framework applicable to other incumbents, big and small, be substantially applied to NorthwesTel.
2627 TELUS made this submission primarily because it is evident that NorthwesTel itself is quite happy to appropriate all of the benefits of the regulatory framework applicable to the other incumbents in other parts of the country, namely price caps, the possibility of price increases under the OTS decision, the removal of the productivity factor under the OTS decision.
2628 However, NorthwesTel's seeming ability to transpose elements of the Commission's existing modern framework all of a sudden breaks down when it comes to issues like cost-based interconnection, and local competition.
2629 In these cases, the framework applicable to all other incumbents is apparently not suitable and indeed profoundly infeasible to implement. This position is simply not credible in our submission. NorthwesTel's approach should be seen for what it is, a strategic cherry picking of the benefits of the Commission's framework for other incumbents while leaving behind the burdens. The Commission should not be taken in by this strategy.
2630 NorthwesTel operates in an environment that is very challenging, but only different in degree, and not kind, from the environments served by other incumbents in this country.
2631 All of the other incumbents serve people who live in houses, who make telephone calls over wireline and wireless networks that connect to those houses and who have weather including, in almost all cases, snow outside of their houses. There may be fewer houses in NorthwesTel's territory, they may be further apart, and it may be much colder outside of these houses in many cases.
2632 But these are operational facts that colour the amount of capital, operating expense and technical expertise required to run their telephone business. These are not facts that say the Telecommunications Act cannot apply or that the regulatory frameworks developed for other incumbents cannot apply.
2633 All of us are in the telephone business and we all operate under common statutory requirements, tariffing obligations, interconnection obligations, the requirement that rates be just and reasonable and free from discrimination. The Telecommunications Act does not provide an exemption from the application of these requirements based on weather or based on size.
2634 That said, a primary tool that the Commission has at its disposal for adapting regulatory framework is the proper recognition of company-specific costs. If it costs more to provide primary exchange service on average in NorthwesTel's territory, the Commission can and indeed should recognize this through higher approved costs.
2635 To the extent that the challenges in NorthwesTel's operating environment translate primarily into greater capital and operating expense, this is a crucial way to adapt the framework for the north.
2636 A similar response applies in the case of quality of service measures. The operational facts of NorthwesTel's environment do not justify an abandonment of efforts to measure and ensure minimum QOS. On the contrary, these standards may well be more important in this part of Canada than anywhere else given the acute dependency on communications infrastructure and given the limited options that customers have in many parts of the territory.
2637 The measures employed by the Commission to measure quality may, however, be different. The standards to achieve may well be different as well from those that would apply in a more urban operating environment. This is a different kind of operating environment, but in degree, not kind. The QOS regime can be adapted in degree.
2638 There may well be other principle adaptations that could be made to the regulatory framework that applies to NorthwesTel. For example, identifying different definitions of universal service obligations. Indeed, TELUS wants to be very clear that it does not exclude the possibility that a fundamentally different regulatory regime might well be possible or even necessary in the very challenging environment of Nunavut, for example.
2639 However, NorthwesTel has not put forth such blank sheet proposal for you to comment or indeed for TELUS to comment on. Rather, they have said in effect that the framework applicable in the rest of Canada is fundamentally fine, save for the parts they don't like.
2640 Given the facts of this position and its limitations, and absent a more compelling and principled alternative argument, TELUS urges the Commission to apply to NorthwesTel the framework that is in place for other incumbents with targeted adaptations to recognize the greater costs and greater operational challenges that exist in the north.
2641 NorthwesTel should not be exempt from any burden or benefit applicable to other incumbents in Canada unless they can make out a compelling principled case for differential treatment.
2642 And I would say as a final note, if there is a single transformative policy decision that you can make that would address many or all of the concerns highlighted above about rates, about costs, about quality, it would be to unleash competition in the north, remove the final barriers to that. I mean, if there is one transformative thing that can be done, you know, let competition happen would be our submission.
2643 So thank you very very much for the opportunity to appear here. I know it is a lot of work coming up here, and we appreciated the dialogue.
2644 THE CHAIRPERSON: Thank you very much for your representation.
2645 Two points. One is I will leave it to NorthwesTel to decide if, when and how they will respond to your analysis on page 2.
2646 I am not going to question any of the data here, some of it apparently may be confidential and you backed into it, so I will leave it to NorthwesTel to decide to what extent they want to, and it may be in final argument on October 17th, but that is for their choosing, not for me to question it.
2647 The question I do have on GATT though is -- and it came up yesterday as well and I didn't question it then -- but you keep mentioning GATT. I understand what the GATT agreements are. But I have no idea why there is any relevance to an interconnecting agreement between NorthwesTel and TELUS compromising whatever position Canada has taken internationally with regard to the GATT.
2648 This is a Canadian carrier to carrier agreement and would not come under GATT at all, as far as I know.
2649 MR. SCHMIDT: Thank you for the question.
2650 So as signatories to the GATT and part of the commitments we have made is to implement the principles in the reference paper, including the commitment that interconnection with major suppliers must be provided at cost-oriented rates.
2651 And then the government is in turn -- so that is a government to government or multilateral trade commitment -- that the government is in turn obligated to transpose into domestic law.
2652 And we haven't yet in the sense that the -- we are getting there probably -- but the interconnection rate that the Canadian Government, you know, via its agent, the Commission, has approved for NorthwesTel isn't an exclusively cost-based rate, it has all sorts of other things in there beyond the funding of interconnection; you know, the funding of universal service, the funding of business, toll connecting links, et cetera.
2653 So my short answer would be, yes, it is an international commitment, but we are obligated to implement it in domestic law. You guys are the medium for implementing that. And right now the rate that has been prescribed isn't in conformity with the trade law commitment.
2654 THE CHAIRPERSON: But that agreement does not apply to this agreement at all between yourselves and NorthwesTel. I understand what you are saying, I understand if AT&T decide to negotiate an interconnection with TELUS or NorthwesTel it might be binding. But an agreement within a country would in no way be impacted by an international treaty.
2655 MR. SCHMIDT: Well, we are not connecting pursuant to an agreement, we are connecting pursuant to a rate that the government prescribes. The reference paper sets out sort of targets for what your framework would look like. And my response would be I can't bring a trade law complaint, only a foreign government can, so to your point. So the U.S. can say that AT&T is being treated unfairly or whatever.
2656 But I would say you have the issue of the -- I totally agree with you, but you have the distinct issue of what is the substantive obligation? The substantive obligation is to transpose cost-based rates for -- implement cost-based rates for major suppliers. Can I complain about it? No, I have to be a foreign government and, you know, I am not there yet.
2657 So I agree with you to that extent, sir.
2658 THE CHAIRPERSON: Thank you.
2659 Any questions? Commissioner Molnar?
2660 COMMISSIONER MOLNAR: I need to understand this toll connect better, because you are saying it is not a cost-based rate. And what portion of this is not cost-based? This provides -- as I understand, the CAT provides connection from the local switch to the point of interconnection. What part of that is not..?
2661 MR. SCHMIDT: So, again, flowing from the Chairman's question, our trade law commitment is to implement cost-based interconnection rates. If you dig far down to the bottom of this, there is a cost-based interconnection rate in the form of the CAT.
2662 And then there is all sorts of other things layered on that, nothing to do with the cost of interconnection at all, supporting business satellite service, supporting residential satellite service, et cetera, you know, everything and the kitchen sink.
2663 So we are saying layered on top of this is all sorts of other sort of universal funding obligations and other things that have the cumulative effect of making this interconnection charge far more than an interconnection charge. So it is not confined exclusively to the cost of interconnection, it is not cost-based. And that is sort of the best answer I can give to that point.
2664 But, you know, is the other stuff that is extraneously layered into the rate cost-based? Without a doubt. I mean, you know, but you could put Mr. Flaherty's airplane, if he owns one, in there too on a cost-based basis, but it has nothing to do with the cost of interconnection, you know, purely speaking.
2665 COMMISSIONER MOLNAR: Okay. And this is the part I need to understand.
2666 If you are terminating a call to a business in a remote community in Nunavut, what part of this cost doesn't relate to that?
2667 MR. REIRSON: The satellite toll connect link costs were found by the Commission in Decision 99-16 to be an extension of the local access network and that's we believe those costs should be attributed to local service and not be part of the CAT rate.
2668 COMMISSIONER MOLNAR: But they are a cost of terminating a call to a business customer within a remote community?
2669 MR. REIRSON: They are utilized to terminate that call, but they've been determined to be an extension of the local access network, and that's what we're basing our proposal on.
2670 COMMISSIONER MOLNAR: Okay. Can I have NorthwesTel just confirm for me something related to these toll connect links.
2671 A business-to-business call or a business-to-residential call within a remote community, do they require these toll connect links to complete those calls?
2672 MR. FLAHERTY: Just to make sure I understand your question. So if it's a local call within the community, business-to-business --
2673 COMMISSIONER MOLNAR: Or business-to-residence. A local call within a community does not --
2674 MR. FLAHERTY: Does not require the toll links, no.
2675 COMMISSIONER MOLNAR: So these links are required for toll traffic completion?
2676 MR. FLAHERTY: That's correct.
2677 COMMISSIONER MOLNAR: Thank you. That was my understanding.
2678 THE CHAIRPERSON: Commissioner Duncan?
2679 COMMISSIONER DUNCAN: Yes, I do have just a couple of questions.
2680 I appreciate you going back and looking at that rate, the proposed rate increases. So we would have to see how NorthwesTel chooses to respond to that. But I'm not sure that it really addresses my concern.
2681 I understand there is another rate that's been determined to be just and reasonable. And I don't know the circumstances of that community, how it would compare to all these others.
2682 But even if I did know that, it doesn't address my concern that is it affordable to the people who live there. That's my concern. I just -- I'm not sure that this is -- I don't know the answer to the question.
2683 MR. SCHMIDT: I agree with you, and to the extent that I'm aware of it, the Commission has -- you know, they analyze rates on a just and reasonable rate standard. They don't -- they have traditionally not analyzed rates on an affordability standard.
2684 It's an empirical question and I agree with you that it is a totally open question. It may or may not be affordable. I mean a lot of things cost a lot more in the North. It may be affordable or it may not be.
2685 But to that extent, you know, in a sense I haven't answered your question then, but I've tried to give you some comfort by referring to precedent under your just and reasonable rate standard about things that seem okay in other parts of the country.
2686 COMMISSIONER DUNCAN: Okay. I appreciate that.
2687 The other aspect of your discussion about the CAT tariff and the suggestion that the business portion be recouped from increases in rates in the other baskets -- just let me get my baskets here -- the other capped services basket, and the specific concern I have there is that that basket includes optional features which would be services purchased by residential customers.
2688 So I think we would have to be careful to consider how that would impact consumers, residential consumers.
2689 MR. REIRSON: Correct, but there would be flexibility -- NorthwesTel would have some measure of flexibility how those revenues are raised within those baskets.
2690 COMMISSIONER DUNCAN: And I know that, but I don't -- I think you probably can still see why I'm suggesting it as a question.
2691 MR. REIRSON: Certainly. Yes.
2692 COMMISSIONER DUNCAN: Anyway, thank you very much.
2693 THE CHAIRPERSON: Commissioner Simpson, do you have any questions?
2694 COMMISSIONER SIMPSON: No.
2695 THE CHAIRPERSON: Thank you very much for your participation in the hearing. We appreciate it very much.
2696 MR. SCHMIDT: Thank you very much for the opportunity.
2697 THE SECRETARY: Thank you very much.
2698 I will now invite Mr. Rondeau from the Utilities Consumers' Group.
2699 Mr. Rondeau, please.
2700 THE SECRETARY: You may proceed, Mr. Rondeau, when you are ready.
2701 MR. RONDEAU: Good morning, ladies and gentlemen. Roger Rondeau of the Utilities Consumers' Group.
2702 Before I make our final rebuttal submission, I have a few observations that I want to put forward on the TELUS submission regarding the increase in rates.
2703 My first observation would be thank goodness they are not our service provider.
2704 My second observation is in the evidence, page 22 of 44, provided by NorthwesTel, we have the TELUS rates as one of the many different rates that have been provided to show throughout Canada.
2705 The highest rate for TELUS in Alberta is $32.76; the highest rate in British Columbia is $30.14. That is well below what we're paying.
2706 COMMISSIONER DUNCAN: Excuse me, Mr. Rondeau, could you just give me that page reference again? Thanks.
2707 MR. RONDEAU: It is page 22 of 44 of the NorthwesTel evidence.
2708 To be perfectly clear, ladies and gentlemen, UCG does not support the NorthwesTel position to increase our residential rates as they are already currently above the Commission's own guidelines. The same holds true for our local businesses.
2709 NorthwesTel has not provided a case for this increase other than to lower the subsidy from the National Contribution Fund.
2710 Perhaps UCG has the wrong impression of what the National Contribution Fund is. We always thought it was there to protect the consumer in high-cost serving areas.
2711 NorthwesTel has not touched on the affordability, as they explained yesterday.
2712 We provided the Commission with a letter from the Yukon Anti-Poverty Coalition, which we hope you have received, as well as a one-page statistics on low-income Yukon citizens that you would --
2713 THE CHAIRPERSON: Just a minute.
2714 Madam Secretary, have we got that document?
2715 MR. RONDEAU: And the one-page statistics on low income.
2716 THE SECRETARY: This is what I have.
--- Discussion off the record
2717 MR. RONDEAU: That's fine. I'll present that at another time.
--- Discussion off the record
2718 MR. RONDEAU: This Anti-Poverty Association has been around for some time now and there has also been a study done on vulnerable citizens that I have. I would like to add a page on low-income. Perhaps I can do that in the final argument.
2719 NorthwesTel has also not provided enough financial information for us to go through to demonstrate that their own efficiencies have benefited their own consumers.
2720 UCG submits that Northerners would benefit from immediate competition, both to the residents of the three territories and to the stimulation of business in the North.
2721 UCG further submits that this should even go further into all telecommunications in the North.
2722 For those Northerners that can't afford additional telecommunication links above and beyond local telephone service, we are simply asking for similar packages for local telephone, long distance, cable and Internet services. This includes the quality of service.
2723 We believe this is a right provided under the current statutes of Canada and the Telecommunications Act. Internet is also considered a right under the United Nations.
