INST Committee Meeting

37th PARLIAMENT, 2nd SESSION

Standing Committee on Industry, Science and Technology

EVIDENCE

CONTENTS

Tuesday, February 4, 2003

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1535

The Chair (Mr. Walt Lastewka (St. Catharines, Lib.))

Mr. François Ménard (Project Manager, Telecommunications, XIT Telecom)

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1540

¹

1545

The Chair

Mr. Jean Sébastien (Telecommunications Policy Analyst, "Union des consommateurs")

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1550

¹

1555

º

1600

The Chair

Mrs. Cheryl Gallant (Renfrew—Nipissing—Pembroke, Canadian Alliance)

Mr. François Ménard

Mrs. Cheryl Gallant

Mr. François Ménard

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1605

Mrs. Cheryl Gallant

Mr. François Ménard

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1610

Mrs. Cheryl Gallant

Mr. François Ménard

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1615

The Chair

Mr. Brent St. Denis (Algoma—Manitoulin, Lib.)

Mr. François Ménard

Mr. Brent St. Denis

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1620

Mr. Jean Sébastien

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1625

The Chair

Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance)

Mr. François Ménard

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1630

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1635

The Chair

Mr. Larry Bagnell (Yukon, Lib.)

Mr. François Ménard

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1640

Mr. Larry Bagnell

Mr. Jean Sébastien

The Chair

Mr. Odina Desrochers (Lotbinière—L'Érable, BQ)

The Chair

Mr. Odina Desrochers

Mr. Jean Sébastien

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1645

Mr. Odina Desrochers

Mr. Jean Sébastien

Mr. Odina Desrochers

Mr. Jean Sébastien

Mr. Odina Desrochers

The Chair

Mr. Gilbert Normand (Bellechasse—Etchemins—Montmagny—L'Islet, Lib.)

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1650

Mr. François Ménard

Mr. Gilbert Normand

Mr. François Ménard

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1655

»

1700

The Chair

Ms. Paddy Torsney (Burlington, Lib.)

Mr. François Ménard

»

1705

Mr. Jean Sébastien

»

1710

The Chair

Mr. Brian Fitzpatrick

Mr. Jean Sébastien

Mr. Brian Fitzpatrick

Mr. François Ménard

»

1715

The Chair

Mr. Serge Marcil (Beauharnois—Salaberry, Lib.)

»

1720

Mr. Jean Sébastien

Mr. Serge Marcil

Mr. François Ménard

»

1725

The Chair

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.)

Mr. François Ménard

»

1730

The Chair

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CANADA

Standing Committee on Industry, Science and Technology

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NUMBER 015

l

2nd SESSION

l

37th PARLIAMENT

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EVIDENCE

Tuesday, February 4, 2003

[Recorded by Electronic Apparatus]

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[English]

    The Chair (Mr. Walt Lastewka (St. Catharines, Lib.)): We'll bring this meeting to order.

    Pursuant to Standing Order 108(2), this is a consideration of foreign investment restrictions applicable to telecommunications common carriers.

    Today we have two witnesses, one from Xit Telecom, François Ménard, welcome, and one from Union des consommateurs, Jean Sébastien. Welcome to you both.

    We'd like to have your opening remarks for 10 minutes. I'll give you a bit of a warning as you go over, but try to keep within that time limit. Then we'll open up for questions from the members of Parliament.

    We'll begin with François Ménard.

    Mr. François Ménard (Project Manager, Telecommunications, XIT Telecom): Good afternoon.

    XIT Telecom is an engineering firm specializing in the construction and operation of private fibre optic networks. Our contribution to the changing of the Canadian telecom landscape since 1997 was recognized in 2001 by CANARIE. We operate more than 1,000 kilometres of facilities-based new infrastructure, have been involved in the engineering of 4,000 kilometres of network on behalf of RISQ in Quebec, which links up all universities in Quebec, and have realized preliminary and/or detailed engineering for over 30 school boards and over 20 municipalities, primarily in Quebec, but increasingly across Canada. We've realized various projects from Kamloops, B.C., to Fredericton, N.B., with specific involvement in the feasibility studies behind the establishment of most optical research area networks, such as Alberta Supernet, ORANO in Ontario, RISQ in Quebec, and the ORANs that are on the drawing board in New Brunswick and Nova Scotia. Our expertise is now crossing the American border with our involvement in the Eastern Adirondacks community network, which is over 600 miles of network across Clinton, Essex, and Franklin counties in upstate New York.

    With the availability of the Villages Branchés program of the Government of Quebec and of the BRAND pilot program of Industry Canada, which is the Broadband Rural and Northern Development pilot program, we should be busier than ever before. However, this is not true, as the incumbents have now begun competing with us, with a commitment to sell their existing capacity built under monopoly regulations at costs that are lower than the cost of construction of new networks, and this without first making proper tariff applications to the CRTC.

    The problem of lack of competition in the last mile throughout Canada has nothing to do with the presence or absence of foreign capital in the system. Rather, the problem results from a total lack of incentive for the public to clamour for change in the system as it exists. Businesses are demanding lower rates, but the venue of competition, especially in high-speed Internet access, has yet to capture the interest of consumer groups--and I believe the next witness will be best positioned to comment on this.

    As currently established, pricing for residential users is subsidized at a rate that is not compensatory of the costs that must be experienced by potential new entrants into this marketplace. The subsidization is supported by prices well above marginal cost for businesses and non-residential users. The cap on existing residential rate increases sets these conditions in stone, which causes the unintended consequence that the development of competition is occurring in the absence of a clear mandate given to Parliament from the population that the barriers to entry should be lowered. The artificially high prices to non-residential users, business users, are more than compensatory for the incumbent telcos, while the less than compensatory pricing for residential users is welcomed by the residents. This pricing regime forecloses any clamour by individuals for change. Until competition can enter with force sufficient to break the artificially high prices currently charged for business users, this situation will persist. Only if real competition is introduced into the non-residential sectors will the ability of incumbents to maintain artificially high prices to these sectors be overcome. Then, assuming that the price caps are taken aside, residential pricing could actually rise to market levels, greatly enhancing the possibility for entry by competitors.

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    There are at least two other factors that appear to be motivating the requirement for the injection of foreign capital into the Canadian telecom system. These factors have one thing in common: apparently, additional funding is necessary to finance competitive endeavours, whether such projects come from new entrants like ourselves, XIT Telecom, or telcos wanting to compete outside their present territories. These two factors are the volatility of the cost to use the public right of way and the inefficiency of the current points of interconnection with the essential facilities owned by the incumbents. They are two very specific issues. When I say the inefficiency of the points of interconnection with essential facilities owned by the incumbents, I'm referring to essential facilities as in the definition taken by the CRTC, which is facilities that are uneconomical for new entrants to overbuild or reproduce. Those factors are common, in that the cost of implementing competition has been and continues to be much higher than necessary , because of the inability of Parliament to be proactive about it, much to the satisfaction of the ILECs, which continue to argue that if the rules were any different, they would result in inefficient and unsustainable entry into the market.

    Let me dive in a little deeper on my two points, first the volatility of the cost to use a public right of way, which I will call a support structure lottery. Few new entrants have been building as a third or fourth party on the existing structures of the incumbent telcos and cablecos as much as we have. We are witnessing first-hand the barriers to entry for the venue of additional facilities in the last mile. Countless times have we been asked to pay huge make-ready costs, the costs to make existing support structures of poles and conduits ready to accommodate our cables, because the current rules of the game are that the newest entrant must be the one to bear all costs. This indeed causes a form of support structure lottery, which only the incumbents can win, as only they are capable of freeing existing capacity, such as taking down an old telephone cable that is consuming space on the pole, without then being faced with the cost of changing the poles or overbuilding conduits, as we are being asked to do, because the telcos want to keep their existing stuff on the poles, which takes up too much space. A comprehensive and steady fast review of the rules for access to support structures is an important conclusion of the national broadband task force that has yet to be acted upon by the CRTC.

    In addition, it was announced yesterday that the Supreme Court will hear on February 19 the arguments of the Canadian Cable Television Association that the meaning of “transmission line”, as incorporated in the 1993 Telecommunications Act, needed to be overly broad to incorporate all power transmissions lines, and thus subject to CRTC regulations.

    Without constitutional federal pre-emption on support structures owned by power utilities, new entrants like us are left at the mercy of lengthy negotiations with power utilities, while the incumbents enjoy grandfathered non-compliance with the current terms and conditions of joint-use contracts. The monopoly control of support structures permits the incumbents to charge exploitative fees for access, to delay provision of access, or merely to refrain from building out such structures and just block access.

