TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TELECOMMUNICATIONS COMMISSION
TRANSCRIPTION DES AUDIENCES DEVANT
LE CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT:
Review of regulatory framework for Northwestel
Inc. /
Examen du cadre de
réglementation
applicable à Norouestel
Inc.
HELD AT:
TENUE À:
Convention Centre
Centre des congrès
High Country Inn
High Country Inn
4051 4th Avenue
4051, 4e rue
Whitehorse, Yukon
Whitehorse (Yukon)
July 13, 2006
Le 13 juillet 2006
Transcripts
In order to meet the requirements of
the Official Languages
Act, transcripts of proceedings
before the Commission will be
bilingual as to their covers, the
listing of the CRTC members
and staff attending the public
hearings, and the Table of
Contents.
However, the aforementioned
publication is the recorded
verbatim transcript and, as such, is
taped and transcribed in
either of the official languages,
depending on the language
spoken by the participant at the
public hearing.
Transcription
Afin de rencontrer les exigences de
la Loi sur les langues
officielles, les procès‑verbaux pour
le Conseil seront
bilingues en ce qui a trait à la
page couverture, la liste des
membres et du personnel du CRTC
participant à l'audience
publique ainsi que la table des
matières.
Toutefois, la publication
susmentionnée est un compte rendu
textuel des délibérations et, en
tant que tel, est enregistrée
et transcrite dans l'une ou l'autre
des deux langues
officielles, compte tenu de la
langue utilisée par le
participant à l'audience
publique.
Canadian Radio‑television and
Telecommunications Commission
Conseil de la radiodiffusion et des
télécommunications canadiennes
Transcript / Transcription
Review of
regulatory framework for Northwestel Inc. /
Examen du cadre
de réglementation
applicable à
Norouestel Inc.
BEFORE /
DEVANT:
Richard French
Chairperson / Président
Helen del Val
Commissioner / Conseillère
Barbara Cram
Commissioner / Conseillère
Andrée Noël
Commissioner / Conseillère
Ronald Williams
Commissioner / Conseiller
ALSO PRESENT / AUSSI
PRÉSENTS:
Madeleine Bisson
Secretary / Secrétaire
Peter McCallum/
Legal Counsel /
Leanne Bennett
Conseillers juridiques
HELD AT:
TENUE À:
Convention Centre
Centre des congrès
High Country Inn
High Country Inn
4051 4th Avenue
4051, 4e rue
Whitehorse, Yukon
Whitehorse (Yukon)
July 13, 2006
Le 13 juillet 2006
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
Argument by Consumers Groups
847 / 5832
Argument by Government of Yukon
873 / 5951
Argument by Telus
892 / 6036
Argument by Northwestel
912 / 6131
EXHIBITS / PIÈCES JUSTICATIVES
PAGE / PARA
NWTEL‑6 Northwestel's
median savings to
841 / 5794
residential customers as a
result
of introducing new toll
plans
proposed
NWTEL‑7 Northwestel's
current yield on 841 /
5796
30‑year Government of Canada
Bonds
NWTEL‑8 Northwestel's
revenue for basic
841 / 5798
exchange and optional services
per
NAS that is equivalent to data
for
the South
NWTEL‑9 Northwestel's
average revenue per 842
/ 5800
NAS based on proposed rates that
is
equivalent to the data for the
South
NWTEL‑10 Northwestel's
confirmation whether 842 /
5802
or not the class 4 or 5
switches
have DMS‑250 IXE functionality
and,
if so, where it
exists
NWTEL‑11 Northwestel's
description of what 843
/ 5804
elements are included
in
Northwestel's $31 million fixed
and
common costs and not included
in
PIAC's
calculations
NWTEL‑12 Northwestel's response
to the
843 / 5808
question of how much of a change
in
investment in 2006‑2007
between
2004‑2006 views of those years
is
due to investment by
Northwestel
affiliates.
NWTEL‑13 Northwestel's details
on the
844 / 5810
(Confid.) reduction and settlement in
CAT
revenues referenced on
Northwestel's
evidence, Appendix 6,
page 5
NWTEL‑14 Northwestel's response
to
845 / 5813
Interrogatory 603: Provide an
example of the derivation of the
per
NAS unit costs for
power
EXHIBITS / PIÈCES JUSTICATIVES
PAGE / PARA
NWTEL‑15 Document providing
verification of 845 /
5815
weighting factor applied to
outside
plant
equipment
NWTEL‑16 Document with detailed
calculations 845 /
5817
used to derive the DRD
amortization
for 2009 and 2010,
including
electronic spreadsheets with
formulas
ERRATA
Wednesday, July 12, 2006 / le
mercredi 12 juillet 2006
Volume 3
Page Line
541 25 "our"
s/b
"their"
536 6 "Dallas
s/b "Dallas Yeulett,
Manager
Yeulett;"
Regulatory Affairs;"
549 11 "of"
s/b "of
this,"
553 4 "you are" s/b "you aren't"
568 10 "an"
s/b
"and"
599 22 "$9,000"
s/b "$9,000 per
NAS"
605 14 "siting"
s/b
"citing"
614 22 "MR. FLAHERTY:" s/b
"THE CHAIRPERSON:"
623 21 "on her"
s/b "out
there"
649 7 "day"
s/b
"say"
653 4 "quarters" s/b "time zones"
678 7 "rates"
s/b
"toll"
678 22 "that"
s/b
"this"
685 14 "of sort" s/b DELETED
722 20 "MR. ROBERTS:" s/b
"MR. HAMELIN:"
799 16 "market"
s/b
"bargain"
799 18 "market"
s/b
"bargain"
812 9 "MR. GRIEVE:" s/b "MR. ROGERS:"
812 11 "MR. ROGERS:" s/b "MR. GRIEVE:"
812 14 "MR. GRIEVE:" s/b "MR. ROGERS:"
Whitehorse, Yukon / Whitehorse (Yukon)
‑‑‑ Upon resuming on Thursday, July
13, 2006
at 1400 / L'audience reprend
le jeudi
13 juillet 2006 à
1400
5785
THE CHAIRPERSON: Order,
please. A l'ordre, s'il vous
plaît.
5786
I'm told that our colleagues from Northwestel have responded with a
number of undertakings and I wonder if I could ask Mr. McCallum to itemize
these undertakings, read them into the record and raise any other issues which
may arise.
5787
MR. McCALLUM: Thank you,
Mr. Chair.
5788
First of all, I just want to say for the record that in terms of the
deadline for final comments from intervenors, I inadvertently said that it was
the 28th yesterday and of course it's not, it's the 21st. That date has not changed. I apologize for the slight
error.
5789
In terms of exhibits, we have received a number of responses to the
undertakings. I thought for
the record I would just quickly say which ones have come in and people can
number them as they wish.
5790
My understanding is that Northwestel is providing a copy to parties as we
speak right now.
5791
Is that correct, Mr. Rogers?
5792
MR. ROGERS: That's
correct.
5793
MR. McCALLUM: For the
record, Northwestel has provided the median savings to residential customers as
a result of introducing new toll plans proposed.
5794
That has been listed as Northwestel Exhibit
No. 6.
EXHIBIT NWTEL‑6: Northwestel's median savings to
residential customers as a result of introducing new toll plans
proposed
5795
MR. McCALLUM: It has
provided a current yield on 30‑year Government of Canada
Bonds.
5796
This is Exhibit Northwestel No. 7.
EXHIBIT NWTEL‑7: Northwestel's current yield on 30‑year
Government of Canada Bonds
5797
MR. McCALLUM: It has
provided revenue for basic exchange and optional services per NAS that is
equivalent to data for the South.
5798
This has been received as
Exhibit No. 8.
EXHIBIT NWTEL‑8: Northwestel's revenue for basic exchange
and optional services per NAS that is equivalent to data for the
South
5799
MR. McCALLUM: They provided
average revenue per NAS based on proposed rates that is equivalent to the data
for the South.
5800
This has been received as Exhibit No. 9.
EXHIBIT NWTEL‑9: Northwestel's average revenue per NAS
based on proposed rates that is equivalent to the data for the
South
5801
MR. McCALLUM: They have
confirmed whether or not the class 4 or 5 switches have DMS‑250 IXE
functionality and, if so, where it exists.
5802
This has been received as Exhibit No. 10.
EXHIBIT NWTEL‑10: Northwestel's confirmation whether or
not the class 4 or 5 switches have DMS‑250 IXE functionality and, if so, where
it exists
5803
MR. McCALLUM: They have
provided a description of what elements are included in Northwestel's $31
million fixed and common costs and not included in PIAC's
calculations.
5804
This has been received as Exhibit No. 11.
EXHIBIT NWTEL‑11: Northwestel's description of what
elements are included in Northwestel's $31 million fixed and common costs
and not included in PIAC's calculations
5805
MR. McCALLUM: These are
coming for the Panel in just a couple of minutes, Mr.
Chair.
5806
THE CHAIRPERSON: Thank
you.
5807
MR. McCALLUM: They have
provided a response to the question of how much of a change in investment in
2006‑2007 between 2004‑2006 views of those years is due to investment by
Northwestel affiliates.
5808
This has been received as Northwestel Exhibit
No. 12.
EXHIBIT NWTEL‑12: Northwestel's response to the question
of how much of a change in investment in 2006‑2007 between 2004‑2006 views of
those years is due to investment by Northwestel
affiliates.
5809
MR. McCALLUM: They provided
details on the reduction and settlement in CAT revenues referenced on
Northwestel's evidence, Appendix 6, page 5.
5810
This has been received as Northwestel Exhibit
No. 13.
EXHIBIT NWTEL‑13
(Confidential): Northwestel's
details on the reduction and settlement in CAT revenues referenced on
Northwestel's evidence, Appendix 6, page 5
5811
MR. McCALLUM: For the
record, it appears that this one has been filed in confidence and I understand
that there are a certain number of requests for confidentiality that have been
made by Northwestel in I think three of the undertaking responses. I am also informed that Northwestel has
provided abridged version for the public file and also for the
parties.
5812
Northwestel has responded with reference to Interrogatory 603: Provide an example of the derivation of
the per NAS unit costs for power.
5813
This has been received as Exhibit No. 14.
EXHIBIT NWTEL‑14: Northwestel's response to Interrogatory
603: Provide an example of the
derivation of the per NAS unit costs for power
5814
MR. McCALLUM: They provided
a verification of the weighting factor applied to outside plant
equipment.
5815
This has been received as Exhibit No. 15.
EXHIBIT NWTEL‑15: Document providing verification of
weighting factor applied to outside plant equipment
5816
MR. McCALLUM: They have
provided detailed calculations that were used to derive the DRD amortization for
2009 and 2010, including electronic spreadsheets with
formulas.
5817
This is Northwestel Exhibit 16.
EXHIBIT NWTEL‑16: Document with detailed calculations used
to derive the DRD amortization for 2009 and 2010, including electronic
spreadsheets with formulas
5818
MR. McCALLUM: And according
to the list that we have, they have a number of undertakings yet to
provide. The written undertakings
were read into the record. They
have to come in on either the 19th, the 21st or the 28th.
5819
They will provide a sensitivity analysis on rate restructuring by the
19th, which is next Wednesday.
5820
Mr. Chair, we were just speaking informally and it may be that there is
one undertaking that Northwestel may have by inadvertence not answered, but we
intend to check that shortly and report back in due
course.