2724 Packaging in the Yukon under NorthwesTel for basic local, LD, cable, Internet is approximately $150 per customer. This is for a basic package. In southern jurisdictions it is more in the $100 range. All we ask for is closer rates for this package.
2725 NorthwesTel used to rely on long distance income to serve and secure their bottom line. Now, it is the Internet and to a somewhat smaller extent cellular.
2726 Thank you, Commissioners, for the opportunity to speak.
2727 THE CHAIRPERSON: Thank you very much.
2728 Are there any questions?
2729 Thank you very much for your participation. I appreciate it.
2730 THE SECRETARY: Thank you.
2731 I would now invite the next presenter on the agenda, Mr. Janigan from PIAC.
2732 THE CHAIRPERSON: I have just been asked, Mr. Rondeau, if you can file your survey as soon as possible so that the parties will have an opportunity to reply to it and respond. I'm not sure what the date you've suggested is.
2733 MR. McINTYRE: This coming Tuesday if possible.
2734 MR. RONDEAU: I can file that today as a matter of fact, later on today.
2735 THE CHAIRPERSON: Perfect! Thank you very much.
2736 THE SECRETARY: Perfect!
2737 Mr. Janigan, when you're ready, you may proceed with your presentation.
2738 MR. JANIGAN: Thank you very much.
2739 THE CHAIRPERSON: Is there a handout, Mr. Janigan?
2740 MR. JANIGAN: No, there is not. I've chosen not to reiterate our entire argument and try to look at a couple of different points that I've raised in the proceeding that possibly have not been addressed by me or by other parties with a degree of detail that might be helpful to the Commission.
2741 The first is the state of knowledge about NorthwesTel's costs and in particular the sufficiency of the evidence associated with NorthwesTel's expenses, revenues and figures that would ordinarily be required in relation to the setting of just and reasonable rates.
2742 As we know, NorthwesTel is completing its first-generation price cap. Ordinarily the regulatory review at this stage is to determine whether or not it's on the glide path to preparing itself for competition, whether or not it has taken on the challenge that's associated with performance-based regulation and introduced efficiency...
--- Power outage
--- Upon recessing at 1102
--- Upon resuming at 1201
2743 THE CHAIRPERSON: Mr. Janigan, I'm always reminded by people who say "If I had more time I could be more concise". You have had more time; take the time you need, though.
2744 MR. JANIGAN: (Off microphone)
2745 If I can remember where I was, I believe I was dealing with a number of different points that we thought should be reiterated to the Commission, or have been raised and haven't been dealt with maybe with the thoroughness that we would like.
2746 First and foremost I think is we are troubled by at least our state of knowledge associated with NorthwesTel's financial position and costs and approach to the first price cap regime. It may well be that the Commission in the materials filed in confidence may have more reason to be satisfied, but from our standpoint we find the information that has been put before us not entirely satisfactory in relation to attempting to adjudicate whether or not we are really on a glide path to competition and to the efficiencies that are associated with competition or whether or not effectively we have old wine in a new bottle, as it were, in relation to the first price cap.
2747 Some of the aspects or some of the reasons that we come to that conclusion is founded in the evidence and materials brought forward by NorthwesTel. In particular, we find that their studies associated with productivity are singularly unhelpful. They have chosen to look at cost studies associated with the H Band, which of course requires contribution, and have changed the model, in some respects, in midstream and have not included cost studies from the D Band which effectively includes the major population centres, and indicated that they didn't do the cost studies because they weren't required to be done for the purpose of calculation of the subsidy.
2748 We find that to be a little bit hard to understand, given that a fair amount of their position is based on the idea that having competition in these high population areas of Yellowknife and Whitehorse will bring problems for them in maintaining their obligation to serve the area and it's difficult to understand how those conclusions could be based on evidence if in fact the supporting cost studies are not done with respect to the D Band.
2749 As well, in the context of the hearing in relation to exchanges with Chairman Katz, it's clear that there at least is some initial question that must be made as to what are the allocation of costs between NorthwesTel's regulated and unregulated services. It's clear that because they are -- for example their broadband service is tied to their local service, that in fact there are some benefits that are being derived from one service by the other.
2750 We don't quite know how the cost treatment is dealt with from the standpoint of looking at NorthwesTel's expenses. And, as well, in our evidence as we touched upon, the customer care system seemed to be allocated solely to residential PES when in fact they support things like internet video.
2751 So there is considerable question of whether or not we really have the right data, what it means, and how does it fit with what the expectations of the regulator are in relation to the performance of a company under PBR.
2752 The question is: Are we certain that NorthwesTel has aggressively pursued the initiatives to lower costs and to raise revenues as would be the expectation under price caps?
2753 I think the answer to that question is probably no. The question is: What does the regulator do in these kind of circumstances when there is not exactly a surfeit of information associated with their performance.
2754 I believe in that circumstance that a commonsense rule applies, that in fact the status quo should remain unless there are substantial reasons to change the status quo in accordance with convincing evidence. As we have said in this case, I believe that there is very little.
2755 There are other remedies that have been pursued by regulators in similar circumstances, things like earnings sharing mechanism and this sort of thing. We don't think that in the event that the Commission chooses to open up NorthwesTel's area to competition that these are necessary, but they are the kinds of things that regulators in the past have looked to to try to ameliorate the impact of the fact that it's very difficult to glean where exactly NorthwesTel is in relation to its financial performance under price caps.
2756 Secondly, in terms of dealing with the issue of competition in general, we are struck by the degree of dissatisfaction that has been expressed in this hearing by everyone except NorthwesTel with the level of services, costs and availability for those services provided by NorthwesTel.
2757 I must say, I don't believe I have attended a hearing in the 20-odd years that I have been before the CRTC where I have heard such dissatisfaction about an ILEC in this circumstance.
2758 If this was the 1970s and we were considering the provision of plain old telephone service we would still have reason to be concerned, however the overall importance of the provision of POTS would not be as significant as the provision of telecommunications services at this time and in this place.
2759 I have been impressed with the submissions in particular by the governments in the area served by NorthwesTel to the effect that telecom and telecommunications services and access to services that are substantially similar to what is received in the south is the key to economic success in this region and, coupled with the developments over the past decade and a half in the Commission, and in accordance with the policy direction of the government, we believe that there is overwhelming evidence that the Commission must move to opening up facilities-based competition for NorthwesTel.
2760 Finally, if I could do a rebuttal of my own argument yesterday, or at least put a gloss on it that wasn't there, I would like to revisit the issue of local number portability costs.
2761 I have become aware of the decision of the Commission in 2007 in TBayTel, 2007-78, in relation to the expectations associated with where these costs should lie, and it's clear that the Commission has indicated that the costs should lie with the incumbent telephone company and be visited only on those customers who have the benefit of competition.
2762 Extrapolating from that decision I would suggest that in circumstances where a competitor is to enter that these costs be considered a Z-factor or exogenous factor associated with the price cap, that effectively the Commission examine those costs to ensure that they are necessary and ensure that those costs are passed on only in the areas where competition is actually likely to occur.
2763 So in this case of course if the competition is occurring in one region of NorthwesTel's territory, it's important that those costs to ready the telephone company for competition are not passed on to other customers who do not have the benefit of competition.
2764 Now, the only fly in the ointment associated with that is that it appears, particularly from the evidence of SSi, that competition may well be able to be provided without the necessity for incurring those costs.
2765 I don't know how much further I can pursue that argument and try to parse out the different kinds of results. But it appears to me that in the examination of whether or not the LNP costs should be considered as an exogenous factor and passed on, one of the factors that will be considered, of course, is whether or not a competitive service can be provided and the way in which those costs can be avoided.
2766 I have nothing -- I don't think anything particularly of importance to add in relation to that matter.
2767 So, in summary, we believe that the Commission is in a circumstance where the overwhelming evidence is that NorthwesTel should be opened up to competition.
2768 There is considerable underwhelming evidence that the price cap should be changed in the fashion that NorthwesTel suggested and, in fact, I think the counsel of caution is that the status quo should remain during the context of the next price cap as we move ever forward into the provision of competitive services throughout the North.
2769 Thank you very much.
2770 THE CHAIRPERSON: Thank you.
2771 Just so I understand, you are suggesting that the costs borne by NorthwesTel if there is local competition should be paid for by its consumers -- its customers who will benefit from competition?
2772 MR. JANIGAN: That appears to be the precedent that has been set by TBayTel and it has some resonance in terms of, number one, segregating off those costs to those customers that actually may benefit from competition.
2773 And, secondly, in relation to the rest of the customers they would not have to bear those costs and, of course, the incumbent telephone company may decide not to pass on those costs because of the presence of competition in that particular area.
2774 THE CHAIRPERSON: Okay, thank you.
2775 Any questions from my fellow Commissioners -- no.
2776 Thank you very much. Appreciate your joining us for this hearing.
2777 THE SECRETARY: Thank you. I will now invite SSi -- excuse me, SSi. Please come forward to the presentation table.
2778 THE SECRETARY: So please reintroduce yourselves for the record and you may proceed.
2779 MR. PHILIPP: Good morning. I think it's still morning.
2780 I am Jeff Philipp, Founder of SSi Micro, and CEO.
2781 With me on the panel today again are Dean Proctor and Robert Lemay-Yates -- sorry, Rob Yates, Co-President of Lemay-Yates.
2782 Our rebuttal argument is limited to three points coming out of yesterday's presentations:
2783 One, we have already deployed a network across the North so it is not a question of if SSi will enter local markets. We are already there. Our facilities represent a vital source of diversity and competitive choice;
2784 Two, our proposal for local interconnection should pose no technical challenge and is able to be readily implemented, and existing cellular interconnections prove that;
2785 Three, NorthwesTel's objections to local competition do not stand up to any scrutiny.
2786 With respect to point 1, SSi's infrastructure is built and operational across the North. Not only is broadband infrastructure able to deliver competitive local voice services, but our facilities provides an important source of diversity.
2787 Our evidence has emphasized that the diversity of competing networks provides added security and reliability for vital communications systems.
2788 Furthermore, diversity was raised in the Arctic Communications Infrastructure Assessment Report as an important feature to be addressed in the North. The ACIA report, which has been referred to by many parties to this proceeding, states at page 100:
2789 In order to ensure services are not knocked out in a single communications event, there needs to be redundancy built into the backbone connectivity.
2790 We noted with great interest yesterday the Commission's discussion with Mr. Flaherty of NorthwesTel concerning quality of service and the various service interruptions that NorthwesTel has suffered. He raised the outage of their terrestrial links to Inuvik during a storm earlier this year as an example of the challenges faced in the North.
2791 In fact, it is diversity of infrastructure and competitive suppliers that can ensure the North minimizes interruptions in communications service, thereby ensuring a higher quality of service is delivered to consumers.
2792 Let me illustrate. Attachment 1 to the presentation is a press release issued by Ice Wireless, the only other cellular operator in the Territories not affiliated with NorthwesTel.
2793 When the NorthwesTel backbone facilities to Inuvik went down last February, Ice Wireless approached SSi to provide an alternative source of backhaul via our satellite facilities while waiting for NorthwesTel to complete repairs. We did so, and Ice Wireless customers suffered minimal loss of service. To quote from a press release issued by Ice Wireless:
"As a result, while long distance from land lines and from other cellular providers has stayed down, long distance service from Inuvik has been restored for Ice Wireless customers."
"This is a great example of how northern companies..."
-- and I quote this --
"...band together in times of crisis."
-- said Tom Zubko, President of Ice Wireless.
"Ice Wireless and SSi both had the same goal here, which was to help the people of Inuvik get back in touch with their loved ones as quickly as possible." (As read)
2794 Please note that we did offer the same assistance to NorthwesTel, but they didn't accept. Had they done so, service interruptions to their customers would also have been minimized. This was a multi-day event.
2795 Turning to our second point, our proposal to implement local competition should pose no technical challenge and can be readily implemented. Cellular providers operate today in the North with 867 telephone numbers and local interconnection. The barriers are only regulatory.
2796 Our third point; yesterday's presentations demonstrated that NorthwesTel's objections to local competition don't stand up to scrutiny.
2797 Among other objections, NorthwesTel went on at length, raising the spectre of service to outlying communities being degraded or unsustainable if competition is introduced.
2798 The reality is that NorthwesTel, in a protected monopoly environment, has neglected smaller and remote communities. There has been a lack of investment, with switches that are over 25 years old. If they were suffering financially, one might expect them to underinvest, but NorthwesTel is not in financial difficulty. In fact, they are profitable, and according to Mr. Flaherty, NorthwesTel pays taxes.
2799 I might point out that one way to reduce this tax burden would be to increase the amount of investment being made in northern infrastructure.
2800 On the other hand, over the last seven years SSi has deployed advanced broadband infrastructure to 56 northern communities.
2801 There is demonstrably no "donut effect", as some parties have called the phenomenon whereby competition is limited to larger markets and smaller markets are neglected. All of our communities and all of our customers enjoy the same level of service and features in each one of our 56 communities.
2802 Tied to this, I would like to clarify the question of subsidies raised by Mr. Flaherty yesterday.
2803 In his presentation Mr. Flaherty suggested that SSi has received subsidies of approximately $36 million and he seemed to imply that this was a lot when compared to the 20 plus million that NorthwesTel has received.
2804 Let me correct the record.
2805 First, SSi has received approximately $11.5 million in capital to build out broadband satellite infrastructure in 55 of our 56 communities. We have received no assistance in Yellowknife where competitive services already existed.
2806 In addition, we have been allocated $24.8 million towards operating costs to deliver broadband to up to 7,000 customers. And that amount, just to be clear, is to cover a nine-year period.
2807 We assume the $20 million referred to by Mr. Flaherty is the annual contribution received by NorthwesTel, and which they have now asked to increase to over $24 million annually.
2808 Second, it should be noted that all funding received by SSi was awarded via public tender, advertised nationally on MERX and, in all cases, matching investment was required by SSi as a condition of receiving any funding.
2809 I would further point out that NorthwesTel bid unsuccessfully in all cases for the same funding.
2810 More recently SSi was awarded the contract to design, build and operate the new Government of Nunavut Wide Area Network, again in a competitive bidding process. No financial assistance was provided for us to complete this project.