    My other point is on the inefficiency of the points of interconnection with the essential facilities owned by the incumbents. A further factor is the collocation requirement for potential entrants into the local loop, which also undermines the potential for change. What I mean by collocation into the local loop is that the ILECs have lured new entrants, the CLECs, into interconnecting with their copper plant inside their central offices. The start-up cost for penetrating a teleco fortress is of the order of $100,000, and there can be tens of COs in big cities. It's a huge cost for CLECs just to penetrate the fortress. In the meantime, with the advances in technology, the incumbents themselves are driving fibre deeper and deeper into neighbourhoods to remote connection points and further and further away from the central offices. The incumbents are thus in a position to abandon a significant portion of their copper plant in exchange for fibre connectivity to these remote points, while potential competitors are forced back into the copper plant for their connectivity, which can only be accomplished at very high cost and through investing in equipment that is obsolescent. This combination of low potential revenue and high required cost makes the potential for facilities-based competition extremely unattractive.

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    On a good note, only at the beginning of 2003 has the CRTC finally launched a process to consider a more efficient interconnection point with the existing telephone network, one that does not require new entrants to build collocation cages inside telco central offices and is based on optical fibre, instead of old copper. It is noted that discussions on this very topic have been the subject of intense CRTC activities for over two years as they pertain to third-party access to cable modem networks of large incumbent cable carriers. If the CRTC continues to be understaffed and technologically ill-equipped to move any faster, it will not be surprising to see the necessity to develop technology-neutral regulations common to both cable and telephone adding months of delays to what is already the longest proceeding in the CRTC's history, as it's been going on since 1996 and rates have yet to be approved, even on an interim basis.

    Even under these changed conditions, however, significant entry remains highly unlikely. This is because incumbents control the support structures through which new entry must occur. None of this has to do with the presence or absence of foreign capital in the Canadian system. In fact, opening the existing system in Canada to foreign capital could well enhance the monopoly power of the existing players.

    The Chair: Thank you very much.

    Mr. Sébastien.

[Translation]

    Mr. Jean Sébastien (Telecommunications Policy Analyst, "Union des consommateurs"): Good afternoon, my name is Jean Sébastien. I am from the Union des consommateurs (Consumers' Union). In your notes you will see that Ms. Nathalie St-Pierre, managing director of the Union des consommateurs, was to be here. She had to cancel at the last minute and she sends her apologies.

    The Union des consommateurs is a federation of groups from across Quebec. In the document that I distributed to you, you will find at the end a presentation about the groups we represent. There are regional consumers' groups from Rouyn-Noranda to Rivière-du-Loup, including of course the major centres, as well as consumers' associations for specialized areas. We therefore represent people from throughout the province of Quebec.

    Among the areas where we intervene, there is the CRTC, where we appear on matters relating to telecommunications and broadcasting. That is why the committee's deliberations today and in the days to follow appeared very important to us.

    This committee is called upon to evaluate whether it would be appropriate to modify the foreign ownership restrictions under the Telecommunications Act. Our presentation will not go into whether relaxing the rules for foreign ownership would ease or not ease access to capital for telecommunications companies. We are here today rather to encourage you to take into account a certain number of important public interest elements.

    An increase in foreign ownership does have risks, especially loss of jobs and a decrease in the level of quality. Furthermore, it is not the best guarantee for the development of healthy competition, as was indicated by the previous presenter, nor of affordable services.

    First of all, let us consider the risk of delocalizing companies. Diluting Canadian ownership has as a corollary a reorganization of those companies which would encourage strategic north-south alliances with a view to increasing productivity. Given the type of services offered in the telephone industry, this is an area that is particularly prone to delocalization of activities. In theory at least, nothing would prevent delocalization of American services towards Canada, but given the size of Canadian companies and American companies that might want to merge, it is probable that the jobs would instead move south.

    The recent history of BC TEL, while it was a subsidiary of America's GTE, is very instructive in this regard. Toward the mid-nineties, BC TEL had announced its intention to move their oversight and diagnostic centres south. The company could not carry out this project, given the opposition of the employees who in their collective agreement had a provision against subcontracting activities which fall under the purview of unionized employees.

    But one should also be concerned about a possible decrease in the quality of service. The CRTC, as is the case with most regulatory bodies in North America, has strict standards for upholding a level of quality of service. However, over the past four years, the reports that are being published by these companies have demonstrated that there has been a decrease in the quality of service. And recently, in 2002, the CRTC decided to remedy the situation by threatening companies with loss of revenue if they did not comply, if the quality of service was not maintained.

    The question to be asked is: would the CRTC be able to supervise quality of service equally efficiently if certain centres of operation, or entire departments, were jointly Canadian and American held? The question is even more important since we know that not all corporations are spotless in terms of quality of service. Recently, in 2000, the regulatory body of the state of New York demonstrated that the management team of Verizon was falsifying reports so that the corporation would appear, on paper, to offer excellent service. Such investigations would still be possible if there were joint departments of Canadian and American companies, but they would require the cooperation of two regulatory organizations, the CRTC in Canada and, of course, the FCC.

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    Strategic alliances between American companies owned by shareholders and Canadian companies would also require that an oversight billing mechanism be implemented between subsidiaries. Companies would no longer try, by way of inter-corporate billing, to develop strategies which would allow them to register high expenses or low expenses, based on what is favoured by regulation. But nothing would guarantee that these corporate strategies would coincide with the interests of Canadians in having affordable service accessible to everyone throughout the country.

    Telephone companies in this country are currently facing a regulatory regime which keeps prices low for consumers. Competitors claim that their initial costs are not covered under these tariffs. They are not the only ones. The CRTC will very soon hold hearings on corporate costs; these will be held during 2003 and will no doubt continue into 2004, and will try to establish what are compensatory costs for companies offering telephone services. These are important matters for all companies, specifically where they offer telephone services in low density areas. That was specifically the case, recently of some Quebec companies that wanted to enter into a price regulation scheme, TELUS Quebec and Télébec, two companies that are complaining of the problems they are having in applying this price regulation regime, which is already being applied to major provincial corporations given the way that the costs are calculated at the present time, costs which are not compensatory, as is claimed by all. I think it would be a good time for the CRTC to study this issue in the next few years, given the current situation of such companies.

    Then, we have to raise the fact that foreign capital is not the only way to foster competition. There are other ways to develop competition given the specificities of Canada's territory. Canada deregulated its telephone industry to allow for competition after some 80 years of a monopoly situation. But this competition does not benefit residential consumers. From the residential consumers' point of view, telephone services cost much more today than before deregulation. It is of course the case for local telephone service, where the increase in rates in major urban centres has varied, based on the company, from 19% to 68% between 1995 and 2000; and this rate is even higher in rural areas, reaching 116% over this 6-year period. Even if we take into account the drop in long distance rates, most Canadian users pay more for phone services now than they did in 1995.

    Let us examine the specific challenge of offering telephone services on Canadian territory. Even if the population density is just 1.5% per square kilometre in the Prairies, even if the population in the far north is even more dispersed, the service must be the same as that offered in major urban centres. Canada has certainly been able to meet these challenges, specifically by allowing cross-subsidization between more or less profitable services. But would it be possible to think that competition in the local service field could develop throughout the country? The low profit margin in many of the regions of the country would tend to discourage competitors who are already well entrenched in major centres.

    And I should also remind you that competition for local service is concentrated in the corporate services sector. So far, residential service is viewed as a soft sector. Given the competition's low level of interest in the sector, consumers cannot make any true choices and can therefore not put any downward pressure on prices, as is the case in a true market.

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    Moreover, consumers have reasons for concern given what former monopolies are saying, and given what their competitors are saying. During the CRTC rate hearings of 2001, dealing with the ceiling price, there was no doubt that the wolf was in the henhouse. Former monopolies and their competitors were requesting an increase in rates for local service of up to 35 per cent over four years and promised that in these conditions there would be solid competition which could maintain downward pressure on the rates.

    The CRTC recognized that there was no justification for such an increase given current conditions, since former monopolies were showing a return to their shareholders based on local service higher than 10 to 11 per cent which is the rate of other regulated companies in the country, specifically in the energy sector.

    According to these companies, their returns in 2000 were at 16.6 per cent to 27.7 per cent. To increase rates one day in order to increase downward pressure in the future, that is the type of affordable service that was being proposed by monopolies and competitors.

    Is there new foreign capital required so that competition can develop on the local service level? It is perhaps the case for those companies who use an economic model where they rent access to a former monopoly and then sell services to the clients. But we feel that consumers have very little to gain in a competition between parasites and their hosts.

    Cable companies could also be a serious potential competitor and they also, without a doubt, would like an infusion of foreign capital. But the Eastlink cable company, in the eastern part of the country, given its current capitalization, already offers telephone services. Contrary to its sister companies elsewhere in Canada and in North America, the company made appropriate technological choices. One could bet that other cable distribution companies whose telephone projects failed will now be in a position to review their past practices.