5821
THE CHAIRPERSON: Thank you,
Mr. McCallum.
5822
Are there any other matters of a preliminary nature that any party wishes
to raise at this point?
5823
Mr. Rogers.
5824
MR. ROGERS: Mr. Chairman,
just briefly to note for the Commission, Commission staff and the parties in the
room, as is customary, we reviewed the transcript and there are relatively minor
transcript corrections and so on.
5825
We have provided that directly to the transcript people, as well as the
Commission Secretary. If anyone is
interested in seeing what we have provided, they can just ask
us.
5826
THE CHAIRPERSON: Thank you,
Mr. Rogers.
5827
I would just remind the Secretary to make sure it is the abridged
versions and not the confidential versions of the undertakings that are
distributed in the room.
5828
Madame la Secrétaire.
5829
LA SECRÉTAIRE: Merci,
Mr. Chairman.
5830
The first party for the oral final argument is the Consumer Groups, by
PIAC.
5831
Ms Lott, please.
ARGUMENT /
PLAIDOIRIE
5832
MS LOTT: Good afternoon,
Mr. Chairman and Commissioners.
5833
I am pleased to deliver the oral final argument of the Consumer Groups,
representing The Consumer Association of Canada and the National Anti‑Poverty
Organization.
5834
The Consumer Groups' interest in this proceeding is with the impact of
Northwestel's proposal on the residential ratepayers, both here in the North as
well as those in the rest of Canada.
5835
I am going to briefly focus my remarks on the areas of most concern to
the Consumer Groups. We will be
providing, as well, a written final argument to expand on these
issues.
5836
While Northwestel has proposed to move to a price cap framework, the
Consumer Groups have a number of concerns with Northwestel's proposed plan for
implementation. The movement to
price regulation, a form of incentive‑based regulation, is generally accepted as
a superior form of economic regulation to rate base rate of return regulation
since it provides the telephone company with more pricing flexibility and the
incentives to become more efficient.
5837
However, these benefits will only be realized if price regulation is
appropriately implemented.
5838
With respect to the issue of proposed going‑in rates by Northwestel, one
of Northwestel's stated objectives if that residents of the North should pay
reasonably comparable prices to those elsewhere in Canada. The Consumer Groups agree with this
objective. Canadians living in rural and remote areas should enjoy reasonably
comparable service at reasonably comparable rates to that enjoyed by those
Canadians living in urban areas.
5839
The Consumer Groups submit that this objective is consistent with the
objectives of the Telecommunications Act.
5840
However, the Consumer Groups disagree with Northwestel's assessment of
reasonably comparable prices. In
addition, Northwestel's application of the reasonably comparable standard is
inconsistent.
5841
With regard to its long distance rate, Northwestel trumpets that
customers already enjoy some of the lowest rates in Canada, yet when it comes to
local residential rates, a market where there is no competition, Northwestel
applies a different standard.
5842
As part of its framework proposal, Northwestel is seeking approval to
increase local residential rates by $2.00 per month and to be permitted to raise
rates annually by the rate of inflation.
5843
As graphically illustrated in the Consumer Groups' Exhibit No. 2, which
was the bar chart, Northwestel's proposed rates are not reasonably comparable to
prices paid by other residential customers in the rest of Canada. They are significantly
higher.
5844
Indeed, Northwestel's residential rates are currently at the high end of
rates in Canada. Permitting
Northwestel to further increase rates would result in a growing gap between the
rates that northerners pay in comparison to those in the rest of
Canada.
5845
While much has been made in this proceeding about the higher average
incomes in the North, the cost of living is also similarly higher. While some may argue that the price of
telephone service should also be higher in the North, the Consumer Groups submit
that this is already the case with Northwestel's current
rates.
5846
Northwestel agrees that local phone service is an essential service, yet
Northwestel has not undertaken any assessment of the impact of its proposed rate
increases on the affordability of service.
5847
Taken together, the Consumer Groups submit that local residential rates
should not be increased any further.
5848
The only tangible benefit for residential ratepayers in Northwestel's
proposed rate changes is a modest adjustment to average toll rates through the
proposed introduction of a new toll savings plan.
5849
Northwestel indicated that, on average, the savings would amount to 40
cents per month per residential customer.
However, these savings will not be experienced by most
customers.
5850
In response to an undertaking requested by the Consumer Groups,
Northwestel identified that the median impact from its proposed toll rate
changes is, in fact, zero dollars.
This means that at least half of all local residential ratepayers will
see the full $2 increase in local rates, with no incremental savings from long
distance.
5851
With respect to the issue of productivity, a fundamental component of
price regulation is setting the price constraints or level of price changes that
are permitted each year for a given basket of services. This constraint is intended to reflect
the level of price changes that would be expected to occur in a competitive
market where the regulated service provider has no market
power.
5852
This constraint is also applied in establishing the annual total subsidy
requirement for the purposes of determining the level of high cost serving area
funding from the National Contribution Fund.
5853
The level of permitted price changes is typically governed by a
constraint consisting of the rate of inflation minus the target productivity
factor, or an X factor.
5854
Northwestel has proposed a target productivity of zero percent and filed
an estimate of its productivity performance over the 1998 to 2006 period of
minus 3.2 percent, meaning that its costs have increased by 3.2 percent per
year, excluding the impact of inflation.
5855
These productivity factors imply that Northwestel has not and does not
expect to achieve annual productivity gains.
5856
The Consumer Groups submit that the proposed target productivity level is
inappropriate. By way of
comparison, the productivity target was established at 4.5 percent for the major
ILECs when price regulation was introduced.
5857
The Commission applied a productivity target of 3.5 percent on Télébec
and QuebecTel when these companies moved to price
regulation.
5858
The Consumer Groups provided a more appropriate estimate of Northwestel's
productivity estimate for the period of 1998 to 2006 of 0.7 percent. That estimate isolates the impact of
Northwestel's Service Improvement Plan program to derive an estimate of how the
cost of non‑SIP residential service changed over time.
5859
In addition, as discussed during cross‑examination with the Northwestel
panel, using Phase 2 cost estimates for residential service to estimate
productivity does not capture the positive impacts on the company's productivity
arising from economies of scope.
This is the provision of additional services, such as high‑speed internet
service, using the same local loop used to provide residential local
service.
5860
This shortcoming understates the company's productivity, in our
view.
5861
The Consumer Groups also submit that it would be appropriate to apply a
consumer dividend or stretch factor to the determination of the target
productivity factor for Northwestel.
The stretch factor is intended to provide a dividend to consumers
resulting from the streamlining of regulation, and increased incentives to
Northwestel to be more efficient.
5862
In Decision 97‑9, the Commission applied a stretch factor of 1
percent.
5863
The Consumer Groups submit that, based on the above, a target
productivity in the range of 2 to 2.5 percent would be appropriate for
Northwestel.
5864
With respect to earnings sharing, the Consumer Groups submit that the
sharing of risks under Northwestel's proposed plan is
asymmetrical.
5865
Northwestel would have the ability to trigger a review of the proposed
framework during the four years of the plan if, in its view, it was impaired in
its ability to advance its proposed objectives and/or to continue to have
reasonable opportunity to earn a fair return on its
investment.
5866
However, there is no comparable protection to ratepayers from over
earnings by Northwestel. Indeed,
ratepayers could not identify Northwestel's earnings level as this information
would no longer be reported by Northwestel to the Commission. Only Northwestel itself would have
access to this information.
5867
The Consumer Group submit that a more balanced approach to protect
ratepayers from over earnings would be to equally share any excess earnings over
50 bases points of the allowable range between Northwestel and
ratepayers.
5868
This mechanism would still incent Northwestel to be more efficient and
profitable since it would keep a portion of the excess earnings, while at the
same time providing ratepayers with a degree of protection from excessive
earnings.
5869
With respect to quality of service, the Consumer Group submit that it
would be appropriate to apply the Commission's retail rate adjustment plan to
Northwestel. It would not be
appropriate to wait until quality of service problems arise before implementing
one of the tools the Commission has developed to ensure that telephone companies
have the incentive to provide high quality service.
5870
This would effectively be, as they say, closing the barn door after the
horse has bolted.
The quality of service results of
other ILECs under price cap we think provide ample evidence of what can
occur.
5871
Furthermore, if Northwestel is successful in meeting the Commission
quality of service standards, no rebate payments would be applicable. The plan acts as a measure to further
encourage Northwestel to maintain its level of service to its
customers.
5872
Now, with respect to the national contribution fund, Northwestel has
proposed to dramatically increase the level of funding it receives from the
national contribution fund from six per cent to over 25 per cent, or $43‑million
of its total revenues for the year 2007.
5873
The Consumer Group have concerns with the proposed expansion of funding
which would be paid for by ratepayers across Canada. The national contribution fund was
established to fund the provision of residential local service in high cost
serving areas. The expansion of the
funding to cover items such as toll connect facilities, non‑access related SIP
expenditures and appreciation reserve deficiencies represents a significant
departure from the purpose of the fund.
These items are not just related to the provision of residential local
service.
5874
The Consumer Group submit that the national contribution fund should only
be available to support the provision of residential service in high cost
serving areas.
5875
Furthermore, funding should not be expanded unless Northwestel
demonstrates that it has exhausted its traditional funding
sources.
5876
As an associated issue, the Consumer Group submit that the level of
mark‑up incorporated in the subsidy requirement should be set at a level
required to permit Northwestel to recover its fixed and common
costs.
5877
The Commission should ensure that Northwestel has justified a different
level of mark‑up from that used by the Commission for other telephone
companies.
5878
Finally, regarding local competition, the Consumer Group disagree with
Northwestel's proposal regarding the introduction of local competition in its
territory. Northwestel's proposed
approach would result in further delay and discourage entrants from pursuing
opening up of the local market.
5879
The Commission established an approach for the smaller ILECs that should
be adopted in Northwestel's case. A
bona fide request from a potential competitor would trigger the necessary steps
to implement the requirements on a timely basis.
5880
The Consumer Group agree with the position expressed by others that
competitive entries should be efficient and that the rates paid for competitive
service should not be priced below cost.
5881
Furthermore, the costs associated with implementing local competition
should not be borne by Northwestel ratepayers.
5882
These approaches would ensure that northerners would receive the benefits
that arise from competitive entry.
5883
Mr. Chairman, that concludes my argument and I would just like to make a
submission about a cost award.
5884
The Consumer Group would like to apply for an award of costs in this
proceeding. We submit that we
represent an important constituency of Northwestel and of other telephone
companies' customers who would be affected by the proposals of Northwestel in
this proceeding.
5885
We submit that we have participated in a responsible manner and have
contributed to a better understanding of the issues through our participation in
the proceeding and at this hearing and, therefore, we are requesting an award of
our costs.
5886
Thank you. Those are my
final comments.
5887
THE CHAIRPERSON: Thank you,
Ms Lott. We note your information
about costs and we appreciate your participation in this
hearing.
5888
MS LOTT: Thank
you.
5889
THE SECRETARY: Mr. Chairman,
the next party to provide their final arguments is the Government of Northwest
Territories.
5890
MS MALJAN: Good afternoon,
Mr. Chairman and commissioners. My
name is Linda Maljan and I work with the Office of the Chief Information Officer
with the Government of Northwest Territories. I am representing Mr. Mike Aumond, our
Deputy Minister of Public Works & Services, who couldn't be back here today
in Whitehorse to make this presentation on our behalf.
