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I Background
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The introduction of price cap
regulation
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1.
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In
Review of regulatory framework, Telecom Decision CRTC 94-19,
16 September 1994 (Decision 94-19), the Commission developed a
regulatory framework for the telecommunications industry intended to allow
all Canadians, over time, ubiquitous and affordable access to an increasing
range of competitively provided telecommunications services. The Decision
94-19 framework encompassed a wide range of regulatory issues, including a
new approach to the regulation of the rates of the incumbent telephone
companies, as well as a framework for the introduction of competition into
the local services market.
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2.
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The
framework for rate regulation involved three key, interrelated initiatives:
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- the replacement of earnings
regulation with price regulation. This new method of regulation
provided the incumbent telephone companies with greater incentives to
improve efficiency and introduce network and service innovations;
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- the splitting of the rate bases
of the incumbent telephone companies into competitive and utility
segments, effective 1 January 1995, to facilitate the transition
to price regulation. The utility segment relates mainly to the local
and access operations of the companies (the Utility Segment); and the
competitive segment refers to services subject to varying degrees of
competition (the Competitive Segment). Earnings regulation was
maintained for the Utility Segment for the period 1995 to 1997; and
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- a significant reduction in the
subsidy of local access services paid by users of long distance
services. Ensuring that the rates for local access services more
closely reflected the costs of these services was necessary to produce
the benefits of price regulation, including increased incentives to
reduce costs.
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These
initiatives were implemented via a number of Commission decisions, the most
important for present purposes being Price cap regulation and related
issues, Telecom Decision CRTC 97-9,
1 May 1997 (Decision 97-9).
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3.
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In
Decision 97-9,
the Commission established the form of price regulation that would apply to
the major incumbent local exchange carriers (ILECs). At that time, these
companies were: BC TEL, Bell Canada, The Island Telephone Company Limited
(Island Tel), Maritime Tel & Tel Limited (MTT), MTS NetCom Inc.
(now MTS Communications Inc.) (MTS), The New Brunswick Telephone Company,
Limited (NBTel), NewTel Communications Inc. (NewTel), and TELUS
Communications Inc. (TELUS (Alberta)). The Commission notes that subsequent
to Decision 97-9,
TELUS Alberta and TELUS Communications (B.C.) Inc. (formerly BC TEL;
hereinafter TELUS (BC)) merged into TELUS Communications Inc. (TELUS). The
Commission also notes that Island Tel, MTT, NBTel and NewTel
subsequently merged to become Aliant Telecom Inc. (Aliant Telecom).
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The initial price cap regime
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4.
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Decision
97-9
established a four-year price cap regime for the Utility Segment, with a
review to be initiated in the last year of the regime.
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5.
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The
Commission's price cap regime was designed to achieve the following
objectives:
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a)
to render reliable and affordable services of high quality, accessible to
both urban and rural area customers;
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b)
to foster competition in the Canadian telecommunications markets;
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c)
to provide incumbents with incentives to increase efficiencies and to be
more innovative, and with a reasonable opportunity to earn a fair return
for their Utility Segments; and
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d)
to implement a price cap regime that is simple, straightforward, easy to
understand and reduces the regulatory burden to the greatest extent
possible.
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6.
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The
structure and pricing constraints in the initial price cap regime reflected
both the state of competition in various services, as well as the
expectation for the development of competition over the course of the price
cap period.
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7.
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Under
the price cap regime, certain of the ILECs' Utility Segment services were
grouped into a single basket of capped services (Capped Services) subject
to the price cap formula. This formula has determined the maximum allowable
aggregate change in prices, on an annual basis, for the Capped Services.
Aggregate rate changes for Capped Services were limited to the rate of
inflation minus a productivity offset of 4.5%. The productivity offset
reflected the assumption that the ILECs could become more productive,
through, for example, reductions in input costs. The price cap formula also
took into account the financial impact of limited exogenous factors arising
from events beyond the ILECs' control.
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8.
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The
single basket of Capped Services was divided into three sub-baskets subject
to additional pricing constraints. For the first sub-basket, Basic
Residential Local Services, average annual rate increases could not exceed
the rate of inflation. Additionally, no individual rate element within the
sub-basket could increase in smaller telephone exchanges by more than 10%
in any year. For the second sub-basket, Single and multi-line local
business services, individual rate elements for single-line business
services in smaller telephone exchanges could not increase by more than 10%
in any year. Finally, for the third sub-basket, Other capped services,
average annual rate increases could not exceed the rate of inflation.
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9.
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Certain
Utility Segment services (Uncapped Services) were excluded from the Capped
Services basket, including optional local services. In addition, the
Commission determined that certain services required by local and toll
competitors (Competitor Services) would not be included in the Capped
Services basket. However, Competitor Services were required to be priced to
recover their incremental costs and to make an appropriate contribution to
fixed common costs.
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10.
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In
Implementation of price cap regulation and related issues, Telecom
Decision CRTC 98-2,
5 March 1998 (Decision 98-2), the Commission determined implementation
issues in connection with the price cap regime, including the appropriate
Utility Segment rates at the outset of the regime (going-in rates).
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11.
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Saskatchewan
Telecommunications (SaskTel) was not subject to the first price cap regime,
as it only came under federal regulation on 30 June 2000. In SaskTel
– Transition to federal regulation, Decision CRTC 2000-150,
9 May 2000 (Decision 2000-150), the Commission approved a transitional
regulatory framework for SaskTel. The Commission determined, among other
things, that Utility service rates could not increase above the levels
established on 30 June 2000. The Commission also indicated that
the company would likely be included in the upcoming review of the initial
price cap regime.
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12.
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As
noted above, in Decision 97-9,
the Commission indicated that it would conduct a review of the initial
price cap regime in the fourth year of the price cap period. In order to
conduct that review in as effective a manner as possible, the Commission
initiated a proceeding in 2000 to determine the scope of the review.
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Review of the price cap regime
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13.
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In
Proceeding to determine the scope of the price cap review, Public
Notice CRTC 2000-99,
14 July 2000 (PN 2000-99), the Commission requested comments on the
scope of the upcoming review of the price cap regime. Issues raised by the
Commission included (a) whether price cap regulation or the current price
cap regime can permit sustainable competition to evolve; (b) the criteria
to measure the success of the current price cap regime in achieving its
goals and objectives; and (c) the issues that should be considered in the
proceeding to review the price cap regime.
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14.
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After
the close of the record of the PN 2000-99
proceeding, the Commission was informed that representatives of various
stakeholders, including ILECs, competitive local exchange carriers (CLECs),
long distance service providers, and consumer and public interest advocacy
groups, had initiated a series of consultations. The parties hoped to issue
a joint proposal to the Commission regarding the regulatory regime that
should follow the initial price cap regime.
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15.
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In
light of these consultations, the Commission postponed finalizing its
conclusions with respect to the scope of the price cap review. Ultimately,
the parties were unable to reach consensus on a proposal and notified the
Commission of this fact.
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16.
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On
the basis of the input from the PN 2000-99
proceeding, as well as Decision 97-9
and related decisions, the Commission issued Price cap review and
related issues, Public Notice CRTC 2001-37,
13 March 2001 (PN 2001-37), to establish an appropriate regulatory
regime to go into effect in 2002.
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Scope of the present proceeding
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17.
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In
PN 2001-37,
the Commission indicated that it would consider whether the current form of
price cap regulation continues to represent an appropriate basis of
regulation to balance the interests of the three main stakeholder groups –
consumers, ILECs and competitors.
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18.
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The
Commission also sought proposals from parties as to the elements that
should be included in the new regulatory regime, including:
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a)
the components of a price cap formula, including the appropriate measure of
inflation, the level and applicability of a productivity factor, and the
treatment of any exogenous factors;
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b)
the definition and treatment of Capped and Uncapped Services;
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c)
the service basket structure; and
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d)
the length of the price cap period.
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19.
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The
Commission also invited proposals on any changes to the current treatment
of Competitor Service rates; on the appropriate treatment of rates in
high-cost serving areas (HCSAs); and on the upward pricing constraints on
the basic toll schedules.
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20.
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In
addition, the Commission invited comments on the appropriateness of
including a quality of service component in the price regulation regime, or
other methods, such as targeted refunds to customers, to address inadequate
service quality. Further, the Commission sought input on other benchmarks
for consumer service, such as billing policies, and on a consumer bill of
rights.
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21.
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With
respect to monitoring and information reporting requirements, the
Commission indicated that any proposed changes should take into account the
role such information plays in ensuring the need for and effectiveness of
competitive and consumer safeguards.
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22.
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The
Commission also stated that it would review the major ILECs' service
improvement plans (SIPs), filed pursuant to Telephone service to
high-cost serving areas, Telecom Decision CRTC 99-16,
19 October 1999 (Decision 99-16). The purpose of the SIPs is to extend
service to unserved customers, and to upgrade service levels to underserved
customers to achieve the basic service objective as defined in Decision 99-16.
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23.
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Finally,
the Commission stated that while it had outlined a number of specific
issues on which it sought comment, parties could also submit comments on
other issues or alternative proposals relevant to the proceeding.
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24.
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In
Public Notice CRTC 2001-37
– Price cap review and related issues: Requests for clarification of
issues and determinations on public disclosure of information and on
further responses to interrogatories, Decision CRTC 2001-582,
10 September 2001, the Commission addressed requests for clarification
of issues made by TELUS and Bell Canada. Among other things, the Commission
confirmed that the issue of the mark-up on Competitor Services would be
considered in the context of possible changes to the current treatment of
Competitor Services rates. Accordingly, the Commission made the record of
the follow-up proceeding to Restructured bands, revised loops and
related issues, Decision CRTC 2001-238,
27 April 2001 (Decision 2001-238), regarding whether the mark-up on
local loop costs should be reduced from 25% to 15%, part of the record of
the present proceeding.
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25.
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In
Public Notice CRTC 2001-37
– Price cap review and related issues: Follow-up to Decision CRTC 2001-582,
re requests for clarification of issues and determinations on deficiencies
and confidentialities, Decision CRTC 2001-618,
28 September 2001 (Decision 2001-618), the Commission addressed
further requests for clarification, and requests from Aliant Telecom, Bell
Canada, MTS, and SaskTel (collectively, the Companies), and TELUS that
certain evidence be ruled outside the scope of the proceeding. Among other
things, the Companies stated that they were unclear as to whether and to
what extent the Commission intended to re-examine the fundamental framework
put in place for local competition. The Companies stated that they prepared
their evidence based on the assumption that the Commission had already made
certain key determinations in Local competition,Telecom Decision
CRTC 97-8,
1 May 1997 (Decision 97-8). The Companies also stated that the
fundamental framework was based on the view that local competition should
be facilities-based, with competitors relying increasingly on use of their
own facilities, and made fundamental distinctions between the pricing rules
for specified essential services and all other services. TELUS asked
whether the Commission intended to vary Decision 97-8.
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26.
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The
Commission confirmed its view that, while local competition, in the long
term should be facilities-based with competitors relying increasingly on
use of their own facilities, significant reliance on resale and unbundling
would continue to be necessary on a transitional basis.
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27.
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The
Commission also confirmed that the definition of "essential
service" contained in Decision 97-8
and the current classification of certain services as "essential"
were not under consideration in the proceeding. With respect to whether
pricing rules for essential services were under consideration, the Commission
noted that services found to be essential services in Decision 97-8
are also Competitor Services (see Decision 98-2).
Therefore, the Commission stated that, insofar as pricing rules for
Competitor Services were clearly within the scope of the proceeding, policy
issues and evidence relating to the pricing of essential services were also
within the scope.
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The proceeding
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28.
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The
following companies were made parties to this proceeding and directed to
file evidence: Island Tel, MTT, NBTel, NewTel, Bell Canada, MTS, SaskTel
and TELUS.
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29.
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The
Commission also invited evidence and submissions from interested parties. A
total of 53 individuals, municipalities, provincial governments,
corporations and other organizations registered as interested parties.
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30.
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The
following interested parties filed submissions, interrogatory responses,
comments and/or arguments:
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- Action Réseau Consommateur, the
Consumers' Association of Canada, Fédération des associations
coopératives d'économie familiale, and the National Anti-Poverty
Organization (ARC et al.)
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- AT&T Canada Corp. Inc. and
AT&T Canada Telecom Services (AT&T Canada)
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- BC Old Age Pensioners'
Organization, BC Coalition for Information Access, Consumers'
Association of Canada (BC Branch), Council of Senior Citizens'
Associations of BC, Senior Citizens' Association of BC, Tenants Rights
Action Coalition, West End Seniors Network (BCOAPO et al.)
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- Consumers' Association of Canada
(Manitoba), Manitoba Society of Seniors (CAC(Man.)/MSOS)
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- Call-Net Enterprises Inc.
(Call-Net)
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- City of Calgary (Calgary)
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- Commissioner of Competition,
Competition Bureau (the Commissioner of Competition)
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- Consumers' Association of Canada
(Alberta) (CAC Alta)
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- Distributel Communications
Limited (Distributel)
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- Futureway Communications Inc.
(Futureway)
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- GT Group Telecom Services Corp.
(Group Telecom)
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- Microcell Telecommunications
Inc.
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- Manitoba Keewatinowi Okimakanak
Inc. (MKO)
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- Paytel Canada, Inc. (Paytel)
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- Primus Telecommunications Canada
Inc.
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- Rogers Wireless Inc. and Rogers
Communications Inc. (RCI)
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- Shaw Cablesystems GP (Shaw)
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- Bell Canada, Aliant Telecom,
MTS, SaskTel (the Companies)
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31.
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ARC
et al. submitted evidence jointly with the following parties: BCOAPO et
al., CAC (Man.)/MSOS, MKO and Calgary. Testimony from expert witnesses on a
variety of subjects was included in these various joint submissions. For
simplicity, references in this Decision to these joint submissions are
attributed to ARC et al.
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32.
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A
total of 1,935 letters and e-mails (3,876 signatures) were received by the
ILECs and the Commission. The breakdown by ILEC was as follows: TELUS -
1,086; Aliant Telecom - 388; Bell Canada - 357; MTS - 38; and SaskTel
- 9. The remaining 57 letters and e-mails were general comments not
directed at a specific carrier.
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33.
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Of
the correspondence addressed to TELUS, 360 letters express disagreement
with the approach used for its SIP and with having to pay to provide
service to those who chose to live in remote areas. Six letters related to
quality of service, while the rest objected to the rate increases.
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34.
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Most
of the 388 letters and e-mails (representing 1,847 signatures) sent to
Aliant Telecom objected to the company's proposal to increase rates.
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35.
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Bell
Canada received 357 letters and e-mails; 55 related to its SIP, while the
remainder generally disagreed with any kind of rate increase.
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36.
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An
oral hearing was held from 1 October to 22 October 2001 before
Vice-Chairman David Colville (chairman of the hearing), and Commissioners
Barbara Cram, Jean-Marc Demers, Stuart Langford, David McKendry,
Andrée Noël, and Ronald Williams.
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37.
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The
oral hearing began with comments from the general public, followed by
cross-examination of the evidence by the parties. Written comments from the
general public were filed up to 15 October 2001, and oral argument by
parties was presented on 22 October 2001. Written arguments were filed
on 22 October 2001 and written reply arguments on 31 October
2001.
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II Overview of the
next price regulation framework
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The form of regulation
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38.
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In
this proceeding, parties addressed whether price cap regulation of the
ILECs should continue; whether the initial price cap regime met the
objectives established in Decision 97-9;
and whether the form of price cap regulation applied to the ILECs should be
modified and, if so, in what ways.
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39.