    There are also public interest impacts associated with the development of a broad band infrastructure throughout the country. Here again, the geographic specificities of our country mean that there are very few markets which would want to compete for companies who would each develop a fibre optic network going straight into the home. The commercial model is not necessarily the best model to follow in developing this new generation of communication networks, even for major urban centres.

    One should remember the example of Stockholm, which in 1994, decided to develop a municipal fibre optic network. Rather than having their streets torn up by various competing companies, the city decided to rent their new generation network to different operators, telecommunications companies, or content distributors.

    The option of a public municipal model puts less pressure on capital requirements inasmuch as a single network is developed in major urban centres and allows the government to distribute its investment so that all of the regions of the country can benefit by having leading-edge technology hardware.

    Diluting the level of Canadian ownership has important risks that we wanted to bring to your attention. Furthermore, even in the most optimistic scenarios for the development of competition in the telephone industry, it must be recognized that Canada's territory does not make it easy everywhere. And that is why its development cannot be at the expense of another objective in the Telecommunications Act: affordable and quality service.

    That is why the committee should ensure that there will be a study on the effects of changing the restrictions on foreign ownership, specifically as it relates to universality of service, affordability and quality. The foreign ownership rules under the legislation as well as the regulations on ownership and telecommunications company control should be maintained. Thank you.

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[English]

    The Chair: Thank you very much.

    To begin the questioning, Mrs. Gallant.

    Mrs. Cheryl Gallant (Renfrew—Nipissing—Pembroke, Canadian Alliance): My question is for Mr. Ménard and it is with regard to providing the infrastructure for the fibre optics and the telecom companies in the rural areas. Do you see that access to foreign capital for putting in the infrastructure would be of any benefit to the newcomers to this industry?

    Mr. François Ménard: Sure it would. I have not taken a position against foreign investment. I have just taken a position that if the rules of the game are not changed, it's not going to mean very much in the end.

    Mrs. Cheryl Gallant: All right. So what we have to do is break down the monopoly before we implement something all together different. Whatever we do after the fact isn't going to make a difference unless this monopoly is dismantled. Is that what you're saying?

    Mr. François Ménard: To give you an example, we're building a fibre-to-the-home network in Kamloops. We're currently doing the backbone phase. The cost of the project is $400,000. Telus intentionally--they say it's not intentional, but we believe it is--has thrown $800,000 of make-ready cost against the project. That means it's twice the cost of construction just to fish the conduits and make sure they've got the spare capacity needed to install additional cable. So the barrier to entry is extremely high.

    We're doing another project for the Columbia Mountain Open Network in British Columbia, in the Kootenays, and in that sector the poles are a little shorter, because it's very old plant. We're doing another project with the same kinds of problems in the Haliburton area of Ontario, which we did another study for and in which the make-ready costs are very expensive, without necessarily being justified. Hydro Ontario wants $6,000 per pole just to change the poles. The same operation from Hydro-Québec is routinely less than $1,000, if not $600. So the fact that make-ready costs are so volatile, which goes to my first argument, is something that definitely needs to be ironed out before, under false pretences, more monies are injected into the system just to pay for these costs that don't need to be there in the first place.

    As to your question more specifically, rural areas, we've got Villages Branchés in Quebec and we've got BRAND, which is a pilot program, but we hope is going to turn into something more than a pilot program and have an uncapped envelope. Right now it's $110 million. In Quebec the Villages Branchés program was $75 million, and the Government of Quebec has recently removed the cap on this envelope, so it's as much money as is needed to do the job. Right now we've got half of all primary schools in Quebec on dark fibre, and the government has supplied the money to do the rest.

    The problem with the Villages Branchés program in Quebec is that it only focuses on connecting public sector buildings, and there is no hope of doing last mile, meaning high-speed Internet for the normal citizen. That, I think, has been the case because of--I will be bold in saying--the lobby of the ILECs in Quebec, making sure it would only fund something that does not become detrimental to their business.

    If we mix the BRAND program with the Villages Branchés program in Quebec, we've got a pretty good recipe. We let the Government of Quebec program do the backbone and bring federal dollars to do the last mile. The only problem is that the BRAND program has this bloody M-30 restriction in it, which prevents a public sector organization financed by the Government of Quebec from receiving any funding from the federal government. I won't go into this infamous battle between between Quebec and Ontario, I'm not taking sides. All I'm saying is, we've found a recipe for that. We use the SADEs, which are federally funded, Sociétés d'aide au développement économique. We bring them as a partner into the project, they do the last mile in the economic development for the normal human being, and then we use the Villages Branchés program to do the backbone, and theoretically it should work. The only problem is that there are a heck of a lot of people out there who need to be briefed on the idea and become more knowledgeable about it.

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    Finally, but not least, one of the important elements of the BRAND program of Industry Canada is something called open access. Let's make sure that if any funding goes towards doing something that becomes a restricted closed system, it's not public money that ends up financing it. I've become involved with the BRAND program to help them identify and quantify “open access”. Let's make sure we don't goof up and, on the basis that it's supposed to be open access, give some money to an incumbent that ends up building a closed system that does not provide any new facilities that can let more competition or more innovative services come in.

    Mrs. Cheryl Gallant: You gave an example in Ontario of Hydro One manoeuvring to keep competition out. Can you tell us, for example, whether the phone company, Bell, or the cable companies in Ontario have implemented any such tactics to make it tougher for you to get in?

    Mr. François Ménard: Sure. The specific project I'm talking about is a fibre optic link between Sir Sandford Fleming College campus in Peterborough and another one in Lindsay. Between Peterborough and Lindsay there is a little town called Omemee. On the portion between Peterborough and Omemee Bell Canada told us they needed all the spare capacity that was available on the pole to install additional cables. That can be doubted, but let's assume it's true. Because of that, we would have needed to change all poles between Peterborough and Omemee, at a cost of $6,000 a pole. Between Omemee and Lindsay we proposed to attach ourselves to the poles, and then Hydro One came out and said, this is an old pole line, and we would prefer having it changed before we let a third party on it. The joint-use contracts today are much more restrictive than they were 10 years ago. If we had built on that pole line, by no means would it have fallen down. In the interest of the public, we could not deliver a fibre optic link between the two colleges, because of make-ready costs. This is without mentioning the trouble we had with COGECO inside Peterborough, where it took us almost three months to lobby COGECO into allowing us to install additional cable on top of their strand.

    The problem is that CRTC decision 2000-13 is only applicable to telcos, it's not applicable to cablecos. Cableco support structures are considered to be under the broadcasting law of Canada, as opposed to the Telecommunications Act, so they're not required to share support structures. So you have to make an intervention every time, on a case-by-case basis, to the CRTC, complaining that this cable company in that piece of the world does not let us attach our cables onto their structures; could you tell them that it's in the best interest of the public that support structures be shared? And then they come back and charge you four times the rate Bell Canada charges for that. It's another tactic: if we're going to let somebody on our structures, let's juice them out.

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    Mrs. Cheryl Gallant: Are you familiar with the industry minister's recent announcement about injecting hundreds of millions of dollars into infrastructure for connectivity in the rural areas?

    Mr. François Ménard: I have a pretty good idea what to do with that money. If we do not solve the support structure problem on a definitive basis, it has to be started all over again once we run out of capacity in existing cables. There has to be a way of easily installing new cables. One way of doing that is to do as la Commission des services électriques de la ville de Montréal did. That's a municipally owned network of conduits that are rented on an open access basis to all telecom carriers. The city of Stockholm went a bit further than that. Instead of having just a network of conduits, they actually pulled in all the fibre and are renting it out. Assuming that the municipality doesn't want to get into the telecom business, but just wants to stay in the support structure business, it could do so by installing conduits. So how about, when you dig up the street and put in a water line, at the same time putting in an additional conduit and making it available for use by a third party?

    Even more brilliantly than that, now in telecom--and this is what I want you to keep in mind--you have a brand new kind of cable that has a bunch of little conduits inside. We call this a micro-conduit cable. So what the city can do is put in a micro-conduit cable between your home and, let's say, the neighbourhood school, the neighbourhood library, or the neighbourhood fire station and let you, the end user, blow the fibre optic strand from your home into the neighbourhood school, where you've aggregated all the demand in a specific neighbourhood. So the municipality can stay in the support structure business, rent out these conduits, and then sell them on the basis of a local improvement tax. The thing that is brilliant behind a local improvement tax is that it reflects the actual cost of building a network, so you don't have to take an entire province, average out the cost, and make everybody else pay for it.