5891
We appreciate this opportunity to participate in this public hearing and
we will be filing our government's final written argument on July
21.
5892
The presentations by those participating in this hearing and those who
made informal statements by video conference, along with the cross‑examination
of the various panels, have been very informative and have assisted in
clarifying many points made on the documents filed since this public notice was
first initiated in January of this year.
5893
For the Government of the Northwest Territories the current proceeding is
of critical importance. The unique
circumstances of northern Canada make northerners particularly reliant on the
provision of telecommunication services at the same time that it renders service
provision a particular challenge.
Historically, the quality and availability of telecommunication services
in the north has lagged far below southern standards while prices have generally
been much higher.
5894
Over the past 15 years the CRTC has taken important steps to reduce the
gap in service quality, price and availability between northern and southern
Canada. And while a gap still
remains, on balance the CRTC has been quite successful. In some cases, such as the recently
completed five‑year service improvement plan and the provision of annual
supplemental funding, Northwestel has been a willing partner in this
progress.
5895
In other cases involving quality of service issues and extension of
service to NWT communities in the mid‑1990s Northwestel has only acted when
forced to by regulatory intervention, and then has done so grudgingly and
reluctantly. In developing its
recommendations in the current proceeding the GNWT has sought to balance the
desire to move to a more efficient and streamlined regulatory process with the
recognition that differences in the northern situation will continue to require
regulatory approaches that differ from those adopted in the
south.
5896
A critical consequence of these differences is and will continue to be
that market forces will be less able than in southern Canada to ensure
achievement of the underlying goal set out in Section 7 of the
Telecommunications Act of providing universally available high quality basic and
advanced services at affordable prices.
5897
We recognize that for the north to maintain pace with more populated
urban areas it would be very expensive to try to maintain reasonably close to
progress made elsewhere. Therefore,
funds for costly things such as infrastructure must be spent wisely and
effectively. We also realize it
would be unreasonable and impractical to rely exclusively on regulation to force
our service providers to maintain pace with our compatriots to the
south.
5898
In addition to strengthening market forces through permitting expanded
competition, northern Canada will continue to rely on both regulatory
intervention and national subsidy funding to maintain gains made to date and to
make further improvements that will enable the NWT to keep pace with the
provinces as the definition of basic services
evolves.
5899
Our written final argument will provide a detailed analysis of the issues
at play in this proceed and will develop the underlying rationales for each of
the specific recommendations we wish to make. Today, I would simply like to layout
what those recommendations are.
5900
First, let me start with our general position on the move to price cap
regulation for Northwestel. While
the GNWT believes that the unique circumstances of Northwestel must be reflected
in the design of a regulatory regime, it also believes a price cap regime will
provide fundamental benefits as compared to the traditional rate of return
regulation. The GNWT accordingly
recommends that a customized version of price cap regulation be applied to
Northwestel. We don't see any need
to move to a new regime via some transitional approach and believe that to not
now move to a form of price cap regulation would be to the disadvantage of all
stakeholders.
5901
With respect to the issue of regulation of long‑distance rates, the GNWT
believes that competition in this market is still significantly limited and that
if forbearance of long‑distance service is to be entertained then tighter
constraints should be imposed on changes to the basic rate schedule for
long‑distance services.
Accordingly, we recommend that in addition to constraints proposed by
Northwestel:
5902
(1) increases should not be permitted to any of the individual rates on
the basic long distance rate schedule;
5903
(2) that during the price cap period no decreases should be permitted in
the time of day discounts to the schedule; and
5904
(3) the going in level of rates under long distance basic rate schedule
should be reduced.
5905
Turning to other price cap issues, the GNWT recommends that no increases
be permitted to any of Northwestel's local rates during the price cap
period. Northwestel's business and
residential local rates are at or close to the highest rates in Canada and we
thus think that following the model adopted by the CRTC for the ILECs in
southern Canada no further rate increases should be
allowed.
5906
We also recommend that a price constraint be applied to both business and
residential calling features and that the pricing constraint provides that every
year the monthly rate for a service may increase by up to $1 but in no event may
be permitted to exceed the highest rate approved by the CRTC to another phone
company.
5907
Concerning Northwestel's proposal to eliminate the current annual
construction program review, we strongly oppose such a move. We are extremely concerned that with
limited facilities‑based competition some form of construction program review is
essential to ensure that adequate investment levels are being
maintained.
5908
Relying on quality of service monitoring, as suggested by Northwestel, to
determine if adequate investments are being made would only detect problems well
after it wasn't possible to correct them.
Unlike Northwestel, we simply do not believe that a move to price cap
regulation and retention of the annual CPR at least until such a time as it no
longer serves a purpose are in any way mutually exclusive
options.
5909
Our last recommendation specifically dealing with price cap proposal is
that interested parties should be permitted to apply to the Commission for a
review of the price cap regime prior to its end and with the proviso that such
requests should only be granted where there are compelling reasons to do
so.
5910
Turning now to Northwestel's proposal regarding the Carrier Access Tariff
and the recovery of toll connect trunk costs, we strongly endorse both the
proposal to lower the existing CAT charge so as to recover only equal access in
switching and aggregation costs and to replace the existing implicit subsidy
mechanism for toll connect trunks with an explicit subsidy from the National
Contribution Fund.
5911
We think this proposal will serve to reduce incentives for an economic
bypass, provide some incentive for expanded equal access competition and replace
an implicit subsidy currently buried in the CAT settlement rate with an explicit
subsidy with all the benefits that entails.
5912
With regard to Northwestel's proposal for restructuring rates, we have
several concerns.
5913
First, in light of the current high level of Northwestel's local
residential rates, GNWT recommends that their proposal to increase these rates
be denied and that as recommended earlier such rates be frozen for the duration
of the price cap period, as is the case for the independent telcos in the south
whose rates, it should be noted, are considerably below those of
Northwestel.
5914
Second, as there are very limited prospects for competition in this
market and as Northwestel's rates are currently at the upper end of the rates
charged by major southern telcos, the GNWT recommends that Northwestel's
proposal to increase business local rates be denied.
5915
Third, the GNWT recommends that in light of the proposed lowering of CAT
charges and of the limited competitive alternatives available to many northern
long distance users, prior to introducing the new price cap model the CRTC
should, in addition to approving Northwestel's proposed new calling plans,
direct Northwestel to make significant reductions to the basic toll schedule for
the benefit of both business and residential customers.
5916
With respect to local competition it is the GNWT's view that while only
limited facilities‑based local competition in Northwestel's operation area is
likely to occur, Northwestel should not be allowed to use the regulatory process
to further delay or deter the possibility for such competitive entry, thus
denying northerners the benefits of local competition that are being accorded to
all other Canadians.
5917
Local competition in Northwestel's territory should immediately be
approved on the same basis as in Telecom Decision CRTC 2006‑14 regarding
SILECs.
5918
Regarding Northwestel's proposed service improvement plan, the GNWT
considers that all of Northwestel's proposed SIP projects at a minimum are
justified by the need to ensure ongoing service provision to a number of
communities in the north and recommends that the new SIP program be
approved.
5919
The GNWT also recommends that Northwestel be required to file annual
status reports on the new SIP together with an assessment of what if any other
projects should be considered for inclusion in this or future SIPs so as to
ensure the achievement of basic service objective on an ongoing basis in all
areas of the North.
5920
With regard to service quality, the GNWT recommends that a service
quality rate rebate and adjustment mechanism be implemented for Northwestel at
the same time it is made subject to a price cap regulatory framework. Such a mechanism should cover all
aspects of services provided to both its retail and wholesale
customers.
5921
The GNWT also believes that the CRTC may be able to play an important
role in moving forward the currently stalled prospects for 9‑1‑1 service in the
Northwest Territories.
5922
Some of the difficulties that have been experienced in moving forward in
this issue were raised by several parties, including the Mayor of Yellowknife,
the President of the NWT Chamber of Commerce and
Northwestel.
5923
To help make progress on this important issue, the GNWT recommends that
Northwestel be directed to undertake, in consultation with territorial
governments and other involved groups, and file with the Commission within 180
days, a study of the feasibility of extending 9‑1‑1 service throughout its
serving territory.
5924
The study should determine:
5925
(a) what changes would be needed to Northwestel's infrastructure to do
this;
5926
(b) any other obstacles to providing the service;
5927
(c) the timeframe within which the service could be provided;
and
5928
(d) the costs of providing the service.
5929
Our final set of recommendations concerns the issue of subsidy mechanisms
that underlie so much of the discussion in this proceeding. While none of the current Panel of
Commissioners was involved in that proceeding, we are sure you are very familiar
with the Commission's high‑cost proceeding and the resulting Decision
99‑16.
5930
In that decision, the Commission found that Northwestel faced a unique
set of circumstances and that its requirement for National Subsidy Funding was
potentially wider than was the case for other telcos.
5931
While at first blush it now appears that Northwestel is looking for a
further expansion of subsidy funding, this is not in fact the case. The residential, local service subsidy
it is seeking is essentially the same subsidy that is made available to all
Canadian telcos. The only issue
that arises there is, thus, not whether Northwestel should receive the subsidy
but whether it has appropriately calculated the required subsidy
amounts.
5932
The second component of Northwestel's subsidy proposal is the toll
connect subsidy. While this might
appear to be a new subsidy, as explained by the company, it is in fact just a
different and better way of collecting an existing subsidy. Failure to collect these subsidies
through national funding would place the entire burden of doing so on the larger
already burdened communities in Northwestel's serving area or require that
Northwestel's remote communities pay higher rates than do other
communities.
5933
We don't consider either of these options to be acceptable and don't
believe the Commission would either.
5934
The last subsidy amount is in respect to the costs associated with
Northwestel's past SIP and the new SIP Northwestel
proposes.
5935
By definition, these expenditures are uneconomic and require a
subsidy. Again, we believe these
subsidies should be funded on a national basis and note that this very
expectation underlies the implicit regulatory bargain that was made when
Northwestel was directed to make these expenditures.
5936
Accordingly, GNWT recommends the CRTC approve the basic residential local
service subsidy, toll connecting facility subsidy, and SIP subsidy as proposed
by Northwestel, subject only to any adjustments to cost estimates made by the
Commission.
5937
In the GNWT's view, failure to approve the proposed subsidies would
result in the quality and availability of northern telecommunications falling
even further below southern standards and it would be inconsistent with the
Commission's finding in Decision 99‑16 and the related
proceedings.
5938
One final point we would like to raise is that several times during this
hearing Northwestel expressed concern about the duplicate facilities established
in the Northwest Territories and Nunavut as a result of federal government
initiatives.
5939
The federal programs, their impact on the marketplace notwithstanding,
were created to address a vacuum, a large gap in the services and technical
capabilities that existed across the more remote reaches of the North. The GNWT discussed these programs at
length internally, including carefully considering sustainability issues, but
decided to participate in these programs because our territory badly needed the
services that would result from project completion.
5940
GNWT feels that Northwestel had an equal opportunity to win the contracts
awarded by Industry Canada but they did not, even though they may have had some
advantage in having some infrastructure already in place.
5941
We were somewhat surprised that after not winning the contract
Northwestel did not in any way appear to try to develop and market solutions or
seek partnerships with the GNWT or try to capture market share that could
eventually fall to the competition.
