ARCHIVED - Transcript, Hearing 30 September 2014
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Volume 2, 30 September 2014
TRANSCRIPTION OF PROCEEDINGS BEFORE THE CANADIAN RADIO-TELEVISION AND TELECOMMUNICATIONS COMMISSION
Review of wholesale mobile wireless services
140 Promenade du Portage
30 September 2014
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 wholesale mobile wireless services
Crystal HulleyLegal Counsel
John MacriHearing Managers
140 Promenade du Portage
30 September 2014
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TABLE OF CONTENTS
PAGE / PARA
6. Bragg Communications Inc.319 / 1796
7. TELUS Communications Company396 / 2222
8. Canadian Network Operators Consortium Inc.517 / 3005
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PAGE / PARA
Undertaking386 / 2163
Undertaking393 / 2201
Undertaking451 / 2536
Undertaking466 / 2645
Undertaking472 / 2688
Undertaking492 / 2818
Undertaking516 / 2997
Undertaking564 / 3259
Undertaking571 / 3310
Undertaking575 / 3341
--- Upon resuming on Tuesday, September 30, 2014 at 0903
1790 THE SECRETARY: Order, please. À l'ordre, s'il vous plaît.
1791 LE PRÉSIDENT : Alors, bonjour à tous.
1792 Madame la Secrétaire, s'il vous plaît.
1793 LA SECRÉTAIRE : Merci, Monsieur le Président.
1794 We will start today with the presentation of Bragg Communications Inc.
1795 Please introduce yourselves for the record and you have 20 minutes for your presentation.
1796 MS MacDONALD: Thank you.
1797 Good morning, Mr. Chairman, Vice-Chairman, Commissioners and Commission staff.
1798 I am Natalie MacDonald, VP Regulatory for Eastlink, and with me here today is, to my direct left, Lee Bragg, CEO and Vice-Chair; Matthew MacLellan, President, Eastlink Wireless; and Denise Heckbert, Manager, Wireless Regulatory.
1799 We are pleased to be here today to talk to you about wholesale mobile wireless services and related issues.
1800 Our access to wholesale domestic roaming and tower sharing on commercially reasonable rates and terms is critical to our ability to compete in the retail market over the long term. Our conditions of spectrum licence already require that we be granted such access, but our experience and the Commission's own investigations have provided evidence that the incumbents will not comply with their obligations without further regulatory action.
1801 MR. BRAGG: Eastlink has a long history of facilities-based competition in Canada's video, Internet and local phone retail markets. Eastlink was the first cable company to launch competitive local phone service in 2001. In recent years, we have upgraded wireline networks in British Columbia, Northern Alberta, Northern and Southwestern Ontario and throughout Atlantic Canada, and we continue to expand.
1802 Our intention is to replicate this success in the retail wireless market. The set aside spectrum for new entrants, paired with the guarantee of commercially reasonable access to necessary wholesale inputs, enabled us to purchase AWS spectrum in 2008 overlaying much of our existing cable footprint. We set out to apply our customer-first approach to create innovative and unique offerings for consumers so they could, for the first time, experience a wireless provider that does not require term contracts, activation fees, system access fees or early termination fees.
1803 We have stayed true to our original intention for entering the market despite the incumbents' unwillingness to provide reasonable access to critical wholesale inputs. Specifically, we have built the only network in Canada that provides LTE coverage throughout 100 percent of the network footprint. We are the sole LTE provider in many rural communities in our serving area and we are just getting started with our network build.
1804 We have also developed unique and customer-friendly service offerings, taking a different approach to wireless plans. We have separated the device subsidy and the monthly service plan so that customers can pick any service plan based on their usage needs and can pick any device. When the device subsidy is paid off, the entire device charge is removed from their account. This ensures that customers have the flexibility to pay for what they actually want and need, and allows them to make more informed choices about their wireless service.
1805 Eastlink is continuing to make significant investments in our wireless infrastructure and business. We are committed to competing over the long term, but in order to do so it is critical that we be able to access necessary wholesale inputs on commercially reasonable rates and terms, as provided for in our conditions of licence.
1806 MR. MacLELLAN: Canadians consider three key factors when choosing a wireless service provider: network coverage, network quality and cost. It is not possible to compete effectively unless we are able to meet these three requirements at a level that is comparable to, or better than, the incumbents. As a result, access to wholesale roaming on commercially reasonable rates and terms is the most critical issue facing our business.
1807 It is important to recognize that roaming is required where Eastlink has no existing network. This means in areas where Eastlink has spectrum licences but has not yet fully built out our network and in areas where Eastlink does not own any spectrum and will therefore not be able to build our own network. Because of the scarcity of spectrum resources, new entrants have not had the luxury of acquiring spectrum throughout the entire country. So roaming is critical in order to provide services.
1808 It is worth referencing the map in Appendix A. This shows all the areas where Eastlink holds spectrum licences.
1809 The blue shaded areas, where we own spectrum, represent 5 million Canadians or 15 percent of Canada's population. These are largely rural communities that are off the radar screen of many service providers. In fact, none of Canada's 10 largest metropolitan areas are within our licensed regions.
1810 The population where we have spectrum represents 31 percent of Canadians living outside of these 10 largest metropolitan areas. Eastlink aims to provide our operating area with advanced 4G LTE networks and competitive service offerings. We have already built our 4G LTE network to cover roughly 700,000 of these Canadians.
1811 The remaining areas where we have licensed spectrum are geographically large and it will take time to develop our networks. As a result, we will need to rely in part on wholesale roaming services within these blue shaded areas in the early years of our development.
1812 The white area in Appendix A represents all the regions in Canada where we do not have spectrum and, therefore, we cannot build a network. As you can see, in most major cities and four entire provinces, Eastlink cannot build a network. In order to provide the 5 million Canadians who may select us as a service provider with the coverage they require, we will indefinitely need wholesale roaming services in these white areas.
1813 When we acquired our spectrum, we knew we would have the roaming coverage needed to offer competitive retail service but we did not anticipate paying prohibitively high wholesale roaming fees to the incumbents. This has had a significant impact on our network build and our retail offering.
1814 When we first launched service, we elected to offer consumer-friendly terms, including no contracts, low-priced plans, no hidden activation fees. We expected that even if customers would pay retail roaming rates while outside our coverage area, they would value Eastlink's high-quality service and reasonably priced plans.
1815 However, years of unexpected charges, long distance fees and roaming costs with the incumbents have made consumers wary about accepting services without pricing certainty, particularly as it relates to roaming charges. Despite our otherwise consumer-friendly terms, we found that it was not possible to overcome the industry's reputation with respect to retail roaming fees.
1816 So it became necessary for us to absorb the wholesale roaming costs, first across Nova Scotia and P.E.I., and later including the rest of Canada. This has been economically challenging for us but it was necessary to make consumers comfortable with choosing Eastlink.
1817 We learned that coverage on its own is not enough. To truly compete and present a viable option for Canadians, price certainty is critical. As we must continue to absorb these wholesale roaming costs, it is essential that they be commercially reasonable so we can continue to expand into new markets within the blue shaded areas in Appendix A.
1818 For example, in Northern Ontario, Eastlink has cable systems in numerous towns and communities, with Timmins and Sudbury being among the larger serving areas. Our ultimate goal is to build a wireless network such that we do not rely on roaming in this area, but the incumbents have been building their networks for more than 30 years and it will take time to catch up.
1819 Wholesale roaming services play a key role in enabling Eastlink to bring competition to more Canadians more quickly. In Northern Ontario, for example, reasonable access to wholesale roaming would allow us to build the core population centres of Sudbury and Timmins, launch service in those communities and begin to develop wireless customer bases while relying on roaming outside these core areas. We can then expand our network into the rural areas between the towns and eventually into more rural communities, lessening our reliance on wholesale roaming with each expansion.
1820 We believe this approach makes use of wholesale roaming services as intended in the conditions of licence as it allows us to more rapidly build and launch our networks in rural service areas. However, the incumbents' wholesale roaming rates are so high that it is cost-prohibitive to rely on roaming services, even temporarily.
1821 For our wireless business to be sustainable and for us to bring competitive services to the remaining primarily rural 4.3 million Canadians within our licence areas, we must remove the incumbents' commercially unreasonable rates from the equation.
1822 We don't believe that retail rates are reasonable as prices to be set for wholesale rates as this would grant wholesale roaming providers a disproportionately large share of the margins, while we bear a disproportionately large share of the costs of serving the retail consumer. These costs include the device subsidy, customer support, bad debt and retail operation, among others. This arrangement makes it difficult for us to reinvest in our network.
1823 MS MacDONALD: The government established conditions of licence regarding wholesale roaming and tower sharing expressly to encourage facilities-based competition, recognizing that access to reasonable terms for roaming and tower sharing is critical for spectrum licensees who need to build networks. The current process has resulted in high rates and onerous terms. It is appropriate for the Commission to intervene to ensure that unreasonable wholesale rates and terms do not prevent Canadians from accessing the benefits of competition.
1824 We have filed detailed comments on arbitration and tower sharing concerns, however, we will continue to focus only on the most important issue for Eastlink in this oral presentation, wholesale roaming.
1825 We will be happy to discuss any matters following our presentation.
1826 The incumbents have market power with respect to wholesale roaming. In most areas of Canada, there are only two networks, the Rogers network and a network co-developed by Bell and TELUS. In many of Eastlink's serving areas there is only one network, including parts of Newfoundland, much of Cape Breton and Nova Scotia's eastern shore.
1827 Through their market power, Bell, TELUS and Rogers all stand to benefit directly by collecting unreasonably high wholesale revenues. They further benefit indirectly by making it more difficult for Eastlink to sustain our nationwide service plans and to launch services in new areas. Increasing our costs, reducing our margins and delaying our network expansion serves the incumbents well by extending the time that they are the only options available to Canadians in our licensed markets.
1828 In any case, even where there are two network providers that could offer wholesale roaming services, there is no effective wholesale roaming market. Incumbents are not competing for our business. Our experience is quite the opposite, that they carefully avoid inadvertently underbidding each other.
1829 It is for this reason that setting "guidelines" is not enough. Indeed, Industry Canada's conditions of licence were based on an assumption that simply making access available on commercially reasonable terms would suffice.
1830 That has not proven to be the case. The Commission itself has recognized this recently in finding that Rogers imposed discriminatory rates and terms. Eastlink notes that our experience with other service providers is that their rates and terms have been equally as prejudicial. As a result, the Commission should take action to ensure commercially reasonable rates and terms are applied.
1831 MS HECKBERT: We submit that the Commission should adopt a retail-minus approach to rate regulation for wholesale domestic roaming, where the definition of "retail" is based on in-market, in-plan rates that the retail customers pay, instead of the current definition which includes high per-use and legacy plan revenue such that the rates are artificially inflated.
1832 Bell has acknowledged in its submissions that wholesale rates should be no more than retail rates, and Rogers has acknowledged the relative simplicity and transparency in retail-minus approaches in its comments under a separate proceeding. In addition, the Government has clarified in Bill C-31 that "commercially reasonable" should mean "no more than average retail rates."
1833 We further submit that wholesale roaming in rural areas should not cost more than in urban areas. The incumbents do not price their rural and urban service plans differently. At the same time, the capacity of their rural networks is generally underutilized due to the smaller populations served. Wholesale roaming on rural networks could offset the incumbents' costs of building in rural areas.
1834 Eastlink submits the Commission should also intervene regarding onerous operational limitations. For example, the incumbents have refused to even discuss seamless hand-offs, which can cause unnecessary dropped calls and data sessions for new entrant customers when moving between networks, despite the fact that each of the incumbents has implemented seamless roaming.
1835 In addition, roaming agreements often prohibit new entrants from answering customer questions as to which networks they may roam on as part of their Eastlink service. This is a violation of consumers' privacy rights and it deteriorates Canadians' ability to make informed choices about their wireless service providers.
1836 As a result, and in keeping with efficient regulation and timely access to rates, we submit that the Commission should select a retail-minus approach to wholesale rate regulation for domestic voice, SMS, and data roaming, as well as international long distance.
1837 Wholesale domestic roaming and related roaming fees such as 4-1-1 and international long distance rates should be made interim as of the date of the decision.
1838 And a costing exercise would follow a decision to this proceeding to establish a reasonable definition of "retail rate" and to establish permitted rates.
1839 We further submit that the Commission should mandate seamless roaming where technically feasible and place the onus on the roaming provider to prove that any requested arrangement is not technically feasible.
1840 Finally, the Commission should prohibit terms that prevent Eastlink from telling our retail subscribers on which networks roaming is available as part of our service.
1841 MS MacDONALD: Eastlink is a committed facilities-based service provider. We have purchased wireless spectrum licences and have made significant investments in our wireless infrastructure, including building an HSPA network entirely overlaid by a 4G LTE network, and building fibre backhaul to nearly all of our wireless antenna sites so that we can support competitive data speeds well into the future.
1842 We made these investments with the intention of bringing advanced wireless services to the 5 million Canadians within our licence areas. We will undertake the significant risk and investments necessary to do So insofar as we have access to wholesale inputs at commercially reasonable rates and terms as provided for in our conditions of licence.
1843 We believe Commission intervention is appropriate and can help ensure that Canadians continue to have truly competitive facilities-based wireless service provider alternatives over the long-term.
1844 Thank you.
1845 THE CHAIRPERSON: Thank you very much.
1846 Commissioner Molnar will start us off with the questions. Thanks.
1847 COMMISSIONER MOLNAR: Good morning.
1848 I feel like we have had a discussion like this not very long ago, to be honest. It's a bit like déjà vu here.
1849 Before I begin my questions, could you just help me understand where you are in your network build? You said that you had reached something like 700,000 of your customer base.
1850 MR. MacLELLAN: So our network build has been focussed on Nova Scotia and PEI to this point. We found that most of our roaming costs are at the edge of our network so we have been focussing on building out Nova Scotia and PEI to try to get out from under the wholesale roaming costs.
1851 We have plans over the coming year to expand to new markets based on what we have seen so far with the interim rates and our hope of what we will see coming out of this proceeding, so our intention is to build out all of the areas in the shaded areas where we have spectrum licences.
1852 For competitive reasons I would rather not say the communities where we are going to launch in the next year, but we would be happy to share that with you.
1853 COMMISSIONER MOLNAR: Yes. I'm not certain that we need that, I just wanted to get a sense. I mean you folks are in the build so some of these issues are very immediate for you.
1854 MR. MacLELLAN: Yes.
1855 COMMISSIONER MOLNAR: I note you said that roaming is your issue and not tower sharing, which is interesting given where you are in your build, but fair enough.
1856 We will talk about wholesale roaming, but I want to start a little bit further back in this proceeding.
1857 You don't speak a lot as it regards the competitive state of the retail market and, as you know, many parties in this proceeding have made that a focus as to whether or not there is sufficient competition in the retail market to, I guess, retain the forbearance that's there today or whether there needs to be measures in place.
1858 I'm sure you are aware, having read the record, that companies such as Bell, TELUS, Rogers make the argument that the retail market is competitive and, as a result, there is no need to intervene in the wholesale market.
1859 So can you tell me from your perspective, how should we as a Commission consider the factors affecting the retail market and the factors affecting the wholesale market?
1860 MR. MacLELLAN: So at the retail level we think that what we saw was retail pricing start to come down when the rules for the 2008 auction came out. That's when the flanker brands came out and there was a different brand in the market for each of the incumbents with lower pricing. We have also seen that in provinces where there is strong competition from a fourth player, like Saskatchewan and Manitoba, that there is lower retail pricing than in other parts of the country.
1861 So we think from a pricing perspective new entrants and the threat of new entrants have helped to lower rates. We think that if there weren't new entrants that those rates wouldn't have come down.
1862 The other aspect we think about in competition is the quality of the network -- so there is the pricing aspect and the quality -- and we are trying to differentiate ourselves based on the quality of the network and we think that from a competitive standpoint the quality of the networks are still in a development stage where there are many communities, for example in Nova Scotia, that are much smaller than communities in Ontario where incumbents have built LTE networks to compete with us. So we think that the competitive state of the networks is still in development.
1863 MS MacDONALD: If I could add to that as well, Matthew is correct in terms that the competitive state is still in development. There are many service areas where we have spectrum and will be building where there is in effect only one wireless provider today, or possibly two in some cases, but in many of our serving areas the coverage of a second may not be as good so effectively there's one choice, so we would disagree that all of the retail markets are competitive. There is much more work to be done.
1864 Linking the retail markets to the wholesale markets, I think the question then becomes you can't just look at those certain markets today that look competitive, we want sustainable competition and the things that we have done with our service plans are a sign of what is to come if we have the right cost inputs to those essential services.
1865 So we would say the wholesale markets are not competitive, we don't have access to competitive supply in order to keep those retail markets expanding.
1866 COMMISSIONER MOLNAR: Okay. So in your view, some of the retail markets are not yet fully competitive, but the conditions are there.
1867 Maybe I should begin by saying how would you define a market from a retail perspective?
1868 MS MacDONALD: Well, I think from a retail perspective I guess the question is: Does a consumer have choice and is that choice providing real competitive alternatives?
1869 So I suppose if you look at a retail market it can be quite small relative to what we see as a wholesale market, because really it's just the smallest market that a customer has an option of choosing from multiple providers.
1870 For us the wholesale market is the big question and we would say that that market is nationwide at this point in time because of a lack of choice.
1871 COMMISSIONER MOLNAR: Well, you began this by saying there are some elements of the retail market that are not competitive so that causes us to have to have to look at the retail market. Is it your view that with the right conditions at the wholesale level that the markets will be sufficiently competitive?
1872 MR. MacLELLAN: From our perspective if we had lower price wholesale inputs we would be able to offer the same plans at lower rates than we do today.
1873 COMMISSIONER MOLNAR: Right, okay. I'll move on.
1874 As you know, there are other parties here who are requesting MVNO-type access. And I believe that you have -- your position as we saw it in your August 20th intervention, was that mandated resale should be a last resort only if facilities-based competition fails to meet the objectives of the Act. That's your position?
1875 MS McDONALD: Yes, it is.
1876 COMMISSIONER MOLNAR: Still? Yeah, okay.
1877 I just -- I wonder with that what do you mean if it fails to meet the objectives of the Act? Are you suggesting that we retest at some time to see whether or not?
1878 MS McDONALD: I would say that we're making very good strides to provide that fourth facilities-based competition and with the right regime in place we will continue to expand. So I actually don't think that we're going to see a failure with the right regime in place for wholesale inputs.
1879 MR. MacLELLAN: One of the things that I think about -- I'm sorry.
1880 COMMISSIONER MOLNAR: I was just going to mention four is not a number that's relevant to me because we have to test the competition within a market. We don't test the number. The number doesn't matter. It's the competitive condition that's right. And you know what our test is. It's 9419 and all the different elements.
1881 So anyway, go ahead.
1882 MR. MacLELLAN: I was just going to say from our perspective, thinking about building out the business, as a start-up we're in a loss position and we're investing in a network knowing that we have to attract a critical mass of customers to be able to cover the fixed costs of the network. And we think that we have a good offer for customers with a very strong network and very attractive pricing.
1883 One of the concerns that I have about an MVNO coming in before the facilities-based new entrants are established, is that for a relatively low investment they could come and compete for those customers which could make it a very challenging proposition for facilities-based new entrants to be able to get to a place where there is a return on the investment to then be able to reinvest in the network and grow into other areas. That's a big challenge that I would see for us as a facilities-based new entrant in the start-up phase.
1884 COMMISSIONER MOLNAR: Okay. So would it affect your ability to utilize the spectrum that you've acquired?
1885 MR. MacLELLAN: I don't know that it would affect our ability to utilize the spectrum other than the spectrum may not be as utilized unless the MVNO was using the network that we're operating.
1886 But at the end of the day we're competing for the customers and there is -- we're competing for megabytes but we're also really competing for the customers and we have to be able to attract and have an offering for customers that is attractive enough that we can get the return on the investment to be able to grow the network.
1887 There's a lot of --
1888 COMMISSIONER MOLNAR: So tell me. When you speak customers, in your plan, in your vision, do you see some wholesale customers? Do you see making your network available to an MVNO?
1889 MR. MacLELLAN: We could see an opportunity to make our network available on a wholesale basis and we have no issue with that. Having it available for roaming so it's incremental traffic for another carrier versus MVNO where it's a substitute for a facilities-based network, we see those as two different things.
1890 We definitely see making our network available as an opportunity to allow roaming onto our network. On a resale basis we think of it as a different issue.
1891 COMMISSIONER MOLNAR: Well, I saw people nodding their heads when I asked if you would consider wholesale customers and I think you answered something different, actually.
1892 You would consider roaming arrangements but not resale arrangements, I think, is what you just said.
1893 MR. MacLELLAN: Yes, that's right.
1894 COMMISSIONER MOLNAR: Okay. So, those companies that want to get -- want to be MVNOs they won't be looking to you for that -- for that access?
1895 MR. MacLELLAN: That's not something that we're entertaining at this time.
1896 COMMISSIONER MOLNAR: Okay.
1897 One more question related to the MVNOs. Some such as CNOC have submitted that a full MVNO who essentially has all the facilities but the RAN and spectrum that they actually are a facilities-based carrier.
1898 What are your thoughts on that; we should consider them to be facilities based?
1899 MR. BRAGG: I think that's a bit of a stretch. I mean this -- to me the whole issue around, you know, facilities-based competition, I mean that tends to provide a higher level or a stronger more embedded competitor in the marketplace who has got more skin in the game and there is a greater likelihood that they are going to stay and focus on the customers.
1900 The MVNO argument, you know I can understand why some people are making it, but the complexity around trying to come up with the right rates and the right structure to support an MVNO, I think, is far more complicated than just solving some of the facilities-based issues on reasonable wholesale roaming or reasonable access to towers which it all comes back to how do you define the level of competition in a market.
1901 Certainly, since the new entrants have launched the incumbents can argue that, "Well, look, there's more competition in these markets so why do we need to do anything?" But it comes back to something Natalie said about it's about sustaining that level. And I think that's the challenge we have is that there are numerous facilities-based new entrants.
1902 We all enter this market with the expectation, right or wrong, that there were going to be reasonable wholesale access to roaming and tower sharing. It just hasn't really turned out that way.
1903 So I think the issue is about the sustainability of the existing competitors in the marketplace. I think that's -- you know, that's the big concern is if things don't change it's going to be very difficult for us to continue, given the fact that we have to pay these unreasonable rates to get access to the third-party facilities.
1904 MS McDONALD: If I could just add one comment too in response to your question? There is a difference between what I call the Eastlink situation and pure facilities-based and the full MVNO which will still require access to the RAN network. And the difference lies in how you have to keep regulating.
1905 So the objective of facilities based is that you may need some access to regulated inputs for a period of time while we build, but in the MVNO model there will be an ongoing need to continue regulating that access because they won't be building that network. And so that is another distinction I wanted to make.
1906 COMMISSIONER MOLNAR: Okay. Well, that's an interesting thing that this is time limited. Any kind of wholesale regulation if you have full facilities-based competition is time limited; that's your view?
1907 MR. MacLELLAN: We were thinking about this before this proceeding and hearing some of the comments yesterday about a time. We think it's time limited but I don't think we can put a number of years on it.
1908 We think that we'd say there will be a time when new entrants are established and that they are out of the start-up loss phase and they have the resources to be able to complete the builds. And so it's about being on a firm footing. And we don't know that we can put a number of years on that.
1909 We saw in 2008 when we bought the spectrum licences that there were five years before in-territory roaming was at that time scheduled to expire. And we saw that there were actions in the marketplace that made it difficult for us to get into market as quickly as we wanted to. So we're concerned that by putting time limits on things then we may just get waited out by the incumbents.
1910 So we'd say it's about establishing the right environment so the new entrants can gain a footing.
1911 COMMISSIONER MOLNAR: Okay. You make a distinction between in-territory roaming and is it just out of territory? I can't remember what terms you used but --
1912 MR. MacLELLAN: That's the term that we use.
1913 COMMISSIONER MOLNAR: In territory and out of territory?
1914 MR. MacLELLAN: Yes.
1915 COMMISSIONER MOLNAR: So speaking of roaming let's talk about what you view to be the relevant market for roaming. Would you see those as two separate?
1916 MR. MacLELLAN: We see the market for roaming to be national because we see that the plans are national plans. Those are the plans we offer, the plans we compete against. And most of the pricing is not differentiated for a customer in Halifax whether or not they are using a megabyte of data in Halifax or Winnipeg or Vancouver or Toronto. So we see it as being nationally.
1917 What's relevant for us about in territory and out of territory is that over time, in territory will be because we have the spectrum we'll be able to build out those areas. But the out of territory are areas that we don't have spectrum so we'll never be able to build in those areas. So we'll always need the wholesale access in those areas.
1918 COMMISSIONER MOLNAR: Right. So there's different conditions around in territory versus out of territory?
1919 MR. MacLELLAN: Over time. Today we don't think that there is a distinction.
1920 COMMISSIONER MOLNAR: Okay.
1921 And you clearly do not believe that the legislated caps, the rates set by those legislated caps are appropriate. It could be argued, particularly for your in-territory roaming that a retail-based cap preserves the incentive for you to build. What's your thoughts on that?
1922 MR. MacLELLAN: I don't know if I'd agree with the statement because we have the largest 4G LTE network in our area by quite a margin. PC Magazine came out last week with the ratings of LTE networks in Canada and we were far and away the best network in Nova Scotia.
1923 COMMISSIONER MOLNAR: Let me ask my question again because it's not about what you have in place. This is a question about your next investment, right?
1924 You didn't build that network with these legislative roaming caps in place. So now we're talking about the caps that have just been put in place and the rates set. That's the price of roaming. And so, as I said, one argument is that a retail-based rate, so you consider it to be a little too high but at a higher rate that preserves your incentive to build.
1925 MR. MacLELLAN: Yeah.
1926 So I see that as two different -- there's two aspects of it. The first is the rate. And we agree that there should be embedded in the rate an incentive for us to want to continue to build. There should be margin in the rate for the incumbents and there should be an incentive: when we reach a critical mass of customers that we want to build our own network. So we're committed to that.
1927 But the other aspect of competition is we don't think it's only about rates. We think it's about the quality of the network. We've drawn a distinction between ourselves and our competitors with the quality of our network, as well as the pricing. Because we're a rural provider, we think that we're more likely to build a better quality network in those rural areas. We think that we'll be able to attract the customers because of the quality of the network.
1928 So we wouldn't just rely on the pricing from the incumbents in those rural areas, but we'd want to have the quality of the network that we are building in rural areas to be our value proposition.
1929 COMMISSIONER MOLNAR: M'hmm.
1930 If the Commission were to make a distinction between in-territory versus out-of-territory, would you consider that a rate such as this may be reasonable for an in-territory roaming rate?
1931 MR. MacLELLAN: Most of our roaming traffic today is in-territory traffic, and so we'd say that over time we could see a distinction between the rates. But it would be difficult for us to continue to grow and expand by having higher in-territory rates.
1932 The example that we offer --
1933 COMMISSIONER MOLNAR: In-territory roaming rates, where you have the ability to build.
1934 MR. MacLELLAN: Correct.
1935 So right now -- we used the example in the oral presentation about Sudbury and Timmins. With high in-territory roaming rates, if we are to build Sudbury, then we would have to do a lot more build before we could launch, which means a lot more capital, and which means it would take us a lot longer before we are ready to launch service, and we'd have a higher embedded cost base when we launched. It would take us longer to get out from under that.
1936 Our preference would be to build rather than Sudbury and all of the surrounding area to Sudbury when we launched so we could avoid those high in-territory rates to build the core of Sudbury and the core of Timmins and the core of Moncton, the core of St. John's, get in business, and then reinvest based on the earning from those areas into growing the networks in the surrounding areas.
1937 So the high in-territory rates would be a disincentive for us to launch multiple communities simultaneously.
1938 COMMISSIONER MOLNAR: Okay.
1939 What you want for a rate is -- or suggest how the rate should be establish is, I think, in paragraph 26 of your remarks here, and I'm not sure I'm understanding exactly what this says. You want a retail-minus rate based on in-market, in-plan rates.
1940 What's the distinction, what's the relevance of what...?
1941 MR. MacLELLAN: We feel that the revenues that are being used in the calculation, in the numerator, are inflated because they include rates for customers who maybe have been on plans for a couple of years or prepaid rates, all of which are higher than the current rates because of the price erosion in the market.
1942 So what we were trying to say was that we think that the current in-market rates should be the rates that are used to establish what the retail is, rather than taking all of the revenue from all the different types of plans, whether they be older plans -- we call them legacy plans -- current plans, or paper-per-use plans. We're competing, really, in marketplace which is post-paid, and those rates have a lower rate than what the average would be coming out of those calculations.