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The
Companies were of the view that, despite some weaknesses, the initial price
cap regime was a major improvement over rate of return regulation. TELUS
submitted that price regulation was a superior regulatory regime that
provided incentives for efficiency and investment which closely emulated
those of a competitive marketplace.
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40.
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AT&T
Canada was of the view that the objectives of the initial regime were
appropriate and should be carried forward into the next regime, although
greater focus should be given to fostering sustainable competition. RCI
submitted that while the initial price cap regime was not successful in all
respects, the general approach and objectives continued to be in the public
interest. ARC et al. supported the continuation of a price-based form of
regulation. ARC et al. submitted that there was value in regulatory
consistency for all parties, and that significant change at this time would
increase uncertainty about the form of the next regime and increase
regulatory risk unnecessarily.
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41.
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Overall,
there was a broad consensus that the initial price cap regime provided
better incentives for improved efficiency and innovation than rate
base/rate of return regulation. In particular, the evidence in the present
proceeding indicated that the ILECs have achieved productivity gains well
beyond the productivity offset of 4.5% established in Decision 97-9.
In light of these results, the general view of parties was that price cap
regulation during the initial period had been an improvement over
traditional rate base/rate of return regulation, and that the Commission
should continue to apply price cap regulation to the ILECs.
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42.
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The
Commission agrees that price regulation remains more effective than rate
base/rate of return forms of regulation in fulfilling the objectives of the
Telecommunications Act (the Act). In particular, price regulation
provides the ILECs with stronger incentives to minimize costs, to operate
more efficiently, and to be more innovative in the provision of services.
Accordingly, the Commission has decided to continue to apply price
regulation to the ILECs.
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43.
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However,
it was evident from the record of this proceeding that there were a number
of concerns regarding certain aspects of the initial price cap regime. In
particular, a number of parties highlighted the unequal distribution of the
benefits from productivity gains and also commented on quality of service
issues. There were also concerns about the interrelationship between the
state of local competition and the structure of the initial regime.
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The state of local competition
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44.
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According
to the Report to the Governor in Council: Status of Competition in
Canadian Telecommunications Markets and Deployment/Accessibility of
Advanced Telecommunications Infrastructure and Services, September 2001
(GIC Report) (filed in this proceeding as CRTC Exhibit No. 5), by year
end 2000, competitors served 771,000 business lines, or approximately
10.3% of the business market. Competitors served 30,000 residential lines,
or about 0.2% of the residential market.
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45.
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On
its face, the GIC Report indicates that local competition is in its early
stages. With respect to the residential market, the GIC Report indicates
that competition is almost non-existent.
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46.
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Parties
were generally agreed that local competition was developing slowly. CLECs
have focused on serving the downtown cores of large urban areas, with
occasional entry, mostly via resale of ILEC facilities, into medium-sized
urban areas. Based on evidence filed by parties during the proceeding,
CLECs have attained market shares of around 10% in the local business
sector overall, and market shares of up to 16% of the local business market
in some large urban centres. The evidence also indicates that in the
residential market, competitors have achieved a market share of approximately
0.2%.
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47.
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Overall,
the evidence filed by parties in this proceeding reinforced the perspective
provided by the GIC Report. Facilities-based local competition is generally
limited to the business market in large urban areas. There is some
resale-based competition in the business market in other areas. There is
little, if any, local competition of any type in the residential market.
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48.
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In
the Commission's view, a number of factors have contributed to the slow
growth of local competition, particularly of facilities-based competition.
For example, CLECs incurred significant start-up and on-going costs. They
were required to lease services or facilities from the ILECs in order to
serve many of their customers, at the same time incurring costs for co-location
in ILEC central offices. In addition, CLECs continued to face challenges
gaining access to multi-dwelling buildings, non-carrier support structures
and obtaining municipal rights-of-way on acceptable terms. While CLECs
could address these difficulties, in part, through resale of ILEC services,
or through unbundled local loops, both of these alternatives resulted in
reduced margins.
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49.
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As
far as the future is concerned, the ILECs stated that they expect continued
entry and market share growth by wireline competitors, including ILEC
affiliates, wireless carriers and cable companies using Internet protocol
telephony or other technologies. The Companies forecast that by 2005, CLECs
would serve approximately 23% of business network access services (NAS) in
the Companies' territories; while TELUS estimated a market share loss of
20% of business NAS in its territory by the same year.
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50.
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The
ILECs expected slower market share gains by CLECs in the residential
market, but anticipated that the cable companies would offer local service
over cable facilities in the 2003 to 2005 period. The ILECs noted that
Eastlink Limited (Eastlink) had gained significant market share in Nova
Scotia. In addition, they noted that Call-Net was re-entering the local
residential market in Alberta and Toronto. TELUS projected that by 2005 or
2006, cable companies would provide local service to about 10% of NAS in
its territory. The ILECs also expected that some wireline users would
switch to wireless services, principally as an alternative to a second
landline and, to a limited extent, as the only access to the telephone
network.
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51.
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AT&T
Canada and Call-Net submitted that there were still barriers to entry to
the local market, noting that the ILECs could have a cost advantage over CLECs
with their size, scale economies and a ubiquitous network. Call-Net stated
that, in addition, the ILECs have numerous incumbency advantages, such as
depreciated networks, low customer acquisition costs and close to 100%
market share.
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52.
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AT&T
Canada expected that competitors would serve 12.8% of business lines in
Bell Canada's territory, and 11% in TELUS' territory by 2005; and that
competitors would serve 2% of residence lines in Bell Canada's territory,
and 1.8% of residence lines in TELUS' territory.
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53.
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Group
Telecom was of the view that the present regulatory framework for local
competition was generally appropriate, and submitted that change should
focus on two key areas. First, under certain conditions, CLECs should be
permitted to provide service to customers who are now under long-term
contracts to the ILECs. Second, the Commission should oversee more closely
the activities of ILECs' affiliates in the ILECs' home territories, to
prevent the avoidance of regulatory obligations through inappropriate use
of affiliates.
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54.
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RCI
submitted that cable companies were currently focused on converting their
networks to digital video, and that RCI expected to enter the local market
only in the period 2003 to 2005. In RCI's view, local telephony provided
over cable facilities would not have a significant impact on competition in
the local market during the next price cap period.
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55.
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ARC
et al. submitted that current wireless services were not a good substitute
for wireline services, because wireless carriers rated their services by
minutes of use and did not permit multiple extensions to one line. ARC et
al. observed that the ILECs' predictions of market share losses to new
technologies during the initial price cap period had not materialized. ARC
et al. also observed that ILECs would likely be among the bigger players
using any new technology.
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56.
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The
Commissioner of Competition submitted that due to pricing, coverage,
suitability for data services, service quality and battery life issues,
wireless services were not a substitute for wireline services at this time.
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57.
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Based
on current trends, the Commission believes it is likely that competition in
the business market will continue to increase over the next few years. The
Commission also considers that, in the business market segment, the ILECs'
market power is reasonably limited in areas where competitors have
facilities or are otherwise present through the resale of ILEC services,
notably through Centrex resale.
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58.
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In
the residential market, however, virtually no competition developed during
the initial price cap period, with the limited exception of some areas in
the Maritimes. Overall, competitors achieved minimal market share in
residential basic local exchange services.
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59.
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In
addition, there was no evidence to suggest that competitors had made any
inroads into the market for residential optional local services. On the
contrary, the ILECs were able to increase revenues from these services
through rate increases without experiencing a significant reduction in
demand.
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60.
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The
Commission considers that competitive entry into the residential market
will continue to be limited in the foreseeable future. Based on the record
of the present proceeding, it is unlikely that the larger cable companies
will enter the residential market in the near future on any significant
scale.
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61.
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The
Commission is also of the view that investment to construct new facilities
to serve residential customers will be limited during the next price cap
period given the current financial state of the industry and the
significant costs involved.
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62.
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Finally,
given the close link between local exchange service and optional local
services, the Commission considers it unlikely that competitors will have
much success selling optional local services to residential customers who
receive their local exchange service from the ILECs. Consequently, in the
Commission's view, the lack of competition in residential local exchange
service will continue to be accompanied by a lack of competition in
residential optional local services.
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63.
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Accordingly,
the Commission does not anticipate that competition will be sufficient to
discipline the ILECs' residential local exchange and residential optional
local service rates during the next price cap period.
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64.
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In
light of the current state of local competition and its projected
development over the next several years, the Commission has decided it is
necessary to introduce a variety of adjustments to the price regulation
regime applicable to the ILECs. These changes are detailed in Parts III, IV
and VI of this Decision.
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Balancing stakeholder interests
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65.
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A
number of parties pointed out that there was a significant disparity in the
distribution of the benefits of price regulation during the initial price
cap period. For example, while the price of local business services dropped
significantly in some areas, residential local service rates (both basic
and optional) rose in virtually all locations. Also, while the ILECs
enjoyed significantly improved returns on their Utility Segment services,
the financial health of competitors - who relied on ILEC services in order
to compete – deteriorated seriously. These developments were considered
problematic by some parties for several reasons.
|
|
66.
|
First,
when considered together, the increases in residential local service rates,
the financial weakness and the limited market penetration of competitors,
and high returns achieved by the ILECs, raised concerns about whether an
appropriate balance had been struck in the initial regime between the
interests of the different stakeholders (customers, ILECs and competitors).
|
|
67.
|
For
example, ARC et al. and BCOAPO et al. argued that the Commission should
attempt to ensure that some of the productivity gains generated by the
industry under price cap regulation accrue to residential customers. For
their part, AT&T Canada, Call-Net and RCI each argued that the
Commission should give greater emphasis to the needs of competitors in
order to foster local competition.
|
|
68.
|
Second,
the disparity between the benefits flowing to business and residential
customers was significant. Between 1998 and 2000, business rates in urban
areas declined in every province except Saskatchewan. SaskTel was not
subject to price cap regulation during the initial price cap period. On
average, business rates in urban areas declined by 15% in Ontario and
Quebec, 11% in British Columbia, and 5% in Alberta. In contrast, during
this same time period, rates for residential local services (basic and
optional) rose in all ILEC territories.
|
|
69.
|
The
fact that these two classes of customers (i.e., business and residential)
received such widely different rate treatment under the initial price cap
regime reinforces the view that the interests of different groups were not
equitably balanced.
|
|
70.
|
Third,
the downward trend in ILEC local business rates squeezed the margins
available to competitors and therefore acted as an impediment to
competitive entry. The Commission considers that, if this situation were to
continue, it would have a significant adverse effect on the development of
local competition – to the detriment of both customers and competitors. The
effect would initially be manifested in the business market where the price
reductions occur. However, over the longer term there would likely be an
impact on competitive entry into the residential market as well, since
CLECs would have difficulty achieving economies of scope and scale on the
same basis as the ILECs.
|
|
71.
|
In
light of these developments, the Commission is of the view that adjustments
are necessary to the basket structure and pricing constraints of the price
cap regime applied to the ILECs. These modifications are discussed in
detail in Part IV of this Decision.
|
|
|
Quality of service
|
|
72.
|
During
the initial price cap period the ILECs, with the exception of SaskTel,
filed quality of service reports, as required by Quality of service
indicators for use in telephone company regulation, Telecom Decision
CRTC 97-16,
24 July 1997 (Decision 97-16). Those reports indicated that quality of
service problems occurred during much of the period for each of the ILECs.
|
|
73.
|
From
1998 to 2000, all of the ILECs who filed reports had substandard
performance for many months each year. Despite some improvement for several
companies in 2000, compared to earlier years, the number of months of
substandard performance was unacceptably high. For example, in 2000, Bell
Canada failed to meet the required monthly standards 48 times across all
indicators, while TELUS (BC) and TELUS (Alberta) each had substandard
performance 42 times. In 2001, only Bell Canada consistently met all
indicators.
|
|
74.
|
The
ILECs' unsatisfactory quality of service record during the initial price
cap regime indicates that measures must be put in place to ensure that
customers receive reliable services of high quality. Furthermore, the
Commission is not persuaded that competitive pressures in either the retail
or competitor services markets will be sufficient to ensure that ILECs will
meet approved service quality standards during the next regime.
Consequently, the Commission has concluded that regulatory changes are
required to address this concern. These changes are discussed in detail in
Part VI of this Decision.
|
|
|
Earnings sharing
|
|
75.
|
An
adjustment to the price cap regime that was discussed in the present
proceeding was earnings sharing. An earnings sharing mechanism involves
setting an earnings threshold which, when reached, triggers the sharing of
additional revenues with customers – either through rebates or via other
rate adjustments.
|
|
76.
|
ARC
et al. suggested earnings sharing should be considered if the Commission
felt there was a significant risk of setting the productivity target either
too high or too low. Under ARC et al.'s proposal, ILECs would be allowed to
choose from a number of alternatives ranging from a high productivity
offset with no earnings sharing, to a low offset with significant earnings sharing.
ARC et al. noted that most jurisdictions have had sufficient confidence,
beyond the first round of price cap regulation, to establish a productivity
target without earnings sharing.
|
|
77.
|
The
ILECs opposed the introduction of an earnings sharing overlay to the price
cap regime.
|
|
78.
|
The
Companies submitted that the most costly consequence of earnings sharing
would be a reduction in incentives for infrastructure investment due, in
part, to greater uncertainty regarding the stream of financial returns from
large-scale investments.
|
|
79.
|
The
Companies also submitted that, if an earnings sharing mechanism were
implemented, the ILECs' administrative burden would be even greater than
under rate of return regulation. A price cap/earnings sharing regime would
require the production, monitoring and analysis of Utility Segment
financial results on an annual basis and the determination of an allowable
rate of return – as is required under rate of return regulation – as well
as demonstrated compliance with the pricing constraints associated with the
price cap formula.
|
|
80.
|
TELUS
submitted that a regulated firm would have little incentive to improve
efficiency if it believed the regulator would take any savings and pass
them on to consumers in the form of lower rates. Similarly, TELUS argued
that large-scale investments in infrastructure modernization would not be
attractive if the regulator could appropriate the returns from such
investment. TELUS also argued that, under pure price cap regulation,
business and residential consumers would benefit from more choice in
suppliers and technologies, and lower prices overall, than under any
monopoly-style form of regulation.
|
|
81.
|
The
Commissioner of Competition submitted that the current price cap structure,
with no earnings sharing overlay, should be maintained in order to ensure
continuity and reduce uncertainty for consumers, industry participants and
investors.
|
|
82.
|
In
the Commission's view, an earnings sharing mechanism would re-introduce a
number of significant elements of earnings regulation and thereby diminish
the advantages of price regulation. The approach proposed by ARC et al.
could alleviate, to some extent, the disincentives typically associated
with earnings sharing, since the ILECs would have input on the extent of
earnings sharing that would apply to them. However, this approach would
increase administrative requirements for both the ILECs and the Commission
due to the additional process involved in calculating and tracking the
earnings sharing overlay. Permitting the ILECs to operate under different
regimes would also likely create confusion and uncertainty in the industry.