5942
These federal programs moved forward very slowly and are still doing so
and it appeared that there may be reasonable opportunity for the company to take
advantage of their position as an incumbent service
provider.
5943
In closing, I would like to thank you, Mr. Chairman, Commissioners
and CRTC staff for your efforts in conducting this proceeding, including both
this oral proceeding and the evidentiary and interrogatory processes that
preceded it.
5944
Let me close by saying that the GNWT values Northwestel's ongoing
health. A viable northern company
is important to us. They contribute
a lot to the Northwest Territories and to individual communities. We recognize the challenges placed on
them in being the provider of last resort.
5945
Following the submission of final argument, we will be keenly awaiting
your decision and wish you all the best in your
deliberations.
5946
Thank you.
5947
THE CHAIRPERSON: Thank you
very much, Ms Maljan.
5948
Madame la Secrétaire.
5949
THE SECRETARY: Thank you,
Mr. Chairman.
5950
We will now ask Mr. Pratt from the Yukon Government to come
forward.
ARGUMENT /
PLAIDOIRIE
5951
MR. PRATT: Thank you, Madam
Secretary.
5952
Mr. Chairman, Members of the Commission, it is my privilege to present to
you the oral argument of the Yukon Government in this
proceeding.
5953
I should perhaps begin by offering thanks and appreciation to the staff,
the reporters and of course the Commission for being here in Whitehorse for this
hearing. It is a bit of a two‑edged
sword. It would have been nice to
have had you here for another week, but we certainly appreciate, in my case very
much so appreciate, that we have been able to conclude in the first
week.
5954
The purpose of the hearing from our perspective ‑‑ and I think it is
clear to everyone ‑‑ is that we are here to review Northwestel's regulatory
framework for the future and to assess the proposal for modified price
caps.
5955
It is not without context, this proposal, because it was contemplated by
the Commission as far back as the decision in 2000 that after several years of
reviewing the progress of the modified rate of return regulation and the
introduction of long distance competition that the framework for Northwestel be
reviewed.
5956
As a consequence, those parties who have been participants in the series
of proceedings ‑‑ and by my count there were at least ten decisions between
then and now that dealt with Northwestel and various aspects of its regulatory
framework. Those parties are really
quite familiar with the adaptations that have been made by the Commission to
meet the unique environmental and economic circumstances that we experience in
the North.
5957
Obviously the key decisions conditioning these adaptations go back to the
99‑16 decision on high cost serving areas, and of course the decision
2000‑746.
5958
In those various decisions issues such as long distance competition,
local competition, capital programs, including the SIP or various manifestations
of the SIP, quality of service, the revenue deferral account and disposition of
funds have all surfaced, resurfaced and been looked at again, the message being
that many of these issues are familiar and well
established.
5959
The Yukon Government's point in bringing this up is that there is a
context that gives us important guidance in assessing the company's current
proposal. Namely, the basic service
obligation is clear, and it has been assessed, affirmed and
reaffirmed.
5960
The high cost serving area subsidy has well served the purpose and has in
various decisions, either implicitly or explicitly, been affirmed. The principle of comparability, services
and prices has been reviewed and repeated throughout the series of
decisions.
5961
Furthermore, we would suggest that it is consistent with the evolved
framework that competition will be allowed where competition is feasible, and
those are determinations that the Commission has invested some time and effort
in reaching conclusions on.
5962
There is, though, the larger context that stems from the
Telecommunications Act policy goals that were activated by the Commission in
99‑16 and in fact have been reinforced by application of other government
programs like the investments in northern infrastructure, which of course have
had some mixed reviews.
5963
But in looking at the overall context the Commission has taken a
responsibility under the umbrella of the Act to achieve some of those objectives
through regulatory initiatives and indeed the regulatory framework for
Northwestel, addressing the application of those principles and goals in the
North.
5964
So when a question comes up, as it did in this hearing, as to why others
should pay, or conversely why Northerners shouldn't perhaps pay more, it is
important to understand the context.
5965
The Telecommunications Act uses those terms, to render affordable and
reliable telecommunications services of a high quality, which are accessible to
Canadians in both urban and rural areas in all regions of
Canada.
5966
We don't think this needs to be interpreted. If your costs are higher, you really
need to prove that you need the help.
That is what the principle says.
5967
Indeed, if costs were the only consideration in determining the
appropriateness of telecommunications services, populations would tend to
gravitate to low‑cost areas, and that is certainly not consistent with the
objectives of the Act.
5968
Before I move on, I would note that there may be some valid and other
important justifications for the national policy goals and the interpretation
that we would put on those policy goals in developing a regulatory approach for
Northwestel.
5969
First, we would suggest that there is value to all of Canada in providing
support for the development of the North, particularly in telecommunications,
but more broadly than that.
5970
Sovereignty is obviously one, but the opportunity for growth is
another. If telecommunications can
be used as an enabler to enhance growth and development in the North, then there
are more opportunities for the subsidy to be winnowed
away.
5971
Secondly, as Mr. Hayden alluded to yesterday, there are many First
Nations people, particularly in the Yukon, but throughout the North, who have
made this area their home for thousands rather than hundreds of years, and it is
important that the national policies take that into account in incorporating
measures for participation and inclusion.
5972
The rationale for the Yukon government's participation in this process
was outlined by Ms Bucklay in her opening statement, as were the principles that
we believe the Commission should take into account in reaching its
decision.
5973
The regulatory framework should give the means for growth in
telecommunications facilities and services that will result in net benefits for
the Yukon.
5974
The framework should allow the continuation of Northwestel as a viable
northern‑based provider.
5975
The services available in the Yukon should offer enough flexibility and
availability, innovation and pricing, so that Yukoners can have comparable
opportunities to those available to other Canadians.
5976
Telecommunications users in the Yukon should have sufficient protection
for prices, value and quality of the services they
require.
5977
Fifthly, the regulatory framework must enable the investment and growth
necessary to ensure that Yukoners continue to have access to advanced telecom
services.
5978
We believe that the approach for telecom development in the North, and,
consequently, for the regulatory framework, is not to simply wait for the Godot
of market forces to arrive and deliver those benefits of choice and
innovation. It is neither to splash
out investment in programs that create infrastructures in the hope that market
forces will come. Rather, we would
support a more measured and co‑ordinated approach, where competition is
introduced where it is sustainable, and to build on the successful adaptation of
regulatory principles, which we would suggest has been the case so far in the
Commission's track record with Northwestel, and continue to have those
adaptations meet the realities of the northern
environment.
5979
Looking at Northwestel's case itself, the company begins by outlining the
principles which it believes should be adopted. We think they are helpful and largely
consistent with those that the Yukon government has put forward in other
proceedings.
5980
One key provision that has attracted considerable interest in this
hearing is the issue of comparability and, really, what that means. What words should we use? Northwestel says "reasonably
comparable". The Yukon government
has always said that comparable services and comparable prices should be the
standard. Others have used other
words.
5981
In our submission, the only meaningful test is to look at what the
benefits are to customers in the North and compare those benefits to those
available to Canadians in the South.
How do the prices compare?
5982
If the actions and regulatory measures that are implemented are to accord
with policy goals, northern Canadians should, at the very least, not be left at
a disadvantage.
5983
In fact, it might be argued, and we have certainly taken the position in
the past, that telecom services are even more important in the north because of
the realities of distance, density and the level of
development.
5984
So, we would strongly urge that the Commission maintain its
interpretation and approach that supported the extension of service through the
SIP programs and the introductions of the beginnings of competitive choice and
the beginnings of access to advanced services.
5985
Northwestel's proposal is a modified price cap framework. The Yukon Government appreciates the
merits of moving the price caps from the point of view of the potential benefits
for customers as well as for the improved efficiency for the company and the
Commission.
5986
The Yukon Government would note, however, that there is a need to modify
the implementation of price cap regulation in order to adapt to the realities of
the north, meaning that some aspects of regulation that are typically assumed to
go along with the introduction price cap need to be assessed and considered as
to whether they should be included or excluded.
5987
What we would suggest for the guideline in implementing or examining this
test of implementation of price caps is to look at, what is the protection for
ratepayers and how can we increase choice and innovation for
customers.
5988
In our view, the basket structure seems more or less to address the needs
to protect ratepayers. We believe,
however, that it is important that the Commission continue to look at the
regulation and monitoring of competitor services in order to achieve some of the
objectives for competitive entry where that's possible.
5989
With respect to productivity, I think it's important to note that during
the history of the modified rate base regulation the Commission did find it
necessary to adopt specific measures to track and encourage Northwestel's
productivity performance, that's the TIP calculations, and the adjustments that
were made in various proceedings there.
5990
We believe that the question of how productivity will be incented in
Northwestel's proposal remains an open
question.
5991
Since it's not anticipated that there will be massive or hugely
significant competitive entry, there may not be the assurance or reassurance
that those productivity gains will be driven by market forces. Consequently, it will fall to the price
cap mechanism to address that.
5992
We'd also note that the existing regulatory framework has utilized the
revenue deferral account in a number of cases to return subsidy funds when
forecasts were exceeded.
5993
Northwestel has not proposed such a mechanism in this case but, in our
view, that underlines the need to look at some mechanism that would address
productivity.
5994
With respect to the four‑year term for the price cap, it seems reasonable
enough to us, but the area of concern that was noted during the proceedings is
that, aside from the exogenous factor adjustment, the formula would only be
reviewed in an asymmetric fashion under Northwestel's
proposal.
5995
Although the witnesses did acknowledge that the Commission has an
overriding discretion to review the formula if necessary, it will be our
suggestion that there be a provision for re‑entering the issue of the formula
and that it should be ‑‑ re‑examining the issue of the formula and that it
should be reciprocal.
5996
Northwestel's case shows very clearly the dramatic impact of the implicit
subsidy on the company, its prices, including the cap and, consequently, the
effect on customers and users in the Yukon.
5997
The existing situation is really a necessary relic of the transition from
rate of return to the environment that we're in now, but it's known to be
untenable and has been acknowledged in a number of proceedings. The Commission did, in a previous
decision, specifically note that the cap was impeding the introduction
of ‑‑the high level of the cap was impeding competition but, under the
circumstances, felt it prudent not to make adjustments at that
time.
5998
In our view, something does need to be done, it doesn't need to be done
now. It is somewhat analogous to
Northwestel's rate structure having been put up on a cliff and it needs to
drop.
5999
If the market forces were allowed to send them into free fall, we think
that would be much more damaging than if measures are taken such as are proposed
here. So, we would support the
proposed cap reductions.
6000
With respect to the inclusion of the toll connect costs in the subsidy,
while it may be offensive to those who are in favour of symmetry, it is a really
very stark example of a northern reality.
The distances are enormous, the settlements are extremely small and this
cost will not go away, as the witnesses have indicated to
you.
6001
We think that Northwestel has shown that there would be significant
impacts on the company and on customers if those costs are not included in the
subsidy. In fact, in our view, that
reinforces the Commission's wisdom in the original 2000‑746 Decision of
including those costs.
6002
Similarly, with respect to the mark‑up the need is clear, Northwestel is
looking at a 25 per cent mark‑up and there is nothing, in our view, to suggest a
better number, but would note that for pricing of specific services there may be
a need, particularly in the case of competitor services to look at a different
approach and, certainly for those purposes, we would not necessarily treat 25
per cent as sacrosanct.