1943 COMMISSIONER MOLNAR: My impression of what you said is that would be tremendously difficult to determine: what are the in-market, in-plan rates.
1944 As you know, there's bundled savings, there are, you know, different promotions and so on. So how you would establish what are the in-market, in-plan rates, have you given thought to that?
1945 MS HECKBERT: Yes.
1946 We think that -- like, we are trying to find something -- a reasonable middle ground here, and we think that in cases where the Commission has a definition already of "promotion," and what satisfies the test to be a promotion, so we assume -- like, our position is we would just take those promotions out.
1947 If they're deeply discounting for a promotion that fits the Commission's test, we wouldn't expect to also get those discounted rates for our roaming rates. It they're offering -- the incumbents are offering bundled discounts, we would not expect to also get that bundled discount.
1948 So we think by just removing those reductions in charges -- or in rates that we could keep it simple: just an examination of their core service offering as listed on their website in a calendar year, and break down how they attributed portions of that rate -- to device subsidy, to voice, SMS and data.
1949 MR. MacLELLAN: It's an exercise that we do today as we compare our rates compared to the incumbents: we break down their plans as we would anticipate how they would break down between the different products within a bundle of text and voice mail minutes and data. So we think it is something that can be done.
1950 MR. BRAGG: You don't need to tally up their entire revenue. All you have to do is look at what's a reasonable rack rate for one of their products that -- not one of these legacy plans or a prepaid that has, you know, a higher rate attached to it.
1951 If it's an existing plan in the marketplace that's $79.95, and we know generally what the margin is that is associated with the -- I call them the customer facing costs, the customer service, the device, subsidy, the sales and marketing, those are the costs that we absorb. So you just chop that margin off, maybe it's 30 per cent, and then the resulting wholesale rate is the $79.95 less the 30 per cent.
1952 I don't think you need to go through the exercise of trying to figure out every plan and every customer, and categorizing them all. It can be relatively simple, I think.
1953 COMMISSIONER MOLNAR: Just that simple, we can take the -- I can open the --
1954 MR. BRAGG: I can do it for you.
1955 COMMISSIONER MOLNAR: I can go on the Internet, grab their rates, subtract 30 per cent, and that's your --
1956 MR. BRAGG: Well, and -- if it's 30 per cent. But they do -- but it's not that difficult to determine what their --
1957 COMMISSIONER MOLNAR: It always seems difficult, to be honest, from this side.
1958 COMMISSIONER MOLNAR: From this side it is always difficult, I will just say.
1959 MR. BRAGG: Oh, I can appreciate that.
1960 COMMISSIONER MOLNAR: Let me ask another question with this.
1961 With a retail-minus rate, would you see this rate changing as retail rates change, or would you see this being set and maintained?
1962 MR. MacLELLAN: We think that it would need to be adjusted from time to time. We appreciate that that's the challenge in the retail-minus approach.
1963 We put it forward, as opposed to the cost-plus approach, because we thought that it would be more manageable as an approach up front --
1964 COMMISSIONER MOLNAR: Yeah. But it is --
1965 MR. MacLELLAN: -- but we do recognize that it would take more maintenance.
1966 COMMISSIONER MOLNAR: -- it is intended to be a proxy for cost, you would agree, so it seems -- that's why I wonder, with the retail-minus, if, in fact, it's supposed to move with retail prices, because it's not really a proxy for cost then.
1967 MR. MacLELLAN: We don't know that it's a proxy for cost. We thought it was a reasonable way to not overcomplicate, we thought, the approach.
1968 We think that we would have lower rates on a cost-plus regime, but we thought that that might be a bigger project and a bigger challenge to try to undertake.
1969 COMMISSIONER MOLNAR: M'hmm. If you can --
1970 MR. BRAGG: I mean the retail-minus, there's still an incentive for us to build out because we think that it's still, arguably, higher than what a cost-plus would give. So I think it satisfies many of the issues that are out there on: if it was 30 per cent -- I'm not stuck on that number -- but 30 per cent less the retail rate, there's still a reasonable return: it covers the assets and it covers the operating cost of the network for the incumbent carrier, but it's also high enough that the competitors, the new entrants, are still motivated to build out their network to avoid those costs.
1971 So we felt it was a reasonable balance and, you know, satisfied some of the existing issues that were there today, without, you know, doing a whole exhaustive cost study.
1972 COMMISSIONER MOLNAR: Okay.
1973 One more question as it regards roaming.
1974 There was a discussion yesterday about vertical foreclosure, the incentive for vertically integrated companies to...I've lost the words now, but, you know, essentially, if you're competing in the same market, they have an incentive to prohibit or inhibit competition in those firms, therefore need to be regulated. As you're talking about roaming, there are certain companies, the regional carriers, for example, where that's not an issue for you.
1975 Would you see that these roaming rates should apply to all carriers or just those where the incentive for vertical foreclosure exists?
1976 MS MacDONALD: Well, first of all, you know, we also considered that, because it's not just about the incumbents competing with us in our market, it's also the fact that when our customers roam in a market where we may rely on one carrier.
1977 So, for example, SaskTel, they are the only provider from whom we could get roaming in their market, so we would be also concerned about ensuring that we can get reasonable rates in markets where we may not be competing with them, but we certainly need to be assured that we have reasonable rates for roaming in those markets as well.
1978 COMMISSIONER MOLNAR: So that causes me to question your assertion that roaming is national.
1979 MR. MacLELLAN: One other aspect of it, which is hard to look at on its face, but there are a lot of relationships between different carriers, and so, for example, SaskTel has relationships with incumbents and we -- it's hard to know sometimes, with all of those relationships, whether -- and those relationships may extend beyond wireless into other communication products -- whether there's a disincentive for a particular carrier to want to deal fairly with us because they may be getting, you know, another incentive from a partner of theirs to not want to deal with us.
1980 And so that's something that I can't point to evidence, but we know that there are relationships like that among many, many carriers in the country. For that reason, I --
1981 COMMISSIONER MOLNAR: Have you attempted to make roaming agreements with the regional carriers?
1982 MR. MacLELLAN: With some. We have extended requests and we're in negotiations with some today.
1983 COMMISSIONER MOLNAR: Okay. Moving on, one of the questions -- you know, all of these things are inter-related, roaming and tower sharing and so on. And one might argue that if there's very good conditions related to roaming, it may be a disincentive for building. You know, we've had that discussion.
1984 And so if we were to regulate the wholesale roaming rates at a price that you believe is reasonable, would you still require relief with respect to tower sharing?
1985 Do you believe we still need to be involved in the arrangements around tower sharing?
1986 MR. MacLELLAN: We do.
1987 We focused on roaming in our oral, and we do say and maintain that it is the most important factor because it's a variable cost. But we plan to continue to build, and we will be doing many, many co-locations. And we think probably a higher and higher percentage as the years go on because there's more and more pressure to not build your own site. And we're trying to do the right thing and follow the conditions of licence and the direction that we're getting from Industry Canada on that.
1988 And so we'll always be on more towers co-locating on others much more than we're going to have others co-locating on us. So it does become an important input factor.
1989 Though it's not as important to us as roaming, it is important because we will continue to build.
1990 COMMISSIONER MOLNAR: You mentioned seamless roaming. How important is seamless roaming to you?
1991 MR. MacLELLAN: Today, it's relatively less important because we built Nova Scotia and PEI, and one's an island, the other's an isthmus, and there's one road in between. And so it makes it a little bit easier for us.
1992 But as we look at the area where we want to expand and you look at communities that might have a network that's spokes coming out of a hub out of that community, there's many, many more points where calls can be dropped, and so we think it becomes more and more important for us as we expand into our other areas.
1993 COMMISSIONER MOLNAR: Okay. Fair enough.
1994 But just tell me here, how important is it to you?
1995 You know, there's many asks on the table here, so how important is this one?
1996 MR. MacLELLAN: Relative to the other two, it's not as important, but of the hundreds of things we think about, it's in the top five.
1997 COMMISSIONER MOLNAR: And you believe if we were to mandate the rates for wireless roaming, would you see us having to establish rates for seamless roaming?
1998 MR. MacLELLAN: Well, we don't think the --
1999 COMMISSIONER MOLNAR: Or what would -- how would you see us involving ourselves in that?
2000 MR. MacLELLAN: It would be directing the incumbents to make it available.
2001 We know that if there's a cost to the integration that we would bear, you know, the responsibility of those costs. It's making sure that those costs are fair and they're not inflated.
2002 There isn't an ongoing variable cost associated with seamless roaming. It's a matter of setting up the system and the inter-connection, so it's not a variable cost. It's setting it up and then having it established.
2003 There would be some ongoing maintenances, changes --
2004 COMMISSIONER MOLNAR: And you could establish that and agree to that with the wireless carrier you're roaming with without our involvement?
2005 MR. MacLELLAN: No, we've asked for and we've been told that it will not be provided unless it's mandated.
2006 COMMISSIONER MOLNAR: Yeah. Okay.
2007 And once we mandate it, you're going to establish the cost through -- by yourselves without our involvement.
2008 MR. MacLELLAN: Well, we've had very little success negotiating any costs with incumbents, so we think that we would need some guidance or direction or pricing from the Commission because we don't think that we would be able to have those costs agreed to on commercially reasonable terms.
2009 COMMISSIONER MOLNAR: Okay. Moving on to the area of towers again.
2010 Industry Canada recently set out a circular on the issue of towers, I think in June, with new requirements for public consultation and so on. I'm sure you're very aware of that.
2011 Could you provide us more details on how these new requirements will impact your ability to build towers?
2012 MS HECKBERT: I think it's just reflective of what Matthew said, we're seeing more and more just in the consultations we're already doing for taller towers, that circular extended consultation requirements to towers and poles smaller than 15 metres. But even in the consultations we've been doing for the taller towers, we've seen increasing push back. And not just in urban areas where, I think, people are more used to that sort of push back, but in rural areas as well.
2013 I think having to do consultations for even the smaller structures which were -- the reason they were exempted in the first place, we believe, was to incentivize smaller, less intrusive infrastructure.
2014 Now that we'll be doing consultations on all, it's just adding more of the same type of consultations and potential push back and difficulties in siting new infrastructure.
2015 COMMISSIONER MOLNAR: Okay. It's just more of the same. Okay. Good.
2016 So as it regards towers and site sharing, what is it -- what, in your view, is the product and geographic markets that we should be looking at?
2017 MS HECKBERT: The product for -- in our experience, I know that in some cases in Ontario, it seems more Southern Ontario, there may be some cases where wireless carrier who's first on a rooftop then manages that rooftop for the building owner with the other carriers.
2018 We have not experienced that so, for us, tower and site sharing is the same thing.
2019 When we're going on rooftops, we just deal directly with the building owner in Nova Scotia and Prince Edward and, so far, northern Ontario. The towers is a single product market. A tower is a tower is a tower. It's just a steel piece of infrastructure that we're going to attach antennas to.
2020 The geographic area -- sorry.
2021 COMMISSIONER MOLNAR: Just so I understand, you're saying that tower and site sharing is a single product market but, in fact, the characteristics of the two are very different because, in site sharing, you often are not reliant on anyone else or need to do public consultations or anything else.
2022 MS HECKBERT: Yeah, sorry. I should have clarified.
2023 For those of us outside of those different communities, so in Nova Scotia, PEI, I believe in Quebec it's the same thing. Site sharing just means the compound around the tower where you site your cabinet, so sorry, that was miscommunication on my part.
2024 But yes, site sharing as defined by those who have that different arrangement in southern Ontario would be, for us, separate. Rooftops are separate. Water towers, things that are not owned by a wireless carrier where we just deal directly with the infrastructure owner is separate from towers.
2025 COMMISSIONER MOLNAR: Okay. And you know, I was kind of using the terms loosely, too, but staff did provide us definitions and I guess we all should use them.
2026 Okay. And I agree with you, tower and site sharing services is that combination. Tower can be separate, site sharing can be separate. Tower and site sharing is another.
2027 So the geographic market, if you told me. I was busy finding definitions.
2028 MS HECKBERT: No, I didn't get to that.
2029 The geographic area, in our opinion, is just the area around each tower, so it's national in scope in that it's always the same thing. It's consistent nationally. But the market area is just the area around the tower that we are trying to cover.
2030 So if we have a coverage gap we're looking to fill in with network build, we first have to look for existing infrastructure because of Industry Canada's rules and if there -- that is the geographic market. If there's a tower there, we have --
2031 COMMISSIONER MOLNAR: For each tower.
2032 MS HECKBERT: Yeah. If there's a tower there, we have to go on it.
2033 COMMISSIONER MOLNAR: Okay. Could you tell me whether it's reasonable or practical for you to switch from one tower to another?
2034 Like if you make an arrangement to share someone's tower, would you see moving to another tower some time in the future?
2035 MR. MacLELLAN: Yes. And we look at that today when we're co-locating on towers. If there is an opportunity to have our own site and it's consistent with what the community would like, we'll move that infrastructure because the cost of co-locating is so high, the cost of moving gear and moving the back haul is not that expensive compared to the cost we're paying for the co-location.
2036 MS HECKBERT: However, I just would like to note that those opportunities are rare. It's rare that we would get approval to have a second site in a community.
2037 As Matthew said, we can do it when a community's okay with it, but oftentimes, once we've co-located, it's -- there's unlikely to be a second tower built in an area. It's especially problematic in rural areas where there aren't buildings or existing other infrastructure that are tall enough for us to co-locate on.
2038 Most of the time, once we've co-located on a tower, we're there.
2039 COMMISSIONER MOLNAR: Yesterday, we heard Wind and Mobilicity, to some extent, speaking about the delays they experienced when they sought to make arrangements for getting on the incumbent's towers.
2040 Have you experienced any of that?
2041 MS HECKBERT: Yes. We experienced initial delays in trying to negotiate reasonable rates and terms. Those delays were significant in terms of they were years.
2042 And then since then, it's -- prior to when we started getting some of our own towers, we really had an issue with delays in getting information. Even when we would get information in the case of certain incumbents, it would not be accurate or they would have put forward too many future requirements that even their existing structure couldn't support their own load, so we had to go through multiple rounds of structural analyses and engineering analyses.
2043 It's those sorts of delays, they can add months to a co-location process that should not take more than about 120 days from initial request to completion of construction.
2044 COMMISSIONER MOLNAR: Right. And did you say that it's improved over time?
2045 MS HECKBERT: I think, and Matthew may want to correct me, but -- did you want to go?
2046 MR. MacLELLAN: No.
2047 MS HECKBERT: I think, as he mentioned earlier, that as we've started getting our own infrastructure, building in rural areas where there may not be other service providers with our infrastructure, we are starting to see a more mutual, more reciprocal relationship.
2048 MR. MacLELLAN: Early on, some of the early delays were because we were having a hard time accepting the rates that were proposed. We had the experience where before the 2008 auction we had infrastructure where incumbents had attached to our towers and so we had an idea of what the market was and then as we started to build out and put in co-location requests and we saw that the rates that were being asked, we didn't think that that was reasonable so we negotiated a long time on that.
2049 We did not go to arbitration on that, we ultimately accepted the high rates.
2050 And the rates are such that it's good business for the incumbents to have us co-locate on their towers and so it's not a painful process anymore because, you know, to get $30,000 or $40,000 a year with doing nothing but allowing access to the structure, that's great business and so they are allowing us on.
2051 COMMISSIONER MOLNAR: So now you are getting on better. I understand.
2052 So you have suggested that we should regulate the rates for tower sharing. Would it be your view that regulated rates would apply to all carriers, new entrants and incumbents?
2053 MR. MacLELLAN: Yes.
2054 COMMISSIONER MOLNAR: Yes.
2055 And you submit that those rates should be cost-based?
2056 MR. MacLELLAN: Yes.
2057 COMMISSIONER MOLNAR: You have, I'm sure, seen the submissions of the larger carriers who say it's very complex, it's impractical, it's unworkable, it's just it's a big problem, you know, to establish cost-based rates for a market that is location-specific?
2058 MR. MacLELLAN: We have built more towers in Nova Scotia and PEI in the last few years than anybody else, so we have a pretty good idea about the costs of building towers.
2059 The land lease cost varies tower by tower, but that's very easily defined because you have a lease with a landlord. The steel that you purchase to erect the tower is very easily defined and even for older structures it's very easy to determine what the value --
2060 COMMISSIONER MOLNAR: So are you suggesting it's cost-based on a location-by-location basis?
2061 MR. MacLELLAN: It can be. But there are certain elements of those sites today, when we go on a site as a co-locator, even -- the sites may have different costs of lease and they might be different heights of tower, but today we have one rate from incumbents to be on a tower for an antenna and they don't differentiate between what type of tower it is. So we could do it tower-by-tower, we could do it by type of tower, a self-support tower versus a guide tower --
2062 COMMISSIONER MOLNAR: But you do essentially have a rate card from them today?
2063 MR. MacLELLAN: We do.
2064 COMMISSIONER MOLNAR: And how does that rate card -- what are the characteristics that it includes in establishing rates?
2065 MR. MacLELLAN: It would go through the type of attachment on the tower and there would be a different rate for each type of attachment and multiplied by the number of attachments and then there would be a rate for how much space you use at the bottom of the tower on the LAN to put your cabinet.
2066 COMMISSIONER MOLNAR: Okay. So would you suggest that those are the appropriate elements to include -- if we were to establish rates that those would be the appropriate elements to include in our rate-setting?
2067 MR. MacLELLAN: I don't know all the details, but it's a very good start.
2068 Denise, do you have a point of view?
2069 MS HECKBERT: Yes. I just would like to clarify about our position.
2070 So, as Matthew mentioned, there are guide towers and self-support towers and there may be different heights, but many of the costs of our co-location are borne by us. We run our own fibre, we run our own power, we pay reinforcement costs, we do the structural analysis and the engineering drawings once our co-location is complete. So that keeps a lot of the costs that may vary from site-to-site solely as our responsibility.
2071 Which means that it starts to boil down to something that's far more similar to support structures where you have maybe one or two or three types of support structure, you have different types of attachments that can be defined and then maybe you have another factor to consider about the height on the tower, the incumbents or the tower owner would reserve the premium spot at the top of the tower for themselves, which is allowable under Industry Canada's rules, so maybe something to consider there, but those are the variables. It's similar in complexity to support structures
2072 COMMISSIONER MOLNAR: I can't remember which of them yesterday suggested that towers should be considered a public good, similar to support structures.
2073 Does that make sense to you?
2074 MR. MacLELLAN: No.
2075 COMMISSIONER MOLNAR: No? Oh, how come?
2076 MR. MacLELLAN: We think it's complicated.
2077 Are you speaking of the last presenter yesterday that said that perhaps these should be perhaps nationalized or wasn't quite sure how it would be done? Is that the submission you are referring to?
2078 COMMISSIONER MOLNAR: No.
2079 MR. MacLELLAN: Oh, I'm sorry.
2080 COMMISSIONER MOLNAR: I wasn't suggesting that we would nationalize towers.
2081 MR. MacLELLAN: Okay. So I'm thinking about a different presentation from yesterday.
2082 COMMISSIONER MOLNAR: Yes. To be fair, this is actually a regulatory category.
2083 MR. MacLELLAN: Okay. Sorry.
2084 MS MacDONALD: Yes. I think there was a bit of confusion about one of the presentations yesterday.
2085 COMMISSIONER MOLNAR: Yes.
2086 MS MacDONALD: We actually agree with that. I mean, there is a government policy that basically we are not to duplicate towers when there is a tower available. It's an absolute necessity, it would be illogical for everyone to go around building towers as they need them, which is why we are sort of stuck co-locating.
2087 So I agree that it is a type of facility that would fall under a public good and we would need ongoing regulated access to them.
2088 COMMISSIONER MOLNAR: Right. And your position is we should establish the rates for that as we do for support structures?
2089 MS MacDONALD: Agreed.
2090 COMMISSIONER MOLNAR: Okay. Understood.
2091 If we don't establish rates I guess there is other forms of oversight we could take on tower in-site sharing. We could, for example, approve the agreements that have been filed. Vidéotron I believe has suggested that we approve a master template for tower in-site sharing containing standard terms, conditions and procedures.
2092 Do you see value in those types of remedies?
2093 MS MacDONALD: I agree that there could be merit in a standardized agreement because the concept that everyone has that right to access and there should be fairly standard terms.
2094 We do believe, however, that the rates should be regulated for the access.
2095 COMMISSIONER MOLNAR: So, in your view, these types of remedies, a standard template, and so on, would be in addition to regulated rates, but would it be fair to say not quite as important to you as regulated rates?
2096 MS MacDONALD: I would say that's fair.
2097 COMMISSIONER MOLNAR: Yes. Okay.
2098 Thank you. Those are my questions, thanks.
2099 THE CHAIRPERSON: Thank you.
2100 Mr. Vice Chair...?
2101 COMMISSIONER MENZIES: Thanks.
2102 Just quickly, what was your primary motivation in entering mobile competition??
2103 MR. BRAGG: I like this question.
2104 Well, it's to grow our business and provide more products and services to our customers and ultimately try to make some money.
2105 COMMISSIONER MENZIES: I heard this yesterday, too, people saying it costs a lot more to connect than they had anticipated. What was the difference? When you did your initial business plan you must have anticipated wholesale roaming rates that you would have had to pay; right?
2106 MR. BRAGG: Yes.
2107 COMMISSIONER MENZIES: And then, just as others said yesterday, it ended up costing a lot more than you had anticipated.
2108 So I'm trying to understand how good business people can do a business plan for something and then -- they had to base that on something, right, what you thought the cost would be, you would have had to have some data that you were basing that on, and then when you started everybody goes, "Oops, that's costing a lot more than we thought."
2109 What happened there? I don't understand how good business people could make a plan anticipating certain rates and get into a business and then the rates would be as far off as they apparently have been.
2110 MR. MacLELLAN: Unfortunately, we didn't have the opportunity to negotiate that rates or to know what those roaming rates would be before the auction, so we entered the auction, then you negotiated those rates as we were building out the network. So our business plan would have looked different had we had a better sense of what those rates would have been prior to the auction or building out the network.
2111 But the other aspect that we did --
2112 COMMISSIONER MENZIES: Sorry. Was it the amount of money that was spent on the auction that then influenced those rates?
2113 MR. MacLELLAN: No.
2114 COMMISSIONER MENZIES: Okay.
2115 MR. MacLELLAN: It was that the rules were set out prior to the action, but it wasn't until you completed the auction that you would then enter into negotiations with incumbents about getting roaming.
2116 COMMISSIONER MENZIES: Right.
2117 MR. MacLELLAN: But the thing that we did that we were wrong about was we anticipated that when we launched service that we would be able to ask our customers to pay the roaming charge when they were off of our network. We were wrong on two counts.
2118 One was consumers' general willingness to have an unknown where they were going to have an extra charge on top of their bill, and we also didn't anticipate some of the changes in the marketplace that the incumbents made to their own plans in anticipation of competition coming in. So when we launched our service, even if you were inside of Nova Scotia and PEI, but off of our network, we were asking our customers to pay us, with no mark-up, cost recovery on the data that they would use off of our network. What we found was that that was not a value proposition that customers were interested in.
2119 And we found that we were confronted with misinformation which we have shared with the Commission where we would go into the retail stores of the incumbents and they would say, "Well, you don't want to go with Eastlink because you're going to pay through the nose and I have seen bills for thousands of dollars", none of which were true, and we were confronted with that.
2120 We didn't anticipate that type of behaviour in the marketplace so we expanded then to include Nova Scotia and PEI usage within our package and then ultimately last November launch packages would include roaming through the rest of the country.
2121 What we had to do in our business to accept those risks were to delay expansion outside of Nova Scotia and PEI and to really focus on building out our network in Nova Scotia and PEI in the rural areas to try to get out from under those roaming rates.
2122 COMMISSIONER MENZIES: In terms of the rates themselves, what was the difference between what your original business plan anticipated and what you wound up paying?
2123 MR. MacLELLAN: Percentagewise?
2124 COMMISSIONER MENZIES: I will take whatever you have.
2125 MR. MacLELLAN: I don't know if our agreements for confidentiality allow me to say what those rates are here, but I'm happy to provide those.
2126 COMMISSIONER MENZIES: Give me a percentage.
2127 MR. MacLELLAN: They would probably have been four to five times higher.
2128 COMMISSIONER MENZIES: Four to five times higher.
2129 MR. MacLELLAN: Yes.
2130 MR. BRAGG: At the highest level, I mean when we entered the AWS auction, there was an expectation, I mean Industry Canada had laid out a framework associated with the rules or the benefits that the new entrants were going to have with the spectrum set aside, we got our heads around that, we participated in the auction, but they also had a structure where they said, you know, there were going to be -- the incumbents must provide access to their facilities, meaning the towers, at market rates and roaming access at market rates and that Industry Canada was going to facilitate this and there was an arbitration process. So I think we had a comfort level that we should be all right.
2131 Matthew described some of the issues that we went through going forward, but that's what we discovered was the definition of market rates and how Industry Canada approached that, it was a little distorted what our original expectations were going to be and how there wasn't really a true market to arbitrate over and we had gone to the brink of arbitration with one of the carriers and ended up not having to do that, but they are still much higher than we anticipated.
2132 Then I think we also felt that we were aware of the potential that -- and I was always a proponent that the CRTC should have jurisdiction over this and, if so, would -- this is going to be a little unfair -- clean up this mess. But we had made the decision, we had purchased the spectrum and started to construct our network, so we were in and we just had to work through some of these issues until we had a reasonable outcome.
2133 COMMISSIONER MENZIES: Okay. Thank you.
2134 In your discussion with Commissioner Molnar about the possible fences around potential regulation, you suggested that it would be -- what I recall you saying anyway, was that it would be good to at least have things in place until you were on a firm footing.
2135 Is that an accurate recollection of what you said?
2136 MR. MacLELLAN: I think that's, yes, fair.
2137 COMMISSIONER MENZIES: Okay. What does "a firm footing" mean? That's not real regulatory language and I would like to have some sort of sense of what that means. Does that mean profitable? Does that mean 3 percent share of the market? Does that mean 20 percent share of the market in the markets in which you complete? How would a person even define being on a firm footing?
2138 MR. MacLELLAN: Our plans would be to deploy a large amount of capital over the next few years and that capital is largely capital which is either from borrowings or from reinvesting returns from the business. We would like to be in a position where we are not in a loss position before we are competing with, for example, MVNOs or losing the wholesale roaming. We would like to be in a position where we are not in a loss position any more in terms of how we are growing out the business.
2139 COMMISSIONER MENZIES: Why is that better for the public?
2140 MR. MacLELLAN: Because if we are going to be in a loss position we won't build out the areas, so the public won't get the quality of network, they won't have the competition, they may have higher prices.
2141 MR. BRAGG: I don't think we are suggesting you have to define what secure footing is for all the carriers, but I think it's just if there are reasonable wholesale rates and reasonable access to infrastructure, it allows us to determine what a secure footing is.
2142 If we don't have to pay a higher than retail wholesale access for elements that we need to grow the business, you know, that's detrimental to our potential secure footing, but as long as they are in a reasonable spot, which we think the CRTC can help define, we can determine our own secure footing. It just enables all the new entrants to find their own secure footing.
2143 COMMISSIONER MENZIES: You have kind of commented in general, but I just wanted to get some reaction from you.
2144 There has been a lot of data filed by incumbents which they have put forward as evidence that indicates that there is a competitive environment, that there is a competitive retail environment which speaks to, in their argument, the non-existence of market power in the wholesale area. Is there any of that -- I'm assuming that you have gone through all that data in terms of volume of radio advertising, newspaper advertising in general, market shares taken by new entrants and that sort of stuff, is there any of that data with which you take factual exception?
2145 MR. MacLELLAN: If you excuse me, I would like to answer the question not on the factual standpoint, but yes, the market share has been taken. But if you look at some of the carriers who have attracted the largest number of customers, they are the low value customers who have more basic plans and maybe don't have an LTE network or offering large data plans.
2146 So while the market share has been taken, I can't argue with those facts, but where the industry is going and what consumers want more and more are high speed, mobile data networks, and if you look at it from that measure there hasn't been the same market competition. I think we see that by the fact that we still have -- really that market in Nova Scotia is still developing.
2147 COMMISSIONER MENZIES: Wasn't it largely the lower end of the market where prices increased last year at the retail level and prices at the retail level for the heavier users went down? Isn't that an indication that there is competition for those heavier users?
2148 MR. MacLELLAN: There is absolutely competition for those users, but my question would be if you have new entrants who are in start-up and they are in a loss position and they either exit the marketplace or they don't develop new areas, will there still be competition on price in the future?