2811 To facilitate the Commission's analysis, we took the liberty of going through the ACIA report and pulling out the details of funding received by both NorthwesTel and SSi. This is presented as Attachment 2.
2812 You will note over the time periods reviewed NorthwesTel's contribution funding totals some $166.8 million, with other identified public funding of $71 million, for a total of $237.8 million. That is a far cry from the $36M in assistance received by SSi.
2813 NorthwesTel suggests that if SSi or others build alternate networks, then that drains sources of implicit cross-subsidy. They of course fail to mention that the biggest growth market they could have, and which would be a very significant source of cross-subsidy, is the mobile business, which they have transferred to sister company, Bell Mobility.
2814 So by their own doing, NorthwesTel is forgoing growth from wireless services, which would be a source of implicit cross-subsidy.
2815 SSi has no legacy infrastructure. We have entirely new technology, with higher efficiency and lower operating costs and we continually upgrade and invest.
2816 We do not believe that it would be fair to be saddled with the upgrades to NorthwesTel's outdated infrastructure simply by being the first to offer competition in the market.
2817 So to close, the SSi Group of Companies has been operating in the North for almost 50 years and we are here to stay. Our facilities have already been deployed and we are ready and willing to compete in the local voice services market across the North.
2818 We thank the Commission again for having allowed us the opportunity to present before you and we would be pleased to answer any questions you may have.
2819 THE CHAIRPERSON: Thank you very much.
2820 Over the last day and a half I have heard a lot about the way you provide service and the way NorthwesTel provides service in the far north. You both use satellite technology, yet it appears as though you are able to provide service at a far lower cost than NorthwesTel.
2821 Is it the fact that you don't have a legacy network? Is it the fact that you are more efficient because you engineer your network differently?
2822 What drives that distinction, because it appears to be not just a couple of percentage points here and there, but something very substantial.
2823 Do you both get your capacity from Telesat? Do you negotiate different deals?
2824 How is it done?
2825 MR. PHILLIP: That's an excellent question, and it's probably not the simplest answer, but I will try to keep it short.
2826 I grew up in a small community of 750 people, as I mentioned in my statements yesterday. We have generated our own power for the last 50 years in that community. We have been off-grid, with 120,000 square feet of commercial space, including residential, business, commercial, motel, bar, restaurant, store, training centres. We have never been on-grid, and there is no ability for us to connect to the grid.
2827 The reason that's important is that in those 40-some years that I have been involved in this family business -- and my wife and I running it for the last 25 -- we have done all kinds of things that would be considered innovative. We built our own power plants. We upgraded those power plants. We take advantage of all of the waste heat from those power plants. We burn all of our waste oil. We utilize the exhaust gas to heat water to heat buildings.
2828 So to hear NorthwesTel, for example, talk about the high cost of power in remote facilities, I know that better than anyone. I am, in fact, a diesel engine mechanic, licensed. I don't practise, but I could fix it, and I do fix it.
2829 In Fort Providence we generate commercial power at 24 cents a kilowatt hour. Day in, day out, that's the full amortized capital cost, plus the operational cost of fuel, cartage, labour, filters -- all of that.
2830 The commercial rate in Fort Providence is 55 cents a kilowatt hour. So, in my business, we save a little over $120,000 a year just on our power costs, and we get heat for free.
2831 That is one example of innovation in a market that has nothing to do with telecommunications, but, in fact, it has everything to do with it, because in Qikiqtarjuaq the price is $2 a kilowatt hour for commercial power.
2832 And my first thought is: We should be putting our own power plants in, because we could operate those at far, far less, even with the imported fuel costs.
2833 So, to answer the telecommunications aspect, we negotiate the same deals with Telesat. We push them as hard as anyone else does to try to get a better deal. But, realistically, they have a monopoly on that aspect of our world, as well. So we have limited room to move there.
2834 We are far more efficient in the build-out of our infrastructure, and far more efficient in the provisioning and billing of our services.
2835 The first thing that I recognized, as one of the original ISPs starting in the north, was that the cost of bad debt, the cost of administration, the cost of running the service and provisioning a service to an end user, in a remote community, where you have no office, is critical. It's the reason why we are on the third generation of our billing system.
2836 And I would welcome any of the Commissioners, or anyone else who is interested, to stop by our office, if you have a chance, and let us show you what we do, because when you see the software that we have built and the network architecture that we have built -- we haven't built it because we had to build it, or we were forced to build it, or there were competitors chasing after us; we built it because it is the best infrastructure we could possibly build within the budget that we could afford as a much smaller operator/player than NorthwesTel -- obviously, as you pointed out yourself yesterday, Mr. Katz.
2837 We believe that we are more efficient. We certainly are more nimble. We have a total within the telecommunications side of our business of, roughly, 40 employees, spread over four offices, between Montreal, Ottawa, the West Coast and Halifax -- and Yellowknife, I suppose -- five.
2838 We operate virtually, with video conferencing and voice, between all of these offices, between all of our staff, every day, all day long. These are services we use in-house and that we sell to clients of ours, like the Government of Nunavut.
2839 We would like to sell these services to every market.
2840 It is because of this attention to detail, maybe, attention to the cost, the base cost of operating in these communities, that we are so efficient. We have far fewer people operating a very large network, in 56 sites, in Canada. That is not the only network that we operate. As I mentioned, we have been in Africa and Indonesia, and we have clients in the South Pacific; in fact, a regulated telco much like NorthwesTel, with 25 remote islands. We provide support to them remotely and on the ground, in their country, when required. But we do most of that remotely.
2841 Even to hear the comments about the cost of operating in these communities -- I agree with everything that NorthwesTel said. It is very expensive, and that means that you have to be very innovative. If you can't find somebody on the ground, you best be thinking about building a redundant infrastructure, so that you can remotely switch to the other piece when one breaks.
2842 We warehouse parts in four locations: Ottawa, Rankin Inlet, Iqualuit and Yellowknife. We warehouse millions of dollars worth of parts to be able to keep these sites running.
2843 And I don't base my business case decisions on what the subsidy is or how many subscribers we might be able to hold onto if competition isn't allowed to come. We base the services we build on the needs that our clients express, and if we can't build those competitively and effectively, we shouldn't be doing it.
2844 I believe that in the north it's time to open us up, not just to SSi Micro. This challenge today to local competition is not about SSi Micro, it's about the north benefiting from competition.
2845 If it happens to be that SSi Micro brings that competition first, so be it. But, realistically, our market is the world, not just the north. And I know that may be hard, because we have never met, and the Commissioners don't know who SSi is, but take the time to look. You will see that we have done a lot of innovative things, not just in telecommunications, and we want to do that globally, not just in the north.
2846 But this is my home. I don't just work here, I was born here and raised here. I have lived here my whole life, other than going to high school out in B.C. because there was no alternative in my community.
2847 So, with that, we want to be in this market. We have been here for 50 years and we don't plan on going anywhere.
2848 And I think that our evidence is the very fact that, in the last five years, NorthwesTel has lost four public tenders to us, totalling, as you saw yesterday, $36 million in funding -- in three rounds that, and the fourth was the Government of Nunavut.
2849 This is not unique, this is the fact that NorthwesTel has lost their way in terms of being competitive, and without competition -- and not just by us. You heard from TELUS. I am certain that TELUS will be our next competitor in this market, and in Whitehorse, and we are okay with that. Provided it is a fair and level playing field, we welcome all competitors. It's okay.
2850 And if we aren't sustainable in a competitive market, we should not be in that market, and I agree that the same holds true for NorthwesTel.
2851 Now, I will go so far as to say that I think NorthwesTel deserves a lot of credit, and I don't mean this for any reason other than we have telecommunications in the north and it is a very challenging market. But I believe that the structure of regulation has allowed NorthwesTel to get quite soft, and it has allowed them to get quite large. Unfortunately, like the automobile industry, there are no big bailouts, and there shouldn't be.
2852 They need to become competitive, not just because we are here now, but because the north deserves competition. That's why SSi Micro is fighting this.
2853 We need to have competition, not just for us, for every ISP. As you saw in the Yukon, with ISPs shutting down left, right and centre, leaving just one, the same thing has happened in Yellowknife and in the Northwest Territories.
2854 When we started, we moved from Fort Providence to Yellowknife. We weren't here. There were four other ISPs here already. Today there is NorthwesTel and SSi.
2855 The other two ISPs, the people that offer internet, buy from us at a direct cost flow-through from what NorthwesTel charges us, because they cannot afford to buy directly from NorthwesTel the kind of service they need.
2856 I think you will find in the next week that one of those two smaller internet providers is struggling desperately right now, because they cannot afford the cost of backbone connectivity, even when paid at cost to us.
2857 So without competition in the north, you will see an exodus of competition. You will find that people who are innovative, that have the ability to deliver services effectively in these communities, will leave. They will not invest here.
2858 I believe that is why we are more effective. We are passionate about what we do.
2859 THE CHAIRPERSON: I have one other question before I ask my fellow Commissioners if they have questions.
2860 There is one party who is not at this hearing at all, who prides itself on offering service in rural and remote areas, and that is Barrett Xplore. No one has mentioned their name for a day and a half.
2861 Are they in this territory? Are they offering service? Are they competitors?
2862 They provide ISP service. They provide voice services.
2863 Can either you or Mr. Flaherty from NorthwesTel give me some idea as to their role in this community, in Canada's far north?
2864 MR. PHILIPP: I don't know Barrett's business case, but I can tell you the practical realities to a service like that.
2865 When you don't have people on the ground in the community, and when the service requires installation on your home -- and it's not just like an ExpressVu that's receiving a signal, it is actually transmitting.
2866 And, as you well know, with satellites 2 degrees apart on the horizon, we can't just have anyone bolting it to the side of the house, turning it on and trying to get lucky hitting the right satellite. That is why the installation of a two-way satellite system, even a small one like the Barrett solution -- or NorthwesTel, at one point, offered the same system, which is Telesat's Ka-band system, just to be clear, which sold under the brand of either Barrett Xplornet, or, in the case of NorthwesTel, Netkaster.
2867 I believe -- and maybe Mr. Flaherty could correct me -- that NorthwesTel quit selling that service, or is not any longer offering the service, because of the cost of installation. To fly and install in a remote community -- thousands of dollars to install a $400 kit, that generates $60 a month worth of revenue, is obviously not viable.
2868 Which is why, when we built our network, we decided that we had to have an aggregation-type model, where we put one uplink in the community, and we distribute wirelessly, with a solution that any agent in that community could hand the modem out, and within four minutes, with our billing and provisioning system, sign that user up. No English as a first language, no math or English as a degree or a requirement to be able to do it.
2869 That is the difficulty, I believe, of a satellite two-way solution, and it is the reason why I believe that things like Barrett are limited -- or are more valuable in markets where you have road access, and where you have access to a larger population base, with one installer that can travel there easily.
2870 THE CHAIRPERSON: I was under the impression that Barrett also provided fixed wireless, where it wasn't one of these two-way satellite communication links.
2871 But you are saying that they are not in the remote communities?
2872 MR. PHILIPP: I wouldn't say that. I don't know where Barrett is or is not, but the challenge that they have in the north, and in any remote village like the north, is that the cost of power is $2 a kilowatt hour in Qikiqtarjuaq.
2873 The ability to get a piece of land in a territory that hasn't settled a land claim or where there is still the inability to purchase and own land, the requirement for environmental approvals before you can build a tower or a building, the fact that you only have sealift once a year, means that you have sort of a two-year window by the time you think of doing this in Qikiqtarjuaq to when you are actually deployed, which makes it very complicated to go into these small markets.
2874 It was certainly complicated for us, we invested a lot of money. Matching funds, as I said, $36 million from the feds, $36 million from us. So I think it is very difficult in those markets that are not road-served.
2875 But there is nothing to say they couldn't be a competitor and we would welcome them like everyone else.
2876 THE CHAIRPERSON: Thank you.
2877 Mr. Flaherty, is there anything you can add or..?
2878 MR. FLAHERTY: Yes, sir.
2879 Barrett Xplore is in the north, they are confined to a number of smaller communities. We estimate in Iqaluit they probably have somewhere in the neighbourhood of 10 to 15 per cent market share in that community. There may be isolated cases outside of Iqaluit where they have service, but in Nunavut I am thinking in particular, but not a lot.
2880 There is a little bit in the Northwest Territories and perhaps even a smaller amount in the Yukon. So if I had to pick one location where I thought they had a bigger presence, from what I know it would be in Iqaluit.
2881 Mr. Philipp talked about our Netcaster service. We do still offer that service. In four communities in Nunavut we offer it sort of on a regular basis. In many other places it is more of a service that we offer to business customers because of the high cost, as Mr. Philipp said, of installing the service.
2882 THE CHAIRPERSON: Thank you.
2883 Any comments, questions?
2884 Commissioner Molnar.
2885 COMMISSIONER MOLNAR: Thank you.
2886 You mentioned with Commissioner Katz that there is limited room to move on the Telesat rates that you pay.
2887 But I am still struck by the fact yesterday you said that you offer 7-cent toll and had been talking I believe, if I remember correctly, about being able to dynamically use your pipes, if you will, to offer your whole portfolio of services and so on. And you have a mentioned a couple times about the fact that you are not encumbered by legacy network and you have a full modern and efficient network.
2888 And I am asking this question relative to one of the issues in front of us, which is this subsidy to the toll connect charges. And I wonder if you can offer 7-cent toll, how is it you are able to deliver such relatively inexpensive toll over a satellite feed when it is determined by others to be such a high cost?
2889 MR. PHILIPP: I think the challenge that I have with that is that I am not quite certain how the other costs get arrived at. I know how my costs get arrived at, I am not certain how we arrive at the other costs. You know, if I were in NorthwesTel's position it would be very difficult right now because, quite frankly, I think that the biggest competitor NorthwesTel faces is themselves.
2890 Broadband internet will replace voice circuits, there is no two ways about it. But broadband internet requires quality of service delivered over that internet for voice to be effective. So if NorthwesTel is worried about competitors coming in offering voice services, how is it that their own broadband is not going to cannibalize their voice revenue?
2891 Currently, the broadband is not reliable enough to provide toll quality voice because there is no QOS that I can purchase as a wholesale vendor to give me the level of quality I need to offer VoIP over their network.
2892 Now, in a satellite-served market where we both purchase from Telesat, there is some very simple math. It comes down to what your operating costs in the community are. The space segment is not the issue, 1 megabit of capacity will carry a large volume of calls.