Overall, the Commission considers that the disadvantages of such an
approach would outweigh its benefits. Consequently, the Commission has
decided that the next price cap regime will not include earnings sharing.
|
|
|
Objectives of the next price cap
regime
|
|
83.
|
In
light of the state of local competition and the concerns identified above,
the Commission considers it necessary to assess whether the objectives of
the initial price cap regime should be carried forward to the next regime,
or whether some modifications to those objectives are necessary.
|
|
84.
|
Most
parties who commented on the objectives of price regulation were generally
of the view that the four objectives identified in Decision 97-9
for the initial price cap regime continue to be relevant and should guide
the Commission in its determinations for the next regime.
|
|
85.
|
The
Companies stated that their proposal had been fashioned to meet the
objectives that a) telephone service prices should continue to remain
affordable, b) the benefits of facilities-based competition be widespread,
and c) the environment be conducive to investments being made in the
telecommunications industry.
|
|
86.
|
AT&T
Canada submitted that the objectives of the upcoming regime should not be
any different than the objectives of the initial price cap regime. To
achieve these objectives, AT&T Canada argued, the upcoming regime
should correct an imbalance in the initial regime and focus more closely on
fostering sustainable competition.
|
|
87.
|
Group
Telecom suggested that the overriding objective of the next regime should
be the removal of existing barriers to facilities-based competition and the
maintenance of balanced incentives for entry on a facilities basis.
|
|
88.
|
RCI
submitted that the objectives for the initial price cap regime continued to
be in the public interest on a going forward basis. However, in RCI's view,
not all of these objectives were satisfied by the initial price cap regime
and certain adjustments were required in the next price cap period to
correct this imbalance.
|
|
89.
|
ARC
et al. argued that in addition to the objectives of affordability,
competition, and investment, as put forward by the Companies, other
critical objectives included reliability and quality of service,
rural/urban equity, creating incentives for greater efficiency and
innovation, and ensuring just and reasonable rates for both retail and
wholesale customers of ILEC Utility Segment services. In ARC et al.'s view,
the next price cap regime should balance the interests of stakeholders by
ensuring fair rates for competitors and end-users and providing an opportunity
for ILECs to earn a fair return.
|
|
90.
|
The
Commissioner of Competition submitted that the primary goal of price cap
regulation is to replicate, as nearly as possible, a dynamically
competitive market for telecommunications. The Commissioner of Competition
also suggested that the price cap regime should meet the multiple
objectives of fostering increased reliance on market forces with the
introduction of local competition, rendering affordable telecommunications
services, allowing pricing flexibility to the ILECs, and protecting
competitors from anti-competitive pricing.
|
|
91.
|
Most
parties also agreed that the interests of the three main stakeholders –
customers, ILECs and competitors – should be balanced under the regime.
|
|
92.
|
In
light of these comments and the matters discussed above, the Commission
considers it appropriate to modify the objectives of the initial price cap
regime for the purposes of the next regime.
|
|
93.
|
First,
given the importance of balancing the interests of customers, ILECs and
competitors, the Commission believes this goal should be identified as an
additional, explicit objective.
|
|
94.
|
Second,
with respect to the objective of fostering competition, most parties who
commented on this point emphasized that the goal should be the fostering of
facilities-based competition. The Commission is of the view that
facilities-based competition is the most appropriate way to ensure high
quality, affordable service, as well as innovation and service
differentiation. Accordingly, this objective has been reworded.
|
|
95.
|
Third,
the Commission notes that the third objective for the initial regime made
express reference to the opportunity for the ILECs to earn a fair return
for their Utility Segments. This objective was implemented by conducting a
revenue requirement review in order to set going-in rates for the initial
regime.
|
|
96.
|
In
PN 2001-37,
the Commission indicated that it did not intend to conduct a revenue requirement
assessment of Utility Segment results unless an ILEC proposed rate
increases to be effective at the outset of the next price cap regime, other
than increases that would reduce the subsidy requirement in HCSAs. None of
the ILECs proposed that rates increase at the outset of the next regime.
Instead, parties focused on the price cap framework, including the basket
structure and the productivity offset.
|
|
97.
|
As
discussed in greater detail in Part X of this Decision, the concept of
a Utility Segment no longer has relevance in the next regime given the
expanded scope of the pricing constraints the Commission has decided to
impose, as well as the introduction of a Phase II-based subsidy
requirement in 2002.
|
|
98.
|
Accordingly,
the Commission has concluded that it is neither necessary nor appropriate
to retain a reference to ILEC Utility Segment earnings in the objectives
for the next price cap regime since the focus of price cap regulation is
prices, not earnings. The wording of this objective has therefore been
modified accordingly.
|
|
99.
|
In
light of the above, the regulatory framework set out in this Decision is
designed to achieve the following objectives:
|
|
|
a)
to render reliable and affordable services of high quality, accessible to
both urban and rural area customers;
|
|
|
b)
to balance the interests of the three main stakeholders in
telecommunications markets, i.e., customers, competitors and incumbent
telephone companies;
|
|
|
c)
to foster facilities-based competition in Canadian telecommunications markets;
|
|
|
d)
to provide incumbents with incentives to increase efficiencies and to be
more innovative; and
|
|
|
e)
to adopt regulatory approaches that impose the minimum regulatory burden
compatible with the achievement of the previous four objectives.
|
|
|
Price cap period
|
|
100.
|
In
Decision 97-9,
the Commission noted that a longer price cap period would provide a greater
opportunity for the benefits of price cap regulation to materialize, while
a shorter price cap period would reduce the cumulative effects of any error
in setting the price cap parameters. The Commission determined that a
four-year period would result in an appropriate balancing of these factors.
|
|
101.
|
In
the present proceeding, the Companies supported a second price cap period
of at least four years, assuming their proposed regulatory framework were
adopted. They suggested that the appropriate length of time for the new
price regulation period would depend on the nature of the pricing
constraints and the other parameters adopted for that period. The Companies
argued that, if the period between reviews were too short, the incentives
associated with price regulation would be blunted. In their view, a short
period would not provide sufficient time to assess whether the constraints
and parameters chosen were allowing price cap objectives, such as fostering
the development of local competition, to be attained.
|
|
102.
|
TELUS
proposed a five-year price regulation plan. TELUS was of the view that a
shorter duration would dampen incentives for infrastructure investment and
cost-saving innovation, since the ILECs would be unlikely to realize the
full value of these measures in less than five years. TELUS also submitted
that new entrants would benefit from a longer period since it would provide
a stable, predictable regulatory framework and rate structure, which are
critical considerations when companies are making long-term capital
investments. TELUS argued that a five-year plan would still be short enough
so that any errors in setting the parameters of the plan would not compound
in perpetuity. TELUS also noted that since this is the second price
regulation plan, the Commission is now more experienced with this form of
regulation, and could move to a longer duration of plan without fearing
unforeseen detrimental effects.
|
|
103.
|
TELUS
proposed that the initial five-year plan automatically be renewed for
successive three-year periods unless, as a result of a Commission-initiated
review, a determination was made to end the plan. The company proposed that
any end-of-term review, and ongoing monitoring, should focus primarily on
the development of competition. TELUS also proposed that the Commission
allow for the possibility of a stakeholder-negotiated alternative to a
review.
|
|
104.
|
A
number of parties, including AT&T Canada, Calgary and Call-Net,
supported a term of four years. The Commissioner of Competition, RCI and
Shaw considered a period of four or five years to be appropriate.
CAC Alta supported a term of three years, proposing that parties
should also have the option of applying to the Commission for longer or
shorter terms. CAC Alta considered five years to be too long, noting that
the uncertain development of competition would be reason enough for a
shorter rather than longer term.
|
|
105.
|
The
Commission considers that, going into the next price cap period, there
remains a need to balance the benefits inherent in a longer plan with those
offered by a shorter plan. A longer plan provides a greater opportunity for
the benefits of price cap regulation to materialize, and also provides the
stability of a predictable regulatory framework for all stakeholders. A
shorter plan has the advantage of limiting the impact of unanticipated
outcomes of the price cap regime that could unfairly benefit one group of
stakeholders at the expense of another.
|
|
106.
|
The
Commission notes that extensions or abridgements of the plan, if granted on
a case-by-case basis, could result in staggered price cap periods among the
regulated companies. This could favour some ILECs over others, depending on
market conditions and other factors present at the time of a particular
review. As well, plan assessments performed at different times would result
in administrative inefficiency, since end-of-term reviews would no longer
be performed for all ILECs at the same time.
|
|
107.
|
The
Commission further notes that most parties supported a minimum term of four
years. The Commission agrees that a four-year plan would allow the benefits
of price cap regulation to be further realized, while providing for the
possibility of a timely adjustment to correct the regulatory framework for
any errors in its structure or to reflect the evolution of competition over
the price cap period. Accordingly, the Commission has determined that the
duration of the next price cap regime will be four years.
|
|
108.
|
The
Commission considers that a review toward the end of the next price cap
period offers the Commission the best opportunity of examining how well the
plan is working and to modify the regulatory framework, as necessary.
Accordingly, the Commission has determined that a review of the next price
cap regime will be initiated in the final year of the plan.
|
|
|
III Competitor services
|
|
|
Definition and Classification
|
|
|
Background
|
|
109.
|
Competing
local, long distance and wireless carriers, as well as resellers, rely on a
variety of ILEC services in order to interconnect with the ILECs' networks,
configure their own networks and provide services to their end-users. The
pricing of these ILEC services has an important impact on the ability of
the competing carriers to succeed in the marketplace, as well as on the
incentives for them to construct their own facilities.
|
|
110.
|
In
Decisions 97-9
and 98-2,
the Commission concluded that ILEC services, which were either in the
nature of an essential service or were used primarily by telecommunications
service providers, should be made available to competitors at rates based
on Phase II costs plus an appropriate mark-up. These services were grouped
in a category called Competitor Services and were not subject to the
overall price cap formula. Other ILEC services which might be used by
competitors, but were also used by retail customers, were included in
either the Other Capped Services sub-basket or the Competitive Segment.
|
|
111.
|
In
PN 2001-37,
the Commission sought comments on possible changes to the treatment of
Competitor Services. This Part of the Decision addresses the assignment to
and pricing of services in the Competitor Services category.
|
|
|
Position of parties
|
|
112.
|
Almost
all parties who filed comments addressed issues related to Competitor
Services. Most of these comments envisioned that the Commission would
continue the approach to Competitor Services set out in Decisions 97-9
and 98-2,
subject to possible adjustments. However, AT&T Canada and Call-Net each
filed major proposals which would significantly change the treatment of
Competitor Services. AT&T Canada and Call-Net argued that implementing
their respective proposals would be critical to achieving sustainable
competition. Given the scope and scale of their proposed changes, these two
proposals are discussed first.
|
|
|
AT&T
Canada's proposal
|
|
113.
|
AT&T
Canada submitted that the current approach to setting rates for Competitor
Services was not satisfactory. In AT&T Canada's view, there were
problems associated with the use of Phase II costs for rating purposes;
namely, the inability to audit Phase II studies, the extent to which the
studies do not relate to each other or to the financial statements of the
ILECs, and the natural tendency of the ILECs to be cautious and therefore
to potentially overstate costs. In light of these concerns, AT&T Canada
argued that Phase II costing was not the appropriate tool to determine
competitively neutral rates for access to ILEC network facilities.
|
|
114.
|
AT&T
Canada proposed a significantly different approach to Competitor Services.
Under AT&T Canada's proposal, among other things, a new category
of services would be created comprising all services in the existing
Competitor Services category, as well as other services used by
competitors, including services such as Digital Network Access (DNA),
Centrex, switched trunks, Primary Rate Interface (PRI) and Digital Exchange
Access (DEA).
|
|
115.
|
AT&T
Canada proposed that a CLEC be entitled to a Facilities Based Carrier (FBC)
rate. The FBC rate would grant a CLEC a 70% aggregate discount from
existing tariff rates for services in the new Competitor Services category.
That is, the CLEC's total bill for the relevant services would be
calculated according to tariffed rates and then discounted by 70%.
|
|
116.
|
AT&T
Canada argued that a 70% discount would be appropriate since, in its view,
this would approximate the cost advantage enjoyed by the ILECs given their
ability to self-supply the relevant services.
|
|
117.
|
In
order to arrive at the 70% figure, AT&T Canada used its own on-net cost
data for the services in question. AT&T Canada argued that this
approach was necessary because the relevant cost data for the ILECs were
not available.
|
|
118.
|
In
calculating the resulting savings, AT&T Canada assumed that: (a) its
network effectively resembled an ILEC network serving approximately the
same number of customers, and (b) the entire customer base could be served
on the network. The second step involved the comparison of the estimated
on-net costs with AT&T Canada's actual cost of serving the same
customer base using a mix of AT&T Canada's own facilities and ILEC
facilities (i.e., the current mix of customers served on-net and off-net).
|
|
119.
|
Based
on the mix of network facilities and services that it purchased from the
ILECs in 2000, AT&T Canada's cost analysis indicated that the
ILECs enjoy a 70% self-supply cost advantage relative to the 2000 tariff
rates charged to competitors for these same facilities and services.
AT&T Canada argued that the ILECs' actual cost advantage would likely
be greater than 70% given that the ILECs would enjoy greater economies of
scale, density and scope than AT&T Canada.
|
|
120.
|
AT&T
Canada emphasized that the 70% discount would apply to the aggregate cost
of a group of services rather than a particular network element or service.
Consequently, in AT&T Canada's view, there would be no concern about a
CLEC receiving a particular service below cost. AT&T Canada argued that
applying the 70% discount to a CLEC's aggregate expenditures would ensure
that the ILEC recovered both its incremental costs of supplying this same
set of services, as well as a contribution towards fixed common costs.
|
|
121.
|
AT&T
Canada stated that the objective of the FBC rate was to neutralise the cost
advantage the ILECs enjoy as a result of their incumbency and ubiquitous
network infrastructure. According to AT&T Canada, its proposal would
remove a significant economic barrier to entry in the local market.
|
|
|
Parties'
comments on AT&T Canada's proposal
|
|
122.
|
The
Companies described the conceptual framework of AT&T Canada's proposal
as nonsensical. They argued that an ILEC's cost of self-supply could not be
measured using costs in a competitor's network. They also argued that
AT&T Canada's 70% discount had nothing to do with the ILECs' cost of
self-supply, or even with AT&T Canada's own cost of self-supply. In
their view, AT&T Canada was effectively proposing that it should
receive a discount so that its total expenditures would be equivalent to
what it would continue to pay ILECs, if AT&T Canada had its own
ubiquitous network. The Companies therefore argued that AT&T Canada
would continue to use $304 million worth of ILEC services but would not
have to pay for those services since it could theoretically self-supply those
services, even though it would not actually incur the costs of self-supply.
|
|
123.
|
The
Companies also argued that AT&T Canada had greatly understated the
financial impacts of its proposal. They submitted that AT&T Canada's
estimate ignored the impact of providing the discount to other companies
that would qualify for the discount. The estimates also ignored the
potential for other Canadian carriers to register as CLECs (and operate on
some minimal scale) in order to receive the 70% discount on other services
(e.g., switching and aggregation which is required only to provide long
distance service).
|
|
124.
|
TELUS
argued that AT&T Canada's proposal was based on the implicit assumption
that all its customers would suddenly move from their physical location so
as to be located on AT&T Canada's current network topography, whereas,
in reality, customers do not move to networks; networks are built to the
customer. TELUS argued that ILECs incur a cost in serving customers; either
by leasing facilities from other carriers, or by incurring the costs of
building a network and that, in reality, networks are not free. In TELUS'
view, no one would invest any capital to build facilities if it could
obtain such facilities at prices so significantly below ILECs' costs.
|
|
125.
|
Both
the Companies and TELUS argued that rates based on Phase II costs permitted
competitors to take advantage of the ILECs' economies of scale and scope.