2149 The other aspect of it is the networks, again we think -- when we talk about competition it's not just about the prices but the quality of the network and there is still a lot of the country which does not have well-developed LTE networks and if you look at where new entrants like ourselves have entered the market with LTE networks, you will have a town like Truro, Nova Scotia with LTE and you would have an equivalent sized town in Ontario which would not have LTE. We are bringing incumbents up to our standards.
2150 COMMISSIONER MENZIES: Okay. Thank you very much. Those are my questions.
2151 THE CHAIRPERSON: You just mentioned to the Vice Chair that you went down the road of arbitration. Can you give me a little bit more detail of the circumstances of that?
2152 MR. BRAGG: Natalie might be better at answering this in the specifics of it. She will know what she's allowed to say; I will end up in jail.
2153 MS MacDONALD: So we did file some details confidentially with the Commission because the arbitration process is confidential and in fact our February 10, 2014 submission from paragraphs 30 to 36 describe that.
2154 Of course, the process of getting there really related to a complete inability of negotiating the roaming rates at a time when we had not yet launched our service and timing was becoming extremely imminent to having already invested in our network build for over four years. So that led to a point where we absolutely needed to launch roaming.
2155 The process as described in some submissions of other carriers we disagree with. The specific experience that we had as outlined is in fact what happened. It was a very long process and it is not a process that we would not want to have to entertain and enter an arbitration process in the future. We felt that for the various reasons, primarily being asymmetrical information, access to it, which makes it very challenging to build your case and argue your case and even have discussions internally with key decision-makers in the company about what the risks are of the outcome. All of those things made it extremely challenging to feel that way around a fair playing field in the process.
2156 THE CHAIRPERSON: So at one point you made the decision to get off the road of arbitration?
2157 MS MacDONALD: This process from the start until the end of a definitive agreement was approximately one year. There were interim proceedings during the process that dealt with disclosure issues, disclosure of agreements. We were provided with limited access to the agreements limited to only two individuals in the company and there was a series of other agreements that we had no access to other than through outside counsel.
2158 Once the disclosure occurred and the other party had disclosed the information we were approached with a proposal to look at negotiating a settlement and given the timing and the concerns about the risks we felt that was the choice we made to sign.
2159 Now, we have made it clear to the Commission, and the rates are filed, that those rates are not reasonable in our view.
2160 THE CHAIRPERSON: Sure. Did you track the direct costs associated with your short journey on arbitration -- or your long journey on arbitration I guess, it depends which --
2161 MS MacDONALD: We obviously have the legal bills, so we have those. There would be significant resource costs that would have been incurred throughout the whole period, including even the time leading up to that in terms of trying to negotiate. So we haven't really tracked the resource costs and time allocated in any definitive way.
2162 THE CHAIRPERSON: Is it something you could help us understand a better sense of that?
2163 MS MacDONALD: Sure.
2164 THE CHAIRPERSON: So you could do that as an undertaking for the 9th of October, in case there was any confusion out there.
2165 Okay. Thank you. Those are our questions. Thank you very much.
2166 Maybe legal counsel has some questions however, sorry. Thanks.
2167 Me STEWART: Merci, Monsieur le Président.
2168 I think you said that seamless roaming was up there within the top five of your issues and I guess roaming and tower sharing would be the other two.
2169 What about the -- well, that would mean the three. And then so what would be the other two in the top five list?
2170 MR. MacLELLAN: And I'm sorry -- I wasn't -- I didn't have another two specific in my mind. But, you know, they are typically -- you know, the things that we think about all the time are technology issues.
2171 When I think about issues for us we have 700 spectrum. We have to make technology investments to make use of that spectrum. We think about entering new markets. We think about customers and price plans.
2172 The customer facing decisions are the decisions that are always in those top five for us and so those are the types of things that we would be grappling with as issues every day.
2173 MR. STEWART: Sorry, to interrupt. I was talking -- I was asking more in terms of regulatory issues that would be of relevance and concern to the Commission.
2174 MR. MacLELLAN: On the regulatory, I'd defer to Natalie if there are other regulatory issues that would be as important as those.
2175 MS McDONALD: So in the wireless context I think obviously roaming, tower sharing regulation included a seamless hand off. And we've also referenced some other provisions in the agreements where we've had challenges with, one of which, as described in our submissions, relating to communicating to our customers on whose network they may be roaming when they choose our service.
2176 And so in the context of this proceeding and the wireless issues those would be the regulatory issues that we brought forward.
2177 MR. STEWART: So really, there is a top four list there.
2178 MS McDONALD: I'm sure we could think of others but those were the four, the key --
2179 MS HECKBERT: I would just say one other thing would be some people have mentioned potentially the CRTC taking on a more active role in arbitration or not arbitration per se but dealing with disputes on negotiations and such. I would say that would be a fifth. We agree with that.
2180 MR. STEWART: That segues very nicely into my next question.
2181 Have you got some suggestions as to how the Commission could assist the process maybe in formal procedures, mediation? Have you thought about this and you can make concrete suggestions to the Commission?
2182 MS McDONALD: Sure. So today, until this proceeding really, under the regime we were relying on the Industry Canada's conditions of licence and the framework there which of course provides the alternative of arbitration.
2183 We do believe that regulation is necessary as we've set out, but we also think that the Commission as an expert tribunal very familiar with the industry, the issues -- a lot of the issues are applicable to issues that the Commission deals with all the time in terms of costing and support structures.
2184 So we think that the Commission is an excellent resource to go to for dispute resolution on those matters related to the very issues that we deal with, more or less industry, so instead of the arbitration process as it is today under the conditions of licence.
2185 MR. STEWART: The concept of nudging has become more and more popular in the business parlance. Do you see that as a -- that principle being applied by the Commission in terms of bringing parties, trying to breakdown differences and clarify issues in terms of access to tower sites so that you may have no problems with the incumbents?
2186 MS McDONALD: So you'll have to excuse me. I'm not familiar with the concept of -- did you say nudging?
2187 Okay. So I'd have to understand what that involves.
2188 MR. STEWART: It's measures that are not as coercive or where there is a -- it's a more sensitive way of dealing where you don't have necessarily financial penalties and the like.
2189 MS McDONALD: So I would say our first course of action as a company is always to work within the guidelines and the framework and, you know, enter into those kinds of negotiations with a view that and a hope that we can negotiate reasonably.
2190 That's the practice and approach we always take and that's exactly why we didn't imagine the challenges we would have even with the existing framework that Industry Canada had established.
2191 Absolutely there is always room for nudging along. I think, you know, getting guidance and having a sense of what the Commission would likely do or want to see is always helpful. I do think that there is a time and place for it and I think that, given the experiences we have had, the direct experiences we've had, the time and place for some of the issues here today is really regulation and so going beyond nudging.
2192 MR. STEWART: Okay, thank you.
2193 I note that in its intervention on the 20th of August this year -- I believe paragraph 28 -- TELUS submitted that given the continuing evolution in network construction based on microsites and decreasing reliance on macro sites, tower sharing in their view is likely to be less important for facilities deployment. Do you agree with that?
2194 MR. MacLELLAN: If we were operating in Vancouver, I think that that would be a different situation. But when we're talking about, you know, the highway between Collingwood and Sackville, New Brunswick there are no microsites and I don't anticipate that there will be anytime soon.
2195 MR. STEWART: Okay, fair enough.
2196 You mention in terms of tower sharing that the co-location or, rather, the support structures concept in tariffing would be a good example that the Commission could look at. And it just occurred to me, what about the co-location tariffs and the concept there? Would that be equally applicable or are there significant differences that you identify?
2197 MS McDONALD: So I might reserve the right to think about that further, but what I will say at the outset is when I think of the co-location tariffs it's oftentimes access to central office space or some other space and this isn't quite the same thing.
2198 You know, I think the tower access itself, although we often refer to it as co-location on a tower, it's really just about access to a pole and the structure itself. So you know, today here I would say I see just the tower access as a support structure access model.
2199 MR. BRAGG: I mean, there may be some principles associated with co-locating that may fit and I think that's part of, you know, why we feel the jurisdiction for the CRTC is a better fit is because of that past experience on co-location, lease loop, support structure. I mean, I think there are many similarities in the fixed wireline business to wireless. So to be able to draw on some of those examples and be able to use some of those where applicable, I think it's worth looking at.
2200 MR. STEWART: Thank you.
2201 Have you done a comparison with respect to the proposed roaming rates in your proposal in terms of retail minus but on the more limited level that comparison between that and what the section 27.1 now says and that you could -- can you -- if so, can you provide that to the Commission confidentially of course, so that the Commission can get an idea of the quantitative sort of difference that this would represent to you?
2202 MS McDONALD: Yes, we can undertake to do that.
2203 MS HECKBERT: Yeah, I mean, we could say generally today we've looked at, for example, the data rates. And just comparing our -- what we think they should be based on their in plan, in-market plans which we filed with the Commission and the average rates that the Commission provided as part of this proceeding to all the participants we found roughly 200 percent mark-up under the IC rates.
2204 And when you start to avoid some -- take out some of the retail costs that's strictly just those rates which our original review of what we thought the retail rate was didn't back out some additional costs. We were just trying to find something completely fair and reasonable.
2205 So when you start backing out some of those retail rates it gets closer to 300 percent mark-up in the IC rates. But we can file the details of that.
2206 MR. STEWART: Thank you.
2207 My last question is now that you know what you're dealing with in terms of the difficulties and rolling out your network after the purchase of spectrum, with the benefit of hindsight would you have considered an MVNO approach that such -- similar to what Cogeco is proposing right now?
2208 MR. BRAGG: I don't think so. I mean, I still think, you know, historically we are investors in this business and we like the idea of being facilities based. And although it has been difficult and more difficult than we anticipated it still, I think, would have been our preferred path to business would be to build out our own network and manage and run it.
2209 In the past any MVNO discussions we've had always seemed to come with some handcuffs put on us on how to control the product or the rates to protect the underlying provider.
2210 We've always maintained we like to be as flexible as possible to be able -- to try to be able to provide the right products and services that the customers demand as the market changes. And we just felt any MVNO -- just I don't think you can really respond to the customers' needs that way. If you own the assets and if you've built the network and you have complete control you can really respond to the marketplace much better.
2211 MR. STEWART: Thank you.
2212 So you did have discussions with carriers on an MVNO basis, is that correct?
2213 MR. BRAGG: Yes, some more detailed than others and some going back -- I mean, you're testing my memory but even -- even before the AWS auction we did have some discussions. I think that the threat of us entering on our own, you know, provided a little leverage in some of those discussions but they still weren't -- they weren't meaningful enough to say, you know, we would prefer to go down that route.
2214 M. STEWART : Merci, Monsieur le Président. Je n'ai plus de question.
2215 THE CHAIRPERSON: Thank you very much for your appearance. I don't think we have any other questions.
2216 But we'd like to thank you, Mr. Bragg. The Commission always appreciates when the CEOs take the time to appear at our Commission meetings.
2217 MR. BRAGG: My pleasure.
2218 THE CHAIRPERSON: Thank you.
2219 So we'll take a break now till 10:50 and continue with the presentation from TELUS. Thank you.
--- Upon recessing at 1036
--- Upon resuming at 1051
2220 LA SECRÉTAIRE : À l'ordre, s'il vous plait. Order, please.
2221 THE CHAIRPERSON: Welcome, gentlemen, all gentlemen, yes, indeed. Go ahead when you're ready.
2222 MR. WOODHEAD: Good morning. Thank you, Mr. Chairman, Vice-Chairmen and Commissioners.
2223 My name is Ted Woodhead, and I am Senior Vice-President, Federal Government and Regulatory Affairs for TELUS.
2224 We are pleased to have the opportunity to appear as part of this important proceeding. I will start by introducing the TELUS panel.
2225 Starting from my far left, your right, is Jacques Garceau, TELUS' Senior Vice-President, Network and Access. Beside him is Kal Amery, Vice-President, TELUS Global Carrier Solutions. Beside him is Eros Spadotto, Executive Vice-President, TELUS Technology Strategy. And beside him is David Fuller, Executive Vice-President and President, TELUS Consumer and Small Business Solutions.
2226 Behind me in the second row of our panel are Stephen Schmidt, Vice-President, Telecom Policy & Chief Regulatory Legal Counsel and Eric Edora, Director, Regulatory Affairs.
2227 From my far right, your left, is Dr. Jeffrey Eisenach, of NERA Consulting. Dr. Eisenach is an authority on communications markets who has testified before courts and regulatory bodies all over the world.
2228 Beside Dr. Eisenach is Dr. Christian Dippon, of NERA Consulting. Dr. Dippon advises governments and operators worldwide on wireless policy and is recognized as a global authority on MVNOs.
2229 Beside Dr. Dippon is Dr. Georg Serentschy. Dr. Serentschy is the former CEO of the Austrian Regulatory Authority, as well as a recent Chairman of BEREC, the Body of European Regulators for Electronic Communications.
2230 It is important to start with some facts about Canada's comparative mobile market performance. These facts must inform any decision to apply additional wholesale regulation. For example, Canadian carriers invest more than in any other country, resulting in rapid and extensive deployment of the world's fastest mobile networks, all while charging unit prices that compare favourably with our global peers.
2231 As measured by quality, network investment, innovation, and unit pricing, there is no public policy justification for additional wholesale regulation. Such additional regulation is not required to remedy a market failure and such additional regulation will not make consumers or Canada better off.
2232 The Commission is faced with a basic choice in this proceeding. It can continue the trajectory of relatively light-handed wholesale regulation where commercial negotiation has played an important part in determining access to wireless networks, including towers and roaming or the Commission can embrace a much more heavy-handed approach regulatory approach, where the rates, terms and conditions for access to mobile networks, including towers and roaming, are wholly determined by regulation, on an ex ante basis.
2233 This is basically a choice of pursuing the path of the United States or the path of Europe in terms of regulation and mobile market outcomes. But the Commission cannot get U.S.-style mobile market outcomes with European-style regulatory measures.
2234 As Dr. Serentschy will explain, wholesale regulation in Europe has led to depressed investment levels, poor quality networks, and a digital deficit instead of a digital dividend for European citizens and companies. All of Europe is paying the price for missteps in communications policies.
2235 The lesson of Europe is that communications policy is economic policy in a digital age. Communications policy can create or take away opportunities for citizens and companies in a digital age.
2236 The Commission's ultimate responsibility, in this proceeding, is to establish conditions that will maximize investment and innovation for the benefit of all Canadians; consumers, citizens, companies.
2237 What international experience and the empirical literature have demonstrated over and over is that resale policies will not build towers, will not extend services to remote and rural areas, and will not upgrade networks to support new, advanced services. Only network investments can do these things. Resale policies will do nothing to make Canada and Canadians better off in any durable, fundamental way.
2238 In its interventions, TELUS filed the evidence of Dr. Eisenach, a telecommunications economist who has comprehensively reviewed the Canadian wireless marketplace and has drawn conclusions on its performance.
2239 Dr. Eisenach...?
2240 DR. EISENACH: Good morning. I have been asked to assess the performance of the Canadian mobile wireless market and, in particular, the evidence put forward by the Brattle Group.
2241 I would like to focus this morning on three specific points: First, the performance of the Canadian market is strong. Second, Canadian MNOs are not earning excess returns and do not have market power. Third, a fourth nationwide MNO would not benefit consumers.
2242 First, the Canadian wireless market is outperforming most other countries, with the main exception of the less heavily regulated market in the United States. Now, this is one area where the Brattle Report and the NERA Report largely agree.
2243 For example, the Brattle Report finds that Canadian wireless prices are, quote, "on a par" with prices in Europe though higher than in the U.S. It finds that Canadians use more data services than anywhere in the world except the U.S. and that Canada has the highest rate of wireless capex in the world, and is a world leader in LTE deployment and adoption.
2244 In short, when you put the rhetoric aside and focus on the facts, the Brattle Report confirms that the Canadian market is performing well overall and specifically on such key metrics as prices, service quality and capital investment.
2245 Second, the lynchpin of the case for regulation is the Brattle Report finding that Canadian MNOs, Rogers and TELUS, are earning excess returns.
2246 As the NERA Supplemental Report rigorously demonstrates, Brattle's analysis is based on wildly unrealistic assumptions about both profits and the cost of capital.
2247 For example, approximately 90 percent of its estimated profits are based on "rosy scenario" predictions of future earnings that far exceed historical experience and grow constantly and without interruption for the next 15 years.
2248 With respect to the cost of capital, the Brattle Report's assumptions are so unrealistic that they actually show Canadian MNOs borrowing money at or below the risk-free rate.
2249 As I demonstrate, when these unsupportable assumptions and other errors are corrected, it is clear that both companies' profits are well within the competitive range.
2250 Now, let's be clear. The case for regulation is entirely dependent on Brattle's finding of excess profitability. No excess profits means no inference of market power in the retail market, and no incentives for foreclosure in the wholesale market.
2251 More broadly, no excess profits mean that there is no free lunch to be had by forcing lower prices through regulation. Instead, all you will achieve is less investment, slower innovation and reduced service quality.
2252 Third and finally, a fourth nationwide MNO would not improve market performance. The Brattle Report's analysis on this score is both deeply flawed and flatly erroneous.
2253 First, as you noted yesterday, Brattle chose not to offer an opinion on whether a fourth national MNO would be economically viable, perhaps this is the case because its own data shows pretty clearly that it would not be.
2254 Second, 80 percent of Brattle's estimated consumer welfare benefits are based on its assumption that a fourth carrier would result in increased product differentiation, when in fact there are scores of different offerings already in the market including, as Vice-Chair Pentefountas pointed out yesterday, including at the low end of the market.
2255 Third, the Brattle Report contains a simple but significant methodological error that causes it to overstate the effects of entry on incumbents' profits by between 30 and 40 percent, an error which then carries through its entire consumer welfare analysis. I must say I was surprised that they did not acknowledge and correct that error in their testimony yesterday.
2256 In summary, the evidence before you, and specifically the evidence in the Brattle Report, does not show that the Canadian market is underperforming and it certainly does not provide a foundation for additional regulatory intervention.
2257 Thank you.
2258 MR. WOODHEAD: The superior performance of the Canadian wireless marketplace makes further wholesale regulation of wireless services unnecessary. Every facilities-based wireless provider already has the right to demand access to roaming on any other wireless carrier's network. As a result, every wireless provider knows that, even in areas it chooses not to build, it will be able to obtain network coverage by way of roaming from another provider, thereby dramatically altering the build-versus-lease decisions that providers will make.
2259 The current Canadian mandatory roaming regime is already more interventionist than regimes in other countries. In the United States, roaming is subject to commercially negotiated rates. In Europe, roaming, where mandated, is typically of limited duration to support network deployment, confined to entrants, confined to particular network technologies and subject to commercial rates. Canada is now an outlier when compared to its peers. Indefinite access to roaming plus regulated roaming rates based on an arbitrary formula will predictably depress investment and negatively affect the quality of Canadian mobile networks.
2260 Some parties in this proceeding have argued for mandated roaming rates. In addition, recent amendments to the Telecommunications Act have put in place a cap for domestic roaming rates. Other parties have also asked for regulated access to services to enable mobile virtual network operators. TELUS disagrees with rate regulation for roaming or MVNO services and has asked that the Commission revert to commercial negotiation for roaming.
2261 In its second intervention, TELUS included the evidence of Dr. Christian Dippon, who provided an economics perspective on the faults of the roaming cap legislation and why regulated MVNO services are harmful.
2262 DR. DIPPON: Good morning.
2263 I have been asked to examine two aspects of this proceeding.
2264 First, I have been asked to analyze the competitive effects of MVNOs and to assess whether regulatory intervention in this market segment will positively contribute to consumer welfare in Canada.
2265 Second, I have been asked to analyze the interim roaming cap and opine on the most efficient methodology that the Commission should use in determining wholesale roaming rates.
2266 As an economist who has studied wholesale access for over 18 years and MVNOs for over 10 years, and has written MVNO policy, I feel very strongly about both of these topics.
2267 The evidence on the MVNO question is very strong: MVNOs add little to competition and provide no measurable benefits to consumers. The wholesale market for wireless access in Canada is working properly with over 25 operator-owned and independently owned MVNOs in the market. Canada's performance is entirely at par, if not better, than that of European and U.S. benchmark countries.
2268 Before I elaborate, it is important to note that capacity of network operators' networks is finite. I frequently advise mobile operators on the value of additional spectrum to their existing portfolio and I know firsthand that mobile operators purchase spectrum that meets their expected traffic levels and subscriber levels. Mobile operators do not purchase excess spectrum in the hope that they can resell excess spectrum on the wholesale market. This means that there is typically no or little spare capacity that mobile operators could make available on the wholesale level. Importantly, forcing mobile operators to make available spectrum beyond its spare capacity directly undermines their business case, forcing them to offer lower quality services to their own customers.
2269 With that note, here are my main conclusions:
2270 1. MVNOs offer services to niche markets and do not have the ability to respond to pricing changes by the mobile network operators. Thus, by their very nature, MVNOs are not disciplining prices. This is not a new finding as it has been well established that competition comes from facilities-based carriers. Regulators, and the FCC in particular, are not even calculating market shares for MVNOs. Rather, they include MVNO subscribers in their respective host's share.
2271 2. Operator-owned MVNOs do not discipline the markets as they would not be launched in conflict with the host operator's objectives.
2272 3. Marketplace evidence demonstrates that independently owned MVNOs either exit the market, which happens most often, or are acquired by a mobile network operator. Unlike incorrectly stated in the Lemay-Yates report, the MVNO business model has long been found to be very difficult at best.
2273 4. MVNO related regulation is rare and limited, and where it has been implemented (for instance in Spain), it has not produced superior outcomes to commercially negotiated settings.
2274 5. MVNOs do not follow the ladder of investment as suggested in the Lemay-Yates report. That is simply wrong.
2275 Based on these findings, my recommendation to this Commission is as follows:
2276 Regulatory oversight with respect to MVNOs is not needed. Imposing regulation creates negative investment incentives which will impact deployment and innovation, particularly in rural and poor communities. It is a dangerous road that should be avoided.
2277 With respect to my second assignment on potential wholesale roaming regulation, the status quo of commercial negotiation with an arbitration fallback provision should be retained.
2278 My findings are as follows:
2279 1. The current regime is consistent with an efficient market outcome.
2280 2. Canada has a strong and successful history of roaming agreements that have been successfully negotiated under the current regulatory regime. This clearly indicates that the wholesale market, along with its competitive safeguards, is working properly.
2281 3. Other methods are clearly inferior:
2282 a. The interim roaming cap is inefficient and it does not provide the proper benchmark to any roaming agreement. It fails to recognize that roaming agreements must take into account reciprocal values. The cap can also not be calculated correctly as retail services are not sold separately for voice, data and SMS.
2283 b. A retail-minus cap, as suggested earlier today, also distorts the market outcome and cannot be properly calculated -- adding to that that it is very difficult to ascertain retailing costs.
2284 c. An incremental cost-based method is least efficient because costs are not the only determinant of efficient market-based wholesale rates.
2285 I therefore recommend that the regime of commercial negotiation with an arbitration fallback be retained by the Commission.
2286 MR. WOODHEAD: The Commission has also asked about whether regulatory measures are needed for tower and site sharing.
2287 Industry Canada rules already require that wireless carriers share access to towers, wherever feasible. This, like mandatory roaming is a fundamental condition of licence. The tower sharing framework assists all carriers in the building of their network infrastructure, given that they do not have to replicate towers in areas where existing towers have space available.
2288 The evidence on the record of this proceeding shows that all wireless providers have access to towers, either through their own builds or through the sharing of the builds of others. Towers are owned by wireless service providers, government entities, broadcasters of over-the-air undertakings and private tower real estate companies. We also know from the record of this proceeding that all wireless service providers are able to place antennas on rooftops, bypassing tower infrastructure altogether.
2289 In terms of rates, TELUS' rates charged for tower sharing are comparable to the rates charged by other carriers and are lower than those charged by third-party tower owners and new entrants. The marketplace for tower sharing is functioning because all parties are given reasonable access at market rates. If a tower operator is found to be acting in an unreasonable fashion there is a backstop of arbitration to mediate any dispute. The properly functioning market is evidenced by the fact that TELUS owns 1,895 towers across Canada and has successfully concluded 745 agreements for tower sharing and has never had to participate in arbitration either as a lessor or a lessee.
2290 Industry Canada's rules prescribe strict timelines so that negotiations for roaming and tower sharing will take place without delay. Industry Canada's rules are well functioning and enable all carriers to obtain the facilities that they require at reasonable rates, without the need for rate regulation.
2291 The basic choice before the Commission is clear. It can choose a course that endorses the existing framework developed and approved by the Minister of Industry with respect to roaming and tower sharing or it can choose to implement a regime to regulate all wholesale arrangements.
2292 The Competition Bureau yesterday said words to the effect of if you the Commission have the choice of either regulating too heavily or too lightly, go with the former.
2293 Regulating too heavily is exactly the approach that Europe took and the results have been disastrous. Cisco estimates that as of February 2014, only 2 percent of devices in Western Europe were connected to a 4G network. EU Digital Agenda Commissioner Neelie Kroes stated in July 2013 that approximately 75 percent of the 500 million EU citizens had no access to 4G services, with the greatest underserved area being rural, where Europeans living or vacationing in rural areas "get treated like second class citizens."
2294 This brings me to a unique and important perspective from Dr. Georg Serentschy that was filed in our second intervention.
2295 Dr. Serentschy.
2296 DR. SERENTSCHY: Good morning.
2297 I have been asked to derive learnings from the regulatory regime in Europe and to describe the consequences of these policies for the European telecom sector, the society and economy.
2298 In terms of my experience, I've served 11 years as the CEO of Austria's National Regulatory Authority RTR and three years as a board member of BEREC, the body of European regulators. In 2012, I served as Chairman of BEREC, and based on these credentials, I know what I'm talking about: What happened in the EU is a cautionary tale for Canada.
2299 The competition landscape in Europe was governed for decades by a policy aiming at maximizing the number of competitors in the market, driven by service-based competition from low-cost entrants instead of supporting sustainable facility-based competition.
2300 As a result of this, the returns of European operators fell below their cost of capital and they were unable to make sufficient network investments. Accordingly, any consumer benefits achieved through regulation were short-lived and ultimately illusory because of corresponding declines in network quality and technological evolution.
2301 Not too many years ago, Europe was the global mobile envy. Fast-forward to today and we see that Europe has many relatively poor-quality networks, and consumers and businesses are frustrated on a daily basis by more dropped or failed calls, slower data speeds, poor rural coverage and slow adoption of 4G because of high prices and patchy networks.
2302 Let me come to the Canadian context. So what does it mean for you?
2303 1. I think that the CRTC has done a fantastic job of supporting an approach to regulation that has incentivized significant investment in Canadian wireless networks.
2304 2. Canada's carriers invest more in advanced wireless infrastructure than carriers in any other country and a result of this is Canada has one of the most advanced and competitive wireless markets across the globe.
2305 3. The CRTC is at a fork in the road. As it considers how to regulate domestic roaming rates in Canada, I encourage the regulator strongly not to recycle Europe's failed policies but rather to learn from them.
2306 4. What I can see from the outside is that facilities-based competition served Canada well so far. Your regime has led to a very high coverage of your mobile networks at attractive and low unit prices. So my rhetorical question is: Why change?
2307 5. The cautionary tale of European regulation offers very clear lessons. Interventionist regulation will do more harm than good to consumers and businesses as well as to Canada's economy.
2308 6. Carrier investment in infrastructure is critical to ensuring superior wireless networks in Canada. The evolution of wireless technology moves at lightning speed, and moving from LTE over LTE advanced and further to 5G is going to again require huge investment.
2309 7. And I am closing with that, Canada's wireless market is one of the most innovative in the world. This is thanks to the CRTC's support for facilities-based competition. Canada has a great global wireless advantage. Don't give that advantage away.
2310 Thank you.
2311 MR. WOODHEAD: That cautionary tale from Dr. Serentschy concludes TELUS' opening statement.
2312 For the Commission to undertake the interventionist proposals in this proceeding would jeopardize Canada's leading position in wireless telecommunications, to the detriment of Canada's citizens.
2313 We will be pleased to answer any questions that you might have.
2314 THE CHAIRPERSON: Thank you very much. The Vice-Chair of Telecom will start us off.
2315 COMMISSIONER MENZIES: Thank you.
2316 I have a lot of questions, even more now, so we'll try to work through this. Some of this stuff would have already been in your reports that I'm going to ask you about, so if you can summarize that will help us work through everything when I ask you to repeat because it's been brought up in the oral.