    If you choose to build your house on a pile of rock and you want to hook up your house to the water system, you're going to pay through the nose. The city is going to take out a loan on your house, and you will have to pay it twice a year for the next twenty years. But telecom is not like that. You need to have a $600 installation charge on the first month in order to cover the infrastructure cost, and because it's on an average territory basis, you don't reflect the true cost of infrastructure as part of the service cost. Now you have to take company averages, and the whole system becomes much more complex because of that.

    So the simple solution is to get municipalities to pull in micro-conduit cable and let the end users own the piece of fibre between their home and an aggregation point in the neighbourhood. If the end user owns the fibre, many wonderful things come along with that. For example, if it breaks, the municipality comes in and repairs the conduit. You, the end user, have insurance on your fibre. The insurance comes in, and through the insurance, you pay for new fibre to be blown in. You call up a contractor and say, the fibre is broken between my house and my neighbourhood aggregation point, fix it. It can be automatic. The point is that if asset-based telecom, which is what we have and is the only model that is sustainable on a moving-forward basis, works for schools, works for municipalities, works for the public sector, by all means, it should work for all of us.

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    The Chair: Thank you very much.

    Mr. St. Denis.

    Mr. Brent St. Denis (Algoma—Manitoulin, Lib.): Thank you, Mr. Chair.

    This is most stimulating. It's obviously a very complex issue. I wonder if it's that complexity that prevents us, as a society, from moving forward. We need to maybe rethink the thing from the beginning. It's fairly obvious from the comments made by Monsieur Sébastien and yourself, Mr. Ménard, that while the issue of foreign ownership is of varying levels of importance, without considering all the rules concerning it, we could theoretically make things worse. It seems to me that if the ownership rules were changed in isolation, the larger companies would have access to foreign capital at lower prices too, and the tide would go up for everybody, which might not make it any better for new entrants. So it means we have to ask questions about the other issues, which you're obviously pleased to talk about.

    You mentioned, Mr. Ménard, in your brief that your company has had some success working in upstate New York. Are the issues you face in dealing with the hydro company or the telephone company or the cable company in typical Quebec or Ontario or B.C. towns the same in upstate New York? In other words, is this a uniquely Canadian problem, or right across our border are there some ideas we can look at?

    Mr. François Ménard: They're worse in the States. I will claim that we're about three to four years ahead on a pile of fronts compared to the FCC, which has gone totally gung-ho on protecting the ILECs under the Bush administration, the incumbent local exchange carriers, the SBCs, Quest, Verizon. We have ten dominant ILECs in Canada, and in the States you have four or five of them. So the problem is even worse, because the incumbents cross states. In the U.S. the problem is at least 50 times bigger than in Canada, because you have 50 CRTCs, one in every state. Each of the public utility commissions must have its own economists, who need to understand all of that and be able to differentiate bluff from reality in the costs that are being filed by the ILECs.

    For example--this is a great example--ADSL, Sympatico High Speed Edition service, in Canada sells for $30 a month Canadian. The third party access rate for the same service in the States is above $30 U.S. In Canada the same service in Bell Canada general tariff 5400 is $21.90, which has proven to be compensatory, and Bell makes a profit. If Bell's costs are below $20 Canadian, it's for certain that in the U.S. they're below $20 U.S. So at the moment I have a funny feeling about the ability of public utility commissions in the U.S. to differentiate bluff from reality.

    That being said, you referred to a specific project, one we're doing in upstate New York. In Canada we have what's called an overlash tariff, Bell Canada general tariff item 901. That overlash tariff allows a third party to install additional cable on top of an existing cable on a pole. So let's say you have two poles, you have a telephone cable on the pole, and you want to attach yourself. What you do is put your cable on top of Bell Canada's cable, and then you spin a piece of metal wire around the two cables together. That's called lashing a cable on an existing cable. In the U.S. Verizon does not have an overlash tariff. The project we're doing in upstate New York is at the feasibility study stage and will enter into detailed engineering over the coming months, but I've identified to them that if they employed the Canadian regulatory state of the art and brought it back to the New York State Public Utility Commission, they could probably save from $1.2 million to $3.6 million on a $12 million project. A tremendous amount of money could be saved just by applying the better system we have in Canada. So actually they're looking to us, instead of us looking to them.

    Mr. Brent St. Denis: Thank you.

    Monsieur Sébastien, if you imagine 5 to 10 years into the future under the current policy regime, and then under a more liberated, competitive regime, the money to be made, obviously, in a competitive environment is by getting to the residential consumer; that's where the people are. Mr. Ménard has made the point that you can only go so far with attaching to schools and libraries and public facilities. Most homes have a cable hook-up, and technology is emerging to use hydro lines for certain types of communications, there's talk about it. We have telephone lines going in and we have the wireless possibilities. I gather from what you're saying that there isn't enough competitive potential within the existing different kinds of hook-ups to the house to meet the objectives of supplying the consumer with the best environment and a better environment for the companies at play here. I wonder if you could help us with that sort of forward look?

º  (1620)  

    Mr. Jean Sébastien: I guess there are different ways one can imagine how competition is going to develop in the future. The business CLEC model, the model being now developed, is not very satisfactory. Basically, the money is still being pumped into the old monopoly, you haven't really changed much in the system. As you mentioned, there are other parallel networks already in existence. The cable company is certainly one, cell phones are another, even though none of the cell phone operators operates as a CLEC right now. On that technical basis, you would have three parallel networks, which would be, considering cross-ownership between all those companies, at best, an oligopoly.

    There are other solutions using rental of local loops. Among them is the municipal ownership of fibre and having municipalities renting local loops. So in that case, even if it's still a system where different operators do rent from the same operator, it's not the case we have right now, where operators are renting from the old monopoly. So you could have different players renting loops from municipally owned facilities. That certainly is one opening up of the system that can be looked into, which, of course, would not displace the other networks in existence. That would open a place for competition and eventually get us to a real market, because the problem we're facing right now, which is what I pointed to, is that we're far away from a real market. Consumers are not faced with choices that will maintain pressure on rates, so the only way there is right now to do something with rates is to have them artificially decided upon or fixed by a regulatory body, but that's a far cry from a real market. To have a real market, we'd need to have real places for competitors that would not act as parasites on a host.

º  (1625)  

    The Chair: Thank you very much.

    Mr. Fitzpatrick.

    Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance): I guess I'm going to be the devil's advocate. I think I heard somewhere that service has been deteriorating. Where I come from, what I see in telecommunications is that the pace of change and the improvement in the quality of service has been astounding, whether you're talking cell phones or high-speed Internet or bundled services. As to cost, where I come from too, I have major disagreements on that. In the business I operated in the 1980s my long-distance costs were $13,000-14,000 a year, and when the system was opened up, they dropped to $5000 and stayed at $5000. My residential cost back in the 1980s, when we had to do a lot of long-distance phoning, was $600 a month, and with a bundled service of about $85, I now get high-speed Internet, very cheap long-distance, and local coverage, and that's in a remote area of Saskatchewan. Maybe things are different in Quebec, but this has been my experience. So I guess I would have to take issue with that. When you look at the trade and the integration of the economy in North America, I don't know why we would want to create obstacles for relationships with the U.S. It seems to me it's very much in our interest to be promoting that, so I don't see a problem.

    I don't understand all the technical terminology. Mr. Ménard, you're obviously a thorough expert in this area. I'm just going to ask some general questions, and hopefully, you'll be able to help me, as a layman, to understand it.

    Am I understanding you correctly that cable companies and telecoms should be dealt with in the same regulatory manner and that the regulatory environment we have should emphasize pro-competitive policies in determining these sorts of things? I'm not sure on that point, when you're talking about municipal systems and that sort of thing. Are you really advocating that the network should be publicly owned and that the providers use that system as the public uses a publicly owned highway system?

    Mr. François Ménard: There are two elements you've brought up in your statement. One is a very successful implementation of long-distance equal access in the Canadian system and the successful build-out of competitive facilities along railway tracks all over the country, going back to the Unitel days, owned by CN, which has evolved into the AT&T we have today. It has applied tremendous pressure on Bell Canada and on Telus to reduce long-distance rates. So while we have witnessed a tremendous decrease in long-distance rates, if you isolate your service package to the specific local loop, local telephone service function, the comments Jean Sébastien has made remain absolutely valid.

    The other thing that was mentioned was what we call, in the technical term, intermodal competition, as opposed to intramodal competition, that is, competition between multiple parallel infrastructures and competition within a single infrastructure. In Canada we have neither, we have a hybrid model of intramodal and intermodal competition.