In particular, competitors did not pay the comparatively high price for
access facilities based on their limited volumes and service mixes, but
instead enjoyed the same cost of network access as the ILECs.
|
|
126.
|
With
respect to AT&T Canada's FBC rate proposal, the ILECs argued that it
could lead to individual competitor services being priced below incremental
cost, resulting in a subsidy to the CLECs. The ILECs argued that they would
be disadvantaged because they would have to recover fixed common costs
associated with services used by competitors from retail rates in other
competitive markets.
|
|
127.
|
Group
Telecom opposed AT&T Canada's proposal on the grounds that it attempted
to sustain a resale-based entry strategy and discouraged investment in
competitive facilities. In Group Telecom's view, facilities-based new
entrants could not compete against the ILECs if their services and
facilities were available at a 70% discount. This would eliminate an
important source of revenues for new entrants (i.e., the lease of
facilities to other competitors). The end result of AT&T Canada's
proposal, in Group Telecom's submission, would be to undermine the
viability of facilities-based competitors like itself and reinforce the
ILECs' facilities monopoly.
|
|
128.
|
While
Distributel generally supported AT&T Canada's proposal, it opposed
AT&T Canada's suggestion that the 70% discount only be available to
CLECs. In Distributel's submission, resellers played an important role in
the market place. Distributel argued that resellers would be driven out of
business very quickly if their competitors were entitled to the 70% discount
and they were not.
|
|
|
Call-Net's
proposal
|
|
129.
|
Call-Net
submitted that the core principle of its proposal would be to reduce rates
charged by the ILECs for critical network services provided to competitors.
Call-Net proposed that a Carrier Segment be created that would include all
regulated services purchased by Canadian carriers from the ILECs. These
services would be priced at their Phase II costs without a mark-up.
|
|
130.
|
Call-Net
noted that cost studies would be required for any services in the Carrier
Segment which were not already priced based on their Phase II costs in
order to establish their rates. Since it would take some time for these
cost studies to be developed and assessed, Call-Net argued that the
Commission should establish an interim regime which would involve repricing
the relevant services to their incremental costs using the results of
existing cost studies as proxies.
|
|
131.
|
Call-Net
argued that, since the ILECs acknowledged that they did not need to recover
their fixed common costs on a service-by-service basis, the lack of mark-up
on the Phase II costs of the services in the proposed Carrier Segment
should not be problematic. Under Call-Net's overall price cap proposal,
ILECs would be permitted to keep both the rollover effects of exogenous
factors permitted during the initial price cap regime, as well as their
annual productivity gains. The associated revenues would, in Call-Net's
submission, ensure full recovery of the ILECs' fixed common costs.
|
|
132.
|
Call-Net
argued that, under its proposal, competing Canadian carriers would be able
to supplement their networks and extend their reach on a "business
case basis" that matched that of the ILECs. In Call-Net's submission,
this would help overcome the historical advantage enjoyed by the ILECs as a
result of their ubiquitous networks.
|
|
133.
|
Call-Net
also submitted that, if its proposal were accepted, competitors would
continue to have incentives to build their own facilities in order to
achieve the following objectives: to derive scale and scope efficiencies,
to realize the accounting benefit of moving the cost from the expense
category to the category of a capital expenditure, to gain greater control
over the costs of facilities and greater control over the quality of
service provided over the facilities and an opportunity to differentiate on
the basis of quality.
|
|
|
Parties'
comments on Call-Net's proposal
|
|
134.
|
The
Companies submitted that Call-Net's proposal would permit high-cost
companies to enter the market successfully and that this result would be
contrary to economic efficiency. They also argued that the fact that ILECs
might recover their fixed common costs disproportionately across services
did not imply that rates for services used by competitors did not need to
incorporate a contribution to fixed common costs.
|
|
135.
|
TELUS
argued that, if productivity gains were used to offset the ILECs' foregone
mark-up on Carrier Segment services, as suggested by Call-Net, this would
amount to taking productivity gains twice. The productivity gains on
non-Carrier Segment services would be taken the first time by effectively
moving them to the Carrier Segment, and taken again through the real price
reductions that competition would demand in the market for the non-Carrier
Segment services. TELUS argued that this would not provide an ILEC with a
reasonable opportunity to recover its costs because reductions in
competitor services rates would drive down retail rates by an amount
greater than the productivity gains that might be realized in the provision
of those services.
|
|
136.
|
The
Companies and TELUS both argued that Call-Net's proposal would make resale
more attractive than facilities-based competition, contrary to the
Commission's express goal of promoting facilities-based competition.
|
|
137.
|
Group
Telecom argued that it would be difficult for other carriers to compete
with the ILECs with respect to services in the Carrier Segment since these
competitive carriers have fixed common costs they must recover, but no
alternative source of revenues of the type proposed by Call-Net for the
ILECs. Group Telecom also argued that the Call-Net proposal would
artificially sustain Call-Net's resale-based entry strategy by mandating
subsidized pricing for ILEC services. According to Group Telecom, Call-Net's
proposal would impede the development of facilities-based competition.
|
|
138.
|
Distributel
supported the general thrust of Call-Net's proposal but opposed the
suggestion that only Canadian carriers be entitled to enjoy the benefit of
the reduced rates for Carrier Segment services. Distributel argued that
resellers should be entitled to comparable treatment since they play an
important role in the competitive market.
|
|
|
Analysis of the AT&T Canada and
Call-Net proposals
|
|
139.
|
The
Commission considers that the AT&T Canada and Call-Net proposals give
rise to concerns in regard to four matters: i) their potential effect
on retail prices; ii) their potential effects on the wholesale market;
iii) their implications for cost recovery; and iv) the
implications of the proposals for facilities-based competition. Each of
these concerns is discussed, in turn.
|
|
|
Effect
on the retail services market
|
|
140.
|
In
the Commission's view, the AT&T Canada and Call-Net proposals would
negatively affect the retail market in at least two ways.
|
|
141.
|
First,
if ILEC services used by competitors were priced at incremental cost, as
Call-Net proposes, or subject to an effective 70% discount, as proposed by
AT&T Canada, ILECs would need to recover fixed common costs from other
retail services. This would put upward pressure on the prices for those
services. However, ILECs would only be able to raise prices in those
situations where they did not face competition, and then only to the extent
permitted by any Commission-imposed pricing constraints. The overall effect
would be to distort the efficient functioning of the retail market.
|
|
142.
|
Second,
if competitors enjoyed lower input prices, this would permit them to lower
their retail prices. This would put downward pressure on the ILECs' retail
prices, despite the fact that this pressure would not be based on the
superior efficiency of competitors. Once again, this would have a
distorting effect on the retail market.
|
|
143.
|
Overall,
the broader the range of services and the deeper the price discount applied
to those services, the greater the distorting effect would likely be on the
retail market. The Commission concludes that the rates charged for
Competitor Services must be set at a level which would not distort the
retail market.
|
|
|
Effect
on the wholesale market
|
|
144.
|
Carriers
such as Group Telecom and AT&T Canada compete in the wholesale market,
supplying facilities and services to other telecommunications service
providers. The Commission agrees with the submission of Group Telecom that the
wholesale market is an important source of revenue for facilities-based
entrants, as well as a means of reducing the risk of capital recovery. If a
carrier serves both the wholesale and retail markets, it has two
opportunities to gain revenue from an end-user: directly via retail
services and indirectly via wholesale services provided to the carrier that
provides retail service to the end-user.
|
|
145.
|
In
the Commission's view, the development of a wholesale market is important
to the overall development of facilities-based competition. Foreclosure of
this market to new entrants would seriously undermine the evolution of
facilities-based competition.
|
|
146.
|
In
the Commission's view, both the AT&T Canada and Call-Net proposals
would have a significant negative effect on the wholesale market since it
is unlikely any competitor could match ILEC prices that were based either
on incremental costs or on an effective 70% discount.
|
|
|
Implications
for cost recovery
|
|
147.
|
To
date, the Commission's general approach to Competitor Services has been to
price them on the basis of Phase II costs plus a mark-up. Many of these
services, such as those identified as being essential and near-essential,
have been priced at Phase II costs plus a 25% mark-up. Other services, such
as Direct Connection (DC) service, have been priced with higher mark-ups.
|
|
148.
|
AT&T
Canada proposed that the Commission abandon its Phase II costs plus a
mark-up method and instead adopt the FBC rate approach. AT&T Canada
argued that the FBC rate approach would be more representative of the real
cost of providing these services on the ILECs' networks. Call-Net suggested
that the Commission modify its approach by setting rates for essential,
near-essential and some retail services used by carriers at their Phase II
costs without any mark-up.
|
|
149.
|
The
ILECs, RCI and Group Telecom recommended that the Commission retain its
current rating approach for Competitor Services. The Companies stated that
adopting AT&T Canada's 70% discount proposal would result in
interconnection, and essential and near-essential services being priced at
62.5% below cost. Even under Call-Net's proposal, the relevant services
would not contribute to fixed common costs, resulting in a competitive
advantage for competitors in the end-user market. TELUS stated that pricing
services used by competitors at incremental cost would impose the burden of
recovering the fixed common costs entirely on the ILECs, which would have
to recover these costs solely from their retail services.
|
|
150.
|
RCI
supported TELUS' view that it would be consistent with recognized economic
theory for interconnection rates to reflect incremental costs plus an
appropriate mark-up to cover fixed common costs.
|
|
151.
|
The
Commission is of the view that services in the nature of an essential
service should be priced so as to permit ILECs to recover the appropriate
service costs and to provide an appropriate contribution, while at the same
time giving competitors an opportunity to compete effectively in the
marketplace.
|
|
152.
|
Having
reviewed AT&T Canada's proposal and the relevant comments of parties,
the Commission finds that AT&T Canada's approach has the effect of
giving AT&T Canada the benefit of the ILECs' networks without providing
for the recovery of the associated costs.
|
|
153.
|
The
Commission considers that Phase II costing does not raise comparable
concerns, since the costs involved are those of the ILECs themselves on a
service by service basis. Moreover, Phase II costs are intended to reflect
economic costs. As discussed in Part X of this Decision, the
Commission intends to initiate a proceeding to review Phase II costing in
order to determine if any modifications would be appropriate.
|
|
154.
|
As
far as Call-Net's proposal is concerned, the Commission considers that
services provided to competitors should generally be priced to recover
Phase II costs and to provide an appropriate contribution. Accordingly, the
Commission is of the view that the removal of the mark-up, as suggested by
Call-Net, is not appropriate.
|
|
|
Implications
for facilities-based competition
|
|
155.
|
The
Commission's regulatory framework is intended to foster facilities-based
competition. The Commission believes that fostering facilities-based
competition is the most appropriate way to ensure high-quality, affordable
service, as well as innovation and service differentiation.
|
|
156.
|
The
Commission is concerned that classifying all services used by a competitor
as Competitor Services – or subjecting them to pricing as proposed by
AT&T Canada and Call-Net – could introduce a significant disincentive
to the construction of new facilities and thereby impair the development of
facilities-based competition.
|
|
157.
|
The
Commission notes that both AT&T Canada and Call-Net stated their intent
to continue to build facilities even if their proposals were granted.
However, competitors would almost certainly prefer to use and resell ILEC
facilities and services if the margins were comparable to or better than
those achievable through self-provisioning. There would be little, if any,
incentive to take the risk of constructing facilities in such a case.
|
|
158.
|
For
example, under the AT&T Canada proposal, a CLEC with a minimal local
network could find it more profitable and less risky to focus its primary
efforts on the resale of an ILEC's Centrex service. The arbitrage
opportunity created by the 70% discount might increase competition, but it
would not be facilities-based. The resale approach would require little
capital, entail less risk and permit much quicker roll-out of service.
|
|
159.
|
Similarly,
the Commission is of the view that a carrier would generally not find it
advantageous to build a network if it could obtain services at an ILEC's
incremental cost as proposed by Call-Net.
|
|
160.
|
The
Commission considers that, in order to foster facilities-based competition,
mandated cost-based rates are necessary for certain facilities and
services. However, it is also important to ensure that such pricing be
justified on a case-by-case basis, and that these services be priced at a
level that does not create a disincentive to the construction of
facilities. In the Commission's view, AT&T Canada's and Call-Net's
proposals raise serious concerns in both regards.
|
|
|
Conclusions
regarding the AT&T Canada and Call-Net proposals
|
|
161.
|
Based
on the analysis above, the Commission is of the view that neither the
AT&T Canada nor the Call-Net proposal would foster facilities-based
competition. On the contrary, each proposal would introduce disincentives
for the construction of facilities. They would also undermine the
development of a wholesale market and likely lead to significant
distortions in the retail market. Finally, neither approach would lead to
just and reasonable rates.
|
|
162.
|
In
light of these conclusions, the Commission does not consider it appropriate
to adopt either the AT&T Canada or the Call-Net proposal for the
classification and pricing of Competitor Services, except as discussed
below with respect to DNA service.
|
|
|
Definition of Competitor Services
|
|
163.
|
In
Decision 98-2,
the Commission concluded that it was appropriate to assign an ILEC service
to the Competitor Services category if the service was in the nature of an
essential service or was primarily used by telecommunications service
providers. Since Decision 98-2,
a number of new services have been added to Competitor Services, such as
trunk-side wireless access interconnection service and MTS' call forward
busy service.
|
|
164.
|
In
the present proceeding, TELUS, Group Telecom and RCI did not consider it
appropriate to change the criteria for classifying a service as a
Competitor Service.
|
|
165.
|
The
Companies submitted that, in the next price cap period, Competitor Services
should include only interconnection services, co-location services and
services which provide essential and near-essential facilities. The
Companies argued that services that can be self-supplied or are available
from alternative sources of supply or, in some cases, can use
essential/near-essential services as a substitute, should be excluded.
|
|
166.
|
The
Commission considers that restricting the composition of the Competitor
Services basket, as proposed by the Companies, would unduly limit the
development of facilities-based competition.
|
|
167.
|
The
Commission has decided to establish two categories within the Competitor
Services basket in order to clarify the pricing treatment of these
services. The first category comprises those services which are in the
nature of an essential service and will be known as Category I services.
Services in the nature of an essential service comprise interconnection and
ancillary services required by Canadian carriers and resellers
interconnecting to the ILEC's networks, including essential services as
defined in Decision 97-8;
and near-essential services, such as those that were the subject of Local
competition Sunset clause for near-essential facilities, Order CRTC 2001-184,
1 March 2001 (Order 2001-184). This last group of services are
critical inputs required by competitors in light of the very limited
competitive supply for these services.
|
|
168.
|
Category
I Competitor Services will be priced on the basis of Phase II costs plus
the mandated mark-up, with certain exceptions as discussed below.
|
|
169.
|
The
second group of Competitor Services will be those services developed for
use by telecommunications service providers - other than services in the
nature of an essential service - and will be known as Category II
Competitor Services. The pricing of these services will be determined on a
case-by-case basis.
|
|
170.
|
The
assignment of Competitor Services between Category I and Category II is set
out in Appendix 1 to this Decision.
|
|
|
Proposed additions to Competitor
Services
|
|
171.
|
Distributel
argued that Centrex tie trunk terminations should be reclassified as a
Competitor Service because they are "primarily used by
telecommunications service providers". Distributel also proposed a
regulatory mechanism to implement a revenue-based interpretation of the
phrase "primarily used". The Companies submitted that
Distributel's request was outside the scope of this proceeding.
|
|
172.
|
With
respect to Distributel's proposed revenue-based interpretation of
"primarily used", the Commission considers that revenue is not
the only factor relevant to the identification of an ILEC service as a
Competitor Service. The Commission also considers that implementing
Distributel's proposal would impose an undue regulatory burden.
Accordingly, the Commission concludes that it is not appropriate to adopt Distributel's
proposal with respect to the interpretation of "primarily used by
telecommunications service providers".
|
|
173.
|
Centrex
tie trunk terminations are a component of Centrex service, a local exchange
retail service, and are used by competitors to compete in the local and
long distance markets. The tie trunk terminations are not a stand-alone
service and were not designed specifically for telecommunications service
providers. Instead, they are one component of Centrex service which is
available to both business customers and competitors.
|
|
174.
|
Resale
of Centrex service, including tie trunk terminations, is a means by which
competitors provide service to end-users, as evidenced by the fact that
Bell Canada derives 78% of its tie trunk termination revenues from
competitors. However, as tie trunk terminations are one component of
Centrex service, this is not sufficient, in the Commission's view, to
warrant classification of tie trunk terminations as a Competitor Service.
