DECISION

Ottawa, 16 September 1994
Telecom Decision CRTC 94-19
REVIEW OF REGULATORY FRAMEWORK
Table of Contents
I INTRODUCTION
A. Public Notice 92-78 - Objectives Established by the Commission
B. Objectives Identified in the Telecommunications Act
C. The Proceeding
II GENERAL FRAMEWORK
A. Scope of Regulation
1. Regulatory Principles
2. General Conclusions
    a. Introduction
    b. Summary of Decision
B. Movement of Rates Towards Costs
1. General
2. Local Rates
3. Long Distance Rates
C. Affordable Service
D. Approaches to Vertical Integration
E. Reductions in Barriers to Entry
1. Local Competition
2. Co-location and Unbundling
    a. Co-location
    b. ONA, CEI and Unbundling
3. Reciprocal Access and Interoperability
4. Convergence
F. Alternatives to Traditional Rate of Return Regulation
1. General
    a. Introduction
    b. Conclusions
2. Implementation
3. Earnings Range on Utility Segment
4. Contribution Calculation
III FORBEARANCE
A. Section 34 of the Telecommunications Act
B. Criteria for the Application of Section 34
C. Application to Competitive Services
1. General
2. Interexchange Services
    a. Toll Services
    b. Competitive Network Services
3. Competitive Terminal Market
D. Forbearance for Optional Local Services
IV REGULATION IN THE INTEREXCHANGE MARKET
A. General
B. Targeted Pricing, Anti-Competitive Pricing and the Imputation Test
1. Modifications to the Imputation Test
2. Form of the Imputation Test
3. Filing of Imputation Test Information
C. Sprint's Margin Proposal
D. Competitive Price Caps/Floors and Pricing Flexibility
E. Bundled Pricing and Long-Term Contracts
F. Customer-Specific Tariffs and Unjust Price Discrimination
G. Interexchange Tariff Information Requirements
H. Treatment of Competitive Shortfalls After Splitting the Rate Base
I. Competitive Tariff Timeframes and Process
1. Use of Interim Approval
2. Placement of Tariff Filings on the Public Record
3. Timeframes
4. Other Tariff Process Matters
V CONTRIBUTION
A. Introduction
B. Contribution Mechanism
1. General
2. Level of Contribution
3. Direct Access Lines
4. Mechanism to Collect Contribution
5. Contribution Discounts
C. Scope of Contribution-Paying Services
D. Bypass Concerns
E. Future Proceedings
1. General
2. Rate Rebalancing
3. Split Rate Base
4. Scope of Contribution-Paying Services
5. Price Caps
VI OTHER REGULATORY REQUIREMENTS
A. Utility Segment Tariff Regulation
1. Pricing of Optional Local Services
2. Utility Service Tariff Filings
3. Information Requirements
B. Investment Review
1. Construction Program Review
2. Depreciation
C. Phase II Studies for Tariff Filings
D. Phase III Matters
1. Introduction
2. Review of Phase III: Public Notice
    94-16146
3. Issues Not Being Addressed in the
    Phase III Review
a. Inclusion of Proposed Changes to Phase
    III Methods in Phase III Forecasts
b. Comparisons of Canadian and U.S. Data
c. Adequacy of Phase III Control Processes
4. Adaptation of Phase III Results
E. Quality of service
F. Machine Readable Filings
G. Inquiry Officer and Staff Mediation Processes
H. Northwestel
1. Form of Regulation for Northwestel
2. Northwestel Tariff Regulation
VII IMPLEMENTATION OF TRANSITIONAL REGIME
A. Split Rate Base
1. Process
2. Revenue Requirement
B. Contribution Component of the CAT
C. Price Cap Proceeding
I INTRODUCTION
A. Public Notice 92-78 - Objectives Established by the Commission
On 16 December 1992, the Commission issued Review of Regulatory Framework, Telecom Public Notice CRTC 92-78 (Public Notice 92-78), initiating a proceeding, to include an oral public hearing, to examine whether the existing regulatory framework should be modified in light of developments in the industry. In that Public Notice, the Commission stated that, in an information-based economy, a modern and efficient telecommunications infrastructure is a fundamental component of, and vehicle for, the production and consumption of goods and services. The Commission noted that, in recent years, technological change and increasing competition have significantly altered the nature of the telecommunications industry, so that, in addition to fulfilling the basic communications requirements of all subscribers, telecommunications has evolved into a tool for information management and a productivity enhancer for business. The Commission also noted that these changes had allowed the telephone companies under its jurisdiction that provide local exchange service to develop a wide range of new audio, video and high-speed data services to satisfy the demands of both business and residence consumers in the local and long distance markets.
In Public Notice 92-78, the Commission noted that, in response to the changing environment, it had issued a number of decisions in recent years permitting the telephone companies to provide a wide range of new services and changing the structure of the industry by allowing more competition in a number of market segments. The Commission stated that, as a result of increased competition, the telephone companies under its jurisdiction are now subject to a greater degree of market discipline. However, they continue to maintain effective control of the provision of network access and local services and to dominate the public long distance market.
The Commission also stated that the changing telecommunications environment raises questions as to whether the current regulatory framework is the most appropriate or effective to serve the public interest. By way of example, the Commission posed the following questions:
(1) Is the Commission's historical form of monopoly regulation still the most appropriate?
(2) Are there alternatives to traditional rate base rate of return regulation that would permit telephone companies greater flexibility to innovate and compete while maintaining a balance among the interests of subscribers, shareholders and competitors?
(3) Should there be increased regulatory flexibility for the telephone companies in competitive markets?
Having posed these questions, the Commission stressed that any changes to the current regulatory framework intended to enhance the efficiency and effectiveness of regulation must, at the same time, be conducive to the attainment of the following objectives:
(1) universal accessibility to basic telephone services at affordable prices;
(2) opportunity for telephone company shareholders to earn a reasonable return on their investment;
(3) equitable treatment of subscribers in terms of service and price;
(4) assurance that telephone companies do not unfairly take advantage of their monopoly or dominant market positions in dealings with competitors; and
(5) encouragement of the development and widespread availability of new technology and innovative services to respond to the needs of business and residence customers.
By way of guidance to those who might wish to participate in the proceeding, the Commission noted the following as areas in which it was particularly interested:
(1) Regulation should continue to protect subscribers and service suppliers from abuse of monopoly or dominant power by the telephone companies. Where there is sufficient competition, more emphasis could be placed on the market to discipline service providers and satisfy user needs. Accordingly, parties were asked to make submissions regarding ways to streamline or eliminate regulatory requirements in light of changes in industry structure. In this regard, parties were asked to address what modifications to regulatory safeguards may be necessary to protect against abuse of dominant power in competitive markets.
(2) Regulatory policy has promoted the maintenance of universal access at affordable rates. Revenues from public long distance services and, to a lesser extent, from local services are used to offset the costs of providing subscriber access. While the Commission accepted a continuing need for a subsidy from long distance services to offset the combined local and access shortfall, it considered that the shortfall could be reduced, without compromising affordable access, with proper incentives both to introduce cost efficient technologies in the local network and access plant and to deploy innovative contribution-generating local services. The Commission further considered that the current system of pricing local service may result in some residence and business subscribers benefitting from a significantly greater subsidy than others and that the distribution of this subsidy could be made on a more efficient and equitable basis. Accordingly, parties were asked to make submissions regarding ways to reduce the combined local and access shortfall in order to encourage economic efficiency and stimulate investment in network infrastructure and services so as to provide benefits to residence as well as business subscribers in terms of price, choice and supply of innovative services.
(3) Finally, the Commission noted that there may be regulatory alternatives to the existing rate base rate of return approach that would better balance the interests of subscribers, shareholders and competitors in an increasingly competitive and technology-dynamic environment, while providing the telephone companies with better incentives to increase their operating efficiency and with greater flexibility regarding the establishment of rate levels. Accordingly, parties were asked to make submissions regarding alternatives or modifications to traditional rate base rate of return regulation.
B. Objectives Identified in the Telecommunications Act
Parliament enacted the Telecommunications Act (the Act) in June 1993, repealing the telecommunications-related provisions of the Railway Act. The passage of the Act marked the conclusion of an exercise to transform several new telecommunications policy initiatives into workable legislation, while at the same time consolidating and modernizing the legislation. The Act came into force on 25 October 1993, prior to the commencement of the oral public hearing in this proceeding.
The Act affirms, in section 7, that telecommunications perform an essential role in the maintenance of Canada's identity and sovereignty and that Canadian telecommunications policy has as its objectives the following:
(1) to facilitate the orderly development throughout Canada of a telecommunications system that serves to safeguard, enrich and strengthen the social and economic fabric of Canada and its regions;
(2) to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada;
(3) to enhance the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications;
(4) to promote the use of Canadian transmission facilities for telecommunications within Canada and between Canada and points outside Canada;
(5) to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective;
(6) to stimulate research and development in Canada in the field of telecommunications and encourage innovation in the provision of telecommunications services;
(7) to respond to the economic and social requirements of users of telecommunications services; and
(8) to contribute to the protection of the privacy of persons.
In addition, the Act provides the Commission with four major new powers to determine which entities and services are to be regulated and which are not. The Commission can exempt classes of carriers from the application of the Act; it can, to varying degrees, forbear from regulating certain types of services; it can order regulated carriers to bring certain types of services (generally, monopoly services) offered by an affiliate into regulated operations; or it can order a regulated carrier to cease providing competitive services. The Act also provides the tools necessary to allow the Commission to alter the traditional manner in which it regulates (i.e., to depart from rate base rate of return regulation).
C. The Proceeding
In Public Notice 92-78, the following carriers were made party to the proceeding: AGT Limited (AGT), BC TEL, Bell Canada (Bell), The Island Telephone Company Limited (Island Tel), Maritime Tel & Tel Limited (MT&T), The New Brunswick Telephone Company Limited (NBTel) Newfoundland Telephone Company Limited (Newfoundland Tel) and Northwestel Inc. (Northwestel). The Commission directed others wishing to participate as parties to the proceeding to so notify the Commission. The Commission received 98 such notifications from individual Canadians, municipalities, provincial governments and other organizations.
The Commission stated that persons who wished to comment on relevant issues, but who did not wish to participate actively in the proceeding, could do so by writing to the Commission any time prior to the completion of the oral public hearing.
On 13 April 1993, 30 parties filed submissions setting out specific proposals to change the current regulatory framework, together with supporting information. These parties were: AGT; Alliance of Canadian Cinema, Television and Radio Artists (ACTRA); Association of Competitive Telecommunications Suppliers (ACTS); Association des Consommateurs du Québec (ACQ); Allarcom Pay Television Ltd. (Allarcom); British Columbia Public Interest Advocacy Centre, on behalf of B.C. Old Age Pensioners' Organizations, Council of Senior Citizen's Organization, West End Seniors' Network, Senior Citizens' Association, Federated Anti-Poverty Groups of B.C. and Local 1-217 IWA Seniors (BCOAPO et al); Canadian Association of Broadcasters (CAB); Canadian Business Telecommunications Alliance (CBTA); Canadian Cable Television Association (CCTA); Canadian Daily Newspapers Association (CDNA); Canadian Federation of Independent Business (CFIB); Canadian Independent Telephone Association (CITA); Canadian Satellite Communications Inc. (Cancom); Canadian Satellite Users Association (CSUA); Changing Concepts of Time (CCOT); Competitive Telecommunications Association (CTA); Director of Investigation and Research, Bureau of Competition Policy (the Director); Gatling Communications Inc.; National Anti-Poverty Organization (NAPO); Northwestel; Québec-Téléphone (Québec-Tel); Government of Saskatchewan (Saskatchewan); Smart Talk Network (STN); Sprint Canada Inc., formerly Call-Net Telecommunications Inc. (Sprint); Stentor Resource Centre Inc. (Stentor) on behalf of BC TEL, Bell, Island Tel, MT&T, NBTel and Newfoundland Tel; Télécommunications Inter-Cité 2000; Telecommunications Terminal Systems (TTS); Telecommunications Workers' Union (TWU); Unitel Communications Inc. (Unitel) and the University of Toronto.
The procedure established in Public Notice 92-78 provided for a full interrogatory process, including the filing of requests for further responses and for disclosure. On 10 August 1993, the Commission issued a determination with respect to such requests, directing that any further information required by its ruling be filed by 27 August 1993. In addition, the Commission permitted parties to file, by 17 September 1993, any revisions to their submissions of 13 April 1993 resulting from positions or proposals advanced by other parties or as a result of changes in circumstances (for example, the passage of the Act).
The oral public hearing took place from 1 November to 9 December 1993, before Commissioners Louis R. (Bud) Sherman (chairman of the hearing), David Colville, Yves Dupras, Gail Scott, Peter Senchuk and Sally Warren. The following parties appeared or were represented at the hearing: AGT, ACTRA, Allarcom, BCOAPO et al, Government of British Columbia (British Columbia), CAB, Cancom, CBTA, CCOT, CCTA, CDNA, CTA, the Director, Fédération des Consommateurs du Québec and ACQ (FNACQ), Mr. Wilfred Golbeck, Government of Ontario (Ontario), Gouvernement du Québec (Quebec), NAPO, Northwestel, Québec-Tel, Rogers Cable T.V. Limited (RCTV), Syndicat canadien des communications de l'énergie et du papier (SCEP), Sprint, Stentor and Unitel.
Examination of the witnesses was followed by the presentation of oral final argument. Parties were also given the option of filing written final argument, as a supplement to their oral submissions. Final written argument was filed on 17 January and reply argument was filed on 7 February 1994.
II GENERAL FRAMEWORK
A. Scope of Regulation
1. Regulatory Principles
The record of this proceeding includes very detailed proposals from a variety of parties on how best to adapt the existing regulatory framework to respond to technological change, competition and industry convergence, in a manner that is consistent with the objectives set out by the Commission in Public Notice 92-78 and with the policy objectives of the Act.
Many parties proposed detailed alternatives to the Commission's existing regulatory framework. While these proposals covered a wide range of matters including forbearance, unbundling of access facilities and services, convergence and rate rebalancing, there was a general consensus that, in so far as the structure of regulation was concerned, the Commission should replace traditional rate base rate of return regulation with regulation that focuses on price rather than earnings. Parties varied on the form and timing of the introduction of price regulation.
There were four broad structural alternatives proposed for consideration, best exemplified by the proposals of Unitel, AGT, Stentor and BCOAPO et al. Parties, in general, tended to support or make proposals similar to one of these four broad models, or parts of them.
Unitel advocated a detailed form of price cap regulation similar to that which applies to AT&T and local exchange carriers in the United States. Unitel's proposal involved placing monopoly and competitive services in a number of categories (baskets) reflecting differences in the degree of competition or substitutability among services. In competitive service baskets, price floors would apply, in addition to price caps. Moreover, only price changes within a pre-set range (band) would receive swift approval. Unitel argued that this type of price cap regulation is necessary in order to deal with incentives for telephone companies to abuse the market power arising from their vertically integrated nature (for example, to cross-subsidize) or to leverage market power in competitive markets. In the latter case, competitors were concerned that, where there were barriers to entry in long distance markets, the telephone companies could keep rates higher, and obtain proportionately more contribution from subscribers, than would be the case if such markets were fully competitive; thus, they would be able to underprice in more competitive markets.
Stentor and AGT also supported the adoption of price caps, but only after a period during which the subsidy from long distance services (i.e., contribution) needed to cover the costs of local/access services (i.e., the local/access shortfall) would be reduced through rate restructuring. Stentor's and AGT's price cap approach also differed from that of Unitel and other competitors in that most competitive services would not be subject to price cap regulation. Rather, AGT and Stentor proposed that the Commission forbear from regulating competitive services or, at a minimum, apply streamlined regulation. AGT also proposed that the Commission forbear from regulating optional local services.
While both Stentor and AGT proposed adopting price caps after rate restructuring, they differed with respect to the approach to restructuring and the form of regulation to apply during the transition to price caps.
Stentor proposed a three-year transitional regime that would combine earnings regulation for services with monopoly or bottleneck attributes (utility services) with forbearance for competitive services. Under its proposal, the existing rate base would be split into two segments, Utility and Competitive (the split rate base approach). The Utility segment would comprise mainly monopoly local and access services, including bottleneck services provided to competitors, and would continue to be subject to earnings regulation during the transitional period.
Stentor proposed a proceeding to allocate revenues and costs to the Utility and Competitive segments (split rate base proceeding).
Stentor also proposed the introduction of a Carrier Access Tariff (CAT) that would be used as the basis to recover contribution and network access costs from competitors and from the telephone companies' competitive services.
Initially, the CAT would be a major source of revenues for the Utility segment. Under Stentor's proposal to restructure rates, the contribution component of the CAT would be reduced annually over a three-year period, until the contribution per minute for long distance traffic was closer to per-minute charges in the United States. This reduction in contribution would have two effects: (1) it would allow long distance rates to decline, since the contribution or subsidy requirement would be lessened, and (2) it would create pressure to increase local rates, since a reduction in CAT revenues would amount to a reduction in Utility revenues. The actual impact of this reduction on the Utility segment's earnings would depend on the offsetting impact of productivity improvements, traffic stimulation and growth in optional local revenues. Stentor contended that the need for local rate increases would vary by company and that there would be an initial requirement for company-specific multi-year revenue requirement proceedings to determine the annual contribution reductions and the offsetting local rate increases.
AGT proposed the adoption of an end-user access charge (EAC) that would be paid by all subscribers on a monthly basis in order to eliminate the subsidy. AGT supported a rapid shift from earnings/cost-based regulation. It proposed to use the Commission's Phase III methodology, on a one-time basis, to identify the local/access shortfall. That shortfall target would then be reduced by forecast net revenues from optional local services, and that amount would then be used as the basis for establishing the size of the annual increases to the EAC that would be required to eliminate the shortfall by the end of a three to five year transition period.
Once the EAC schedule had been established, earnings regulation would be replaced by price regulation on specific services and by a guaranteed price constraint, in the form of a price index, on a representative basket of toll and essential local services consumed by residence and small business users. Thus, shareholders would assume the risks and rewards of the plan. AGT also committed itself to using revenues generated by the EAC increases to reduce rates for basic long distance services. Finally, AGT proposed to implement an optional, non-means-tested lifeline service to be offered only to single-line residential customers to offset the impact of its proposal to rebalance rates by means of the EAC.
BCOAPO et al submitted that, short of divestiture, no regulatory mechanism can provide adequate protection against potential abuses resulting from the telephone company's control of bottleneck facilities. BCOAPO et al proposed divestiture in order to create a financially independent wholesale monopoly company, which would deal at arm's length with competitive telecommunications activities. Monopoly facilities wholesalers would own and operate all monopoly access and local facilities, excluding interexchange transmission facilities or any switching equipment above a Class 5 office. Competitive service retailers would own all non-monopoly facilities and would provide all services competitively, including access and local services, either on their own facilities (e.g., cable or cellular facilities) or on facilities leased from a monopoly facilities wholesaler.
As noted above, most parties tended to support some variant of the approaches described earlier. NAPO, however, strongly supported the retention of some form of incentive earnings regulation. NAPO suggested that, under price caps, it would be difficult to establish the appropriate productivity factor. NAPO argued that, absent some form of earnings oversight, companies could earn excess profits if productivity were greater than forecast. In NAPO's opinion, profit levels are the best indicator of just and reasonable rates.
2. General Conclusions
a. Introduction
The digital universe promises a range of telecommunications services seemingly limited only by the rate of diffusion of new technology, access to capital and the imagination of users. It is important, in such a dynamic environment, that regulation encourage, rather than impede, the provision of efficient, innovative and affordable services.
Regulation must also be flexible and responsive to change, unencumbered by objectives based on static definitions of markets or services. In today's environment, even the definition of basic service is evolving and will vary depending on the perspective of the user. At one time, plain old telephone service (POTS) was synonymous with basic service; now, the demands of subscribers are so diverse that a POTS infrastructure would be woefully inadequate to serve the needs of most. Increasingly, those needs encompass custom calling features or call management services to protect privacy and to achieve desired efficiencies, such as those obtained through an enhanced ability to send and receive messages any time and anywhere. Moreover, computer communications, once considered enhanced or ancillary to the voice network, is now an essential building block of the public infrastructure, particularly as computers, modems and facsimile machines extend into the residence market and as home-based businesses grow in number. As a result of modernization of switching and signalling facilities, new and innovative services that expand choice and produce new revenues are being introduced. As interactive or transactional services become increasingly available, access to these and other information services may also come to be considered essential by many subscribers.
In brief, telecommunications today transcends traditional boundaries and simple definition. It is an industry, a market and a means of doing business that encompasses a constantly evolving range of voice, data and video products and services. Telecommunications services range from basic access services connecting subscribers within a physical area, to multi-media applications where virtual communities that transcend geographic boundaries are created among users with common interests. It is this evolution of telecommunications that has given rise to visions of an information highway linking Canadians with each other and the world.
In this context, the Commission notes that the Act contemplates the evolution of basic service by setting out as an objective the provision of reliable and affordable telecommunications, rather than merely affordable telephone service.
In this Decision, the Commission has developed a regulatory framework that will assist in the development of a telecommunications infrastructure that will allow all Canadians, not just a select few, ubiquitous and affordable access to an increasing range of competitively provided basic and advanced information and communications products and services to serve increasingly diverse user requirements. In this environment, users should have the opportunity to choose whatever package of services and whichever suppliers best fit their particular needs. The realization of such a vision demands a reduction in technical, regulatory and economic barriers to entry. Thus, the framework established in this Decision places greater reliance on market forces and attempts to ensure that regulation, where required, is effective. Market forces allow for greater choice and supplier responsiveness and ensure that user applications, not regulators, drive supply considerations. Regulation is necessary to ensure that service is affordable, where market forces are not sufficient to provide that assurance, and to address issues of undue preference and unjust discrimination that arise due to the vertically integrated nature of the telephone companies and their dominance in some markets.
Finally, the Commission notes that the framework adopted in this Decision applies primarily to AGT and the other Stentor companies that were party to this proceeding (AGT and the other Stentor companies). The Commission has adopted a different regime for Northwestel. This is discussed in Part VI, Section H, of this Decision.
While the Manitoba Telephone System (Manitoba Tel) is a Stentor member that is subject to regulation by the Commission, it did not become subject to the Commission's jurisdiction until 31 December 1993. Accordingly, it was not made party to this proceeding and is not subject to this Decision. Manitoba Tel is directed to provide comments, within 45 days, as to which, if any, aspects of the framework for AGT and the other Stentor companies set out in this Decision should not apply to it.
As of 26 April 1994, the independent telephone companies in Canada came under the Commission's jurisdiction. In this proceeding, CITA, on behalf of many of these companies, argued that the Commission should take account of the particular circumstances of these companies in developing its regulatory framework. The Commission is currently working with the independents to create a regulatory structure that recognizes their particular needs, and will determine the most appropriate structure through separate processes.
b. Summary of Decision
The Commission's regulatory framework, as set out in this Decision, is based on a number of interrelated initiatives which, taken as a package, are designed to achieve the objectives described herein. Consistent with the objectives of the Act, the Commission intends to place greater reliance on market forces and, accordingly, has taken initiatives to increase flexibility for the telephone companies on the one hand, while removing barriers to entry and adopting conditions to safeguard competition on the other.
Meaningful regulatory reform cannot be undertaken without a significant reduction in the subsidy that users of long distance services are currently providing in order to keep rates for local/access service low. In the opinion of the Commission, the current subsidy is much larger than necessary to maintain affordable service. Accordingly, as discussed in Section B below, the Commission is initiating, effective 1 January 1995, a process of rate rebalancing. This process will entail three annual increases of $2 per month in rates for local service, with corresponding decreases in rates for basic toll service. This process is necessary if Canadians are to benefit fully from increased competition and if bypass opportunities and the potential for uneconomic entry are to be reduced. Moreover, rate rebalancing is necessary to increase equity for those users who are bearing the burden of a subsidy that is larger than required to achieve universal service objectives.
In establishing a rebalancing regime, the Commission considers that all consumers of long distance services, not just high-volume users, should benefit from offsetting long distance rate reductions. Accordingly, reductions in contribution obligations for the telephone companies will be used to reduce rates for basic toll services, thereby also directly benefitting low-volume residential and business users. Further, in order to reduce current contribution levels at a faster rate and to create a more equitable distribution of the subsidy, as discussed in Part V, the Commission will initiate a proceeding to apply contribution to other services using switched access, not only to long distance voice services. By reducing the contribution charge through rebalancing and by having more services contribute to the remaining shortfall, the Commission considers that it can better balance economic and social requirements, while creating a sustainable basis for the public infrastructure and a climate for reduced regulation and increased reliance on market forces.
The key concern of competitors in this proceeding has been the potential for telephone companies to abuse market power arising from their vertically integrated structure and historically dominant market position. As well, parties have expressed concerns about the potential of the telephone companies to over-invest under earnings regulation, or to cross-subsidize competitive activities from monopoly activities. In this Decision, the Commission has taken a number of steps to address these concerns.
First, the Commission has decided to replace earnings regulation with price regulation. As discussed in Section F, price regulation, rather than earnings regulation, is more appropriate for regulating utility services in an increasingly competitive environment. However, price regulation will not produce anticipated benefits such as reduced regulation and increased incentives to reduce costs until rates are closer to costs. Accordingly, the Commission has decided to replace earnings regulation with price caps effective 1 January 1998. This will allow time to reduce the contribution from long distance services to the local/access shortfall.