2317 I want to start with a question which goes to paragraph 7 in your presentation you've just made. It's the statement: "Only network investments can do these things." Speaking of building towers and resale policies will do nothing, communications policy is economic policy, and you speak of all these good things.
2318 What I'm going to ask is these are things, network investments that new entrants want to do too. It's not like adding --
2319 UNIDENTIFIED SPEAKER: (Off microphone).
2320 COMMISSIONER MENZIES: Oh, sorry. It's not like adding -- it's working? You can hear me okay?
2321 MR. WOODHEAD: Yes.
2322 COMMISSIONER MENZIES: Okay. So adding a new entrant, how can adding a new entrant negatively affect network investments and the innovation and productivity that come with it?
2323 MR. WOODHEAD: I don't think -- I'm sorry, I don't think we said adding a new entrant.
2324 COMMISSIONER MENZIES: No, you didn't. I said that.
2325 MR. WOODHEAD: Oh! Because --
2326 COMMISSIONER MENZIES: But the issue is about --
2327 MR. WOODHEAD: -- our position is not that. Our position is -- and I'll pass it off here in a second -- but our position is that if you impose arbitrarily low wholesale regulation on the network builders that that will have follow-through effects on those network builders in terms of decisions as to where they will deploy their fixed envelope of capital.
2328 COMMISSIONER MENZIES: The summary of some of the arguments we've had before us are that that would be offset by the forces that the new entrants would bring to the market.
2329 MR. WOODHEAD: Well, if you set rates -- if the rates are set too low, there is nothing to offset because they are, you know, competing with us in the retail market, but in terms of our network investments the amount of money we would receive is not making up for the shortfall.
2330 COMMISSIONER MENZIES: Right. So it's not necessarily whether the rates are regulated or not, it's whether the price is right and the cost is right?
2331 MR. WOODHEAD: Yeah. I mean if the regulated rate is set properly, which we don't believe it should be regulated because we think that the existing commercially negotiated method has worked fine. I mean we've heard evidence that -- we just heard from Eastlink that they have the largest LTE network in P.E.I. and Nova Scotia. That's because they built as opposed to relying on wholesale access. That actually is -- actually I commend them. It's a positive story.
2332 And if we go down this path which we've gone in this country over the last couple of decades, and I think, you know, all well intentioned but I'm not sure that -- well, I'm more than not sure that it hasn't actually produced much positive consumer benefit.
2333 COMMISSIONER MENZIES: The commercially negotiated rates, speaking of Eastlink and others, they indicated those were like four or five times higher than they had anticipated, right?
2334 MR. WOODHEAD: I don't know what their rates were. I heard them say that, yeah.
2335 COMMISSIONER MENZIES: Right. Which is a barrier, they say, to being able to enter and compete and do the good things that you gave them credit for.
2336 MR. WOODHEAD: Except that they demonstrated that it didn't create a barrier to them building the largest LTE network in P.E.I. and Nova Scotia. They claim now that that has stalled them to move to other markets. You know, that's what they claim.
2337 COMMISSIONER MENZIES: Okay. Now, I know what you think about that, so I'll go on to my next question.
2338 MR. WOODHEAD: Actually, does anyone else have a comment? Dave or Jeff?
2339 DR. EISENACH: Well, I would just say briefly that the issue is not a fourth entrant per se or a new entry in general per se but rather the ability of market forces to endogenously determine market structure.
2340 So when you think about markets in dynamic terms, the number of firms in an industry is determined over time by the rates of return to capital in that industry. Capital enters when rates of return go above the competitive rate that entices entry. New firms enter and the market can support additional firms if the firms in the current market are earning excess returns.
2341 So that's the natural dynamic process that you want to allow to happen. When you come in and you start setting below market terms or rates for wholesaling, you're disrupting that process.
2342 Just in the Brattle report, for example, they acknowledge that there are economies of scale and that the effects of the kind of artificially created fourth national carrier, they imagine, would be to raise the cost of incumbents. They don't really take a look at the profitability of the fourth carrier, as I mentioned, but when you look at the data that's in their report it's pretty clear a fourth carrier wouldn't be viable.
2343 COMMISSIONER MENZIES: Right.
2344 DR. EISENACH: So that doesn't benefit consumers.
2345 COMMISSIONER MENZIES: And as was said earlier today, I don't really care about the numbers and the number doesn't --
2346 DR. EISENACH: Sure.
2347 COMMISSIONER MENZIES: -- four means nothing or five or three. It's the dynamism within the market and the opportunity --
2348 DR. EISENACH: Precisely.
2349 COMMISSIONER MENZIES: -- for somebody to successfully enter the market or at least to have the opportunity to bring market forces to bear on the market as it exists and create innovation and dynamism on the fringe, which may get to the core and create in the long term a better network. So that's kind of what we're talking about here, right?
2350 DR. EISENACH: Precisely. And the only thing I would say about that is -- you know, as an economist, I would say the correct way or the economically correct way to look at that is to ask the question: Are there anticompetitive incentives for foreclosure that are causing the terms offered by incumbents for sharing their platforms to be uneconomic, to be --
2351 COMMISSIONER MENZIES: Right, and that's the vertical foreclosure argument that's being made against you?
2352 DR. EISENACH: Bingo.
2353 COMMISSIONER MENZIES: Okay. I'll go on to the next point, which --
2354 DR. SERENTSCHY: May I briefly comment on this if it's possible?
2355 COMMISSIONER MENZIES: Please, briefly.
2356 DR. SERENTSCHY: This magic number of how many operators a certain market can carry, I mean we had that on and on in Europe. We had a couple of four-to-three boiling down the number of mobile network operators. The last one was in Germany now, that even the strongest and biggest economy in Europe -- Germany, with close to 90 million inhabitants -- could not carry four full-fledged mobile network operators and that has been allowed to boil down to three.
2357 So I mean the basic economics are always the same. Everywhere on the globe they are the same. So I cannot imagine how that would work with the even more challenging Canadian geography, a fourth full-fledged operator. That is a little side comment from my side.
2358 COMMISSIONER MENZIES: And so my next question is, in paragraph 9 -- I'll just refer to it -- of your oral presentation, you make the statement:
"Second, Canadian MNOs are not earning excess returns..."
2359 We'll get on to that, but it says:
"...do not have market power."
2360 My question just on that was: What definitions of markets did you use to make that determination on market power?
2361 DR. EISENACH: Well, the question of market definition, I think, is a very important one and it's one I know we've been talking about over the last couple of days.
2362 Market definition is an exercise that needs to be conducted in the context of the question that's being asked and answered, right. So I don't think there's a single market definition that you can look at and say, well, mobile wireless markets in Canada are national or they're provincial.
2363 If we're looking at the retail market in Canada, I think that there's a strong case that the market is something like either national or provincial. It's clearly a widespread market and I think the way you can determine that is you look across the spectrum of geographies and see that the offerings being made, even on a national basis, are very similar, but certainly within provinces you don't see barriers to entry. To the extent there are barriers to entry, they're primarily spectrum licences and those tend to be provincial.
2364 When you're looking at this question of foreclosure though, it's a somewhat different question. You're looking at the ability of some firm or group of firms to exercise, to raise rivals' costs, to exclude rivals. And there, I think it's a very fact-based analysis.
2365 If I MRO is a carrier who needs roaming services in Saskatchewan, I face one set of circumstances. If I am looking for tariff services, tariff sharing services, in Manitoba or in Nova Scotia, a very different set of circumstances, very specific to the parties involved, the products involved and so forth.
2366 And I think that's an argument against kind of an across-the-board price, XENA price regime and in favour of the kind of arbitration regime that you have today.
2367 In an arbitration proceeding you can ask the question : Is the carrier at hand somehow trying to exclude a competitor in a way that's going to harm competitioning consumers and that's the way I looked at market power here.
2368 COMMISSIONER MENZIES: And you came to the conclusion that market power doesn't exist?
2369 DR. EISENACH: In the aggregate, and I am not saying that there could never be market power in some micro market and that point, I am not making. What I am saying is when you look at the only evidence in the record of market power is the Brattle evidence of excess returns and that evidence simply doesn't withstand with me.
2370 COMMISSIONER MENZIES: Thank you. In paragraph 17, you speak to the issue of excess profits : "No excess profits mean that there is no free lunch to be had by forcing lower prices through regulation. Instead, all you will achieve is less investment, slower innovation and reduced service quality."
2371 That's a -- I took that as in reference to regulation, to produce a slower innovation. It may be in your reports which have been read, but not necessarily remembered, but could you just repeat or could you follow for us any data on how regulation slows innovation?
2372 DR. EISENACH: I do and I will give a very brief answer and we will be happy to file very briefly when -- First of all, I signed academic, the academic research on this point, both in terms of wire line markets and there is now some research with respect to wireless markets.
2373 So, access regulation tends to set prices in at least some circumstances below the prices that wouldn't return full cost of capital on new investment. I think in the circumstance that you have here in Canada now with this five cent FUO across the board cap, one thing we know about that cap is it's like the clock, the broken clock, which is right twice a day, right.
2374 That five cent cap one-size-fits-all-cap is almost surely too high some places and almost surely maybe too low in other places. The places where it is likely too low are rural areas. They are areas where you would most like to send investment.
2375 So, the danger of a one-size-fits-all-cap in this situation is that you're going to discourage investment in precisely the places where you would most like to see it because people will choose to roam instead of build new infrastructures in those areas.
2376 COMMISSIONER MENZIES: Thank you. Paragraph 18, there is a statement there :
"Brattle chose not to offer an opinion on whether a fourth national MNO would be economically viable -- perhaps because its own data shows pretty clearly that it would not."
2377 Is that just made because you've mentioned it, I think about Saskatchewan where it had been mentioned earlier today that -- or yesterday as well, I think -- where there are four carriers, notwithstanding what we have said about numbers, but people will make the argument there are four there and, therefore, that's one of the reasons why there are lower retail prices in Saskatchewan.
2378 Could you comment on that?
2379 DR. EISENACH: Yes. So, I think others on the panel may want to comment on the price differences, which I think are also -- tend to pair with differences and details of the service plans, so I am not sure it's an apples to apples comparison on that front.
2380 But again, I don't think that -- I don't think that there is a one-size-fits-all answer to the correct market structure. Hence, there are a lot of things that affect correct market structure, including past dependency. The fact that there were infrastructures built out or there were incumbent carriers.
2381 COMMISSIONER MENZIES: I am just going to take that to mean that it's not necessarily the number in Saskatchewan and I am putting words in your mouth here, but it's the conditions, the number and the other conditions that would make that different as what you are precisely saying.
2382 DR. EISENACH: And I am not saying there will never be a fourth viable carrier in Canada. I am just saying you shouldn't artificially create one.
2383 COMMISSIONER MENZIES: O.k. Thanks.
2384 MR. WOODHEAD: If I could ask Mr. Fuller to add some further comments to that.
2385 COMMISSIONER MENZIES: Sure.
2386 MR. FULLER: Yes. So, when we look at our price points in different regions in the country we would basically look at three things.
2387 The first is: what's the value of, in that market, the attached buckets of minutes SMS and data that our people want to buy.
2388 And then, the second thing we look at is the quality of our network, our coverage. And also we look at our distribution capability because in markets where we don't have much distribution we tend to have to price more aggressively to people to get appreciable share.
2389 And I suppose the third thing we look at too is : Is it a place where we are bundling with our wire line services or not? In other words, is it part of our income regime or what our market share is.
2390 So, when you at Saskatchewan, you know, we have very poor distribution there, not very extensive distribution. We are effectively the new entrants in Saskatchewan. We only recently launched market services there a couple of years ago, you know which traditionally hadn't been a market for us.
2391 So, you know, we do, you know, price slightly lower there in some aspects, but in other aspects we don't. So, as an example, we don't have an at a line construct there because our market initial value proposition is focused more on singular subscriber as opposed to family plans that we would have much more success with in Alberta and B.C., you know.
2392 So, you know, the net of that is I think each market is different and I think, you know, the other, you know, interesting piece of information is, you know, despite the fact that, you know, Saskatchewan has on the surface in some cases on a comparative basis lower rate plans, they actually try fairly hard smart phone penetration and interestingly, if you look at ARPU, you know, the average revenue per user in, you know, the three main incumbents nationally is in the $59.00 range. Atsastel it's $64.00. It's almost $5.00 higher.
2393 So, you know, despite the fact they have lower, you know, entry level prices in some cases, the average revenue per user of the main incumbent there, the market share leader is actually quite high.
2394 COMMISSIONER MENZIES: Thank you. Can you just remind us briefly when you mentioned in your oral presentation today that the Brattle Report simple methodological -- I'll leave the adjective out there -- that causes it to overstate the effects of entry, just remind us quickly what that area is and where it can be found for those who --
2395 DR. EISENACH: Me, I'll be looking for the page number, but I think I can explain this in pretty straightforward terms.
2396 Brattle expert testified yesterday that they looked at two events. One in which Verizon actually -- was going to delay its entry and the second which it announced that it was not going to come in.
2397 Each of those had a coefficient attached to it, right. The coefficient was the amount by which the Canadian MNOs market capitalization decline on each of those dates holding other things constant. And at each of those dates, the Brattle Report states, believes, assumes that the market believed the probability was 50 percent and then after the announcement it believed it was something lower.
2398 So, we've got two cases of the market, the markets belief changing based on "no news" and from 50 percent to something lower.
2399 The Brattle Report adds those two coefficients and the problem is you can go from 50 percent to something lower. Going from 50 percent to something lower is the same exercise happening twice.
2400 It's not you're going from 50 to 25 and then going from 25 to zero you could add those coefficients, right. But this is going from 50 to something less than going from 50 to something else again, presumably the second time, zero. Right.
2401 You can take either of those, you can take the bigger one, you can take the smaller one, you could average them, but what you can't do is add them up and they added them up and the impact on the estimated effect of the value of the MNOs vary some 30 percent for one of the companies, at 41 percent for the other, and I'll find the page number for you in one second.
2402 MR. WOODHEAD: Excuse me, Commission, I have the page reference. It's actually the paragraph reference, it's paragraph 97 of Appendix B to our second intervention. That's the Report of Dr. Eisenach.
2403 COMMISSIONER MENZIES: Thank you very much. In terms of your position, and we'll get to some of these things in more detail a bit later, but on MVNOs you're making the point that they add nothing to consumer prices in terms of downward pressure, but you make the argument that, in fact, they have a negative impact on the market because that's what I'm assuming from this anyway, so you can straighten me out on that, because of network capacity issues.
2404 MR. WOODHEAD: I'll let doctor Dippon start and then I'll follow up with the last part --
2405 COMMISSIONER MENZIES: And also in there, if you -- it would probably be efficient if it is for you to sort of address the arguments that we've heard about MVNOs and the ladder of investment in terms of the Netherlands going from -- and Australia I believe, SINOC mentions it, I think I have that right -- companies that begin as MVNOs and then go to MNOs?
2406 MR. WOODHEAD: Absolutely.
2407 MR. DIPPON: Can I just make sure I'll remember all the questions, I might forget it, so please forgive me and then re-ask.
2408 COMMISSIONER MENZIES: I hope somebody does because I might forget them too.
2409 MR. DIPPON: Alright. So, first of all, we are not saying that MVNOs per see have a negative effect on the network operator, but what we are saying is if they are artificially created through regulation, they might.
2410 And let me just say that there are many MVNOs in Canada. I think there is 27 of them, which is very much at par with other countries and I detail that in my report.
2411 But if you start forcing entry, there is a number of proms that are going to happen and one thing I was talking about is the network capacity.
2412 If you say, say you were to set a rate that is different or say even more specifically lower than commercially negotiated rates, so more MVNOs will enter than otherwise, where is that capacity coming from when mobile operators spilt their networks and I have been in those situations many times.
2413 They'll ask me for traffic forecast, they're asking for subscriber forecast and then they build their network subject to what they call a "fill factor" -- I am not an engineer, but what they call "fill factor" -- where in case there is unexpected spike demand.
2414 Now, sometimes that leaves after that, leaves some spare capacity and network operators typically are willing to sell that spare capacity on the wholesale level. Hence, we are seeing a lot of MVNOs in Canada and everywhere else. That's where -- that's why MVNOs are created.
2415 The complication comes in if you disrupt that process and you are implementing a rule whereas you say MVNO access needs to be provided at all time, at a certain rate. I wouldn't even know how I would advise a mobile operator how they can incorporate that in their network just because the capacity is finite.
2416 And before -- I'll pass here and I can answer your next question about the ladder of investment, but I wanted to see whether you had any follow-up on that.
2417 COMMISSIONER MENZIES: No. That's fine. That was clear to me. Go ahead.
2418 MR. WOODHEAD: If I may, I'll put this into the context of Telus and what's happening in the marketplace.
2419 So, of those 27 MVNOs, they are largely if not entirely on Bell and Rogers. That's because there is a rather acute spectrum imbalance in Canada.
2420 Telus today has 19 percent of the allocated commercial mobile radio spectrum. We have 30 percent of the customers. That is an arithmetic imbalance. We are the most efficient user of our spectrum in the country.
2421 So, when COGECO appears before you, yesterday what I heard them saying was they wanted to be this form of MVNO, and all they want is this simple thing and it's called "my RAN capacity" and I will be happy if you asked Mr. (inaudible) about this, but we don't have any RAN capacity.
2422 We're out. The bus is full. There is no spare spectrum line around or capacity line around to support what Mr. Audet was talking about. That's number one.
2423 Number two just because -- while I am on the COGECO example, because I have to say that, you know, in 2007 or 2006 COGECO embarked presumably on a strategic decision, embarked on a different journey. It embarked on a journey into investing $ 665 million in Cablevisio in Portugal. That investment was subsequently written down and I believe they sold what was left of it for 40 million euros, $60 million Canadian.
2424 That is not something that can be laid at the doorstep of the incumbent wireless carriers.
2425 Subsequent to that investment, COGECO made comments in the AWS auction framework, but didn't show up for the auction where there was a set-aside for new entrants who were able to access to spectrum without the contention of open competition, at a marginal fractional cost, compared to the incumbents.
2426 COGEGO, nowhere to be seen in the 700 auction again with auction spectrum, very valuable spectrum frankly available for them. Who knows, if they show up in AWS3, again where auction has been specifically set aside for operating new entrants, or the 2500 megahertz auction which we also --
2427 So, the point of the ones -- sorry, the point of this is they need a strategic decision to do something else.
2428 They decided, for financial or other reasons, not to enter the wireless market. They have subsequently bought Atlantic Broadband in the United States, which you are well aware of.
2429 COMMISSIONER MENZIES: I am not quite sure where you're going with that?
2430 MR. WOOHEAD: Well, I am going -- I am going with how, for example, they say that in the United States -- this is where I was landing with Atlantic Broadband, but where they say in the United States, MVNOs are hosted all over the place, well they have cable operations in the United States, but why haven't they started that there?
2431 And I just find it, you know, my points are these: We have no RAN capacity to actually host an MVNO. We had one with AMPT, it went bankrupt. COGECO made its own strategic choice and that is not a regulatory problem and --
2432 COMMISSIONER MENZIES: So, was AMPT the only one you had, the only MVNO you had, that are operated on your network?
2433 MR. FULLER: Yes, yes. They are the only, but again like this comes back to the definition of an MNVO and that --
2434 COMMISSIONER MENZIES: We have this -- that was going to be my next question.
2435 MR. FULLER: Yes, so, we --
2436 COMMISSIONER MENZIES: What type of an MVNO was AMPT?
2437 MR. FULLER: AMPT was -- they were towards the full end of the spectrum.
2438 COMMISSIONER MENZIES: We're talking, for the records, this is the type of mobile virtual network operator chart from the Lemay Yates Report.
2439 MR. FULLER: Yes. Not quite familiar with it exactly. They were in the middle of that spectrum basically.
2440 COMMISSIONER MENZIES: I just want to make sure I said it out loud right.
2441 MR. FULLER: Right. They were towards the end of doing a number of the customer facing things themselves, but not, you know, all the way through the end where the only thing they were getting from us was RAN capacity. So, that was with AMPT.
2442 And then, we do support PC Mobile on the postpaid side and they are more in that on the far left side, I think, of that spectrum, that more of a reseller.
2443 COMMISSIONER MENZIES: PC Mobile is -- would be on this chart?
2444 MR. FULLER: Yes, probably on the more --
2445 MR. WOODHEAD: More to the -- they are more closer to the reseller.
2446 COMMISSIONER MENZIES: Right.
2447 MR. WOODHEAD: They rebrand their postpaid service and it's priced differently.
2448 COMMISSIONER MENZIES: So, have you been approached by any other MVNOs similar to the definitions of MVNOs that we have here, to provide service to them, other than AMPT?
2449 MR. AMERY: So, over the course of our history and both in the CDMA and in our next generation network we've had ongoing discussions that spoke to the spectrum of that metrics that you have there, sir.
2450 However, we have not had discussions on the far right, you know, in all frankness where we in the COGECO's presentation spoke to yesterday, we have not had those type of detailed technical discussions.
2451 COMMISSIONER MENZIES: So, no one's approached you in that area?
2452 MR. AMERY: Not for the full MVNO that COGEGO referred to yesterday.
2453 COMMISSIONER MENZIES: But for any of the others?
2454 MR. AMERY: Yes.
2455 COMMISSIONER MENZIES: And what happened?
2456 MR. AMERY: Well, primarily they were reseller arrangements and quite honestly the commercial negotiations based on the terms that both organizations now would serve their best interest could not be agreed to.
2457 COMMISSIONER MENZIES: I see. Thank you.
2458 MR. FULLER: So, sir, we didn't get this -- your continuum. So, sorry, just to be very specific in using this RAN area. AMPT would have been in the -- probably in your light hybrid category and then PC Mobile would be in the resale category.
2459 COMMISSIONER MENZIES: Okay. Thank you for clarifying.
2460 MR. FULLER: Yes. Thanks.
2461 MR. WOODHEAD: And if I could ask doctor Dippon to talk about the ladder of investment and then potentially, doctor Serentschy if he has something to add from the European perspective.
2462 COMMISSIONER MENZIES: Go ahead.
2463 DR DIPPON: Certainly. Thank you. Sir, you were asking about the ladder of investment. The ladder of investment hasn't worked definitely not for MVNOs and I think the ladder of investment has also not worked in the wire line industry. There is a lot of academic literature on that.
2464 But let me just answer in terms of the comments that were made yesterday that supposedly the ladder of investment has worked for MVNOs and that's just simply not true.
2465 First of all, there are several thousands MVNOs in the world and I think yesterday we had a mention over two or three cases, so I think for every case that was mentioned yesterday, I could probably find another 10, 20, 30, 50 cases where the ladder didn't work.
2466 But even for those three cases that were mentioned yesterday and, unfortunately, I only recall two. I think it was Teletou in Netherlands and British Telecom or BT in the U.K. That is just misleading to say that the ladder of investment has worked and let's look at that.
2467 Teletou entered an MVNO in about 1995 or 1996. That was a commercially negotiated MVNO agreement, so it was not a regulatory forced agreement that was commercial. It took them until 2013 to become the supposedly MNO, 19 years. That's a long ladder to climb.
2468 On top of that, it's my understanding they didn't purchase spectrum, they entered into a spectrum sharing agreement.
2469 So, I think, you know, can you say the ladder of investment has worked? Well, if you give it a 20 year time frame, maybe, but nothing more and they will be very misleading to say that it has worked.
2470 The same thing or a very similar thing is true with British Telecom. British Telecom was forced to exit the mobile industry after it purchased spectrum, and I think it was the 2002-2003 auction, maybe it was 2001, and it just borrowed too heavily and they paid enormous amounts of money for those -- for those bands. It was in the order of, I think it was $400-500 per pop or per megahertz per pop, for potential subscriber, which is a huge amount of money.
2471 They were no longer able to carry their mobile operation and spent it off. BT then became an MVNO. It's just now that it considers or makes plan to go back in and become an MVNO. Again we're talking 20 years.
2472 So, and like I said, I don't remember the France case, but it is a far over statement that the ladder of investment has worked because not even those two outlier cases it's clear that it has worked.
2473 COMMISSIONER MENZIES: Thank you.
2474 DR SERENTSCHY: May I briefly comment?
2475 COMMISSIONER MENZIES: Briefly, please.
2476 DR SERENTSCHY: For this. I think the ladder of investment concept was one of the most misleading concepts ever invented because it created a lot of wrong directions along the parts of liberalization of the European telecom market and I am not aware of any successful stepping up all the ranks until the top in reasonable time.
2477 COMMISSIONER MENZIES: Just going over on that. It's argued by others that the relatively high percentage of MVNO presence in European markets is a sign of good things and from what you've just said I am taking it that you disagree with that?
2478 DR. SERENTSCHY: I think the MVNO's presence in Europe is what was -- with a few exceptions, a very recent few exceptions -- was something which was always based on commercial agreements and was more serving specific niches, like ethnic niches, in the market, and they did well.
2479 We have seen cable operators starting or trying to start MVNO operations without an ambition to be very price aggressive. It's more to complement the portfolio of services towards quad play.
2480 What was a recent development with MVNOs in Europe, in the course of the last three major merger cases we had, starting from Austria, over Ireland, and the last was in Germany, that the digicompetitions, or the European competition watchdog, imposed MVNO obligations in terms of that the merged company has the obligation to set aside or to reserve a certain part of its network capacity for up to a certain number of MVNOs. But even the rates were not prescribed. They were, so to say, "offered" by the merged company.
2481 COMMISSIONER MENZIES: But it seems to me that the opportunity to create an MVNO, whether you're a cable company, or maybe even if you're a small ISP, is part of a competitive offering in today's marketplace because the major players all have quadruple offerings for people and it's -- I mean we've heard the pure players say that there is a market for pure play, but there's some evidence, too, that the more multiple offerings you have to offer, maybe not in the narrow terms of this discussion but in the broader marketplace, creates a better opportunity for an overall more competitive telecommunications environment, and that --
2482 MR. FULLER: It's so -- well, I mean, what we find, actually --
2483 COMMISSIONER MENZIES: What's wrong with having more competitors, with more to offer, in terms of -- because that's -- the bundle, obviously, has a lot of market value, right, and lots of people like it. It provides value to consumers and customers.
2484 MR. FULLER: It does to a certain subsegment of the population, but only a certain sub. What we basically have found is that roughly about a third of consumers are interested and want to bundle mobile services in together with their wireline services, but two-thirds of the market does.
2485 You know, TELUS competes very successfully in large parts of the country where we have no wireline facilities, and have, you know, driven, you know, I think pretty decent market share in a number of provinces where we're not the wireline provider. That's evidence that I think that --
2486 COMMISSIONER MENZIES: I mean I'm not sure wireline is the big growth opportunity now, right?
2487 MR. WOODHEAD: But he means as a pure play, wireless pure play.
2488 MR. FULLER: What I'm saying is --
2489 COMMISSIONER MENZIES: Okay.
2490 MR. FULLER: -- is that there's still ample opportunity to be a pure play and there's a big chunk of the market that has no interest -- two-thirds of the market that has no interest at all in bundling wireless together with wireline. So if you are a pure play wireline provider, like someone like Cogeco, there's still, you know, a very significant chunk of the market that would be fine, you know, choosing wireless services with a --
2491 COMMISSIONER MENZIES: But it's still an opportunity for people to be more competitive, right, because one third of the market is one third of the market? I mean TELUS doesn't have one third of the market in mobile, and I'm sure would like to. It has 28 per cent, right?
2492 That was just the point: that giving people the opportunity, whether you -- I'm getting your point that artificially creating that is one thing. Ensuring that there aren't market power barriers to it would be another thing, would you agree?
2493 MR. WOODHEAD: Right. And we are not suggesting -- we haven't suggested, you know, prohibit MVNOs. We haven't said anything like that. We're saying that -- or at least the two points that I would make are: they need to be commercially negotiated agreements, and then my other point that, factually, as a matter of physics, we have no spare RAM capacity.
2494 COMMISSIONER MENZIES: Okay, understand. Go on to other stuff.
2495 If your primary incentive is to maintain rates and revenues in order to support capital investment and incent capital investment, why do we hear from Globealive, WIND and others, for instance, about -- complaints about delays in implementation?
2496 MR. WOODHEAD: Of...?
2497 COMMISSIONER MENZIES: Of --
2498 MR. WOODHEAD: Which service -- what particular thing?
2499 COMMISSIONER MENZIES: Of tower sharing or anything like that that you're offering to --
2500 MR. WOODHEAD: Well, I mean, I think Mr. Garceau can --
2501 COMMISSIONER MENZIES: Their general complaint is the process isn't just expensive, it's long and --
2502 MR. WOODHEAD: Well, Mr. Garceau can help you with that one.
2503 MR. GARCEAU: Yeah, Vice-Chairman, the process is long. It depends on your definition. But the process takes months. It doesn't take days, it doesn't take weeks, that is true.