Accordingly, Centrex tie trunk terminations will not be classified as a
Competitor Service.
|
|
|
Digital Network Access service
|
|
175.
|
The
ILECs' DNA tariffs provide customers, including competitors, with the
digital transmission of information from the customer's premises to another
premises within the local exchange at 1.544 Mbps (DS-1), or 44.736 Mbps
(DS-3), or from the customer's premises to the rate centre in the local
exchange to connect with other network services at transmission speeds of
DS-0 (64 Kbps), DS-1 or DS-3. In addition, companies, such as Bell Canada,
offer a service that provides transmission at 155 Mbps (OC-3) and
622 Mbps (OC-12) which is available between two points in the same
local exchange or to connect a customer's location to a network service at
a wire centre.
|
|
176.
|
The
DNA tariff structure includes four elements: the access, link,
intra-exchange channel and a channelizing feature. The access component of
DNA service is the transmission facility from the customer premises to the
ILEC's serving central office. The intra-exchange channel component
provides transmission facilities between the ILEC central offices that are
within a local exchange. The link component provides the connection between
the access component and a competitor's equipment or other ILEC services.
The channelizing feature is used to channelize a DS-1 service into DS-0
channels or a DS-3 service into DS-1 channels.
|
|
177.
|
In
Decision 97-8
and in Order 2001-184,
the Commission provided for the unbundling of essential and near-essential
Type A and Type B loops and priced them at Phase II costs plus an
appropriate mark-up (mandated cost-based rates). Type C loops, which are a
DNA service at a DS-1 transmission speed, were not part of the unbundling
regime established in Decision 97-8.
Type C loops are, however, included in the ILECs' unbundled loop tariffs,
but are priced in accordance with the DNA service rates.
|
|
178.
|
The
similarities between Type A and B loops and DNA service are:
|
|
|
i)
they all provide access from a customer premise to the ILEC central office;
and
|
|
|
ii)
they are all used as inputs in the provision of end-user services such as
local, toll and data.
|
|
179.
|
Call-Net
argued that a DNA service should be provided to competitive carriers at
mandated rates. In support of this proposal, Call-Net indicated that its expenditures
on DNA service had represented its largest expenditure on ILEC
telecommunications services in 2000. Call-Net stressed the importance of
DNA service as an input to the services of both competitors and ILECs,
including a wide variety of local, toll and data services. Competitors also
used DNA service to connect their switches with those of the ILECs.
AT&T Canada made similar points in support of the proposal.
|
|
180.
|
The
Companies opposed Call-Net's proposal, arguing that a Type A-5 loop, a
specific category of Type A loop, combined with x-DSL technology, can be
used by competitors to derive a DNA-like DS-1 service. The Companies were
of the view that this would effectively lower the cost of DS-1 service for
competitive carriers.
|
|
181.
|
Call-Net
identified several problems with using a Type A-5 loop to derive its own
DNA-like DS-1 service. First, Call-Net argued there was a significant
difference in the ILECs' mean time to repair (MTTR) for DNA service as
compared to Type A loops. It stated that ILEC customers had contracts for
DNA service that quote an MTTR of four hours, whereas competitors had an
MTTR of 24 hours for Type A loops. Second, Call-Net argued that there were
certain technical restrictions in using a Type A-5 loop as a DNA service. For
example, provisioning a Type A-5 loop for DNA service requires copper
continuity, no loading coils, no bridged taps and a limited distance from
the ILEC central office. Costs and time required to condition the Type A-5
loops were also raised by Call-Net, particularly given the roll-out of new
fibre technologies. Finally, Call-Net argued that it is not possible to
derive useful transmission speeds at the DS-3 level with a Type A-5 loop.
For these reasons, Call-Net concluded that the Companies' proposed solution
was not viable.
|
|
182.
|
The
Commission agrees with Call-Net's assessment of the difficulties of using a
Type A-5 loop as a cost-effective way of provisioning DNA service, and
considers that the reliance on such an approach would place competitors at
a competitive disadvantage.
|
|
183.
|
For
this reason and with a view to fostering facilities-based competition, the
Commission concludes that there is a need for the ILECs to develop a
competitor-DNA service and that this service should be assigned to Category I
Competitor Services.
|
|
|
Competitor-DNA service
|
|
|
Components
of the service
|
|
184.
|
As
noted above, the DNA service tariff has four components: access, link,
intra-exchange channels and a channelizing feature. The Commission has
determined that the access component and the link component should be
included in a competitor-DNA service, as provided for in the following
paragraph.
|
|
185.
|
The
access component of the competitor-DNA service is to provide a transmission
facility at DS-0, DS-1, DS-3, OC-3 and OC-12 transmission speeds from an
end-customer premise to a competitor's switch within the same ILEC serving
wire centre area or to the ILEC serving wire centre, in which case it must
terminate on the competitor's co-located equipment. The link component, being
an integral part of the access, is to allow for connection at transmission
speeds up to the OC-12 level.
|
|
186.
|
In
order to avoid distortions in the retail market for DNA service, a
competitor may not engage in simple resale of the competitor-DNA service.
|
|
187.
|
With
respect to the intra-exchange component is concerned and as far as the
access component other than as set out in the previous paragraph, the
Commission is of the view that the record is insufficient to establish
whether they should be part of the competitor-DNA service. The
Commission does not consider that the channellizing feature should be
included in a competitor-DNA service.
|
|
188.
|
The
Companies argued that competitors can supply DNA service when it is used to
provide the facilities that link a CLEC's co-location site (in the ILEC's
central office) and the CLEC switch. TELUS also made reference to the fact
that CLECs were self-supplying connecting facilities between co-location
sites and their own switches in a significant number of cases. Group
Telecom stated that all of its 62 existing co-location sites were
provisioned with its own fibre, as would be the case for most of its
planned co-location sites.
|
|
189.
|
The
Commission recognizes there is some self-supply by carriers of intra-exchange
facilities. However, it is unclear from the record the extent to which
carriers can self-supply or have competitive alternatives to intra-exchange
facilities. Prior to making its determination on this matter, the
Commission requires additional information from parties. The follow-up
process for this purpose is addressed below.
|
|
190.
|
The
creation of a competitor-DNA service would result in a reduction in
revenues for the ILECs. As discussed later in this part of the Decision, it
is appropriate to compensate the ILECs for the reduction in DNA service
revenues attributable to the introduction of the competitor-DNA service.
|
|
191.
|
Accordingly,
each ILEC is directed, when it files its tariff for a competitor-DNA
service, to submit an estimate of the annual reduction in DNA revenues
attributable to the introduction of the competitor-DNA service, on the
basis of 31 December 2001 demand from competitors for DNA service.
|
|
|
Interim competitor-DNA service tariff
|
|
192.
|
In
order to implement the competitor-DNA service as expeditiously as possible,
the Commission directs each ILEC to issue an interim competitor-DNA service
tariff no later than14 June 2002. The interim tariff is to have the
following terms and conditions:
|
|
|
- service is available only to
competitors to provide access between an end customer premise to a
competitor's switch within the same ILEC serving wire centre area or
to the ILEC serving wire centre, in which case it must terminate on
the competitor's co-located equipment;
|
|
|
- a competitor may not engage in
simple resale of the competitor-DNA service;
|
|
|
- rates for the access component
are to be set at the rate levels currently approved for the access
component of DNA service when it is provided under a five-year
contract term; and rates for the link component are to be set at the
rate levels currently approved for the link component of DNA service,
reduced by 40%;
|
|
|
- the service is to be provisioned
on a monthly basis with an average four-hour MTTR, determined on a
monthly basis; and
|
|
|
- the link component is to be
available solely for use in conjunction with the access component of
competitor-DNA service to connect to the competitor's equipment.
|
|
|
Access Tandem service
|
|
193.
|
The
Commission has examined the pricing of services in the Competitor Services
category and finds that the Access Tandem service rates require
reassessment. The Access Tandem service is similar in many respects to DC
service which has benefited from significant cost reductions over the past
few years. It could be expected that the costs of Access Tandem service
would also have declined. The process for the review of Access Tandem
service rate is discussed below.
|
|
|
Call-Net's proposal to waive loop
order service charges
|
|
194.
|
Call-Net
proposed that the Commission waive ILEC service charges associated with the
provision of unbundled loops for residential customers. Call-Net argued
that waiving these charges is necessary to "jump-start" local
competition in the residential market and to lower the costs of customer
acquisition.
|
|
195.
|
The
Companies and TELUS argued that Call-Net's proposal would provide
incentives for uneconomic entry and compromise economic efficiency by
sending incorrect price signals to the marketplace. In their view,
Call-Net's proposal would permit a CLEC to avoid the full costs of
acquiring a new customer, and CLECs otherwise marginally too inefficient to
compete would, by virtue of the subsidy, find it profitable to enter the
market.
|
|
196.
|
The
Commission recently held a proceeding to review loop service order charges
that led to Interim approval for revised unbundled loop-service order
charge, Decision CRTC 2001-694,
16 November 2001. In that decision, the Commission approved significant
rate reductions. The Commission notes that the service charge for loop
orders is not avoidable and causes the ILECs to incur various provisioning
costs. Accordingly, the Commission concludes that it would not be
appropriate to waive the ILECs' loop order service charges as Call-Net
proposed.
|
|
|
Mark-up on Category I Competitor
Services
|
|
|
Background
|
|
197.
|
In
general, the services in Category I Competitor Services have been priced on
the basis of Phase II cost plus a 25% mark-up. In PN 2001-37,
the Commission invited comments on possible changes to the treatment of
Competitor Services, including the mandated mark-up. The Commission also
asked parties to provide their views on whether the mark-up for Competitor
Services currently tariffed with a 25% mark-up should be reduced to 15%.
|
|
198.
|
The
possibility of reducing the 25% mark-up to 15% was the subject of the
follow-up proceeding to Decision 2001-238
which focused on the appropriate level of mark-up for the ILECs' unbundled
loop service. As noted above, the record of the Decision 2001-238
follow-up proceeding has been made part of the record of the present
proceeding. For convenience, the Decision 2001-238
follow-up proceeding is referred to as the "Loop mark-up
proceeding" hereafter.
|
|
199.
|
The
Commission notes that, as it is addressing the appropriate level of mark-up
in respect of virtually all Category I Competitor Services in this
Decision, with the exceptions noted below, it will not be necessary for it
to make a separate finding in the Loop mark-up proceeding.
|
|
200.
|
The
Commission notes that there are three services in Category 1
Competitor Services for which the associated rates do not include any
mark-up. The Equal Access Start-up rate was designed to specifically
recover equal access start-up costs. Co-location construction charges
resulting from sub-contracted work, pursuant to Co-location, Telecom
Decision CRTC 97-15,
16 June 1997 (Decision 97-15), are flowed through to co-locators. The
Billing and Collection Accounts Receivable Management Discount service is
rated on the basis of an estimate of percentage of revenues billed that are
uncollectible.
|
|
201.
|
The
Commission notes that the determination of an appropriate level of mark-up
for a given service's costs is a decision related to pricing rather than
costing.
|
|
202.
|
As
indicated previously, for the purposes of costing Competitor Services, the
Commission will continue to utilize the Phase II costing method. Phase
II costs measure prospective incremental costs of a particular service.
These costs are based on the present worth of future economic cashflows
over a multi-year study period associated with providing a service. The
present-worth calculations rely on time value of money principles and are
determined based on a forward-looking cost of capital. The approach is
based on the principle that providing a given service in order to meet the
anticipated demand for that service causes a company to incur additional
costs to those that it would incur if it did not provide the service. It is
only those costs that are included.
|
|
203.
|
By
design, therefore, Phase II costs do not capture a company's fixed common
costs, since those are not incurred as a result of offering the service.
Phase II costs are influenced by recent technology developments and
substitutions, recent operational developments and solutions, and as
discussed below, may bear little or no resemblance to the embedded plant
operations and costs. The phrase "embedded cost differential"
refers to the difference between embedded costs and Phase II current costs.
|
|
204.
|
Historically,
the level of mark-up used in respect of rates for Category I Competitor
Services has been generally designed to provide a contribution to the
recovery of two broad categories of costs. The first category is fixed
common expenses, such as the ongoing corporate overhead costs that do not
vary with the company's offering of services and that are therefore not
included in a Phase II cost study. The second category is the embedded cost
differential. These costs include annualized capital costs not included in
Phase II studies, such as service start-up capital costs that are not
incurred to provide a specific service or changes in the costs of given
equipment over time. In addition, this differential reflects the fact that
embedded costs reflect a mix of newer and older technologies, whereas Phase
II costs reflect growth technologies. This differential is a sunk cost and
is therefore not included in the Phase II cost study.
|
|
205.
|
In
Decision 92-12,
the Commission stated that a mark-up can be viewed as providing a
contribution to common and access costs as well as to the differences
between Phase II current costs and Phase III embedded costs (which
generally exceed Phase II costs). While initially not allowing for a
mark-up on the network interconnection charge, the Commission subsequently
determined that pricing of the separate components should generally include
a 25% mark-up.
|
|
206.
|
The
Commission stated in Decision 97-8
that essential facilities, and other facilities to which mandated pricing
is applied, should be priced to recognize fixed common costs in addition to
Phase II costs. These facilities should also be priced so as not to unduly
deter facilities-based competitive entry.
|
|
207.
|
In
Changes to the contribution regime,Decision CRTC 2000-745,
30 November 2000 (Decision 2000-745), the Commission noted that: (a) in
pricing certain services, it has in the past applied a 25% mark-up on the
Phase II costs to contribute to the recovery of the company's fixed common
costs along with the embedded cost differential; (b) in the context of
calculating the total subsidy requirement, it is not appropriate to include
the embedded cost differential; (c) it expected that the ILECs' fixed
common costs will decline in a competitive environment as a result of
increased operational efficiencies; and (d) in the context of calculating
the total subsidy requirement, a mark-up of 15% would provide a sufficient
level of contribution to recognize the ILECs' fixed common costs.
|
|
|
Positions of parties
|
|
208.
|
The
Companies submitted that a mark-up of 25% reflects the balancing of
different regulatory objectives and that there is no need to lower the
mark-up. In the Companies' view, such a reduction would lead to competitive
inequity and would hinder the development of facilities-based competition.
|
|
209.
|
The
Companies submitted in the Loop mark-up proceeding that the overall mark-up
for unbundled local loops should include a mark-up to recover the embedded
costs associated with local loop plant, and a mark-up to recover the fixed
common costs of the ILECs.
|
|
210.
|
Under
the Companies' proposal, a cost-based percentage mark-up would be determined
based on average percentage mark-ups required to recover (i) fixed common
expenses and (ii) embedded costs, weighted respectively by the proportions
of expenses and capital in the Phase II loop cost studies. Under this
proposal, the percentage mark-up required to recover the company's fixed
common expenses would represent a corporate average based on the ratio of
the company's total functional operating expenses (FOE) classified as fixed
common costs over total company Phase II expenses (which consist of demand
or service-driven FOE adjusted to capture the related variable common
costs). By contrast, the percentage mark-up required to recover embedded
costs would be based on the ratio of depreciation expense associated with
the embedded loop plant to annual depreciation expense associated with
current loop capital expenditures. The Companies calculated the mark-ups
required under their proposals using the costs specified in Decision 2001-238.