During the transition to price caps and a more competitive market structure, regulation must ensure that the interests of subscribers, shareholders and competitors are balanced. For the transition, it will be important to have in place a regulatory system that monitors earnings, reduces contribution significantly, recognizes concerns about equity and affordability, and contains safeguards to deal with vertical integration. Accordingly, the Commission, as discussed in Section F below, is adopting a split rate base regime, similar to that proposed by Stentor, to take effect at the beginning of the transitional period. Only services in the Utility segment will remain in the regulated rate base. Services in the telephone companies' Competitive segment will no longer be subject to earnings regulation.
The Commission is also adopting a CAT to ensure greater equity in terms of how telephone companies and competitors contribute to the subsidy and to the recovery of the costs of network access. The CAT will include contribution, start-up cost recovery and bottleneck service charges applicable to the telephone companies' and competitors' traffic. In order to prevent anti-competitive pricing in the long distance market, telephone company long distance services must be priced to recover all underlying costs and charges for contribution, start-up cost recovery and bottleneck services (price imputation test). The Commission considers that the split rate base, CAT and price imputation test will reduce incentives and opportunities to cross-subsidize and engage in anti-competitive pricing. Moreover, the establishment of the split rate base and CAT will break the link between reductions in long distance rates and pressure to increase local rates. Competitive safeguards are discussed in greater detail in Section D and Part IV below.
In the opinion of the Commission, regulation should focus primarily on services supplied on a monopoly (or near-monopoly) basis or in markets that are not yet workably competitive. This includes access to bottleneck or other Utility services by competitors. Where markets are sufficiently competitive, market forces are generally preferable for governing the behaviour of telecommunications service providers. As set out in Part III, the Commission is forbearing from regulating the sale, lease and maintenance of terminal equipment. While it considers that it would be premature to forbear from regulating interexchange services, it considers that the framework set out here may allow forbearance in the not too distant future. Until such time, the Commission has set out tariff criteria in Part IV of this Decision that will permit faster turnaround for telephone company tariff applications. The Commission expects that these criteria and the safeguards put in place in this Decision will permit a more streamlined approach to regulation in these markets during the transition to forbearance.
In order to increase competition in all markets, the Commission (as discussed in Section E below) has determined that barriers to entry, as well as restrictions on the participation of telephone companies in emerging information and transactional telecommunications service markets, should be removed. In order to provide greater choice to subscribers and service providers in the provision of telecommunications and information services, restrictions on local competition will be removed and open access and interoperability principles among networks will be promoted. However, as discussed in that Section, while entry will be promoted in a variety of markets, the Commission is not in a position in this proceeding to determine if telephone companies should be permitted to hold broadcasting licences.
B. Movement of Rates Towards Costs
1. General
One of the fundamental policy issues in this proceeding, as in past proceedings, concerns reducing the subsidy currently directed towards the recovery of the costs of providing subscribers with access to the switched network. This is perhaps the most difficult and contentious issue the Commission has had to address in this proceeding. In the opinion of the Commission, meaningful regulatory reform, increased reliance on market forces and the competitive development of all markets require action to reduce this subsidy by a program of rate rebalancing.
Proponents of the closer alignment of rates and costs stressed the economic benefits of such an approach. The Commission agrees with the arguments of AGT, the Director and others that pricing based on costs is necessary in order to improve economic efficiency, deter uneconomic entry, send proper investment signals and ensure that competition in local markets is not precluded by below-cost pricing. AGT, CBTA and the Director all noted the inefficiencies associated with a pricing system that subsidizes users regardless of need. CBTA argued that this amounts to a form of taxation and that rates priced well above costs in order to fund such a general subsidy cannot be considered just and reasonable.
While some parties underlined the importance of cost-based pricing to economic welfare, other parties expressed significant concerns related to rebalancing in general and the proposals of Stentor and AGT in particular.
Unitel argued that the extent of the rate increases proposed by Stentor and AGT was inconsistent with the competition principles established in Competition in the Provision of Public Long Distance Voice Telephone Services and Related Resale and Sharing Issues, Telecom Decision CRTC 92-12, 12 June 1992 (Decision 92-12), and with objectives related to affordable service. Moreover, Unitel, Sprint and others argued that there were serious cost misallocations in Phase III, resulting in an overstatement of the need to rebalance.
NAPO also stressed the importance of examining the underlying cost allocations before considering rebalancing. NAPO argued that economic welfare arguments obscure the lower usage of toll service by low-income subscribers and the proportionately greater impact on such subscribers of any increase in the price of local services.
Quebec submitted that there is no requirement for a rate rebalancing procedure. Quebec suggested that reducing the number of rate groups would reduce the local/access shortfall and that eliminating the lower rate groups would result in a more efficient and equitable distribution of the total subsidy. Quebec suggested that Phase III was the best tool for establishing the size of the shortfall and indicated that a review of Phase III should be undertaken to restore consensus about the validity of the results. In Quebec's opinion, constant productivity improvement is one way to reduce the local/access shortfall, although not a "quick fix" for the problem.
Ontario considered that a regulatory framework should lead to a reduction in Canadian long distance rates and a reasonable degree of comparability between Canadian and American long distance rates, for all customers. Ontario also noted difficulties in making accurate comparisons between Canadian and U.S. rates. While Ontario saw a need to reduce both contribution and long distance rates, it also considered that the new framework should prevent local rates from increasing substantially faster than the rate of inflation in consumer prices.
While Ontario supported a review of Phase III, it argued that there has been no challenge to the belief that long distance services are provided at prices that substantially exceed costs, while the local/access cost categories fail to cover their costs.
In the opinion of the Commission, the subsidy from long distance to local service is substantially larger than necessary to maintain affordable access to telecommunications and imposes an inequitable and unnecessary burden on many long distance users. Moreover, since contribution amounts to a tax on information-intensive enterprises, it is important that it not create a much greater burden than is necessary to promote affordable access.
The Commission notes that the objective under the Act of affordable telecommunications applies to long distance services, as well as local services, and is of the view that maintaining contribution and toll rates at higher levels than necessary would be inconsistent with the achievement of that objective. While the Commission expects that productivity improvements and revenues from new optional services will help to reduce the local/access shortfall, these factors alone are not sufficient to bring the subsidy down to a more appropriate level.
Rebalancing can foster the establishment of conditions necessary to ensure the competitiveness of Canadian telecommunications. Such conditions include ensuring sustainable competition in all markets, through open access principles and pricing policies that provide incentives to users and service providers to conduct their business over Canadian networks. Improper pricing policies or other barriers to entry can result in the misallocation of resources, a reduction in choice of supply in certain markets and the suppression of demand in others, resulting in, among other things, increased costs to information-intensive enterprises and barriers to communications among Canadians. If telecommunications is to meet its potential as an engine of economic growth and serve as a vehicle for economic, social and intellectual transactions, then the underlying structure should be as economically efficient as possible, recognizing of course that unrestrained adherence to economic efficiency arguments could have an affect on affordability.
The Commission notes that the higher the subsidy, the greater the incentive for bypass becomes, either through the U.S. or through the use of dedicated facilities that might well be uneconomic and would not be as attractive to users if contribution were not a cost of switched access. The economic incentives and opportunities to engage in bypass are obvious, and in an open-market economy, firms will be increasingly under pressure to minimize costs by whatever means possible, including diverting traffic from the public network. If larger users do avoid the public network, then the remaining subscribers may be faced with higher costs for reduced levels of service.
In the opinion of the Commission, the benefits of a more efficient regulatory framework based on price regulation cannot be fully realized without bringing rates substantially closer to costs. In the absence of rebalancing, the size of the local/access shortfall will remain substantial for the foreseeable future. This would require a process that retained many of the elements of rate of return regulation in order to establish contribution rates.
The Commission would agree with arguments by some parties that the benefits of rate rebalancing will not be evenly distributed. Under the current system, subscribers that are heavy toll users are required to pay a disproportionately higher level of contribution, in aggregate, to subsidize access by other subscribers, irrespective of the latter's need or ability to afford access. As a result, heavy toll users will tend to benefit more from rate rebalancing than low-volume users. At the same time, the Commission recognizes that the low-volume users who are less likely to benefit from rebalancing may also be low-income users.
In the opinion of the Commission, the objectives under the Act of promoting the use of Canadian facilities and making telecommunications affordable in all regions of Canada are intrinsically linked. The regulatory framework in this Decision attempts to balance economic efficiency and competitiveness with social objectives, including affordability, as required by the Act. The issue of affordable service is discussed further in Section C below.
The Commission considers that to engage either in full rebalancing as proposed by AGT or in the reduction of the CAT by a pre-set amount as proposed by Stentor would require a detailed costing/forecasting exercise to derive the level of local rate increases required for each company to reach these targets. Not only would this be a highly speculative exercise, given problems of multi-year forecasting, it would not take adequate account of social objectives. In the opinion of the Commission, a fairer and more efficient approach is to establish at the outset the extent and duration of rate rebalancing to be undertaken.
Moreover, the Commission considers that equity between large and small toll users is best achieved, and the interests of competitors in the long distance market more fairly addressed, if toll rate reductions under rate rebalancing are directed at the basic toll services used by low-volume residential and business customers. The Commission notes that, unlike large volume toll services, the rates for these toll services have not declined significantly since Decision 92-12. In the Commission's view, if the general body of subscribers are to pay higher proportionate local rates to establish a more efficient, equitable and sustainable system, the public interest is better served by having the benefits of lower long distance prices also flow to the general body of subscribers.
In light of the above considerations, the Commission finds it reasonable to implement a plan that will limit the impact of local rate increases associated with rate rebalancing to three increases of $2 per month, to be implemented over the next three years. Accordingly, AGT and the other Stentor companies are directed to file rate rebalancing proposals (local rate increases and long distance rate reductions) in the form of tariff applications, to take effect 1 January for each of the years 1995, 1996 and 1997. The rate rebalancing proposals for each year shall be filed with the Commission by no later than 1 December of the previous year. The process for establishing any general revenue requirement for the Utility segment during the transition period is addressed in Section F below.
The Commission would expect to give expeditious approval to the rate rebalancing proposals, subject to the criteria and requirements set out below and in Part V, Section E.2, and the provision of sufficient information to demonstrate that these criteria and requirements have been met.
Coincident with the filing of the rate rebalancing proposals, AGT and the other Stentor companies are directed to file revised contribution charges reflecting the Utility segment revenue increase flowing from the local rate increases. This is discussed further in Part V and Part VII below.
While the Commission recognizes that its rate rebalancing approach will leave some telephone companies with a higher proportionate shortfall than others, it notes that there will be continuing incentives to reduce costs and increase revenues from new markets. Moreover, the proceeding to implement price caps, discussed in Section F and Parts V and VII below, will provide parties with the opportunity to determine how to manage residual contribution requirements in a price cap environment.
Finally, the Commission has noted the concern of parties that costs may be misallocated, effectively overstating the extent of the shortfall. In Review of Phase III, Telecom Public Notice CRTC 94-16, 16 March 1994 (Public Notice 94-16), the Commission initiated a Phase III review to examine these concerns. The Report of the Inquiry Officer in that proceeding was released concurrently with this Decision.
2. Local Rates
Effective 1 January in each of the years 1995, 1996 and 1997, the monthly rates for primary exchange services are to be increased by $2. However, if a company can demonstrate to the Commission that rates for either business or residence customers for a particular service in a particular rate group are already compensatory, the company may propose not to increase those rates.
The Commission notes that these increases will be offset by CAT reductions, as described in the next Section.
3. Long Distance Rates
As explained more fully in Section F.2 below, the Commission is establishing a transitional form of regulation to apply prior to the implementation of price caps. As indicated from the above, that transition regime will include the establishment of a CAT, similar to that proposed by Stentor.
Under the Commission's rate rebalancing plan, the contribution component of the CAT must be reduced by an amount equivalent to the revenues derived from the local rate increases, as described in Part V, Section E.2, with long distance revenues being reduced by an amount equivalent to the reduced CAT expenses charged to the telephone companies' Competitive segment.
As noted above, the Commission considers that equity among large and small toll users is best achieved if reductions under rate rebalancing are applied to the basic toll services used by low-volume residence and business users.
The Commission also notes that toll reductions from rate rebalancing could have a significant impact on the competitive earnings of higher-cost Stentor members. In order to mitigate this impact, the telephone companies are directed to file, in their rate rebalancing proposals, reductions in basic toll schedules sufficient to result in an after-settlement revenue reduction, assuming no stimulation in demand due to the basic toll rate reductions, equivalent to the reduction in CAT expenses charged to the Competitive segment. In the Commission's view, this approach will adequately address any significant impact on the competitive earnings of the higher-cost Stentor members. The basic toll revisions must also meet the requirements for interim approval of basic toll revisions set out in Part IV, Section D, of this Decision.
The Commission notes that, while telephone company basic toll users will benefit most from the reductions in long distance rates associated with the reduction in the CAT, the telephone companies will obtain additional revenues due to stimulation resulting from the basic toll reductions. These revenues may be used to further reduce toll rates where the market dictates or to stabilize earnings in the Competitive segment. This will mitigate the impact on the telephone companies' competitive position resulting from the requirement that reductions in the CAT obligations be applied to basic toll rates. The Commission notes in this regard that competitors will be able to target the benefits they receive from CAT reductions to any market segments, as they see fit.
C. Affordable Service
Section 7 of the Act states that a primary objective of the Canadian telecommunications policy is to ensure that affordable, high quality telecommunications service is accessible to Canadians throughout the country. As noted above, the first principle for ensuring choice, diversity and lower prices in the long run is to emphasize economically efficient pricing and greater reliance on market forces. At the same time, regulation is necessary to protect the interests of low-income subscribers and those in markets to which the benefits of competition may not extend.
Many parties to the proceeding indicated that universality had already been achieved, noting that Canada's telephone penetration rate of over 98%, is one of the highest in the world.
Stentor noted that Canada's high penetration rates had been achieved with average monthly rates for local service ranging between $11.00 and $22.00, and submitted that any increases within that range would maintain current penetration levels. Stentor was also of the opinion that innovative optional services, productivity improvements and a reduction in toll bills would serve to keep total consumer expenditures on telephone service low, even if local rates increase.
NAPO and BCOAPO et al expressed the view that, as demand for basic telephone service is inelastic, penetration rates are not necessarily a good indicator of affordability. According to these associations, subscribers would incur other financial hardships as a result of paying higher telephone bills.
NAPO argued that any significant amount of rate rebalancing would leave the majority of consumers worse off, due to the fact that a small number of subscribers consume a disproportionately large amount of long distance service.
The Director stated the view that rate restructuring is unlikely to significantly affect the goal of universality, given the extremely low percentage of household income spent on local telephone service, relative to the value derived, and the offsetting effects of lower long distance rates on subscribers' monthly bills.
Stentor indicated that, should market-based pricing prove to have a negative impact on low-income subscribers, its members would be prepared to work with government authorities to design and implement a targeted subsidy program.
In AGT's view, competition provides the best protection for the interests of consumers. However, in the transitional period, a mechanism to ensure affordable local/access service would be required. AGT proposed the introduction of an optional, non-means-tested lifeline service available only to residential customers with a single telephone line. AGT considered the notion of means-testing inappropriate and fraught with problems, such as the need to define socially appropriate criteria for eligibility. AGT's proposed lifeline service would feature a two-part tariff: (1) a flat monthly rate consisting of a fully phased-in EAC and a lifeline charge for local usage that would provide a limited number of local calls, and (2) a charge per call for all daytime and early evening calls over the established limit, with free or discount calling during the late evening and overnight.
In order to ensure price stability during the transition period, AGT made the commitment that the total price an average residential or single-line business customer would pay in a given year for a representative basket of toll and essential local services would be the same or lower than the price that would have been paid for the same basket of services in the previous year.
AGT would also, at a minimum, maintain the penetration rate for essential local service at the level prevailing when lifeline service was introduced. The company indicated that this could be accomplished by monitoring Statistics Canada data on penetration rates and by conducting research on penetration rates on a more frequent basis. Prices and other terms and conditions of the service (such as the "lifeline charge", the free call allowance, and peak and off-peak rates for calls exceeding the free-calling threshold) would be adjusted, as required, to affect overall demand for the service in a manner consistent with AGT's penetration rate commitment.
BCOAPO et al and NAPO were opposed to means-tested programs. Further, neither association supported AGT's proposal. BCOAPO et al stated that lifeline was merely a local measured service that would help low-volume users, as opposed to low-income users. According to NAPO, poor people would be dissuaded from using the lifeline service, as AGT had indicated it would raise rates if too many people subscribed to the service.
From Ontario's point of view, the implementation of a means-tested subsidy program would not be in the public interest. However, Ontario stated that it would be beneficial to encourage telephone companies to introduce compensatory pricing packages for local and long distance service that would promote affordability for low-income or low-volume users.
In the Commission's view, penetration is the most reliable indicator of affordability. However, the Commission agrees that many low-income subscribers, particularly the majority who do not make substantial use of long distance service, will have less disposable income after rate rebalancing. For this reason, the Commission is constraining the increase on the local side to a specific dollar amount, even though that may not be enough to fully eliminate the shortfall. Moreover, rate rebalancing is being implemented over a transitional period to further mitigate the impact on subscribers.
However, taking into account both offsetting toll rate reductions and the relatively small proportion of income that low-income subscribers spend on telecommunications, the Commission concludes that a lifeline service is not required at this time. In the opinion of the Commission, controlled rebalancing and initiatives to reduce costs and increase the number of contributing minutes will contain upward pressure on local rates and thus lessen the need for lifeline service or special funds for high-cost areas. For many subscribers in lower rate groups, the local increases provided for in this Decision will result in rates for primary exchange service below those already paid by subscribers, including low-income subscribers, in higher rate groups. Moreover, in considering affordability, it is also important to consider the subscriber's total bill, and not just on one element of that bill. Since revenues from rate rebalancing will be directed to reducing rates for basic toll service, rebalancing will result in total bill increases that will be less than the local bill increases for most subscribers. In fact, many subscribers will see their total bills reduced.
While the Commission does not consider a lifeline program necessary at this time, it does consider AGT's optional, non-means-tested lifeline service to be interesting and innovative, and encourages the telephone companies to introduce optional packages that provide greater choice for subscribers, particularly for low-volume users. In the Commission's opinion, local competition may also increase calling options in the longer run.
The Commission notes that, if a lifeline program is ever necessary, a company-funded approach, as proposed by AGT, would be preferable to and more practical than a government-funded program. While the Commission also considers it preferable to avoid means-tested service, it has not been convinced that it is possible to avoid it, except through approaches like AGT's that may curtail usage by low-income subscribers.
D. Approaches to Vertical Integration
In this Decision, the Commission has recognized special problems that may arise due to the vertical integration of the telephone companies and has developed a variety of initiatives to address such concerns. Dr. Blumenfeld, on behalf of Unitel, noted that the introduction of competition in telecommunications encounters a fundamental problem where the incumbent firm is vertically integrated and controls an upstream monopoly product, while participating in the downstream competitive market. In telecommunications, the monopoly product (the local exchange network) is, as a practical matter, the sole source of ubiquitous switched distribution to end users, and is, therefore, an essential input, one on which both the vertically integrated firm and its competitive market rivals depend.
The Commission agrees that the telephone companies have both the incentive and the opportunity to use their vertically integrated structures to lessen competition by exploiting control over bottleneck facilities.
Another potential abuse that may arise from vertical integration involves cross-subsidization through over-allocation of the cost of shared facilities to the Utility segment or the transfer of revenue from the Utility to the Competitive segment. Such activities can permit the vertically integrated telephone company to artificially price its competitive services below cost in order to harm competitors, while burdening its monopoly subscribers with the cost of its competitive operations. Moreover, under the existing regulatory framework, the telephone company may not suffer financial losses, even in the short term, because it may be able to recover losses from monopoly subscribers.
The Commission notes that the proposals of both Stentor and AGT recognize these incentives and attempt to address related concerns through initiatives such as open access and unbundling and through transitional regimes aimed at reducing opportunities for cross-subsidy.
Some parties contended that only structural separation or divestiture can adequately address problems of vertical integration. CBTA and BCOAPO et al considered that, as long as telephone companies remain vertically integrated, there will be opportunities for anti-competitive conduct. Both parties proposed structural separation of monopoly and competitive activities. CBTA considered that, if the telephone companies provided competitive services through separate affiliates, there would be no need to regulate such services. BCOAPO et al proposed that the industry be restructured, through divestiture, to create separate monopoly local/access facilities companies that would provide a range of services, including local services. In effect, regulation would be directed at a monopoly provider that would wholesale facilities to service suppliers, but not compete with them.
According to CBTA, structural separation reduces the opportunity for, and enhances the ability to detect, inappropriate self-dealing and cross-subsidies, while requiring much less regulatory scrutiny.
Unitel, while submitting that only divestiture can completely eliminate the incentives of the telephone companies to use their bottleneck facilities to the disadvantage of competitors, did not propose divestiture because of the cost and disruption inherent in such a step. Instead, Unitel asked the Commission to adopt a "divestiture standard" by strengthening existing safeguards and implementing new ones designed to have the same effects as divestiture.
Stentor submitted that the evidence in this proceeding does not support the implementation of structural separation. Furthermore, in Stentor's opinion, its proposal of cost separation, through splitting the rate base into Utility and Competitive service segments, is more economically efficient than structural separation. In commenting on Unitel's proposed "divestiture standard", which is intended to replicate the effects of divestiture, Stentor stated that it would amount to "virtual divestiture" and would therefore result in the same economy-wide drawbacks associated with structural separation. Further, both Stentor and AGT submitted that Unitel's proposed "standard" should be rejected because it is based on the faulty presumption that the Stentor companies' economies of scope give them an unfair competitive advantage. According to AGT's witness, Dr. Alfred Kahn, there is nothing unfair or anti-competitive about an advantage resulting from economies of scope; rather, striving for such advantages is the essence of competition.
The Commission considers that there is no compelling evidence to support the dismantling, through divestiture, of the telecommunications system in Canada. There are better methods for dealing with problems stemming from the vertically integrated structure of the Stentor companies. Divestiture could be damaging to the competitiveness of Canada in global markets and could dampen the emergence of integrated services evolving from the convergence of the communications, information, computing and entertainment industries. Similarly, the Commission is not convinced that structurally separate affiliates are necessary, given the approaches adopted in this Decision. While such a solution does have merit in a new and distinct market such as wireless, it is generally a static solution that reduces economies of scope and still requires regulation to oversee intercorporate transactions.
Rather, in establishing the new framework, the Commission has incorporated other, more flexible, regulatory alternatives that should be as effective as structural separation in safeguarding against anti-competitive abuses associated with the vertically integrated structure of the Stentor companies, but without many of the associated problems.
This framework will, as discussed below, deal with potential anti-competitive problems, while allowing the Commission to significantly reduce regulation in some markets and, in other cases, more quickly reach a point where it can forbear.
First, as discussed in Section F, the Commission intends to split the rate base into Utility and Competitive segments and adopt a CAT. Under the split rate base, only Utility services will remain subject to earnings regulation. Further, through the CAT, telephone companies will be required to contribute explicitly towards the Utility shortfall and the costs of network access based on pre-established charges. This will break the link between toll rate reductions and potential local rate increases and should result in more equity between the competitors and the telephone companies' toll operations in terms of the costs and obligations associated with the Utility segment. In addition, the split rate base will reduce the potential for a cross-subsidy from monopoly to competitive services.
Second, in response to concerns about anti-competitive pricing, the Commission has established, in Review of Regulatory Framework - Targeted Pricing, Anti-Competitive Pricing and Imputation Test for Telephone Company Toll Filings, Telecom Decision CRTC 94-13, 13 July 1994 (Decision 94-13), and in this Decision, a regime that effectively sets a price floor to prevent anti-competitive pricing.
Third, the Commission will be removing many of the restrictions on competition in the local market and is directing AGT and the other Stentor companies, in Section E below, to file tariffs for unbundling and co-location. This should remove many technical and regulatory barriers to entry in all markets.
Fourth, the Commission will implement a price cap regime for the Utility segment with a commencement date of 1 January 1998, which will allow it to reduce regulatory oversight while further lessening the incentives and opportunities for vertically integrated telephone companies to cross-subsidize competitive services with revenues from monopoly markets.
Fifth, since telephone company toll reductions to offset the reductions in the CAT will be directed primarily towards low-volume residence and business users, rebalancing will not be utilized merely to target large business customers at the expense of the general body of subscribers. Contribution will be reduced to more sustainable levels, concurrent with local rate increases.
E. Reductions In Barriers to Entry
1. Local Competition
Stentor has proposed that all service providers be allowed to compete, to carry and process anything (including content and multi-media services) independent of technology, for any customer, anywhere. In final argument, it requested that the Commission find that Canadian telephone companies can play a useful role in the provision of new information services, including the provision of content, subject to such safeguards as are required to ensure furtherance of the policy objectives of both the Broadcasting Act and the Telecommunications Act. Stentor also asked the Commission to endorse an environment of open networks and multiple distribution technologies. AGT requested that, in addition to declaring that all telecommunications markets are open to competition, the Commission adopt policies promoting the development of competition in the cable television, information and entertainment services markets and remove restrictions on the participation of telephone companies in those markets.
The Commission considers that, with very limited exceptions (e.g., restrictions related to consumer safeguards), all barriers to entry in telecommunications should be removed. In addition, the Commission considers that telephone companies can play a useful role in the provision of new information services, including content-based services. However, it is outside the scope of this proceeding, conducted pursuant to the Act, to determine if telephone companies should be permitted to hold broadcast licences.
In large part, the local telephone market is already open to competitive entry by a variety of suppliers. Wireless providers may interconnect, there are minimal restrictions on resale and sharing of telephone company services, nor are there limitations on the competitive provision of private-line, data or enhanced services. Further, telephone companies face new entry by wireless service providers, cable-television systems and competitive access providers. However, prior to this Decision, the Commission has not dealt with certain key issues related to local competition in a general sense. These issues include the interconnection of wire-based (fibre, cable-television) networks to provide public local switched voice service and the termination of non-telephone-company-owned transmission facilities on the telephone company's local switch.