2893 And when you take the oversubscription of the number of customers that you have to the number of simultaneous calls that you have, and if you can dynamically switch that circuit to one or more communities without having to buy individual circuits into every community, your operating costs are far far cheaper.
2894 So in our network we can buy, as an example take 1 megabit of capacity, and if a voice call with overhead is even 50 kilobit for simple math, we are talking 20 simultaneous calls on a single 1-megabit circuit. Twenty simultaneous calls with an oversubscription of 20 to 1 is 400 subscribers paying $60 -- $31 a month.
2895 That is not a bad revenue stream for providing no toll long-distance, just simply their device plugged into your local network. It is why we offer it at $5 a week or $15 a month to have your device registered and plugged into our network.
2896 I mean, really, what are we providing? We are providing you with the ability to register on a switch somewhere. It doesn't cost anything for that, the power is being paid for, the building is in place, the agent is in place. The nominal up-charge for us to deliver an IP VoIP device connected to our network in the community is nominal.
2897 Quite frankly, we were going to come out of the gate in Iqaluit at no monthly fee, but that would have just been silly. So at $15 a month we think it is a very competitive service. And at 7 cents a minute it more than pays for the toll charge over our satellite network.
2898 Now, I can't comment as to the inefficiencies of NorthwesTel's satellite network, but we are not on our first satellite network. As I mentioned yesterday, we have invested in three satellite upgrades since we started competing in this marketplace, not because the old infrastructure was outdated, but because it couldn't deliver the things that I fundamentally felt we had to be able to deliver and at the price point that I knew we had to be able to meet.
2899 People can't afford long-distance in the north, it is one of the biggest complaints we hear. And it blows me away, quite frankly, that we make $60 a month retail delivering a 500 kilobit service into a customer's home and NorthwesTel can charge $31 a month to have a phone activated on a switch with no long-distance and no satellite capacity.
2900 Now, they have terrestrial infrastructure, they have copper, they have older legacy systems, they have a much higher provisioning and billing cost because, as they mentioned, they run multiple billing systems, and that gets very complicated.
2901 We looked at provisioning billing from big vendors. We discounted a million-dollar software package and wrote our own in the end because we couldn't get what we needed.
2902 Now, as I mentioned in my remarks yesterday, some of the people here with us at the back, Jeremy Childs, our Manger of Software Development, has been with me 15 years. Our senior management team has been with me over a decade, everyone of them.
2903 And it is through the efficiencies that we have gained in developing new software, new methods of doing it, upgrading our infrastructure when we didn't find it to be competitive enough, that has allowed us to offer services at the price point that we can.
2904 I don't have any explanation as to why others can't, other than they aren't as efficient. We aren't doing this to lose money and go bankrupt and we haven't been in business for 50 years with those types of business models I assure you. And it is not just in telecommunications, the margin in bulk fuel I will have you know is far lower and the operating costs, even in one community, are far higher.
2905 I don't know what else to tell you.
2906 COMMISSIONER MOLNAR: Fair enough.
2907 I wonder if NorthwesTel would like to comment at all about the differences in the costs of that toll connect or, you know, relative costs per minute between an IP network, a dynamic IP network, new network, versus what is in place today?
2908 MR. FLAHERTY: If I may, I prefer to respond in my reply.
2909 COMMISSIONER MOLNAR: Yes, absolutely.
2910 MR. PHILIPP: I might be able to shed, with one example, a little more light on it, and it is probably a very good example.
2911 Healthcare, prior to the Government of Nunavut selecting us for their wide-area network contract the Government of Nunavut subscribed or was a client of ArctiCOM, a subsidiary joint venture of NorthwesTel's. And for things like healthcare they were, because of the network architecture, required to purchase one link from Iqaluit to each remote nursing station.
2912 Now each link, to deliver a reasonable amount of video conferencing, and in this case it was 512 kilobits in each direction, is a 1-megabit connection x 25. Twenty-five megabits worth of capacity. If they did this in everyone of the 25 regions or 24 outlying communities and connected them back to Iqaluit would be 24 circuits back to Iqaluit at 1 megabit.
2913 Twenty-four megabits from Telesat or at retail, let me say, is going to be in the neighbourhood of about $200,000 a month. And at most, you are going to get one call from one community to one doctor at a time. And yet, you have 23 other circuits unused, costing you a huge amount of money.
2914 If you could buy four circuits, because you only have four doctors to talk to in the south, because contractually that is all they have, you could spend $40,000 a month instead of $220,000 a month and deliver a higher quality of service because those four circuits could all land in one community, if you had an emergency and required four doctors on-call to that community or could deliver one call to each of four communities simultaneously.
2915 And furthermore, when that bandwidth isn't being used for healthcare, it goes right back dynamically into the pool that benefits their core financial systems, benefits the education delivery through internet into their schools. Because dynamically, millisecond by millisecond on our hub we can reallocate, according to the Government of Nunavut's own priorities, how their bandwidth is used.
2916 It is no different with voice, it is just voice actually should be a lot simpler because it really is a lot lower bandwidth. But when you start looking at core financial systems, healthcare, distance education, it becomes critical that that bandwidth can dynamically be reallocated.
2917 We can do that over satellite, can't do it over terrestrial I might add. When you build a fibre network you build the biggest piece at the gateway and then you get very small, these thin route pipes that NorthwesTel talked about.
2918 You get very small up near the edge, Tuk, Homin, those places, the links out of there are very small. If NorthwesTel is concerned about an extra 1 megabit of capacity coming out of a remote community, it gives you an idea of how small those links can get.
2919 Our network has no such limitation. We have currently 150 megabits worth of capacity in the cloud over Nunavut shared dynamically in two pools; one in-bound to all the remotes, and the other one being the mesh pool between them. We would like to make it even more efficient, quite frankly.
2920 And in the next month, we will be investing in additional hardware. And my wife at the back of the room, the CFO, should cover her ears, because it will be expensive. And I have no business case for it yet, but I know there is one and I know that if my operating costs go down I will recover my investment.
2921 THE CHAIRPERSON: I still have one or two questions.
2922 First of all, were you involved at all in the Inukshuk Initiative? Can you explain your role?
2923 MR. PHILIPP: Yes, absolutely. We both could. That's why I looked at Dean. I've been talking so much and I'm usually accused of that, so I was going to give him a chance. But he's shy, so I'll take over.
2924 THE CHAIRPERSON: Not the Dean that I know.
2925 COMMISSIONER MENZIES: My question was going to be whether you had ever worked in sales.
2926 MR. PROCTOR: We are not a sales-oriented organization.
2927 MR. PHILIPP: I'll tell you the same thing I tell everyone else that asks me. I'm the CEO, and really, I'm the CTO. My interest is in the toys. My interest is in the hardware and the solutions and not just in telecommunications, in power, in transportation, in all aspects. I'm interested in ways to make things more efficient.
2928 So to answer your question about sales, yes, I've done sales as well, but I've also worked in the restaurant, I've worked in the shop.
2929 Inukshuk. I've known Dean since we originally wanted to bring cellular to Yellowknife, oh, a decade and a half ago, when long distance was $1.10 a minute and air time was $1 a minute for cellular and you paid $2.10 a minute to make a long distance call over cellular.
2930 So we approached Microcell and Microcell were interested in the North. They saw some appeal of the North. In fact, Microcell tried to launch cellular in Iqaluit -- I'll let Dean if he wants to go into why it didn't work -- but that didn't get off the ground and we consequently stayed in touch.
2931 And when the 2.5-gig spectrum became available, we worked with Microcell and Inukshuk, the subsidiary, to put together a proposal to secure the 2.5-gig spectrum.
2932 And a part of that project with Inukshuk and a part of my interest in that was to be able to use that spectrum in the North. So our arrangement was that we really wanted that spectrum in the NWT and Nunavut, and in fact in the Yukon as well.
2933 As it turned out, Inukshuk -- which is now obviously Bell and Rogers in the South -- kept the spectrum in the Yukon because they were interested in that because they were offering services there already and they have the spectrum in southern Canada, but we have the spectrum as SSi in the North.
2934 And so that is where the 2.5-gig spectrum came from. And in fact, if Bell and Rogers were a little bit more agreeable, we would have a full roaming agreement and every customer in Nunavut should be able to roam everywhere in southern Canada because we have the same infrastructure in terms of the wireless last mile.
2935 But technologically, we can do it. It became a real challenge for Bell and Rogers because provisioning and billing and software development is not their forte.
2936 THE CHAIRPERSON: So I missed something. You kept the 2.5-gig spectrum in the North?
2937 MR. PROCTOR: Sorry, battling microphones.
2938 Yes, maybe to step back on that one, the actual allocation process for the 2.5 gig, the licences were issued back in 2000. I'm going to go back in my memory now.
2939 Inukshuk was awarded licences to the 2500-MHz MCS spectrum in every province and territory of Canada, except for Saskatchewan and parts of Manitoba where it had already been allocated, and SaskTel actually was allocated that in Saskatchewan.
2940 Our arrangement -- our working relationship with -- now, I have to put back on my Inukshuk hat from 11-12 years ago. Our working relationship with SSi was extremely close, where in fact with Jeff, he was down very often in Montreal as we were testing out the technologies that were going to be deployed not only in the South but more urgently in the North. So that went on in the early 2000s.
2941 The equipment that was selected was from a company called Nexnet, which is now today owned by Nokia Siemens. It was launched here in Yellowknife, in 2004, first. It was actually through Jeff's persistence in testing that in fact this became the first commercial launch of that technology in Canada and probably the second or third in all of North America.
2942 But at that point it was still Inukshuk's licence. We were negotiating at that point in time a transfer in fact of the spectrum over to SSi, and that took place in 2004 actually, around that same timeframe.
2943 So at the same time as Jeff was -- or SSi was deploying the technology here in Yellowknife, we were also negotiating a transfer of the spectrum so he actually had control over the spectrum. But it was initially allocated to Inukshuk and a transfer took place.
2944 There have been similar arrangements, not full transfers, but Inukshuk has actually done similar arrangements where -- I'm not sure what the right term might be -- we'll call it sub-licensing of spectrum, for example, to the KRG in Nunavik in Northern Quebec. They also run a network, but it is not their spectrum. It remains -- I believe today it still remains Inukshuk spectrum.
2945 THE CHAIRPERSON: Is there any relationship at all between the 2.5 spectrum that you have and Bell and TELUS' joint -- Rogers and Bell's joint venture for Inukshuk today?
2946 MR. PROCTOR: Commercial? Commercial relationship? Pardon me.
2947 THE CHAIRPERSON: Commercial or financial.
2948 MR. PROCTOR: I'll let Jeff answer that one, but yes.
2949 MR. PHILIPP: Yes, commercial.
2950 THE CHAIRPERSON: Commercial.
2951 MR. PHILIPP: Yes. No financial relationship whatsoever. We -- when that licence was transferred to us, it really was one of the conditions that I had put out there with Inukshuk originally, was that I was not willing to invest millions of dollars in 2.5-gig hardware if I didn't have control of the spectrum. So as a condition of our arrangement, the spectrum was transferred to us at a nominal cost.
2952 Now, there is no further commercial relationship or arrangement between Inukshuk and us.
2953 Bell and Rogers have since -- they're looking at upgrading their infrastructure from that Nokia Siemens platform. They were the master distributor, I believe is the right term in Canada. So we had to purchase through them, from Motorola at the time.
2954 We no longer do that. We buy directly from Nokia Siemens and we've been purchasing directly from Motorola actually for the last five years, I believe.
2955 THE CHAIRPERSON: Is that 2.5 network operational today?
2956 MR. PHILIPP: In all 56 communities. You can take a modem from Yellowknife to Grise Fiord, to that community of 55 people, Kakisa, and get the exact same level of service.
2957 THE CHAIRPERSON: Yes.
2958 My last question, and it's just a mathematical one, on page 6, in paragraph 20, you talk about the funding that was received by SSi and it indicates that there was roughly $25 million, $24.8 million towards operating costs to deliver up to 7,000 customers broadband service over nine years.
2959 Now, assuming 100 percent of the customers subscribe to the service and I divide the $24.8 million by 7,000 customers divided by nine years, I get $400 per customer, divided by 12 months is roughly $35 per sub.
2960 So you've received the equivalent of $35 a month per sub for nine years in operating costs to support those, assuming that 100 percent of the customers take it up. At 50 percent, then it becomes $70 a sub. Is that the right math?
2961 MR. PHILIPP: That's the right direction in the math. The only things missing in that that would affect that calculation are things -- and they were alluded to yesterday -- there was one round of funding and then there was a second round of funding.
2962 What actually happened was when the Industry Canada Brand Program came along, we were selected as the vendor. We built out a business case with Nunavut Broadband Development Corp., we presented it to the federal government, and Industry Canada politely told me that I was absolutely a lunatic to expect that we would have more than 2,000 customers buying Internet in Nunavut ever.
2963 And I rejected that idea, but ultimately, they were not willing to fund it with any more than 2,000 subscribers in the business case, and that really goes towards the dollars that are set aside for that subsidy paid out annually towards the number of subscribers you actually have. If you don't have them, you don't get the subsidy.
2964 And what Industry Canada was worried about was if they went with my projection of 7,000 subscribers, they would be setting aside a large amount of money and they might have trouble with Treasury on that. So they agreed to subsidize the business case up to 2,000 customers and have us come back if we exceeded that.
2965 In month eight of an eight-year business plan, we exceeded 2,000 subscribers. We went back to Industry Canada and we said: Geez, guys, look at how successful it's been. We now need you to make good on that promise and deliver the subsidy for the remainder of the users or do we stop signing people up or do we charge them the real cost of delivering the service, which at the time, you're right, initially was more like $56 per subscriber, I believe, in the initial round when it was 2,000 subs.
2966 It took eight months to convince Industry Canada, because their first answer was: I'm sorry, that program is closed, there is no more money.
2967 My response was: I just spent $5.5 million in capital of our company's money in matching funds with the federal government's $4.9 million to build this network and I did not build it on the assumption that we would run out of subsidy after 2,000 subscribers, especially when I knew full well, having grown up in one of these communities, that there would be 60 percent penetration and 7,000 subscribers by year eight.