2504 Now the process has got responsibilities on both sides. The rules that Industry Canada has set back in 2008 has prescribed the time for us to respond, and we abide by those timelines.
2505 Now part of the process of erecting a new tower requires a lot of engineering design, and that is done by the requester. So that timeline is theirs as well. And that takes months. The average time for us to receive -- once we get a request to collocate and award a space, it takes, on average, two to three months for the requester to do their own assessment of what they would put on the tower and all that work.
2506 And then after that, there's an engineering civil design, and, depending on availability of the engineering design firms, what kind of drawings and what kind of -- there's a lot of assessment in terms of tower strength, tower rigidity, twist for extended antennas, wind loading, ice, which varies by region, so it's a detailed engineer assessment. That, again, is done by the requester.
2507 And we can wait. I mean it's no -- it's okay for us, but we can wait several months for that to be completed as well.
2508 So sometimes it's quick, sometimes it's not. It depends on what is requested to be added the structure and what kind of study is required to ensure the integrity and the safety of that structure.
2509 Then, on top of that, there's Safety Code 6 which needs to be done.
2510 But most that timeline actually rests on the requester's side.
2511 And the complaints about us delaying, I would say, first of all, have been regulated, in terms of how much time we have. And on the onset it was the result of getting flooded with requests in the beginning and we had to readjust. We weren't staffed to handle that, so we had to readjust. And we fully abide by the timeline, so...
2512 MR. WOODHEAD: Would it be helpful --
2513 COMMISSIONER MENZIES: Okay, thanks.
2514 MR. WOODHEAD: -- Mr. Vice-Chair, for us to take an undertaking to provide you with the actual prescribed timelines?
2515 COMMISSIONER MENZIES: Yes, it would.
2516 MR. WOODHEAD: So I would undertake to do that. I'm not --
2517 COMMISSIONER MENZIES: On the 9th.
2518 MR. WOODHEAD: -- sure what date we're using here, but...
2519 COMMISSIONER MENZIES: It's always been the 9th of October.
2520 MR. WOODHEAD: Oh, okay. Very good, we can do that.
2521 And then I thought -- Jacques, maybe -- I don't know if you have it, or we can also include -- for example, we have examples of how many total requests we've received.
2522 COMMISSIONER MENZIES: If you have the volume of requests to back up that statement and show when the rush came --
2523 MR. WOODHEAD: Yeah, and show how many --
2524 COMMISSIONER MENZIES: -- that would be --
2525 MR. WOODHEAD: -- actually, all -- where the work was done and they were withdrawn?
2526 COMMISSIONER MENZIES: Any facts you have to support your argument, in terms of those specifics
2527 MR. WOODHEAD: Yeah, we'll --
2528 COMMISSIONER MENZIES: -- would be helpful.
2529 MR. GARCEAU: We can definitely supply that.
2530 If I may just to --
2531 COMMISSIONER MENZIES: Like, you suggested you were flooded with requests --
2532 MR. GARCEAU: Yes.
2533 COMMISSIONER MENZIES: -- right, so...
2534 MR. GARCEAU: So we received from two new entrants over a hundred requests at one time from of them.
2535 COMMISSIONER MENZIES: That's fine. Just file that as an undertaking and that would be great.
2536 MR. WOODHEAD: Very good.
2537 COMMISSIONER MENZIES: In terms of, overall, your argument that market power doesn't exist, but -- I mean, the number of new entrants, at least when they're referring to incumbents, they describe the group of three as an oligopoly that's protecting itself to the detriment of consumers. Quebecor even uses -- Videotron uses the term "abusive" regarding that behaviour.
2538 I mean, isn't a -- a company such as yours, its primary obligation is to ensure value to its shareholders, right? If that's the forefront ambition, wouldn't it actually make sense for you to be creating barriers to new entrants to protect your share value?
2539 As we heard from the Competition Bureau yesterday, there would have been a 8 per cent reduction if Verizon had entered the market. So why wouldn't you be obliged to vigorously defend the market as it exists, and your share value?
2540 MR. WOODHEAD: Because we want to grow market, is and when.
2541 But, Dave, go ahead.
2542 MR. FULLER: Well, I would say -- I mean do we vigorously defend the customers that we have and do everything we possibly can to keep them happy and reduce our churn, yes, we do. That is not specific to new entrants versus incumbents, though, right?
2543 Like our focus is, you know, vigorously competing with --
2544 COMMISSIONER MENZIES: I wasn't asking about your customers, I was asking about your shareholders, that you would vigorously defend the value of their shares, right? That was the basis of it.
2545 Just so we're not confused, what I was saying was --
2546 MR. FULLER: But the --
2547 COMMISSIONER MENZIES: -- as officers in a publicly traded company, you're expected to uphold your share price, right, and your value --
2548 MR. SPADOTTO: If I may, Vice-Chair --
2549 COMMISSIONER MENZIES: -- your value is to shareholders. And so given that that's a priority, isn't it necessary to defend that share value?
2550 I'm not saying it's wrong. In terms of that context of defending shareholder value, it's right, I guess. But wouldn't that lead people to the assumption that part of that defence of your stock price is to ensure your market position and that new entrants don't come in?
2551 MR. SPADOTTO: I think the answer to that is, as officers of companies, we do many things. One of the things we do is, of course, appeal to the capital markets. Another thing we do is maintain the laws of Canada, and vigorously abide by them. Other things we do is we maintain the rights of our employees.
2552 There's many things that, as an officer of a company, we need to do, and we do all of them. And we do all of them making sure we meet all those guidelines. So if there's laws that are in place that we have to abide by, I can assure you we abide by them.
2553 MR. WOODHEAD: And one of those categories is anti-competitive behaviour.
2554 I'm going to --
2555 COMMISSIONER MENZIES: Okay. I wasn't accusing you of breaking the law.
2556 MR. WOODHEAD: I understand that, but --
2557 COMMISSIONER MENZIES: I was accusing you of vigorously defending your market share.
2558 MR. WOODHEAD: Well, that's very different than anti-competitive behaviour.
2559 COMMISSIONER MENZIES: It -- well --
2560 MR. WOODHEAD: That's actually a competitive market.
2561 And if you can just -- sorry.
2562 COMMISSIONER MENZIES: Okay.
2563 MR. WOODHEAD: Like, people are throwing around terms here around market power, and I thought that was kind of set out in 94-19, what the definition was. If you go and you look at the three kind of categories, none of those things exist here. That's the market power that people are supposed to be talking about.
2564 If someone wants to come and accuse -- and I'm not trying to be defensive, but if someone wants to accuse anybody in this industry of anti-competitor behaviour, there you are, and there's the Competition Bureau. Like, no one's -- like, I say, "have at it."
2565 But the fact of the matter is that there's nothing on the record of this proceeding that demonstrates that market power, as so defined in 94-19, has been offended.
2566 But Jeff, you may want to add some more on this point.
2567 DR. EISENACH: And let me try to be concise, but hit two or three points.
2568 First of all, the 8 per cent that you referred to is precisely the 8 per cent that was subject to the error. So, at most, we're looking at about 4 to 5 per cent. Number one.
2569 Number two, as others have pointed out, the fact that the market might have thought that the three MNOs were worth less in the event of a Verizon entry does not mean that the market thought that the three MNOs were earning excess profits prior to a Verizon entry, it meant that it thought that profits would fall in the event of a Verizon entry.
2570 But that doesn't prove they were excessive to begin with, and others have made that point.
2571 Again, if you read the Brattle report, Brattle is very clear in saying: We're not saying that it means -- that this doesn't prove that they were earning excess profits. They're right on kind of the technique --
2572 COMMISSIONER MENZIES: They weren't saying, they were just sayin'.
2573 DR. EISENACH: They're just sayin'. I think that's exact right, they were just sayin'. And there's a lot of that in the Brattle Report, frankly.
2574 Now you've thrown me off.
2575 Two other points.
2576 The two other points are -- and it does come back to what was talked about yesterday -- "potentially incentives," I think was they phrase, they potentially may have incentives to try to foreclose. Every firm, in every market, in every economy everywhere, potentially has incentives to foreclose. It's the capacity to foreclose that we're interested in, and that hasn't been demonstrated, either collectively or individually, to follow, again, a line of questions from yesterday.
2577 One of the things you have to take into account in looking at that is: if I were to engage in exclusionary conduct, it costs me money to do so. When I refuse to do a deal with you to share my tower or share my spectrum, I am foregoing revenues.
2578 Can I get those revenues back?, can I recoup my lost profits?, right, that entire analysis has to be undertaken before you conclude someone is engaging in that kind of behaviour.
2579 And then lastly, with respect to 94-19, the three criteria:
2580 Is the market workably competitive? -- I think that was another discussion yesterday -- I think there's almost a concession that it is.
2581 Is there "a" dominant firm with substantial market power? No one, I think, is even alleging a dominant firm.
2582 And high market shares. Well, it depends on how you calculate them, but -- necessary, but not sufficient.
2583 And, again, I think if you listen to the conversation yesterday, we've all kind of come to the conclusion that in markets like this you're going to see a certain level of concentration, and that is the natural and efficient market structure.
2584 So I think under 94-19, frankly, as I say in my rebuttal -- in my supplemental report, we ought to be looking at going in the other direction here and forbearing more, as opposed to regulating more.
2585 COMMISSIONER MENZIES: Notwithstanding the recent legislation, 27.1, were roaming rates in decline, and have you reduced your roaming rates?
2586 MR. WOODHEAD: I'll say --
2587 COMMISSIONER MENZIES: There seems to be some consensus --
2588 MR. WOODHEAD: I'll say --
2589 COMMISSIONER MENZIES: -- that they have been. Some scepticism, too --
2590 MR. WOODHEAD: Yeah.
2591 COMMISSIONER MENZIES: -- about the motivation, so...
2592 MR. WOODHEAD: If I could just do a little intro, and then I'm going to pass it over to Mr. Amery.
2593 I think an important part of the context here is that much of what you looked at in your previous examination of the roaming file is a bit of an artifact of history because of a technology choice that was made by the industry.
2594 The Rogers group of companies adopted GSM when it was on a GSM path, but acquired microcell GSM. The incumbents were mostly -- other incumbents were mostly CDMA-based.
2595 When all of the entry occurred, I mean the world had sort of coalesced, gathered around HSPA in a GSM ecosystem. So the problem, to the extent that there was one, was because they had one supplier. As soon as we overlaid and Bell overlaid HSPA, and all of the others did as well, you instantly had multiple sources for roaming.
2596 And, you know, we don't -- I'll tell you right now, we don't have exclusive anything in our roaming agreements, but -- what was the case in 2008 or 2009 is no longer present today, and it's just a technology choice. But --
2597 COMMISSIONER MENZIES: I just want to know if your rates have gone down.
2598 MR. WOODHEAD: And that's where Mr. Amery can...
2599 MR. AMERY: You know, particularly in the global area. Because we've offered access to Canada, and we represent a viable competitor, the global rates on roaming have been reduced over the course of the last number of years.
2600 In the domestic context, we really didn't have any roaming on the new network with any of the entrants, as Mr. Woodhead has identified. They were covered under an arrangement they had with another carrier.
2601 So we didn't have them. And, in fact, while we've just completed those for --
2602 COMMISSIONER MENZIES: But they would make their arrangement with Bell and that would give them access to your shared network?
2603 DR. EISENACH: No. In fact, the new entrants' -- I believe exclusivity clauses were entered into in all of them. We didn't have any arrangements with any of the new entrants prior to recently. TELUS or Bell.
2604 MR. WOODHEAD: Until the 27.1.
2605 COMMISSIONER MENZIES: And that was as a result of 27.1?
2606 DR. EISENACH: Yeah.
2607 So no decline would be the answer, sorry, sir.
2608 COMMISSIONER MENZIES: Thank you.
2609 MR. WOODHEAD: Because they couldn't -- they were under the exclusivity, which they no longer are.
2610 COMMISSIONER MENZIES: What is your view on the rate set by 27.1? Are they appropriate?
2611 MR. WOODHEAD: Kal.
2612 MR. AMERY: Well, I can speak in the global context.
2613 We have over 600 agreements in place for roaming, and all of them are commercially negotiated. Different people bring different value to the table, and rates should be negotiated. I don't believe artificially capped rates serve the good of anyone, to tell you the truth.
2614 MR. WOODHEAD: If I could ask --
2615 COMMISSIONER MENZIES: Has there been a downstream impact that you --
2616 MR. WOODHEAD: Well, as I've said, up until quite recently we didn't even have agreements to roam, so there would be no impact, as far as we could see. While we have concluded the agreements with many of the new entrants, we're in the process of implementing. So at this point in time I can't tell you.
2617 COMMISSIONER MENZIES: Has it had any impact so far on your investment plans?
2618 MR. WOODHEAD: Eros, I was wondering if you could comment on that.
2619 MR. SPADOTTO: The quick answer to that is to date we don't -- we haven't observed any declines in our investment plans to date; however, they are possible. And they are possible because it is highly dependent on how much network they consume.
2620 So, as an example, if a new entrant was to use our network, but has not built out sufficiently far enough outside of a urban area, and starts using excess amount of our capacity, call it in the fringe or the suburbs, that will take capacity that we will have to go build. And as explained earlier, in our particular case, being somewhat spectrum-challenged, we will not be able to add the capacity by using spectrum, we will actually have to go and build cell sites. That will cost us money and that will cause deferment.
2621 COMMISSIONER MENZIES: And cause...?
2622 MR. SPADOTTO: It will cause us to defer spending in other areas.
2623 COMMISSIONER MENZIES: Okay, thank you.
2624 MR. WOODHEAD: And so we'll primarily be in rural.
2625 COMMISSIONER MENZIES: WIND argues that any rate cap would have to be set below current retail rates.
2626 What's your response to that? What would be the impact of such a rate?
2627 DR. DIPPON: Yes, if I may answer that question.
2628 I was looking at the retail-minus cap. The retail-minus cap is -- first of all, it would be extremely difficult to do, and I think the Commission has already recognized that, because you would have to back out retailing cost. Retailing costs --
2629 COMMISSIONER MENZIES: I'm not sure why you said the Commission's already said that.
2630 DR. DIPPON: I'm sorry?
2631 COMMISSIONER MENZIES: When commissioners ask questions, they're not testifying, they're asking questions.
2632 DR. DIPPON: Understood.
2633 So the retail-minus cap distorts market outcome in the same way as the cap itself does. Retailing -- so if you go retail-minus cap, you have to back out retailing costs. You can't really do that separately for voice, data and SMS because retailing is done at once. So it is very difficult to actually do a study like that.
2634 But I think, more importantly, it is that -- what we've talked about, and it's the same problem I have with the cap, whether it's the cap or the retail-minus approach, is that it really distorts market outcome. If you allow a commercial negotiation, then both parties bring a certain amount of value to the table. That leads to, ultimately, an agreement. And either the retail-minus approach or the cap itself doesn't recognize those reciprocal values.
2635 COMMISSIONER MENZIES: Thank you.
2636 COMMISSIONER MENZIES: So in your 20th of August, you stated that:
"Canada is among the world leaders in smartphone penetration. Smartphones now represent 79% of TELUS' postpaid base, up 8% from the previous year."
2637 Other parties have argued that Canada's wireless penetration rate is an indicator that the retail mobile wireless market is not competitive.
2638 On page 7 of Oranges 15th May, they state:
"In Q4 2013, the penetration measured by unique users was 54%, compared to 80% in the EU and 72% in the U.S. When measured by connection, the penetration is also lower: 80% in Canada, 108% in the EU and 132% in the USA."
2639 Can you please comment on the usefulness of penetration, both wireless and smartphone, as a measure of competitiveness in this market?
2640 DR. EISENACH: Well, I don't think I've seen the specific numbers that you cited on a per-individual basis, the first set of numbers you cited there, and, if I might, I'd ask to maybe respond to those in an undertaking, if I could.
2641 COMMISSIONER MENZIES: Sure, that would be fine.
2642 DR. EISENACH: But more broadly, I'm certainly prepared to respond.
2643 COMMISSIONER MENZIES: You will do the undertaking then, and I --
2644 DR. EISENACH: I would like to do that, if I could.
2645 COMMISSIONER MENZIES: Okay.
2646 DR. EISENACH: First of all, with respect to any comparisons with Europe -- and, again, I think the Brattle Report fully acknowledges this -- for example, you're looking at two situations which are very different from Canada, one of which is that you have cross-border roaming.
2647 Anyone who lives within 10 miles of a border, of a national border, in Europe, historically, has had multiple SIM cards. That is why you get numbers like 150 per cent penetration, which are intuitively challenging until you realize that.
2648 Also, there's a lot of academic literature which suggests that calling-party-pays regimes have higher penetration because they give people incentives, again, to have multiple SIM cards to avoid -- in order to make in-network calls, which in calling-party-pays systems tend to be more prevalent. So that's with respect to Europe.
2649 With respect to the United States, I think there are others who can address this briefly in terms of some particular idiosyncrasies in differences in the market, but when you look at Canadian penetration, the assertion is that Canadian penetration is too low because there are not enough low-end offerings. And this is another subject that's come up here.
2650 And I have a web site that I cite, too, in my report which I would encourage you all to visit which has dozens, literally, of low-end offerings in every province in Canada.
2651 There's no shortage of low-end offerings, so I think when you look at penetration, you have to ask the question, is there some market failure here that is preventing consumers from getting access to products which ought to be available in the marketplace. And there's simply no evidence of that.
2652 MR. WOODHEAD: I think Mr. Fuller had a comment to add.
2653 MR. FULLER: Yeah. I think the doctor covered a number of them. So you know, I think in the EU it's a very different market than here. You've got calling party pays and then the roaming effect of it, and it was already pointed out that I think the -- you know, there's a study that showed the average European carries 1.55 SIMs per user.
2654 In the U.S., it's different. The U.S., I think it's driven by a number of things. Tablet penetration is about 10 to 15 percent higher than it's been in Canada.
2655 Secondly, share plans, which Canada has recently adopted, led by TELUS roughly about a year and a half ago, are quite a bit more mature in the States by about two years. Share plans actually significantly enhance the ability for people to add multiple SIMs or multiple subscribers to an account to share the data, and those subscribers are sometimes people like, you know, family members, but oftentimes tablets, oftentimes even connected car and things like that.
2656 So I think as you see share plans mature in Canada, that will naturally drive up penetration as well.
2657 And the other thing that the States introduced roughly about --
2658 COMMISSIONER MENZIES: Are you suggesting that penetration rates are a good measure of competivity(sic)?
2659 MR. FULLER: No, I think penetration rates are a measure of the number of subscribers that you're adding to a share plan over time.
2660 You know, I think -- you know, the last point I'll make is nationwide calling was also prevalent in the U.S. for about two years prior to it being introduced in Canada and, as a result of that and other things, wireless substitution is substantially higher in the States versus local line.
2661 I think wireless substitution in the States is in the 41 percent range. In Canada, it's 19 percent. And as a result, you know, that, too, drives the -- you know, I think the wireless penetration side of the numbers.
2662 You know, I think the --
2663 DR. EISENACH: There's one item we missed, and just so we don't miss it.
2664 The U.S. has what's called a wireless lifeline program that was introduced in 2008. More than 10 million low income Americans today are getting literally free cell phones from companies like Trackphone and Boost that are paid for by the universal service program in the U.S. So there's about a five percent kind of artificial impact there as a result of just the availability of free cell phones for anyone who is participating in a public assistance program.
2665 COMMISSIONER MENZIES: Thank you.
2666 You made reference to it in your oral presentation today, but if we were to decide that some intervention was necessary into the roaming and tower and site sharing markets but didn't want to require the filling of tariffs, an alternative could be to have rules and terms and conditions and even guidance with respect to rates and establish a mediation or arbitration dispute resolution process of some kind when things broke down, what would be our view on the best way to design such a system?
2667 You did, in your oral comments, suggest that that might be an option we examine.
2668 MR. WOODHEAD: Yeah. I mean, I was here a couple of weeks ago -- some of us were here a couple of weeks ago, and we, you know, called for a similar type of thing there.
2669 I think -- to answer your specific question, I think we could take an under --
2670 COMMISSIONER MENZIES: You might have missed me, but I wasn't there.
2671 MR. WOODHEAD: No, I know you weren't there. Some of us.
2672 COMMISSIONER MENZIES: Take me through it.
2673 MR. WOODHEAD: Some of us were here.
2674 COMMISSIONER MENZIES: Yes. Many were, but I wasn't, so take me through it.
2675 MR. WOODHEAD: Okay. So it's really kind of what you're suggesting, that, you know, we believe that commercial negotiation should be the first line of -- in the sand here and that there should be a fallback to arbitration. Potentially mediation first.
2676 And that in order to make that workable, I think, what we -- what you really need to do is sort of think through what are the kinds of principles or -- and be very proactively out front about that, what are the kinds of principles that you are going to be looking for in ultimately being that arbitrator.
2677 I think that's one of -- if I can be of any assistance on this, I think that's one of the key drivers around why some of these alternative schemes don't sometimes operate best. It's because people --
2678 COMMISSIONER MENZIES: But what I'm trying to get to, and just sort of in the interests of time --
2679 MR. WOODHEAD: What are the actual things?
2680 COMMISSIONER MENZIES: Actually, I was kind of looking for answers. And you're -- I mean, if your answer is, these are the questions the Commission should ask in determining what the answer should be, that's okay. But you don't have to have the answer right now.
2681 But I was trying to look at what sort of --
2682 MR. WOODHEAD: Yeah.
2683 COMMISSIONER MENZIES: -- framework and whether you think that's preferable to a system where we'd be establishing tariffs.
2684 MR. WOODHEAD: It's always preferable to a system of establishing tariffs.
2685 COMMISSIONER MENZIES: Could you give that a little thought and maybe come back to us and show us what it might look like?
2686 MR. WOODHEAD: Yeah. What I would suggest, then, is --
2687 COMMISSIONER MENZIES: It's okay to tell us the questions we should ask, but we do need to know answers.
2688 MR. WOODHEAD: So what I would so is undertake to get back to you with an undertaking on -- with an answer on the 9th, and we'll develop specific criteria that we think we might want to consider.
2689 COMMISSIONER MENZIES: Great. Thanks very much.
2690 Just we've touched on this a little in the past, but just in a more direct response, PIAC and others -- and I'll give you the reference.
2691 PIAC states at paragraph 36 of its 20th of August, they contend that you would still have strong incentive, even with regulated rates, to invest because you need to retain existing customers in a competitive environment and you need to gain customers. And I mean, retention is an increasing portion as things have built out.
2692 Why are they wrong, in your view?
2693 MR. WOODHEAD: Well, because they don't operate under a CAP-X budget, but I think you probably want a little more than that.
2694 And Dave, I think, has a comment, but like, clearly, the evidence that we have provided, which I think is fairly, you know, uncontroverted, Dr. Serentschy has outlined what exactly transpired in the -- in Europe.
2695 I think that that would be an interesting lesson for you.
2696 But Dave and Eros, I think, will have some comments around the actual -- like what -- how our capital decisions are actually made and how that capital is allotted and what are the puts and takes of it.
2697 MR. FULLER: Yeah. So Eros can illuminate.
2698 But you know -- and I think, Mr. Vice-Chair, it really does depend on the rate. But if the rate is regulated and abnormally low, then absolutely it will result in us deferring investments. And I'm not going to give you specifics of why, but --
2699 COMMISSIONER MENZIES: Well, again, it isn't so much the issue of regulation as whether the regulation gets it right.
2700 MR. FULLER: Correct, yes.
2701 COMMISSIONER MENZIES: That the rate --
2702 MR. FULLER: If the rate becomes abnormally low, then our incentive to drive facilities-based competition starts to erode. So if you look at what's happened in Canada over the last number of years, all of the incumbents have raced each other, and some of the new entrants as well, have raced each other to build better and better quality networks, right, better coverage, better capability, better speeds.
2703 COMMISSIONER MENZIES: Where is your network build at now in terms of -- there's some argument out there that much of the network has already been built and that, therefore, the fear of not being able to access rural remote -- you mentioned in your inventions earlier that the current environment has allowed you to -- I think you made reference to builds to facilities in First Nations and remote locations of B.C. That was the example you'd used in terms of that.
2704 The continued build-out of networks would be something of concern to us, so where are you at with that? Is it built? What's left to be built, and what is incenting you at this time to build it?
2705 MR. SPADOTTO: So if I may answer that question, the -- at the root of this question is the definition of a network.
2706 We fundamentally completely rebuilt our networks to launch HSPA in 2009. And perhaps somewhat surprising, even to us, the onslaught of wireless data caused us to over-build those brand new networks in 2012 with LTE.
2707 And I would continue that the onslaught of data has caused us to consume our available spectrum that we have available right now, so we're now forced into a position where we're looking at LTE advanced and 5G networks.
2708 Those are new networks that will be hundreds of millions of dollars in over-builds, billions of dollars when you count the capacity, and they will be mitigated and managed based on where we create a return.
2709 If I can actually step back one layer and talk about how do we build our capital programs, I've been in the wireless industry for many, many years, and capital programs are always built in this way.
2710 You always start with who are my existing subscribers, and I must serve them. What additional demands will those existing subscribers put on my network? I will serve that next.
2711 What new subscribers may I attain and how much demand will they create? I will try to go after them next.
2712 What new areas of potential business are there, i.e. expanding into new areas, expanding into rural territories? I will go after that next.
2713 And you start building up a ladder that way in terms of where you make investments.
2714 If you start to not be able to substantiate your capital programs, you will cut away at that list from the top. The first thing that goes is rural.
2715 When I start thinking about a new network and a new network expansion, that's exactly what we will cut off.
2716 And to be really frank, that is actually happening to TELUS today. If I take a look at our position with our lack of overall spectrum and the new 700 spectrum that we just achieved, we are pushing that spectrum at the urban territories. It's where we need the capacity.
2717 We are, unfortunately, in a constrained capital program -- every capital program is constrained -- have decided to put the rural expansion on the back burner. That is clear. That is happening today. It's happening because of results today.
2718 If we actually start to chip away and make capital investments even lesser, it's going to happen to a greater extent.
2719 COMMISSIONER MENZIES: Thank you.
2720 That sort of detail on your corporate decision tree is much appreciated.
2721 Eastlink, Videotron and Wind have all requested that wholesale roaming be required to be provided on a seamless basis. What's the cost of that to you? Why is it an issue, and why should it be a problem?
2722 It seems like something that should work, particularly with commercial agreements.
2723 MR. WOODHEAD: I'll let Kal start, but -- actually, why don't you just start, Kal, or Eros?
2724 MR. SPADOTTO: Allow me to start, and maybe I'll back in to, again, the years of experience I've had in this industry.
2725 And I, years ago, was also at a new entrant. It was called Clearnet. And we had to build out networks to also attract subscribers.
2726 And one of the things that we learned in that build of the networks is you have to build the networks sufficiently far enough into and outside of the urban and suburban and near rural territories to make sure that you could acquire subscribers. And that, to me, is a very key element in this.
2727 If you push the boundaries of the network out far enough, you actually drive the requirement for that handoff to a very low extent. In fact, what we learned way back then is the quality of inter-RAN handoff or going from one network to another network was relatively poor, so you extend it a way out so you never run into those situations.
2728 So that's -- so the first thing I would say is, as a new entrant, you have to make sure you build out your networks far enough.
2729 If you don't build your networks out far enough, then you're actually causing a massive amount of traffic inside the -- inside what the -- call it the incumbent's network would be.
2730 That massive amount of traffic creates great concern. It creates great concern not only for the traffic, but also the flows that go in between the technical parts of your network. And that creates risk for us, and it has to be managed very carefully.
2731 That creates the difficulty. That creates the difficulty and creates the cost.
2732 So part of it -- part of the answer is, how expansive are these new entrants' networks. If they're out far enough, it becomes a non-issue.
2733 COMMISSIONER MENZIES: Thank you for your answer.
2734 How is the -- Industry Canada's new requirement for public consultation on commercial tower installations impacting or do you anticipate it will impact your ability to build new towers?
2735 And also, what's the impact of Industry Canada's new requirement on the tower and site sharing market? Will it make this issue, tower and site sharing, even more important as we go forward?
2736 MR. WOODHEAD: Sorry. What is the impact of the new tower and site sharing rules from June on --
2737 COMMISSIONER MENZIES: I'll start again.
2738 MR. WOODHEAD: Sorry.
2739 COMMISSIONER MENZIES: I'll give them to you one at a time. That wasn't fair.
2740 Can you provide more details on how Industry Canada's new requirement for public consultation on commercial tower installations for towers less than 15 metres in height will impact your ability to build new towers?