Stentor and AGT expressed support for local competition, subject to certain conditions. These conditions include reciprocal access to other suppliers' networks, freedom to compete in other markets and rate restructuring. Other interested parties also supported the principle of local competition. However, CCTA was of the view that local telecommunications competition should be dealt with in a separate proceeding.
In the opinion of the Commission, restrictions on entry into the local market should be removed and principles of open access, unbundling and co-location (discussed in the next Section) should be pursued. The applications and solutions required to meet the needs of users in today's environment are not always possible if entry is restricted in some markets. Users should have the flexibility to obtain solutions from any supplier or mix of suppliers. This means that barriers to entry on the supply-side of telecommunications, including those that restrict telephone companies, should be reduced. Conversely, service providers must have the means to access and serve subscribers without technical barriers to entry. Further, as discussed earlier, economic barriers created by the subsidization of basic local rates should be reduced.
The Commission is of the view that the potential exists for meaningful local competition in basic telecommunications and in many of the information-based telecommunications markets. The Commission also considers that encouraging that potential will lead to benefits, such as productivity improvements and the introduction of even more innovative services. In the short term, competition may be concentrated on access to facilities-based interexchange carriers (IXCs) and emerging information services of an interactive or transactional nature; in the longer term, as contribution is reduced and services unbundled, competition should result in the creation of switched network alternatives. What ultimately emerges will be determined by the demands of users and the willingness of suppliers to take risks. The role of the Commission should be to ensure that the right economic and technical conditions for open access are in place, while ensuring that access remains affordable wherever local markets are not workably competitive.
Consistent with the above, the Commission finds increased competition in the local telecommunications market to be in the public interest. In the following Sections, the Commission is establishing proceedings to implement unbundled tariffs and tariffs to permit co-location in order to permit increased competition. However, the Commission would be predisposed to approve applications to interconnect local systems offering local switched voice services, even prior to the approval of those tariffs.
While the Commission considers that barriers to entry should be removed, it also recognizes that in most local markets, including switched access, local channels and particularly residential services, the telephone companies will remain dominant suppliers for some time to come. Moreover, the Commission notes that, even after rebalancing, there are likely to be some residential markets where rates may remain below cost in order to address requirements for affordable services. Accordingly, the Commission considers that telephone companies should retain the obligations to serve that are set out in their current tariffs.
AGT recognized its continuing obligation to serve customers of essential local services. However, the company stated that this obligation should be contingent on its ability to recover the unique costs associated with that obligation in a manner that neither advantages nor disadvantages it in competitive markets. AGT believes that, when competitors enter the local market, there may be a need to assess explicit contribution on competitors' local services in order to maintain universal local service. Expanding the base of contributing minutes is addressed in Part V of this Decision.
2. Co-location and Unbundling
a. Co-location
Currently, all transmission facilities terminating in the telephone companies' central offices must be provided by the telephone companies. Co-location refers to an arrangement whereby customers of the telephone company can terminate their own transmission facilities in the telephone company central office. Physical co-location allows competitors to physically terminate transmission facilities in the telephone company central office. Virtual co-location allows competitors to terminate facilities at a point outside the central office, but in all material aspects provides the same service at the same rate as would physical co-location. What this means in practice is that there is no specific charge for the transmission component connecting a transmission facility terminated at a virtual co-location point to the central office. With physical co-location, space in the central office may be limited and the telephone companies may have legitimate security concerns that would restrict the ability of competitors to maintain their equipment located in the central office. Virtual co-location solves these problems by placing the termination point outside the central office.
Virtually all parties supported the concept of co-location. There were, however, some differences as to how it should be implemented. The telephone companies generally took the position that co-location should be based on negotiations, while other parties, such as Unitel and Sprint, submitted that the Commission should mandate co-location.
Stentor stated that co-location raises the following issues:
(1) the availability of suitable space;
(2) reciprocal access by the companies to bottleneck facilities of other suppliers;
(3) effective resolution of safety and security issues;
(4) full compensation for any new costs;
(5) unbundling and rational pricing of local services;
(6) increased pricing flexibility for the companies in order to respond to market conditions; and
(7) the recognition of collective agreements.
Stentor submitted that co-location should not extend to antenna sites, since competitors can establish their own sites. Stentor was also opposed to unrestricted access to support structures since, in its view, such access would lead to premature exhaustion of structure capacity. Stentor submitted that, should the Commission allow access to support structures, the existing rates applicable to cable television companies would not be appropriate. Finally, Stentor submitted that co-location arrangements should only be made available for transmission equipment, and not for competitors' switches and processors.
AGT indicated that it would be willing to enter into negotiations leading to the implementation of co-location arrangements. AGT submitted that, if such negotiations were unsuccessful, it would be appropriate for the Commission to adjudicate; however, if co-location were to be mandated by the Commission, it should only be in respect of virtual co-location.
Unitel submitted that co-location is an essential element of equal access, since it puts competitors on an equal footing with the telephone companies' long distance operations, in terms of both service quality and price. In this context, Unitel noted that both AGT and Stentor supported the concept of co-location. However, Unitel disagreed with AGT and Stentor as to the approach to implementation. Unitel argued that co-location should not be left to negotiations, but rather that the telephone companies should be required to file proposed tariffs for public comment within 60 days of this Decision. Unitel submitted that, where physical co-location is not possible, virtual co-location arrangements should be made available, employing pricing principles that would allow the competitors to enjoy the same interconnection costs as the telephone companies' own long distance operations.
CTA submitted that the Commission should require physical co-location where feasible and that the implementation of unbundling should not rely on a negotiation process.
The Commission is of the view that the provision of co-location will facilitate competition by providing competitors with the option of delivering their traffic to the local switches over either leased or owned facilities, based on cost and efficiency considerations. Co-location may foster increased entry by creating an additional source of supply of local channels to end-users and to resellers.
The Commission notes that its determinations in this Decision with respect to co-location pertain only to competitors' transmission equipment. Access to support structures and antenna sites is not properly considered co-location, but is rather a matter of network access, better considered in the context of reciprocal access and interoperability principles, discussed below. In the case of support structures, this matter is currently being addressed by the Commission in another proceeding.
In Decision 92-12, the Commission indicated that, in several areas, the telephone companies and competitors should attempt negotiated solutions. The Commission is of the view, however, that this approach has not been fully successful and that, in many cases, the Commission's involvement has been required to resolve disputes. Therefore, while negotiations should still be carried out, the Commission is of the view that co-location tariffs should be established through a proceeding based on the tariff-filing process.
The Commission is of the view that, generally, the telephone companies should provide co-location where requested. As an initial step, the Commission directs the telephone companies to file proposed co-location tariffs within 120 days. Such tariffs should be based on the principle that telephone companies should provide competitors with access to local switches that is comparable, in terms of price and quality, to the access provided to their own long distance operations.
To facilitate the process, the Commission encourages competitors to make their requirements known to the telephone companies, either through bi-lateral discussions or through the existing committees, within 60 days. The proposed telephone company tariffs should reflect, where feasible, any such requirements.
b. ONA, CEI and Unbundling
Comparably efficient interconnection (CEI) was the term used in this proceeding to refer to arrangements whereby competitors are provided with access to the local network that is equivalent or comparable to that provided to the telephone company's competitive services. CEI requires that the telephone companies unbundle the components of the local network used to provide access to its long distance services and make these components available to competitors.
Open network architecture (ONA) as suggested by Unitel is an extension of CEI. Under CEI, competitors can only gain access to those network functions that are used by the telephone company. Under ONA, competitors can obtain network functions whether or not they are used by the telephone companies. ONA requires the telephone companies to respond to the requests of competitors by developing and tariffing the access arrangements desired by those competitors.
The terms ONA and CEI were introduced in the United States and involve many issues and concepts specific to the U.S. situation. There was some debate in this proceeding as to whether such concepts apply primarily to enhanced services, as opposed to other services. In the opinion of the Commission, in an open entry, open access environment, the need for access elements will involve applications that transcend simple market definitions. The central issue that must be addressed is whether, and the extent to which, the telephone companies should be required to provide unbundled Utility service components. The Commission will therefore use the more generic term "unbundling" in place of ONA/CEI.
Virtually all parties supported the general concept of unbundling as an essential element of a competitive environment. There were, however, some differences as to how it should be implemented.
The telephone companies generally argued that unbundled tariffs should be developed as the components are demanded and that the basis for development should be inter-carrier negotiation.
AGT stated that it is willing to commit to CEI and that it has already conformed to all CEI requirements in the case of certain enhanced services. AGT indicated that its proposal would require it, whenever it introduced a new service, to file a tariff for any essential underlying monopoly service components. With respect to ONA, AGT considered that an industry forum could be established to identify requirements. AGT also indicated that it would be willing to put forward a more structured ONA proposal.
With respect to unbundling of optional local service elements, AGT proposed a fourfold process. First, AGT would consider any request to provide an unbundled service element. Second, when AGT offered any new optional local service, it would tariff any underlying bottleneck elements. Third, AGT would be willing to propose a specific unbundling plan for key service elements following this Decision. Fourth, AGT would be willing to work with the Commission and all interested parties to develop a timetable for the introduction of ONA.
AGT submitted that implementation of the above should rely to the greatest extent possible on negotiations between the parties, and that the Commission's role should be to facilitate negotiations and adjudicate any disputes.
Stentor indicated that its member companies are not currently able to identify the full extent of unbundling that would be required. Stentor argued that unbundling should be customer driven, that there must be sufficient demand for a particular form of unbundling, and that it must be technically feasible and economically viable. Stentor proposed that unbundling occur progressively and that it depend, in part, on discussions and negotiations among the interested parties and on the establishment of appropriate industry standards. Stentor indicated that it would not expect to have to meet the individual demands of each customer, but would rather expect that negotiations would result in a range of standard interface arrangements.
Unitel submitted that, to foster competition, competitors must be able to offer services that are comparable in type, quality and price to those offered by the telephone company. In order to achieve this, competitors must be able to interconnect to the local network on terms that are comparable to the access provided by the telephone companies to their own long distance operations. Mr. Drazen, a Unitel witness, submitted that the required interconnection arrangements are best defined by the needs of each competitor and that, as those needs evolve, the relevant interconnection arrangements will also evolve.
Mr. Drazen also submitted that CEI must meet three requirements. First, the interconnection must provide the same service quality to competitors as to the telephone companies. Second, the scope of interconnection must be equivalent to the extent that competitors have access to the same range of services and functional capabilities as are available to the telephone companies. Third, the charges for the access arrangements should be comparable to the costs incurred by the telephone companies. In addition, one of the essential elements of CEI is co-location, as discussed above.
Mr. Drazen provided the following list of the required unbundled components:
(1) loops, switches and interoffice transport;
(2) SS7 (signalling system 7) call set-up function;
(3) signal transport elements of SS7;
(4) interface points with SS7 based on published standards;
(5) numbering resources (NXXs);
(6) reciprocal joint traffic arrangements; and
(7) joint installation, maintenance and testing functions.
Mr. Drazen pointed out that there have been protracted debates in the United States concerning the implementation of ONA. One network unbundling plan advanced by Ameritech (a U.S. Regional Holding Company) was submitted for illustrative purposes. Mr. Drazen did not, however, endorse the exact form of unbundling proposed by Ameritech.
Unitel indicated that the importance of an ONA tariff rests on the fact that such a tariff would require the telephone companies to provide competitors with network services or functions that they do not make use of themselves, thereby enabling competitors to offer services that the telephone companies themselves choose not to offer.
Unitel argued that the implementation of ONA cannot be left to industry negotiation. Unitel submitted that there is a lack of incentive on the part of the vertically integrated telephone companies to unbundle their local networks in a manner that is useful and cost effective for their competitors; accordingly, negotiations simply provide the telephone companies with the opportunity to delay implementation. Unitel submitted that the Ameritech proposal would provide a suitable starting point for unbundling and that the telephone companies should file proposed tariffs based on that proposal, as the basis for a public process.
Sprint submitted that ONA/CEI can be viewed as a regulatory safeguard that can help to: (1) reduce the telephone companies' bottleneck monopoly power to a set of core functions, thus providing for greater intra-exchange service competition, and (2) reduce the overall market power of integrated telephone companies by reducing their ability to operate their local bottlenecks in a fashion that confers preferences on their own long distance businesses. Sprint therefore submitted that the Commission should require Stentor to develop and file an ONA/CEI tariff modeled on the Ameritech tariff. In Sprint's view, the relevant principle is the recognition that the integrated telephone company should be required to be a non-discriminatory wholesaler of bottleneck network functions, both to its network service retail arm and to all other network service competitors. Sprint submitted that, under this approach, unbundling would be specifically designed to permit competitors to substitute non-telephone company functions for those of the telephone company, where doing so is necessary to provide competitors with the same network management flexibility and efficiency that the telephone company provides on an exclusive basis to its own long distance business.
The Director submitted that all users of the basic network should be able to interconnect to all underlying network functions and interfaces, not just those used by the regulated firm for its own purposes, on an unbundled and equal access basis. The Director argued that the regulated carriers should be required to grant all requests for the use of the network, except where it can be demonstrated that there are technical constraints, that unbundling is not economically feasible, or where customer privacy protections would be violated.
CTA submitted that the unbundling of network, transmission and signalling components is an essential precondition for fair and sustainable competition and that the Commission should set a timetable for the implementation of ONA under the direction of an Inquiry Officer.
It is noted that it has generally been the Commission's policy to apply the concept of unbundling to many types of services, usually with the aim of ensuring fair competition. Following from Decision 92-12, the telephone companies have recently filed network access tariffs that unbundle many of the functions of the local network. As a result, significant unbundling is already under way.
The Commission is of the view that unbundling, together with co-location, will increase competition, choice and efficient supply, and stimulate the development of competition in local, long distance and enhanced services. For example, unbundling will encourage the development of competition, since competitors will be able to mix their own components with those of the telephone company in the most efficient manner.
All parties agreed that, in general, bottleneck services should be unbundled. Competition, however, may benefit if this concept is applied to the provision of other network services over which the telephone companies exercise a high degree of market power. For example, while the provision of local channels is technically competitive, the telephone companies are, in most areas, the only provider of such services and are virtually always the dominant supplier. Accordingly, the Commission considers that services subject to dominant supply should be unbundled to the greatest extent practicable.
In general, the Commission considers that the development of unbundled tariff components should flow from two sources. First, where the telephone company introduces a new competitive service, tariffs are to be filed for all of the underlying bottleneck components used in the provision of that service. Second, where a competitor requests a specific component, the telephone company is to file a proposed tariff, whether or not the telephone company itself uses that component. Where the telephone company is of the view that it is not feasible to offer a particular component on an unbundled basis, it is to so indicate to the Commission, on a timely basis, setting out its reasons.
As with co-location, the Commission is of the view that leaving the development of service unbundling entirely to negotiation would likely not be very effective. On the other hand, it may be impractical for the telephone companies to develop tariffs in the absence of input from the competitors. While no party was willing to specify with any precision what components should initially be included in an unbundled tariff, several parties noted that the Ameritech tariff provided a practical starting point. The Commission considers that it would be appropriate to commence the development process by having the telephone companies file an initial proposal modelled on the Ameritech tariff, modified to reflect specific requirements identified by competitors. The Commission considers that the comments generated by the filing of such a tariff may provide the foundation and general principles for ongoing access requests.
Consistent with the above, the Commission considers that competitors should make any specific unbundling requirements known to the telephone companies, either through bi-lateral discussions or through the existing committees, within 90 days. The telephone companies are directed to file, within 180 days, proposed unbundled tariffs based on the Ameritech model tariff and on the specific requirements identified by the competitors. The telephone companies are also encouraged to continue to develop and submit more comprehensive tariff proposals in order to facilitate broader access.
3. Reciprocal Access and Interoperability
AGT and Stentor proposed that bottleneck elements of telephone company networks be made available to others through unbundling and open access, and that other industry participants that have monopoly characteristics or licensing privileges (i.e., the cable television industry and wireless service providers) should provide similar access to their networks. In their view, economic and other advantages could accrue if cable television and wireless service providers participated in the provision of all telecommunications services, including local services. They considered that competition in all telecommunications markets should be permitted, provided that there are equivalent opportunities to compete in markets served by other network providers and that such providers bear similar obligations to serve.
Stentor considered that customers are not overly concerned with particular technology, but only want services to meet their operational requirements. Reciprocal access to interconnected networks can only benefit customers to the extent that they can avail themselves of various network elements to establish a telecommunications system that meets their needs. Regulatory barriers that adversely impinge on the ability of a service provider to offer the full range of services may force customers to accept less than optimal solutions. Stentor recommended that the Commission endorse the idea of the potential unbundling of cable television facilities, while symmetrically regulating cable companies as common carriers. The Commission was urged to establish an appropriate forum to discuss interconnection and interoperability issues, including access to the set-top box.
CCTA generally welcomed and encouraged telephone company competition in the development of advanced "infotainment" services. Moreover, it agreed with Stentor that both suppliers and consumers of local telecommunications services would benefit from the competitive supply of a broad array of new local communications services. However, it was also submitted that Stentor's proposal to transform the broadcasting distribution market into a competitive common carrier marketplace is fundamentally inconsistent with the regulatory scheme of the Broadcasting Act and may undermine the Commission's ability to require broadcasting licensees to provide a high level of support to the broadcasting system. CCTA and Rogers considered that the telephone company proposals did not contain sufficient information on the type of interconnection and interoperability required, and that it was therefore premature for the Commission to set out any specific interconnection rules.
The Director submitted that, in order for convergence to occur, the Commission must ensure that competitors are not denied access to bottleneck or essential facilities and that the terms and conditions associated with such access are open and non-discriminatory, whether those facilities are controlled by telephone companies, cable companies or others under the Commission's jurisdiction.
Allarcom suggested that the Commission should convene a hearing to examine alternative technologies before large investments are made. BCOAPO et al commented on the need to avoid wasteful duplicative investments in the distribution network. BCOAPO et al also remarked that cooperation is required to achieve the optimal mix of copper, coaxial and fibre facilities.
In the Commission's view, barriers to entry in local or other evolving telecommunications markets are not conducive to the achievement of the goals of this Decision or the objectives of the Act. Users require applications that meet their needs, and such applications will transcend traditional market distinctions such as local or long distance, basic or enhanced. Only users can adequately identify their needs and no single supplier can serve the needs of all users.
The Commission considers that reciprocal access and interoperability would contribute significantly to effective competition in the provision of telecommunications services, including many new information services. While this proceeding is limited to consideration of access to the telephone company networks, and is not intended to dispose of matters properly covered under the Broadcasting Act, the Commission considers that a system of open and interoperable networks for the provision of telecommunications services is essential if the vision of a ubiquitous public infrastructure, or information highway, is to be achieved.
The Commission is of the view that competition has the beneficial effect of increasing consumer choice and that local competition and open access are essential to creating a ubiquitous public infrastructure, a network of networks to meet the evolving communications needs of all Canadians. Effective competition requires the existence of multiple suppliers of carriage services. Therefore, an environment that facilitates the entry of new suppliers, wherever entry is economically efficient and technically feasible, is essential. In this context, the Commission notes that the opportunity to exploit the economies of scale and scope is greater if all network providers of telecommunications services are required to provide access to their networks and to permit resale of their services.
4. Convergence
One of the more significant issues facing policy-makers in Canada and elsewhere is the possible entry of telephone companies into the broadcasting business, either as broadcast distribution undertakings or as providers of services which may be defined as broadcasting under the Broadcasting Act.
In this proceeding, the Commission has been requested to provide direction on the role of telecommunication carriers in broadcasting. While the Commission regulates both broadcasting and telecommunications, it is clear that a panel of the Commission conducting a proceeding under the Act is not empowered to make determinations that can only be made under the Broadcasting Act, such as whether or not telephone companies should hold broadcast programming or distribution licences. Moreover, the Commission notes that principles such as open entry and open access, which should govern the provision of all telecommunications services, including new interactive information services, are not necessarily appropriate when considering cultural policy matters.
The above notwithstanding, there are several convergence issues that can be addressed in this proceeding, including (1) the treatment of investment in broadband facilities, (2) the provision of video dial tone (VDT) service, and (3) the involvement of telephone companies in the content of information services, including those of a transactional or interactive nature.
Under the broad regulatory policies set out in this Decision, the Commission considers that barriers to telephone company activities in the above areas should be removed, subject to safeguards to address vertical integration and the ongoing review of investment to determine how to recover the costs of investment in network facilities and new services.
As discussed above, the AGT and Stentor plans contemplate open entry in all markets, including local telephony, information services and the distribution of broadcast programming. Parties expressed various views on the telephone companies' proposals. A number of parties argued that those proposals are too general to act upon. Allarcom submitted that the Commission should neither approve nor disallow competition with broadcast distribution undertakings in this Decision, as no clear benefit to the Canadian broadcasting system had been shown. Allarcom requested that the Commission require telecommunications carriers to stipulate in their tariffs that service providers leasing facilities to offer programs for reception by the public must have any necessary licence under the Broadcasting Act, and must provide evidence of it to the carrier on request. Astral Broadcasting Group Inc. requested that the Commission issue a general ruling that video on demand, VDT and similar services are broadcasting activities and, as such, are subject to Broadcasting Act requirements. CAB did not object in principle to telephone companies operating as alternate carriers of content, provided certain conditions are met.
CCTA and RCTV requested that the Commission deny the request for approval in principle of telephone company entry into the cable business, VDT or other video entertainment services. In particular, CCTA was concerned that approval in principle in this proceeding of the type requested by the telephone companies would be interpreted as a positive signal for the construction of broadband facilities. While CCTA expressed concern with telephone company construction of broadband facilities, in general, it considered that the telephone companies should be given the flexibility to provide a range of advanced information and entertainment services by means of their existing networks and any enhancements to those networks that are developed over the years. CCTA supported telephone company carriage, on a common carrier basis, of tele-banking, tele-education, computer games or other transactional information and entertainment services on behalf of third parties. CCTA also considered that the non-programming services in the territory between broadcast program distribution and telephony are fundamentally different from broadcast programming services with respect, for example, to the statutory basis for regulation and the cultural and nation-building objectives underlying the Broadcasting Act.
Ontario stated that, if telephone companies can carry video on a common carriage basis over their telecommunications networks cost-effectively, there is no public interest from a telecommunications perspective in preventing telephone companies from entry into this market. Any conditions that the Commission may wish to impose, as a matter of broadcasting policy, on the delivery of broadcasting signals should be placed on broadcast licensees and not on telecommunications carriers. Quebec submitted that technological change will enable telephone and cable companies to carry comparable services and that the Commission should recognize this fact in its decision. The Director and CBTA supported telephone company involvement in content creation. Nova Scotia submitted that the Commission should not advocate an open policy for telephone company provision of broadcast services.
Allarcom and CAB generally opposed telephone company involvement in content creation. CDNA, while not opposing telephone company involvement in the creation of content, expressed concern that newspapers must have the same access to bottleneck facilities as their competitors. In particular, CDNA considered that telephone company investments in content creation activities should be made through separate affiliates and limited to minority interests. Allarcom and CAB also considered that the separation of content and carriage should continue.
In reaching its determinations on convergence, the Commission has proceeded on the basis that the way Canadians communicate, both with each other and with others around the world, has changed significantly during the past few years. Evolving communications technologies will continue to provide the potential for services, both social and commercial, to be offered in a variety of new ways. Use by individuals, businesses and institutions of Canada's communications systems is creating electronic marketplaces and virtual communities that transcend geographic boundaries and which are increasingly interactive and transactional in nature. Underlying these phenomena is a political, economic and cultural revolution, in which Canadians are redefining themselves and their business, social and institutional environment in ways that outpace the ability of regulators to recognize and define, let alone control.
As discussed below, telephone companies may, operating in their role as common carriers, carry a range of services, including licensed broadcast programming and other broadband services. This would include VDT applications. VDT refers to the technological capability through which broadband services may be offered, not to the services themselves. VDT is therefore not a broadcasting activity. Rather, it is the use of the technology that will determine the nature of the activity.
The Commission recognizes that many VDT applications will require substantial investment, particularly to provide it to the home. Accordingly, the Commission considers that its regulatory framework must provide appropriate competitive and consumer safeguards in connection with telephone company construction of broadband facilities. To the extent that technology investment forms part of the rate base under rate of return regulation, the Commission must be satisfied that recovery of the capital investment is done in an appropriate manner. Thus, if the telephone companies are to invest in broadband to the home, a business case must be established before the Commission will permit such investment to be recovered through increases in basic Utility rates charged to the general body of subscribers or considered for the purposes of setting contribution.
The Commission agrees with RCTV's argument that the telephone companies may profit under price caps from investments made during rate of return regulation, since the life cycle of any broadband investment could extend to the period under price cap regulation. Accordingly, the Commission will require the telephone companies, during the proceeding to implement price caps, to provide information to allow the Commission to assess the effects of such investment on price levels.
The Commission considers that the greatest public benefit will ultimately be realized if basic telecommunications and innovative information services are competitively provided, accessible to all sectors of the public and satisfy a broad range of demand, and if the facilities used to offer such services are accessible to all potential service providers.
In the past, the Commission has generally supported telephone company initiatives to deploy new technologies. The Commission recognizes that the telecommunications infrastructure must continually evolve to serve the evolving demands of residence, business and institutional users for an expanding range of services. Moreover, notwithstanding the emphasis certain parties placed on the use of broadband facilities for video transmission, the Commission anticipates that not all services carried on these facilities will be broadcasting within the meaning of the Broadcasting Act. The Commission considers that the development of innovative and advanced services will only be impeded by attempts to restrict on technological grounds the services telephone companies may carry. As long as any investment made during the transition is economically justified and appropriately recovered, the telephone companies should not be restricted in terms of the technology they adopt.