    I will make a bold statement: fibre to the home is the end game. There is nothing that will ever been a substitute for fibre to the home. It's a thousand times faster and a thousand times cheaper, when you take it over 20 years, than any other system. We've run out of juice on the old copper, whether it's coaxial owned by the cablecos or telephone wires owned by the ILECs. The wireless is just not there. Industry Canada is not doing the very simple thing that should be done with Spectra, taking the ISM band, 2.4 gigahertz, and widening it tremendously, tenfold. People will realize that the cost of engineering radios that pump data across the air is far more expensive, always, than building out something to send it across fibre optics. If you finance your fibre optic system on 20 years, aggregating all demand, do it once and do it well. My personal goal is that we don't let the Japanese beat us to this. We're pretty close to that. With the investments municipalities are willing to make in a backbone today, with the help of the BRAND program, with the help of the Villages Branchés program, with the willingness of the school boards to build a fibre optic network linking all the schools, we'll have, over the next three to four years, a bunch of rural communities that have a brand new infrastructure hundreds of times faster than the infrastructure the large municipalities will have. The biggest example of that is a project in Provo, Utah, called Utopia, which has a good meaning in English, not so good a meaning in French. This project was built by all the communities around Salt Lake City. They were all getting better infrastructure, and at the end Salt Lake City had no choice but to hop on the bandwagon, because everybody else was building better stuff than they would get in the big city.

    So whether I advocate for a municipally owned system or a privately owned system is not the point. The point is that there has to be a support structure that is self-renewable, will always accommodate more capacity, and is owned and build very cost-efficiently. I'm with a private company, and I don't want the municipality to own my fibre optic cable. I will put it in place, but there has to be a way, if somebody wants to compete with me, that he doesn't have to dig up the street once again to do that.

º  (1630)  

    I will claim that my business model of operating the fibre optic infrastructure as a community network on an open-access basis will remove all sorts of disincentives built into the current telephone system. The telephone system is a big money-making machine. They charge you 75¢ when you dial *69. This is a free feature on the Internet. So if you start deploying voice over IP on a municipal fibre-to-home system, build an aggregation point and let the long-distance carriers that have the cross-country network come in and interface with that system. A very good example is the city of Kamloops. It's sitting on the Trans-Canadian Railway. There's more fibre going across Kamloops than across any other city in B.C., aside from Vancouver, yet none of it terminates in Kamloops, because the city has yet to build the last mile of network that's worth interconnecting with that system.

º  (1635)  

    The Chair: Thank you very much, Mr. Fitzpatrick.

    Mr. Bagnell.

    Mr. Larry Bagnell (Yukon, Lib.): Thank you, and thank you, witnesses, for coming today.

    I assume they're similar to our witnesses from yesterday in thinking opening foreign investment would help, but there are other major problems related to competition. When you do get to talk, you can address that if you want.

    You used the example of a city in Sweden that had fibre optic. You didn't have to go that far. Dawson City in the Yukon has done that as well. The city has just purchased all the fibre optic to all the homes and businesses.

    I'm going to get on to the competition stuff now. Mr. Ménard, do your telcos or the cables or the fibre optics pay property tax on the lines, either in New York or in Canada, as they're running through a municipality that should be charging a fee?

    Mr. François Ménard: The issue is, are municipalities properly compensated for use of their right of way made by private sector companies that have what I will call a privilege? They have the privilege to dig up streets on the public right of way for a nominal fee, if no fee at all. In the U.S. this is not true for telephone companies and true for cable companies, because there's a municipal cable franchise system. A cable company has to return, I think, 5% of gross profits to the city for use of their public right of way. The telephone system is federally pre-empted, so there is no such compensation. In Quebec we have something called la TGE, Taxe sur le gaz et l'électricité, set at 8% of gross profits of the telcos, which is supposed to go back to municipalities, but the Government of Quebec has been keeping it and not returning it to the different municipalities, so it's created a whole pile of problems.

    The issue that is interesting, however, is what the city should do with respect to telecom that is in the best interest of its population moving forward? If we have to engineer a system that is ideal, what should it be? I think a telco paying a tax for the public right of way in a municipality is not the appropriate system. The appropriate system is the municipality finally coming to terms with the fact that support structure for telecom is a municipal responsibility--I'm not saying telecom services, just support structures. Let's own the poles, let's make sure I get to control whether somebody is abusing that structure. For example, if the telco has very old cables and is intentionally not taking out the poles, there's got to be a way for somebody to say, it's not in the interest of the public that the old cable stays there, and you're going to have to pay out of your own pocket for taking out that cable. The City of Montreal works exactly in this fashion. It owns a network of conduits underneath downtown Montreal. It does not get to all residential streets yet, but with the micro-conduit cable I talked about earlier, we have a big arteries network, and now the city could install micro-conduits, which would make a capillaries network reaching out to every home. That would be a superb system, and it could do it selling it as infrastructure.

    To go back to the issue of whether a telecom operator should pay a tax for the privilege of installing fibre inside a municipally owned support structure, that's obviously not necessary any more, because the service provider rents the support structure from the municipality, and the costs to the municipality are recovered through the rental fees of the support structures that are being operated by the municipality. What do you do if we go back to the 1920's in Canada and have municipalities that don't understand telecom, don't understand it's in the best interest of the public to build support structures for telecom, and therefore prefer to let the crown corporation build up the system, and then make an argument that they should be properly compensated for what we call value on the municipal evaluation role for all the central offices they have, for all the wires they have on poles? Currently, with the TGE, the law on municipalities in Quebec is written in such a fashion that a telco doesn't pay municipal tax on its central office, it pays that through the TGE, and it doesn't have to pay municipal taxes on all of its property.

    So I think at the moment cities, at least in Quebec, are properly compensated. If the money would funnel through properly, that would probably help.

º  (1640)  

    Mr. Larry Bagnell: Thank you, that's good.

    Mr. Sébastien, I was delighted to hear you talk about the Great White North, where I'm from. The problem is even exacerbated, as you know, because it's harder for competition. Because there are fewer customers, it's hard to make an economic case for one customer. As you know, regulated prices don't really work that well, especially if there's only one company. The company is going to say, we'll close your doors if you don't give us the high price, and people can't do without telephones. Do you have any ideas on how to solve that problem?

    Mr. Jean Sébastien: I think that's where eventually looking at municipal ownership, not only of the conduits, but of the actual telecom apparatus, has potential. Then you could have companies that would offer voice over IP as small competitive companies that might have an interest in all markets in Canada. I think that's certainly a way to the future.

    The Chair: Thank you very much, Mr. Bagnell.

    Mr. Desrochers.

[Translation]

    Mr. Odina Desrochers (Lotbinière—L'Érable, BQ): Thank you, Mr. Chairman. I would like to know how much time I have. This is my first visit to your committee and I have some logistical concerns that I would like to raise.

[English]

    The Chair: Eight minutes.

[Translation]

    Mr. Odina Desrochers: Thank you very much.

    Even though I was only here for part of your presentations, Messrs. Ménard and Sébastien, I did pay close attention to what you had to say. I will take over where my colleague Paul Crête left off. My questions will stem in part from my personal values.

    In today's free market environment, it has become ever more difficult to control the limitations related to the Free Trade Zone of the Americas and indeed free trade itself.

    What concerns me, and this also applies to the debate on bank mergers, is the consumer. Will there be improved services, regardless of whether or not there is an increase in foreign investment?

    Mr. Jean Sébastien: The message that I have just conveyed to the committee today is that, for the time being, it is not necessary to increase foreign investment. The regulatory bodies have not yet found a way to maintain the quality of service—the area which is of greatest interest to us—within the framework of a new model which would include more foreign capital.

    For example, the fact that activities in the United States are becoming more centralized may make it difficult for the CRTC to continue monitoring the quality of service. Your colleague said that things had improved because there are now more services available, and gave the Internet as an example. Nevertheless, when it comes to repairs and responding to customer enquiries, the businesses did not fare as well towards the end of the 1990s as compared to what they had done in past years.

    The CRTC has done some retooling, and it must now make use of these new controls. These measures are being used for the first time in a free market, and some fine-tuning has to be done before opening up the system to foreign investment.

    Things were much simpler in the old days. If the service given by a company was not up to standard, the CRTC would limit their yield per share to three or four per cent, for example. It was the carrot and stick approach. But in a political context that is moving towards a free market, the CRTC is flexing its muscles. We should give it a head start before letting foreign investors join the race.

º  (1645)  

    Mr. Odina Desrochers: You say that the CRTC is developing some tools. What are they? Do you think that will be enough to withstand the market demands particularly when foreign capital is involved?

    Mr. Jean Sébastien: With respect to the tools, I must point out that all undertakings must file reports relating to the quality of their services. There are very specific indicators that must be taken into account, and if these companies don't meet the required threshold during the next four years, their rates will have to be reduced by a given amount for each breach, or, in other words, for every failure to comply with the quality of service objectives.