2741 MR. WOODHEAD: Well, I think I'd pass that off to Mr. Garceau.
2742 Most -- I think that most of the small towers are actually deployed by new entrants.
2743 MR. GARCEAU: Yeah. So you know, in a nutshell, it would extend the time, obviously, to go and be able to build those -- such structures.
2744 We do public consultation, you know, almost all the time now. We do it -- we go through the process of each municipality, what they ask of us, and we support that.
2745 For the small towers, we didn't used to have to, and now, you know, we need to do it on top of it. Yes, up to now, I think there's some new entrants that have used 15 metre towers more extensively. We are building some of them ourselves and, you know, we abide by the new rules.
2746 It does extend the time, but you know, it is workable.
2747 COMMISSIONER MENZIES: Is it reasonable to expect that within certain markets for new entrants -- is it reasonable to expect that they should be able to switch from one specific tower site to another?
2748 Is that a practical commercial alternative to them if there was a -- another tower, if they were on your tower, for instance, and there was a --
2749 MR. GARCEAU: I'm sorry. You probably would have to ask them.
2750 Normally, you know, when --
2751 COMMISSIONER MENZIES: I'm counting on your technical expertise.
2752 MR. GARCEAU: Yes. So on -- from a technical point of view, usually the process lengthy enough as we described previously. You usually make all the assessments of -- you know, of going there and making, you know, the investment of putting equipment and so forth.
2753 It is, you know, unlikely that you would move. It would be special cases and special reasons. But usually what -- I'm not sure if I'm answering your question directly. I'll add something, and you tell me.
2754 One of the comparisons that often comes is, you know, towers versus, let's say, rooftop where it's owned by a landlord, not by, you know, a wireless provider.
2755 And sometimes, you know, people will say, well, it's easier, you know, going on a rooftop.
2756 What's easier is you have many choices, but the negotiation with the landlord -- and I'm taking, you know, from my perspective -- is a one off every time. So the negotiation for a rooftop can be as long or more long, depending on what you need to secure for the long term.
2757 What's important in that is not just access. It's, really, to set the terms of, you know, long the term, what's the renewal, what's the incremental cost, you know. Some would say, well, it's so many percentage point per year and so forth.
2758 COMMISSIONER MENZIES: But aren't your tower sharing agreements, aren't they --
2759 MR. GARCEAU: Yes.
2760 COMMISSIONER MENZIES: -- unique to each tower?
2761 MR. GARCEAU: No, hold on.
2762 So my point is --
2763 COMMISSIONER MENZIES: Because they have quite a range in them; right?
2764 MR. GARCEAU: Yes. So --
2765 COMMISSIONER MENZIES: From nothing to everything.
2766 MR. GARCEAU: Yeah, I totally agree.
2767 The tower structures are really unique, so we can get to that. But two different things.
2768 The MOUs, the agreements we have between the wireless providers, and we have agreements with virtually everybody, are really reciprocal, so they -- everybody negotiates what is important to them, what they want included, and they are a little bit different.
2769 They are -- you know, as stated by pretty much everybody, they are in line, but they are different. All of them are negotiated one on one, and they are slightly different. But they basically take into account the particulars of what the tower, you know, structural analysis and all that process needs and then the pricing is based on, well, okay, if you are going to put 50 antennas and, you know, it's going to cost you more than putting 10.
2770 As an example, we have an agreement with one of the new entrants which is -- and if you look at pricing per se, it's beneficial to them because our networks are more evolved, so we put more equipment on their towers than they put on ours and, actually, in terms of money exchanged, they actually get more money from us than we get from there. And that's okay.
2771 So for me, the -- once you've made that engineering decision as part of your network to go in the given tower, it's unlikely you would like to move.
2772 Sometimes we get to move because of the landlord, you know, either is building his -- you know, if we're on a tower on a building, it's a problem with the roof, they need to redo it, we may have to move. A water tower gets -- a municipality will, you know, basically dismantle it.
2773 There are events like that out of our control. But purely on an engineering radio basis, it's very rare.
2774 COMMISSIONER MENZIES: Is there any difference between the rates that you charge or the negotiations you have with Rogers and Bell for tower and site sharing than there is between new entrants for similar configuration and location?
2775 MR. GARCEAU: No, they're relatively the same. They're negotiated virtually the same way.
2776 The important things is that they are absolutely reciprocal between the two parties, so in other words, whether it's with Bell or whether it's with Videotron, whatever I pay Bell to put antennas is what Bell pays me. Whatever I pay Videotron is what they pay me for an equivalent occupancy of that tower space.
2777 MR. WOODHEAD: Jacques, I was just wondering, do you have examples of rates, for example, that are higher than the rates that we typically charge from other providers, be they --
2778 MR. GARCEAU: Yeah, so -- thanks, Ted.
2779 So one of the points that -- so one of the notes that I read in one of the submissions was that we had discriminatory rates for new entrants. That is truly not the case, for basically two reasons.
2780 First of all, they're reciprocal, and I gave you an example that we actually pay more to a new entrant than they pay us because of what we put on the towers, so it's not discriminatory.
2781 And also, if you go to a third party like NSBA Tower Company, their rates is actually higher than ours and higher than what you will get from a wireless service provider.
2782 We're not in the business of, you know, selling tower space per se. We don't construct towers with, you know, 10 times the loading resistance in the hope to make money in this business. That's not our business.
2783 COMMISSIONER MENZIES: In your submissions, you talked about tower and site sharing arrangements being very difficult -- it would be very difficult to regulate them because of the -- some of the unique characteristics such as, I think you listed, it would not be possible to take into consideration the fact specifics involved in each situation such as antenna size and type, number of transmission lines, equipment space, land requirements and site location, including urban versus rural.
2784 But Videotron and Eastlink, and others, have said that this should be a relatively simple process, that you can put things into broad categories to define costs and determine a costing formula for that.
2785 So what was your -- what is your response to the arguments put forward by Videotron and Eastlink in regard to the ability to establish broad categories for cost?
2786 MR. GARCEAU: Yeah. Thank you, Mr. Vice-Chairman.
2787 I was -- to be honest, I was a little bit confused with describing the simplicity and actually on the tower type.
2788 The tower type, to me, is one of the least relevant criteria because it's really about what is -- what are you going to put on that tower, what is the space available. To me, it depends on, yes, tower type. A 30 metre tower will have less space than a 100 metre tower, but the criteria per se is, is there space available; what is the equipment you want to put on the tower and can the structural analysis allow you to put equipment on that tower. But I don't think you can assign a rate based on the tower type.
2789 COMMISSIONER MENZIES: But is it possible to establish broad categories for, for instance, the type of towers, the type of antennas, et cetera?
2790 MR. GARCEAU: We have broad categories mostly based on what you put on the structure rather than the structure itself.
2791 COMMISSIONER MENZIES: Okay. What's your response to Vidéotron's and Eastlink's proposals that the costing principles that apply to support structure services would be an appropriate approach?
2792 MR. GARCEAU: I'm sorry, the cost --
2793 MR. WOODHEAD: I can --
2794 COMMISSIONER MENZIES: I think this is Ted's, sorry.
2795 MR. WOODHEAD: I can take this.
2796 Well, first off, I think the support structure costing which was done through the Phase 2 regime, if we were going to do that we would need to that here.
2797 But these structures I think, as well from experience, the support structure rates were set artificially low for reasons that were prevalent I guess at the time, but if you were going to do that -- which, again, I don't think there is any demonstrable evidence that you need to -- then that would have to be some sort of further Phase 2 costing exercise.
2798 I think the difference between actual global wireless towers and telephone poles is fairly dramatic.
2799 MR. SPADOTTO: If I can add, Ted, I mean telephones -- and we of course have hundreds of thousands, millions of telephone poles, they are not engineered structures whereas these facilities are very much engineered. So when you do, as Jacques had mentioned, not only do you have to take a look at what is actually being mounted on the tower for basis of weight, but you also have to take a look at it for other conditions.
2800 In other words, if I put a very big antenna on there, that will create a different wind load on that tower, that needs to be taken in to account for structural rigidity.
2801 If I'm in a particular area of the country that is subject to freezing rain, I better take consideration for the weight that that freezing rain will actually add to that tower, add to that antenna, add to that thing that is being put on the tower.
2802 So because these things are engineered, if you actually start thinking, "Okay, how do I decompress this or decompose this into different things I have to charge for", you now get into, okay, I'm charging for weight, I'm charging for wind loading, I'm charging for what part of the country it's in because I have different kind of environmental conditions that happen to it, I'm charging for how distant this tower and its antennas may be from humans, because I have to calculate out Safety Code 6, it becomes a very, very complex undertaking that is very unique on each individual tower.
2803 COMMISSIONER MENZIES: Thank you.
2804 WIND submitted in its 15th May intervention that:
"Rate cards for tower and site sharing services contain premium rate provisions that are often applied..."
2805 They say:
"... on an arbitrary basis, making the costs of tower sharing extremely high."
2806 Can you tell us more about these premium charges and do you apply them?
2807 MR. GARCEAU: I'm really not aware what the premium rates refer to.
2808 Like I said, the most important thing in the MOU we have is that they are reciprocal. So it's negotiated and it's agreed.
2809 I'm sorry, I don't understand what premium rates refers to.
2810 COMMISSIONER MENZIES: They say that:
"Premium rate provisions are applied on the rate card for tower and site sharing services."
2811 MR. GARCEAU: I'm sorry, maybe I need an example. I'm not saying it's true or untrue, it depends on the definition of what they refer to as "premium rates".
2812 I'm sorry, I'm not trying to avoid the question, I don't know what they refer to as "premium rates". We have rate cards, but I don't understand "premium rates".
2813 MR. WOODHEAD: Yes. So, Jacques, if I might help, on our rate card is there something that spells out a premium rate and a moderate rate and a low rate?
2814 MR. GARCEAU: No.
2815 COMMISSIONER MENZIES: Thank you.
2816 MR. WOODHEAD: Mr. Vice Chair, would you like us to produce our rate card in the undertaking on the 9th?
2817 COMMISSIONER MENZIES: That would be helpful if you could produce the rate cards so we could clear up any misunderstanding or clear up everybody's comprehension of that.
2818 MR. WOODHEAD: Very well.
2819 COMMISSIONER MENZIES: I wanted to ask you about your flanker brands.
2820 Assuming they are competing for the low usage market and they don't have to pay wholesale roaming charges, how does that make it possible -- or how does that act as a blocker, I guess as would be alleged, to new entrants into the marketplace, the existence of your flanker brands?
2821 MR. FULLER: Well, in our particular case our flanker brand, which is Koodo, was never designed to be and isn't a blocker for any new entrant. We made the decision to enter with a flanker brand, solely based off a desire to make sure we continued to gain market share and we are worried that in a world where Rogers had made the decision to maintain the Fido brand and you had Virgin in the marketplace associated with Bell, that we needed -- because of competing vigorously against Bell and Rogers, a flanker brand.
2822 In fact, if you look at the timing of it, we internally made the decision to launch our Koodo brand in Q4 of 2006. We launched Koodo, it soft launched in January of 2008 and full launch later that quarter.
2823 So we had introduced our flanker brand in the case of Koodo as a means to compete effectively and vigorously in the market against the likes of Fido and Virgin not to forestall new entrants
2824 COMMISSIONER MENZIES: Like Mobilicity or --
2825 MR. FULLER: No. It was before they --
2826 COMMISSIONER MENZIES: It was before them, right.
2827 MR. FULLER: Yes. Yes.
2828 COMMISSIONER MENZIES: So whatever existed before them.
2829 MR. FULLER: Yes.
2830 COMMISSIONER MENZIES: It was from the major players' innovation in that area was your motivation?
2831 MR. FULLER: Yes. It was a pretty -- I spent many years in the consumer packaging goods industry before I joined telecom, as a market matures and penetration grows it's a pretty standard practice to do a line extension, right, you know, introduce basically a similar product with different branding, it allows you to more uniquely target different value segments in the market and different specific segments.
2832 That's why we launched Koodo, to, we felt, more effectively compete and offer differential value propositions to different segments of the market. You know, where the TELUS brand might appeal to some, the Koodo brand appeals to others. It's more of a tween-focussed and teen-focussed and young people-focussed brand and it has actually been enormously successful for us, you know, in a segment of the market and in locations of the country where I think we would have struggled to compete with TELUS.
2833 COMMISSIONER MENZIES: Right. Thank you for your patience, those are my questions.
2834 THE CHAIRPERSON: Thank you.
2835 Commissioner Molnar...?
2836 COMMISSIONER MOLNAR: Thanks.
2837 I just have some questions to make sure I understood what I heard here today.
2838 I'm going to begin with kind of something that was just covered and that was the towers. You mentioned that they are engineered and so it's far too complex, it's nothing like support structures. Then a minute later you said you had a rate card.
2839 So when you produce this rate card, will I understand how you can have a rate card and yet take into consideration each tower uniquely based on its load, temperature, location and, et cetera?
2840 So I find those two very difficult to understand.
2841 MR. SPADOTTO: Yes. Let me try to address that and, Jacques, I can pass it over to you if you want to extent that.
2842 So I completely stand by my assertions that these towers are engineered, they are engineered from their civil works to also their RF kind of capabilities. That is true. If you take a look across the country, if you go talk to a civil engineer that is part of building these things, they will tell you there are different things that have to be done in different places.
2843 We operate in a very complex industry and, as Jacques mentioned, we are not in the market of actually selling tower space, that is not how we organize ourselves. We organize ourselves to actually build our networks, but we do occasionally have to use other people's towers and they ours and we have had to actually take this complexity out of the rate card because it just adds a burden.
2844 Having said that, because these are reciprocally kind of negotiated, we both have common interest to actually behave in the same manner and we behave that way with a common rate card.
2845 If you change the nature where the reciprocity goes away, where one party actually has greater obligations on them, then you actually have to start looking at all these compounding factors, and that's what I was trying to express.
2846 Jacques, I don't know if there is anything to add to that?
2847 MR. GARCEAU: No, nothing to add to that. Thank you.
2848 COMMISSIONER MOLNAR: Okay, I understand. You can make the complex simple where there is reciprocity, it's just harder to do where there is not reciprocity?
2849 MR. SPADOTTO: As in any business dealing.
2850 COMMISSIONER MOLNAR: Right.
2851 MR. SPADOTTO: Once you have common interests --
2852 COMMISSIONER MOLNAR: For sure. I understand that. That actually takes me to my next question, because in roaming, in paragraph 31 of your statement you say that:
"Canada has a strong and successful history of roaming agreements that have been successfully negotiated under the current regime and this clearly indicates the wholesale market is working properly."
2853 Are you referring in any way to agreements where there has not been reciprocity?
2854 MR. SPADOTTO: There is always reciprocity in any agreements, a simple reciprocity --
2855 COMMISSIONER MOLNAR: Yes. Well, except for cash.
2856 MR. SPADOTTO: -- in payment for something.
2857 COMMISSIONER MOLNAR: Yes, except for cash.
2858 MR. SPADOTTO: Right.
2859 COMMISSIONER MOLNAR: But as you noted in your tower example, you're not talking about cash, you're talking about we have a need, it is in our business interest to expand our network, extend our network and serve our customers through reciprocal agreements as it relates to roaming and tower sharing and so on.
2860 We are now in a situation where there are new entrants who don't really have all that much to offer besides cash.
2861 MR. SPADOTTO: Cash, cash is king. So I come from --
2862 COMMISSIONER MOLNAR: And their argument is that the cash is too much.
2863 MR. SPADOTTO: Well, again, I come from the history of being a new entrant and we were able to negotiate a rate with an incumbent at the time that we were happy with and presumably they were happy with. It caused us to build out networks to the extent where we optimized how much we paid them and both parties were very happy with that arrangement.
2864 I would suggest that the same form of cash is king reciprocity exists today.
2865 COMMISSIONER MOLNAR: Yes. So that's the commercial negotiations that you are recommending because the market is working well, so you recommend the regime of commercial negotiation, that being new entrants pay what will be negotiated?
2866 MR. WOODHEAD: Yes. They pay a commercial rate because that builds in --
2867 COMMISSIONER MOLNAR: Okay. And so where you say there is a successful history of roaming agreements, would you agree that the history of roaming agreements for those new entrants has not been a successful history based on the evidence that we have?
2868 MR. SPADOTTO: What I would add, Commissioner -- and again I go into my history -- in my history I had more than one person to negotiate with and that created the necessary conditions for me to create a rate. Presumably for my friends at Fido, they had a similar situation and they were able to negotiate with more than one participant to come up with a rate.
2869 In Canada with the new networks, the HSPA, the conversion to HSPA, at the time when the new entrants were around to negotiate with the current incumbents, there was only one party to negotiate with and that I think is the root cause problem.
2870 COMMISSIONER MOLNAR: Yes. No, I understand that, I'm just --
2871 MR. SPADOTTO: If we go today --
2872 COMMISSIONER MOLNAR: I'm just confused as to how we can say there is a successful history --
2873 MR. WOODHEAD: Because there have been many, many concluded agreements.
2874 I don't know what the evidence is that it hasn't been successful. I have heard people say --
2875 COMMISSIONER MOLNAR: For the new entrants?
2876 MR. WOODHEAD: I have heard them say that they didn't like it because they want lower costs, I heard that, but I don't know that that makes --
2877 COMMISSIONER MOLNAR: But you have said that --
2878 MR. WOODHEAD: That's not concluding that it's not successful.
2879 COMMISSIONER MOLNAR: Oh.
2880 MR. SPADOTTO: If I could also add, the --
2881 COMMISSIONER MOLNAR: Or the Commission's decision, that wouldn't conclude it's not successful?
2882 MR. WOODHEAD: I'm not aware of the Commission's decision on that. I am aware that the Commission found instances of unjust discrimination in a particular provider's agreement and I think that has been dealt with. As I have said, we don't have that in our agreements.
2883 COMMISSIONER MOLNAR: Right. But you had no agreements.
2884 MR. SPADOTTO: No, we actually did.
2885 MR. WOODHEAD: We had one agreement.
2886 COMMISSIONER MOLNAR: Okay.
2887 MR. WOODHEAD: We had an agreement.
2888 MR. SPADOTTO: We have an agreement with Public Mobile and that agreement was not exclusive and, to the best of my knowledge, they actually had a similar agreement with the other CDMA operator in Canada and to the best of their ability they could manage their own interconnection and where they chose to actually spend their dollars.
2889 So there is a case where I think there was a very dramatic example of where you have more than one party to actually negotiate with you come to an agreement that works for both parties and that agreement worked. Again, I presume as Public Mobile they were able to choose where they put their traffic.
2890 COMMISSIONER MOLNAR: Okay.
2891 My other question is, I just want to understand, you undertook to provide some criteria to consider an arbitration, is that right, in the case where there may be issues of foreclosure, as was noted that there could be issues that existed. The conditions maybe don't exist in aggregate, but they could exist in certain markets or situations where they could be problems in the market and therefore we would use an ex ante approach such as arbitration.
2892 I understood one of your undertakings to the Vice Chair was that you would undertake to provide some factors that should be considered in arbitration?
2893 MR. WOODHEAD: Yes. That's correct, around what the appropriate costing types of things or factors that you should take into account.
2894 COMMISSIONER MOLNAR: So are you thinking of something like if we look at another market where we concern ourselves with vertical foreclosure is obviously the broadcasting market and we put in place a vertical integration code of conduct?
2895 Are those the sort of factors that you are thinking of, that something like that could be established to deal with matters related to roaming and tower sharing?
2896 MR. WOODHEAD: I think that what I was just talking -- I mean what I was talking about were factors that don't relate to vertical foreclosure because I don't believe --
2897 COMMISSIONER MOLNAR: No. And neither do those if you --
2898 MR. WOODHEAD: Yes. No, so I agree. I agree that we could come up with factors that I think are relevant.
2899 Whether they are exactly like the ones for the vertical integration one that we were talking about a couple of weeks ago, I don't know that they would look all the same, but they would be specific to this issue, yes.
2900 COMMISSIONER MOLNAR: But it's the notion of -- yes.
2901 MR. WOODHEAD: Yes.
2902 COMMISSIONER MOLNAR: Yes, okay.
2903 MR. WOODHEAD: That's what I was hoping to provide.
2904 COMMISSIONER MOLNAR: Okay. Very good, thanks.
2905 Those are my questions.
2906 THE CHAIRPERSON: I just have a few questions before passing on to legal.
2907 First of all, in your oral presentation today you say at paragraph 11:
"In short, when you put the rhetoric aside..."
2908 Whose rhetoric are you referring to?
2909 MR. WOODHEAD: That's the Brattle Group.
2910 THE CHAIRPERSON: No one else's rhetoric?
2911 MR. WOODHEAD: No.
2912 THE CHAIRPERSON: Okay. Thank you.
2913 Mr. Woodhead, just a moment ago when you were talking to the Vice Chair about -- you referenced Commission decision and policies with respect to support structures and you said that the rates were set artificially low, I think was the phase you used, to achieve certain policy objectives.
2914 What were you referring to exactly?
2915 MR. WOODHEAD: Well, my recollection was that initially --
2916 THE CHAIRPERSON: This is back when you were at the Commission; correct?
2917 MR. WOODHEAD: Yes, when I was a staff person.
2918 THE CHAIRPERSON: Okay.
2919 MR. WOODHEAD: I believe that at the time the rates were made artificially low to assist certain cable operators in stringing coax cable. That was the primary --
2920 THE CHAIRPERSON: Right. It was part of the 1990s when the Commission --
2921 MR. WOODHEAD: Yes. Right.
2922 THE CHAIRPERSON: -- the government was trying to lower barriers of entry to make sure that we had two competitive suppliers of wireline services to Canadians.
2923 MR. WOODHEAD: Right. But in that case you had a monopoly supply of one product, poles. In this case those conditions don't exist.
2924 THE CHAIRPERSON: My recollection was that I don't recall the monopoly supply, there were poles that were owned by electrical companies --
2925 MR. WOODHEAD: There was always -- there is some utility poles.
2926 THE CHAIRPERSON: -- some municipalities, others --
2927 MR. WOODHEAD: But by and large they were either owned by the phone company or jointly owned between hydro companies and telephone companies. There were other smaller utility poles around.
2928 THE CHAIRPERSON: We will be able to check the record -- my recollection was different -- that in certain --
2929 MR. WOODHEAD: We are the ones, though, that had the tariffs.
2930 THE CHAIRPERSON: Right.
2931 MR. WOODHEAD: So spooling ahead, when I believe we as -- well, "we", the industry, everyone, all the stakeholders, we realized that there was a very vast delta between rates charged by telcos and rates charged by these other types of utilities that you're talking about, hydro companies, whatever those were, that are regulated by the provincial regulators or someone else, cities, and the rates were actually sort of right sized at that point in time I think.
2932 As I say, in my view the sort of supply conditions are not at all the same here.
2933 THE CHAIRPERSON: So you see no precedent there from a policy perspective to encourage sustainable competition by lowering barriers?
2934 MR. WOODHEAD: No. I understand the appeal of that to someone. I mean, I think I understand why people might see the appeal of that, but the actual problems with setting those prices in a correct fashion that doesn't harm those incentives to invest are too great.
2935 Let's kind of also remember, when those initial support structure decisions were made, that was in the monopoly environment for local telephony, there was rate of return regulation, there were construction program reviews, et cetera, et cetera.
2936 THE CHAIRPERSON: Well, my recollection is a bit different. I think we were in the price cap world by then.
2937 MR. WOODHEAD: Well, I'm talking about initially in the early '90s.
2938 THE CHAIRPERSON: Ah, I see.
2939 MR. WOODHEAD: Ultimately we got into a price cap regime, you are correct, and there were a series of -- you know, I'm oversimplifying, but there were a series of decisions and, as you know, culminating in the late '90s around the 2000 timeframe.
2940 THE CHAIRPERSON: Okay. Thank you.
2941 On another issue, the Competition Bureau criticizes the incumbent's evidence -- described it -- and this is their word -- "suspect" because the incumbent's experts, including the experts here I guess, did not have access to the most probative evidence, namely evidence that went beyond publicly available information.
2942 So perhaps I can address my question to the three experts. Did you have access to company-specific and confidential information to prepare your evidence?
2943 DR. EISENACH: I had limited access to a couple of specific pieces of information which were offered in the nature of fact-checking, but the nature of my exercise was to examine the conclusions of a report which was prepared on the basis of publicly available information and there was no confidential information that I particularly would have found relevant to my report other than, as I say, a couple of instances where I said, you know, "Is there anything you know which is different from what is in my report?" and the answer was "No".
2944 THE CHAIRPERSON: So the way you went about fact-checking is you put it just the way you just did? You didn't actually see the documents or evidence that were confidential, you merely asked TELUS to confirm that there was nothing wrong with it?
2945 DR. EISENACH: What I asked is: Are there any facts which would cause the information that I am reporting here to be incorrect? And the answer was no.
2946 THE CHAIRPERSON: And you relied on that answer?
2947 DR. EISENACH: Yes, sir.
2948 THE CHAIRPERSON: Okay.
2949 Dr. Serentschy, I'll take the benefit of you being here to ask you about the Austrian experience. It's my understanding that Austria has seen a reduction from four to three wireless carriers as a result of an approval of a merger in early 2013. Is that correct?
2950 DR. SERENTSCHY: It's correct, yeah.
2951 THE CHAIRPERSON: And this was the purchase of Orange Austria by Hutchison. Is that correct?
2952 DR. SERENTSCHY: Yes.
2953 THE CHAIRPERSON: And that merger had been done and approved, subject to certain conditions by the antitrust authorities to make sure that there weren't untoward negative impacts in the Austrian market. Is that correct?
2954 DR. SERENTSCHY: The conditions -- I mean there were a couple of conditions set. The one was at that time was we had a multiband auction in plan and there was the idea to allow for a new entrant to the market. The idea was that we should have arranged for spectrum for this new entrant.
2955 THE CHAIRPERSON: And MVNO, I believe?
2956 DR. SERENTSCHY: No, no, no.
2957 THE CHAIRPERSON: No?
2958 DR. SERENTSCHY: No, and MNO.
2959 THE CHAIRPERSON: An MNO.
2960 DR. SERENTSCHY: A spectrum. I mean, a spectrum was set aside for a new entrant because the hope of the Commission was -- of the European Commission was that a new company would come and enter the market.
2961 THE CHAIRPERSON: Has that occurred?
2962 DR. SERENTSCHY: No. I was not surprised about that.
2963 THE CHAIRPERSON: And what happened to rates?
2964 DR. SERENTSCHY: What happened to...?
2965 THE CHAIRPERSON: Subscriber rates as a result of the merger in Austria?
2966 DR. SERENTSCHY: Austria faced price increases and that also caused the start of a sector inquiry by the competition authority, by the national competition authority. The price increases were percentage-wise high. However, it has to be said that these increases which occurred in the fourth quarter and in the first quarter -- the first quarter of last year and the first quarter of this year -- are still, the prices are still below the 2011 prices. So we had a steep fall of prices from 2011 on and even earlier.
2967 And the increases could not -- I mean, did not went over the line of 2011.
2968 THE CHAIRPERSON: Right.
2969 DR. SERENTSCHY: Yeah.
2970 THE CHAIRPERSON: But I put it to you, based on some statements you reported to have made to Blumberg in early 2014 that you expect rates to even go even higher up in Austria as a result of that merger. Isn't that correct?
2971 DR. SERENTSCHY: I think --
2972 THE CHAIRPERSON: You're not surprised to see it.
2973 DR. SERENTSCHY: Exactly. I said I wouldn't be surprised if the prices would increase higher because the price war amongst these four operators we had before the merger was tremendously, I mean incredible price war and it is not to my surprise that as soon as the market comes up -- sorry -- the market consolidates that the prices would increase. At the same time, it was also -- it became clear that MVNOs would enter the market by the end of this year or beginning of next year. And it is --
2974 THE CHAIRPERSON: But they haven't so far?
2975 DR. SERENTSCHY: No, they haven't so far. But it has been announced that they will pop up fourth quarter or first quarter of next year.
2976 THE CHAIRPERSON: Don't you think there's a lesson in that for us as Canadian regulators about the risks of having barriers to entry that are too high to maintain a sustainable level of competition? In fact, if we make mistakes we may actually see subscriber rates go up.
2977 DR. SERENTSCHY: I think there is a very clear lesson out of it and that lesson for me is that the permanent price decreases we had which was driven by a maverick in the market, maybe Hutchison, that thus such price decreases are not sustainable. It cannot be carried over and over. That is the lesson for me.