2968 It took us eight months and a little under $1 million in losses in order to convince the federal government that this was not stopping and in fact we would hit those numbers, at which point they came back and agreed not to give us a new subsidy but simply to honour the deal that we had made, which was that they would provide a subsidy for up to X number of users over this period of time provided we continued to deliver the service.
2969 And we are measured and there are criteria and rating that Nunavut Broadband Development Corp. use in analyzing whether or not we are doing what we should be.
2970 So in Nunavut we've been very fortunate. We have a great community champion and the network continues to grow, and in fact we have exceeded now the number of subs that were originally projected in our business case.
2971 THE CHAIRPERSON: So how much is a consumer in Nunavut paying you for the service over and above the $30 roughly that you're getting from the government?
2972 MR. PHILIPP: The basic package is $60 a month, and I say that because there's a $60-a-month, $120 and a $400-a-month package, and really the difference is two things.
2973 One is local access speed. But also and the real difference is usage because this is a satellite-served community and all of our networks are satellite-served and we need to be very, very cautious on utilization and usage, and so we have built in usage caps into every plan and those are what really determine the difference in price between the packages. But the subsidy is the same regardless of the package.
2974 THE CHAIRPERSON: So people are paying either $60, $100 or $400?
2975 MR. PHILIPP: Yes, $60, $120 or $400. And really, $120 and $400 are geared more at the, I would say, business user as opposed to residential, but that's not even quite the case anymore, to be honest, because even residential users now have much higher demands. They have the equivalent of a business user five years ago.
2976 THE CHAIRPERSON: And your penetration is as high as you say it is. I'm trying to understand.
2977 What I've heard in the last day and a half is that the $2-a-month telco increase that NorthwesTel is looking for is a burden -- will be a burden on residents up here.
2978 But yet, in Nunavut, which is probably the least affordable of the three territories, have got consumers in bulk that are prepared to pay $60, $120 and $400 a month.
2979 Either there's a disconnect somewhere or there's a two-tier system here. I don't get it.
2980 MR. PROCTOR: We assume that wasn't a question to us but a comment.
2981 THE CHAIRPERSON: Well, I guess I'm looking for an answer. I mean I get it from --
2982 MR. PROCTOR: We don't have an answer for the $2, whether it's reasonable or not. We don't give a comment on that --
2983 MR. PHILIPP: I don't think that was the question though. Let me take a stab at that. And I know, Dean, you're telling me not to go off the reserve here too far, but I believe that's a valid question.
2984 And you're absolutely right, people are paying $60 a month and they're not happy about it.
2985 Now, $60 a month five years ago when there was nothing but long distance dial-up at a 50-cent-a-minute long distance for a 14-kilobit call if you were lucky was cheap and people bought it in droves.
2986 And absolutely, people are using it for things like voice and to offset other telecommunications.
2987 I mean you heard earlier that there are, you know, nine people per household and one phone line. But you know what, they've got Internet and they've got Skype and they've got other voice services that are helping them offset and defray the cost of telecommunications.
2988 People are not paying $31 a month for voice service in Nunavut either. They're paying on average closer to $60 a month by the time they add one or two other basic features and try to get their price down to as low as 10 cents a minute if they buy the other $6-a-month world bundle or whatever it happens to be.
2989 So I think that you're absolutely right, people are paying $60 a month and they're doing it because it is absolutely critical that we have telecommunications and connectivity in these communities.
2990 And it isn't just voice. It's about being able to see and hear people now, and so audio has to catch up.
2991 And we're just a little bit ahead of the game and I hope that if we're allowed to also do audio, compete locally in the voice market, that we can offer a more competitive service to these users by bundling things like Internet and voice.
2992 THE CHAIRPERSON: My question actually went beyond that, to the point of affordability, and what I heard was $2 a month is no longer affordable to add on to a $31.33 monthly bill, let alone a $60 bill when you add on long distance.
2993 And I'm sort of saying it appears as though there are consumers out there that don't have that problem obviously. What I don't know is the magnitude of those that do have that problem.
2994 MR. PHILIPP: Yes. You know, I absolutely agree, and if you were to ask consumers, I'm sure you would find as many unhappy with our $60-a-month price as you would NorthwesTel's $31. That is the reality in the market.
2995 Now, can we do better? We would like to. Is it expensive? Absolutely. I think the question is why are we paying $31 a month for voice service if we're delivering 50 kilobits per second versus $60 a month for 500?
2996 THE CHAIRPERSON: Thank you.
2997 Well, thank you very, very much. I appreciate your appearance here and your input and the valuable information you provided us.
2998 I see by the clock it is one o'clock. I would like to suggest that we adjourn for the lunch period and come back at 2:15 with NorthwesTel's Phase II reply.
2999 Thank you.
--- Upon recessing at 1304
--- Upon resuming at 1427
3000 THE CHAIRPERSON: Madam Secretary, I think everybody is ready.
3001 THE SECRETARY: Thank you, Mr. Chairman.
3002 We are now ready to hear the NorthwesTel Inc.'s oral rebuttal.
3003 Please reintroduce yourselves for the record, after which you have 10 minutes.
3004 MR. ROGERS: Just as a housekeeping matter, Mr. Chairman, I gave to the Secretary a little while ago our response to an undertaking given to Commissioner Molnar yesterday in regard to quality of service. So that's been provided to the Hearing Secretary and I imagine it could be entered as an exhibit.
3005 THE SECRETARY: Yes. It will be placed on the public record as well.
3006 Thank you.
3007 MR. FLAHERTY: Thank you, Madam Secretary.
3008 Just to reintroduce the panel that's with me, Phil Rogers, External Regulatory Counsel for NorthwesTel; Muriel Chalifoux, former Director of Regulatory and Carrier Services, currently consulting with NorthwesTel; myself, Paul Flaherty, President and CEO of NorthwesTel; and, to my right, Jason Bilsky, the Chief Financial Officer and our VP of Corporate Services.
3009 I would like to say that a lot has been said in the last two days for sure -- that's probably a huge understatement -- so I will attempt to address the items one by one. I may depart from the text a little bit as I go through it because there are so many things.
3010 We probably will confine ourselves to the things that we think are of most importance. You I'm sure will have questions for us.
3011 I would say that there is a lot of allegations that have been made over the last two days and I would really trust the Commission to continue to use its usual judgment in making sure that you understand and get into the facts that are behind some of these allegations. So I will attempt to address some of them, but I guess I would just encourage you to make sure for yourselves that you are comfortable with the facts that people have put on the table by the nature that I'm not going to talk about every single one of them.
3012 NorthwesTel acknowledges the view of certain parties opposing local rate increases, particularly in the residential market. However, it must be recognized that the cost of providing services is increasing and that Northerners cannot rely solely on the National Contribution Fund.
3013 We think it is inappropriate for prices for all other goods and services to go up and for telecom rates to remain frozen. You know, when I go home at night I pay more for gasoline, I pay more for heating fuel, I pay more for food as time marches on. To suggest that telecommunications would just stay flat for an indefinite period of time to me doesn't seem realistic. It's not in step with all the other things that are happening within the marketplace in the north.
3014 Consequently, then, NorthwesTel submits that it's appropriate for customers to pay at least a portion of the cost increase.
3015 Furthermore, NorthwesTel would like to clarify the misperception that Band D rates are compensatory.
3016 Subsequent to Decision 2007-5, NorthwesTel filed a Part VII application revising our res PES costing results for both Bands H1 and Band D, indicating that the costs are higher than residential rates in both bands, and that fact hasn't changed.
3017 At a minimum the company must be afforded the pricing flexibility to recover costs plus a reasonable mark-up in Band D and that the costing results justify the $2.00 increase.
3018 The company would also like to address the $30 figure that's been referred to by several parties here that was mentioned in TRP CRTC 2011-291.
3019 First, this $30 target was set in order to address inequities in the subsidy regime given that res PES rates in high-cost areas in the south varied significantly. NorthwesTel submits that it's proposed rate in its Band H1 high-cost serving area is consistent with the policy direction reflecting the unique high-cost nature of NorthwesTel's operating area.
3020 Furthermore, the company notes that this particular determination does not apply to non-high-cost areas, including NorthwesTel's Band D communities of Whitehorse and Yellowknife.
3021 If the Commission is concerned regarding affordability, NorthwesTel suggests it could scale the increased in rates to the highest previously approved rate of $32.76.
3022 I will pause there for a moment because there is some confusion.
3023 In our evidence we did highlight a number of comparisons. We realized afterwards that those comparisons included extended area calling in some cases. So if you remove the extended area calling, the highest rate that we could find was in TELUS territory at $32.76 and we did file that in an interrogatory.
3024 So what we are suggesting is if the Commission deemed that the $2.00 was an issue, that you could come back to the previously highest approved rate of $32.76, resulting in a $1.43 increase instead of the $2.00.
3025 However, this would result in a continued shortfall in Band D that would need to be addressed through sufficient pricing flexibility on a go-forward basis, thus the proposed constraint of "I" on the residential basket in our view is appropriate.
3026 With regards to the business access rate increase, the company emphasizes that it must be permitted the pricing flexibility to ensure that rates are compensatory. The proposed $2.00 rate increase is required to recover costs plus a reasonable contribution to fixed and common costs.
3027 Furthermore, it's evident with the current one rate approach that there is a significant flow of cross subsidy between the profitable communities of Whitehorse and Yellowknife and the high-cost communities. Thus, the increase in Band H1 rates reduces the need for internal cross subsidy.
3028 NorthwesTel also acknowledges that business rates in the north are currently lower than other companies high-cost serving area rates in the south.
3029 With respect to the topic of res PES H1 costs, the company would like to make some brief comments about statements made by other parties regarding the validity of the costing results filed with the Commission.
3030 NorthwesTel did not -- I stress -- did not allocate the full cost of the customer care and billing systems to the res PES Band H1 cost study.
3031 We fully recognize that those systems will be used to serve our wireless business, our cable business. We apportion those and then we apportion them back to NAS and then we separated bus and res. So we very much have taken great pains to do that.
3032 This is evident in the supporting modeling and assumptions that were filed in confidence with the Commission.
3033 Furthermore, Commission staff review these underlying assumptions and cost inputs in detail and, as one would normally expect, such a thorough vetting has resulted in some revisions.
3034 With respect to satellite toll connect, the three northern governments and TELUS supported the proposals to include funding for the residential satellite toll connect links from the National Contribution Fund.
3035 As noted by the company and reiterated by TELUS, the Commission did indeed determined in Decision 99-16 that these costs were an extension of the local network and should be assigned to monopoly access. If it were not for these geographic distances and the need for an independent local switch in each of these satellite communities, NorthwesTel would have deployed host remote technology and, as per TELUS' comments yesterday, the corresponding links would have been assigned to res PES.
3036 As TELUS points out, the current approach of a blended CAT where costs are averaged across all toll traffic places the burden of subsidizing these high-cost links on toll carriers and, more specifically, on minutes between Whitehorse, Yellowknife, Fort Nelson and the south.
3037 Utilizing the National Contribution Fund is not only appropriate given that it has been previously determined that these facilities are access related in high-cost, but it is also a more equitable cost recovery than continuing to place the burden on the toll market in Whitehorse, Yellowknife and Fort Nelson.
3038 And, as I mentioned earlier this morning of course, we are seeing significant decline in those minutes and that subsidy is disappearing because of people choosing alternate forms of long distance.
3039 Some parties supported that the business satellite toll connect links also need to be recovered in a more equitable fashion. TELUS specifically commented that these costs could be recovered through business access rate increases. However, as we have noted above, Band H1 business is already not compensatory.
3040 Furthermore, placing the burden on other cap services would not be equitable or sustainable as these services are either too small or in a state of decline.
3041 It is evident that with the significant impact of VoIP, which will only be exacerbated with the introduction of local competition, that a new solution for recovering these costs is required.
3042 With respect to SIP2, NorthwesTel's SIP proposal is targeted to where the greatest needs exist and addresses the most uneconomic situations regarding the delivery of the BSO. As call display is available for 95 percent of our customer base, the provision of call display to the remaining 29 communities was a result in the last 5 percent of our customers having access to the BSO and, more importantly, to call display, an important tool for customers to deal with social concerns within their community.
3043 With regard to the SR500 project, it's an exceptionally high-cost project and uneconomic. Rates and funding, including the res PES subsidy from the National Contribution Fund, are not sufficient to fund the replacement of this network. The capital investment cost for this network is approximately $15,000 per NAS. This is 10 times higher than the average loop investment cost in Band H1, which is used for res PES costing study.
3044 Furthermore, an adjustment was made to the subsidy requirement to ensure that there was no double counting.
3045 Corporate profitability. In 2007 the Commission moved away from rate of return regulation to a price cap framework. Even under the previous rate of return regulation there was no requirement for any ILEC to cross subsidize regulated business from non-regulated businesses and GNWT's comments in this regard appear to be out of step with telecom policy over the last 20 years.
3046 In the high-cost serving area decision, and the subsequent contribution proceeding, the Commission established a framework of explicit subsidy for the provision of basic service in high-cost areas from a broad range of services on a national basis.
3047 Consistent with this framework, we are requesting targeted subsidies based on cost for the provision of basic services in the areas where it is most in need.
3048 Capital investment. This was another interesting area.
3049 We are investing to meet the basic service objectives in a cost-effective way. We are at the upper end of the telecommunications industry averages.
3050 As I indicated to the folks from TELUS this morning, our intent in citing TELUS was by no means in any way to infer that TELUS is under investing. In actual fact, we would commend TELUS for what they have done in terms of investing.
3051 But it was used more in a comparison to say that NorthwesTel is investing as much as other benchmark companies. To be specific and build on comments made by TELUS yesterday, a 10-year average TELUS wireline capital intensity is 23 percent. NorthwesTel's 10 year average is 24 percent on a consolidated basis. If you look that up for wireline only it would be even higher.
3052 We are not saying we are better, only that we invest at the same high rate as other leading companies.
3053 Cumulative investment in the past 10 years has been in excess of $420 million and steadily growing. Examples of where we have recently invested in network that supports the delivery of regulated services are transport upgrades for redundancy, $10 million; access plant, $4 million; power upgrades, $2 million; environmental fuel system compliance, $3 million.
3054 Furthermore, the company is investing in next-generation satellite IP VPN networks, $5 million; technologies to replace TES. This network will be used for traditional voice data, voice services, as well as data.