Based on these analyses, the total mark-up appropriate for unbundled loops
was estimated at 37.5% for Bell Canada, 33.6% for Aliant Telecom, and 44.9%
for MTS.
|
|
211.
|
With
respect to other essential and non-essential services, the Companies
submitted that the same principles used to develop the estimated mark-up
for unbundled loops would be applicable. However, due to the absence of
data related to embedded capital, the Companies submitted that the ILECs
did not have specific service level data available that would permit the
identical approach to be followed in the case of these services as proposed
for unbundled loop services.
|
|
212.
|
The
Companies submitted that the incremental costs associated with non-loop
essential and near-essential services were in contrast to loops,
predominantly non-capital related expenses. The Companies noted that this
meant that the fixed common expense mark-up (estimated at 26.4%, 18.4% and
34.5% for Bell Canada, Aliant Telecom and MTS, respectively) would have a
greater weight in determining the mark-up on non-loop essential and
near-essential services than was the case for loops. The Companies
suggested that the capital costs associated with non-loop related essential
and near-essential services were primarily related to electronic equipment,
the costs of which have been falling over time, implying that the mark-up
associated with embedded capital costs for non-loop related essential and
near-essential services would certainly be positive. Hence, the overall
mark-up applicable to non-loop related essential and near-essential
services would be greater than a mark-up based only on the fixed common
expense mark-up. Thus, according to the Companies, a mark-up of at least
25% would be justified for these non-loop related essential and
near-essential services.
|
|
213.
|
TELUS
submitted that rates for the services in question must be maintained at
least at the level of Phase II costs plus a mark-up of 25%. TELUS argued
that its ability to recover its embedded costs would be in jeopardy if the
Commission decreased the level of mark-up used to calculate rates for
Competitor Services, as TELUS would be required to include a mark-up of
greater that 25% on remaining services (other than rates for Competitor
Services and residential services).
|
|
214.
|
TELUS
submitted in the Loop mark-up proceeding that the data and the terms
required to determine mark-ups were complex, and that it was essential to
establish uniform definitions for costs and mark-up. The mark-up should, in
TELUS' view, allow for the recovery of two broad categories of costs. The
first category would include fixed and common non-capital expenses, such as
the expenses classified and defined as fixed common costs in the Phase II
manuals, as well as other expenses that were not included in Phase II
studies or in the fixed common cost category such as Official Telephone
Service. The second category would include annualized capital costs not
included in Phase II studies, such as start-up capital that was not
incurred to add to the network to provide any specific service. Together,
these two categories of costs, referred to by TELUS as fixed and common
costs, must in the company's view be included in the mark-up, if it was to
have a reasonable opportunity of recovering its total Utility Segment
current costs. TELUS further submitted that the difference between embedded
and current capital cost should also be recovered as an additional and
separate adjustment.
|
|
215.
|
TELUS
did not support the adoption of a service-specific mark-up. TELUS argued
that, if a service-specific mark-up were set without considering the
mark-up for all other Utility Segment services, there would be no way to
evaluate whether the total Utility service revenues would over or
under-recover total Utility Segment costs.
|
|
216.
|
TELUS
submitted that its evidence fully supported the Commission's finding in
Decision 97-8
that total Utility Segment Phase III costs exceeded the Phase II costs by
more than 25%. TELUS indicated that, although it had stated on more than
one occasion that it would accept a 25% mark-up, the new evidence
demonstrated that the required mark-up, regardless of the approach used,
was greater than 25% and that the required percentage mark-up was different
for each ILEC. TELUS argued that it was the Commission's duty to set just
and reasonable rates for each company separately and, as the Commission now
had before it evidence that demonstrated that ILEC-specific mark-ups were
required, it should establish mark-ups on that basis.
|
|
217.
|
TELUS
proposed two separate methods to calculate the average percentage mark-up.
Under the first approach, an average percentage mark-up would be calculated
by taking the ratio of the fixed common costs associated with the Utility
Segment services as a whole to the total Utility Segment Phase II cost (sum
of Utility Segment service Phase II costs). Under the second approach, the
difference between the total Utility Segment Phase III cost and the total
Utility Segment Phase II cost would be calculated, and this difference
would be divided by the total Utility Segment Phase II cost. Under TELUS'
two alternative approaches, similar average percentage mark-ups for TELUS'
Utility Segment, of 35.4% and 36.7% respectively, were obtained.
|
|
218.
|
TELUS
submitted that the record of the Loop mark-up proceeding also demonstrated
the need for a broader Phase II and mark-up review than TELUS had
recommended in the past. In TELUS' view, this review should include an
audit of Phase II costs and current fixed and common costs as well as an
audit of the Phase II processes, methodologies and implementation so that
one consistent approach could be adopted nationally.
|
|
219.
|
In
the Loop mark-up proceeding, SaskTel submitted that it had provided data to
support the need for a minimum mark-up of 20.6% to recover its fixed costs.
In SaskTel's view, a mark-up of 25% continues to be appropriate for the
recovery of both fixed common costs and shared costs.
|
|
220.
|
In
the Loop mark-up proceeding, Call-Net and AT&T Canada noted the high
variability in the Companies' mark-up estimates. They pointed out, for
example, that Bell Canada had proposed a mark-up of 163% for unbundled
loops to recover embedded costs in its initial submission, but in its final
comments had submitted that a mark-up of 41% was required. Call-Net and
AT&T Canada submitted that, because the level of ILEC output had
increased substantially, the relative level of fixed common costs must have
decreased and would continue to do so. They further submitted that the
ILECs had over-estimated the differences between embedded and current
capital expenditures, over-estimated the amount of fixed common costs and
put forward proposals to shift disallowed Phase II costs into the mark-up.
|
|
221.
|
Call-Net
and AT&T Canada argued that, if accepted, the ILECs' proposals would
thwart local competition by raising the rates paid by entrants for
unbundled loop facilities. Call-Net and AT&T Canada submitted that the
ILECs had failed to justify the continued use of a 25% mark-up, and that a
mark-up in the range of 8% to 10% would be more than sufficient to allow
the ILECs to recover their fixed common costs.
|
|
222.
|
Group
Telecom argued that, despite the many years of debate surrounding the issue
of the appropriate mark-up, no reliable cost justification for the 25%
level of mark-up has ever been provided or even attempted by the ILECs.
Group Telecom noted that the ILECs had for several years claimed that it
was not possible to justify the level of mark-up on the basis of costs.
Group Telecom further submitted that the ILECs had not made a case for the
continued use of the 25% mark-up for unbundled loops.
|
|
223.
|
Group
Telecom commented on TELUS' proposed methodology and noted that TELUS had
relied on a ratio of annual fixed common costs to annual total Phase II
costs. Group Telecom submitted that the aggregate Phase II costs calculated
for TELUS' Utility and Competitive Segments were not reliable because Phase
II costs were not available for all services, and argued that TELUS has
made an arbitrary adjustment to determine the Phase II costs of those
services for which costing information was not available. Group Telecom
noted that not all of the Phase II costs had been filed with the Commission
in the context of the tariff approval process. Group Telecom further noted
that, even in the case of the cost studies that had been filed, the degree
of regulatory scrutiny had varied. For example, in respect of the Phase II
costs of retail services, scrutiny through the imputation test was
typically much reduced by comparison with the scrutiny to which cost
studies for essential and near-essential services were subjected. As a
result, Group Telecom submitted that the Commission could not have sufficient
confidence in the aggregate Phase II costs for it to rely on these costs in
establishing the required mark-up.
|
|
224.
|
Group
Telecom recommended that any attempt to determine a cost-based percentage
mark-up to be applied to Phase II loop costs should be based on an average
of the components considered necessary to recover fixed common expenses and
any embedded cost differential, weighted respectively by the proportions of
expenses and capital in the Phase II loop costing studies. Group Telecom
further submitted that the ILECs had provided no persuasive evidence to
support their request for a mark-up greater than 15%. Group Telecom argued
that, in fact, a 15% mark-up provided a significant contribution to the
recovery of any excess of embedded over Phase II capital costs, contrary to
the Commission's expectation in Decision 2000-745.
Group Telecom recommended that the Commission adopt a 15% mark-up in
establishing rates for unbundled loops on a final basis.
|
|
225.
|
Futureway
submitted that Bell Canada's expenses had significantly declined since the
25% mark-up had initially been set, and that there were compelling reasons
to reduce the mark-up to a level lower than 15%.
|
|
|
Commission determination on the
mark-up
|
|
226.
|
In
the Loop mark-up proceeding, Group Telecom submitted that a 15% mark-up on
Phase II loop costs would permit each ILEC to recover a corporate average
percentage of fixed common expenses, and would in addition provide a
significant contribution towards the recovery of the embedded cost
differential. The Commission notes that Group Telecom's analysis relied on
the Companies' proposed cost-based percentage mark-up method, which
determines a blended average percentage mark-up that considers the recovery
of fixed common expenses and embedded capital costs, weighted respectively
by the proportions of expenses and capital in the Phase II loop cost
studies. Under Group Telecom's analysis, a total mark-up of 15% was assumed
as a starting point. The mark-up on Phase II loop costs required to recover
the corporate average percentage of fixed common expenses was then
determined and deducted from the 15%. The remaining amount, if any, was
assumed to contribute to the recovery of embedded capital costs.
|
|
227.
|
Under
this proposal, the percentage mark-up required to recover the company's
fixed common expenses represented a corporate average based on the ratio of
the company's total FOEs classified as fixed common costs over total
company Phase II expenses. In the denominator, the total company Phase II
expenses were assumed to be equal to the demand or service-driven FOE
adjusted to capture the related variable common costs. In the case of Bell
Canada and TELUS, Group Telecom estimated the percentage mark-ups required
to recover the company's fixed common expenses to be 21.8% and 9.5%,
respectively. When weighted by the respective proportions of expenses in
the loop cost study of 29% and 23.9%, the percentage mark-ups on Phase II loop
costs required to recover fixed common expenses were estimated at 6.3% for
Bell Canada and 2.3% for TELUS. Given that these percentage amounts are
clearly less than 15%, the remainder was assumed to contribute to the
recovery of embedded capital costs. While the percentage mark-up amounts
contributing to the recovery of the embedded capital costs were lower than
those implied by Bell Canada's and TELUS' respective proposals,
Group Telecom's analysis demonstrated that a 15% mark-up would permit
each ILEC to recover a corporate average percentage of fixed common costs
and would in addition provide a contribution towards the recovery of the
embedded cost differential.
|
|
228.
|
TELUS
was the only ILEC that commented on Group Telecom's approach. TELUS
indicated that it generally found Group Telecom's methodology to be sound,
but noted that the proportion of expenses had been applied to the wrong
percentage mark-up required to recover the company's fixed common expenses.
TELUS submitted that, in calculating the corporate average percentage of
fixed common costs, Group Telecom had erroneously included in the
denominator TELUS' total operating expenses instead of TELUS' total FOEs.
TELUS noted that total FOEs would be a lower amount than total operating
expenses because some costs such as network maintenance were not included
in FOEs. TELUS submitted that as a result, the embedded capital recovery
implied in the 15% was also wrong.
|
|
229.
|
The
Commission notes that the Companies' proposed percentage mark-up method relied
on each ILEC's total operating expenses, including network maintenance
expense, to calculate the corporate average percentage of fixed common
costs. The Commission considers Group Telecom's calculation for the
recovery of the fixed common expenses to be correct. Moreover, even if the
total FOE estimate was adjusted to exclude TELUS' maintenance expense,
TELUS' corporate average percentage of fixed common costs would be such
that a 15% mark-up would permit TELUS to recover this revised corporate
average percentage of fixed common costs and, in addition, would provide a
contribution towards the recovery of its embedded cost differential.
|
|
230.
|
The
Commission notes that the above analysis is based on loop costs, for which
the proportion of expense-related costs is no greater than 30% of total
service costs. Nervertheless, the Commission anticipates that the same
result will obtain in respect of virtually all other Category I Competitor
Services that are subject to mandated cost-based pricing.
|
|
231.
|
Accordingly,
the Commission finds that a 15% mark-up on each ILEC's Phase II service
costs for Category I Competitor Services, that are subject to mandated
cost-based pricing, will provide sufficient contribution towards the
recovery of that ILEC's fixed common expenses and the embedded cost
differential.
|
|
232.
|
The
Commission notes TELUS' argument that mark-ups should be ILEC-specific
because each ILEC's costs are different. The Commission also notes,
however, that mark-ups have historically been applied uniformly across
ILECs' services as a matter of policy. Moreover, as discussed above, the
Commission considers that a mark-up of 15% on each ILEC's Phase II
costs for Category I Competitor Services subject to mandated cost-based
pricing will provide sufficient contribution towards the recovery of each
ILEC's fixed common expenses and the embedded cost differential.
|
|
233.
|
In
light of the above and having regard to the objective of fostering
facilities-based competition, the Commission finds it appropriate to approve
rates for these services based on Phase II costs plus a 15% mark-up.
|
|
234.
|
As
indicated earlier, rates for Category I Competitor Services have generally
been determined based on Phase II costs plus a 25% mark-up. Accordingly,
each ILEC is directed to reduce Category I Competitor Service rates, the
rates for which were based on this principle, to Phase II costs plus 15%.
In regard to the Category I Competitor Service rates that currently have a
mark-up greater than 25% above Phase II costs, these are discussed in the
section below. For those few Category I Competitor Services, the rates for
which mark-ups on Phase II costs are less than 15%, the Commission will not
require rate reductions. A summary of the Commission's determinations
regarding the rate adjustments to Competitor Services is provided in
Appendix 1 to this Decision. The specific filing requirements are set
out below.
|
|
235.
|
The
Commission notes that this pricing adjustment, as well as the creation of a
competitor-DNA service, will reduce the revenues the ILECs derive from the
relevant services. Because these changes result from policy consideration
as opposed to cost reduction, the Commission is of the view that the ILECs
should be compensated for the reduction in revenues. The Commission considers
that these policy considerations and the method of conpensation balance the
interests of the three main stakeholders. The method of compensation is
discussed in Part V of this Decision.
|
|
|
Specific mark-up implementation
Issues
|
|
|
Co-location
floor space rates
|
|
236.
|
In
Decision 97-15,
the Commission concluded that, with the exception of MTS, ILECs generally
have vacant central office floor space with no alternative uses, and accordingly,
the Phase II costs associated with the use of this floor space for
co-location purposes are zero. The Commission further noted that the
competing interconnecting carriers would derive value from the ILECs' floor
space and should contribute towards the recovery of the associated
investment. With respect to MTS' proposed floor space rate, the Commission
considered that, given its practice of moving personnel into vacant central
office space, MTS would incur incremental costs in providing floor space
for co-location purposes. MTS' floor space rate was therefore determined
based on Phase II costs plus a 25% mark-up and was set at $16.20 per square
metre. In determining floor space rates for the other ILECs, the Commission
considered MTS' floor space rate as a benchmark, to be adjusted for the
differences in the ILECs' embedded land and building costs.
|
|
237.
|
The
Commission is of the preliminary view that it would be appropriate to use
the floor space rate of $14.90 per square metre, based on MTS' Phase II
costs plus a 15% mark-up, for each ILEC. In the Commission's view, this
rate would recover each ILEC's Phase II costs and would provide sufficient
contribution to aid in the recovery of each ILEC's fixed common costs and
embedded costs. The Commission also notes that the floor space rates
adopted in Decision 97-15
for TELUS included use of the required bay space. Accordingly, the
Commission is of the preliminary view that TELUS' half-bay floor space
rates per square metre should be revised to $12.95 for Category I, $10.36
for Category II, and $6.48 for Category III.
|
|
|
Direct
Connection rates
|
|
238.
|
In
Unbundled rates to provide equal access, Telecom Decision CRTC 97-6,
10 April 1997 (Decision 97-6), the Commission adopted a uniform DC
rate of $0.007 per-minute per-end for each ILEC excluding SaskTel.
|
|
239.
|
Subsequent
to Decision 97-6,
on 9 March 2000, the Commission issued a letter decision (the
9 March 2000 letter decision) that lowered the ILECs' DC per-minute
per-end rate of $0.007 to $0.003. In the proceeding leading to this letter
decision, the Commission received revised Phase II costs for the DC service
from each ILEC except SaskTel. The Commission noted that the ILECs have in
general reported significant cost reductions for the DC service, due in
part to reductions in the per-minute expenses.
|
|
240.
|
The
Commission concluded in the 9 March 2000 letter decision that the
proposed uniform $0.003 per minute per-end DC rate recovers the service's
revised Phase II incremental costs. The Commission noted that it had
established in Decision 97-6
mark-ups for the DC service that were in excess of 25% to recognize, among
other things, the differences between the DC service's embedded and current
costs. The Commission indicated in the 9 March 2000 letter decision
that it found no evidence to demonstrate that the mark-up included in the
$0.003 rate does not provide sufficient contribution to recover fixed
common costs, including the recognition of embedded costs.
|
|
241.
|
In
Direct Connect rate approved for SaskTel, Order CRTC 2000-1080,
1 December 2000, the Commission approved a DC rate of $0.005
per-minute per-end for SaskTel, based on Phase II costs plus a 25% mark-up.