2978 THE CHAIRPERSON: That's not necessarily very comforting to Canadian subscribers who may see their prices go up over time.
2979 DR. SERENTSCHY: I'm not familiar with the price development in Canada but I think you don't have the situation that you're boiling down from four to three now.
2980 THE CHAIRPERSON: But we may see some entrants having -- struggling to get market share, grow their market share in Canada.
2981 DR. SERENTSCHY: I would like to -- Mr. Chairman, I would like to repeat what I said earlier. What we have seen even in the largest and strongest and richest economy in Europe, namely Germany, that this country cannot carry four full-fledged MNOs and that under certain conditions the same as in Austria, more or less, the commission cleared the merger. Why should the Canadian market with a much, much more challenging geography carry economically viable four carriers?
2982 THE CHAIRPERSON: Well, I think as others have said, we're not necessarily counting the number of carriers but the health of the marketplace.
2983 DR. SERENTSCHY: I think it's ultimately up to market forces. And as long as -- so to say the market is competitive -- I wouldn't see any problem in that.
2984 THE CHAIRPERSON: Right, okay. Well, thank you for that insight in the Austrian marketplace. Thank you.
2985 I believe those are our questions. So we'll take a break till 2:15. Thank you very much.
2986 Oh, sorry, of course. I keep forgetting about legal. Sorry about that. I was keen to go have lunch.
2987 MS HULLEY: Thank you, Mr. Chair. I'll try to keep my questions very brief.
2988 My first question is for Dr. Dippon and it's just with respect to your statement at paragraph 27 of the opening remarks that "MVNOs add little to competition and provide no measurable benefits to consumers".
2989 I just want to clarify the use of the term "MVNO" in that sentence. That paragraph also implies -- it talks about 25 operator-owned and independently-owned MVNOs. I believe TELUS' position is that its flanker brands are not an MVNO. There's also the table on the record about the types of MVNOs.
2990 Would your statement remain the same if you were speaking solely about a full MVNO, meaning an MVNO who only has access to the brand?
2991 DR. DIPPON: So to answer your question, no, we wouldn't be the same. My definition on MVNOs is the entire spectrum including flanker brands. But I also say that there is very little information available on what exactly MVNOs do. So what is a full MVNO? Where do we cut it off? It's a very fluid spectrum and you can't really cut it off that way.
2992 But just to answer your question, it includes the entire spectrum of MVNO definitions.
2993 MS HULLEY: Thank you. And my second question is for Mr. Woodhead. In response to a question from Commissioner Menzies, you explained that TELUS has not entered into MNO arrangements partially at least because it does not have spare RAN capacity. Can you explain on what basis you make your determinations that you don't have any spare RAN capacity?
2994 MR. WOODHEAD: I'll let Eros answer that one, I think. He's got a --
2995 MR. SPADOTTO: Thank you. Yeah. So the basis is, as simply stated, that when we look at our network we have congestion periods in the day through our network in a growing multitude of cell sites. Those congestion -- we define those congestion periods by what we feel is what the market is dictating as the average rate of download speeds and we are falling in some areas drastically below that.
2996 If you were -- the impetus of that or implication of that is if you were to add somebody on top of that network they would not only not get good service from the cells but they would further impair our own subscribers. We cannot ameliorate that due to our lack of spectrum.
2997 MS HULLEY: Would you be able to file for the record an example or evidence of a case where you've determined you don't have spare RAN capacity?
2998 MR. WOODHEAD: Absolutely.
2999 MR. SPADOTTO: We meet regularly with Industry Canada to talk about our concerns and the material that we share with them I'm happy to share along with you.
3000 MS HULLEY: Thank you.
3001 Thank you, Mr. Chair. Those are my questions.
3002 THE CHAIRPERSON: Thank you. So now we will break till 2:15 and continue the hearing with the next presenter. Thank you.
--- Upon recessing at 1308
--- Upon resuming at 1415
3003 THE SECRETARY: À l'ordre, s'il vous plaît. Order, please.
3004 THE CHAIRPERSON: Good afternoon, gentlemen. Please go ahead when you're ready.
3005 MR. TACIT: Thank you, Mr. Chair.
3006 Good afternoon. My name is Chris Tacit, of Tacit Law, counsel to CNOC. With me today are:
3007 - Mr. William Sandiford, Chair of the Board and President of CNOC;
3008 - Matthew Stein, CEO of Distributel Communications Limited, as well as a Director and the Chair of the Carrier Relations Committee of CNOC;
3009 - Matthew Gamble, the Principal of Thoughtfire Consulting Inc.;
3010 - Stuart Jack, Partner, Nordicity Group Limited and;
3011 - Alex Pavlovic, Director of Technology, Nordicity Group Limited.
3012 MR. SANDIFORD: CNOC is an association of 34 competitive telecommunications service providers, offering a variety of services. We estimate that our members serve approximately three-quarters of end- users receiving Internet access services from non-incumbent telecommunications service providers, or TSPs.
3013 The national mobile wireless market is characterized by broad coverage of mobile wireless services, rapid technological evolution, very large revenues and dominance by a small number of national incumbents, each of which has consistently held its roughly one-Third share of 90% of the Canadian wireless market. Overall, the three new entrants have a combined revenue market share that is less than 3 percent.
3014 In our intervention in this proceeding we demonstrated that Canadian wireless markets, both retail and wholesale, are far from competitive in Canada. The evidence in support of this conclusion includes:
3015 The extremely high degree of market concentration in the provision of wireless retail services by three national incumbents and in a couple of regions, a regional incumbent.
3016 The higher prices paid by Canadian consumers for wireless services based on international comparisons.
3017 The higher profitability enjoyed by the Canadian incumbents relative to other similarly situated entities.
3018 Barriers to entry associated with factors such as the advantages enjoyed by incumbents with respect to spectrum acquisition, unregulated domestic roaming, unregulated antenna tower and site sharing, vertical integration and service bundling, access to new technologies at relatively low cost and risk, and coordinated interactions.
3019 And finally, the non-substitutability of wireless and wireline services.
3020 In this environment, entrants have struggled and consumers have been deprived of the benefits of competition. CNOC members want to enter the market for mobile wireless services in order to serve consumers better, but they are unable to do so due to the tremendous barriers to entry. These barriers include the prohibitive cost of spectrum and the unwillingness of vertically-integrated incumbents to provide mobile wireless services to their competitors on a reasonable wholesale basis.
3021 For their part, Canadians are increasingly consuming telecommunications services on both wireline and wireless platforms in a complementary manner. They expect to be able to purchase bundles of wireless and wireline services from their TSPs. This is something that the incumbents can offer today and competitors cannot.
3022 In order for consumers to take full advantage of the choice, low prices and other benefits that only competition can bring, the situation needs to change.
3023 In the balance of this presentation we will be asking you to be the engines of that change and we will describe the ways in which we think that you can accomplish that.
3024 More specifically, we are asking you to require the incumbents to provide the following mandated wholesale services; first and foremost mandated services that will enable competitors to operate as full MVNOs, as well as roaming services and tower and site sharing services. We will deal with each request in turn and then discuss some common principles that we think should apply in all three cases.
3025 However, before doing so, I would just like to remind the Commission that in our intervention in this proceeding we demonstrated how all of these services meet the Commission's essential facility test whether as articulated in Telecom Decision 2008-17 or, as we have proposed, to amend it in the wireline wholesale proceeding and how none of them qualify for forbearance pursuant to the framework articulated in Telecom Decision 94-19.
3027 MR. STEIN: Thank you Bill.
3028 I would like to start by outlining CNOC's proposal for a full MVNO solution.
3029 A mobile virtual network operator, or MVNO, is an entity that provides mobile communication services, sells subscriptions, and bills customers under its own brand but does not necessarily have its own spectrum licence. A full MVNO invests in, builds and operates its own backbone network in addition to securing interconnection agreements with other carriers to terminate traffic.
3030 A carrier of this type must also deploy a variety of facilities including its own switches and servers in order to interconnect with traditional mobile network operators, or MNOs. However, the MVNO does not have to incur the prohibitive cost of acquiring scarce spectrum before it can operate, removing one of the most significant barriers to entry.
3031 The full MVNO option requires significant capital investment of $12 million to $15 million. It also constitutes an important rung on the ladder of investment in wireless networks. This option provides an MVNO the flexibility to invest in available spectrum where there is sufficient density to warrant such an investment.
3032 MVNOs can also add significant value and innovation in retail services in the market. Examples of this include wireless services tightly integrated with business fixed lines, borderless networking, robust call screening services, and other services our industry has yet to contemplate.
3033 A full MVNO operating under an appropriate regulatory regime must have the ability to:
3034 (1) Launch services and handsets independently of MNOs;
3035 (2) Select the best alternative access network, enabling MVNOs to link to several MNOs so that they are not tied to exclusive arrangements;
3036 (3) Issue their own SIM cards, allowing MVNOs to provision their own customers, protect their privacy and competitively sensitive information;
3037 (4) Obtain interconnection rights, and establish independent international roaming agreements; and,
3038 (5) Build a network inlay, enabling MVNOs to provide services to customers using alternatives to leveraging MNO networks, such as WiFi, licensed spectrum or other new technologies as they become available.
3039 Implementing a full MVNO model is not onerous and is consistent with what is already being done in the wireline world. The capabilities for MVNO deployment are all standards-based. These standards are developed by the GSM Association (or GSMA), a body to which all of the incumbent Canadian MNOs belong. Full MVNO models have also been developed in many countries around the world. It is therefore feasible to have a regulated MVNO model in Canada.
3040 Interconnection arrangements between MNOs and MVNOs will have to be developed, but the standards already employed by MNOs to interconnect with each other can be used for interconnecting MVNOs to MNOs.
3041 From a tariffing perspective, we believe that rates for the services required to enable full MVNOs should be regulated. For traditional GSM networks, we propose to have MVNO voice services charged on a per-minute basis, SMS on a bill and keep basis and data using a capacity-based billing (or CBB) model.
3042 As wireless networks move towards VoLTE implementations, all types of traffic will present as IP-based data, and hence the CBB model would be an appropriate manner of charging for that traffic.
3043 MVNOs must be able to obtain numbering resources, including Mobile Network Codes, directly from the Canadian Numbering Administrator.
3044 Just as mandated wholesale services supporting a full MVNO are essential, so too are mandated wholesale roaming services at regulated rates.
3045 Such services are essential to support those wireless carriers that wish to combine MVNO operations with the purchase of spectrum in selected areas or whose business models may consist of operating as full MNOs throughout their operating territories. The government's move to cap domestic wholesale roaming rates for now is ample evidence of the need for the Commission to implement this type of regulatory measure.
3046 In order to ensure that incumbent MNOs do not unduly discriminate against new entrants, we also urge the Commission to order the incumbents to provide seamless roaming on a ubiquitous basis.
3047 In those cases where new entrants do deploy their own spectrum, they will also need tower and site sharing services. We are asking the Commission to require the incumbent MNOs to provide such services on a mandated basis.
3048 In all of the cases where we are requesting the regulation of rates, we believe that those rates should be based on Phase II costs plus an appropriate, fair and consistent mark-up.
3049 It will also be critical for the Commission to check the incentives and ability of incumbents to discriminate on a non-price basis against their competitors. For this reason, we are advocating the application of equivalence of input, or EOI, principles to the tariffs for wholesale mobile wireless services.
3050 EOI means that a carrier controlling an essential facility used to provide both retail and wholesale services must treat its retail operations and wholesale customers equally with respect to:
3051 - service offerings;
3052 - timescales;
3053 - terms and conditions, including price and service levels;
3054 - use of systems and processes; and
3055 - commercial information about such products and services.
3056 In other words, EOI is simply a practical manner for the Commission to ensure that incumbents do not unduly discriminate against their competitors. EOI is applied for that purpose in a number of other countries.
3057 For example, the application of EOI principles to wholesale tower and site sharing services would require an incumbent MNO to treat its own retail operations and its competitors' in the same manner with respect to such matters as engineering and construction standards and processes, availability of spare capacity and the positioning of antennas on towers.
3058 To reap the full benefits of an EOI regime, systemic oversight tools should be developed and applied rigorously by the Commission. These tools typically include:
3059 - mechanisms for compliance monitoring -- based on a set of KPIs, key performance indicators;
3060 - service level agreements;
3061 - service level guarantees;
3062 - transparent reporting;
3063 - legal commitments by incumbent carriers; and
3064 - appropriate incentives for adherence to the principles of EOI.
3065 In addition, compliance with EOI principles should be verifiable.
3066 We also note that the Commission intends to conduct a proceeding with respect to wholesale competitor quality of service indicators. We are asking the Commission to ensure that the review also includes wholesale wireless services.
3067 Finally, we believe that there is considerable urgency in implementing the wholesale regime that we are advocating in order to bring the benefits of greater competition to consumers. For this reason, we would ask the Commission to implement our recommendations as soon as possible and, in any event, within one year of the date that it issues a regulatory policy in this proceeding. We recognize that a follow-up proceeding and related CISC activities will be required to give effect to its wholesale mobile wireless regulatory policy.
3068 Before concluding, we would like to thank the Commission for conducting two wireless proceedings of its own motion and recently prohibiting exclusivity provisions in wholesale roaming agreements. We now urge the Commission to continue protecting consumer interests by adopting the recommendations that CNOC is making in this proceeding.
3069 This concludes our presentation and we would be pleased to respond to the Commission's questions.
3070 THE CHAIRPERSON: Thank you very much. The Vice-Chair of Telecom will start us off. Thanks.
3071 COMMISSIONER MENZIES: Thank you.
3072 Just so we have the framework, and I honestly can't recall exactly what was in your written but I think you had some reference to it, but could you repeat for us what your definition is of the product market here and your definition of the markets we're dealing with?
3073 MR. TACIT: From a wholesale perspective?
3074 COMMISSIONER MENZIES: The product that we're talking about.
3075 MR. TACIT: Yes.
3076 COMMISSIONER MENZIES: The wholesale perspective.
3077 MR. TACIT: Yes. So, from a wholesale perspective we've been concerned with roaming, tower sharing, tower access and also the bundle of services that are required to enable an operator to be a full MVNO.
3078 COMMISSIONER MENZIES: Right. So the carriage of all mobile services is what we're talking about?
3079 MR. TACIT: Yes, all mobile wireless services.
3080 COMMISSIONER MENZIES: Okay. And the geographic market?
3081 MR. TACIT: The geographic market can sometimes be national because there are national roaming, for example, markets. They can also be regional. We've chosen for administrative simplicity to consider them along provincial boundaries, except for the territorial ones, which we've combined into one market. We recognize that may be somewhat imperfect and you might need some greater granularity in some cases but, generally speaking, we've tried to balance the complexity of going through the analysis and applying the test with some sort of administrative simplicity by choosing those areas.
3082 COMMISSIONER MENZIES: In your tables in Appendix A, you illustrate how market share by new entrants remains small. It is small but it is alive, so it could be viewed by others that there is competitive activity within the incumbent framework. But your case is that market power exists?
3083 MR. TACIT: Correct. We're not saying there's zero competition. We've never said it's a monopoly, but we are saying that the incumbents are able to collectively exercise market power in both wholesale and retail markets, which justifies regulatory intervention.
3084 COMMISSIONER MENZIES: Right. Is the issue, in your view, primarily because some companies with pure play have historically struggled to enter the market, whereas some other companies that have multiple platforms to present to consumers as options, such as, say, Eastlink and Videotron, while they do obviously share your point of view about market power, do seem to be surviving and engaging customers and competing within the wireless market?
3085 MR. TACIT: Well, I think the problem exists regardless of, you know, what new entrants -- how they want to structure themselves and what they want to provide. I guess we're starting with the point that we believe there's a competitive problem or lack of sufficient competition due to this market power situation I described.
3086 So starting from that perspective, I guess it really doesn't matter if some of the competitors want to operate as multiplatform or single platform. Certainly, our members' perspective is that we're trying to enter the wireless market. So clearly, there's keen interest on our part to enter from a multiplatform perspective, if I understood your question right.
3087 COMMISSIONER MENZIES: Yeah. Because most of your members would have an existing platform now from which, for instance, a small ISP can offer voice and Internet --
3088 MR. TACIT: Yeah. Mr. Sandiford --
3089 COMMISSIONER MENZIES: -- and this would give them mobile access and make them more competitive overall in the market, in the broader market, not just the relatively narrow one we're talking about.
3090 MR. SANDIFORD: Yeah. A lot of our members today are already offering double play or in some case triple play services. As you're aware, we participated in the hearing a couple of weeks ago with regards to television. We have several members that are looking to enter those markets as well, and putting a proper framework in place would allow them to complete the bundle and compete and give consumers in Canada greater choice.
3091 COMMISSIONER MENZIES: Would you think in terms of the MVNOs that they would be -- their opportunities for success would be that much better when they're attached to companies that have additional features to them that they can bundle or would that be separate from just pure play MVNOs?
3092 MR. SANDIFORD: Yeah, I would think that it would seem logical that the more these innovative companies could have to offer to the subscribers by way of bundling that their chances of success would likely be much higher.
3093 MR. TACIT: And that's the reason we're also bundling our regulatory proceedings and engaging in a triple play and we'll be back here in November as well.
3094 COMMISSIONER MENZIES: Okay. You've covered two weeks ago and six weeks from now, so we'll stay here for now.
3095 Some of the evidence before us argues against -- or argues that the primary issue might be that the established players have locked up so much of that market that there's no opportunity to enter but also that they are blocking entry. Do you have any examples you can give us of any of your members who have attempted to launch MVNOs in any way and what they have experienced? Is there any evidence to go on that?
3096 MR. TACIT: We actually did file an interrogatory response on this and part of the information was filed in confidence. It was a response to a Cogeco interrogatory. But there were certainly at least a couple of examples of companies in response to a Cogeco one of 9 June 2014. There were a couple of examples. I'm not sure I can say much more on the public record about that.
3097 COMMISSIONER MENZIES: Well, can you tell us if rates were offered?
3098 MR. STEIN: Yes, there was discussion of rates. There was discussion of several things. A lot of details were worked out, but certainly in one case, as things progressed over time, it became more and more complicated. New restrictions were being brought to the forefront that hadn't existed before. Every time we were willing to accept the new restrictions, it seemed that there were just yet more gates popping up behind them. So while we tried, we certainly didn't succeed.
3099 COMMISSIONER MENZIES: Some of the new entrants have argued against a regulated rule for MVNOs. They can make their own arguments but I put it to you that it's already a different market for them to enter and new entrants need to have every -- to be able to exploit every market opportunity that there is and the existence of MVNOs would just confuse that and make it more difficult to get new entry. And some suggest that MVNOs just be left for next time or whatever that might be.
3100 MR. TACIT: Well, from an economic perspective and a policy perspective, I guess our view is that really the focus should be competition as a whole instead of individual competitors, and while we certainly wish the new entrants well and philosophically we're aligned with their efforts to bring in competition, the reality is that up until now the success of the framework that we have has been limited and some changes are required to be made.
3101 We actually think that we can actually help them as well because MVNO solutions provide opportunities to serve target niche markets, and guess what, that traffic has to go somewhere too. So some of those carriers may decide that they want some MVNO traffic themselves too to fill up their pipes if they're not getting sufficiently quick retail customers. So I'm not sure it's a win-lose proposition. I think the pie can actually grow for everyone.
3102 COMMISSIONER MENZIES: Can you just fill out our understanding of what those niche markets are that we're talking about? Give me three or four examples of what they would like.
3103 MR. STEIN: Niche markets that MVNOs may pursue? They may pursue communities of interest, they may take an ethnic-focused approach, they may take a business-focused approach. I know that we had cited a couple of examples of innovation. All of those may be the kinds of focuses.
3104 But I would also point out, not to sort of step away from the question, but our members have all had, to an extent, their successes in the markets they've chosen to go after and I don't see any reason to believe that the MVNO framework would create something very different. There would be small MVNOs and large MVNOs and so forth.
3105 COMMISSIONER MENZIES: Maybe just more broadly, are they demographic niche markets, are they geographic niche markets, are they --
3106 MR. STEIN: They might be some of both. I don't think it's one or the other. I think it's a combination thereof.
3107 COMMISSIONER MENZIES: And those are the types of markets that your members are working in now; is that what you were saying?
3108 MR. STEIN: M'hmm.
3109 COMMISSIONER MENZIES: Okay. But you're not going to tell me what they are?
3110 MR. TACIT: Well, we've said I guess in our introductory paragraph, one of them, in our oral presentation, we talked about complementary business lines and so on, complementary services to business lines. There are opportunities to serve, for example, ethnic markets. Some of the members already serve -- target their activities in particular to certain ethnic or demographic markets, and being able to do that on a multiplatform basis would certainly be helpful.
3111 There are other more technology-based innovations that could occur, cross-border or borderless roaming arrangements and so on. So there are a whole host of things. If you would like us to provide a more comprehensive list, we can undertake to do that.
3112 COMMISSIONER MENZIES: I'm trying to get -- it's not so much even a list of the market opportunities that I'm trying to get you to give away. I'm just trying to get some sense of the Canadians that are being defined as underserved now or have specific needs that the system might not be serving, which your proposal suggests would serve them.
3113 MR. TACIT: I think part of the beauty of competition is that service providers can sometimes create market opportunities that consumers themselves don't even know exist until you present them with the opportunity because you're trying to capture their attention.
3114 So there will be demographic-based ones, there will be technologically based ones, there will be service- and pricing-based innovations, and there will be all sorts of new things that come up just because you've got new players in the marketplace that are hungry and want to develop new ways of doing business and serving consumers better.
3115 COMMISSIONER MENZIES: If a full MVNO framework was established as you suggest, what would be the impact, if any, on the desirability of purchasing spectrum? For instance, why would I want to be WIND or Eastlink or Videotron when I could be Cogeco?
3116 MR. TACIT: Well, I guess part of the problem we have is -- again, I come back to what is the principle that we're trying to pursue and to me it's about promoting competition. The purchase of spectrum doesn't occur in a vacuum. It's not an end onto itself, it's a means, and the reality is that it's a scarce public resource. It has to be rationed by definition.
3117 There are all sorts of projections about how, you know, we're running out of it. So using it more efficiently seems to us to actually be a good thing by encouraging more efficient use by the sharing of it. There's no question that there will be some players who want to continue on that path.
3118 There will be other opportunities for MVNOs to migrate into being partial or full MNOs as well. We've described how, depending on customer density, MVNOs may want to actually purchase spectrum and become MNOs, whether on select geographic areas or broader areas. The upcoming 2,500-MHz auction provides opportunities, actually new opportunities, because the tiers in which the spectrum is going to be allocated are actually smaller, so it might actually be a nice way for MVNO and MNO activities to dovetail.
3119 So the reality is that we're really talking about more efficient, better use of spectrum that exists, which is scarce and running out, and doing that in a way that promotes competition.
3120 COMMISSIONER MENZIES: Some would argue that MVNOs would be of benefit only to large urban areas and wouldn't necessarily -- they might make a contribution to competition but wouldn't necessarily make a meaningful contribution to accessibility and build out into other areas of the country that are underserved right now. I would just like to give you the opportunity to respond to that.
3121 MR. STEIN: Well, if I've understood your question correctly, I don't think I would view it as only of value in urban areas. In fact, one of the situations that we see as very possible is that somebody may acquire some spectrum in the areas where they are currently dense, leverage an MVNO relationship to have their network reach into the less urban areas and to the most remote places that networks reach in the country and still be able to serve customers that way. While they may have started out or may frequent that dense urban area where that MVNO also had acquired some spectrum, they can seamlessly use it in the other parts of the country.
3122 Similarly, that MVNO can attract customers from a very broad area, and once they find that they do, through brand and so forth that they do attract a number of customers in an area, then they can seek and acquire spectrum to lower their cost structure and so forth.
3123 So I really do see it as something that runs complementary to one another, not one or the other.
3124 COMMISSIONER MENZIES: Okay. Now, take me through the rungs on the ladder of investment that has been presented as this being the opportunity for the build. We've had the discussions about Netherlands, Australia. I believe you make reference to them. This morning we had a couple of folks sort of -- well, not sort of -- give a strong critique on that and say that that isn't really what you say it is.
3125 So this is your opportunity to take us through and describe to us every rung on that ladder of investment and how it contributes to something that if MVNOs are a seedling that they will grow into your full ladder.
3126 MR. TACIT: Well, first of all, I think --
3127 COMMISSIONER MENZIES: Sorry, I mixed metaphors.
3128 MR. TACIT: Yes, Vice-Chair.
3129 So I think the first thing we want to clarify is that, you know, we can't give guarantees as to how a particular market will develop and who will become a full MVNO, whether they will become a full MVNO.
3130 What we do observe right now is that under the current arrangement it is virtually -- it's extremely difficult to become an MVNO and be successful and make a difference in the competitive marketplace. So what we're saying is we need something to change to at least create that possibility.
3131 The way we see this evolving is that once MVNOs deploy capital, buy their own switches, buy their own routers and servers, interconnect facilities to MNOs and so on, now they're invested in networks.
3132 So if opportunities come up based on economic density in various markets, if the right spectrum auction conditions develop -- for example, we talked about the smaller tiers in the upcoming 2,500 MHz and so on -- as these factors materialize, there will be a real opportunity for them to acquire spectrum and to be partial or complete MNOs.
3133 I'm not going to make a guarantee that we're going to have four, five, six, seven pure MNOs if you implement an MVNO wholesale market, but what I can say is that we're not likely to have any more if you don't.
3134 So it's a gradual step-by-step process, it creates an opportunity, and it's up to people, based on their business cases and capital, to be able to take advantage of that. But there is an opportunity and what we have observed is that elsewhere in the world it has actually happened, which gives us some hope and confidence that it can happen in Canada as well.
3135 COMMISSIONER MENZIES: Can you take me through your comments regarding the policy directive? I found them interesting. As you know, the directive's primary impact initially was forbearance and you're arguing its need for de-forbearance. In terms of that, would you suggest it be used as an inspiration for some sort of competitor test in areas?
3136 MR. TACIT: Well, what we're saying is two things.
3137 First of all, I guess the first message is that the policy direction is a flexible instrument, and while it cautions against excessive regulation I think it's also quite clear that where there is an actual market failure or need for regulation that you're completely empowered and in fact encouraged to act.
3138 And there are a number of places where that occurs, you know, for example, ensuring that regulatory measures are symmetrical and competitively neutral. So if we're talking about the ability of new entrants to compete, which is what competitive neutrality is all about, then to me the policy direction actually takes you in that direction if you agree with us that there is market failure that needs to be addressed.
3139 So it's a matter of degree. First of all, there has to be a market failure or some other public policy reason for regulation, and then the degree or the measure that you adopt has to be proportionate to the deficiency that regulation has to overcome and address.
3140 So we don't see any barrier to that in the policy direction at all. You know, if you were to overregulate in a market that's working, then that would be a problem under the direction, but this market is far from that.
3141 COMMISSIONER MENZIES: Well, we've got some submissions here and as I'm sure you've heard some this morning, there is a strong argument put forward that that market as it is has developed very well over the years and serves a lot of Canadians and most of their needs are met in terms of that.
3142 And I am trying to get to the specific point at which you make the argument that that is somehow broken and needs to be fixed, sort of.
3143 What facts can you put in front of us that counter the arguments made, for instance, this morning?
3144 MR. TACIT: Sure. Well, in part 2 of our intervention we went through the various indicators that we believe are evidence of market failure, including such things as market concentration, excessive economic and accounting profits in the industry and some of the other factors that we also mentioned again in our oral presentation today.
3145 So, to us, those are all indicators. As we all know, you know, the regulatory business is a rather imprecise thing and we have to try and look at all the indicators to divine out of that a meaning.
3146 But what we do see is that there isn't as much choice and that Canadians are overpaying for mobile wireless services.
3147 We see, for example, situations where in the same day, you know, one of the incumbents raises prices by $5.00, the other two follow. To me, I mean, they're fairly watching each other's activities and matching prices, but they're certainly not trying to beat them.
3148 The reality is they all have roughly a third of the market and they have been in that situation for some time and under those conditions economic theory will tell you that when you have a small number of players, each roughly having most of the pie, they tend to get comfortable and there is a likelihood that they will not try to really exert themselves out of their comfort zone to compete very vigorously.
3149 COMMISSIONER MENZIES: So, if we were to measure it that way by looking in market presence and we look at the "Big 3" as they are known and with 90 percent market share, is there -- do you have a concept of what that market share pie would look like in a healthier, in what your view would be a healthier market?