The Commission therefore affirms that, subject to the licensing of service providers where required, broadcasting or content-based services may be distributed on a common carrier basis over telephone company facilities, whether those facilities are narrowband or broadband in nature. With respect to services that require a licence under the Broadcasting Act, or in respect of which the Commission may issue an exemption order, the Commission notes that section 4(4) of that Act exempts a carrier from its provisions where the carrier acts solely as a common carrier.
However, the Commission considers it is appropriate that telephone company tariffs for broadband service require that, where a service provider uses telephone company facilities to offer a broadcasting service to the public, the service provider have the necessary licence under the Broadcasting Act, or satisfy any requirements associated with an exemption.
With regard to the provision of content, the Commission considers that competition, technology and the globalization of markets have reduced concerns that any one supplier can control the provision of information services. Information is an unlimited commodity and software is the creation or expression of ideas. While various entities may control certain databases and various forms of information (e.g., by copyright), information is manipulated and disseminated far more rapidly than it is possible to control. The Commission notes that innovative information services, evolving multi-media services and other advanced services are or will be offered competitively by a variety of providers, most of which are not regulated by the Commission.
In a competitive environment governed by open access and unbundling, the Commission considers that, not only would telephone company participation not prejudice the diversified development of innovative and advanced services, but telephone companies could make an important contribution to increasing the number and diversity of services, including services of an interactive or transactional nature, available to consumers.
The Commission has considered the arguments of parties in this proceeding as to the involvement of the telephone companies in the content of services they may wish to provide. In the opinion of the Commission, the regulatory framework in this Decision, particularly safeguards to deal with vertical integration, are sufficient to deal with cross-subsidy and access issues. Given these safeguards, the Commission considers that telephone companies can enter the content side of the information services business without prejudicing its development.
In light of this, the Commission is predisposed to consider favourably applications by Canadian carriers under section 36 of the Act for permission to control the content of telecommunications services that they provide. This is a statutory requirement from which the Commission is not empowered to forbear. The Commission is not persuaded by Stentor's argument that Section 36 deals only with the requirement for Commission approval of any potential carrier control of content supplied by others. However, given its findings that cross-subsidy and access issues are adequately addressed in this Decision and in light of the imposition of the imputation test to address anti-competitive pricing, the Commission considers that there is a heavy onus on interveners seeking to restrict telephone companies from controlling the content of telecommunications services they provide.
Where the service is a broadcasting service within the meaning of the Broadcasting Act, telephone companies or their affiliates, like other service providers, must apply for a licence (where they are otherwise permitted by statute to do so) or qualify for an exemption under the Broadcasting Act.
Certain parties, including CDNA, argued that telephone company investments in content should be made through separate affiliates. In view of the safeguards established in this Decision, including the implementation of the principles of open access and unbundling, the Commission finds that permitting telephone company involvement in the creation of content will not result in discrimination against other content providers or in cross-subsidization from monopoly service customers. Further, as noted above by Dr. Kahn, telephone companies should not be prohibited from taking advantage of legitimate economies of scope, as such a prohibition could only reduce the benefits of competition.
The Commission therefore finds that, where telephone companies become involved in the content of services, they are not required to offer such services through a structurally separate company, but may do so if they choose.
F. Alternatives to Traditional Rate of Return Regulation
1. General
a. Introduction
A key issue in this proceeding is whether there are alternatives to the existing rate base rate of return approach that would better balance the interests of subscribers, shareholders and competitors, while providing telephone companies with better incentives to increase their operating efficiency and with greater flexibility in the establishment of rates.
Currently, the telephone companies' competitive and non-competitive services are subject to company-wide rate base rate of return regulation. Under this approach, the company is permitted to earn revenues equal to its total costs, including depreciation, operating expenses, interest expense, income tax expense and a fair and reasonable rate of return on shareholders' equity. This level of revenues is referred to as the company's revenue requirement. Once the company's revenue requirement is determined, its rates are set to make up any projected revenue deficiencies or to eliminate any projected excess revenues. When a company's forecast rate of return on average common equity (ROE) is projected to fall below the bottom of a reasonable range, it will typically file an application for a general rate increase. However, prior to approving any application, the Commission evaluates the reasonableness of the company's financial projections and the appropriateness of its allowed or proposed ROE range. Conversely, if a company's ROE is projected to be above the top of its currently allowed range, the Commission can direct the company to take rate action in order to eliminate the excess earnings.
As noted above, parties tended to advocate a shift to price regulation, although some favoured a structural separation approach and others expressed certain concerns with respect to moving away from earnings regulation.
In their evidence, numerous parties listed their concerns associated with the current form of rate base rate of return regulation, particularly in an environment where the telephone companies provide both competitive and monopoly services. Unitel, for example, stated that, under the current form of regulation, the companies have both the incentive and the opportunity to recover losses in the long distance market through monopoly service rate increases.
AGT, Unitel and other parties noted that direct regulation of prices would eliminate the regulatory link between prices, costs and earnings. Under this approach, Unitel added, there would be no need to examine cost allocations or rate of return and, therefore, one of the main incentives for anti-competitive behaviour by companies operating in both competitive and non-competitive markets would be eliminated. Unitel stated that price caps, if properly structured, limit the potential for improper forms of price targeting and allow the benefits of competition to flow through to subscribers. It also submitted that price caps are more appropriate in an environment of increasing competition because they allow a more gradual transition to complete deregulation.
AGT and Stentor noted that the current form of regulation, which is more suited to a monopoly environment, results in an increasingly onerous regulatory burden in a mixed monopoly and competitive environment. Stentor and other parties stated that the telephone companies face a lack of pricing flexibility under rate base rate of return regulation, which results in undue delays in introducing new products and services. Finally, various parties stated that earnings regulation and, in particular, rate base rate of return regulation, provides the companies with limited incentives to minimize cost and to improve their productivity, as compared to price regulation.
Stentor stated that price caps represent a more effective and less costly form of regulation because they provide the companies with stronger incentives to innovate and be more productive, since shareholders rather than customers assume the risks and the rewards of business decisions. The Director pointed out that there was unanimity among expert witnesses in this proceeding that, in theory, rate of return regulation sends uneconomic investment and production signals to the market and provides the wrong incentives for firms already in the market or contemplating entry. Consequently, the Director contended that rate of return regulation impedes technological innovation and competition and limits the ability of Canadians to benefit from greater product and service choices.
Stentor stated that price caps would allow the Commission to meet its regulatory objectives more effectively by placing more reliance on markets while still providing shareholders with an opportunity to earn an adequate return on invested capital. It added that, under price caps, the increased pricing and service flexibility and the opportunity for companies to benefit from their efforts would strengthen the investment community's confidence in the telephone companies.
A few parties questioned the merits of adopting price cap regulation. NAPO believed that the evidence presented by AGT, for example, failed to show conclusively the merits of price caps relative to the current form of regulation. In addition, NAPO considered that price cap regulation would result in the same degree of regulatory burden for parties, given the issues that would have to be resolved (for example, the determination of the appropriate inflation measure and productivity offset).
b. Conclusions
In the opinion of the Commission, it is in the public interest to develop a regulatory framework predicated on price regulation, rather than earnings regulation, for AGT and the other Stentor companies subject to this Decision. Further, the Commission considers that, while a price cap system is the best way to regulate Utility services, less onerous forms of price regulation should apply in non-Utility markets where there is not as yet sufficient competition to warrant forbearance.
Price caps allow for more efficient and effective regulation in a number of ways. First, price caps reduce incentives and opportunities for companies to over-invest or misallocate costs. Once caps are established, prices cannot exceed them (apart from the operation of a limited number of exogenous variables), even if the investment base is increased. Second, price caps reduce opportunities to cross-subsidize or engage in anti-competitive pricing, because price changes in one basket cannot be offset by changes in other baskets. Third, price caps provide incentives for telephone companies to be more efficient and innovative, since shareholders assume more of the risks and rewards of business decisions and retain the benefits of higher levels of productivity. Fourth, price caps can eliminate the need for regulatory assessment of investment, expenses and earnings between price cap performance reviews.
The Commission notes the concerns of some parties that, under price caps, telephone companies may have an incentive to reduce service quality in order to lower costs and increase profits. The Commission considers that the integrated nature of the network, together with overall incentives to increase productivity and be more efficient, will generally serve to offset this incentive. Moreover, as noted in Part VI, Section C, the Commission intends to review quality of service regulation to reflect the new regulatory framework and the increasingly competitive environment. While the Commission considers that price caps will be a more effective form of regulation than its current regulatory regime, it considers that a transitional regime is required to establish suitable conditions for price caps. In the opinion of the Commission, the proposals of Unitel, Stentor and AGT all have merit. However, none addresses all the Commission's concerns.
First, the Commission concurs with the view that rates should be closer to costs before price cap regulation is implemented, since this will allow more of the benefits of regulatory streamlining to be realized. Currently, contribution rates are at levels such that the process of setting these rates requires reviewing earnings and forecasting demand, cost and revenues on an annual basis to ensure that the local/access shortfall is covered and that competitors are not contributing excess amounts. Until the contribution rate per minute has been reduced to a level that represents a far less significant expense, the Commission believes that many elements of earnings regulation will have to be retained.
Second, while price regulation may still be necessary in some competitive markets, the Commission does not consider that detailed price baskets, caps, bands and floors are either necessary or appropriate in the Competitive segment, given the safeguards in this Decision and, in particular, the effective price floor resulting from the imputation test. Under the imputation test, each interexchange service will be priced to recover causal costs and explicit contribution, start-up cost recovery and bottleneck service charges applied to the telephone companies' competitive operations. Once such costs are included in the price of each service, no other price floor is necessary to protect against anti-competitive pricing. The Commission considers that the CAT and the price imputation test will provide adequate protection against anti-competitive pricing practices. Therefore, price caps are only required for services in the Utility segment. Further, the split rate base reduces concerns that the telephone companies will offset losses in the Competitive segment by increasing Utility rates.
However, until the Commission determines that basic toll service is sufficiently competitive, it will maintain an upward price constraint on such services, given the essential nature of basic toll service and the current dominance of the telephone companies in that market segment. This is discussed further in Part IV, Section D. The above approaches should provide the telephone companies additional flexibility in setting rates, while maintaining some protection for small users of competitive toll services, reducing the potential for anti-competitive pricing and ultimately permitting smooth and rapid deregulation of segments of the market where sufficient competition exists.
Third, both the Stentor and AGT proposals are based on multi-year forecasts that could consume considerable resources to examine. In the case of AGT, the Commission also considers that its approach would be highly contentious given that not all elements that affect the local/access shortfall over the transitional period, such as productivity, would be fully examined; nor would actual changes over the transition be taken into account, since costing would not be used once the initial target had been established. As noted earlier in this Decision, the Commission considers that the local/access shortfall, as well as the contribution rate per minute, should be reduced as quickly as possible. In the Commission's view, the planned local rate increases and growth of earnings in the Utility segment, including any productivity gains in the provision of local services, should be taken into account, thus reducing the local/access shortfall and the contribution rate per minute over the transition period. The Commission notes that the AGT plan did not propose to assess these factors in as detailed a fashion as the Commission considers necessary, if contribution is to be reduced as much as possible during the transition.
The Commission also considers that the risks of the AGT plan would have varied considerably among the various companies, making it more complicated to manage the relatively short transition to price caps. The Commission considers that the rate rebalancing initiated as a result of this Decision will keep attention focused on the proposed price cap framework itself, rather than the transition to that framework, while removing uncertainty over the impact of rate rebalancing on local rates.
In the opinion of the Commission, a split rate base and CAT, combined with staged, preset local rate increases, is the best way to control the transition to price regulation and the associated impact on shareholders and subscribers. Specifically, shareholders will have an opportunity to earn a fair return on Utility investment and an opportunity to benefit from superior performance in the Competitive segment. Subscribers and competitors are better protected because the link between toll rate reductions and local rates is broken, opportunities for cross-subsidies from monopoly to competitive services are reduced and local increases due to rebalancing are explicit.
2. Implementation
As noted in Part V, Section E.3 below, the proceeding to consider implementation of the split rate base will be combined with the proceeding to establish the 1995 contribution charges. The split rate base will be implemented in 1995, with an effective date of 1 January 1995.
Stentor expressed the view in this proceeding that the Utility segment of the split rate base should include the Phase III Monopoly Local and Access categories, as currently defined, a new Utility "Other" category and a portion of common costs. Further, the Plant Under Construction (PUC) category should be eliminated, and adjustments made to take account of PUC and Allowance for Funds used during Construction. The Commission expects that this approach will be used as the basis of split rate base proposals to be filed by the telephone companies.
The Commission notes the concern of some parties that the split rate base process would be contentious because of disputes over the allocation of revenues and costs. However, Phase III costing will be required to establish the local/access shortfall and contribution rates, irrespective of the form of regulation adopted, and provides the logical costing framework to be used in splitting the rate base. The Commission's Phase III Review, initiated in Public Notice 94-16, is expected to reduce the contention over revenue and cost allocation.
For Phase III reporting purposes, the application of the CAT will be recorded as an expense for the telephone companies' Competitive segments and as revenue for their Utility segments.
As discussed earlier in this Decision, there will be a transition period from 1 January 1995 to 31 December 1997, during which local rates will move closer to costs and contribution rates will decline. Given its view that the initial rate levels under price caps should be closer to costs than at present, the Commission intends to adopt price caps after this period. Therefore, effective 1 January 1998, the Commission will implement price cap regulation for the Utility segment. Although several parties provided specific comments (and in the case of Unitel, very detailed evidence) on the form of price caps, the Commission considers that it is more appropriate to consider the issues associated with the implementation of a specific price cap regime in a separate proceeding. The Commission anticipates that a proceeding on price cap regulation will be initiated in the first half of 1996.
3. Earnings Range on Utility Segment
AGT, Stentor and Unitel all agreed that, on an intuitive basis, the Utility segment was likely lower in risk than the Competitive segment. However, AGT and Stentor argued that the rapidly changing telecommunications environment has resulted in converging risk levels between the two segments, thereby making the risk differential between the Competitive and Utility segments difficult to quantify. In addition, Stentor argued that the difficulties in quantifying the cost of equity for one segment of the company's business would lend support to using the company's overall cost of equity capital as a proxy for the cost of equity capital for the Utility segment only.
AGT stated that, if Stentor's split rate base proposal were adopted, the inclusion of optional local services in the rate base would provide support for expanding the allowable ROE range. AGT also submitted that, absent the mechanisms to accurately differentiate between the relative risks and costs of the two segments, assigning a particular cost of capital to any one segment would be speculative and arbitrary. AGT stated that, given the rapidly changing telecommunications market, it would have to be demonstrated that there are risk differences between business segments that affect the telephone company's overall cost of capital. Secondly, AGT stated that any such risk differences must be quantifiable.
Unitel proposed that the overall company-wide cost of equity be reduced by at least 2% to arrive at the allowed ROE for the Utility segment.
The Commission notes that, in recent revenue requirement proceedings, Stentor members have stated that they face an increased risk arising from long-distance competition. The Commission considers that long distance competition is likely to have increased the risk of the Competitive segment relative to the Utility segment. Any increase in the Utility segment's risk arising from the competition in that segment is likely to be minimal in the short-run. Moreover, any increased risk from competition in the Utility segment should be more than offset by reducing the local/access shortfall.
In view of the fact that, in the near term, the Utility segment will likely be lower in risk than the Competitive segment, the Commission considers it is appropriate to reflect the relatively lower risk in the Utility segment in the allowed ROE range for the transition period. The Commission notes that the costs of capital for most Stentor members have been reviewed in recent proceedings, and considers that the forecasts underlying the Commission's findings in those proceedings remain reflective of the current capital market and economic conditions. Accordingly, the Commission has relied on the current allowed ROE range for each company as a starting point.
Consistent with the above, the Commission concludes that, for the purposes of determining an allowable range for the Utility segment, a downward risk adjustment of 50 basis points should be made to the mid-point of the current company-wide ROE range. Should parties consider that further risk adjustments to the Utility segment are necessary, either in the form of changes to the capital structure used for regulatory purposes or by means of a further adjustment to the allowed ROE, suggested adjustments can be considered as part of the split rate base implementation proceeding.
The new allowed ROE range for the Utility segment will be 200 basis points, 100 points on either side of the mid-point. In the Commission's view, it is appropriate to have a widened range in order to incorporate an increased incentive for the company to be more productive in this segment and to allow for variances in ROE that could arise as a result of the smaller rate base. All profits earned within the widened range will go to the account of the shareholders. However, should the Utility segment achieve earnings above the upper limit of the allowed ROE range, the excess earnings will be applied to a deferral account to be cumulated over the transition period. At the end of the transition period, the Commission will determine, as part of the price cap implementation proceeding, how to deal with the deferral account.
As in the past, the onus will be on the companies to apply for a rate increase should their forecasts indicate that, at existing rates, they will earn below the lower limit of the widened range on the Utility side.
4. Contribution Calculation
During the transition period, the Commission will use the mid-point ROE as a maximum ROE for the purposes of establishing contribution charges in the annual contribution proceeding. In the Commission's view, this will permit it to carry out its policy of reducing contribution rates as quickly as possible. The Commission also expects that, in circumstances where earnings fall below the allowed rate of return, contribution will not be increased to increase earnings. This is discussed further in Parts V and VII below.
III FORBEARANCE
A. Section 34 of the Telecommunications Act
Section 34 of the Act states as follows:
34.(1) The Commission may make a determination to refrain, in whole or in part and conditionally or unconditionally, from the exercise of any power or the performance of any duty under sections 24, 25, 27, 29 and 31 in relation to a telecommunications service or class of services provided by a Canadian carrier, where the Commission finds as a question of fact that to refrain would be consistent with the Canadian telecommunications policy objectives.
(2) Where the Commission finds as a question of fact that a telecommunications service or class of services provided by a Canadian carrier is or will be subject to competition sufficient to protect the interests of users, the Commission shall make a determination to refrain, to the extent that it considers appropriate, conditionally or unconditionally, ... in relation to the service or class of services.
(3) The Commission shall not make a determination to refrain ... if the Commission finds as a question of fact that to refrain would be likely to impair unduly the establishment or continuance of a competitive market for that service or class of services.
The sections enumerated in Section 34 can be summarized as follows:
(1) Section 24: the offering and provision of any telecommunications service by a Canadian carrier are subject to any conditions imposed by the Commission or included in a tariff approved by the Commission;
(2) Section 25: among other things, no Canadian carrier shall provide a telecommunications service except in accordance with a tariff filed with and approved by the Commission, specifying the rate or the maximum or minimum rate, or both, to be charged;
(3) Section 27: among other things, every rate charged by a Canadian carrier for a telecommunications service shall be just and reasonable, and the Canadian carrier shall not unjustly discriminate or give an undue or unreasonable preference in relation to the provision of a telecommunications service or the charging of a rate for it;
(4) Section 29: no Canadian carrier shall, without the prior approval of the Commission, give effect to any agreement or arrangement, whether oral or written, with another telecommunications common carrier respecting the interchange of telecommunications, the management or operation of facilities or the apportionment of rates or revenues; and
(5) Section 31: no limitation of a Canadian carrier's liability in respect of a telecommunications service is effective unless it has been authorized or prescribed by the Commission.
B. Criteria for the Application of Section 34
Various parties advanced criteria that the Commission should use in determining whether or not to refrain from regulation, and commented on the markets with respect to which the Commission should refrain. The criteria advanced generally reflected themes common in competition policy literature and jurisprudence, and can be summarized as follows:
(1) the Commission should forbear when a market becomes workably competitive;
(2) a market cannot be workably competitive if the dominant firm possesses substantial market power;
(3) market power is a function of three factors: (a) market share held by the dominant firm; (b) demand conditions affecting responses of customers to a change in price of the product or
service in question; and (c) supply conditions affecting the ability of other firms in the market to respond to a change in
the price of the product or service;
(4) high market share is a necessary but not sufficient condition for market power; other factors must be present to enable a dominant firm to act anti-competitively.
On a more specific level, parties differed in their views as to what constitutes a workably competitive market, the role played by market share as a determinant of market power, the extent to which there are barriers to entering the Canadian telecommunications market and the extent to which these barriers will be eroded by emerging technology and proposed competitive parity rules.
A number of parties, including AGT, the Director, Saskatchewan and Stentor, stated that the Commission should forbear from regulation as soon as possible in markets that are workably competitive. Further, they asserted that, if there is some question as to the degree of sufficiency of competitive forces in a particular market, the Commission should err on the side of forbearance, i.e., it should cease regulating and allow competition to unfold. The Director also noted that Section 34 requires the Commission to forbear not only when it finds that a market is workably competitive, but also when it finds that a market will likely become competitive in the future. The Director also submitted that public policy should not concern itself with market power per se, but rather with the abuse of market power.
AGT and Stentor proposed forbearance for a number of telecommunications services. While both proposals relied on the commonly accepted pre-condition that the market should be workably competitive, AGT went on to propose that the Commission also forbear from non-essential services. In other words, in AGT's view, regulation should be confined to essential services provided on a monopoly basis.
The Director and Ontario stated that there is insufficient evidence on the record of this proceeding to conclude whether specific markets are sufficiently competitive to warrant forbearance. CTA, Sprint, Unitel and others took the position that it is premature to forbear from regulation at this time. Moreover, BCOAPO et al, CTA, NAPO and Unitel, among others, noted that potential competition is not a substitute for actual competition.
There was general consensus that the concept of "market power", commonly used in competition law, should be the standard by which to determine whether a market is competitive. The concept of market power is intended to explain the ability of a dominant firm to raise prices above those that would prevail in a competitive market. The Commission notes that the Merger Enforcement Guidelines of the Director define market power as the ability of a firm to unilaterally and profitably impose a significant, non-transitory (i.e., permanent) price increase.
AGT, the Director, Quebec and Stentor stated that it is not necessary to find that firms possess no market power in order to conclude that there is adequate competition to warrant forbearance from regulation. Residual market power should not constitute sufficient reason for continued regulation. Unitel and Sprint, among others, emphasized the role of strategic behaviour on the part of the dominant firm as a factor in maintaining market power. Unitel argued that forbearance would be premature at this time because the Stentor companies will have residual market power as a consequence of their dominant market position and control of bottleneck facilities. Thus, Stentor members would be able to pursue anti-competitive strategies, even after implementation of additional rules to allow competitive parity. Unitel argued that regulatory policy should focus on removing the artificial structural advantages enjoyed by the Stentor companies, rather than on forbearance.
AGT, the Director and Stentor submitted that low barriers to entry may be sufficient, in themselves, to curb the exercise of market power. In contrast, Dr. Kwoka, on behalf of Unitel, contended that merely removing entry barriers may not be sufficient and that it may take a long time to erode Stentor's market power. Further, Dr. Kwoka noted that some advantages may accrue to the dominant firm just because it was the first in the market. For example, the sunk capital already committed by the dominant firm makes it hard to displace.
The Commission notes that the first step in assessing competitiveness is generally the definition of the relevant market. Indeed, once defined, the relevant market forms the basis for the entire forbearance exercise, as well as any subsequent analysis examining alleged anti-competitive behaviour. The relevant market is essentially the smallest group of products and geographic area in which a firm with market power can profitably impose a sustainable price increase. Thus, in determining whether to refrain, and the extent to which it should refrain, the Commission considers it necessary to first identify a well-defined product market that takes into account the substitutes and other market features of the service in question. The Commission finds support for this approach in the language of Section 34, which refers to "a service or a class of services".
The next step in assessing market competitiveness involves determining the market share held by the largest firm, as well as the market shares of other firms in the market.
Unitel took the position that large market share is a major determinant of market power. Market share is a significant measure of the firm's control over market output and an index of how closely the dominant firm approximates a monopoly. Thus, Unitel submitted that debate as to the importance of market share is superfluous in this context, because the market shares of the Stentor companies exceed 90% in most cases.
AGT, the Director, Quebec and Stentor submitted that a large market share is a necessary, but not a sufficient, condition for market power. These parties argued that a finding that a firm has sizable market share is simply an important step necessary to determine whether further examination is necessary. They also noted that, in regulated industries, market share is even less indicative of market power, because it is largely the outcome of artificial entry barriers created by regulation. Thus, they submitted that increased competition following the removal of such barriers would significantly lower the market shares of Stentor members.
The Commission notes that Unitel's position on the significance of market share as a measure of market power is, in effect, consistent with the criteria outlined in the widely accepted Merger Enforcement Guidelines of the Director, which require that mergers resulting in a market share of 35% or more be examined closely. The Commission, however, is of the view that it would be inappropriate to adhere to a particular market share as a basis for determining whether to forbear. Consistent with the criteria contained in the Merger Enforcement Guidelines, the Commission considers that a number of factors in addition to market share should be considered in assessing market power.
For instance, demand conditions will affect the ability of the dominant firm to exercise market power. In assessing demand conditions, the basic focus is on the ability of customers to switch to another supplier or reduce consumption of the good or service in question in response to a price increase. Important market demand conditions identified by parties included: (1) the availability of economically feasible and practical substitutes; (2) the costs to customers of switching suppliers (the higher these costs, the greater the market power of the dominant firm); and (3) whether the product is an essential input, for example, a bottleneck service, into the customer's production process.
The Commission also considers it important to obtain information on the supply expansion responses of firms to price increases or other developments affecting the relevant market. The easier it is for rivals to expand output in response to a non-transitory price increase, the lower is the dominant firm's market power. For example, it is important to assess whether competitors have enough capacity, or could easily add new capacity, to accommodate a substantial number of new customers in a reasonable period of time, if dominant firms were to raise prices significantly.