    This type of model could probably be used in the event of an increase in foreign ownership, but since the audits could become more difficult to carry out if there are joint operation centres, which could be a real possibility, since the aim is to increase productivity, I feel that we should begin by putting a system in place. This is only the first year.

    Mr. Odina Desrochers: My question is to Mr. Ménard or Mr. Sébastien. There is something that concerns me. When corporate mergers or buyouts occur, businesses are often relocated. Do you think that a merger or an acquisition of a company in another province, for example a merger between an American telephone company and another one here, might result in the relocation or transfer of employees?

    Mr. Jean Sébastien: Yes, that possibility certainly exists and it isn't necessarily a bad thing. Productivity gains are a plus for consumers, but we must also evaluate the effects of a relocation. There could be job losses, but there are also systemic effects, and they cannot be measured at this time. So yes, there is a very real risk.

    Mr. Odina Desrochers: Mr. Ménard, would you like to add anything?

    Mr. François Ménard: No, that's fine.

    Mr. Odina Desrochers: Since I do have some knowledge in this area, Mr. Chairman, I will leave it at that.

[English]

    The Chair: That's all right, we'll go to you for questions later on if you wish.

    Monsieur Normand.

[Translation]

    Mr. Gilbert Normand (Bellechasse—Etchemins—Montmagny—L'Islet, Lib.): I have a technical question. Something struck me earlier. Mr. Ménard, you said that the telecommunications companies are awaiting a decision related to electricity providers.

    You also say that fibre optics is the best option and will continue to be for the next 20 years. However, I have read about and even seen experiments with electric wires that were quite successful, and you don't even need a booster every 40 or 60 kilometres as is the case with an optical fibre. Moreover, this technology is expected to expand quite extensively over the next few months and years.

    So, if the fibre optic option is clearly better than electricity, is the fibre optic industry at all concerned about the possibility of electricity being involved in the network? That is my first question.

    Secondly, if electric wires can be used for the network... It will be up to the judge to decide whether or not the CRTC will have any jurisdiction over electric networks, but I have a feeling that some companies are worried about the advent of what I would call new technologies. It is obvious that consumers are paying close attention because they are afraid of an increase in rates.

    I think that you were right, Mr. Sébastien, in what you said earlier, because in my region, in Montmagny, we almost lost the QuébecTel headquarters in Rimouski when the Americans threatened to buy it. Thankfully, at that time, they were prohibited from owning more than 20 per cent. Therefore, in that case, the law was on our side, but if we want to make any scientific headway, if we want to introduce new technologies—and we know that these technologies are always expensive at the outset, but that the costs will drop as the use increases—we can't afford to simply close the door on these options.

    I have some reservations with respect to what both of you have said, Mr. Ménard and Mr. Sébastien, although some of your comments are well taken. You mentioned the municipalities. I know that when I served as mayor, we had bought part of an electrical grid for street lighting. The savings for the municipality were considerable because instead of having mercury bulbs, we installed sodium lighting and automatically reduced our energy consumption. So it was a win-win situation, with the municipality saving money while improving the service for its citizens. We used to have to wait for the power company to change the bulbs, and they used to wait until they had 10 bulbs to change, while we kept getting calls complaining about the lights being out on a given street corner. So that is something we must bear in mind, even though not every municipality has the means to set up a fibre optic structure which it could then rent. It might be cost-effective, but I don't see that happening, unless companies like TELUS Quebec and Bell Canada were to make their infrastructures available to the municipalities, which is not beyond the realm of possibility. But from what I have heard, I don't think they are about to give up what amounts to a cash cow for them.

    So what is our vision of the future, when all is said and done? Are we moving towards new technologies that will broaden our horizon? There are no two ways about it, you can't do it if you don't have the money.

    That being said, I will repeat what I stated yesterday: if our Canadian companies had been subjected to the same laws in other countries that foreign companies must comply with here in Canada, they would never have managed to do business in many of those countries, particularly China, Poland or the Czech Republic. So I think we will have to relax our regulations while being cautious and encouraging the development of new technologies.

º  (1650)  

    Mr. François Ménard: First of all, I would like to tell you that the Côte-du-Sud School Board has published a call for tenders to build a fibre optic network throughout its entire area, which includes the city of Montmagny. We will be submitting a bid, probably in conjunction with TELUS Quebec and Bell Canada.

    A little further up the south shore of the St. Lawrence, the three school boards located in the area of the Lower St. Lawrence have also issued calls for tenders, with a deadline of January 26 or 27. There were three bidders, TELUS Quebec, Bell Canada and Xit Telecom.

    Mr. Gilbert Normand: This is a system...

    Mr. François Ménard: This is what we call the Villages branchés program. Competitors are understandably reluctant to build networks. This network would be paid for by the Quebec government through the program called Villages branchés. Three companies have submitted bids. There were stringent requirements including a $500,000 bid bond and a performance guarantee of $5 million or $6 million. The bar was set quite high, but they did generate a response. The same thing is expected for Côte-du-Sud.

    You have made a number of comments relating to the electrical transmission of data. This technology involves two main aspects.

    On the one hand, the electric power companies are not in business to provide telecommunication services. Even though they might have done that on numerous occasions, it is not something that they are interested in doing.

    Also, about four years ago, Nortel paid a huge price to acquire the technology that would allow them to transmit data over electric wires. The company then brought this technology to North America, but dissolved its investment. It was not feasible for North America. It could be done in Europe, but not in North America. Why? Because of the population density. It costs between $1,500 and $2,000 to bypass each transformer in the distribution network. The data cannot physically cross a catalytic convertor, which means that there must be a bypass whenever such a convertor is in the way. There are more catalytic convertors in the North American network than there are in Europe. The voltage is lower and population density is not as great. You need only take a walk down the street and count the number of large gray cylinders on a pole. There are a number of them.

    That being said, does our proposed system prevent an electric power company from entering into the telecommunications business? Not at all. However, one of the first things that I have learned in my law course at university is that clause 91 of the Constitution states that telecommunications fall under federal jurisdiction. I imagine that no electric power company would state that the telecommunications rates that apply for the electricity grids should be regulated by the Quebec Régie de l'énergie. That would make no sense. However, they are quite content to say that the pole rate should be regulated by the Régie de l'énergie, which has absolutely nothing to do with telecommunications at this time. The CRTC is eminently qualified but underused, and would be the appropriate body to make these decisions if the concept of a transmission line meant any type of transmission line.

    Now let's return to what you said about our interest in fibre optics alone. It is a reality. If ever there was a time for these projects, it is now. This is a one-time opportunity. If the cities in Quebec miss out on the Villages branchés program, it will be just too bad, they will have to wait quite a while longer before they have access to the fibre optic network. So it is up to them to jump on the bandwagon now. There must be an official partnership between the municipality, the MRC or regional county municipality, and the board of education, in order for the government to contribute; and the network has to last 20 years. The program was designed this way, with terms and conditions, in response to lobbying. XIT Telecom is not too far behind.

    Is this type of system preferable to an open-access system? Probably not, because it is limited to the parapublic sector. So we will have to find some way for the system to benefit all Canadians, and not just the schools and municipal offices.

º  (1655)  

    I think we must continue along this road, and give municipalities the telecommunications expertise that they don't yet have. We are an engineering department, just like the Bell Canada engineering department. Any city in Canada can turn to us for help with their telecommunications problems. We think this model is here to stay, and will help to foster competition within the telecommunications sector.

»  (1700)  

[English]

    The Chair: Thank you very much, Mr. Normand.

    Ms. Torsney.

[Translation]

    Ms. Paddy Torsney (Burlington, Lib.): Thank you very much and welcome. What you had to say was very interesting. I think that all members of the committee have had their eyes opened. I hope that by the end of our study I will know 10% of what you know about this subject.

[English]

You're very impressive. It's been really interesting to listen to what you have to say and the ideas you're presenting for us. While some of it is quite outside the foreign review, all of us are interested in this subject.

    It was particularly interesting to listen to you, Mr. Ménard, because I'm in the process of trying to get high-speed cable to my constituency office. It's been fascinating that while all the buildings around me are wired, my building isn't--I'm in a slightly older building. We've gone from $10,000 for cable to maybe through the hydro line, maybe through this, maybe we can do this for you, and everybody's suddenly very interested in making sure we're hooked up.

    You mentioned that part of the challenge is that our constituents, the general public, have not been clamouring for some of the things they should be. I wonder, perhaps Mr. Sébastien, if you know better why Canadians are not aware of what they're not getting. Are we just complacent? Actually, both of you probably have some comments.