3150 What share would MVNOs represent, for instance, and what share would --
3151 MR. TACIT: Well, it's hard to say because, again, it's a process and so, what I caution against is this: We are at such an early stage of this exercise. In other words, from our perspective we believe we have identified a serious problem that needs to be addressed.
3152 I think the way to deal with this is the way that we have dealt with it in the wireline world, and that is, let's agree that there are a number of essential services, if we want to use that terminology that we need to regulate, let's see how that market actually develops over two, three, four years and then, think about, you know, what are the appropriate types of forbearance tests that might be appropriate.
3153 It's kind of hard to think about what the forbearance test is going to be today before we have even regulated. And the reason I caution that is really a practical one.
3154 You know, we can do a detailed 94-19 type of analysis of a market at any given point in time and know what that looks like at that point in time.
3155 The reality is that forbearance tests that the Commission adopts from time to time are really proxies for that exercise and the reason we need them is because it's really onerous to go through the 94-19 analysis all the time. So we need some sort of proxies.
3156 But I think it's dangerous to start developing those proxies before we have had some experience in the new environment to see how the market develops because if you do that, you run the risk of getting those wrong and either forbearing too soon or forbearing too late.
3157 So, we know that proxies are going to be imperfect by definition, they are a substitute for something that's a lot more detailed and precise. So, we know there is already a margin of error built into it.
3158 We think we can reduce that margin of error by getting some experience under our belt in that market, in the regulated environment, and then we will see how it develops.
3159 So, it may not come down purely to market share is what I am trying to say. There may be other aspects.
3160 COMMISSIONER MENZIES: Okay, I get that. And there is nothing really wrong with what you've said, except what I was trying to get at is the idea that we get presented before us, I mean, a lot, but often it gets portrayed as well. Here is what the market share pie looks like and this is bad. Right.
3161 So, but what we don't get is something that says, here is what the market share looks like and this would be good. Right.
3162 I mean, show us what good looks like. If you want us to get to good in your view, you kind of have to give us a little road map, other than it starts here. It's kind of like having a monopoly board with only one square on it and it says "start". Right?
3163 MR. TACIT: No. I understand what you are saying. So, I would say on a principle level, we certainly want to see bigger market segmentation, but not such a tight oligopoly. In other words, you know, more than three or four players to start with.
3164 I know numbers in end of themselves are not indicative of the health of a market, but the chances for a market power to be exercised increases with the fewer number of players that you have, that certainly is true.
3165 So, while having a certain number may not be a complete condition, we think it's kind of a necessary one. And then after that, you start looking at market shares and seeing how successful competition is by virtue of what kind of inroads. But I think you also have to look at the kind of "rivalrous" behaviour that evolves.
3166 For example, are we going to get a situation like in the U.S. where, you know, sort of the Maverick newer players who are hungrier to gain market share voluntarily start providing wholesale services of their own? That's going to start giving you an indication.
3167 So, I am afraid I can't do better than that in the sense of giving you like a complete answer based on a number. But what I can tell you is that it sure isn't 90, it involves more than three, perhaps even more than four players, and it involves some evidence of "rivalrous" behaviour and capability to serve the market on the part of the new players.
3168 COMMISSIONER MENZIES: What did you think of the idea of -- that was presented yesterday regarding sunset on any new regulation in the --
3169 MR. TACIT: I am really glad you ask that question because that really bothered me and the reason it bothered me is I have been around these parts for a while and I remember when we did the local competition proceedings, and one of the features of that decision was that near essential facilities would be subject to a five-year sunset clause, and in Order 2001, I think it was 184, the Commission had to reverse that because the timing wasn't right.
3170 I think -- I think time frames are simply too arbitrary. I think you have to, again, do that, either do that market analysis or come up at a later point in time with a proxy forbearance test that you can put the data through the test and see which way you come out.
3171 I think if you do it any other way it's really dangerous.
3172 COMMISSIONER MENZIES: Okay, because we do have a, you know, a policy directive that says that we should only regulate where we need to regulate and so, therefore, there should be a point at which we would have a look to find out if we regulated, if we are regulating in order to create the market forces that deregulation didn't create, which is essentially the argument, at what point do we decide that the market forces are healthy again.
3173 MR. TACIT: And I agree with you. All I am saying is that maybe a passage of time is too arbitrary as a way of gauging that, that that's not the right measure. That's all I am saying.
3174 COMMISSIONER MENZIES: Is there a measure that is right?
3175 MR. TACIT: Well, again, now we are getting into trying to, you know, to construct the forbearance test and I am back to what I have said before, which is you are going to have some indicators such as number of players market shares, "rivalrous" behaviour and ability to serve the market when it comes to new competitors.
3176 Those are some of the traditional things you would look at and I think you could probably fashion that forbearance test out of some of those things when the time is right.
3177 You know, we have been doing the same kind of exercise in the wireline proceeding as it goes along too now that -- But, you see, that market is more mature and we have seen how the wholesale market has developed.
3178 So, we have a lot more confidence in trying to make recommendations forbearance test in that market than we would at this stage in this market.
3179 COMMISSIONER MENZIES: I am going to read you a reasonably long sentence. It's an excerpt from Rogers and it's about competition hereto.
3180 In that paragraph 26 of Rogers May 15th intervention, they state:
3181 "The questions identified in 2014-76 imply a focus on assessment of competition in wholesale markets for purposes of determining the requirement for regulation of wholesale markets.
3182 However, the first question that must be asked and answered, any assessment of the requirement for a regulatory intervention in wholesale markets is whether the downstream retail market is competitive.
3183 Competition and wholesale markets is not a measure of the competitiveness of retail markets nor is it a necessary condition for competitive retail markets. In fact, there are numerous examples of highly competitive retail markets for which there is no upstream wholesale market at all, let alone a competitive upstream wholesale market."
3184 Bell and Telus have made similar, but not necessarily identical arguments.
3185 So, how should the state of competition in the retail market -- how should we be applying the state of competition in the retail market to our assessment of whether the wholesale market should be regulated?
3186 MR. TACIT: Well, if you look at the -- first of all, at the classic essential facilities test under Decision 2008-17, it gives you the linkage between the upstream and the downstream market and I am not going to repeat that. But basically, that's the linkage right there.
3187 So, yes, you have to see if the, you know, if the facility is needed in order to ensure that there isn't a substantial lessening or denial of competition in the downstream market and as we have said, we believe, based on a whole number of indicators, that retail markets in Canada and the mobile wireless industry are not sufficiently competitive.
3188 So, yes, wholesale regulation is a tool kit to provide relief when you have that situation. It is one of a number of different possible tool kits, the other is retail regulation.
3189 Another one which has already been attempted and, in our view, only partially succeeded to date, which is sort of the licensing condition approach that Industry Canada has taken.
3190 So, it's a remedy.
3191 It's not an end onto itself and we are not saying that wholesale regulation is an end onto itself. It's there to fix market failure in the retail markets.
3192 COMMISSIONER MENZIES: In terms of tower and site sharing, we have had a number of different submissions that suggest we take an oversight rule.
3193 Everything from approving every tower and site sharing agreement to requiring agreements or periodic reports summarizing the agreements to be filed for information purposes only, Videotron proposed that the Commission approve a master template tower and site sharing agreement containing standard terms, conditions and procedures that apply, et cetera.
3194 What are your views with respect to the suggested remedies?
3195 MR. TACIT: Well, Vice Chair, this feeds into exactly, you know, what we believe philosophically we should be moving to in terms of a regulatory framework in Canada, which is more towards an equivalence of input regime. And under that regime, what the Commission would probably end up doing is more along the template side of the house.
3196 And the reason I say that is because what you would want to do is articulate the specific requirements associated with access, that are the non-price features -- let's leave the pricing aside for the moment -- so that you can prevent non-price discrimination.
3197 And the way you do that is to make sure that the incumbents have to treat their wholesale customers the way they treat their own retail operations.
3198 And so, the Commission is well-equipped to ask them, you know, when it comes to, you know, you needing to provision X or Y, what's your process for doing that? How do you -- whatever the system you use?
3199 And to the extent that that can be documented on a one-time basis, you don't need to look at every agreement afterwards.
3200 There is some initial work in terms of documenting the standards and the processes, the engineering construction, time lines, all of those things and then applying them. And yes, it would certainly be good in accordance with legal commitments aspect of EOI principles, if that could be reduced to an actual agreement that incumbents would have to sign with those who want access.
3201 COMMISSIONER MENZIES: So that would be through what you have suggested on your 15th May Mandated Tariff Service for access?
3202 MR. TACIT: Yes, that's right. And that mandated tariff service could be supplemented by an agreement that has standards, terms and conditions approved by the Commission.
3203 I mean the precise vehicle, whether it's all in the tariff or partly in the tariff and partly in a contract, you know. I am not -- you know, it doesn't really matter as long as we get precision enough that we know what the obligations are and that they are verifiable and "auditable".
3204 COMMISSIONER MENZIES: Right. And so, the incumbents have argued pretty strongly that's -- or put forward their arguments in a strong fashion, that these arrangements are too complex to be able to deal with them, that sort of basis.
3205 So, I would like to get your response to that having -- you probably having seen their arguments?
3206 MR. TACIT: Well, you know, what's interesting about that is when -- is the dichotomy that was pointed out this morning when Telus was on the stand between -- how they can simplify things that happen to be in their commercial interests, but not necessarily other things.
3207 And I think -- I think that's part of the issue, as the Commission has to create some sort of an incentive for them to simplify those things as much as possible.
3208 And one of the ways of doing that is inquiring perhaps very deeply initially into how they do things for themselves and why they do them for themselves and basically make sure that others are not treated in an inferior manner to that.
3209 The more that that can be reduced to a set of principles and guidelines and rules that everybody can follow and observe, the less of that is going to happen.
3210 COMMISSIONER MENZIES: In Videotron and Eastlink both suggested that something be created based on the costing principles that apply to support structure services. What are your thoughts on that?
3211 MR. TACIT: In terms of the pricing of it, there is some appeal to that. You know, we have thought about a phase to kind of approach to all of the tariff services that we are seeking the Commission to create, but when it comes to towers, there certainly is a lot of similarity to support structure.
3212 So, before making an unequivocal commitment to that, I would like to take that away and think about it a little bit but -- and we will answer that perhaps more fully in our final argument, but, you know, there is some logic to that.
3213 COMMISSIONER MENZIES: Just in terms of clarity, you submitted that the markets and this goes to your 15th of May, that the markets for tower and site sharing services are both national and regional.
3214 Can you define what you mean by "regional"?
3215 MR. TACIT: Well, again for administrative simplicity, we were thinking of provinces or territories. I know that -- I know that each tower is a specific site, but the reality is that in order to make a network and a region work, you know you need so many towers deployed in so many places.
3216 So, you can't to that extent sort of aggregate and look at them together and say, if I want to operate in those areas, and I need access, then I need access in that same footprint. So, all of those belong to that market notionally.
3217 And again, it's a way to try and avoid having to deal with each tower as a separate market which I think would be very unwieldy to do.
3218 COMMISSIONER MENZIES: I am still quite unclear on that, what you mean by "region".
3219 MR. TACIT: Sorry. Well, it's what I have said in answer to an earlier question, which would be largely provincial or in the case of the territories, the three of them grouped together.
3220 COMMISSIONER MENZIES: Okay. So, the Atlantic would be still provincial, for instance?
3221 MR. TACIT: Each one of them, yes, would be.
3222 COMMISSIONER MENZIES: Okay Thanks. So, I want to get to the diagram that we have used previously, that I think you're familiar with, on page 12 of the Lemay-Yates Report submitted by COGECO.
3223 MR. TACIT: Please give me a moment to bring that up.
3224 COMMISSIONER MENZIES: We can provide you with a copy if you don't have one.
3225 MR. TACIT: Yes. That would be helpful.
3226 COMMISSIONER MENZIES: So, as you look at it, you'll see that there is quite a contrast between full MVNO at the one end to peer reseller at the other.
3227 MR. TACIT: Yes.
3228 COMMISSIONER MENZIES: So, for ease of reference I am going to refer to these two extremes: full MVNO versus resellers. Okay?
3229 So, to the extent your answers might be different if we were talking about a type of MVNO that fell somewhere in between these extremes, please feel free to point that out and address that as well in terms of the questions that I have.
3230 MR. TACIT: Okay. We will do our best, sure.
3231 COMMISSIONER MENZIES: Okay. So MVNO access is not mandated in the U.S. and Canada, but MVNOs have a much stronger presence in the U.S. What is it about the Canadian market that is different? Is the limited presence of MVNOs in Canada evidence that the market can't support them?
3232 MR. TACIT: No, I don't think so. I think there are a couple of differences. One is that it's a much smaller market and so, even the largest competitors that are non-incumbents are much smaller than the so-called smaller competitors in the U.S.
3233 You also in the U.S. do have actually four MNOs and the two that have the smaller shares are hungry as I've said earlier and that sends commercial behaviour to try and get more traffic on their networks and to try and make money of that capacity that they have.
3234 So, to the extent that they can't fill those pipes purely with retail traffic, they go for wholesale traffic. They don't have the same vested interest in protecting a roughly sort of stable equal market share situation like we have in Canada.
3235 COMMISSIONER MENZIES: If MVNO access were to be mandated by us, which carriers would be required to offer MVNO access?
3236 MR. TACIT: Well, in our evidence, we have really focused on the three national incumbents and the two provincial regional incumbents.
3237 COMMISSIONER MENZIES: Can you name names?
3238 MR. TACIT: Sure. Bell Mobility, Telus, Rogers, Sasktel and MTS.
3239 COMMISSIONER MENZIES: Thank you. What's your response to the argument made by Telus this morning that network congestion is an issue that they face and they think MVNO mandated access would create further problems?
3240 MR. TACIT: Well, really all they are saying is that if there are more customers, they are going to be out of spectrum. In fact, I think they said this morning they are out of RAN now. If that were -- I mean only they can tell you if they are out of spectrum in that sense.
3241 But I don't see how adding the capability for an MVNO, a full MVNO, increases that or makes that difficult, other than it adds customers to the mix. But the same would happen on the other networks too.
3242 So, I am not sure I follow their logic there and I did listen all the way through trying to.
3243 COMMISSIONER MENZIES: Also, the incumbents make the argument that regulation including this would disincent network build out and investment and I would like to hear your argument on that too, as to how this would not be a net loss in terms of build and investment?
3244 MR. TACIT: Well, you know, we have heard this every time that regulated access has been sought to incumbent networks. We heard it in speed-matching, and that fear hasn't really materialized. In fact, they not only continue to roll out fibre to the node, but there are, you know, millions of subscribers now connected via fibre to the premises.
3245 So, you know, every time the spectre of regulated access is raised, this is the comeback. We don't think it's really credible for the same reason we didn't think it was credible in the wireline world.
3246 The reality is that the three of them, from a network-evolution perspective, have to keep up with each other. None of them can afford to fall behind, and that will be even more the case if you add more competitors. So we honestly don't believe that that's a credible outcome.
3247 COMMISSIONER MENZIES: One of the things that gets argued in terms of why competition is good isn't just because competition is good, it's because of what it provides. It adds risk and it adds innovation to an economy, which are considered to be good things which advance it, and create new technologies and new all kinds of practices and services and efficiencies.
3248 So what is it that a mandated MVNO structure would bring to that game that doesn't already exist?
3249 MR. TACIT: Well, I think we talked about that a little earlier in your questioning when we talked about the kinds of market niches that MVNOs could serve. I think there are opportunities for new types of innovative services, such as the ones we described, and there are others. And, you know, we can provide you some more information on that in confidence if you'd like, but there are such opportunities.
3250 What we do have to caution, though, is --
3251 COMMISSIONER MENZIES: Actually, before I forget --
3252 MR. TACIT: Yeah.
3253 COMMISSIONER MENZIES: -- I would like that.
3254 MR. TACIT: Okay.
3255 COMMISSIONER MENZIES: So if you could undertake to that by next --
3256 MR. TACIT: We will do that.
3257 COMMISSIONER MENZIES: -- by October 9th?
3258 MR. TACIT: Yes.
3259 COMMISSIONER MENZIES: Thanks.
3260 MR. TACIT: But in addition to that, we do have to caution that, you know, a lot of the core technological innovation is actually driven by the suppliers of the network equipment that supplies everybody. These are global companies, that supply a lot of players in the market, and so, to that extent, that innovation is actually going to be driven by what carriers ask for as features.
3261 It seems to me that the more carriers you have trying to innovate on a service basis, the more they're going to be asking for new features, and different applications to be supported on those platforms, and that's going to help, actually.
3262 COMMISSIONER MENZIES: So what would prevent the best or -- I'm not saying there's anything wrong with it, but it might not change the market a lot -- the best innovator to pop up, grab a couple of points of market share perhaps with something new and dynamic and wonderful, and it costs him $15 million or $20 million to launch this, and then he just sells it for $150 million, $200 million, or something like that -- I'm just making this up as I go along --
3263 MR. STEIN: It was sounding pretty good, though.
3264 COMMISSIONER MENZIES: -- to one of the big companies and it just becomes absorbed in the system again?
3265 MR. STEIN: I don't think there's anything in particular prevents that. But even in that case -- what you just said is that somebody comes along, innovates, creates something new, does make an investment, and, ultimately, you said that they sold that -- I assume that that innovation, or whatever it is that they created, or that value was of value to somebody, who then chose to buy that. That, by itself, didn't sound like a bad thing.
3266 COMMISSIONER MENZIES: No, I'm not saying it's a bad thing, it's just over -- at the end, it doesn't necessarily -- I mean it creates innovation and competition, and provides some buzz on the edge of industry in terms of that, it doesn't necessarily add to the volume of competitors and split the market shares in the end the way you're arguing that this framework should, particularly if it's mandated.
3267 MR. STEIN: So, first, we're talking about one fictitious player, and not all the others, so they're still around.
3268 And, two, somebody just bought that. So whoever bought that enterprise probably didn't do it so that they could take it out of the market, but so that they could invest further and see it thrive.
3269 So I would argue that that sounds like a really good start to something new and fresh.
3270 MR. TACIT: And in addition to that, if you have open market conditions, somebody else is going to be encouraged by that and come in behind with some other innovation.
3271 COMMISSIONER MENZIES: Okay.
3272 Just a couple more questions. One is on seamless roaming.
3273 You're asking that that be mandated, and we heard this morning that there's two parties need to be involved in that tango. I took it from your comments here that you just wanted that mandated to -- that should just apply to incumbents.
3274 Why just incumbents and not everyone?
3275 MR. TACIT: Well, when we wrote our evidence -- or our intervention, we were really focused on solving the competitive problem that we identified, which is really caused by the reluctance and unwillingness of the incumbents to provide services. So, really, we focused all of our remedies on them, and that's where we think the mandated part should focus at this point in time.
3276 COMMISSIONER MENZIES: You also suggested access to handsets, and I just want to clarify there.
3277 Are you asking us to regulate, mandate access to handsets?
3278 MR. STEIN: No.
3279 To clarify, we're familiar with some cases where, at the -- again, using the diagram you directed us to, in the resale MVNO type of MVNO, where the MNO says, "Here are the exact four handsets you're allowed to use, but ignore our website, where we have eight others, the newest ones, the exciting ones the customers seek, but here are the few that you're allowed to sell," we're not suggesting anything other than that those MNOs in this regulated environment not be allowed to restrict which handsets are used on their networks.
3280 When somebody roams from a far-off country, they roam into Canada and they roam on whichever network, there's not a clear indication of which handset there would be and so forth. We're just suggesting that there shouldn't be special restrictions placed on handsets, that MVNOs could choose whichever handsets they're interested in, arrange those handset with the handset manufacturers, and bring them in. That's all.
3281 COMMISSIONER MENZIES: Thank you. Those are all my questions.
3282 Thank you.
3283 THE CHAIRPERSON: Thank you.
3284 Commission Molnar, please.
3285 COMMISSIONER MOLNAR: Thanks.
3286 TELUS this morning made the statement that the wholesale market for wireless in Canada is working properly with over 25 operator-owned and independently owned MVNOs in the market. I don't really want to talk about the operator-owned, but there's some number of independently owned. That's their position.
3287 So what I'd like to know from you folks -- and you have 34 members with an interest in getting into the market -- can you tell me the experience of those that you know about, those that have companies here -- or, you know, Bill, to the extent you can speak to others, what their experience has been dealing with these companies, both the incumbents and the new entrants, in trying to seek a commercial arrangement, MVNO arrangement?
3288 MR. STEIN: We've spoken to our members, and we have filed some comments in the interrogatories which go into some more detail on that, but what I will say is that the experience seems pretty consistent: a lack of interest on the part of the MNOs, first, to do anything to the left side of the diagram. A full MVNO is completely off the table.
3289 At a resale MVNO, where there is some branding and so forth, it's not as bad, but certainly pretty close, up to and including the example I used earlier, where every time you feel like you're getting a little closer there's a new barrier that emerges. Then it's, "Sorry, it turns out we can't do it the way we thought we would, the rate is going to be different" or "Well, you can, but it can't be in that geography" or "It can be in that geography, just not in the big cities" or "Well, it can be in the big cities, but not with phone numbers."
3290 So it just becomes -- it's made increasingly difficult, and we've heard this from a number of our members.
3291 COMMISSIONER MOLNAR: And do you have member who today are reselling in some way?
3292 MR. STEIN: We have one or two.
3293 MR. TACIT: Yeah, I think that's correct.
3294 COMMISSIONER MOLNAR: One might think perhaps there was even a ladder in the scale or resale, right: as you gain more customers, you become a more valuable wholesale customer to negotiate.
3295 Like, I'm just wondering.
3296 And have you had discussion with new entrants? You made the point that new entrants, smaller entrants, are hungry. They have a lot of spectrum and not a lot of customers. Have you had those discussions?
3297 MR. TACIT: Well, I'm not sure what the members have done on that. As CNOC, we'd have to go canvas them to see what they've done.
3298 COMMISSIONER MOLNAR: Right.
3299 MR. TACIT: What I do know that is that, you know, when we sort of put out general inquiries about this, what came back is, you know, "We haven't been able to get an agreement with anybody."
3300 COMMISSIONER MOLNAR: M'hmm.
3301 MR. TACIT: I don't know if, in dealing with the new entrants, some of the problem is the more limited coverage, some of the other technical, you know, barrier that may exist there. I'm not sure.
3302 I don't know if you'd like us to look into that more or not.
3303 COMMISSIONER MOLNAR: Yeah. If you haven't replied -- and I will admit I have not read every interrogatory response -- so if you haven't replied I would be very interested.
3304 MR. TACIT: On the new entrant question specifically?
3305 COMMISSIONER MOLNAR: Well, both, but --
3306 MR. TACIT: Okay.
3307 COMMISSIONER MOLNAR: -- make sure that, you know, all discussions seeking a commercial arrangement with new entrants are also disclosed.
3308 MR. TACIT: Okay.
3309 COMMISSIONER MOLNAR: And I will just tell you, I mean I'm starting from the perspective that we should be the last avenue and not the first avenue, and so I'd like you to provide the evidence that it cannot be done without regulatory intervention.
3310 MR. TACIT: Understood.
3311 COMMISSIONER MOLNAR: Okay. Thank you.
3312 MR. TACIT: Thanks.
3313 THE CHAIRPERSON: Monsieur le vice-président.
3314 COMMISSIONER PENTEFOUNTAS: Merci beaucoup. Thank you.
3315 Just briefly, I know my colleague, the Vice-chair of Telecom, broached these subjects.
3316 But on the spectrum-to-market-share ratio that was raised by TELUS this morning, their number was: we've got 19 per cent of spectrum and 30 per cent of the market, or 31. And if you look at Bell's numbers, they're very similar. They're very close to capacity if you were to make that ratio apply. Perhaps the only one that has any kind of leeway might be Rogers.
3317 Is there a problem with that ratio in their contention that there just isn't any capacity to spare?
3318 MR. TACIT: Honestly, I'm not technically qualified to answer that question. We can...
3319 I don't know how to answer that for them. I mean it's their networks, not ours. This is something, honestly, that you would have to ask them. But I'm not technically qualified, certainly, to respond.
3320 COMMISSIONER PENTEFOUNTAS: Well, they told us it mathematically doesn't work. They're maxed out.
3321 MR. STEIN: Well, I'm not sure.
3322 You do have to ask them, so speculating. But they do seem to still be selling their product. They do seem to still be running ads. They do seem to be still attracting new customers. They just don't want any of ours.
3323 And it's not like when you add MVNO you've go to go carve out a whole piece of spectrum and reserve this for that MVNO. It's all a mix. So it's not a situation where: oh, we've got three MVNOs, so that's the top 6 per cent of our amount of spectrum available. It's not like that at all.
3324 If they're still acquiring customers, why shouldn't they be allowed to be MVNO customers?
3325 COMMISSIONER PENTEFOUNTAS: Yeah.
3326 MR. STEIN: Speaking specifically to the example this morning.
3327 COMMISSIONER PENTEFOUNTAS: Okay.
3328 MR. SANDIFORD: To further my colleague's answer, and to be a little more blunt, it seems disingenuous to me that they would try to infer that they are out of spectrum while they are actively and aggressively trying to add more customers to their network.
3329 COMMISSIONER PENTEFOUNTAS: I don't think they tried to infer, I think they --
3330 MR. SANDIFORD: They did.
3331 COMMISSIONER PENTEFOUNTAS: -- they did, yeah --
3332 MR. SANDIFORD: Yes.
3333 COMMISSIONER PENTEFOUNTAS: -- if I understood them correctly. Okay.
3334 We also had three distinguished experts this morning, including, I think, a former chair of BEREC, explain to us that the MVNO regime in Europe has been a total and complete catastrophe, that the quality of the network is third-rate at this point. There have been all kinds of documents and studies to the effect that, you know, a 4G is maybe 2 or 3 per cent of the market, and the European market is basically working at a 2G clip.
3335 How would you respond to the alleged catastrophic result of the MVNO regime in Europe?
3336 MR. TACIT: Well, first of all, it's not nearly as catastrophic as they claim. There are certainly differences, but some of it is very contextual.
3337 One of the really big differences between the European and North American situation has been that in Europe a lot of the big spectrum auctions took place just before all of the dotcom bubble burst. So the spectrum that they bought was a lot more expensive.
3338 It turned out that, roughly, for example, in the U.K. auction, it cost about 650 Euros per capita, whereas in the Canadian auction, in 2001, which happened after that, the price was $49 Canadian per capita.
3339 So, yes, they still have a lot of debt to pay off as a result of that experience.
3340 There are also other factors we could go into. If you'd like a fuller response, it would take some time, so I'm happy to give you an undertaking on that if you'd like.
3341 COMMISSIONER PENTEFOUNTAS: Yes, please.
3342 MR. TACIT: And in addition --
3343 COMMISSIONER PENTEFOUNTAS: But your answer today is that the primary cause of an inability to meet ROI numbers is that spectrum was overpaid for?
3344 MR. TACIT: Right. It is the most expensive asset in wireless networks.
3345 I don't know if our friends from Nordicity have something to add here as well.
3346 MR. JACK: There's a number of examples of successful MVNOs in the European market. We can provide a list or I can give them to you right now.
3347 COMMISSIONER PENTEFOUNTAS: No one's denying that there are successful MVNO offerings in the European market, but the network and the hosts upon which those MVNOs -- the host networks upon which those MVNOs ride do not have sufficient growth in profits to allow them to make the necessary capex to maintain and improve the networks.
3348 MR. JACK: But going back to the previous example, it's very circumstantial that they overpaid for that major portion of their network called spectrum. So if they hadn't done that, they would be in a different situation.
3349 COMMISSIONER PENTEFOUNTAS: Notwithstanding the population concentration, which is much higher in Europe than it is in Canada, they still paid that much more for spectrum, and that doesn't allow them to meet their WACC, if you will.
3350 MR. TACIT: The number I gave you was per capita, so it accounts for the --
3351 COMMISSIONER PENTEFOUNTAS: No, no, I understand. Yeah.
3352 MR. TACIT: -- for the difference.
3353 COMMISSIONER PENTEFOUNTAS: Yeah.
3354 Okay. Thank you.
3355 Mr. Chairman, thank you.
3356 THE CHAIRPERSON: Those are our questions. Thank you very much.
3357 MR. TACIT: Thank you.
3358 THE CHAIRPERSON: Thank you.
3359 So that ends the -- oh, yes, legal.
3360 Legal? No questions, legal?
3361 No, okay. I didn't think there were.
3362 So that ends the intervenors for today, so we're adjourned till 9 o'clock tomorrow morning.
3363 Thank you.
--- Whereupon the hearing adjourned at 1538, to resume on Wednesday, October 1, 2014 at 0900
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