In that decision, the Commission noted that SaskTel's cost to provide DC
service was $0.00382 per-minute per-end. The Commission concluded that a DC
rate of $0.005 per-minute per-end is appropriate for SaskTel to recover the
associated Phase II costs and to provide sufficient contribution to recover
fixed common costs.
|
|
242.
|
The
Commission is of the preliminary view that it would be appropriate to use
the updated DC Phase II cost estimates provided in the above proceedings
plus a 15% mark-up to determine each ILEC's revised DC rate. In the
Commission's view, this revised DC rate would recover each ILEC's
Phase II costs and would provide sufficient contribution to aid in the
recovery of each ILEC's fixed common costs and the embedded cost
differential. The Commission is therefore of the preliminary view that the
following ILEC per-minute per-end DC rates should be adopted:
|
|
|
NewTel
|
$0.00131
|
|
|
MTT
|
$0.00216
|
|
|
Island
Tel
|
$0.00219
|
|
|
NBTel
|
$0.00267
|
|
|
Bell
Canada
|
$0.00128
|
|
|
MTS
|
$0.00276
|
|
|
SaskTel
|
$0.00439
|
|
|
TELUS
(Alberta)
|
$0.00214
|
|
|
TELUS
(BC)
|
$0.00185
|
|
|
Line-side
wireless access service and paging/telephone number access rates
|
|
243.
|
In
Bell Canada Tariff Notice (TN) 5903, Bell Canada proposed that its line-side
wireless access service (WAS) rates be lowered to $0.06 per active
telephone number and $0.02 per reserved number, based on its updated
service costs, plus a 25% mark-up. In Telecom Order CRTC 97-1765,
27 November 1997, the Commission noted that the line-side WAS rates
filed to support Bell Canada TN 5903 only included the Phase II prospective
incremental costs and did not include past embedded costs of advancement of
the 416/905 area code split and costs for the advancement of the
step-by-step switch modifications. The Commission concluded that the
interim rates of $0.14 per active telephone number and $0.04 per reserved
number would also provide an adequate recovery of these costs.
|
|
244.
|
The
Commission is of the preliminary view that it would be appropriate to
determine Bell Canada's line-side WAS rates for the active and reserved
telephone numbers based on the above Phase II cost estimates plus a 15%
mark-up. In the Commission's view, these revised WAS telephone number rates
would recover Bell Canada's Phase II costs and would provide sufficient
contribution to assist in the recovery of Bell Canada's fixed common costs
and the embedded cost differential. The Commission is therefore of the
preliminary view that Bell Canada's telephone number rates, applicable to
both the line-side WAS and paging/telephone number access (TNA) tariffs,
should be revised to $0.0593 for the active number and to $0.0153 for the
reserved number.
|
|
|
TELUS'
wireless service provider enhanced provincial 9-1-1 network access service
|
|
245.
|
In
TELUS TNs 327 and 4120, the company proposed a rate of $0.03 per wireless
telephone number per month, rounded to the nearest cent. TELUS submitted
that the rate was established based on Phase II costs plus a mark-up in
accordance with the Commission's directives regarding the pricing of
Competitor Services.
|
|
246.
|
The
Commission notes that the rate for this service, if based on Phase II costs
plus a 15% mark-up, would be no more than $0.0263 per wireless telephone
number per month when rounded to the fourth decimal place. The Commission
is of the preliminary view that it would be appropriate to adopt the rate
of $0.0263 per wireless telephone number per month for TELUS' wireless
service provider (WSP) enhanced provincial 9-1-1 network access service in
both Alberta and British Columbia.
|
|
|
Follow-up processes
|
|
247.
|
In
addition to the interim competitor-DNA tariff discussed above, the
Commission also directs the ILECs to file by 13 September 2002 proposed
tariffs for final consideration, which incorporate the following elements:
|
|
|
- rates for the competitor-DNA
service at DS-0, DS-1, DS-3, OC-3 and OC-12 rates that reflect
Phase II costs plus a 15% mark-up, with supporting cost studies;
|
|
|
- rates for the access component
of the competitor-DNA service, developed using the rating model
adopted for unbundled loops and the banding structure approved in
Decision 2001-238,
such that the prices for the number of access facilities do not vary
with the quantity provided; and
|
|
|
- identify the band to which each
wire centre or exchange is assigned.
|
|
248.
|
The
ILECs are also directed to file in the same time period modified DNA
tariffs which identify the band to which each wire centre or exchange is
assigned.
|
|
249.
|
The
Commission wishes to provide parties with the opportunity to comment on
whether the ILECs should make the intra-exchange channel component of the
DNA tariff and the access component of that tariff, when used in
circumstances other than those described in the tariff, available to
carriers through a competitor-DNA Tariff. The Commission requests that
parties filing comments include a discussion of the factors influencing
competitive supply of these facilities by non-ILECs and a discussion of the
factors influencing a competitive carrier's ability to self-supply
facilities between a competitors switch and an ILEC's switch and those
facilities that substitute for the intra-exchange channel of the ILECs' DNA
service. Parties are also requested to provide as much factual data on a
band-specific basis by incumbent territory as possible.
|
|
250.
|
The
Commission establishes the following process for the purpose of the
follow-up proceeding.
|
|
|
- All persons wishing to
participate are requested to register with the Commission by
17 July 2002.
|
|
|
- The Commission will publish a
list of interested parties for the purpose of this follow-up
proceeding as soon as possible thereafter.
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- Parties are to submit their
comments by 13 September 2002.
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- Parties may submit reply
comments by 15 October 2002.
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- Parties filing submissions are
required to copy all parties on the list of interested parties.
Documents must be received, not merely sent, by the date indicated.
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251.
|
The
process for review of the Access Tandem service rate is as follows:
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|
- ILEC Access Tandem service rates
are made interim as of the date of this Decision.
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|
- ILECs are to file updated cost
studies and revised rates for the Access Tandem service by 17 July
2002.
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- Interested parties may file
comments by 21 August 2002.
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- ILECs may file reply comments by
3 September 2002.
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- Parties submitting comments and
reply comments are required to serve a copy of their comments on all
interested parties. Documents must be received, not merely sent, by
the dates indicated.
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252.
|
In
connection with the changes in the Category I Competitor Services rates,
each ILEC is directed to:
|
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- file by 6 August 2002 proposed tariff
pages for approval which reflect the Commission's determinations in
this Decision for the Category I Competitor Service rates, by rate
element, as specified in Appendix 1 to this Decision.
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- file by 6 August 2002the
estimated revenue loss attributable to the reduced mark-up, on an
annualized basis, based on 31 December 2001 demand levels and
excluding the revenue loss associated with the use by the ILEC's
Competitive Segment of Category I Competitor Services.
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253.
|
The
Commission also establishes the following process to provide parties with
the opportunity to comment on its preliminary views with respect to the
above-noted revised rates for co-location floor space, DC service, Bell
Canada's line-side WAS/TNA telephone number services and TELUS' WSP enhanced
provincial 9-1-1 network access service.
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|
- Parties to this proceeding may
submit comments by 2 July 2002 and the ILECs may submit comments in
reply by 12 July 2002.
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- Parties submitting comments or
reply comments are required to serve a copy of their comments on all
other interested parties. Documents must be received, not merely sent,
by the dates indicated.
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254.
|
The
Commission notes that, in Part IV of this Decision, all tariffed rates
were made interim, effective 1 June 2002. Consequently, the changes to
the Category I Competitor Service rates will be effective on that
date.
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IV Services, baskets
and pricing constraints
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Introduction
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255.
|
In
the initial price cap regime, the Commission imposed an overall price cap
constraint equal to inflation less a productivity offset on revenues from a
single basket of ILEC services. This basket was divided into three
sub-baskets that were also subject to additional sub-basket, service or
rate element pricing constraints:
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- Basic residential local services;
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- Single and Multi-line Business
local services; and
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256.
|
Services
that were priced to maximize contribution before the implementation of
price caps, such as optional local services, and services for which the
Commission considered that a price cap would be redundant, such as Special
Facilities Tariffs (SFTs), were generally not assigned to a capped services
sub-basket. Competitor Services, as defined in Decision 98-2,
were also not included in capped services. Rates for certain other
services, such as 9-1-1 service and Message Relay Service, were subject to
a price freeze over the four-year price cap period.
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257.
|
In
PN 2001-37,
the Commission asked for comments on what changes, if any, should be made
to the structure of the initial price cap regime. The Commission received a
number of proposals for change.
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Positions of parties
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The Companies' proposals
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258.
|
The
Companies' proposal assigned Utility Segment services to the following
categories:
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a)
services subject to an upward pricing constraint;
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b)
services not subject to an upward pricing constraint; and
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c)
local payphone services.
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The
Companies' proposal with respect to local payphone services is discussed
separately below.
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259.
|
The
Companies took the position that a productivity offset should not apply to
any basket or sub-basket of services or to Utility Segment revenues as a
whole. The Companies submitted that a productivity offset should apply only
to the costs for residential local exchange service in HCSAs.
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Services
subject to upward pricing constraints
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260.
|
The
Companies assigned ILEC services that would be subject to upward pricing
constraints to the following service groupings: Basic Residential Local
Services, Other Residential Local Services, Business and Other Capped
Services, services with frozen rate treatment and Competitor Services.
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a)
Basic Residential Local Services
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261.
|
In
non-HCSAs, the Companies proposed that rates for residential individual
line service (including Touch-Tone) should be allowed to increase, on
average, by the rate of inflation each year. In addition, price increases
would be capped at 10% per year at the rate element level. The Companies
stated that the proposed upward pricing constraint was intended to ensure,
through a price freeze in real terms, that prices for these services would
remain fair.
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262.
|
In
HCSAs, the Companies submitted that the prices of residential local
individual line and multi-party services should generally be constrained by
specified maximum annual increases. The Companies therefore requested the
flexibility to increase residential individual line and multi-party service
rates in HCSAs by an annual maximum of $2, with a maximum monthly rate of
$30 to be reached over the next price cap period.
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263.
|
SaskTel
proposed not to increase residential local service rates in 2002. SaskTel
also indicated that, in 2003, it would eliminate excess mileage charges
when it would implement the $2 residential local service rate increase.
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264.
|
Aliant
Telecom proposed to increase residential individual line service rates to
$25 in 2002 across its territory. MTS requested the flexibility to increase
residential individual line service rates in Band D (a non-HCSA) by $2 in
each year of the next price cap period. These requests are considered
separately below.
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265.
|
The
Companies submitted that the proposed pricing flexibility would provide the
correct signals to the marketplace and therefore would promote competitive
entry in the residential market. In support of their argument that the
pricing flexibility sought would result in affordable residential rates,
the Companies provided international rate comparisons, and evidence
regarding the penetration rates for telephone service and the percentage of
household income spent on telephone service.
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266.
|
The
Companies submitted that their proposal would permit a gradual reduction in
the subsidy requirement. The Companies argued that, notwithstanding the
pricing flexibility requested in HCSAs, residential local rates would
remain affordable. The Companies noted that, if their proposal was
approved, rates in HCSAs would be less than rates currently approved for
Télébec ltée (Télébec) and certain other independent telephone companies at
the end of the next price cap period.
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267.
|
The
Companies proposed to place a ceiling on annual rate increases for
multi-party service in HCSAs and further proposed that the level of this
ceiling should be determined on a company-specific, and band or sub-band
specific basis.
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268.
|
Aliant
Telecom stated that it planned to discontinue residential two-party,
four-party and multi-party service within the next year in areas where
facilities exist to upgrade to individual line service. According to Aliant
Telecom, fewer than 20 of its party lines could not be upgraded. Aliant
Telecom did not request the flexibility to implement rate increases for
these services in the next price cap period.
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269.
|
Bell
Canada proposed to move rates for residential multi-party service closer to
residential individual line rates over the next price cap period. Bell
Canada argued that these rate changes would narrow the gap between
multi-party and individual line service prices and encourage customers to
migrate to individual line service.
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270.
|
Bell
Canada noted that the last time customers of party line service experienced
a rate increase was 1 January 1998. The company indicated that it
still had approximately 34,000 four-party line customers. Bell Canada noted
that, with the completion of its Local Service Improvement Program at the
end of 2001, individual line service would be available on demand throughout
its territory. Bell Canada proposed to grandfather, effective
1 January 2002, all four-party access lines that remained in service.
The company stated that, at that time, it would cease offering four-party
line service to new customers.
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271.
|
Bell
Canada and SaskTel provide Exchange Radio Telephone Service (ERTS) within
certain telephone exchanges beyond where they have distribution lines. Bell
Canada also offers individual line service using Regional Communications
Service (RCS) where it is more economical to provision service using this
technology. Bell Canada noted that ERTS and RCS customers would be subject
to the proposed rate increases for HCSAs through the basic rate component
of their monthly rate. Bell Canada proposed to freeze the rate for the
other rate components at their current levels for the period from 2002
to 2005.
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272.
|
Consistent
with the Companies' proposal for residential services in HCSAs, SaskTel
proposed a maximum annual increase of $2 for both ERTS and Northern Radio
Telephone Service rates in each of 2003, 2004 and 2005.
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|
b)
Other Residential Local Services
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273.
|
The
Companies proposed that the Other Residential Local Services category would
include basic residential installation charges and Extended Area Service
(EAS) and Community Calling Plan (CCP) charges, where separately identified
(i.e., in Newfoundland and Saskatchewan). For these services, the Companies
proposed to have the flexibility to increase rates, on average, by no more
than the rate of inflation each year. In addition, price increases at the
rate element level would be capped at 10% per year.
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274.
|
As
an exception to the Companies' proposal, Aliant Telecom requested the
flexibility to increase EAS and CCP charges in Newfoundland to a uniform
rate of $5 per month over the next price cap period.
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c)
Business and Other Capped Services
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275.
|
The
Companies proposed that average price changes be constrained by the rate of
inflation each year for those services assigned to the business and other
capped services group in respect of which upward pricing constraints were
still needed. The Companies also proposed to impose an annual 10% limit on
price increases for these services at the rate element level. They argued
that this pricing flexibility would be required to further encourage the
growth of local competition in the business market. They also submitted
that it would send the signal to competitors that mandated rate reductions
would no longer be required for these services.