The likelihood of entry is an important and related supply factor that the Commission must take into account in assessing the competitiveness of the market for a service or class of services. In this context, the Commission will consider whether entry occurred in the past, whether current attempts are being made to enter, and whether firms from related product or geographic markets have considered expanding into the relevant market. The Commission will also consider the nature of barriers to entry affecting the market, such as the presence of essential bottleneck facilities that competitors cannot duplicate and whether there are regulations or policies in place that prevent or limit entry, such as restrictions on foreign ownership, regulatory or licensing approvals or approvals for rights of way.
Lengthy construction periods and high sunk investment costs may also constitute major barriers to entry. In particular, high sunk investments increase the risk associated with entry, because they are not recoverable in the event that entry fails.
Stentor, in discussing the supply responsiveness of competitors, cautioned that it is not necessary for workable competition that competitors have the ability to serve most of the geographic area of the market or to cover the entire breadth of services offered by incumbent telephone companies; rather, the real issue is whether rivals have enough capacity to constrain the incumbent telephone companies' anti-competitive behaviour.
In assessing the degree to which a market may be workably competitive, evidence of rivalrous behaviour is also important. Such evidence may include falling prices, vigorous and aggressive marketing activities, or an expanding scope of activities by competitors in terms of products, services and geographic boundaries.
The nature of innovation and technological change in the relevant market may also be a useful indicator. Industries characterized by rapid innovation in products, processes and technology tend to experience greater price movements and new entry, thereby making it difficult to exercise market power.
The Commission recognizes that, under some circumstances, the simple threat of entry may be enough to cause incumbents to behave competitively. In addition, the Commission acknowledges Stentor's argument that competition occurs at the margin, and that it is unnecessary for competitors to cover the entire market. However, the Commission is also aware that it may take time for effective competition to develop even after the most significant barriers to entry are removed and competitive parity rules are established. This Decision addresses many of the current barriers in order to set the stage for forbearance.
The Commission agrees with those parties who argued that residual market power does not constitute sufficient reason for continued regulation; alternatively, the mere possibility of competition does not provide sufficient grounds to forbear. In general, the Commission considers that regulatory policy should aim to remove artificial barriers to entry, in order to ensure sufficient opportunity for workable competition. Therefore, in assessing whether or not competition in a market is or will be sufficient to protect the interests of users and is or will be sustainable, the Commission will require evidence that significant barriers to entry are removed and that such competition has occurred or will occur within a period of one or two years.
The Commission does not concur with AGT that it should, at this time, forbear from regulating so-called non-essential but monopoly services. The reasons for the Commission's view are discussed in Section D below, in the context of optional local services. The Commission would, however, be prepared to consider applications to forbear from regulating specific non-essential monopoly services on a case-by-case basis, provided that the concerns identified in that Section are addressed.
C. Application to Competitive Services
1. General
Stentor submitted that the Commission should forbear with respect to services in the Competitive Toll (Toll) category and the Competitive Network (CN) category (private line and enhanced services, excluding local channels), and with respect to the two Competitive Terminal categories.
In Stentor's view, with the introduction of equal access and 800 number portability, the CN and Toll categories can be viewed as essentially a single market comprising interexchange network services. AGT and Stentor submitted that, because the individual service offerings are generally substitutable in use and in terms of supply, they constitute essentially a single product market for the purposes of assessing competition.
Unitel submitted that it is inappropriate to consider interexchange services as a single market. According to Unitel, this category is composed of four distinct market segments, specifically, Direct Distance Dial (DDD), 800 services, optional or discount toll and CN, none of which is a practical substitute for the others. Unitel noted that 800 service provides inward calling capability only and is not a substitute for DDD or optional toll services, which have outward calling capability. Optional toll service is not a substitute for DDD service, since services in the former category are generally geared to larger users and are uneconomic for smaller users. Unitel also disputed that CN services can generally be substituted for optional toll services, since, in Unitel's view, CN category services appeal only to high-volume users with a limited range of call destinations.
In support of its position, Unitel noted that, in the United States, the Federal Communications Commission treats "Residential and Small Business", "800" and "Business" services as separate service baskets for purposes of price cap regulation.
The Commission agrees with Unitel that it is inappropriate to consider the CN and Toll categories together for the purposes of assessing competitiveness and, thus, whether or not it is appropriate to refrain from regulating these services. Rather, the Commission considers that the services in question constitute at least four distinct markets, services or classes of services. These four markets, which the Commission shall refer to broadly as interexchange services, are basic toll, 800, discount toll and CN. Any decision on the Commission's part to refrain would involve an assessment of demand, supply and other conditions within each of these markets. Since the Commission has general concerns as to the competitiveness of these markets, it has set out below broad remarks and conclusions with respect to toll services (basic toll, discount toll and 800 services) and with respect to CN services. Once the Commission's general concerns with respect to these services are satisfied, the Commission would be prepared to consider applications to forbear from regulating these markets or components of these markets.
With respect to the sale, lease and maintenance of competitive terminal equipment the Commission finds it appropriate to refrain from the exercise of the powers and the performance of the duties referred to in Section 34. The Commission's more particular conclusions with respect to that market are also set out below.
The Commission notes that its determinations with respect to both interexchange services and the sale, lease and maintenance of competitive terminal equipment pre-suppose the splitting of the rate base. Thus, those determinations do not apply to Northwestel.
2. Interexchange Services
a. Toll Services
Toll services comprise basic toll, discount toll and 800 services. AGT and Stentor submitted that they do not have substantial market power in the Toll services category, mainly because there is considerable substitutability among the different Toll services and because resellers and sharing groups can readily exploit the availability of these services. Further, Stentor noted that the ability of its members to raise prices is constrained by the low barriers to entry into these services. In support of this position, it noted the relative ease with which Unitel has been able to expand its capacity. Specifically, in discussing capacity and supply elasticity, Stentor submitted that Unitel has been readily able to add network capacity equivalent to 22% to 26% of the intertoll portion of the Stentor network.
AGT noted that technological developments in particular have increased competition in toll services by reducing barriers to entry. AGT and Stentor also noted that Unitel's and Sprint's alliances with large U.S. based carriers such as AT&T and Sprint (U.S.) will give them access to the latest technology and value-added services and allow them to become the carriers of choice for Canadian subsidiaries of AT&T's and Sprint's U.S. customers.
CTA, Sprint and Unitel, among others, submitted that the Stentor companies will continue to enjoy substantial power in the toll services market within their respective territories for some time, because of their enormous market shares, control of bottleneck facilities and the existence of other vertical and horizontal impediments to competition. They also alleged that Stentor has used a variety of market foreclosure tactics, including substantial preemptive price reductions in market segments that competitors might target.
Sprint also cited a number of institutional barriers to competition, such as high private line rates, radio licensing requirements, ownership restrictions, right-of-way constraints, preferential access in Saskatchewan and agreements by Stentor members not to compete with each other.
Two technical barriers to entry cited by most parties are the lack of equal access and of full 800 portability. Although Unitel did not contest Stentor's and AGT's assertion that the introduction of equal access in mid-1994 and the recent availability of 800 portability will enhance the competitiveness of these market segments, Unitel was concerned about the length of time it will take competitors to overcome other advantages enjoyed by the Stentor companies. Further, Unitel noted that equal access will not be universally available for some time: not in Manitoba until late 1995 and not in the immediate future in Saskatchewan or in the territories of the independent telephone companies. As well, Unitel, among others, asserted that, in order to compete effectively in the 800 service market, competitors need more than simple 800 portability; rather, they require multi-carrier selection capabilities (this issue is currently before the Commission in another proceeding).
The Commission is of the view that the estimates provided by Stentor as to the expansion of Unitel's network are considerably overstated. Stentor itself noted that it may not be meaningful to combine the information on network capacity provided by the individual Stentor members, due to the different reporting methods employed by each member. Further, it is difficult to arrive at an accurate estimate of the network capacity of Stentor and Unitel from the record of this proceeding. However, the Commission notes that the construction of the facilities necessary to discipline Stentor's pricing initiatives would require a considerable commitment of capital and an extended period of time. In the Commission's view, contrary to Stentor's suggestion, it would not be possible for Unitel and the other IXCs to rapidly expand network capacity to this extent.
Based on the record of the proceeding, the Commission concludes that it would be premature to forbear from regulating toll services at this time. In this regard, the Commission notes that the Director also argued that there was insufficient evidence in this proceeding to warrant forbearance. The Stentor companies enjoy very high market share in toll services. Further, there remain significant barriers to entry, limiting the ability of competitors to effectively discipline anti-competitive behaviour.
The Commission would add that, in general, it is supportive of forbearance for the Stentor companies with respect to toll services. However, there are a number of critical conditions that must be met before it can refrain from the exercise of powers and the performance of duties with respect to these services. These conditions include: (1) full technical and operational implementation of equal access; (2) resolution of issues concerning 800 access, including multi-carrier selection capability; (3) comparable access for competitors, including the resolution of unbundling and co-location issues; (4) implementation of the imputation test, discussed in detail later in this Decision, to deal with concerns as to anti-competitive pricing; (5) the splitting of the rate base and the implementation of the CAT; and (6) evidence of rivalry in the relevant market.
This Decision establishes a general timetable whereby many of the issues noted above can be addressed. In the Commission's view, events that will unfold in the coming months will have a critical impact on the speed with which it could grant an application to refrain, in whole or in part, with respect to some or all of these services. Further, with the roll-out of equal access, increased activity in the marketplace will provide first-hand evidence as to whether the goal of open access is being met in practice.
b. Competitive Network Services
In Stentor's view, the CN category of services consists of private line and data services, enhanced services and certain local channel services. Stentor and AGT submitted that this market has been competitive for a number of years and recommended that the Commission forbear from regulating the services in question. They contended that this market is characterized by low barriers to entry and effective price competition. In addition, there are well established interconnection arrangements between the dominant telephone companies and their competitors. According to Stentor, by 1992, Unitel's market share in the CN category had grown to 25%, resellers accounted for 6%, and the share of the Stentor members' share had fallen to 67%. Stentor noted that resellers in this market include Sprint, ACC Long Distance Ltd., Insinc Integrated Network Services Inc., Fonorola Inc. and Optinet Télécommunications.
CBTA, CTA, Ontario, Sprint and Unitel took the position that it would be premature for the Commission to forbear from regulating CN services. The reasons they cited include the persistence of high market shares by the Stentor companies and high private line rates in relation to rates in the United States. CTA noted that the CN category is in effect a duopoly, with both Unitel and Stentor enjoying substantial market power. NAPO also expressed doubt as to whether these markets are competitive. Quebec, however, recommended forbearance from regulating private line and data services.
With respect to local channels, AGT did not envisage forbearance at this time because of its view that these channels are currently an essential local service, the pricing of which will continue to be determined by the Commission for the immediate future; nor did Stentor request forbearance for this category, except for certain unique services or applications contained in the local channels portfolio, such as "Channels Between Buildings on Continuous Property" and "Channels Within the Same Building". These unique services are considered terminal equipment pursuant to Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 82-14, 23 November 1982, and are covered by the Commission's remarks in Section 3 below.
The Commission agrees with those who argued that it is premature to forbear from regulating CN services at this time. In the opinion of the Commission, the key issue to address with respect to forbearance is the supply of transmission facilities. In the case of private lines, there are essentially only two significant national facilities-based providers, Unitel and the Stentor members. Other entrants in these markets are small regional providers. Resellers are dependent on private lines, and consequently upon Unitel and the Stentor members. Given the constraints on the supply of transmission facilities, the Commission is concerned over the potential for unjust price discrimination in this market, absent tariff regulation. The Commission notes, however, the increasing competition in this market as resellers and new IXCs construct their own facilities and the possibility that electrical utilities will expand their telecommunications facilities or resell/lease their excess capacity.
The Commission considers that there may be some services, such as the currently available enhanced and packet data services, that may be subject to a sufficient amount of competition. However, the record of this proceeding is not sufficient for the Commission to determine the degree of rivalry among suppliers offering these services, or for it to define them in general terms. Accordingly, the Commission would be prepared to consider service-specific applications for forbearance in these markets, in advance of considering forbearance for the whole CN market.
Finally, with regard to local channels, it is the Commission's position that no case for forbearance has been made in this area.
3. Competitive Terminal Market
The competitive terminal market comprises the sale, lease and maintenance of terminal equipment.
For purposes of defining the market, the Commission considers that there are two distinct market segments: (1) the Competitive Terminal - Multiline & Data (CT-MD) market, consisting of key systems, PBXs and data equipment; and (2) the single-line or Competitive Terminal - Other (CT-O) market, consisting of single-line telephones and accessories.
Recently, in Forbearance - Sale of Terminal Equipment by Canadian Carriers, Telecom Decision CRTC 94-14, 4 August 1994 (Decision 94-14), the Commission found it appropriate to refrain, with regard to the sale of competitive terminal equipment by Canadian carriers, from the exercise of powers and the performance of duties under most of the sections listed in Section 34. Specifically, the Commission did not refrain with respect to Section 24 and subsections 27(2) and (4).
The CT-O market is substantially competitive, consisting of both domestic and imported products, sold by many retailers in a large variety of styles and prices. While Stentor provided no market share information for the CT-O market, given the range and number of competitors providing single-line sets, the Commission finds the market to be workably competitive.
The Commission notes that competition has also developed in the CT-MD market, especially in the area of PBXs. Several factors have contributed to the development of competition, the most significant being technological change, which significantly reduced the historic difficulties in installing and maintaining key system and PBX equipment. Specifically, modular and packaged components have significantly lowered the skill level required for competent installation and maintenance.
As noted by Stentor, as the PBX market matured, competitors branched out into the key system market. This brought a new form of competitor into the market, as established companies who were in ancillary businesses (such as electrical contractors) successfully entered.
The Commission notes that overall market penetration by entrants has been substantial, and that the market shares of the telephone companies for the installed key system and PBX base has been falling consistently over the last five years.
While the Commission notes the concerns raised by parties such as ACTS and TTS that the telephone companies may have certain advantages over competitors (for example, the appeal of "one-stop shopping"), it concurs with Stentor that such advantages do not imply that the market is not competitive. Furthermore, both business and residential customers are generally aware of the alternatives available to them and have little reluctance to switch from the telephone companies to alternative suppliers.
The Commission also agrees with Stentor that the terminal equipment market is characterized by a relatively high degree of supply elasticity and that there is no evidence of significant barriers to entry.
The Commission notes that the main complaint from competitors in the CT-MD market (for example, ACTS) has been that prices are too low, rather than too high. Accordingly, the Commission is more concerned with the potential for predatory behaviour than with the dominance of the telephone companies.
In summary, the Commission agrees with the vast majority of parties that the CT-O and CT-MD markets are workably competitive. As discussed in detail below, the Commission is of the view that the appropriateness of refraining pursuant to section 34 depends on its ability to ensure that local rates are insulated from the impact of any negative financial performance by the services with respect to which it refrains. In the opinion of the Commission, safeguards against cross-subsidy are also an important element in ensuring that markets remain workably competitive. In addition, as noted above, the Commission has concerns with respect to the potential for predatory behaviour on the part of the telephone companies, in particular with respect to the CTMD category. However, the Commission notes that, once the rate base has been split, the ability of the Stentor companies to cross-subsidize anti-competitive pricing initiatives with revenues from monopoly services will be largely eliminated. Thus, the ability of Stentor members to engage in predatory pricing on a sustained basis will be significantly reduced. In addition, any incentive for the Stentor companies to engage in predatory pricing in the Competitive segment will be replaced with an incentive to price terminal equipment offerings to maximize profits, thus increasing the return to their shareholders. The lack of such an incentive under the current regulatory framework was the source of the Commission's concern in Decision 94-14, regarding the possibility for below-cost pricing by the telephone companies for certain products in certain geographical markets.
As discussed in Part V, the Commission intends to initiate a proceeding to split the rate bases of the Stentor members subject to this Decision. The Commission intends to implement the split effective 1 January 1995.
In light of the above, the Commission finds, pursuant to subsection 34(1), that to refrain as specified below with respect to the sale, lease and maintenance of CT-O and CT-MD equipment is consistent with Canadian telecommunications policy objectives. Further, pursuant to subsection 34(2), the Commission finds that these services are subject to sufficient competition to protect the interests of users, so that it is appropriate to so refrain. Finally, with reference to subsection 34(3), the Commission finds that to so refrain is unlikely to impair unduly the continuation of a competitive market for these services.
The above findings and determinations do not apply to terminal equipment supplied on a monopoly basis, specifically, to equipment required by tariff to be supplied by the telephone companies in conjunction with the provision of two-party, four-party or multi-party primary exchange services. The above findings and determinations also do not apply to components of service that are not currently assigned to Phase III terminal equipment categories, but which may, subject to Commission approval, be opened to competitive provision in the future and which would, as a result, be classified as terminal equipment (for example, single-line inside wiring).
Consistent with the above, effective 1 January 1995, the Commission will refrain, with respect to the sale, lease and maintenance of CT-O and CT-MD equipment, from the exercise of powers and the performance of duties with respect to Sections 24, 25 and 31, and with respect to subsections 27(1), (2), (4), (5) and (6). The Commission will require that the telephone companies, in their role as providers of Utility services, maintain current internal procedures for the handling of competitor confidential information.
Pursuant to subsection 34(4), effective 1 January 1995, Sections 24, 25 and 31 and subsections 27(1), (2), (4), (5) and (6) will not apply to the sale, lease or maintenance of CT-O or CT-MD equipment by AGT, BC TEL, Bell, Island Tel, MT&T, NBTel and Newfoundland Tel. Consistent with its determination to refrain to this extent, the Commission envisages that any anti-competitive practices in this market on the part of these companies will be addressed by the Director.
The Commission directs AGT, BC TEL, Bell, Island Tel, MT&T, NBTel and Newfoundland Tel to issue tariff pages deleting reference to the sale, lease and maintenance of competitive terminal equipment. Issued tariff pages are to be effective 1 January 1995, co-incident with the effective date of the split rate base.
D. Forbearance for Optional Local Services
AGT proposed that the Commission forbear from the regulation of optional local services. AGT submitted that the requirement to file tariffs for competitive or non-essential services is not only unnecessary, but burdensome and costly.
AGT noted that Section 34(1) of the Act provides the Commission with broad discretion to forbear from the regulation of a service or class of services where it finds as a question of fact that to do so would be consistent with the Canadian telecommunications policy objectives set out in Section 7 of the Act. AGT submitted that Section 34(1) grants the Commission the power to forbear from the regulation of optional local services. Further, in AGT's submission, forbearance from the regulation of these services would be consistent with the objectives of the Act and would, in fact, promote the achievement of a number of those objectives.
AGT submitted that economic regulation should be confined to essential services provided on a monopoly basis. AGT's view was that, while monopoly supply is a necessary condition for economic regulation, it is not a sufficient condition. AGT stated that optional local services are, by definition, "non-essential". Therefore, there is no compelling social or economic reason for regulating either the prices of these services or the earnings they generate.
In particular, AGT submitted that there is no valid public interest objective to be served in regulating the prices of optional local services. AGT noted that, in the past, these services have been priced so as to maximize contribution. Thus, to date, the Commission has not only sanctioned the pricing of optional local services at levels that maximize contribution, it has actively encouraged such pricing in order to generate subsidies to keep the price of essential local services below cost. AGT argued that, consequently, forbearance from the regulation of optional local services would not result in increased prices for these services or leave consumers any worse off. In AGT's submission, any rate (short of a predatory rate) is just and reasonable for an optional local service since, by definition, such services are optional. Moreover, AGT argued that it is precisely the profitability of such services that will precipitate new entry and, with it, lower prices.
The Commission notes that, while Section 34(2) provides that the Commission shall refrain where competition is or will be sufficient to protect the interests of users, Section 34(1) provides the Commission with the authority to refrain where that test is not met. Thus, AGT's proposal that the Commission refrain with respect to optional local services raises the issue of the conditions under which it would be appropriate to refrain under Section 34(1). In this regard, the Commission has a number of concerns with respect to AGT's proposal that the Commission forbear from regulating optional local services.
First, in refraining as proposed by AGT, the Commission would, in practical terms, be giving up its ability to directly affect, through the rate-setting process, the financial performance of, or the contribution derived from, the services in question. However, in the Commission's view, the appropriateness of refraining with respect to a service or class of services depends on, among other things, its ability to ensure that local rates (1) are insulated from the effect of a negative financial performance by the service or class of services, and (2) can continue to benefit, where appropriate, from contribution from the service or class of services. Under AGT's proposed regulatory framework, this would be achieved by projecting the required amount of optional local contribution to local rates over the transition period and using that projection to reduce the amount of the scheduled EAC increases necessary. The actual financial performance of optional local services over the transition period would therefore have no effect on the EAC or on local rates. However, under the transitional regime found appropriate by the Commission, which involves rate of return regulation for the Utility segment (including both basic and optional local services), refraining with respect to all or some optional local services would require a suitable mechanism to separate out the revenues and costs associated with the services subject to forbearance. Only with this further disaggregation of the Utility segment would the Commission be able to ensure that local rates would be insulated from the failure of the optional local services subject to forbearance to achieve any target or imputed level of contribution.
Second, Section 34(3) prevents the Commission from refraining in any situation where to do so would be likely to impair unduly the establishment or continuance of a competitive market. The Commission considers that any potential for the development of a competitive market for optional local services depends on the unbundling of the necessary bottleneck services so that competitors can offer similar services. Given AGT's control over bottleneck services, the Commission is of the view that its ability to ensure that the necessary features are unbundled and made available to competitors would be compromised if it did not retain some element of tariff regulation with respect to optional local services. In particular, such regulation ensures that the Commission is made aware of any new service features, and any related bottleneck issues, prior to the introduction of those new features. In addition, prior to refraining with respect to specific services, the Commission would require assurance that all necessary bottleneck services were unbundled and appropriate tariffs implemented. Consequently, the Commission considers that to refrain generally with respect to this category of services would not be consistent with Section 34(3), in that it would be likely to impair unduly the establishment of a competitive market.
Third, the Commission considers that forbearance under Section 34(1), either in monopoly markets or in markets that are not, or will not be, subject to competition sufficient to protect the interests of users, should be limited to situations where rates would remain just and reasonable and where rates and services would remain available without unjust discrimination, regardless of the lack of either regulation or sufficient competitive market forces. The Commission considers that failure to limit forbearance under Section 34(1) in such a fashion would be inconsistent with its overall mandate and would imply the use of a lower threshold, in terms of consumer protection, for forbearance in monopoly markets than in competitive markets (where the threshold is competition sufficient to protect the interests of users).
The above interpretation of Section 34(1) raises two primary questions relevant to an assessment of any service or class of services with respect to which the Commission may consider refraining:
(1) are rates likely to be just and reasonable after forbearance? and
(2) what is the potential for unjust discrimination after forbearance?
With respect to the first question, AGT argued that concern over monopoly pricing of optional local services should not prevent the Commission from forbearing, given that the Commission's current policy is to maximize contribution from these services and that, as a result, forbearance would be unlikely to result in rate levels higher than under rate regulation. In the case of any individual optional local service for which the Commission considered the policy of contribution maximization to be inappropriate, AGT indicated that it would be prepared to satisfy other specified pricing policies, such as a freeze on certain rates. Alternatively, AGT suggested that individual services to which such specific concerns are attached could be treated as essential local services for regulatory purposes. The Commission agrees that, for those services for which the Commission's policy is the maximization of contribution, overall rate levels would not likely be any higher should the Commission find it appropriate to refrain. Consequently, if forbearance were limited to those optional local services for which the maximization of contribution was appropriate, the Commission's primary concern would be with respect to the potential for unjust discrimination or undue preference, rather than with respect to just and reasonable rates.
AGT argued that, were the Commission to refrain, the company would have limited, if any, incentive to engage in unreasonable price discrimination. AGT stated that one reason for this would be the prospect of losing optional local service customers. AGT stated that optional local services are, by definition, discretionary or non-essential, notwithstanding that they may be provided on a monopoly basis. AGT argued that customers who were, or perceived themselves to be, unreasonably discriminated against would always have the option of no longer buying the service in question. Of even more concern to incumbent telephone companies, submitted AGT, would be the possibility that these same customers would also choose to transfer other telephone company business (i.e., purchases of telephone company competitive services) to other suppliers. In light of these concerns, AGT's view was that unreasonable price discrimination would be extremely unlikely to occur.
The Commission considers that an important part of the incentive to unjustly discriminate is the ability to profit from the unjust discrimination. In general, the ability to gain from unjust discrimination is greater in a predominantly monopoly market than in a competitive market, due to the consumer's lack of choice. The presence of a competitive alternative means that customers who realize that they have been subjected to unjust discrimination are not obliged to make a trade-off between their dissatisfaction with a telephone company's behaviour and their need for the service. In addition, in a competitive market, customers are more likely to be aware that a price is unjustly discriminatory, because of the marketing efforts of competitors. The Commission therefore considers that there is a greater potential for unjust discrimination in a predominantly monopoly market, even a market for potentially competitive optional services, than in a competitive market.
Finally, the Commission considers it likely that privacy issues will continue to arise with respect to certain optional local services. Determinations regarding such issues have the potential to significantly affect the economics of such services. The Commission therefore considers that these issues are best addressed before the introduction of new optional local services and features and before significant related investments on the part of the telephone companies.
The Commission is prepared to consider applications for forbearance with respect to specific optional local services, provided that the concerns identified in this Section are addressed. However, given the desirability of addressing bottleneck access and privacy issues prior to the offering of new service features by the telephone companies, the Commission will not include features not yet introduced in any determination to refrain with respect to a specific service. Rather, the Commission will require that both new services and new features for existing services be introduced pursuant to approval of proposed tariff pages. However, the Commission would be prepared to consider a concurrent application requesting that it refrain with respect to the new service or new features.