6003
On the rate proposals themselves, Northwestel has indicated the relative
comparability of the local rates with the increases and, although they are at
the high end, they are certainly within the range of comparability. We are concerned, however, with respect
to issues of affordability and would strongly urge the Commission to have the
company investigate Bill Management Tools or other measures that might be made
available to assist those who genuinely have affordability
problems.
6004
The toll rate proposals will indeed give benefits to customers. Although, we do have some concern that,
with respect to some of the prices, I believe the witnesses indicated that some
rates could go up and some could go down.
Certainly that is a market phenomenon, but in the transition to more open
or complete competition, that does pose a potential concern for groups or
specific customers who don't have competitive alternatives. Certainly the private line and access
rate reductions are beneficial and we would agree with Northwestel's position
that they do need to come down further.
6005
With respect to the capital program there is a critical need, in our
view, for continued investment in the north in telecommunications. We believe that there has been value in
the ongoing Construction Program Review by the Commission, particularly with
respect to the Service Improvement Programs.
6006
Northwestel did agree that the Service Improvement Programs would still
continue to be reviewed. It would
be our proposal that the Construction Program also be subject to an ongoing
review by the Commission simply because the quality of service measures that are
the backstop in the event that underinvestment occurs are simply not going to be
sufficient in the event that there is an issue with investment because of the
long construction and investment cycles.
6007
With respect to local competition, Northwestel's position initially is
that there should be no local competition unless there is a formal and detailed
review of the terms. In the
testimony this week it was conceded that the company's not opposed to local
competition in principle, so the position is a little bit yes and a little bit
no. There clearly is evidence that
local substitution alternatives exist by wireless or Voice over
IP.
6008
In our view, there should be no reason why the Commission should not
authorize local competition without the involvement of a further detailed
proceeding. Certainly, the question
of costs for equal access and the issue of a full‑blown facilities‑based
competition and all that goes with that, including local number portability are
big, needy, high‑cost issues and those would need to be addressed
separately. We certainly don't see
the existence of those issues as being a barrier to authorizing local
competition.
6009
With respect to toll competition I have already mentioned there has been
a considerably history of review up to this point.
6010
We are somewhat concerned about the forbearance proposal, however. Northwestel has indicated and has
demonstrated that there is market share loss certainly in one sector, in the
prepaid card sector, but there is really no significant evidence of choices
outside of that, so that from a customer point of view we would be concerned
that a customer whose choice was not to take a prepaid card really has nowhere
else to go and in the event of forbearance has no recourse of the event of
concerns about price levels.
6011
With respect to the proposed service improvement plan it will come as no
surprise that the Yukon Government is very supportive of continued investment in
the infrastructure. We believe that
is critical and we think it is absolutely vital to our economy and to our
society for there to be an opportunity to keep up with technical advances. We don't need to be ‑‑ we certainly
don't want to be left behind.
6012
Historically the service improvement plan has been very effective. It is a good solution and we recommend
that Northwestel's proposal be adopted and indeed would look forward to further
extensions of the service improvement plan if Northwestel proposes
them.
6013
Regarding the quality of service measures, as I indicated, they are
perhaps a thin backstop in the event of under‑investment of capital, absent an
ongoing construction program review.
6014
As an alternative or perhaps as an enhancement, we would suggest that the
Commission consider including something like customer satisfaction measures as
an interim step to meeting ‑‑ to turning over this responsibility to market
forces.
6015
Certainly, as we move from one pole to another, from monopoly to
competition, there is a number of stopping places along the way and in order to
ensure that or at least have the ability to monitor how well things are going,
it may be helpful to have those kinds of measures as well and I believe the
company has indicated that they do collect data long those
lines.
6016
With respect to the need for infrastructure it has been very clear, I
would suggest, from the Yukon Government's participation that we are highly
concerned about the development of infrastructure to enable access and ongoing
access particularly to health and education services but more broadly to the
wide range of choice available to customers.
6017
It is clear that in many parts of the north that investment in a single
infrastructure is uneconomic and double the investment for duplicate
infrastructures is potentially very damaging.
6018
That is why we have suggested in our submission that there may be room
for a vehicle such as a regional coordination committee to have inputs from
local users, from interest groups, maintain close contacts with companies and
the various levels of government in each jurisdiction, and to incorporate the
various arms and elements of the federal government's interest in the north to
come up with solutions that would be efficient and effective in meeting those
needs.
6019
In our view the ultimate evolution of competition in the north is more
likely to be sustainable if the target is smaller in nature, particularly at the
application and service level.
Consequently the infrastructure becomes much more important and the idea
of commonality and a common approach to designing and managing or perhaps
operating that infrastructure becomes more important.
6020
So then to sum up, the Yukon Government's recommendations would be that
the Commission adopt the price cap proposal with some of the specific
adaptations as we have described.
6021
We submit that the price cap formula is acceptable, but it may be
necessary to address the issues of productivity and
incentives.
6022
The rate restructuring proposals of Northwestel are necessary and, in our
view, acceptable, specifically the CAT reductions and the reductions to private
line and access rates for competitor services.
6023
We do, as noted, have a concern with the impact of local rate increases
and would strongly recommend the company be asked to take measures to address
those issues.
6024
With respect to the subsidy calculation, the Yukon Government recommends
that because the benefits to the North and the people of the North far outweigh
the cost of the subsidy, that the proposal of Northwestel be
accepted.
6025
With respect to the capital program, we recommend that the construction
program review be maintained and that the SIP proposal be
adopted.
6026
The reporting requirements with respect to construction program and the
annual financial reporting we believe are useful tools for the Commission and
would recommend that the company be required to maintain those filing
requirements.
6027
Finally, we would recommend that the Commission give consideration to the
solutions such as we have proposed under the Regional Coordination Committee to
address the need for managing the development of an infrastructure in the North
that will be adapted particular to the needs of each region looking to ensure
that advance services continue to be available to all northern homes and
businesses.
6028
Thank you for your time and attention.
6029
THE CHAIRPERSON: Thank you
very much, Mr. Pratt and the Government of the Yukon.
6030
I have been reminded that we are probably more or less at the mid point
of our afternoon and I have been reminded that that means we should take a
break.
6031
So we will see one another again at 3:15, please.
‑‑‑ Upon recessing at 1503 /
Suspension à 1503
‑‑‑ Upon resuming at 1517 / Reprise
à 1517
6032
THE CHAIRPERSON: Order,
please.
6033
Madame la Secrétaire.
6034
THE SECRETARY: Thank you,
Mr. Chairman.
6035
The next party is Telus.
ARGUMENT /
PLAIDOIRIE
6036
MR. RYAN: Thank you,
Mr. Chairman.
6037
May I begin by saying, Mr. Chairman, that we have found, for our
part at least, the public hearing that you have conducted in conjunction with
this proceeding to be extremely useful, and we think it has made a major
contribution to our understanding of the issues. We hope it has allowed us to put forward
suggestions to the Commission that will be more helpful.
6038
The task of ensuring that Canadians in the North have access to
affordable, reasonably priced modern telecommunications services raises complex
issues, as we have seen, and achievement of that task undoubtedly requires the
support of parties outside of the North.
6039
As I indicated in our opening statement, Telus is glad to do its part in
assisting in the achievement of the goal, and we ask only that the Commission
assure itself that Northwestel is also doing its part.
6040
Whatever the Commission decides, we are sure it will be setting important
precedents for how the National Contribution Fund should be
used.
6041
Mr. Chairman, in our opening statement we expressed concerns about the
uses to which Northwestel has proposed to put funds in the National Contribution
Fund, and we indicated our view that some of the proposed uses don't qualify
under the principles that up to now have covered the use of those funds. We expressed the view that some of the
proposed uses aren't consistent with Commission policy.
6042
We also made the point that we think price caps are a superior form of
regulation, and we expressed our support in principle for the use of price caps
and Northwestel's transition to a price cap regime.
6043
We also noted that there were problems with each of the three steps that
we think need to be undertaken as a part of the transition to price
caps.
6044
Those three steps, of course, were that there should be a determination
of the revenue requirement, that there should be a structuring of rates and
subsidies, and that there should be a plan for the regulation of price changes
over time.
6045
I want to address now, if I may, each of those three
points.
6046
First, with respect to the determination of the revenue requirement, in
our respectful submission, Northwestel has attempted to leapfrog the
conventional requirement for a full revenue requirement review. The information filed by Northwestel is
not sufficient for a full evaluation of its revenue requirement, there is a need
for better information, and the company has an obligation to come forward with
that information.
6047
It is our proposal in relation to this issue that Northwestel should be
required to file more detailed support for its revenue requirement before any
increase in its revenue requirement is
permitted.
6048
I will pass immediately to the second of the three points. The evidence in this case indicates that
Northwestel is proposing, in effect, to replace $28 million in revenues that it
currently derives from charges levied on customers and payments received from
interconnecting carriers, and replace that $28 million with about $39 million in
explicit subsidy, to be drawn from the National Contribution
Fund.
6049
That explicit subsidy, to our amazement, amounts to in the order of 25
percent of the company's total revenues in any given year.
6050
Mr. Hamelin was asked in cross‑examination to provide an example of any
other commercial enterprise in Canada that receives a subsidy of that order, and
he was unable to name one.
6051
Right there, Mr. Chairman, should be a warning flag to the Commission
that there is something not quite right about the Northwestel
proposal.
6052
The company's request is driven, in large part, by its stated objective
that northern rates should be reasonably comparable to southern rates. That idea has an initial and superficial
appeal perhaps, but it doesn't make the costs that are associated with the
provision of services in the North simply go away. That issue of cost still needs to be
addressed.
6053
The objective of northern rates being reasonably comparable to southern
rates is certainly not one that is part of current Canadian public policy. It is not an objective that is mandated
by section 7 of the Telecommunications Act, and it is not contemplated, in our
submission, by section 46.5 of the Act, which is the provision that governs the
National Contribution Fund.
6054
Let me remind you, if I may, what section 46.5 provides. It says that the Commission may require
any telecommunications service provider to contribute, subject to any conditions
that the Commission may set, to a fund to support continuing access by Canadians
to basic telecommunications services.
6055
Whatever the words "access by Canadians to basic telecommunications
services" mean, it is unlikely that what Parliament had in mind, in our
submission, was that residential subscribers in Alberta or British Columbia or
Ontario or Quebec or Atlantic Canada, who pay into this fund, should underwrite
the cost of toll connecting trunks or high‑speed network access facilities or
private lines used by Bell Mobility or other carriers, or even by TELUS. That, in our submission, is simply not
what the fund is about.
6056
Indeed, the minister, when he was recently speaking on the subject of
universal access, did not endorse the concept that northern rates should be
reasonably comparable to southern rates, as was suggested at one point in this
proceeding. I will remind you of
what he said in the speech, as reproduced in Telus Exhibit No. 5. He said:
"Canadians living in remote areas of
the country where there is limited choice, the Government would ensure universal
access to telecommunication services at a reasonable price for those
Canadians."
6057
Nor have previous Commission decisions endorsed the idea that northern
rates should be reasonably comparable to southern rates.