3055 I wanted to pause again for a moment here. When people spoke about this subject there was a lot of variety of items that were brought up. We heard things about next-generation cellular service, we heard things about redundancy in communications, we heard things about broadband access and by no means is NorthwesTel suggesting NorthwesTel should be the provider of all these things, but in the chart below, or in the notes below, this is our estimate of what it would take to do all of these things in all the communities.
3056 So we think it would take about $50 million to introduce next-generation cellular. And today there isn't really a solution for HSPA for example over satellite, but we say, you know, it's in that order of magnitude.
3057 If we wanted to create transport redundancy, it would be in the order of magnitude of $200 million. If we wanted broadband access in every community at 10 Megabits per second -- again for the satellite communities assuming that you had a five-year commitment for satellite bandwidth -- it's about $60 million. Then the switches we have talked about in terms of upgrading all of those, enabling CCS7, another $32 million.
3058 So if you added all those up it makes a great wish list of $340 million and I guess I suggest to the Commission, in my view at least, it is a bit of a wish list.
3059 So the company's challenge of course is how do we balance these needs. Clearly we have an obligation under the BSO to meet those needs and we take that very seriously, but we also, as the Commissioners were questioning me yesterday, have a responsibility to listen to our customers and try and advance services.
3060 So, for example, in last year we introduced internet in 10 new communities; we put cell sites in two new communities; we did two new switch replacements, and those are all over and above meeting demand or keeping the network going.
3061 So I guess what I'm trying to illustrate to you is very much we are having to balance our investment across the -- obviously the critical need to meet the BSO, but also the needs of consumers and businesses across the north, but there isn't enough money to do all that's required if you come back to what I have just talked about in terms of the $340 million.
3062 Even if you spread this over 10 years, it would mean $34 million per year of additional capex. The result would be a capital intensity rate of 34 percent sustained over 10 years. No telecom company is investing at that rate in telecommunications.
3063 You know, we need a different solution. And I know the Government of Nunavut talked about different options. We do need to look at how do we do things differently as we go forward, because the desire is there for these services but, as I said, it's unrealistic to expect, particularly a private industry that's going to invest all this money when most of these things there is no economic return for.
3064 The $200 million in redundancy, there is no additional revenues associated with that. So that was another element that we did last year, we spent $10 million on redundancy. That affects most of northern Canada.
3065 So I guess what I'm trying to illustrate is, I come back to the point we have done a little bit in the cellular, we have done a little bit in the redundancy, we have done a little bit in the broadband, we have done a little bit in switch upgrades and, again, we take very seriously the need to meet the BSO and we believe that we do the modified BSO.
3066 Given the economic constraints the company makes significant annual investments to not only support the delivery of these services, but to also introduce next-generation services as well.
3067 With respect to quality of service, yesterday the Commission heard a number of concerns raised by the governments about NorthwesTel's quality of service. This is another area where we believe we are talking about the same subject, but I don't think we are.
3068 Concerns ranged across a large spectrum of issues such as broadband bandwidth, data speeds, cellular dropped calls and availability of mobile services. These are competitive services and in fact, as evidenced in the attachment, which I will come to in a moment, NorthwesTel is not the primary internet provider in Nunavut or in the Northwest Territories.
3069 Furthermore, with regards to cellular, this issue is likely more related to availability versus quality of service, with the exception of Iqaluit. I know there's an issue there and I know that Bell is addressing the issue as the service provider in Iqaluit.
3070 So I refer you to an attachment that we tried to put together. Like everything else in this business it's complex, but hopefully it gives you a perspective on the north. You know, we did this fairly quickly so there may be some small adjustments that others might suggest to it, but I think by and large it gives you a picture.
3071 So this is broken into three blocks, the Northwest Territories, Nunavut, as well as the Yukon Territory and B.C. on page 2.
3072 So the first column is PES service. So you will see PES service every single community, "N" being NorthwesTel. You will see NorthwesTel's cellular. So in the Northwest Territories we have two communities, Fort Simpson and Norman Wells. If you get into the Nunavut territory I think we are up to seven or eight communities now -- eight communities.
3073 And then if you go across into B.C. we don't have any, Bell has quite a number, and then of course in the Yukon, given the project that I mentioned this morning, the partnership with the Yukon governments, we have pretty extensive cell coverage. Now, this is all CDMA cell technology, it's not HSPA technology or the next generation.
3074 If you look at other cell providers that are provided in the third column, you will see, as was referenced by many, Bell's presence in here. But again I reiterate, as much as people say that we are owned by Bell, the mind and management of NorthwesTel is independent from Bell. I am 3000 kilometres away from their head office, I don't deal with Bell people on a daily or even a monthly basis. I run my operations, they run theirs; they set their prices, we set ours. So yes, they are an affiliate, I can't deny that fact, but we do act independently.
3075 So then I get to internet. And again, if you look in the Northwest Territories you can see the green, and it's probably in maybe three quarters of the communities; but you can see the yellow, SSi is in virtually every community with the exception of three.
3076 So for the Government of the Northwest Territories to suggest that NorthwesTel is the predominant internet provider in the Northwest Territories, that's not what I take from this picture.
3077 Again, if you move down the table, in Nunavut NorthwesTel has ADSL in Iqaluit.
3078 We do have satellite which isn't included in here in four communities, that's the Netcaster KA(ph) Service.
3079 Then if you go into British Columbia, NorthwesTel is more invested there, we were fortunate to get some funding from Industry Canada to help us there.
3080 And then in the Yukon, again the partnership with the Yukon government. They very much wanted to come to the table with NorthwesTel in 2000 and in 2001 the Yukon was the most connected region in all of Canada as a result of it.
3081 So again, I won't continue on, but cable TV is showing their where it exists, where we have it, where our co-ops has it, and you will see satellite television in there.
3082 But I think it is illustrative to say that this is quite a mixed landscape of services that are offered by a variety of different people -- it's not all NorthwesTel, as some might suggest -- and in many cases I think the concerns about service are more about the absence of it than the quality of it, particularly as related to some of the comments that I heard yesterday.
3083 The northern parties did not raise specific concerns about the quality of service indicators developed and used by the Commission to address the technical concerns over quality of service raised by the Commission in PIAC, NorthwesTel has filed the average annual results for both out-of-service trouble reports cleared, remote, and repair appointments met. That is Undertaking No. 1.
3084 I might just take you to that for a moment. I am assuming that you have that document.
3085 There are two pages to it. The first is simply the averaging of the results. I would draw your attention to, again, the volume of incidents that we are talking about.
3086 In a typical year, particularly in 2.1(c), they go from a low of about 1,675 to a high of about 2,200 last year. This year, year to date -- that is year to date at the end of July, I believe -- or the end of June, the 968.
3087 So we are on track to be somewhere around just under the 2,000 range again this year.
3088 If you take the average for the year, you will see -- as I mentioned yesterday, I suspected what you would see is pretty flat, a drop in 2010, and then back to levels that are just at or slightly above the target level of 90 percent.
3089 Repair appointments met -- you see exactly the same pattern, as well.
3090 If you go to page 2 -- and I apologize, we only had time to do 2011, but if you go to page 2, I thought it would be illustrative to try to break this down for you.
3091 You see the service result achieved from January through June that is shown there. The total number of troubles that we received is shown on the next line. As I mentioned before, the volume is a significant issue here, and I think one that warrants some very serious consideration.
3092 If you go to the bottom, I have just divided the volume by the 72 communities. It is 2 troubles a community. And the 151 is a very, very small base. So "Missing" has a much different proportionate effect on that base than if I were a company that had 10,000.
3093 I think that is an important consideration, which sort of leads me to the question: Is it worthwhile or appropriate to be measuring this on a monthly basis, given the small volumes.
3094 I will go on, though. The total troubles missed are shown right below. So the number of troubles that we would have had to not miss, shall we say, to achieve the target, is shown there.
3095 In January, 4; February, 2; March and April we met it; 4 in May and 3 in June; for a grand total of 13 tickets.
3096 Again, if we look at the average year to date, we are 90.9 -- I will come to the 90.9 -- we are at 90 percent up at the top.
3097 Now, again, not having a lot of time to do this, we tried to just give the Commission an idea of what do the results look like if we simply remove inaccessibility due to weather.
3098 It doesn't necessarily make them all hit the target, but it does show that it makes a difference.
3099 Nine of the 13 troubles were caused by our inability to get to the community because of weather.
3100 Now, again, the alternative -- full-time tech, 24/7, in the community, no matter that we have 2 tickets per community per month.
3101 So if you adjusted those service levels, all of a sudden January is no longer a missed month, we are at 90.7. In February it didn't change. In March and April -- March is a little better, but they were both above, and you can see that April/May came much closer, as well.
3102 So hopefully that's illustrative to at least give you an understanding of the realities that we face in terms of the numbers, in particular. The volumes are the big piece that I wanted to address.
3103 These demonstrate that NorthwesTel indicators are not declining, when we look at the averages. They are typically at or above the standard for the year.
3104 With regard to the out-of-service remote, it must be understood that this is a unique indicator. No other phone company has this remote classification. On a monthly basis, we may have anywhere from 120 to 160 repairs across the whole company, slightly more than 2 per remote community.
3105 I guess that's the important thing to understand. There are 72 communities, and they are spread over the 4 million square kilometres that we serve, as well.
3106 Given the very low volumes, the law of small numbers can cause the results to swing dramatically from month to month. Often only 2 or 3 misses in a month can mean the difference between meeting or not meeting an indicator.
3107 Inaccessibility to a community due to weather can result in missing this indicator.
3108 In the south, during price caps, too, those companies could be exempted for events beyond their control.
3109 Consequently, in the undertaking that NorthwesTel has filed, for the first half you can see, as I just mentioned, that we missed 13.
3110 We go on to talk about the adjustments that I already spoke of.
3111 To us, it is evident that assessing these results on a monthly basis can be misleading. We conclude that it is not appropriate to require NorthwesTel to meet this indicator every month, given these volumes. It is more appropriate to measure it on a basis that is more statistically valid, like an annual basis.
3112 We propose that the Commission should track for one year the results, understand this more, and then determine, based on results, if the company requires incentives or penalties.
3113 With respect to SSi Micro, yesterday questions were raised by the Commission regarding the long-term sustainability of local competition, especially in the smallest, most northern, and highest cost communities in Canada. It's an important public policy issue.
3114 NorthwesTel receives an explicit subsidy to provide ubiquitous, reliable telephone service to meet its obligations to serve.
3115 Similarly, SSi Micro has received millions in direct government funding to build and operate a rural broadband network.
3116 Mr. Phillip yesterday highlighted that this funding runs out in 2012, which, if not replaced, could lead to dramatically higher rates for Nunavut subscribers.
3117 I might note for a moment that Mr. Phillip spoke this morning about his prices for service. He talked about, in Nunavut, offering a service at 384 kilobytes for $60, a 512 kilobyte service for $120, and a 768 kilobyte service for $400.
3118 NorthwesTel, as I said, only offers high-speed internet in Iqualuit.
3119 So, for the equivalent 768 kilobyte service, NorthwesTel charges $85, versus his $400.
3120 For our 1.5 megabyte service, which they don't offer, we charge $120, where he is charging $400 for 768.
3121 So one has to wonder, if funding doesn't come forward next year, where do those rates go next year, if they can't be comparable to NorthwesTel's today.
3122 There is lots of discussion about costs and efficiencies and benefits, yet I would suggest to you, at least in the community that we serve, Iqualuit, that, for whatever reason, the costs of providing these services, or the costs being charged to the consumers, are a lot more than the costs that we are charging for high-speed internet service, and we are actually providing a higher speed of service, as well.
3123 In 2009, Mr. Phillip was quoted in a northern business magazine -- I have a copy here, if the Commission would like -- as saying:
"Last June I threatened to shut [the network] down if the federal government didn't smarten up. Eight months into it we started losing money because we weren't getting any contribution for satellite subsidy."
3124 This article continues on to say:
"Now with $21-million in new federal bandwidth funding starting to flow, things appear to be back on track."
3125 It appears pretty clear that without continued federal funding, the Qiniq broadband network, one of the underlying building blocks to provide VoIP-based local competition, is not economically sustainable.
3126 Introducing local competition will not change the fundamental uneconomic nature of most locations in the north. Challenges around price of satellite bandwidth, broadband speeds, and wireless access will remain. Introducing local competition in NorthwesTel's smallest communities will create a permanent need to continue to invest in two networks.
3127 Furthermore, while SSi is obviously quite confident in their network to deliver quality voice, the company notes that their model not only relies on subsidies, but one must also consider customer comments regarding the quality of their service.
3128 The Commission must take due care in assessing the long-term viability of their proposal from a financial and quality perspective, particularly given the critical importance of telephone service in the north.
3129 SSi has also made comments regarding the excessive rates of our backbone network. This, of course, is just their side of the story. NorthwesTel has filed extensive evidence in this Part I application that illustrates that our prices are indeed comparable to rates in other high cost regions in the south.
3130 It must be recognized that NorthwesTel has an extensive backbone network that requires significant investment.
3131 For example, we invested over $60 million to build a fibre link between Whitehorse and Fort St. John. That is only one small part of the 4 million square kilometres that we serve.
3132 The other piece I would like to talk about for a few minutes is that there seems to be the suggestion that NorthwesTel is very backward, it's not very innovative, we are inefficient, and I wouldn't be doing my employees justice if I didn't tackle that.
3133 Some examples of the innovation that our teams are working on include -- in the Yukon, right now, we are working with the Yukon Cold Climate Innovation Centre, and we are working on using a Stirling engine to provide inexpensive power to our remote microwave sites. That is something that has never been done in North America. That is an example of one of the things we are doing.
3134 We have introduced a new satellite IP VPN service. It is very similar to what SSi Micro keeps talking about. This has resulted in new contracts. The impression was left this morning that NorthwesTel is just losing contract after contract after contract.
3135 The Government of the Northwest Territories just signed a new agreement with us for a brand new, state of the art, IP VPN network. The RCMP did likewise, as did Arctic Co-operatives Limited, as well as the federal government.
3136 Again, if you are left with the impression that somehow we are not innovating, I would ask you to reconsider when you look at the facts.