IV REGULATION IN THE INTEREXCHANGE MARKET
A. General
For the purposes of this Part, the interexchange market is defined as the basic toll, discount toll, 800 and CN (including certain local services) market segments. The toll market is a subset of the interexchange market, which includes the basic toll, discount toll and 800 market segments.
The objectives of the Commission's regime for the interexchange market are pricing flexibility and streamlined disposition of tariff applications. However, until the conditions for forbearance are met, the Commission will be unable to rely solely on market forces to ensure that rates remain just and reasonable. This, in turn, raises the issue of the safeguards necessary to achieve this objective. Due to the controversial nature of interexchange filings, the Commission considers that specifying tariff criteria, so that all parties know the rules in advance, is critical to streamlining the disposition of these filings.
B. Targeted Pricing, Anti-Competitive Pricing and the Imputation Test
1. Modifications to the Imputation Test
As discussed below, the Commission finds it appropriate to modify the imputation test established in Decision 94-13 to reflect the implementation of the CAT, and to extend the application of the test to include CN tariff filings.
As noted in Decision 94-13, the Commission considers that application of the imputation test will be sufficient to ensure that rates are not anti-competitive. Therefore, the Commission is satisfied that there should generally be no additional regulatory concerns with targeted pricing, absent any concerns over unjust discrimination or undue preference. In the Commission's view, as long as telephone company toll prices recover costs, and imputed contribution, start-up cost recovery and bottleneck service charges, targeted pricing would not be anti-competitive. Given this position, it follows that it would be inappropriate to constrain competitive pricing initiatives further by proposals like price bands, as such constraints might only serve to diminish the economic benefits associated with competition.
There are three specific changes to the imputation test and its application necessitated by the new regulatory framework. Two of these result from the application of explicit bottleneck, start-up cost recovery and contribution charges to the telephone companies under the CAT. The first is that the contribution amount imputed will no longer be the contribution amount per-minute per-end corresponding to line 10 of the contribution calculations on page 198R of Decision 92-12, but rather the CAT contribution charge applicable to the telephone companies. This modification will not result in any immediate change in the contribution amount to be imputed. For the reasons set out in Decision 94-13, the Commission continues to be of the view that, for the purposes of the imputation test, contribution should not be included for telephone company traffic originated or terminated on Direct Access Lines (DALs) (a telephone company DAL is an access line dedicated exclusively to a service or services in the Competitive segment).
The second issue raised by the implementation of the CAT is the treatment of the telephone companies' use of bottleneck services for purposes of the imputation test. Most parties were of the view that the telephone companies' use of bottleneck services should be reflected in the imputation test through the imputation of the CAT prices for those facilities. AGT proposed a slightly different arrangement, whereby the CAT price for a specific bottleneck service would be adjusted for any difference between the costs of providing access to the telephone company's toll operations and to the competitor's network. In the Commission's view, for bottleneck services, it would be preferable to impute the CAT prices (including that for recovery of start-up costs). The Commission is of the view that the imputation test is a specific case of the test that should be used whenever monopoly and competitive elements are bundled for purposes of pricing. The more general test, discussed below in the Section on bundled pricing, involves the imputation of the bottleneck rate as a cost.
The third change is that the Commission considers it appropriate to extend the applicability of the imputation test to cover CN services, in addition to toll services. The Commission considers it appropriate to treat the CN market segment in the same manner as the other interexchange market segments from the perspective of ensuring competitive equity and defining anti-competitive pricing. The imputation test for CN services would replace the current requirements that rates maximize contribution and be compensatory on the basis that the revenues for the service in question exceed the causal costs. The Commission notes that, in the case of most CN services, the imputation test amounts to the same test as the previous test for compensatory rates, excluding cross-effects. The exception will occur when the CN service in question makes use of bottleneck components of the CAT or attracts contribution charges.
The modified imputation test will take effect upon implementation of the CAT. Consistent with Decision 94-13, the requirement that the modified imputation test be met will apply only to rates approved after the imposition of the test. Thus, the Commission does not, as a result of the modified imputation test, envisage increases to interexchange rates that have already been approved.
2. Form of the Imputation Test
With the modifications described above, the imputation test becomes a requirement for each service that the revenues (or average revenue per minute) equal or exceed the sum of:
(a) the costs (or average cost per minute) for bottleneck services used by the telephone company in the provision of the service in question, using CAT prices (including that for recovery of start-up costs) for bottleneck services as the costs of the bottleneck services;
(b) Phase II causal costs, excluding costs for services covered in (a); and
(c) contribution, if applicable.
The Commission considers that the application of the modified imputation test should involve the use of the appropriate Phase II study (excluding cross-effects), as modified to reflect the imputation of bottleneck services' rates and contribution as costs. The Commission will require that the test be applied for each company, unless all revenues (both intra-company and non-intra-company) associated with the service in question are subject to settlement, in which case a single Stentor study will be considered appropriate.
In their economic studies, the telephone companies are directed to identify separately the imputed amounts associated with contribution and with each bottleneck service component and to describe and justify their assumptions concerning the proportions of telephone company traffic originating and terminating on DALs.
3. Filing of Imputation Test Information
Stentor proposed that, in the event that competitive services remain subject to tariff regulation, no Phase II information be included with competitive tariff filings and the complaint process be used to deal with any concern that may arise after interim approval has been granted. Stentor expressed concern with respect to the added expense and delay in service introduction caused by a requirement to file Phase II information with tariff applications. Stentor indicated that the streamlined procedures it proposed were designed to permit both the introduction of new services and changes to existing services on a timely basis, thereby better serving customers. Stentor stated that, in cases where a complaint established a strong prima facie case that predatory pricing may be occurring, the companies could be required to file a cost study developed using Phase II principles.
Under AGT's proposal, the requirement to file supporting cost studies for competitive offerings would be dispensed with. Instead, an affidavit would accompany the filing attesting that the proposed rates, terms and conditions were not unreasonably discriminatory and otherwise met all regulatory requirements. In AGT's view, such an affidavit would provide the Commission with sufficient assurance that the requested tariff change is proper.
Given its view that there are incentives for competitors to abuse the regulatory process to delay service introductions and competitive price responses on the part of incumbent telephone companies, AGT's proposal was that the complaint process only be available after interim approval for competitive and optional local services was granted, and that a complaint only trigger an investigation by the Commission "where warranted". AGT submitted that an investigation into a predatory pricing complaint would be warranted only where the complainant had established a prima facie case that the interim-approved tariff involves price predation.
Under AGT's proposal for regulatory streamlining pending forbearance, although telephone companies would not be required to file costing information for competitive services, they would still be required to conduct such costing studies as were necessary to enable them to execute an affidavit confirming that the proposed tariff rates were compensatory. AGT stated that most of the information would have been prepared in advance of the original tariff filing.
AGT estimated that the maximum interval between the commencement of a practice of predatory pricing, its detection, and subsequent termination by the Commission would be three to four months. AGT's estimate of the probable duration of any such interval is one to two months.
For the reasons set out below, the Commission will require the telephone companies to file information addressing the imputation test with applications for interexchange rate reductions and new interexchange services.
In addition to regulatory burden and delays in pricing and service initiatives, there are, in the Commission's view, four considerations with respect to a requirement that information addressing the imputation test accompany tariff applications:
(1) potential remedies available to the Commission in a situation where it approves a tariff in the absence of detailed costing information and, subsequently, upon complaint or otherwise, finds that the rate in the tariff is not just and reasonable and/or is unjustly discriminatory;
(2) the means and incentive that the telephone companies may have to price below imputation test levels;
(3) practical or streamlining considerations; and
(4) the appropriateness of establishing criteria for just and reasonable rates and then considering proposed rates without determining whether those rates meet the criteria.
With respect to item (1), the remedies that the Commission would definitely have available include (a) modification of the rate on a going-forward basis, (b) use of its interim power to order application of the higher rate retroactively to the date of any interim approval, (c) imposition of a requirement on a going-forward basis for imputation test information to accompany tariff applications, (d) imposition of regulatory constraints on pricing flexibility, and (e) permitting customers who have committed to long-term contracts on the basis of the anti-competitive rate to terminate their contracts without termination penalties. In the Commission's view, in an environment of tariff regulation, the potential availability of other remedies under the Competition Act, the criminal offenses or civil liability provisions of the Act or in common law is uncertain and therefore should not be relied upon to form the basis of any decision not to require imputation test information to be filed with tariff filings.
The use of the power to order application of higher rates back to the date of interim approval or the power to order the termination of contracts, by disrupting relations with customers and causing additional administrative expenses, would present a deterrent to telephone company anti-competitive pricing. The potential imposition of imputation test filing requirements or other regulatory requirements would also present such a deterrent, because of the potential for attendant costs and delays. The remedies likely available to the Commission or to parties harmed by the anti-competitive pricing would not, however, provide for compensation to those parties. Consequently, to the extent that harm occurred and was not compensated, the behaviour of the telephone company may have been successful in discouraging entry or aggressive conduct by existing or potential rivals.
With respect to the potential duration of harm to competitors that may occur under a scenario where a complaint process was relied upon, the Commission considers that AGT's estimates of one or two months from date of interim approval to disposition of the complaint as the probable duration and three to four months as the maximum duration are extremely optimistic, given the Commission's experience with competitor complaints, as discussed below.
With respect to item (2), the Commission considers that, as discussed in Decision 94-13, the telephone companies currently have the means to sustain pricing below imputation test levels in the most contested markets by using contribution generated in less competitive markets to offset lower contribution in the former.
With respect to any incentive to price below imputation test levels, as noted above, the use of the power to amend interim orders to require the retroactive application of higher rates and the termination of contracts would present a deterrent to telephone company anti-competitive pricing. The potential imposition of imputation test filing requirements or other regulatory requirements would also present such a deterrent. The telephone companies argued that they have no incentive to engage in predatory or anti-competitive pricing.
In the Commission's view, it may not be necessary to drive competitors out of the market in order to profit from pricing below imputation test levels; rather, it may be sufficient to discourage or delay entry by others or to so weaken existing competitors that they are less able to finance entry into less competitive market segments or must moderate any aggressive pricing strategies.
As to item (3), while the telephone companies' proposal not to provide Phase II or imputation test information with competitive tariff filings, in combination with the complaint process, would likely result in shorter approval times for those tariff filings, the Commission is concerned that such a process would not in fact be consistent with a reduction in regulatory burden or with overall streamlining. The Commission's experience with competitor complaints is that they typically involve a significant expenditure of time and effort by all parties.
In the Commission's view, numerous complaints from competitors alleging anti-competitive pricing could be expected under a regime that required interexchange service tariff approval, while not requiring supporting information demonstrating that the imputation test would be met.
With respect to item (4), the Commission notes that the Act requires the Commission (where forbearance is not appropriate) to prevent the occurrence of behaviour contrary to the Act, rather than merely to impose penalties or compensate those harmed. The Commission notes that, absent forbearance, the Act requires it to determine that rates are just and reasonable and not unjustly discriminatory, prior to either interim or final approval. Given that the Commission has determined that one of the criteria for assessing whether rates are just and reasonable is consistency with the imputation test, and given that this criterion relates to something as significant as the potential for anti-competitive pricing in a newly competitive market, the Commission considers that it would be desirable to ensure, prior to approval, that proposed interexchange rate reductions and rates for new interexchange services are consistent with the imputation test.
C. Sprint's Margin Proposal
Sprint proposed another method of addressing the issue of anti-competitive pricing. Sprint suggested, in the context of its price cap proposal, the establishment of a "margin-squeezing safeguard" designed to maintain competitor input and telephone company output price relationships during the term of a price cap plan. Under Sprint's margin-squeezing safeguard, average price reductions in any Stentor member switched interexchange service basket (for example, discount toll) would result in an immediate price reduction, through a reduction in contribution charges, in the essential input required by competitors.
Sprint suggested the use of interconnecting circuits as the essential input. Sprint submitted that this approach is probably superior to using the price of private line inputs (converted to a per-minute cost), since it is neutral between resellers and facilities-based competitors and since interconnecting circuits are a true monopoly bottleneck service. The total "going-in" price of these services would be the tariffed rate plus the access contribution surcharge.
Thus, using interconnecting circuits as the essential input to competitors, any price reductions in a telephone company interexchange service basket would result in an equivalent immediate reduction in the contribution costs of competitors.
The Commission notes that Sprint's margin proposal was designed to operate in a price cap regime. However, the Commission considers Sprint's proposal inappropriate, whether implemented in the context of a price cap regime or as part of some other regime.
The Commission notes that Sprint's mechanism does not attempt to determine whether price reductions are financed by:
(1) reductions in contribution, with contribution continuing to meet or exceed the contribution component of the imputation test;
(2) reductions in contribution below the contribution component of the imputation test; or
(3) productivity gains in toll services.
Consequently, Sprint's mechanism does not distinguish between those rate reductions that would be anti-competitive (i.e., (2) above) and those that would not be anti-competitive (i.e., (1) and (3) above). Thus, the mechanism would unduly limit telephone company pricing flexibility and reduce the incentive to be efficient for both telephone companies (since telephone company productivity improvements beyond the price cap productivity offset would have to be passed on to competitors) and competitors (since they would be protected from the effects of these telephone company productivity improvements). Sprint's mechanism would therefore limit one of the primary benefits of competition.
In the Commission's view, the imputation test adequately addresses concerns over anti-competitive pricing.
D. Competitive Price Caps/Floors and Pricing Flexibility
In the Commission's view, in the discount toll, 800 and CN market segments, there will be no requirement for upward pricing constraints or price caps. In the discount toll and 800 markets, competitive pressures are forcing rates down. In the CN market, customer demands and bypass concerns should keep prices from rising significantly. As noted in Part III, the concern about the private line market is more a matter of price discrimination.
The Commission also considers price floors unnecessary in any segment of the interexchange market. Sprint suggested that below-band filings should generally be barred and that one option for establishing a price floor be a test similar to the imputation test. The Commission considers that the imputation test will achieve objectives similar to a price floor such as that based on Sprint's suggestion.
Unitel suggested that price floors be used to indicate when public process and economic information is required. In the Commission's view, there would be no justification for delaying a rate reduction that met the imputation test simply because the rate reduction took a service category below an arbitrary band or floor. As noted above, a price reduction that meets the imputation test cannot be considered anti-competitive or inappropriately targeted. With respect to any streamlining or reduced regulatory burden under Unitel's plan (due to the absence of a requirement for costing information with in-band tariff filings), the Commission considers that any such benefit would be more than offset by the longer process contemplated for the disposition of applications for new services and for reductions below the price floor, and by the administration of the price cap regime for competitive services.
The Commission considers, however, that an upward pricing constraint for the basic toll schedules would be appropriate as a tool to permit streamlining of the disposition of basic toll rate revisions. The nature of this market creates an impediment to streamlined tariff disposition and pricing flexibility because of a reduced ability to rely on market forces to discipline pricing.
In addition, a logical outcome of the approach adopted for rebalancing is the need for a price ceiling on basic toll rates. The Commission has directed the telephone companies to reduce basic toll rates as part of rate rebalancing. In order to ensure that the intent of this approach is not circumvented by reducing basic toll rates (as part of rebalancing), and afterwards raising them, a basic toll price ceiling is required.
Unitel proposed that there be five service categories in its basic toll basket: North American peak DDD, North American off-peak DDD, overseas peak, overseas off-peak and operator/credit card charges. The Commission considers that, given the pricing rules included in the new Stentor/Teleglobe interconnection agreement, overall increases in overseas rates are unlikely. In addition, given that Teleglobe's Globeaccess rates represent a significant portion of Stentor members' costs of overseas traffic, any overall overseas price increases or shifts in price relationships are likely to be dictated by the movements of those rates or the relationships embodied in them. Teleglobe's rate relationships, in turn, are dependent on accounting rates negotiated with foreign administrations. In light of these factors, the Commission considers that it would be preferable not to impose a prior constraint as to when it would be appropriate to expedite disposition of price changes for overseas basic toll rates, but rather to continue to handle these on a case-by-case basis.
The Commission also considers that operator/credit card charges should not be subject to a separate constraint, but rather should be included within an overall North American basic toll constraint. The Commission notes that revisions to these charges are already dealt with on an expedited basis where the level of the charges is cost-justified or has previously been approved for another federally regulated telephone company. The Commission further notes that there are alternatives to operator services.
The Commission considers, however, that it would be appropriate to constrain changes in the peak/off-peak relationship for purposes of expedited disposition. Therefore, the Commission adopts a general policy that there should be no price changes that result in an overall price increase for North American basic toll schedules combined and that expedited interim approval will be given to basic toll rate revisions that:
(1) do not result in an overall price increase for North American basic toll schedules combined (this would apply either to individual company filings or to Stentor filings for national services);
(2) meet the imputation test; and
(3) do not decrease the off-peak percentage discount for any given time period, except in instances where overall off-peak basic toll rates would fall or remain unchanged even with the off-peak percentage discount reduction.
Filings involving exceptions to the above will be considered only after awaiting comments from any interveners pursuant to a public notice, notice to subscribers, press notice or the CRTC Telecommunications Rules of Procedure (the Rules).
E. Bundled Pricing and Long-Term Contracts
AGT's position was that, in competitive markets, all competitors should be free to offer whatever goods or services they wish, either bundled or unbundled. Stentor submitted that all market competitors should be free to bundle products and/or services in order to satisfy customer demand. Stentor was of the view that all of the services presently included in the Toll, CN and Competitive Terminal categories will be fully competitive once equal access and 800 number portability are available. Stentor submitted that there would be no need for the Commission to concern itself with the bundling of these services.
AGT submitted that, while bundling of monopoly and competitive services should also be permitted, fair competition requires that two conditions be met. First, the monopoly service must also be made available on an unbundled basis. Second, the price at which the monopoly service is offered on a stand-alone basis should be imputed to the bundled service when the competitive and monopoly services are sold on a bundled basis, and the competitive service must cover its incremental cost. AGT considered that satisfaction of these requirements would ensure that the provider of the monopoly service is unable, through bundling, to use its monopoly position to gain an unfair advantage in the provision of competitive services. Stentor adopted a similar position.
AGT submitted that its bundling rule would provide sufficient safeguards to ensure that it did not unfairly take advantage of its monopoly service provisioning. At the same time, AGT's rule would allow the telephone companies to respond fully to market demands.
Stentor was of the view that the above costing rule concerning bundling should be limited to those cases that involve Utility or bottleneck services. Stentor stated that exceptions should be made, on a case-by-case basis, as recognized in Enhanced Services, Telecom Decision CRTC 84-18, 12 July 1984 (Decision 84-18), to ensure that the telephone companies are not placed at an undue competitive disadvantage.
Sprint submitted that there is a danger that the incumbent telephone companies could suppress efficient competition by bundling competitive services with monopoly services. Sprint stated that, if a customer must purchase the competitive service from the incumbent in order to get the monopoly service at the lowest available price, entrants will be unable to compete effectively. Sprint argued that, given their continued monopoly over bottleneck facilities and dominance in competitive markets, the telephone companies should be prevented from bundling together any of their competitive and monopoly services. Sprint submitted that such bundling would provide the telephone companies with a unique opportunity to gain an undue and unwarranted advantage over their rivals through anti-competitive actions such as market foreclosure practices or tied selling. Sprint argued that, in order to promote greater competition, all telephone company products and especially local exchange bottleneck services and facilities should be unbundled.
Unitel submitted that the Commission should prohibit the telephone companies from offering bundled services until the interexchange market is found to be effectively competitive. Unitel was of the view that no service or product associated with a Phase III Broad Service Category (BSC) should be bundled with a service or a product from another BSC. Unitel submitted that services or products from a single BSC could be bundled if each of the services and products were subject to effective competition. Unitel argued that, since the services and products included in the Access, Monopoly Local and Toll BSCs are not yet competitive, it would be inappropriate under any circumstances to bundle these products and services. Unitel's position was that such bundling is anti-competitive because it provides a means to prevent or limit competition. Unitel argued that the bundling of competitive services with monopoly services prevents competitors from competing on an equal basis.
Unitel stated that the Commission must be vigilant in preventing the telephone companies from abusing their dominance in the long distance market. Unitel was of the view that this should include prohibitions on the use of long-term contracts during the transition to competition and on the bundling of services.
As discussed in Part II, Section E, the Commission supports the unbundling of network access facilities. That issue is dealt with earlier in this Decision.
The Commission notes that the bundling of monopoly elements with competitive elements is currently permitted in some instances. One example is the provision of long distance service by the telephone companies. Long distance service represents the bundling of switching and aggregation service (a bottleneck service) with interexchange network facilities or elements. The Commission therefore considers that the issue is not whether such bundling should be permitted at all, but rather under what circumstances it should be permitted. (The Commission notes that, while the term bundling generally refers to a situation where one rate covers a number of service elements, the following discussion also applies to situations where there may be separate rate elements for each service element, but a number of service elements are aggregated for purposes of applying volume discounts, with the result that the discount available is greater than it would be were the service elements not aggregated).
The Commission considers that the bundling of monopoly elements with competitive elements is generally appropriate, subject to three conditions:
(1) the bundled service must cover its cost, where the cost study for the bundled service includes:
(a) the bottleneck component(s) "costed" at the tariffed rate(s) (including, as applicable, start-up cost recovery and contribution charges); and
(b) the Phase II causal cost for component(s) not covered in (a);
(2) competitors are able to offer their own bundled service through the use of stand-alone tariffed bottleneck components in combination with their own competitive elements; and
(3) resale of the bundled service is permitted.
The Commission notes that the requirement in (1) is a variant of the imputation test discussed above and is similarly designed to achieve competitive equity, but is more widely applicable, because it includes services where there may be no explicit contribution component (as well as the toll market where there is explicit contribution). Thus, it would potentially apply to, for instance, optional local services.
There are two potential exceptions to the above that the Commission can identify at this time. First, Stentor suggested that, similar to the situation referred to in Decision 84-18, there is the possibility that the requirement in (1) above could put the telephone companies at a competitive disadvantage. Stentor did not elaborate as to how this could occur. Given that tariffed rates would be used as costs only in the case of the bottleneck component and the fact that the purpose of the above test is to put the telephone companies and competitors on an equal footing, the Commission considers it unlikely that the situation referred to by Stentor would arise. However, it would be prepared to consider exceptions, where warranted, with the condition that its objective would continue to be competitive equity.
The second exception involves terminal equipment. The Commission considers that its current general policy against bundling of terminal equipment with network service elements, either Utility or Competitive, should continue. The Commission considers that, because there are likely to be relatively few significant network providers for the foreseeable future, bundling might limit distribution channels for terminal equipment.
With respect to competitive service elements, the Commission finds bundling to be permissible where the bundled elements belong to the same market segment (for example, discount toll). With respect to bundling elements from different market segments, as noted above, the Commission will not permit the bundling of terminal equipment with network service elements. Further, the Commission finds that, prior to the resolution of issues surrounding 800 service access, 800 service elements bundled with those from either the CN or discount toll market segments are to be costed at the tariffed rates for 800 service on a stand-alone basis, rather than at causal costs.
With respect to the bundling of CN components with elements from the discount toll market segment, the Commission notes that this currently would be permitted for the purposes of providing enhanced services. The Commission will also permit such bundling for services that are not enhanced.
The Commission notes that the imputation test described above for services that bundle monopoly and competitive elements replaces the current enhanced services rate evaluation test established in Decision 84-18. The latter test required that all basic service elements, whether monopoly or competitive, used in the provision of enhanced services be costed at tariffed rates. The new test will apply to all services that bundle monopoly elements with competitive elements, not just to enhanced services, and will require that only bottleneck elements be costed at tariffed rates. In addition, the new test, by generally reducing the cost-based price floor for enhanced services, should facilitate the introduction of economically viable new services, while maintaining competitive equity. There will be no imputation requirement for services bundling only competitive elements, except as indicated above for 800 service.
With respect to the issue of long-term contracts for interexchange services, the Commission notes that it has previously permitted Stentor members to provide service under long-term contracts in the CN market segment and for virtual corporate network services (which currently rely primarily on dedicated access). With respect to telephone company toll services involving switched access, the Commission determined, in the context of the introduction of Advantage Plus (a large-volume discount toll service since replaced by Advantage Preferred) that, absent the availability of trunk-side access in at least the territories of Bell and BC TEL, long-term contracts would grant the telephone companies an undue advantage. The Commission remains of the view that this is the appropriate policy. With respect to 800 service, the Commission decided in Telecom Order CRTC 94-376, 15 April 1994, concerning Advantage 800, that, without a resolution of the issues surrounding 800 access, long-term contracts could grant the telephone companies an undue advantage.
F. Customer-Specific Tariffs and Unjust Price Discrimination
Pending forbearance, Stentor proposed that there be flexibility in pricing and packaging of competitive services by means of customer specific tariffs. Stentor stated that these tariffs would provide for new services or combinations of existing competitive services designed to meet a specific customer need. They would be filed as an individual offering and would be available to other customers with the same requirements. Stentor stated that customers require, among other things, carriers that are able and willing to respond to their needs and provide innovative, flexible and customized communications services and facilities.
Stentor submitted that such tariffs would not be unjustly discriminatory in relation to either general tariff services or other customer-specific tariffs, given that they would apply in competitive circumstances and be generally available to any customers under similar terms, conditions and circumstances. Stentor also noted that competitive markets by their nature tend to produce a variety of price/service packages tailored to various circumstances. Stentor indicated that the companies would not distinguish between competitors and customers for the purpose of customer-specific tariffs.
CBTA's position was that enough regulatory flexibility should be permitted to allow customers to purchase customized packages of competitive services through special buying arrangements.