    I noticed, Mr. Ménard, you mentioned on page 3 that residential pricing will have to rise to market levels, greatly enhancing the possibility for entry by competitors. When people start paying these higher rates, what services will they have that will make them happier to be paying these rates? And as a country, how wired will we be, and what will that mean for our economy and for us as individuals? Because ultimately, just giving the higher rates won't make them very happy.

    Both of you are free to comment.

    Mr. François Ménard: The modelling that has been done in most of the business cases backing municipal investment in, most likely, fibre-to-the-home facility shows that as long as you funnel all of the money through one infrastructure and not through two or three infrastructures, it is possible to get all the services on one single fibre optic cable for, probably, $60 to $70 a month for as long as you're willing, as a consumer, to commit yourself to purchasing television, telephone, Internet access, long-distance, and ancillary services, such as star features, voice mail, movies on demand, and what not. A few years ago when the CRTC was investigating the possibility of permitting long-distance competition, a study was made showing that on average, Canadians were spending $20 to $30 more than the basic telephone service in long-distance calls. If you aggregated the fact that Canadians were making a minimum number of long-distance calls and you said, now can we implement competition, the business case was suddenly made, because telcos were advocating at the time that since the majority of the population were making long-distance calls, as a result of permitting long-distance competition, they were going to deprive them of revenues that cross-subsidized local service, and eventually that was proven to be wrong. So long-distance competition was implemented, and as this member mentioned, his long-distance bills went down tremendously, while his local service kept going up.

    Certainly, the case can be made that as long as a consumer funnels money through two different parallel infrastructures, which we can argue have been built and paid for, but have tremendously expensive maintenance costs.... Maintaining a cable TV network is very expensive. Maintaining a phone network is also very expensive. Those two networks are not going away, so the ILECs must have an incentive to get rid of that infrastructure and trade it for a new infrastructure. This is what we've done in the town of Iroquois Falls, Ontario. We were appointed by the city to negotiate with Persona Communications, which is a local cable TV operator in Iroquois Falls, and Northern Telephone and Ontario Telecom to encourage them to surrender the space they currently consume on the poles. If the city built alone, it would have to pay $6,000 a pole to heighten them and have the room to install their own fibre optic cable. But if instead the cable TV operator and the telco take down what they have on the pole, all of that space is freed up, new infrastructure can come on line, and the city can manage it at a much lower cost. And it would provide Persona with the opportunity to start providing cable modem services in Iroquois Falls. Currently, the cable TV plant in Iroquois Falls is one-way, it's not bidirectional, so they can't provide cable modem service. So they have an incentive to let go of their infrastructure.

    So I think incumbent operators, which think of themselves first as operators of infrastructure, not service providers, have to come to grips with the fact that moving forward, they will become service providers, not owners of infrastructure. Ownership of the infrastructure will be so intimately tied with the right of way. It's overly expensive to engineer multiple rights of way for multiple parallel infrastructures, so as only to accommodate what I call the dream of the FCC, workable intermodal competition. Intermodal competition doesn't deliver, it's not been proven, and moving forward, it won't deliver the speed people will want to have telemedicine, tele-education, which are only sustainable on fibre.

»  (1705)  

    Mr. Jean Sébastien: One of the things that will need to be looked at is the actual costs to the company, and those are the forward-looking costs. The incumbents have been asked for the past few years to use their forward-looking costs, which are the costs a new entrant would have if it were to build its own system, and those costs are being reviewed. When those are on the table and every party has had a chance to look at them, it will give us a clear picture of the Canadian telecom industry right now.

    You are also asking if consumers would perhaps be willing to pay more. They would only be willing to pay more if they paid less globally, which is not the case right now. Sadly enough, the 2002 report by the CRTC on the state of competition has seen the number of pages on effects on consumers dwindle to five pages, compared to the first year that report was published, and some of the data that were available in the first year are not available the second year. Among the data that should be in that report every year is how much consumers are actually paying for their whole phone use. In the first year the CRTC decided the average Canadians use was 125 minutes of long-distance per month. That's the average, but to create an average, you have people who use 800 minutes, who weigh a great deal in the calculations. So when the data were redone for the price cap hearing, they showed that most Canadians in 2000 were actually paying more for a phone than they were in the past. But that may change in the future as long-distance rates go down. Of course, if people pay less globally, they'll pay more for the local. It's a give and take.

»  (1710)  

    The Chair: Thank you.

    Mr. Fitzpatrick.

    Mr. Brian Fitzpatrick: I want to get back to ownership restrictions on Canadian telephone companies and try to get some comments. I've heard a lot of comments that if we open this up, the two big incumbents could be grabbed by some large American incumbent , and we'd lose some sovereignty or control, the office will move south of the border, and so on. I have problems with that argument, quite frankly, because a company like CNR, which hasn't got any of these restrictions and so on, has grown very aggressively throughout North America and retained its Canadian character. And quite honestly, Nortel is a big supplier of telecom equipment, much stronger than its major American competitor, Lucent, I would say, and is, I think, ready to make a recovery. There are lots of other examples of that. Magna International is another good one.

    I look at the telecom incumbents in the United States. Nobody is going to tell me that WorldCom is coming into Canada and going to take over Bell Canada. It's not in the cards. There are some strong players in there that may be equal to Bell Canada, but a lot of them are in pretty bad shape. It would seem to me opening up restrictions and so on would allow a lot of the Canadian telecom industry to expand and grow in the United States market, rather than the other way round. I guess I'm taking a more positive outlook on this thing.

    As far as raising capital goes, let's be serious here. The big capital market for an outfit like that is through the issue of bonds and debentures, and they're doing that in the United States already. They're raising American capital in those markets to finance operations. They've got a good investment grade, and they can raise money in those markets. So I think this is a straw man, this argument about foreign ownership restrictions.

    Mr. Jean Sébastien: One of the elements of an answer to that is that we may not be there right now, because quite a few cross-regulatory issues will open up once we do that. François mentioned the situation in the United States right now, where there are 50 regulatory state bodies plus the FCC and criss-crossing regulations. That's something that will be coming up when we open up, and this has got to be taken into account, clearly, before we do. This is what we're asking the committee to look into.

    Mr. Brian Fitzpatrick: The regulatory things, from what I can see, are of more concern than ownership. Everybody is talking about regulatory problems, not trying to close off capital for companies to grow and expand and move on.

    Mr. François Ménard: I would like to invoke the fact that I am 29, and I was not involved in the setting of foreign ownership restrictions in the first place. That being said, I am not opposed to that either. In fact, we could certainly use foreign investors in the networks we're deploying. We would be glad to have such foreign investments. However, I am not fearful of my getting foreign investments, I am fearful of the monopolies, which have not exited yet, getting access to that foreign capital, which will allow them to sustain, not increase, their local telephone service rates. I had my speech read yesterday by a professor of economics at Cornell University, and it passed the test.. So in an economist's way of looking at this, pressure should be applied on local rates, stemming from the fact that lower profits on the business rates would weigh in the balance seriously. If rate of return for the shareholders is to be maintained, the only way to do that is to increase local service rates.

    Now we have the price cap, 2002-34 from the CRTC, which prevents that from exceeding--I won't say a number, because I don't remember it by heart, but it's definitely in that decision. And there is not a clear mandate from the public to implement local telephone service competition.The public has not yet intervened. I see no presence of l'Union des consommateurs or the Public Interest Advocacy Centre, and I've been calling these groups on a weekly basis over the last two years, saying, by the way, should you intervene in cable modem third party access proceedings at the commission, all of your fees would be paid for by the incumbent operators through the taxation rules. They have not been intervening on the DSL proceedings. So obviously, my conclusion is that there is not a tremendous interest from the Canadian public in the establishment of competition. Why would I intervene? My phone rates are low, I have nothing to cry about. I have a pretty darn good service at a pretty low cost for my local telephone service, and my high-speed Internet, given the battle between the cablecos and the telcos, is the lowest in the world. But how is that sustainable? When I want to do telemedicine and tele-education on my high-speed Internet, it won't work either, and I will only realize that once the government puts doctors on-line.

    So at the moment there are no incentives for Canadians to start thinking about these issues, and we're out there at the forefront of regulation trying to convince municipalities to think about this stuff. We have a tremendously important mission, lots of people to educate, and that's what we've endeavoured to do. It's going to take time. I hope we won't have incumbents that will be able to sustain pressure being applied that should theoretically result in more expensive DSL and more expensive local telephone service, which are not increasing because they have access to additional capital, which allows them to offset that factor and apply even stronger pressure on the new entrants.

»  (1715)  

    The Chair: Thank you.

    Mr. Marcil.

[Translation]

    Mr. Serge Marcil (Beauharnois—Salaberry, Lib.): Thank you very much, Mr. Chairman.