6058
In Commission Decision 2000‑746, what you said was:
"The Commission agrees with the
objective of maximizing all revenue sources before depending on supplemental
funding." (As
read)
6059
This, in our respectful submission, Northwestel has plainly failed to do
and the idea, which I'll come to shortly, that some facilities should be zero
rated or certain rates should be lowered and the revenues associated with those
facilities and services should be sacrificed and replaced by money from the
national contribution fund, is simply inconsistent with Decision 2000‑746 and
the reasoning behind it.
6060
The Commission also spoke to the issue of the use of supplementary
funding in Decision 99‑16, and you'll recall that in that decision, which was
referred to you in testimony yesterday, what the Commission said
was:
"To be eligible for any
supplementary funding, Northwestel will have to demonstrate that it cannot meet
the basic service objective using the traditional funding mechanisms relied upon
by companies in southern Canada."
(As read)
6061
Again, in our respectful submission, Northwestel has failed to offer you
such a demonstration.
6062
Let me turn then to the subject of local rates and Northwestel's specific
proposal.
6063
Northwestel has, of course, proposed a $2 increase in local residential
rates and a $5 increase in local business rates but, in our submission, the
company has not given adequate attention to either affordability or
reasonableness.
6064
In cross‑examination the witnesses for Northwestel indicated on several
occasions that they conducted no affordability study and they also indicated
that they had not analyzed the potential for rate increases of a different
order, either up or down as part of their preparation of this
application.
6065
We understand, Mr. Chairman, that costs in this jurisdiction are higher
and that's a factor you will want to take into account in any determination you
make on the subject of local rates, but it is also the case that incomes are
higher.
6066
And I remind you that we filed as Telus Exhibits 3 and 4 some information
on average incomes in the Yukon and the Northwest Territories that showed there
was a significant gap between incomes in those two territories and average
incomes in the rest of Canada with the former being considerably
higher.
6067
Notwithstanding these misgivings we have about parts of the Northwestel
proposal for local rates, we do think that it is a safe minimum step for you to
approve a residential rate increase of $2, but we also think you should direct
Northwestel to conduct an affordability study and file it with the Commission,
so that going forward the company and the Commission have better information on
the limits of affordability in the territory served by
Northwestel.
6068
This would help you in getting an appropriate idea of the upper level
that the residential rates could rise to.
6069
So, I submit that it would be appropriate to approve the proposed rate
increase of $5 for basic local service ‑‑ sorry, local business
service.
6070
Next, if I can turn to the subject of toll connect. This is a particularly puzzling part of
Northwestel's proposal. They
propose to abandon the current CAT and at least part of the current settlements
and replace those with a switch connect rate.
6071
One of the oddities of the switch connect rate as put forward by
Northwestel is that it includes no cost for the toll connect facilities. Effectively, Northwestel is proposing
that these be zero‑rated.
6072
The revenue impact of adopting this part of the Northwestel proposal is
in the order of $18.4 million. That
is, in effect, about $25 million worth of CAT revenue and settlement revenue
would be sacrificed in return for about $7 million of switch connect revenue,
leaving the balance of $18.4 million that I have just mentioned. We think this proposal is fundamentally
misguided.
6073
It is said to be motivated by concerns about bypass of Northwestel's
network. Well, Mr. Chairman, this
charge would clearly eliminate any danger of bypass in that respect. If you are going to give away the
facility for free, it is a pretty safe bet that nobody else will build one in
competition with you. But we think
that is an overreaction to the threat of any competition that there may
be.
6074
It always seemed to us that there must be something more to this proposal
than concerns about bypass and it emerged in cross‑examination that, at least in
part, the proposal that Northwestel has put forward was the product of pressure
from what was referred to as a major customer. Well, nobody asked who that major
customer was and I am merely conjecturing when I suggest it might be Bell
Mobility. But whoever it was, the
answer that Northwestel gave to that customer should have just been, no, no
thank you. We can't zero rate
facilities for toll connect and draw the funds from the National Contribution
Fund to replace them.
6075
The bypass idea of course is premised on the notion that there is a
prospect of real competition for Northwestel in its territory. But the competition claims of
Northwestel have always seemed to us to be exaggerated. It became clear during the course of
this proceeding that Northwestel is most often just competing against itself and
other members of the Bell Canada family, Bell Mobility or the new venture that
Northwestel is a 70 per cent owner of called Latitude Wireless or potentially
the so‑called mining organization that was referred to in the ad from the Globe
& Mail that seems to suggest that Northwestel would be establishing a
reseller of combined packages of terrestrial and wireless
services.
6076
All of these parties are welcome in the north as service providers but,
given the close interrelationship between them, it is something of an
exaggeration to look on them as real competitors for
Northwestel.
6077
Other times of course competitors that do exist are simply reselling
Northwestel service or using Northwestel facilities. So there is no real prospect of
facilities‑based competition at present, other than what is potentially offered
by BRAND and that is a unique issue that should be dealt with in quite a
different way in our submission.
6078
So whatever the case is, we doubt very much that there is any need for
urgency on this point by Northwestel and the Commission has time to sort out
issues related to competition in the north and needn't feel compelled to rapidly
approve this proposal for revision of the toll connect arrangements and the
substitution of the switch connect charge.
6079
Our proposal is that the costs of toll connect should be included in the
switch connect so that it is a true cost‑based rate. The interrogatories from the Commission
to the company indicate that a charge of 4.15 cents would cover all of the
associated costs of switch connect, including toll connect and we think that is
the charge that this Commission should approve.
6080
If Northwestel chooses to charge less than 4.15 cents, then that should
be a decision, the consequences of which the company and its shareholders bear
themselves. There should be on
right to draw on the Contribution Fund for any difference between the 4.15 cents
in the switch connect charge that the company chooses to
implement.
6081
Let me next say something briefly about the other proposed rates
changes. These are detailed, of
course ‑‑ and other parties have already referred to these today ‑‑
they are detailed in Appendix 5 of the company's evidence, the table that
appears at the back of the evidence.
6082
Very significant decreases in private line and wireless service provider
network access charges are proposed.
These, again, seem to be the product of pressure from a major
customer. They don't seem to be
designed with any other objective in mind.
There is no evidence that those rates, which are substantially lower than
the current rates, would be compensatory and Mr. Woodland said in his
testimony that an economic evaluation study had been conducted for only one of
these products.
6083
Our proposal, Mr. Chairman, is that proposed reduction in these rates
must be cost‑justified and we recommend that if the company wishes to proceed
with these proposed rate reductions that they should be required to file a Phase
II cost study to substantiate the reasonableness and the "compensatoriness" of
the proposed charges.
6084
Again, if Northwestel chooses to lower rates below those levels, they
should have no right to draw from the National Contribution Fund to make up the
discrepancy. Those funds, I repeat,
are not there to subsidize Bell Mobility or Latitude Wireless or even
Telus. They are there for the
benefit of subscribers, not for carriers and competitors or major customers of
the company.
6085
Another issue that arises is the need to consider the current balance
between Northwestel's wholesale and retail prices.
6086
Northwestel has proposed lowering significantly the wholesale prices that
I have referred to. We do have a
concern that the lowering of these wholesale prices will simply lead to a
reduction in retail prices.
6087
Such reductions will do nothing to alleviate Northwestel's competitive
problems and it will lead to a reduction of both in the end wholesale and retail
revenues, increasing the economic pressure on the
company.
6088
Again, whatever steps the company chooses to take in this regard, the
National Contribution Fund should not be available to them to make up any
differential.
6089
The third of the three steps that we suggest need to be undertaken by the
Commission as part of any transition to price caps by Northwestel relates to the
regulation of prices over time and how that will be
achieved.
6090
Northwestel has proposed what is referred to as a modified price cap
proposal and the important word in that phrase, Mr. Chairman, seems to be the
word "modified."
6091
The proposal put forward by Northwestel does not comport with what is
usually understood as a price cap regime.
In particular there is considerable asymmetry between what we would call
the upside and the downside risk to the company.
6092
The company has proposed that they have multiple escape paths from the
regime if events don't turn out the way it is presently contemplated, which is
an idea that is largely antithetical to the idea of a price cap
regime.
6093
We will elaborate on our concerns about the company's proposal in that
regard in our written argument but let me give you in the meantime a summary of
what our proposal for the company should be in respect of its price cap
regime.
6094
First of all, Mr. Chairman, we do not support a delay in introducing
price caps. We think that would
probably be counterproductive.
6095
Secondly, we propose that contribution per line should be included in the
residential services basket and that is also a point we will elaborate on in
final argument.
6096
Third, we propose that the residential services basket be governed by an
X factor of X equals I pending the determination of a new X that would be the
outcome of the new effort that the company has undertaken to make to develop
more data points for the establishment of a proper X factor. But, as we say, in the meantime X should
be set at equal to I.
6097
Fourth, we propose that residential local service rates should be allowed
to rise on average by the rate of inflation, which indeed is implicit in the X
equals I, and there should be a consequent reduction in contribution per
line.
6098
Mr. Chairman, together with the document I had passed up to you as part
of my written materials you will find a chart at the end that looks like this,
which is an attempt to simply reproduce in the simplest possible terms what our
proposal is for residential local rates.
6099
I will just take a minute to explain that.
6100
The top line, it's labelled "X equals I", is essentially the
cost of providing residential local rates.
It's Phase 2 plus 25 percent.
6101
The sloping line that you see beneath that is local rates. They start at present at a certain level
and they should be allowed to rise over time with the rate of inflation. As that happens, assuming costs remain
constant, contribution will naturally shrink over time.
6102
When a new X is determined for the company as a result of this new effort
the company has undertaken to make, when the new X is determined the cost line
at the top may slope up or down, depending on the new X
factor.
6103
That is, in a nutshell, our proposal for local residential
rates. We think this would
address the contribution issue because it would make provision for contribution
falling over time in all likelihood and it would ‑‑ in the short term
at least local rates would be allowed to rise only by the rate of inflation, and
all of this would be subject, of course, to the findings of the affordability
study that we have recommended the company be directed to
undertake.
6104
The fifth point in connection with the price cap proposal, there should
be another retail services basket which would include local business service and
X should be set equal to I for that basket as well, again pending the
determination of a new X. Of
course, there would also be the possibility of rate element constraints being
posed on the company in conjunction with that basket.
6105
Finally, in this section of our oral argument, we suggest that there
should be a wholesale services basket and the rates for services in that
basket be frozen pending the determination of a new
X.
6106
I will turn, then, to the final part of my submission, which is entitled
"What should the Commission do?"
This is essentially a recap of what I have already said, Mr.
Chairman.
6107
We say first of all that there should be no increase in Northwestel's
revenue requirement without fuller evidentiary support.
6108
We should say that there should be no rate or contribution changes, with
three exceptions:
6109
Residential rates should be allowed to increase by $2.00; business rates
by $5.00; and the CAT rate should be set at 4.15 cents.
6110
The Commission should order Northwestel to submit affordability data to
assist the Commission in determining the affordable reasonable level of rates,
and hence the support required from the National Contribution Fund going
forward.
6111
On an interim basis, X should be set equal to I for local residential
services and other retail services and there should have been interim freezing
of wholesale rates.
6112
There should be the submission of a reliable productivity that is X
factor study.
6113
You will see my last point on this page was, there should be forbearance
for Telus retail toll service.
6114
It is certainly a good idea, Mr. Chairman, but not one that we
intended to put forward as part of our case today.