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276.
|
As
an exception to the Companies' proposal, SaskTel requested the flexibility
to increase business rates in HCSAs to $38 by 2005. SaskTel also indicated
that it would eliminate excess mileage charges for all business customers
in 2003 when it would implement rate increases for business customers in
HCSAs.
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d)
Services with frozen rate treatment
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277.
|
The
Companies proposed to maintain the approach taken in Decisions 97-9
and 98-2
whereby the Commission froze the rates or terms of certain services. The
Companies also proposed that the Commission maintain the current rate
treatment for 9-1-1 service during the next price cap period. In addition,
the Companies proposed to freeze rates for residential unlisted number
service, which the Commission capped at $2 in Telecom Order CRTC 98-109,
4 February 1998.
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e)
Competitor Services
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278.
|
The
Companies stated that the current process for reviewing rates for
Competitor Services is based on evidence of a change in the underlying
costs. The Companies initially proposed that rates for Competitor Services
should continue to be subject to review on application by the ILECs, by the
competitors or through a proceeding initiated by the Commission.
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|
279.
|
In
their reply argument, the Companies stated that they would not oppose the
application of an inflation factor less a productivity offset (I-X) to
rates for services assigned to Competitor Services, as defined by the
Companies: that is, essential, near-essential, interconnection and
co-location services. The Companies further submitted that periodic reviews
of underlying costs should not be undertaken if the prices of Competitor
Services were governed by inflation less a productivity offset. The
Companies submitted that prices subject to this approach would reflect
assumed changes in underlying costs on a going forward basis.
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Services
not subject to an upward pricing constraint
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280.
|
The
Companies submitted that a service should not be subject to upward pricing
constraints if any of the following conditions were met:
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i)
the service was subject to sufficient competition to discipline pricing;
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ii)
the service was discretionary;
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|
iii)
the service was already subject to contractual arrangements that govern
prices; or
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|
iv)
the service was a substitute for services whose rates are constrained by
market forces or regulatory pricing constraints.
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281.
|
With
respect to the first condition, the Companies' proposal for a
competitiveness test is described and considered later in this Decision.
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|
282.
|
For
discretionary services, such as optional local services, the Companies proposed
that the pricing policy established in Decision 97-9
should be maintained and that an upward pricing constraint should not apply
to discretionary services.
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283.
|
The
Companies submitted that the policy in Decision 97-9
had been established on the basis that no public policy goal would be
served by imposing pricing constraints on these services. They noted that,
because the rates for these services had been set to maximize contribution,
the residential local exchange service rates were lower than they would
otherwise be. Finally, the Companies submitted that customers could tailor
their consumption of such services based on price.
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284.
|
The
Companies further submitted that capping optional services would be
inconsistent with the Commission's determination in Decision 2000-745
that a target contribution of $60 from optional services per residential
access line would be used in the calculation of the subsidy requirement for
HCSAs.
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285.
|
As
far as services subject to contractual arrangements were concerned, the
Companies argued that it would be redundant to place additional pricing
constraints on services for which rates were already constrained by factors
independent of the price cap framework. The Companies submitted that
fixed-price contracts offered under SFTs fall into this category.
|
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286.
|
Finally,
the Companies argued against imposing upward pricing constraints on the
rates of services that were substitutes for other services whose rates were
constrained by market forces or through regulatory pricing constraints. For
example, the Companies submitted that rates for Centrex service, which
would be a substitute for business access services, should not be capped.
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TELUS' proposal
|
|
287.
|
TELUS
proposed that all Utility Segment services except residential local service
in HCSAs be uncapped and placed into one of three categories:
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|
a)
non-forborne services subject to both an upper pricing constraint and a
price floor;
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|
b)
non-forborne services subject only to a price floor; or
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|
c)
forborne services that are not subject to pricing constraints.
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|
|
TELUS
noted that forborne services were constrained by the terms and conditions
on which forbearance was granted. TELUS' proposal with respect to local
payphone services is discussed separately below.
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|
Non-forborne
services subject to an upper pricing constraint and a price floor
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|
|
a)
Residential local exchange service
|
|
288.
|
TELUS
requested the flexibility to increase rates for residential local exchange
service (including EAS) by an annual maximum of $3, to a maximum monthly rate
of $35 to be reached over the five-year price cap period proposed by TELUS.
TELUS noted that the rate increases in HCSAs would be offset by an
equivalent reduction in contribution.
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289.
|
TELUS
further submitted that the imputation test would continue to apply to these
services. TELUS submitted that a monthly rate of $35 was affordable and had
been deemed so by the Commission when it approved the current rate for
Télébec ($34.42). TELUS argued that because the maximum rate would not
change over the next price cap period, it would, considering inflation,
decrease in real terms and, therefore, would be even more affordable at the
end of the next price cap period.
|
|
290.
|
TELUS
argued further that any proposal to limit price increases to residential
services to a greater degree than it proposed could limit competitive entry
in non-HCSAs and would delay these rates from reaching market levels. The
company argued that competitors would not find it attractive to provide
competitive residential local service until rates reached market levels.
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|
|
b)
Business local exchange service rates
|
|
291.
|
TELUS
proposed that rates for business local exchange services (including EAS) in
bands where competitive entry had not occurred should be subject to an
upward pricing constraint of 10% per year. TELUS noted that the imputation
test would continue to apply to these services. The company was opposed to
the application of an additional pricing constraint to these services on
the basis that doing so would further limit the ILECs' pricing flexibility.
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|
|
c)
Services with frozen rates
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|
292.
|
TELUS
proposed to freeze rates for services with social welfare considerations
and public safety concerns at their current rates. These services include
9-1-1 service, Message Relay Service, Call Display Blocking, Call Blocking
for 900 service and Toll Restriction.
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|
293.
|
Individual
line service (ILS) charges are additional non-discretionary charges for
residential and business exchange service provided to customers in Alberta
beyond a base rate area. TELUS noted its intention to replace ILS charges
during the next price cap period and submitted that ILS charges should be
frozen at their current rates, thereby maintaining the affordability of ILS
charges, until such time as it submitted a proposal for Commission
consideration.
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|
|
d)
Competitor Services
|
|
294.
|
TELUS
proposed that Competitor Services be priced at Phase II costs plus an
approved mark-up and that the Commission should retain the current rules
with respect to price changes for these services. The company noted that
unbundled loops would continue to be subject to their own internal price
cap mechanism.
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|
|
e)
Installation charges
|
|
295.
|
TELUS
proposed that service charges for the installation of local exchange
services should be priced at Phase II costs plus an approved mark-up.
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|
Non-forborne
services subject only to a price floor
|
|
296.
|
TELUS
proposed that rates for those non-forborne Utility Segment services that
were not included in the baskets described above should be subject to a price
floor to protect against anti-competitive below-cost pricing. The
Commission's current imputation test would determine the price floor.
|
|
297.
|
TELUS
opposed the application of a pricing constraint to optional local service
rates on the basis that these services were discretionary and did not
receive a subsidy. TELUS agreed with Bell Canada's view that this would be
inconsistent with the contribution regime established in Decision 2000-745,
in which the Commission established a monthly contribution target of $5 per
residential NAS as an incentive for the ILECs. TELUS argued that placing an
upward constraint on price changes for residential optional local services
in the next price cap period would deny the ILECs the flexibility they
required to meet or exceed this target. TELUS argued that artificially
constraining prices for residential optional services would also have a
dampening effect on competitive entry in the local market.
|
|
298.
|
TELUS
submitted that, if the Commission wished to sustain the conditions under
which implicit subsidies could be used to support the ILECs' residential
local service prices, it should not impose any pricing constraints on
residential optional local services and should not impose an I-X offset on
the revenues derived from these services.
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|
|
Other parties' comments on the ILECs'
proposals
|
|
299.
|
AT&T
Canada submitted that the ILECs' proposals would preserve those elements of
the current regime that have allowed the ILECs to earn record profits and
to stifle competition. AT&T Canada argued that the ILECs' proposals
incorporated new measures to ensure even greater profitability in the
future and removed all checks on the ILECs' ability to increase profits at
the expense of consumers and competitors.
|
|
300.
|
Call-Net
submitted that while the ILECs professed to be interested in providing a
greater incentive for competitive entry by letting prices move to market
levels, in reality they were requesting pricing flexibility to raise and
lower prices at their discretion in the narrowly defined markets where
competition does exist.
|
|
301.
|
Call-Net
submitted that what was most troubling of all was that the ILECs proposed
to keep their productivity gains across all of their services, other than
those on residential local services in HCSAs. In Call-Net's view, the ILECs
would either use these revenues to frustrate competitive entry or to
benefit their shareholders.
|
|
302.
|
Group
Telecom submitted that the long-run sustainable level for business and
other rates would be determined by the marketplace, and that these rates
would change over time in response to changes in the costs of providing
service. Group Telecom suggested that the Commission exercise care in
substituting its judgement for that of the marketplace, particularly in
instances in which the regulatory regime being considered could place
downward pressure on retail rates. Group Telecom argued that there was a
risk that regulation could push prices below long-run market levels and
thereby compromise opportunities to recover investments.
|
|
303.
|
Group
Telecom agreed with the pricing constraints proposed by the Companies for
business and other capped services. AT&T Canada generally supported the
pricing constraints proposed by the Companies on residential, business and
other capped services.
|
|
304.
|
RCI
noted that one of the themes running through the Companies' and TELUS'
proposals was that increasing prices would encourage more competition. RCI
noted that prices for capped services were above costs with the exception
of residential rates in HCSAs. The company submitted that increasing rates
at a time when costs were falling would not encourage competitive entry, as
competitors would know that any rate increases in the geographic locations
where they competed would be short-lived.
|
|
305.
|
RCI
submitted that the ILECs' proposal to encourage competitive entry by
raising rates would potentially result in huge revenue increases that would
be used by the ILECs to do one of two things: fund aggressive activity in
markets as they became competitive, or benefit the ILECs' shareholders.
|
|
306.
|
ARC
et al. and BCOAPO et al. argued that subscribers were entitled not only to
affordable rates, but also to just and reasonable rates. In their view,
just and reasonable rates were necessarily linked to costs and, by
implication, to earnings. According to ARC et al. and BCOAPO et al.,
subscribers should be entitled to their share of direct financial benefits
flowing from price cap regulation.
|
|
307.
|
ARC
et al. and BCOAPO et al. also submitted that residential rates must meet
the criterion of affordability, where affordability refers to a consumer's
ability to pay. Calgary and ARC et al. and BCOAPO et al. submitted that
affordability was an issue for low-income customers, but not for those with
high incomes. They submitted that affordability had a much more limited
scope than the concept of "just and reasonable rates", which was
relevant for all ratepayers.
|
|
308.
|
ARC
et al. and BCOAPO et al. also argued that telephone service was an
essential service that people could not afford to be without, regardless of
their financial circumstances. ARC et al. and BCOAPO et al. submitted that
the evidence of the Companies regarding penetration rates did not provide
an appropriate indicator of whether residential local rates were affordable
for low-income households.
|
|
309.
|
Noting
that residential local exchange rates were generally compensatory in
non-HCSAs, ARC et al. and BCOAPO et al. and the Commissioner of Competition
submitted that the Commission should not increase these rates to encourage
competition. These parties argued that if competitors were unable to
compete against the ILECs when the ILECs' prices were compensatory, then
their entry was not desirable. The Commissioner of Competition further
argued that relaxing the price constraints on the ILECs to increase margins
for competitors would be counterproductive.
|
|
310.
|
CAC
Alta submitted that the proposals of the ILECs were fundamentally unfair. It
argued that consumers should not be expected to underwrite either
competition or excessive profits to the ILECs or any combination of the
two. CAC Alta argued that customers of residential local service should
share in the many benefits occurring in this industry which could be used
to lower rates without the caveat that prices would have to go up before
the benefits of lower rates could be delivered.
|
|
311.
|
The
Commissioner of Competition submitted that the evidence in this proceeding
strongly suggested that the ILECs continue to possess market power with
respect to local exchange service in most areas of Canada. He argued that
ILECs were likely to retain that market power for the foreseeable future.
The Commissioner of Competition submitted that it would be necessary for
the Commission to continue to protect consumer interests and to foster the
competitive process.
|
|
312.
|
The
Commissioner of Competition submitted that the proposals of the ILECs
appeared to be an overreaction to a perceived design flaw of the initial
price cap regime that resulted in downward pressure on business rates. He
noted that a contributing factor was that residential rates were not
sufficiently high, resulting in little, if any, room to move residential
rates downwards.
|
|
313.
|
The
Commissioner of Competition argued that the approach adopted by the
Commission in Decisions 97-8
and 97-9
should be continued. In particular, he opposed proposals favouring a
productivity offset equal to zero. The Commissioner of Competition
submitted that proposals to prematurely remove pricing constraints on the
ILECs were not warranted and that removing these constraints would be
inimical to the efficient pricing and provision of local telecommunications
services to Canadians.
|
|
314.
|
AT&T
Canada opposed any form of pricing constraint that could potentially place
downward pressure on residential local rates in HCSAs, where rates were
already below cost. AT&T Canada submitted that rates in HCSAs should be
allowed to increase during the next price cap period in order to reduce the
total subsidy requirement and to establish greater equity in the subsidy requirement
levels in each ILEC operating territory.
|
|
315.
|
AT&T
Canada noted that residential rate levels in HCSAs varied significantly
from one ILEC to another, ranging from just over $20 to almost $30 per
month. AT&T Canada submitted that a common target rate for residential
local service of at least $35 should be established in HCSAs across all
ILECs, noting that the Commission had already approved residential rates of
close to $35 in other parts of the country, e.g., in Télébec's territory.
AT&T Canada proposed that residential local rates in HCSAs should be
allowed to increase sufficiently in each year so that each ILEC would be
able to meet the target rate level by the end of the next price cap period.
|
|
316.
|
ARC
et al. and BCOAPO et al. submitted that it was not necessary to rebalance
the rates in HCSAs to the extent proposed by the ILECs. These parties
submitted that the HCSA subsidy had been reduced in size to a sustainable
level, and they argued that the subsidy required would continue to diminish
as costs declined. ARC et al. and BCOAPO et al. argued that evidence in
this proceeding clearly showed that competitors were a long way from even
indicating an interest in serving residential customers in HCSAs,
regardless of prevailing rate levels.
|
|
317.
|
The
Commissioner of Competition argued that the concern with existing rates in
HCSAs stemmed not from concerns about the exercise of market power, but
rather from the economic inefficiency associated with a policy that
mandated retail prices below costs. He submitted that implementing
proposals to move rates to costs would lead to an increase in economic
efficiency and would greatly improve prospects for competitive entry. The
Commissioner of Competition supported proposals made by the ILECs and
AT&T Canada to increase rates and to reduce the subsidy in HCSAs.
|
|
|
RCI's proposal
|
|
318.
|
RCI
submitted that the fundamental principles of the existing price cap regime
should be maintained through the application of the existing price cap
formula, with an updated productivity offset, to service baskets containing
services that were not subject to sufficient competition to warrant
forbearance. RCI submitted that it was necessary to reduce rates pursuant
to the price cap formula. RCI argued that, if excess revenues were left
with the ILECs, the ILECs could use these revenues to target business local
markets and to subsidize rates for services in other related
telecommunications markets in which competition already existed.
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319.
|
RCI
submitted that the price cap index mechanism should be retained, with the
modifications outlined below. RCI proposed the following basket structure:
(a) a basket composed of Competitor Services and Other capped services
sub-baskets; and (b) a basket composed of the Residential services and Business
services sub-baskets.
|
|
|
Competitor
Services and Other capped services
|
|
320.
|
RCI
submitted that a price cap index should be applied to the rates for
Competitor Services and Other capped services, as cur |