3137 Local competition: There is broad support for local competition. We recognize the benefits. It was mentioned earlier that it would benefit NorthwesTel, and there is no question that when you are in a competitive environment, it forces you to operate differently.
3138 We are not opposed to local competition, and I said that yesterday. If the right conditions are met, it can be introduced in a more measured manner.
3139 I will be addressing those conditions in detail. They deal with rollout schedule, cost allocation and recovery, pricing changes, and other issues.
3140 To start with, there was general recognition that a logical way to proceed would be, initially, in the major centres, Yellowknife and Whitehorse.
3141 The company actually proposes to add Iqualuit, so that a major centre in each territory is included.
3142 The parties and the Commission seem to recognize the very high costs of LNP, so we are proposing no LNP initially.
3143 Even with this limited rollout, there would be capital costs of approximately $500,000 depending on whether local loop unbundling is offered.
3144 The Commission would have to prescribe the sharing of these costs and the period of recovery.
3145 The feasibility costs and the need for LNP could be assessed at the end of the next price caps period.
3146 NorthwesTel assumes SSi would not be interested in operator services or long distance services from NorthwesTel.
3147 Any technical interconnection issues could be dealt with in a format like CISC or with an appropriate committee structured and directed by guidance from the Commission.
3148 However, this proposal for local competition assumes that certain preconditions are met, specifically:
3149 - local rate increases of $2 on residential and business as proposed are approved;
3150 - costs of network changes are allocated 50/50 between NorthwesTel and the entrant and recovered over three years -- ongoing costs would be recovered via interconnection charges;
3151 - the satellite toll connect link subsidies now embedded in CAT would be addressed as the company has proposed for residential and for business via the National Contribution Fund;
3152 - the company would use the price flexibility already permitted under the basket constraints to de-average business access rates between Band D and Band H1 in order to bring prices closer to costs and reduce embedded cross-subsidies from the larger centres.
3153 We didn't mention it but we acknowledge the comments from PIAC this morning that particularly for NorthwesTel's share of the start-up costs that we would look to an exogenous factor, as was suggested this morning.
3154 With regard to the small remote communities, we have identified a number of the technical issues which should be resolved first before any rollout to the remote communities is planned. The CISC or a CISC-like process would be the vehicle to try to address these issues.
3155 Specifically, among the issues to be resolved are:
3156 - We believe there would be a loss of call display functionality between the networks. This is a very important social issue, especially in Nunavut.
3157 - NorthwesTel also seeks clarification on whether SSi calls from SSi customers to NorthwesTel customers, including calls to emergency services, will continue in the event that satellite connectivity to the community is lost.
3158 These are the technical issues that we have identified based on preliminary information submitted by SSi.
3159 However, it must be recognized that NWTel has only received two high-level diagrams and that detailed interconnection requirements and diagrams will be required and it is likely that additional technical issues will need to be resolved.
3160 If they can be resolved to the Commission's and other parties' satisfaction and if the Commission meets these preconditions, then it would be possible to proceed with local competition in a phased approach as proposed by the company.
3161 So this concludes my comments.
3162 I would like to thank the Commission for the opportunity to present these comments. We're glad that you came to the North. I know it was an inconvenience for you to come here, but I think it is important that you came.
3163 We also thank the other parties for their participation in the process.
3164 Finally, I would like to thank the Commission staff for being helpful in the process of running this proceeding.
3165 Thank you, Mr. Chairman.
3166 THE CHAIRPERSON: Thank you very much.
3167 And just to clarify, it's never an inconvenience for the Commission to come out and understand locally the landscape, as opposed to working out of Gatineau. We do spend a lot of time in Gatineau, but it's actually a pleasure to come out and actually live the life that people that we try and represent are living themselves. So I don't think that is a burden at all. Neither, I'm sure, my fellow Commissioners.
3168 I just have one question and it's more of a clarification, and maybe it's a basis for broader discussion.
3169 Yesterday you made a point of addressing the issue of call display in the 29 communities. You talked about the need for that from a safety and customer benefits. You mentioned it again today as well.
3170 You asked for this back in 2006. We denied the subsidy for that program as well. You've asked for it again today.
3171 I just want to understand. If we deny your request to receive this money out of the subsidy fund, are you not going to provide this service to customers?
3172 MR. FLAHERTY: I think we would take the same approach we've taken in the past, that we wouldn't invest uniquely just to provide this service because it's not economic, as I talked to you about.
3173 However, as the time comes to need to replace those switches, as we also spoke about yesterday, when that switch does need to be replaced, it will provide those features at that time.
3174 THE CHAIRPERSON: So unless these 29 switches are on the horizon to be upgraded, there won't be service -- that level of call management services offered to those people?
3175 MR. FLAHERTY: That's the way we've approached it in the past, yes.
3176 I might also add for the information of the Commission that the issue is probably more prevalent if you're in the east and less prevalent as you move to the west.
3177 So if the Commission were looking for a way to, shall we say, reduce the ask, there's actually six communities which we could file with the Commission who've been most vocal. Those are the ones who have actually filed letters on the record.
3178 Many other communities, if I look at the penetration of similar communities in similar territories, they have less use for or less demand for. The highest demand is in Nunavut. Right now there's one community, the community of Gjoa Haven in Nunavut.
3179 THE CHAIRPERSON: Over what period of time do you depreciate your switches?
3180 MR. FLAHERTY: Subject to check, on average we believe it's about 12 years.
3181 THE CHAIRPERSON: Okay. So when I look at one of these interrogatories you filed -- I think it's in NorthwesTel Interrogatory filed by SSi, but I stand to be corrected -- a number of switches are in there 18, 20, 22, 24 years old. So presumably they're on the horizon to be replaced anyways, I would imagine?
3182 MR. FLAHERTY: In time they will be replaced, that's right.
3183 THE CHAIRPERSON: Okay. Can you file with us, those 29 communities that have yet to have these call management services, when you are currently planning to replace those switches based on what they are, where they are, the current software that may or may not exist in those switches?
3184 I mean you must have plans right now out, I don't know, 5-10 years for capital replacement of your switches. Just let us know, of these 29, what the timelines are for their natural replacement.
3185 MR. FLAHERTY: Yes.
3186 I wouldn't say that we have plans that go out five to 10 years. Because this world is changing so fast, as Mr. Philipp talked about earlier, you know, I mentioned as well that the Hughes network is coming to its end of life. Again, we're not exactly sure when that will occur.
3187 I think, as Commissioner Molnar asked yesterday, one concern of course is that we don't want to strand a bunch of investment unnecessarily.
3188 So again, I threw out a counter-proposal just now that one approach might be to go to the communities that have expressed the most need and the most interest for that, reducing this and then ensuring that we're not spending money that ultimately may have to be replaced subsequently with a switch replacement.
3189 THE CHAIRPERSON: Okay. But if you can undertake to provide all 29.
3190 I mean we can identify which ones have written in under this hearing and let us know they're concerned, because we got the same complaints that you would, I would imagine, for this hearing.
3191 But I just wouldn't mind knowing what the outlook is on the horizon for all 29 of those switches through the natural evolution, particularly given they've all been depreciated anyways for a number of years.
3192 I'm not suggesting you have to take them out because they've been depreciated. If they're still useful, they're useful.
3193 But obviously, here's a case where there is something missing in the community and to date you have not seen fit to provide the community with some of the essential services I think that they're looking for.
3194 And there may be six that are more important, but there's another 23 that shouldn't be denied either. So I just wouldn't mind knowing what the time horizons are for these if possible.
3195 Those are all my questions.
3196 Fellow Commissioners, are there any --
3197 Commissioner Menzies.
3198 COMMISSIONER MENZIES: I just wanted to have your thoughts on why you wouldn't propose a -- practically and philosophically, doesn't it make more sense for residential PES rates to move gradually rather than suddenly?
3199 Sort of every few years it goes up $2 or something like that. Wouldn't it make sense to have smaller increases over a period of -- if, for instance, you were looking at a $2 increase, wouldn't it make sense to do it 50 cents a year over the same time period rather than all at once?
3200 MR. FLAHERTY: Definitely. Your thought process is along ours. That's why we proposed the notion of "i" as well.
3201 I guess the question is: Is there a way for the company to be compensated for the increase in costs that have occurred over the last five years? The costs have gone up, I believe, $3 and we're proposing that $2 be addressed.
3202 Again, absent it coming in through rate increases, then of course some of it flows right back through to the calculation of the subsidy required from the high-cost serving area fund.
3203 COMMISSIONER MENZIES: I also wanted to just -- do you think in a competitive market that that increased rate is a competitive rate? If, for instance, it was a $33 rate and somebody else wanted to charge less, would you still be -- would you be moving your rates around to compete for customers?
3204 MR. FLAHERTY: I think it goes back to the philosophy that's generally mentioned, that as you get into a competitive environment rates tend to move towards costs. And as we've said, even in Band D, the current rates don't cover costs plus mark-up.
3205 COMMISSIONER MENZIES: Thank you.
3206 THE CHAIRPERSON: I just thought I would give SSi an opportunity to respond to the article on paragraph 45 that you refer to.
3207 Mr. Philipp, are you still here?
3208 MR. PHILIPP: Yes. Absolutely, I would love the opportunity.
3209 Specifically, the article is referring to the fact, as I mentioned earlier this morning in my remarks, that the federal government agreement with Industry Canada was to subsidize broadband access at a fixed rate set by the CRTC -- sorry, not the CRTC -- by Industry Canada at $60 a month.
3210 They set that rate and then required of us or requested of us what the subsidy required would be in order to provide that rate over eight years.
3211 During that negotiation with Industry Canada, as I mentioned this morning, they determined that 2,000 subscribers would be the most that Nunavut would ever see.
3212 We accepted that at the time based on the condition that they said that should we exceed 2,000 we could come back to them and they would then top us up for the remainder or for the additional subscribers that joined the network after that.
3213 So what that article refers to was that it took me eight months to reach 2,000 subscribers, or it took the network eight months to reach the 2,000 subscribers projected by Industry Canada in Year 8, which I knew to be false when we first worked with them.
3214 So we went back to Industry Canada and suggested, okay, it's time for you to ante up for the remainder of the subscribers. It will be no different than if NorthwesTel all of a sudden were faced with limiting their subsidy to 5,000 subscribers and find out 10,000 signed up for their service. They would certainly be back to you for the additional subsidy per subscriber, which is exactly what we went back to Industry Canada for.
3215 When Industry Canada told us the program was shut down and there was no additional funding, I pointed out to them that my company had just invested over $5 million in matching funds to their $5 million for capital and that it was not part of the agreement that we would only sign up 2,000 subscribers. In fact, I pointed out to them in the business case that we had suggested to them 7,500.
3216 We ended up settling on 7,000. For that the Industry Canada organization, the BRAND project came up with an additional $10 million which, as you saw in the evidence that I filed this morning in our rebuttal, out of the $21 million that was highlighted -- and I did circle it in red in our evidence this morning -- $10 million was allocated towards the subsidy to broadband users up to 7,000 subscribers within Nunavut.
3217 So the remainder of those funds were not for SSi. And I think even the quoted bullet 45 of Mr. Flaherty's statement, it says -- the article continues on to say "That part was not said by me".
3218 Now that there is 21 million in additional federal funding, things appear to be back on track.
3219 That was the reporter that said that.
3220 There was 10 million that flowed to QINIQ. For the additional subscribers it is paid out annually and only if those targets are met and it requires a matching 50-cent contribution for every 50 cents from the feds.
3221 So out of the 10 million that the feds did agree to flow SSi also agreed to flow 10 million to subsidized broadband internet in Nunavut.
3222 So, to clarify that point, yes, absolutely. I threatened the federal government with the fact that they had entered into a deal that I would say was contractually fraudulent when they agreed to allow us to invest millions of dollars in that network.
3223 It was -- it subsequently has been resolved.
3224 THE CHAIRPERSON: Just to clarify, I'm now concerned -- confused by the years.
3225 In the previous paragraph, in paragraph 44, it says, "Mr. Philipp highlighted yesterday that his funding runs out in 2012."
3226 And this morning you said that that amount of money of top-up into the $24.8 million is to cover a nine-year period. When does your funding actually run out?
3227 MR. PHILIPP: The funding is overlapping depending on the project and the territory. The NWT started a year later than Nunavut. The total funding over the period that it applies to is nine years from the very start of the QINIQ network to the end of the subsidies, which run out in June 2013.
3228 It's part of the 2012, sorry, federal calendar year, sort of March 31st, 2013. But it actually does go one-quarter longer so it's June of 2013.
3229 At which point the federal subsidies should they not be renewed will run out and the costs to consumers, should as pointed out here, we not be able to find a way to replace that subsidy would have to change or the service would have to change.
3230 Now, we have found a number of other areas that we can cross-subsidize these things, one being the Government of Nunavut -- quite frankly, is a client of ours -- is helping bring affordable broadband to Nunavut.
3231 We don't mind using our "unregulated services" to subsidize other "unregulated services". I find that that is the only way that we can make these things affordable in Nunavut.
3232 To the point of internet being offered in Iqaluit by NorthwesTel, I notice that they have sort of gotten that donut model sorted right out. They have got Iqaluit, being the only market in Nunavut that they serve, and they service the terrestrial communities in the Northwest Territories where they have unfair access to pricing on the backbone that we can't get.
3233 The rest of them, satellite-served, they don't touch.
3234 THE CHAIRPERSON: Mr. Philipp, are the rates that Mr. Flaherty quoted correct in your territory for bandwidth?
3235 MR. PHILIPP: We are $60 a month in every community. We do not change the rate based on the community.
3236 And, in fact, I do not believe that NorthwesTel's rates in Iqaluit are even breakeven for them. But it's an attractive loss leader in a DSL community.
3237 THE CHAIRPERSON: But there were two other rates that you quoted, Mr. Flaherty. I'm sorry, I didn't write them down.
3238 MR. FLAHERTY: I quoted -- these are Mr. Philipp's from his website, $60 for 384 K, $120 for 512, $400 for 768.
3239 And my equivalent rates that I talked about were $73 for 512, $85 for 768 and $120 for 1.5.
3240 I would disagree with Mr. Philipp's comment that it's not profitable.
3241 THE CHAIRPERSON: Okay.
3242 Mr. Philipp, your rates were correctly quoted?
3243 MR. PHILIPP: Yes, sir.
3244 THE CHAIRPERSON: Okay. Thank you.
3245 Commissioner Menzies?
3246 COMMISSIONER MENZIES: Sorry, I have one other question.
3247 In paragraph 27 of your reply here where you detailed the investments you have made, I just wanted to know to what extent any of those investments or which of those investments or how much was subsidized, or were you compensated for those through any subsidies at all?