CTA submitted that permitting the members of Stentor to customize packages of competitive services through "special" buying arrangements would circumvent any serious attempt on the part of the Commission to curtail inappropriate cross-subsidies by the telephone companies. Sprint argued that very strict limits should be maintained on the use by dominant carriers of special assembly or customer-specific tariffs. Unitel submitted that it would be inappropriate to permit the telephone companies to offer contract-based services until such time as the interexchange market is found to be effectively competitive.
Stentor's proposal for customer-specific pricing raises the issue of the potential for unjust discrimination resulting from such tariffs, which in turn raises the issue of the potential for unjust discrimination in the competitive interexchange market generally.
The Commission considers that, in the interexchange market, the operation of market forces, in conjunction with the flowing-through to shareholders of Competitive segment profits and losses, the imputation test and the upward pricing constraint on basic toll rates discussed in Section D, reduce the potential for unjust price discrimination in respect of general tariff services. The general availability of these services and the ease of access by resellers to these services increase the disincentives to engage in unjust discrimination.
The Commission considers that, under current market conditions, customer-specific tariffs present a greater risk that unjust price discrimination will arise. Even if a policy is adopted that customer-specific tariffs must be available to customers with similar requirements under similar circumstances, such a policy could result in disputes over, or delays in, the provision of the arrangement to particular customers, given the judgment involved in determining whether there are similar circumstances and requirements. The Commission considers that this aspect of customer-specific tariffs may impede access by customers, and in particular by resellers, to similar tariffs, thereby curtailing the extent to which resale would limit the potential for unjust discrimination. The Commission notes that tariffs that are not customer-specific but rather provide for the general availability of services, by making explicit the conditions necessary to qualify for the service, avoid this problem, even in the case of services that relatively few customers would qualify for or find attractive.
The Commission considers, however, that it would be appropriate to provide increased pricing flexibility for customer-specific arrangements, subject to safeguards against unjust discrimination.
In the Commission's view, there are two general types of customer-specific tariffs:
(1) those providing, via a special facilities or special assembly tariff (SFT), a service that involves service features or technology that differ from those covered by the general tariff; and
(2) those providing a bundle of services tailored to a particular customer's needs, primarily involving elements available from the general tariff, where the purpose is to customize the offering in terms of rate structure or levels (for example, distance sensitive/insensitive, usage sensitive/insensitive, one-time charges, etc.).
Tariffs such as those described in (1) are generally permitted under the Commission's current rules, subject to certain conditions. These arrangements will continue to be permitted, subject, in the interexchange market, to the following:
(a) the provision of a study demonstrating that the imputation test is met;
(b) the telephone company demonstrating in its tariff application that there is not sufficient demand to offer the service through the general tariff;
(c) in order that there be no unjust discrimination or undue preference, the service package and the associated rates, terms and conditions provided under the customer-specific arrangement being generally available to other customers; and
(d) resale being permitted.
The Commission will also permit the second type of arrangement noted above, subject to the following:
(a) the provision of a study demonstrating that the present worth of revenues under the customer-specific contract equals or exceeds the sum of:
(i) the present worth of revenues under general tariff rates for those service components available under the general tariff over the duration of the customer-specific contract; and
(ii) the present worth of causal costs for those components not covered by general tariff rates;
(b) the telephone company demonstrating in its tariff application that there is not sufficient demand to offer any customer-specific elements of the service through the general tariff;
(c) in order that there be no unjust discrimination or undue preference, the service package and the associated rates, terms and conditions provided under the customer-specific arrangement being generally available to other customers; and
(d) resale being permitted.
With this second type of tariff, the imputation test would usually not be required, given that the general tariff rates would generally reflect that test. The Commission notes that the approach outlined for the second type of tariff may also be appropriate for certain local facilities that may be in the Utility segment, such as local facilities associated with interexchange facilities.
The Commission recognizes that this regime is transitional until there is sufficient competition in the supply of underlying network facilities. The Commission assumes that, with greater competition, there will be an increase in contract pricing by service providers. Such competition would be expected to effectively discipline the telephone companies. In addition, effective competition in the supply of transmission facilities will reduce the potential for unjust discrimination in the provision of those facilities.
G. Interexchange Tariff Information Requirements
In Information Requirements for Competitive Toll Filings by the Telephone Companies, Telecom Letter Decision CRTC 93-12, 30 July 1993 (Letter Decision 93-12), the Commission established information requirements for competitive toll filings that were designed to address three issues:
(1) the contribution (or revenue requirement) impact, and therefore the potential local rate impact, of the proposed toll rates;
(2) whether the proposed rates are compensatory; and
(3) in cases where the toll filing was not included in the company's filing in the annual contribution proceeding, an estimate of the cumulative impact on the competitor contribution charge of the toll filing in question and previously filed toll applications that were not included in the contribution filing.
Under the current regulatory framework, the contribution from toll to local is dependent on the level of toll rates. Telephone company toll rate reductions tend to reduce the toll contribution and therefore raise concerns about upward pressure on local rates.
Under the new regulatory framework, where competitive services are no longer subject to earnings regulation and where an explicit CAT is charged to the telephone companies, there is no requirement for the information referred to in (1) and (3). The level of contribution made to the Utility segment by the Competitive segment will be determined by the level of the explicit contribution component of the CAT, rather than by any implicit contribution generated by or embodied in toll rates. Consequently, toll rate reductions in and of themselves will no longer have the potential to reduce contribution or put upward pressure on local rates. Since profits and losses from the Competitive segment will be flowed through to shareholders, any reduction in the contribution or the margin embodied in toll rates will be borne by shareholders. Consequently, there will be no need for concern over the potential contribution impact of toll rate reductions, once the CAT has been implemented and after the effective date of the split rate base.
In advance of the effective date of the split rate base, but after the implementation of the CAT, a similar insulation of local rates from the negative effects of toll rate reductions can be achieved through the use of Phase III (or Phase III equivalent). Similar to the situation in which the rate base is split, the costs associated with bottleneck services that are currently assigned to the Toll category will be assigned to the Monopoly Local or Access categories (rather than to the Utility segment, as will be the case under the split rate base) and the revenues associated with the application of the contribution, start-up cost recovery and bottleneck components of the CAT to the telephone companies' own services (as well as from application of the CAT to competitors' services) will be assigned to the Access and Monopoly Local categories. The CAT charges incurred by the telephone companies' own services would be treated as a cost from the perspective of the Toll and CN categories. In the event that the Toll category (modified as described) is forecast not to recover the full amount of the CAT contribution component (due, for instance, to planned toll rate reductions), the category would be in a position of shortfall. For revenue requirement purposes, there would be a regulatory adjustment to offset any shortfall. Therefore, for revenue requirement purposes, it would be as if the Toll category had recovered the full amount of the CAT contribution component, and local rates would accordingly be unaffected by the planned reductions or by any contribution shortfall.
The Commission notes that it is unlikely that it will prove necessary to invoke this interim arrangement to insulate local rates from the negative effects of toll rate reductions, given the short period of time between implementation of the CAT and 1 January 1995, the effective date of the split rate base. The Commission will, however, implement this mechanism in the event of any request for a general increase in rates with a proposed effective date prior to 1 January 1995.
Consequently, the contribution or revenue requirement impact information required by Letter Decision 93-12 (i.e., item (1) above) will not be required once the CAT is implemented.
As noted above, with the implementation of the CAT, there will no longer be any need for the information now necessary to address the third requirement of Letter Decision 93-12, noted above. This information is required under the existing regulatory framework to ensure that the competitor contribution charge established in the annual contribution proceeding remains appropriate throughout the year, in the sense of maintaining competitive equity.
With the implementation of the CAT, however, the potential impact of unforecast toll filings on the appropriate level of the competitor contribution charge will no longer be an issue from the perspective of toll tariff filings. Competitive equity from a toll pricing and bottleneck/contribution charge perspective will be maintained through the use of the imputation test and the introduction of explicit contribution and bottleneck access charges for the telephone companies.
To summarize, the implementation of the CAT removes the need for carriers to provide information as previously required by items (1) and (3) above of Letter Decision 93-12.
In the Commission's view, this will result in a substantial reduction in the burden on the telephone companies associated with toll filings. This information represents the majority of the information currently required and is also generally that portion of the information that has been the subject of greatest controversy and which, in the Commission's view, embodies the greatest degree of uncertainty and judgment.
Letter Decision 93-12 did not apply to telephone company CN filings. However, there is currently a similar requirement for contribution or revenue requirement impact information, which, for similar reasons, will no longer be required, subject to the implementation of the CAT and either the implementation of the split rate base or, in the context of any request for a general increase in rates with a proposed effective date prior to 1 January 1995, the use of regulatory adjustments to offset any shortfall in the CN category occurring prior to the effective date of the split rate base.
The Commission notes that, pursuant to Decision 94-13, the second aspect of the Letter Decision 93-12 requirements noted above was replaced with the requirement for information relating to the imputation test, which will apply to applications for interexchange rate reductions and new interexchange services, except in the case of certain customer-specific arrangements, where a general tariff recovery test is required, as described above.
With respect to proposed rate revisions to North American basic toll schedules, the telephone companies are directed to provide information indicating whether the conditions set out in Section D above are met, in addition to information addressing the imputation test. The price ceiling and off-peak constraints should be addressed by comparing reprice revenues, assuming no stimulation or market share retention, to revenues at existing rates. The Commission considers that, as a general policy, an indication as to whether each of the conditions set out in Section D above are met should be on the public record.
The Commission will require that, for filings involving new service features, a block diagram be filed, indicating the categories (existing Phase III categories or, after the rate base is split, Utility/Competitive segment) to which revenues and costs are to be assigned.
H. Treatment of Competitive Shortfalls After Splitting the Rate Base
In the Commission's view, after the effective date of the split rate base, there will be no regulatory action required or policy concerns with respect to shortfalls in the Competitive segment. The Commission's view is based on the following.
First, under a split rate base, any Competitive segment shortfall will be borne by shareholders, not by the Utility segment. Consequently, there is no possibility that a cross-subsidy from the Utility segment will result from a Competitive segment shortfall.
Second, the Commission has determined that the appropriate test for anti-competitive pricing is based on current causal costs, such as are produced by Phase II (in combination with the imputation of any explicit contribution and bottleneck access charges). Consequently, a test based on Phase III is not necessary as a safeguard against anti-competitive pricing.
I. Competitive Tariff Timeframes and Process
1. Use of Interim Approval
Where it is satisfied that the information requirements and criteria are met, the Commission will be prepared to grant expedited interim approval of interexchange filings, without waiting for comments from interveners. With respect to concerns expressed by parties regarding the granting of interim approvals prior to the filing of comments by interveners, the Commission considers that this process is appropriate for the reasons set out below.
First, the imputation test and basic toll price ceiling are intended to prevent, and address potential intervener concerns over, anti-competitive pricing and overall rate increases in the less competitive basic toll market segment.
Second, the implementation of the CAT serves to insulate local rates from the negative impact of interexchange rate reductions, thereby removing that issue as a potential concern of either the Commission or interveners.
Third, while the Commission cannot, on an a priori basis, assume that competitive market forces will always operate to ensure that any proposed interexchange rates are not unjustly discriminatory, the Commission considers that, as noted above, market forces, in conjunction with the flowing through to shareholders of Competitive segment profits and losses, the imputation test, the basic toll price ceiling and the safeguards adopted for customer-specific tariffs will reduce the incentives and opportunities for the telephone companies to engage in any unjust discrimination relative to the current regulatory framework.
Fourth, Ontario argued that, in making an interim order, the Commission must be satisfied that the order must be made prior to the hearing of the full case and that it will have the capacity to remedy the results of the order if, upon full consideration, it finds that the interim order should not be affirmed. Ontario argued that this is a difficult standard to apply in the context of setting rates in a competitive environment. The Commission is of the view that, even in cases where it would not have the capacity to remedy the results of the order, it would be appropriate to make use of interim orders where the public interest in expeditious disposition outweighs any negative consequences arising when tariffs approved by interim orders are subsequently found to require modification. The Commission notes that the safeguards and information requirements adopted in this Decision are designed to minimize the likelihood of any such negative consequences.
2. Placement of Tariff Filings on the Public Record
Stentor proposed that, for tariff filings of competitive services, the entire filing, including the covering letter, the proposed tariff pages and the tariff notice, be maintained in confidence until interim approval is granted or a public notice is issued. Stentor proposed that, at that time, the filing would be placed on the public record, subject only to confidentiality claims with respect to costs or other such information of value to competitors. While the companies did not generally contemplate the filing of tariff applications in confidence for Utility services, Stentor stated that it is conceivable that there could be circumstances where, due to the presence or potential presence of competitive services or suppliers, the companies may also wish to file tariffs associated with services that may be in transition from Utility to Competitive in confidence with the Commission.
AGT's proposal envisaged that the entire tariff filing for any competitive or optional local service could be filed in confidence, and that no document included in the filing would be provided on the public record, at least until interim approval was granted.
The Commission considers that there are circumstances in which applications should not be placed on the public record prior to interim disposition. In the Commission's view, subsection 61(3) of the Act, which grants it the power to make ex parte decisions, permits the Commission to deal with certain applications in this manner.
The Commission notes that the essence of an ex parte decision is that it is made at the request of and after hearing the submissions of one party only. The Commission's view is that, in exercising its power to make ex parte decisions, it may make an interim ruling without considering comments on the application from interested parties. In addition, the Commission considers that, in order to give effect to its express statutory power to make ex parte decisions, it must be permitted to make an interim decision without providing interveners with either notice of, or an opportunity to contest, the application.
If the Commission were to place ex parte applications on the public record, there would effectively be no ex parte proceedings, as other parties would have an opportunity to respond to any such applications. Consequently, the Commission's view is that an ex parte application should not be placed on the public record until it has received interim approval or a decision has been made to place the application on the public record. Further, although there may still be instances where the Commission will receive comments regarding an ex parte application prior to it being placed on the public record, in the Commission's view, it need not consider those comments prior to rendering an interim decision regarding the application.
The Commission considers that there are several considerations to be balanced in any determination to permit ex parte tariff filings. These would include traditional public interest concerns, such as the procedural rights to notice of parties adverse in interest, the public interest in an open regulatory process and the benefit to the regulatory decision-making process derived from comment by interveners. Relevant considerations would also include concerns related to the public interest in the effective operation of the competitive marketplace. The latter would include (1) the desirability of relying to a greater extent on market forces, minimizing the extent to which the regulatory process provides market participants with a competitive advantage and permitting the telephone companies to benefit from superior performance, new service/marketing ideas, etc. to the greatest extent possible, and (2) the potential for harm or prejudice to the competitive position of the telephone companies.
The Commission considers it reasonable to expect that the telephone companies' competitive positions would be prejudiced by the lack of an ex parte process for competitive tariff filings. This harm, in the Commission's view, would take the form either of a loss of or reduction in a legitimate competitive advantage or the creation of a competitive disadvantage, due to advance knowledge of telephone company initiatives by competitors or to a longer period between the date a filing is placed on the public record and the date of its implementation. The prejudice to the telephone companies' competitive position derives from the longer advance notice to competitors, absent an ex parte process, and therefore the greater opportunity for them to respond to telephone company initiatives, thereby reducing the market effectiveness of those initiatives, through advertising or other customer contact, pricing responses, the advancement of the date of implementation of the competitor's own service, etc. The Commission considers that the ability of the competitors to actually pre-empt the telephone company initiative is not required for prejudice to result. It would be sufficient only for the length of time over which any advantage may otherwise have existed to be reduced.
With respect to the length of time, the Commission notes that advance notice to competitors can be broken down into two components: (1) the interval from date of filing to date of interim disposition, and (2) the interval from date of interim disposition to date of implementation. Because the public interest clearly requires that tariff applications, once granted interim approval, be placed on the public record, any ex parte tariff process would address only the interval from date of filing to date of interim disposition. Therefore, in many cases, any such process would only reduce, not eliminate, advance notice of telephone company competitive initiatives.
The degree of harm would depend on the degree of competition, the speed with which competitors could respond, the extent of innovation involved in new services or pricing packages and the length of time that a filing would be on the public record prior to interim disposition. In the Commission's view, apart from differences with respect to harm across different market segments and between Northwestel and the other telephone companies, the potential for the telephone companies' competitive positions to be prejudiced generally would not vary systematically across types of filings (e.g., promotions, new services, repricings of existing services). While new services would be the most likely type of filing to embody innovation, these are also likely to require the greatest amount of time for competitors to respond. Promotions or repricing initiatives, while perhaps less innovative, are the type of filing most easily pre-empted or responded to by competitors.
The Commission considers that, in order to provide greater certainty to parties, it would be appropriate to establish criteria or a policy concerning the appropriate circumstances under which ex parte tariff applications might generally be appropriate. The Commission also considers that any such criteria must be as unambiguous as possible in order to avoid delay and uncertainty in their interpretation. The Commission's view is that the criteria should be tied to the five market segments potentially at issue:
(1) discount toll;
(2) 800 service;
(3) basic toll;
(4) CN services; and
(5) optional local.
The Commission considers that, in practical terms, the potential harm to the telephone companies is greatest in the discount toll market, followed by the 800 service market.
In the Commission's view, however, the issue is not solely whether the lack of an ex parte process prejudices the competitive position of the telephone companies, but whether that factor and other concerns related to the public interest in the effective operation of the competitive market are offset by the more traditional public interest considerations described above. The Commission also considers that the extent to which the latter considerations may outweigh the former concerns will vary by market segment.
The Commission considers that it would be appropriate to consider an ex parte process for interim disposition only for those tariff filings that meet all of the Commission's tariff criteria (i.e., the imputation test, etc.) and which raise no issues related to bottleneck services, consumer safeguards or privacy.
The Commission considers that the presence of safeguards and market forces and the opportunity to comment after interim disposition are sufficient in certain instances to ensure that the interests of parties are not unduly prejudiced by an ex parte process and to address concerns related to the impact of an ex parte process on the benefit to the regulatory decision-making process derived from comments by interveners. However, the Commission considers that, where competitive filings do not meet safeguards or when they raise bottleneck service, consumer safeguard or privacy issues, the traditional public interest considerations clearly take precedence over concerns related to the public interest in the effective operation of the competitive market, due to the potential impact on competitors and consumers and to the Commission's likely greater reliance on the contributions of interveners in these situations.
The Commission concludes that, once the CAT has been implemented, ex parte interim disposition will generally be appropriate for Stentor member discount toll and 800 service filings where the applicant demonstrates that all safeguards are met and no bottleneck service, consumer safeguard or privacy issues are raised. The Commission would also be prepared to consider a similar regime for IXC tariff filings. Moreover, the Commission intends to issue a public notice seeking comment on the appropriateness of forbearance from regulating services provided by non-dominant IXCs.
In the Commission's view, the degree of competition and the potential for harm to the telephone companies flowing from greater advance knowledge of their initiatives in markets other than Stentor member discount toll and 800 markets are such that the traditional public interest concerns would outweigh any concerns related to the public interest in the effective operation of the competitive market. Consequently, the Commission's general policy will be not to extend the ex parte process to Stentor member optional local, basic toll or CN tariff filings (or to filings by Northwestel), but rather to continue with the current practice regarding the placement of these tariff applications on the public record.
3. Timeframes
Stentor proposed that competitive tariff applications be given interim disposition within seven days of filing, while AGT proposed a period of five business days. The Commission considers that it would not be appropriate for it to have regard to any timeframes for tariff disposition apart from those specified in the Act, for a number of reasons.
First, the issue of deadlines was recently considered by Parliament, with the result that the Act requires that the Commission deal with tariff applications within 45 business days or make public, among other things, written reasons why it has not done so.
Second, from a practical perspective, the timeframes suggested by Stentor and AGT would not be feasible. The Commission notes that Stentor's suggested timeframe was predicated on, among other things, there being essentially no rating criteria or a priori concerns and, therefore, no provision by the telephone company, and no review or analysis by the Commission, of information required to demonstrate compliance with safeguards or economic criteria. AGT's proposal was similar, except that any requirement that rating criteria be met would be satisfied by means of an affidavit. In order to address regulatory considerations, the Commission is imposing safeguards and is requiring the provision with tariff filings of information necessary to address those safeguards. The Commission considers that the timeframes suggested by Stentor and AGT would: (1) preclude an analysis of the information provided and of any additional concerns related to unjust discrimination, bottleneck access, consumer safeguard or privacy issues; (2) be inconsistent with the requirement that the Commission be satisfied that rates are just and reasonable and not unjustly discriminatory prior to interim approval; and (3) essentially require that the Commission give automatic approval to filings for interexchange services. The Commission notes that, as recognized by Stentor, absent a determination by the Commission to forbear, the Commission must be satisfied that the record shows no breach of subsections 27(1) (just and reasonable rates) or 27(2) (no unjust discrimination or undue preference) of the Act prior to the granting of either interim or final approval of proposed tariffs.
However, the Commission considers that there are opportunities for streamlining, given the reduced information requirements set out in this Decision, the fact that local rates will be insulated from the negative financial consequences of interexchange rate reductions and the fact that incentives for unjust discrimination will be reduced under the new regulatory framework.
First, aside from delays due to concerns relating to provision of bottleneck services to competitors, delays in toll filings under the current regulatory framework result primarily from concerns over the potential impact on local rates of toll reductions and over anti-competitive pricing. With the implementation of the CAT, the former concern is no longer an issue, while the imputation test is designed to address the latter. Consequently, the Commission considers that delays in disposition of toll filings that meet the new criteria and information requirements will be reduced.
Second, the Commission intends, for purposes of providing for comment on interexchange filings, to rely primarily on the 30 day comment period from date of filing provided for in the Rules. The Commission's general policy for interexchange filings will be to issue public notices only in cases where both (1) and (2) below are met:
(1) either:
(a) the imputation test, the conditions applicable to basic toll revisions, or the SFT general tariff recovery test are not met; or
(b) the filing raises concerns over access to bottleneck facilities, privacy or consumer safeguards; and
(2) the Commission considers that the comment process provided for in the Rules is not likely to generate a record sufficient for decision-making or is not likely to provide an adequate opportunity for customers affected by privacy or consumer safeguard issues or by basic toll rate revisions to provide comment.
The Commission notes that the purpose of identifying regulatory concerns and information requirements in advance is to facilitate streamlining by avoiding the need to seek further information. Consequently, the Commission intends to place greater emphasis on information provided with tariff filings and to place reduced reliance on requests for further information.
4. Other Tariff Process Matters
The Commission notes that the Rules currently provide that registered interested parties are to receive all proposed agreements and general rate applications for which they have registered, but only those tariff applications that are the subject of a public notice.
With respect to various parties' requests that carriers be required to provide registered interested parties with copies of all tariff filings, not merely those that are the subject of a public notice, the Commission notes that it has denied similar requests in the past. The Commission also notes that some of the carriers have agreed among themselves to exchange tariff notices, but that not all carriers participate.
The Commission notes that one option would be to require that the carriers provide copies of tariff applications to registered parties on a cost-recovery basis. The Commission considers this unnecessary, given that tariff applications not subject to an ex parte process are to be made available in the public examination rooms at the time of filing and that, therefore, the opportunity exists for carriers and interveners, individually or collectively, to gather and to distribute this information and, when costs are incurred, to recover those costs from those requiring the information. The Commission understands that at least one private sector service is already available whereby those who subscribe are made aware of tariff applications that have been filed with the Commission.
The Commission notes that the filing of documents in machine-readable form and the establishment of a related database available to the public would enable interested parties to access and obtain copies of all tariff filings or other applications. As described in Part VI below, the Commission is actively pursuing this objective.
V CONTRIBUTION
A. Introduction
Based on information filed in the proceeding leading to Decision 92-12, the Commission established contribution charges applicable to facilities-based carriers and to resellers competing in the long distance voice services market. The respondent telephone companies were directed to provide, in December of each year, estimates of appropriate contribution charges to come into effect the following year. The estimates were to be based on the methodology approved by the Commission.
In AGT Limited - Interconnection of Interexchange Carriers and Related Resale and Sharing Issues, Telecom Decision CRTC 93-17, 29 October 1993 (Decision 93-17), the Commission established contribution charges applicable to facilities-based carriers and to resellers competing in the Alberta long distance voice market. The contribution charges established in Decision 93-17 are based on methodology consistent with that approved in Decision 92-12.
Since Decision 92-12, the Commission has conducted two annual contribution charge proceedings. The proceeding for the year 1993 concluded with the issuance of Contribution Charges Effective 1 April 1993, Telecom Decision CRTC 93-11, 29 July 1993, in which the Commission approved some modifications to the methodology for calculating contribution established in Decision 92-12. The second annual contribution charge proceeding concluded with the issuing of 1994 Contribution Charges, Telecom Decision CRTC 94-18, 14 September 1994 (Decision 94-18), in which the Commission approved contribution charges applicable for the year 1994. The Commission has issued several other decisions and orders dealing with issues related to contribution (related, for example, to contribution exemptions).
B. Contribution Mechanism
1. General
In Decision 92-12, the Commission considered contribution to represent a subsidy from long distance telephone services. As such, the Commission held the view that the contribution scheme operates independently of access cost causality. The Commission adopted a definition of contribution that would result in entrants paying contribution charges based on the amount of foregone contribution resulting from their entry into the long distance voice services market.
AGT argued in this proceeding that the Commission's current contribution mechanism is not competitively neutral. AGT's argument was based on four points. First, contribution is not paid by competitors on traffic carried on direct access lines (DALs), and the 2% DAL surcharge is not sufficient to compensate the telephone companies for contribution lost on DAL traffic.
Second, AGT argued that competitors receive a discount to account for non-price stimulated minutes; in Decision 92-12, the Commission established the adjustment to allow competitors to avoid paying contribution on non-price stimulated minutes.