6115
We will address the subject of Northwestel retail toll service
forbearance in our final argument.
6116
Mr. Chairman, we came here today, in short, because we were concerned
that the National Contribution Fund would be used by Northwestel to top up its
revenue requirement. We are
confident that the proposals we are making will ensure that the fund is used
only for purposes for which it was originally intended.
6117
We conclude where we began.
We say that in order to accomplish the Commission objectives, support
from outside the North will certainly be required. We say that Telus is glad to do its
part, and we want to see Northwestel also do its part.
6118
Thank you very much.
6119
THE CHAIRPERSON: Thank you,
Mr. Ryan, Telus.
6120
A question from Mr. McCallum.
6121
MR. McCALLUM: Just a quick
clarification, if I may.
6122
For the purpose of the record, you referred to the graphic that is at the
back of your submission. We have
not been making the final arguments exhibits expressly.
6123
In this case, if this is going to be included in your final written
argument then there would be no need to make this an exhibit. I just wonder if you could clarify if
that is going to be included in your written as
well.
6124
MR. RYAN: We will see that
it is included in our final written argument and that would address the
procedural point.
6125
MR. McCALLUM: Then when the
transcript is read, it is read with something that is the same as what you have
just submitted today.
6126
MR. RYAN: All
right.
6127
MR. McCALLUM: Thank you very
much.
6128
THE CHAIRPERSON: Thank
you.
6129
THE SECRETARY: We will hear
the last party to provide oral final argument.
6130
Northwestel, please come forward.
ARGUMENT /
PLAIDOIRIE
6131
MR. FLAHERTY: Mr. Chairman,
Members of the Commission, as we bring this hearing to a close, I think all of
us have developed a sense of the importance of the Commission's task in this
proceeding.
6132
This hearing is about more than Northwestel. It is about the future of
telecommunications services in the North.
From the larger centres like Whitehorse all the way to Arctic Bay, to Old
Crow, to Sanikiluaq, will the people of the North have access to most or all of
the services that are available to Canadians in the
South?
6133
If we can ensure that they will have access to those services, how can we
ensure that the prices will be reasonable in the context of the North and in
relation to prices in southern Canada?
6134
We take our role as the service provider of last resort very
seriously. For us this means
serving not only the major centres but all of the remote villages scattered
across the Arctic tundra. You have
seen our commitment in our quality of service results.
6135
As we go forward into a new regulatory regime, we are looking for a model
that will permit us to continue to serve in that way and survive
financially. In these remarks, I
will be giving you an overview of some of the key points that in our view should
be the focus of attention.
6136
To better understand the context in which Northwestel and other northern
telecommunications service providers operate it is useful to consider some key
characteristics of northern demand and usage of telecommunications
services.
6137
Based on our experience as an operating company in the North, we can say
that Northerners are in some ways the same and in other ways different from
customers in the South. They are
the same in that they seek similar modern telecommunications services to
communicate with family, friends and for business
purposes.
6138
At the same time they are very different in certain ways. Because most of the communities are
isolated and distant from each other, as well as from large urban centres in the
South, Northerners rely very heavily on telecommunications services to stay in
touch with others in the North or in the South.
6139
They simply have no option.
They have a greater dependency on telecommunications services for
purposes such as health, education and commercial
dealings.
6140
When faced with higher rates for service they desire or need, like all
other Canadians, Northerners seek alternatives. Northerners have shown that they are
unusually adept at seeking out and taking advantage of lower cost
alternatives.
6141
For example, prior to the introduction of long distance competition in
2001, many Northerners used various forms of call back services to evade the
high cost long distance rates of Northwestel.
6142
They also used prepaid cards to obtain rates even prior to the legal
introduction of long distance competition.
6143
In my testimony yesterday, I spoke of the rapid growth of VoIP services
in the North, mostly using Skype or Vonage, in order to obtain free, or nearly
free, long distance services.
6144
None of this is at all surprising.
Like all Canadians, northerners have needs for comparable services which
they must meet. One way or another,
they find means to obtain those services at the lowest possible
rates.
6145
In this regard, they are the same as all Canadians: they want comparable services to those
available to Canadians. To their
credit, they have a proven track record of finding alternative means to obtain
those services at prices comparable to those in the South.
6146
Frankly, we should expect nothing more and nothing less from
northerners. If the northern
telecommunications regulatory system does not provide them with comparable
services at reasonably comparable rates, northerners simply cannot be forced to
accept such a system, nor should we expect them to.
6147
Northwestel is concerned that some parties are attempting to leave the
impression that competition in northern Canada is an illusion. It is far from an illusion. Customers enjoy significant choice today
from multiple service providers offering products and services in many
forms.
6148
We have spoken at length of toll competition in the North, which has
resulted in competitors capturing 32 percent market share in a mere six‑year
period.
6149
The primary form of competition, prepaid cards, is unique to the North,
but it is a testament to the adaptability of northerners to find alternative
solutions.
6150
Prepaid cards are offered by national providers at national rates as low
as 2.5 cents a minute.
6151
In addition, technology‑based competition in the form of cellular and
satellite solutions offer customers alternative means to local access, toll and
features, solutions that erode Northwestel's NAS and toll
revenues.
6152
On Monday, Mr. Stewart, a local Yellowknife businessman, noted in opening
comments the use of a satellite solution from one of the three diamond mines in
the Northwest Territories receiving dial tone from
Vancouver.
6153
In fact, we can tell you that two of the three diamond mines have service
from a southern‑based satellite provider other than
Northwestel.
6154
The vast majority of oil and gas companies in northern British Columbia
obtain their services from providers other than
Northwestel.
6155
Many more of these alternate solutions will be deployed in the North with
extensive mining and oil and gas operations expected in the near
term.
6156
Cellular service is offered by five service providers in the North, who
will offer service covering 77 percent of Northwestel's customer
base.
6157
Two of the predominant carriers, Bell and TELUS, are locked in a national
pitched battle for market share.
Any spillover effects on the northern market are of no concern to either
company.
6158
Service plans can include free long distance, or the same toll rates
offered in southern Canada.
6159
In addition, there are many transient and seasonal resource workers in
the oil and gas and mining industries, working throughout the North, who use
cellular plans obtained in the South.
6160
There are 13 broadband ISPs in the North. This has become a highly competitive
market, particularly in our largest centre, where the company has approximately
50 percent market share.
6161
There are 34 cable service providers in the North, serving over 80
percent of the NAS lines, and 33 of these providers are not affiliated with
Northwestel.
6162
Many of these cable providers offer high‑speed internet today and have
the capability of offering Voice over IP applications.
6163
IP technology is drastically changing the competitive landscape in the
North. Voice over IP providers
offer an enhanced value proposition to northern residents through
distance‑insensitive rating.
6164
Of particular note is Skype offering free long
distance.
6165
Currently, approximately 3 percent of Northwestel's toll minutes are
being carried by VoIP providers, 80 percent of that by Skype. These numbers have grown by 300 percent
in the last six months.
6166
There are, of course, a multitude of PBX equipment providers that now
offer IP‑based solutions that, for example, interconnect branch offices with
VPNs and completely bypass Northwestel's toll
network.
6167
These solutions are particularly attractive to the customers that
Northwestel is most dependent upon, as 50 of our largest customers account for
over 60 percent of our toll business.
6168
One recent customer deployed equipment and estimated that it would have a
payback period of only eight months on the equipment, based on the toll savings
alone.
6169
Northwestel has spoken at length of the BRAND and NSI programs from
Industry Canada that result in the availability of broad band and data services
in 56 of the communities in the Northwest Territories and
Nunavut.
6170
In addition, the Department of Indian & Northern Affairs is
specifically funding and promoting the development of VOIP solutions through the
north using subsidized community champions to push the adoption of
VOIP.
6171
These government sponsored programs not only result in duplicate
infrastructure serving remote communities, but also actively promote subsidized
bypass of Northwestel's network and services, even in the most remote,
uneconomic communities.
6172
The company highlights this situation for several reasons. Firstly, although the Commission is
clearly not responsible for this situation, it is important that we all do what
we can so that going forward government and regulatory policy is more closely
coordinated to avoid such situations in the future.
6173
Secondly, and far more relevant to the case at hand, the creation of
these duplicate networks will increase risk to the company going forward in
terms of both additional competition, as well as the potential for stranded
investment.
6174
Migration of customers to these government‑funded IP networks can be
expected to drive up the unit cost of the service the Commission supervise most
closely, residential primary exchange services, thus requiring greater subsidies
in future price cap periods.
6175
With respect to the proposal put forward by the company in this
proceeding, it is essential to note that no competitive losses associated with
such alternative networks have been incorporated in the financial forecasts put
forward.
6176
Thus, to be clear, there is no subsidy being requested in association
with competitive losses to such networks.
6177
In addition, our price cap proposal does not provide any mechanism to
support the company in the case of future customer losses to these
competitors.
6178
Effectively, the company would be expected to bear the impacts of any
such losses during the upcoming price cap period.
6179
Most parties agree that a subsidy is required in the north. Telus agrees with this principle, as
we've just heard.
6180
Northwestel submits that it's not a question of whether a subsidy is
needed, rather the issue is how large a subsidy and how to fund
it.
6181
Northwestel notes that a significant portion of its current subsidy is
funded on a per‑minute usage basis through the current high CAT and high
transport rates. That method of
subsidizing high cost areas has been abandoned in the
south.
6182
Northwestel submits that the inclusion of a usage‑based subsidy in its
current rates, such as the CAT and transport rates, encourages faster migration
of traffic from the TDM Legacy Network to alternative networks and/or
technologies, including IP.
6183
Traffic on these alternative networks do not contribute to the funding of
Northwestel's remote and rural network.
6184
Northwestel's high dependence on a major subsidy stream tied to the usage
of Legacy services on a per‑minute basis constitutes a unique
risk.
6185
As you know, the subsidy requirement of other carriers is funded in its
entirety through the revenue tax mechanism associated with the national
contribution fund.
6186
This risk is of particular concern to Northwestel with regard to
interconnecting carriers. Given the
large volume of traffic associated with each of these individual carriers, there
is potential for a sudden and significant impact in the event of a decision on
their part to migrate their traffic to an IP network.
6187
The same is true for the small number of large customers who account for
the majority of Northwestel's toll traffic. As you have heard, our 50 largest
customers account for approximately 61 per cent of the toll
traffic.
6188
With regard to toll connect facilities, simply put, these facilities are
uneconomic. As Northwestel
indicated in its testimony, our major centres have essentially zero costs
associated with toll connect facilities because they essentially use a direct
connect method.
6189
Nevertheless, these same major centres are required to bear the cost of
this uneconomic facility.
6190
Clearly, Northwestel cannot absorb these significant costs in its rate
base without totally undermining both the reasonableness and sustainability of
rates.
6191
The current CAT is 60 times higher than the direct connect rate of
southern ILECs and even the proposed lower switch connect rate remains seven
times the comparable direct connect rates.
6192
Current business toll rates are an average 60 per cent above the
prevailing Legacy Network business toll rates in southern Canada and the
proposed rates remain 25 per cent higher.
6193
Currently, digital private line rates are approximately 15 times higher
than rates on forborne roots in rural and of similar distance. The proposed rates remain approximately
14 times higher. Current wireless
service provider interconnection rates are 12 times higher and the proposed
rates remain twice as high.