    My questions are along the same lines as those of Mr. Fitzpatrick. Since the beginning, we have heard a lot about technology and the pros and cons of fibre optics, etc. We wanted to focus debate on the basic question we are dealing with today, which is whether the regulations need to be reviewed on an urgent basis. The question arises because Canadian firms find it very difficult to get financing. Many communications firms have declared bankruptcy and others are in financial difficulty. Is it because they have invested poorly or because the amount of capital required in this industry is huge and we do not have the capital it would require to continue to develop our communications sector?

    You are in the business, whereas Mr. Sébastien is not. He is a critic and more of a consumer advocate.

    I understand that this situation is very difficult for someone from business, even if that particular business is doing well, to accept. Why should we review the regulations in order to allow foreign capital into the market? If that happens, many small Canadian businesses will be taken over by Americans or other foreign interests, and we could lose control of our Canadian model.

    Would it be better to deregulate in order to allow our Canadian businesses to access that capital, or would that approach have mainly downsides? As you said earlier, if the various levels of government, that is, provincial, municipal and federal levels, own the infrastructure the way they own transportation systems such as streets, highways and so on, it would free up capital, enabling businesses to invest more in technology and consumer services rather than in infrastructure.

    I would like to be able to leave here at 5:30 having heard Mr. Sébastien, who is a consumer advocate, and Mr. Ménard, who is an entrepreneur, express very clear positions. Is there any advantage to deregulation or does the answer lie elsewhere?

»  (1720)  

    Mr. Jean Sébastien: In our opinion, other things need to be done before ownership or restrictions on foreign ownership are deregulated. To begin with, regulations are needed to deal with costs—which is the next step for the CRTC—so that competitors can develop a strong economic model. Competitors must become stronger than they are right now before we open the door to the risk of creating monopolies, as Mr. Ménard pointed out. Everyone will have access to the same 40%, 60% or 100% if we open the door wide. Right now, it would not be a good idea to open the door by allowing a higher percentage of foreign ownership. It may be advisable in two years or in four or five years, but it would not be a good idea right now.

    Mr. Serge Marcil: And Mr. Ménard, what is your opinion?

    Mr. François Ménard: I believe that I was very clear on this point before: it would be a good idea for private companies to have access to foreign capital in order to improve their competitive position. I must say that we have already entered into discussions with American investors for that purpose. However, I doubt very much that this can happen without modeling and answers to some basic questions. For example, I want to know what investments have been made by all CLECs in Canada over the past five years in colocation equipment throughout Canada.

    To my mind, that investment is worth absolutely nothing. It is worth nothing now, since I believe that the CRTC will incrementally allow interconnections that do not require colocation facilities so that a given competitor can interface with a network of companies that hold ownership. That would render the CLECs' argument totally bogus. What will happen to all the money that was invested? People will look a little silly if the CRTC changes the rules of the game five years down the road. Moreover, we will have to deal with new competitors who will come into the market without having to meet the same costs as we have had. That is the first question.

    Second, how much have all the competitors in Canada spent over the past five years in preparatory work that could have been avoided with more proactive regulations on the part of Canada's parliament with respect to how reasonable it is to have so much preparatory work done when a competitor comes into the market? I am thinking, for example, about a complete and fundamental review of the asker-payer rule. Right now, the general rule is as follows.

[English]

The last guy who wants to build must pay all the make-ready costs. He must pay to change the pole, he must pay to move Bell, move the transformer of the power utility from the old pole to the new pole, he must pay to move the cable TV company. That's part of his input costs, and that destroys a business model pretty quickly. So on that basis, there are two very important questions that must be asked. How much was wasted on collocation cages? How much was wasted on make-ready costs? Once you have the answers to those, you can say, gee whiz, we could have avoided all of these costs. Why should we need foreign investments now to build competition if these costs are no longer part of the cost structure?

    I don't think foreign investment should serve to finance debt of the competitors. It should be looked at on a moving-forward basis, because at the moment, if I'm thinking that I'm a CLEC, I want foreign investment not to finance my future activities, but to pay what I'm going to owe next quarter to my bank. That's not the right way to look at the problem.

»  (1725)  

    The Chair: Thank you very much.

    Mr. McTeague, to wrap up the day.

[Translation]

    Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): Thank you for your presentation, Mr. Sébastien and Mr. Ménard. It is very encouraging when we find solutions. The only question I have deals with competition.

[English]

    Is it your belief that we should perhaps look, as one of the solutions, at a way in which we would divorce incumbents or the opportunities at the wholesale level from those who are reselling, retailing or connecting people at the home level or at the business level? You obviously have this concern about integrated companies being able to put smaller competitors out of business. We heard from some people here yesterday. We've also heard something on the municipal side of things, referring to subdivisions across the Greater Toronto Area, examples where developers who are paying for the connections, for the services, are simply saying, hey, since we paid to put the fibre optics in and connect to the homes, we own the product and we'll determine, by negotiation with the many incumbents, who will have the final percentage of tariff.

    Are those two areas you believe have to be looked at by this committee, potential divorce of incumbents to prevent predatory pricing and extending the municipal interests to ensure that developers or those who are putting in and paying for these services at the user end should ultimately find their way into the competitive mix?

    Mr. François Ménard: It's going on at the moment. CRTC decision 2002-76, which was released last December--I will say five years too late--is spanking Bell Canada for using Bell Nexxia as a vehicle for getting around tariff filings, for getting around the requirement to be imputable with regard to the services it provides to competitors, services Bell Canada should provide to customers, but has been using Bell Nexxia to funnel through.

    In the area of high-speed Internet and in the area of private fibre optic networks one of the great things we have witnessed, last week, is that Bell Canada, for the first time, actually bid on the Commission scolaire des Découvreurs project in Quebec City not with Bell Nexxia, but with Bell Canada, as a result of the current show cause proceeding initiated by CRTC decision 2002-76. That means Bell Canada will be required to file updated rates for dark fibre, which it has been avoiding, because the last thing Bell wants to do is have a general tariff for dark fibre that can be ordered up by any competitor; then Bell must build dark fibre, the holy grail of telecom, and supply that service to competitors. So it's been using Bell Nexxia under the premise, if we build it for public sector and it's not going to compete with us, no problems, but if we have to build it and run the risk of this being used by our competitors, big problem. So that is changing. Gee whiz, it should have been done five years ago, but it's only been happening since last December.

    Second, you're talking about Future Way in Toronto and you're calling this asset-based telecom. It's no different from a school board wanting to own its own fibre optic network and then negotiating terms of interconnection with the ILEC, so that services can be provided on top of the school network. Definitely, there's room for that to happen. That's called a dominant position, and a dominant player is required to file just and reasonable rates with the commission. There's always the possibility of somebody acting in a dominant fashion not filing rates, somebody complaining, arguing that this person is acting as a dominant player, and so requesting rates to be filed for it. It's exactly what Bell Canada has done with Future Way. Future Way was dominant, in that Bell Canada had no choice but to use Future Way infrastructure to provide services, should end users in that neighbourhood want to get services from Bell Canada. As a result, it's been asking the CRTC to force Future Way to file tariffs for third party access to its infrastructure.

    I said third party access. There's great confusion right now in Ottawa between wholesale and third party access. Wholesale has volume rates predicated on buying one to 100, 1,000, 10,000, and it forces competitors into minimum commitments of purchase. Third party access is regulated under CRTC decision 1999-592, which stipulates that retail Internet services rates are forborne, but for the underlying infrastructure used by the incumbents to provide these services, there must be a just and reasonable tariff made available. The CRTC has a history of preferring rates that do not have volume discounts in them. This is called third party access, and this is why we have cable modem third party access, and this is why we have DSL third party access, two proceedings that have been going on at the CRTC for years and have yet to be delivered. Meanwhile we have a Canadian industry of Internet service providers that is screaming bloody murder because they're being put out of business, because incumbents are making use of infrastructure that was built initially to provide telephone services, but they found ways to use to provide Internet services, without filing just and reasonable tariffs for use of that infrastructure by third parties.

»  (1730)  

    At the moment, I would be so bold as to say, there's a tremendous void of communication between Parliament and directions being given to the CRTC. Perhaps it has to do with the fact that the CRTC is an independent body, and it would not be well to see a member phone up Madame Rhéaume and tell her, it would be in the interest of the public that this happen. This is not the way the line of communication works, but with motions of Industry Canada, through Governor in Council, percolating back through the CRTC. And at the moment we have one hand of the government saying broadband is a good idea, it should be extended to all Canadians, another hand of the government, the CRTC, acting in absolutely no way proactively on this issue, only reactively and only following complaints of competitors.

    The Chair: I want to thank both of you for a very enlightening afternoon. We all learned something we haven't learned over the last week and a half, and it's great to have you people here today with us. So thank you very much.

    This meeting is adjourned until tomorrow at 3:30.