3248 MR. FLAHERTY: None of these investments were subsidized.
3249 Are you thinking -- like we have done projects, for example, like the cellular network. You are maybe alluding to something like that for example?
3250 COMMISSIONER MENZIES: Okay. Yeah.
3251 MR. FLAHERTY: So none of these are like that. I did quote some other services that we had invested in internet into five -- I think I said eight communities. Those ones did receive some funding from Industry Canada on the broadband side, similar to what Mr. Philipps talked about, a 50-50 matching. But that's not part of what I listed here.
3252 COMMISSIONER MENZIES: Thank you. I just wanted to clarify that.
3253 THE CHAIRPERSON: Commissioner Molnar?
3254 COMMISSIONER MOLNAR: Thank you.
3255 I want to refer you to paragraph 3 of your remarks here. On the issue of the local rates you state and you stated it yesterday, that the Band D residential rates are not compensatory. And here you point to something you filed subsequent to Decision 2007-5.
3256 Could you just tell me in case I have missed it if you have filed anything in this proceeding too? You have?
3257 MS CHALIFOUX: We filed our reference to these costs in response to PIAC-4, I believe. No?
3258 Oh, PIAC-9 and 18.
3259 COMMISSIONER MOLNAR: So you filed a reference to a costing study conducted in 2007 and that's your support for this?
3260 MS CHALIFOUX: Yeah. We filed the cost results from that proceeding that disaggregated our costs into Band D and Band H1 and then we provided some demonstration comparing those costs to rates as well as adjusting the costs for potential inflationary pressures and, again, comparing them to rates and demonstrating that Band D is indeed in a shortfall position.
3261 COMMISSIONER MOLNAR: Okay. I will go back to the evidence then that you filed on that.
3262 I have just one more question.
3263 Before lunch I had asked a question and sought NorthwesTel's response or input as it regarded the issue of toll connect or, essentially, you know, the long haul back from the local switch.
3264 And I wonder to what extent there is -- you know, in comparing to what I have been hearing from SSi Micro about the dynamic nature of the IP -- you know, IP facilities and some of the cost advantages of that, I wonder to what extent -- and particularly because you had mentioned looking at a new backbone network.
3265 Backbone is perhaps not the right word here but you know what I'm talking about, your toll connect network and that you were looking at having to potentially replace what you had today with the new IP-based network in the future. And I wonder to what extent there can -- you might achieve some efficiencies, cost economies or so on, moving to a new network infrastructure for this toll.
3266 MR. FLAHERTY: It's difficult to answer. I thought about your question since you asked it earlier.
3267 Of course, one of the differences between ourselves and what SSi have today, is we have a standalone dedicated toll network that's in place to meet the peak hour usage. I think I heard Mr. Philipp -- I stand to be corrected if I'm wrong -- say that on occasion they may be busy and people just get busy signals.
3268 Of course, you know, we very much look at that very carefully and ensure that we don't have blocking on the network. So there is a difference from that perspective.
3269 In terms of the future, it's a bit difficult to answer that question specifically.
3270 As you get into new technology, depending on what it is, the characteristics, what's it required to adapt with what exists today, you know, it's difficult to say until we get into it.
3271 Generally speaking, as new technology comes around there is often opportunities to see improvements in efficiency but, again, some of this stuff -- as I mentioned earlier, one of the concerns that we have on our own network that we haven't used some of these media gateways is the lack of self-healing or the lack of local calling or staying within the community if we lose the link.
3272 So this technology continues to evolve. And to make sure that, at least from our perspective, that it meets our carrier-grade needs, I think more work is done.
3273 So I guess in a roundabout way saying until we really get into the design of it and see the true costs of it, it's difficult to say exactly.
3274 COMMISSIONER MOLNAR: Okay. If I remember from yesterday, you have four years until your existing system is not supported. So you have got four years to figure it out at the maximum?
3275 MR. FLAHERTY: I wouldn't say at the maximum. As I indicated to you before, we're not alone in this. AT&T Alaskom is very much engaged in the same issues as well as Telesat. They do it on behalf of Bell and others.
3276 Twice now we have come to dates that were supposedly the final dates and have been negotiated -- we have been able to negotiate an extension in part because I think the technology is still evolving in where it can go.
3277 COMMISSIONER MOLNAR: I'm seeing SSi Micro kind of going like this so I'm not sure if you feel that you have a comment. If you do, go ahead. Otherwise I have no more questions.
3278 MR. PHILIPP: I will be very brief and I think it's a fairly obvious statement, but I don't believe NorthwesTel invested $10 million in a fibre upgrade without knowing the cost study and the effective benefits of that.
3279 Much like the new iDirect network that NorthwesTel is putting in now at an estimated $5 million cost. I doubt they would have done that, being as fiscally responsible as they are, without knowing the exact cost benefit of it.
3280 And last point, the Hughes system that Telesat is operating for Bell Aliant and others, including NorthwesTel, is beyond end of life and in fact we have been approached by some of those same clients looking to replace that system much sooner because Telesat has said that they absolutely will shut it down, there are no parts left for it.
3281 So in terms of depreciation and getting the most out of the investment, I would say we are end of life.
3282 THE CHAIRPERSON: Thank you.
3283 Commissioner Duncan...?
3284 COMMISSIONER DUNCAN: Just a quick question with respect to paragraph 20, the cumulative investment over the past 10 years in excess of $420 million.
3285 I'm just wondering if you have a split, or even a rough split, on how much of that would have been for the delivery of residential service or related to residential?
3286 MR. FLAHERTY: Not off the top of my head, no. We could provide something in our final reply, if you like.
3287 COMMISSIONER DUNCAN: Yes, that would be interesting, I think. Thank you.
3288 And one other question. I may not have heard it quite clearly when you were talking to Commissioner Menzies about the cost increases in your subsidy formula.
3289 You will get compensated for those through the Contribution Fund, right, the way the formula works?
3290 MR. FLAHERTY: Of course the formula does first take off any changes to rates.
3291 COMMISSIONER DUNCAN: Yes, I know.
3292 MR. FLAHERTY: So to the degree there is rates it's a smaller numbers; to the degree there is no rates it's a larger number.
3293 COMMISSIONER DUNCAN: So if the consumers didn't pay anything of the $2.00 -- just so I understand the formula, if the consumers didn't pay anything you would get compensated for the money you are already getting for that $2.00 -- you know, there's no rate increase, there is no change -- and then you would get additional subsidy if there have been increases in your costs?
3294 MR. FLAHERTY: Right. Of course that doesn't address Band D, which again we would suggest is below cost. So that only deals with Band H1.
3295 COMMISSIONER DUNCAN: Okay. And the possibility of having two rates, is that...?
3296 MR. FLAHERTY: It's definitely a possibility. It's not something that we have done before. There hasn't necessarily been a lot of support for the idea, but I think through the course of this proceeding it is becoming more evident that we are going to have to consider something different.
3297 COMMISSIONER DUNCAN: Okay. Thank you very much.
3299 THE CHAIRPERSON: Mr. Flaherty, I didn't hear you comment at all on PIAC's argument that in effect you did have some productivity gains when they adjusted some of your assumptions and updated them as well.
3300 Are you going to file something to either confirm or correct the record on that?
3301 MR. FLAHERTY: We actually did file something.
3302 I will ask Muriel to just talk about that briefly.
3303 MS CHALIFOUX: Yes. PIAC calculated that implied productivity offset by looking at the 2006 results relative to our 2010 cost results and just looking at the marginal cost differences relative to the change in GDP PI over that same year and we noted in our response to PIAC, filed on September 9th I believe, that there were a couple of adjustments that admittedly make those two years not comparable, one being as PIAC noted, the fact that we had a bit of a change in our data gathering for maintenance expense, or input cost study for maintenance expense, and the second one being the 2010 study reflected the significant billing system project that the customer will be undertaking on a go-forward basis.
3304 So in order to normalize those two adjustments NorthwesTel provided a revised productivity calculation just looking at the period 2007 to 2010 and again it went back to showing a negative productivity so we feel that is perhaps a more comparative figure.
3305 THE CHAIRPERSON: I can't remember, I mean I read those over as well. There was some reference, I believe from you folks, that in the last year, in 2010, you included some proactive maintenance I guess is what it was called that wasn't in the previous years which increased your maintenance costs.
3306 MS CHALIFOUX: Actually it was preventative maintenance --
3307 THE CHAIRPERSON: Preventative.
3308 MS CHALIFOUX: -- and it was captured in our 2007 study and then for every study that we completed subsequent to that, so for all four years.
3309 MR. FLAHERTY: You may remember, Mr. Katz, in Whitehorse back in 2006 the Chair at the time was encouraging us to become more robust in our costing approach and again this is one of the outcomes of that, is we went away and made sure that we could provide something in a more detailed fashion. That's why you see the change in 2007.
3310 THE CHAIRPERSON: So the 2007 to 2010 data was prepared on an apples to apples comparison and still reflected a negative productivity?
3311 MS CHALIFOUX: Yes. It showed a negative productivity of -1.24.
3312 THE CHAIRPERSON: Mr. Janigan, have you or your team been able to look at that latest piece of information?
3313 MR. JANIGAN: Yes. I think we responded to it in relation to our submission that we don't believe the 2006 number is an outlier in that respect and in fact of course you can -- if you are using the 2006 as the baseline there is no reason to be adding in numbers when you are looking at a productivity comparison.
3314 This is not simply something for recovery of costs, it's something for looking at whether or not your productivity has improved over a period of time.
3315 We would also note that there is still no explanation for why the productivity studies was only done on Band H which, as the company acknowledges, is the Band where it's most difficult to induce productivity changes and, in the final result, the meta fact of the submissions of NorthwesTel is to suggest that throughout the entire price cap periods from the first price cap to the second price cap, almost no productivity will be achieved or recognized in an industry which historically it had productivity five times the national averaged.
3316 I hesitate to say I would have some difficulty to find another regulated industry or regulated company under a price caps regime which showed no productivity over that period of time.
3317 MR. FLAHERTY: If I may respond to that, Mr. Chair?
3318 THE CHAIRPERSON: Please.
3319 MR. FLAHERTY: I would disagree that there is no productivity. I think the issue is a couple of fold.
3320 I mentioned yesterday -- again contrary to the governments of the north -- we use GDP PI as our inflation factor and GDP PI by no means reflects the degree of inflation that occurs in the north. I think you saw some great examples of costs in Nunavut, what you didn't see was how they are changing by year.
3321 I talked about my personal example in Whitehorse over the period of this price cap period, cost of fuel alone changed by 24 percent. So I'm not suggesting, because I don't have something better to give you, but I would say GDP PI is not necessarily a good reflector.
3322 So if you really start back at the formula, the overall costs are increasing faster than the productivity that we can generate.
3323 You know, an example of productivity, we put a new system in place about three years ago that allows our call centre representatives to self-provision features for customers where they are on the line. It saved us having to go through to assignment, having to go through to technicians to go and make changes to the network. So clearly we have productivity.
3324 So we are not suggesting by any means that there is no productivity to be had, but the problem is the costs, the total costs are increasing faster than the productivity that we can have.
3325 MR. JANIGAN: I don't want to make it a continuous debate, but the definition of productivity is effectively increasing your outputs over inputs. If your inputs are increasing faster than your outputs you don't have productivity.
3326 THE CHAIRPERSON: Okay. I guess we will leave the debate for more experienced staff here who will come back to us.
3327 I think Commission Duncan has a follow-up question.
3328 COMMISSIONER DUNCAN: Just a clarification.
3329 I asked for the breakout of the $420 million residential portion, but what I'm really interested in is what's regulated and non-regulated, what would relate to your regulated versus your non-regulated streams.
3330 MR. FLAHERTY: I'm sure you appreciate of course because there are so many shared assets it will be very much an estimate.
3331 Again, for example, when we spend capital on a transport network, when we spend capital on a generator, when we spend capital on a building upgrade --
3332 COMMISSIONER DUNCAN: Yes.
3333 MR. FLAHERTY: -- you know, we are going to have to look and figure out a way to prorate that across all the different services that are using it.
3334 So we will come up with an estimate for you.
3335 COMMISSIONER DUNCAN: Okay. Thank you.
3336 THE CHAIRPERSON: Thank you very much. This concludes our hearing.
3337 I want to thank the representatives from NorthwesTel. It doesn't happen very often, but when you have to come and bare your soul sometimes you have to have a strong backbone. Thank you very much for persevering through this and being upfront and providing us with the information that we have received so far and the information that will be coming as well.
3338 I want to thank all the parties for participating and providing input to this very important item as well.
3339 Hopefully we will have a decision out by Christmas on this matter. I'm not sure it's going to be a Christmas present necessarily, but it will be a decision.
3340 I want to thank the staff who worked very, very hard, both here and the staff that are back in Gatineau and elsewhere.
3341 I want to thank Yellowknife for their hospitality in hosting us here as well.
3342 Thank you. This concludes the proceeding.
3343 Excuse me, I have to refer back to our Secretary.
3344 THE SECRETARY: Yes, Mr. Chairman, I just have something to enter in to the record.
3345 THE CHAIRPERSON: Certainly.
3346 THE SECRETARY: As Exhibit CRTC NO. 2, which is the CRTC Staff questions as an undertaking to NorthwesTel that I will give them right away.
EXHIBIT CRTC-2: Undertakings to NorthwesTel
3347 THE SECRETARY: If you bear with me, I just have a final announcement as well.
3348 NorthwesTel is to respond to these questions by October 14th.
3349 Also, Mr. Chairman, I was just going to mention that parties are reminded that they may file final written argument with the Commission on any matter within the scope of this proceeding, serving copies on all of the parties by October 17, 2011.
3350 Final arguments including an Executive Summary are not to exceed 15 pages.
3351 This completes the Agenda of this hearing.
3352 Thank you very much.
3353 THE CHAIRPERSON: Thank you all very much.
--- Whereupon the hearing concluded at 1536
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