Finally, even the residential local services revenues, at the proposed
rates, will be 18 per cent higher than the national
averages.
6194
To not subsidize these facilities seriously puts in jeopardy the entire
toll connect network. Given that investments had been made, this must clearly
constitute a breach of regulatory bargain.
In the final analysis the jeopardy to the funding of Northwestel's
subsidy requirement puts at risk Northwestel's ability to meet its obligation as
a provider of last resort throughout all of the north.
6195
Over the course of this hearing we have heard several parties reiterate
the importance of ensuring Northwestel has a regulatory framework which enables
it to continue acting as a provider of last resort. In its opening statement YTG listed as
one element of their five statements of principle that regulatory framework
should enable the continuation of Northwestel as a viable northern‑based
telecommunications provider.
6196
There have been a number of references in this proceeding to the issue of
affordability. The issue is
certainly a relevant issue for the Commission. How should the Commission reach a
conclusion concerning affordability?
While there is no absolute measure of affordability, there are a number
of factors that the Commission normally considers in this context. No one factor is determinative. Among these of course, evidence
regarding drop‑off and/or penetration rates.
6197
We keep track of drop off and the reasons people provided for dropping
off. By this one measure, there is
no evidence that warrants any concern.
Last year we had only 20 customers who mentioned affordability as the
reason to terminate service.
6198
Penetration rates also do not show any statistically significant
decline. Apart from the overall
decline occurring in all telephone companies as subscribers replace wire line
phones with wireless and/or Voice over IP.
6199
There are other factors relevant to affordability which the Commission
often considers, though no one factor is conclusive. For example, the Commission will often
consider rates already approved for the same or similar services offered by
other incumbent companies. This
approach is very commonly followed by the Commission when assessing proposed
rates of the small incumbent telephone companies. These small companies frequently do not
have statistical data on affordability within their territory, thus the
Commission has regard to the rates already approved for similar services in
neighbouring telephone companies.
6200
The magnitude of the gap between rates and costs is another relevant
factor. The Commission has been
gradually moving residential primary exchange service rates closer to cost. The larger the gap or shortfall the more
the Commission appears to be interested in taking steps to narrow the
gap.
6201
The percentage increase sought is another factor. The Commission seems willing to accept
price cap formulas which permit an increase up to 5 per cent in a year. Such an increase does not appear to
cause the Commission great concern about affordability even when, as in our
case, there is no demographic analysis available of the customer
base.
6202
Finally, although all of the foregoing factors are relevant to assess
affordability, in the final analysis there is no precise formula or equation to
quantify the affordability of a rate.
Ultimately, affordability is a matter of judgment to be exercised by the
Commission based on all the facts and circumstances of each
case.
6203
It has been suggested that the quality of service penalties and rebates
might be necessary as one element of any price cap framework for
Northwestel. This is suggested
notwithstanding the widespread recognition by all parties and the Commission
that Northwestel's quality of service has been and continues to be
high.
6204
In our view, the rebate penalty mechanism is a solution in search of a
problem. There is no such problem
now and it would be a fundamental error for the Commission to assume in advance
that there necessarily will be such a problem. Each company must be regulated as a
separate entity in light of its own circumstances.
6205
Furthermore, Northwestel would suggest that the imposition of such a
penalty mechanism in the absence of any demonstrated need would be contrary to
both the letter and the spirit of the proposed policy direction to the CRTC and
the Telecom Policy Review report.
In both of these documents the clear recommendation is that the CRTC
should intervene and regulate only where there is a demonstrated need and even
then only to the minimum extent necessary.
6206
Thus to assume a quality of service problem exists where there is no
evidence and then to impose regulation is contrary, in our view, to the spirit
and direction of the directive proposed by the
Minister.
6207
Nevertheless I can assure you, Mr. Chairman, that if Northwestel's
quality of service were to deteriorate consistently below the standards
prescribed by the Commission, absent an awfully good explanation and
justification, we fully recognize that the Commission would need to
act.
6208
There has been considerable discussion over the past four days concerning
the topic of subsidization, and rightfully so since in one form or another
subsidization is unavoidable. It is
central to the business reality of telecommunications in the north both today
and in the future.
6209
The reality today is that Northwestel's actual current subsidy
requirements is in excess of $40 million.
Under the present regulatory framework we receive about $10 million in
supplemental funding from the National Contribution Fund and the remaining
shortfall is covered by cross‑subsidization from very high‑price services
charged to the company's customers and interconnecting
carriers.
6210
Aside from being fundamentally inconsistent with price cap regulatory
principles, internal cross‑subsidies are simply unsustainable in light of
alternative networks and the emergence of IP‑based
technologies.
6211
Under the proposal being put forward some $30 million of this implicit
subsidization will be made explicit.
6212
To break out the elements of the subsidy requirement, $11 million alone
is attributed to the ongoing cost associated with the service improvement
program that was rolled out over the past five years to further the basic
service objective in largely uneconomic regions.
6213
Approximately $17 million of this subsidy is due to residential primary
exchange services following exactly the same approach and methodology employed
by southern telcos under price caps.
6214
The residential PES cost study underscores the high cost of that service
in particular and the high cost of Northwestel's operating area in
general.
6215
The implementation of key system investments essential to the efficient
operation of a small telecommunications company like Northwestel has added a
large increment to those costs.
6216
The addition of 2,800 NAS under the service improvement program at 10
times our average per NAS investment cost increased the overall average cost of
residential primary exchange service
significantly.
6217
Eleven million of the subsidy required relates to toll connect and is an
essential component to ensure the viability of the long thin transport routes
and the extensive toll satellite network that provides basic connectivity to the
rural and remote communities in Northwestel's operating
area.
6218
Seventy‑one per cent of the toll connect facility costs are incurred by
the 42 small communities served by satellite. This illustrates the extreme
difficulties Northwestel faces in trying to balance the competing principles of
cost‑based rating and the provision of reasonably comparable services and
rates.
6219
This reallocation of subsidy from implicit to explicit will in no way
provide a windfall benefit to Northwestel.
It will create an environment significantly more transparent and
competitor‑friendly.
6220
Other than the proposed local rate increase for residential customers
there is no linkage between the subsidy requirement and Northwestel's proposed
rate structure. There should be no
mistaking the fact that the subsidy proposed is truly
cost‑based.
6221
Northwestel notes that there appears to be a concern regarding the
adequacy of our costing. Leading up
to and over the course of this proceeding Northwestel has put significant effort
into its Phase II cost studies.
6222
These studies support the calculation of residential primary exchange
service costs, rates and the resultant subsidy, toll connection facility costs
and the resultant proposed subsidy, switch connect facility costs and the
resultant rate proposed as a replacement for the current bundled CAT rate, the
imputation test for toll service and toll‑free service, and finally
consideration of an appropriate productivity or X factor.
6223
The studies were all performed in accordance with standard Phase II
costing principles, as guided and assisted by Mr. Leon Schufelt, an independent
expert well known to the Commission.
6224
No party challenged the validity of either the input data or the
methodologies used. The issue is
not one of quality nor of accuracy but rather it pertains only to the lack of
additional data points specific to the productivity
study.
6225
We recognize that there are insufficient data points to clearly determine
the productivity factor. However,
the increase in cost between the two years studied illustrates the high‑cost
nature of Northwestel's environment and the challenges faced in reducing costs
in residential PES and any other services with a high proportion of fixed
costs.
6226
Northwestel has proposed to permit resale of local access services in its
territory as an immediate means to extend the benefits of local competition to
customers in the North. Resale of
Northwestel's retail services will allow competitors to incorporate local
service in a value‑added bundle for customers, extending to customers the
benefits of competitive innovations in value‑added
services.
6227
Resale of Northwestel's retail services will also allow national
competitors to serve their national customers in the
North.
6228
Cellular telephone service also provides another form of choice to both
residential customers and small businesses in the North.
6229
The attractiveness of cellular telephone service as an alternative to
local service in the North has recently increased due to aggressive pricing for
both airtime and long distance rates.
The CRTC 2005 Decima survey indicated that a full 15 percent of
residential customers surveyed would consider replacing their local wireline
service with wireless service.
6230
With regard to the issue of facilities‑based competition, Northwestel
notes that it has proposed a roadmap to move forward on this issue similar to
the model employed for the introduction of long distance competition in the
North.
6231
I won't go into the details here, but in response to Interrogatories
CRTC‑1501, 1502 and 1503, we describe the practical engineering impediments we
face to implement the Commission's model for competitive local exchange
carriers. Solutions to these
impediments must be developed, costs understood and the implications on the
broader telecom model in the North understood to determine the feasibility of
proceeding with facilities‑based competition.
6232
Finally, I note that to date no competitive local exchange carrier has
approached the company seeking local network
interconnection.
6233
Northwestel is quite concerned by some suggestions relating to the
retention of substantively most of the regulatory requirements associated with
its current regime.
6234
In Telecom Decision CRTC 2002‑43 the Commission concluded that any form
of earnings regulation would negate the regulatory streamlining benefits
inherent in price cap regulation since most of the details related to the
current reporting requirements would have to be maintained. The Commission found that the
disadvantages of such an approach outweigh its benefits.
6235
Northwestel submits that if some form of earnings‑based regulation
is to be retained in the North, then its current regulatory framework should be
retained rather than a mix of price caps and earnings
regulation.
6236
In any event, regardless of the ultimate form of regulation, material
changes in the operating environment in the North requires restructuring of
Northwestel's rates to address the unsustainability of continued funding of the
company's subsidy requirement through usage‑based and permanent levies on legacy
services.
6237
In conclusion, Mr. Chairman and Members of the Panel, we thank you and
your staff for your time and attention.
6238
You have an important and difficult task in this case. Your decision will affect the whole of
the North and its effect will be felt for many years. We will of course be addressing further
matters in the written argument next week.
6239
We, and all parties from the North, have been pleased to participate in
this proceeding and express our views directly to the Commission in the region
in which we live and work. We wish
you well in your deliberations.
6240
Thank you.
6241
THE CHAIRPERSON: Thank you very much, Mr. Flaherty and
Northwestel.
6242
I think, Madame la Secrétaire, that brings our proceedings to a
close?
6243
THE SECRETARY: That's it for
today.
6244
THE CHAIRPERSON: The
Commission would like to thank all of the participants in this hearing. We appreciate your investment of time,
energy and wisdom in helping the Commission to come to an appropriately balance
conclusion or set of conclusions.
The conduct of the hearing throughout on your part has been exemplary and
we appreciate that as well.
6245
I would like, on behalf of my colleagues at the front of the room, to
thank our staff for the hard work and the smooth operation of the hearing. I know that it represents rather more
effort than is immediately obvious to those of you who simply see them during
the hearing because most of their work is before, after and around the
hearing. They have done a very fine
job.
6246
I would like to say on behalf of my colleagues, it has been a pleasure
for us to be here in Whitehorse and to appreciate firsthand some small fraction
of the organizational and technical and financial challenges that Northwestel
has to face, thus far with conspicuous success.
6247
So thank you very much.
‑‑‑ Whereupon the hearing concluded
at 1615 /
L'audience se termine à
1615
REPORTERS
______________________
______________________
Kristin Johansson
Richard
Johansson
______________________
______________________
Jean Desaulniers
Fiona Potvin
______________________
______________________
Sue Villeneuve
Beverley Dillabough