Third, competitors benefit from explicit and implicit contribution discounts. AGT suggested that there is a potential implicit discount that can be realized when competitors load more minutes of traffic on their interconnecting circuits than the minutes assumed for the purpose of establishing the per-trunk charges.
Fourth, AGT argued that, given the way in which contribution is calculated and paid, the full dollar value to competitors of any discount constitutes an effective surcharge on the overall contribution responsibility of the telephone companies.
Stentor made similar criticisms of the current contribution regime. Stentor argued that its proposal for a CAT and split rate base removes the linkage between contribution rates and the telephone companies' Budget Views, and permits the determination of contribution rates independently of rates for competitive services.
Stentor proposed that the CAT: (1) utilize a per-minute contribution rate rather than the existing per-trunk mechanism; (2) only apply to traffic associated with direct interconnection to the public switched telephone network (PSTN); and (3) be applied to a broader range of services.
AGT proposed that equivalent contribution charges would apply to all interexchange carriers interconnecting to the PSTN (including providers of data, enhanced, interconnected private line, cellular, cable and public cordless telephone services), on the basis of the number of minutes of interexchange traffic carried. AGT argued that its contribution proposal is competitively neutral.
The Commission considers that the proposals put forward by AGT and Stentor would have certain benefits, and agrees, in principle, that, over time, all carriers interconnecting under similar terms and conditions should be subject to the same contribution charges. The Commission considers, however, that, for a variety of reasons, adoption of either of these proposals is not possible at this time. Some of the issues raised by the proposals are discussed below, while others will be considered in future proceedings.
2. Level of Contribution
In Decision 92-12, the Commission defined contribution using Phase III BSCs. The Commission concluded that the target contribution should equal the Access shortfall (excluding contribution revenues), plus surpluses from all other BSCs except the Toll category.
Under the Decision 92-12 approach, the target contribution is then adjusted for common and PUC costs and for revenues flowing to/from other members of Stentor through the Stentor Settlement Plan (SSP). The adjusted target contribution is referred to as the contribution requirement (as found at page 198R of Decision 92-12).
As noted elsewhere in this Decision, the Commission is adopting a CAT and a split rate base approach to regulating the telephone companies. Accordingly, the Commission intends to adjust the contribution requirement to reflect the split rate base. The Commission contemplates that the new contribution requirement will be defined as the sum of the Access shortfall (excluding contribution revenues) and Monopoly Local surplus, plus appropriate revenues and expenses from other categories, including common costs and costs for PUC, deemed to be associated with the Utility segment.
The Commission intends to issue a public notice in November 1994 to initiate a proceeding to split the telephone companies' rate bases and to establish final 1995 contribution rates.
3. Direct Access Lines
Under AGT's proposed contribution regime, all minutes, including those carried via DALs, would pay contribution. As an alternative to its preferred treatment of DAL traffic, AGT proposed that contribution not be paid by the telephone companies on minutes carried on DALs. In AGT's view, this alternative would create an environment in which the telephone companies and their competitors would be treated equally.
AGT recognized that it is difficult to measure and report traffic carried on DALs. However, AGT proposed that special studies be conducted to estimate the average monthly usage per voice grade equivalent access arrangement and that interconnecting carrier payments be based on a per-line usage estimate.
Stentor proposed that the CAT apply only to traffic associated with direct interconnection to the PSTN. As a result, neither telephone company nor competitor traffic associated with DALs would pay contribution. Stentor argued that this would equalize the rules between the telephone companies and competitors.
The Commission continues to be of the view, expressed in Decision 92-12, that it is not feasible to levy a contribution charge on competitor DAL traffic and that a 2% increase in the contribution charge for switched access should be assessed on all competitors (i.e., all competitors of the telephone companies) in order to compensate for their use of DALs.
With respect to telephone company traffic, the Commission does not consider there to be significant difficulties (administrative or otherwise) in measuring the amount of traffic being carried over DALs. Therefore, the Commission considers it appropriate, with the CAT, to apply the contribution charge to all of the telephone companies' voice/data traffic carried over the interexchange portion of the PSTN.
Notwithstanding the foregoing discussion, the Commission is of the view that a modification to the existing contribution mechanism is required to more accurately recover lost contribution from competitor minutes being carried over DALs. In Decision 92-12, the Commission determined that a multiplicative adjustment should be used to convert the competitors' switched toll minutes to total switched and non-switched minutes. The multiplicative factor was to be held constant over time and was based on the averages of estimated competitor non-switched minutes and competitor total toll minutes over the study period. This factor is referred to as the DAL loading factor (as found at line 8.(b) of the table on page 198R of Decision 92-12).
The Commission notes that Bell argued in the 1993 contribution charge proceeding that the combined effect of the DAL surcharge and DAL loading factor gives competitors a 12% discount on their contribution calculation. The Commission shares Bell's concern. Accordingly, the Commission is eliminating the DAL loading factor adjustment beginning in the year 1995.
Notwithstanding the foregoing change to the method of calculating contribution, the Commission continues to be concerned that DALs may be used to avoid contribution. The Commission's concerns are discussed in Section D below.
4. Mechanism to Collect Contribution
In Decision 92-12, the Commission adopted a per-access-trunk mechanism to collect contribution. The per-trunk approach is based on a per-minute rate, which is converted to a per-trunk charge based on estimates of the number of minutes that are carried on access lines within trunk groups of various size. The per-access-trunk mechanism was judged by the Commission as being superior to various alternatives (including a per-minute mechanism), because it entails less incentive to target or to avoid certain markets. Furthermore, the Commission held the view that a per-access-trunk mechanism would likely result in the least introductory and ongoing regulatory involvement.
Stentor proposed that the CAT utilize a per-minute contribution charge, rather than the existing per-trunk mechanism. Stentor submitted that it would be appropriate to move to a per-minute contribution charge at this time to enable contribution to be applied equally to both the telephone companies' and competitors' traffic. AGT and Stentor were critical of the existing per-trunk mechanism because, in their view, there is a potential implicit discount that can be realized when competitors load more minutes of traffic onto their trunks than the minutes assumed for the purpose of establishing the per-trunk charge.
Unitel argued that Stentor's proposal for a per-minute contribution mechanism is a continuation of arguments made by Bell during the proceeding leading to Decision 92-12. Unitel noted that the Commission rejected Bell's proposal in Decision 92-12 in favour of a per-trunk mechanism as proposed by Unitel. Unitel argued that the per-trunk mechanism has several advantages, including the fact that competitors are encouraged to actively structure and market their services to attract off-peak and residential markets. Unitel submitted that the Commission has already made its determination respecting the appropriate contribution mechanism. Stentor, in Unitel's view, did not present any new or credible arguments to warrant a review of, or change to, the mechanism established in Decision 92-12.
The Commission is of the view that, with the implementation of the CAT, a per-minute mechanism will be more suitable than the existing per-trunk charge and that, where feasible, the charge should be applied at both the originating and terminating points of a call. Further, the Commission notes that, pursuant to Decision 92-12, all competitor voice/data traffic using trunk-side connections is currently subject to contribution charges. Accordingly, the Commission is of the view that a per-minute contribution charge should apply to all telephone company voice/data traffic carried over the interexchange portion of the PSTN and to all competitor voice/data traffic accessing and egressing the PSTN via trunk-side connections. Due to measurement difficulties, the Commission considers that the existing per-trunk mechanism remains appropriate for competitors' Canada-U.S. and Canada-Overseas traffic and for traffic originated or terminated via line-side connections. For the purposes of calculating the per-minute contribution charge, Overseas and U.S. minutes will continue to be double-counted (in order to reflect payment of contribution at both the originating and terminating ends of a call). Similarly, the telephone companies are to calculate their contribution payments on Overseas and U.S. traffic by double-counting all minutes either originating or terminating in the U.S. or Overseas.
The Commission considers that, with the CAT, a per-minute mechanism should result in greater equity between the telephone companies and competitors. However, the Commission remains concerned over possible disincentives that an average per-minute mechanism may have for the carriage of low-margin traffic. Moreover, the Commission notes, as discussed in Section D below, that there may be further approaches to restructuring contribution to reduce incentives to bypass. Accordingly, the Commission would be prepared to consider proposals to de-average (peak/off-peak, originating/terminating) the per-minute contribution charge. However, given the need for uniformity in the manner in which contribution is collected, any proposed changes by the telephone companies should be filed by Stentor on behalf of its members.
In light of the above, the Commission directs AGT and the other Stentor companies to issue, within 15 days, revised tariff pages replacing the current Access Services Tariff for Interconnection with Interexchange Carriers with a CAT reflecting the above, and providing for an effective date of 30 days from the date of this Decision. The contribution charge applicable to the telephone company should equal the per-minute contribution rate found at line 10 of the "1994 calculation of contribution" table found in Decision 94-18. The CAT should also include all bottleneck service and start-up cost recovery charges.
5. Contribution Discounts
In Decision 92-12, the Commission found that a contribution discount of limited duration was appropriate. The telephone companies have argued that the explicit contribution discount should be eliminated because competitors have gained more market share than was predicted in Decision 92-12. AGT argued that the elimination of the explicit discount would make the contribution mechanism more competitively neutral.
Entrants argued for a continuance of the discount. CTA argued that economic equal access (CEI, ONA and co-location) must be implemented before a competitor can be said to be on an equitable footing with the incumbent telephone companies. CTA submitted that the discount schedule established in Decision 92-12 should remain unaltered when a new regulatory regime is adopted.
CTA also argued that, while some measure of toll competition exists in the operating territories of the respondents to the proceeding that culminated in Decision 92-12, toll competition in Alberta and Manitoba is in its infancy, and ubiquitous geographic coverage will not be available for some time due to the absence of toll competition in Saskatchewan.
The Commission considers that the reasons for contribution discounts identified in Decision 92-12 remain valid and that the discounts should accordingly remain in place.
C. Scope of Contribution-Paying Services
The contribution regime established in Decision 92-12 provided exemptions from contribution charges in certain situations where line-side access is utilized. In particular, Exemption 8(c) at page 183 of Decision 92-12 states:
Where an interconnecting circuit associated with line-side access, a Canada-USA circuit or an overseas access circuit is used by Unitel for the purpose of providing a data service, the contribution charges specified in Item 7 shall not apply, provided that Unitel applies to the Commission on a case by case basis and provides evidence satisfactory to the Commission that by reasons of the technical, economic, or operational characteristics of the service, it is unlikely that the connections will be used significantly for voice service.
A similar exemption applies for dedicated services interconnected to the PSTN.
Since issuing Decision 92-12, the Commission has approved access service tariffs for interconnection with IXCs and resellers that provide for similar exemptions. The Commission has also disposed of a number of applications requesting exemptions for network configurations involving dedicated and data services.
With the advent of equal access, the services noted above will not, pursuant to Decision 92-12, be eligible for a contribution exemption if they are delivered using a trunk-side interconnection.
AGT and Stentor argued in this proceeding that the contribution charge should be extended to cover all services and service providers that make use of the PSTN. BCOAPO et al supported this broadening of the base of contribution-paying services.
Under the telephone companies' proposal, the new services that would pay the contribution charge include data, cellular, paging, enhanced, interconnected private line, cable and public cordless telephone service. The telephone companies argued that, as service boundaries become increasingly blurred, distinctions are increasingly artificial and arbitrary. As an example, they cited Advantage Vnet, a contribution-eligible switched voice service that provides functionality previously only available with dedicated contribution-exempt services.
On a preliminary basis, the Commission considers the application of contribution charges to a broader base of services to be desirable. Accordingly, the Commission intends to initiate a proceeding to examine issues associated with a broadening of the base of contribution-paying services.
D. Bypass Concerns
During this proceeding, parties raised concerns that traffic may be bypassing Canadian facilities. The Commission recognized, in Teleglobe Canada Inc. - Resale of Transborder Services, Telecom Decision CRTC 91-10, 26 June 1991 (Decision 91-10), that incentives to bypass Canadian facilities exist, and that avenues for responding to those incentives are increasingly available to users of telecommunications services.
As stated in Decision 91-10, the Commission considers the most effective long-term means for reducing bypass to be the lowering of Canadian toll and private line rates. In the Commission's view, recent reductions in rates for switched voice services have lessened the incentives for some types of bypass. However, private line rates have not been significantly reduced since the release of Decision 91-10. Moreover, in comparing incentives for bypass, the Commission notes that switched rate comparisons can be misleading, due to the incentives for large users and resellers to seek lower prices and given the small incremental costs of adding Canadian traffic to corporate or reseller networks based in the U.S.
In TelRoute Communications Inc. - Bypass Restrictions, Telecom Public Notice CRTC 94-23, 27 April 1994 (Public Notice 94-23), the Commission sought comment on issues relating to bypass, including whether the contribution regime established in Decision 92-12 should be revised to alleviate any bypass incentives and, if so, what revisions would be appropriate.
As stated in Public Notice 94-23, the Commission considers that the level of private line rates may continue to provide a significant incentive to bypass Canadian facilities.
In Public Notice 94-23, the Commission also noted its concern that the contribution regime established in Decision 92-12 may be providing incentives to bypass. Parties to this proceeding raised similar concerns. As noted in Section B.3 above, parties also argued that the contribution regime, through the treatment of traffic carried over DALs, may create incentives to avoid contribution through the use of DALs.
The Commission considers that reducing contribution by rate rebalancing will reduce incentives to bypass. Moreover, as discussed in Section B.4 above, the Commission notes that there are possible modifications to the contribution regime established in this Decision that may also reduce the incentives for bypass and contribution avoidance. Specific modifications could include: (1) differential charges for access to and egress from the PSTN; and (2) differential charges to reflect peak/off-peak pricing.
E. Future Proceedings
1. General
The Commission considers the lowering of rates for long distance services to be central to reducing incentives to bypass Canadian facilities, increasing economic efficiency and developing sustainable competition in the long run. The Commission's rate rebalancing initiative, the CAT, and expansion of the base of contribution-paying services will assist in achieving this objective. The CAT and the broadened contribution base will provide opportunities for the telephone companies' Utility segments to generate revenues and reduce contribution at a faster rate, thereby fostering new toll rate reductions. However, the Commission does not expect that contribution will be eliminated over the next three years.
The annual contribution charge proceedings in each of the next three years will provide a forum for all parties to comment on the rate of decline in contribution levels.
The procedure for the annual contribution proceedings during the transition period will have to be modified to accommodate the determinations made in this Decision. A general description of the required modifications is set out in the following Sections.
2. Rate Rebalancing
The Commission considers it appropriate that the contribution charge be reduced at the beginning of each year to reflect the rate rebalancing initiative. Accordingly, the telephone companies are directed to file a new proposed CAT, reflecting a reduced contribution charge, with their annual rate rebalancing proposals filed pursuant to the directions in Part II, Section B. The revised contribution charge to give effect to the annual rebalancing initiative will be based on the previous year's contribution requirement and total market minute estimates, the former being reduced by the increase in utility revenues associated with the next year's local rate increase, as applied to the previous year's Network Access Service count. The Commission would expect to give expeditious approval to the rate rebalancing proposals and the revised CAT, subject to the criteria and requirements set out in this Decision, including those in Part II, Section B above, and the provision of sufficient information to demonstrate that these criteria and requirements have been met. The revised CAT will remain interim until a decision in the annual contribution charge proceeding is issued.
As was the case in the 1994 contribution charge proceeding, the telephone companies are to file by the end of January 1995, a proposed contribution charge for the 1995 proceeding, based on their new Budget Views. For the 1995 proceeding, the proposed contribution charges are to be based on the existing contribution regime (as modified in this Decision to eliminate the DAL loading factor) and should reflect the rate rebalancing initiative. For 1995, because the Commission will be examining the methodology used to split the rate base, proposed contribution charges and other estimates should be provided based on the existing Phase III or equivalent methodology, as well as on the split rate base. This is discussed below.
3. Split Rate Base
As indicated above, the Commission will combine the proceeding to examine the methodology used to split the rate base with the 1995 annual contribution charge proceeding. Accordingly, the telephone companies will be required to file proposed contribution charges based on the existing methodology and on the estimated Utility segment results (using the companies' proposed methodology for splitting the rate base). A final CAT will be approved once the Commission has reviewed the forecasts and methodology.
In order to calculate the contribution requirement of its Utility segment, each telephone company is to use the lesser of its forecasted ROE and the mid-point ROE (approved in Part II, Section F, of this Decision). The per-minute charge is to be calculated to generate sufficient revenue to allow the Utility segment to earn the above ROE before the contribution discount is applied to the per-minute rate to be paid by competitors.
If the contribution charge so calculated exceeds that for the previous year, the contribution charge will be maintained at its existing level.
4. Scope of Contribution-Paying Services
As noted in Section C above, the Commission is in favour of expanding the scope of contribution-paying services. Given the potential impact of such a change and the significant workload faced by the Commission and the industry, the Commission does not expect to issue a public notice on this matter prior to 1996.
5. Price Caps
The Commission will hold a proceeding to finalize the parameters associated with each company's price cap mechanism. Coincident with the move to price caps, the Commission intends to discontinue the annual contribution charge proceeding. In the price caps proceeding, the Commission will seek comment as to how the contribution component of the CAT should be treated in a price cap regime.
VI OTHER REGULATORY REQUIREMENTS
A. Utility Segment Tariff Regulation
1. Pricing of Optional Local Services
Under the transitional regime established in this Decision, a portion of the Stentor members' fixed common costs will be assigned to the Utility segment. Because fixed common costs are, by definition, not causal, they are not included in the calculation of causal costs. However, in order that the telephone companies' Utility segments remain whole financially, fixed common costs must be recovered. Consequently, under (transitional) rate of return regulation, a pricing rule requiring that prices for at least some services exceed causal costs, thereby generating contribution, is necessary in order to ensure that fixed common costs are recovered.
The Commission considers that optional local services should be compensatory and should in general continue to be priced so as to maximize long-run contribution to Utility segment fixed common costs and to the maintenance of low basic exchange service rates. The long-run maximization of contribution from these services is consistent with minimizing any increase in basic local rates that may be necessary over time, as the subsidy from toll services is reduced. It is also consistent with the approach the telephone companies would likely take were these services not subject to regulation, since it is consistent with long-run profit maximization in an unregulated environment.
2. Utility Service Tariff Filings
Stentor proposed a process for Utility services tariff filings that would involve the granting of interim approval within 30 days, unless there is a prima facie reason not to grant such approval. Stentor also suggested that, where it is determined that a public notice is required before final approval, the public notice would be issued within 30 days of the application date and a decision issued within 90 days of the public notice. Stentor submitted that this process would provide adequate time for public comment and would not cause an unreasonable waiting period for customers of the proposed service. Stentor's view was that it is important that customers be given reasonable assurance that proposals put on the public record would be dealt with in a reasonable and timely manner. Stentor stated that, with a maximum period of 120 days to the final decision, the interests of all parties would be fairly balanced.
Stentor recognized that there would be a variety of circumstances under which the Commission would not grant interim approval for Utility services within 30 days. Stentor stated that prima facie reasons why the Commission would not grant interim approval within 30 days would generally involve the potential for widespread impact on customers, such as rate increases for basic exchange services or the elimination of existing service options.
AGT proposed that, absent forbearance for optional local services, it be given maximum flexibility to price and introduce optional local services and that a streamlined process for the filing of tariffs be adopted (similar to the one it had proposed for competitive services, described in Part IV). This would require that the Commission be prepared to grant immediate interim approval for tariff revisions related to such services, to be followed by early final approval, except where a prima facie case could be made that a service was priced below its incremental cost or involved unreasonable discrimination. AGT was of the view that such flexibility is essential if new services are to be developed and introduced in a timely and efficient manner in response to marketplace demands.
AGT proposed dispensing with the requirement to file supporting cost studies for optional local service offerings. Instead, an affidavit would accompany the filing attesting that the proposed rates, terms and conditions were not unreasonably discriminatory and otherwise met all regulatory requirements. In AGT's view, such an affidavit would provide the Commission with sufficient assurance that the requested tariff change is proper, thereby allowing the Commission to issue interim approval upon receipt of the application or, in any event, within five business days.
As noted above in Part IV, the Commission does not consider it appropriate to have regard to any timeframes for tariff disposition apart from those specified in the Act.
Furthermore, the Commission considers AGT's suggestion for interim approval of optional local tariff filings within five business days to be unreasonable, given that the services in question are generally monopoly services with all the attendant concerns over unjust discrimination, privacy, consumer safeguards and pricing. In light of such concerns, the Commission does not consider it appropriate that such filings be supported merely by an affidavit; rather, as discussed below, supporting information should be provided. The timeframes suggested by AGT would: (1) preclude an analysis of the supporting information provided and of any additional concerns related to unjust discrimination, bottleneck or other unbundled access, consumer safeguard or privacy issues; (2) be inconsistent with the requirement that the Commission satisfy itself that rates are just and reasonable and not unjustly discriminatory prior to interim approval; and (3) essentially require that the Commission give automatic approval to tariff filings.
With respect to Stentor's proposed process, the Commission notes that its current practice is to deal expeditiously with optional local filings that do not raise significant regulatory concerns, either by way of an interim order within the 30 day comment period provided for by the Rules, or by way of a final order issued after the thirtieth day if no negative comments are received. The Commission notes that Stentor recognized that, for filings that raise more significant regulatory concerns, it would not be possible to grant interim approval within 30 days.
The Commission considers that the maximum period of 120 days suggested by Stentor from date of filing to date of final decision is not likely to prove sufficient in some cases, given the potential for controversial filings raising issues such as privacy, bottleneck or other unbundled access rates, increases in basic local rates or the restructuring of multi-line access rates and the consequent need for adequate public participation.
With respect to Stentor's proposal that no approval process be required for routine or administrative tariffs, the Commission notes that it has already approved applications from Bell to streamline or withdraw certain administrative tariffs. In addition, Stentor's objective could be achieved through de-tariffing of certain items or through the Commission's use of its power to approve revised tariffs to take effect on the occurrence of a specific event, such as the meeting of some criterion. The Commission considers that the primary concerns with such a practice would be the specification of appropriate criteria, the opportunity for public inspection of any de-tariffed items, the application of Terms of Service to such de-tariffed items and the extent to which the public interest in permitting intervener comment on any of the items in question prior to approval is outweighed by the benefits of streamlining these filings. Consistent with past practice, the Commission is prepared to consider applications from the telephone companies for further streamlining of the process for routine or administrative filings, including the potential withdrawal of the associated tariffs.
3. Information Requirements
Stentor's proposal envisioned that Phase II studies would be submitted in support of new, or substantially changed, optional Utility service tariff filings in order to ensure that such services are priced to make a contribution. Stentor also indicated that a Phase II study should be provided in support of new or substantially changed basic Utility or competitor access tariffs.
As noted above in Section A.2, AGT proposed that the requirement to file supporting cost studies for optional local offerings be replaced with an affidavit accompanying the filing attesting that the proposed rates, terms and conditions are not unreasonably discriminatory and otherwise meet all regulatory requirements.
Given the need to ensure that bottleneck and other basic local services are priced appropriately in relation to cost and that optional services are priced to maximize contribution, the Commission will maintain existing Phase II information requirements for Utility service tariff applications, subject to the modification that, where competitive or potentially competitive optional services in the Utility segment make use of bottleneck services, tariff rates for the bottleneck services are to be imputed as a cost of the competitive or potentially competitive optional service. This latter requirement is consistent with the Commission's general approach to bundling, as described above in the context of the interexchange market.
The Commission does not consider an affidavit sufficient to demonstrate that rates are compensatory and maximize contribution, given that optional services would form part of the Utility rate base and given that the application of economic study methodologies can involve judgment.
B. Investment Review
1. Construction Program Review
The construction program review (CPR) was designed to generate information that can be used to assess the reasonableness of projected construction expenditures and to provide a means of evaluating the technology deployment plans of carriers on an ongoing basis. In the past, the Commission has considered regular reviews of the capital plans of carriers necessary, since such plans are continually in flux and, through subsequent depreciation, the expenditures comprise a significant portion of the revenue requirement.
The Commission has generally required carriers to provide economic or other justification for proposed discretionary capital program expenditures supporting service introduction or increasing operational efficiency. If a program has a positive net present value, the revenue requirement over the life of the investment will be reduced. The Commission has consistently used this principle to assess the reasonableness of proposed capital programs, recognizing that carrier investment decisions can significantly impact the future revenue requirement.
Currently, the telephone companies file their capital plans annually, with supporting documentation, for internal Commission review. The Commission no longer holds public review meetings with respect to investment plans, except in conjunction with a revenue requirement proceeding, and intends to continue this practice during the transition to price caps. An exception would occur if the Commission deemed that certain elements of the capital plan warranted full public review. In addition, the carrier filings will be available in the Commission's public examination rooms, enabling parties to request initiation of such a review.
Although some of the parties to this proceeding envisaged the eventual elimination of the CPR process if price-based regulation were introduced, there was general consensus that periodic reviews of planned capital spending should continue as long as earnings regulation remained in place. The Commission is of the opinion that, as long as regulation continues to focus on the earnings of the telephone companies, it is necessary to undertake annually a thorough review of projected capital expenditures and technology deployment plans. Moreover, in a period of dramatic change it will be essential for the Commission to monitor investment carefully as telephone companies prepare for price cap regulation, consider whether to accelerate depreciation and prepare to invest considerable amounts in broadband infrastructure. This is necessary to ensure that the Utility rate base is not inflated prior to moving to price caps, to control the impact of investment and depreciation on local rates during the transition phase and to assess whether all investment in Utility infrastructure should be reflected in contribution rates. Accordingly, for the duration of the transition period, pending full implementation of the revised regulatory regime, the present review process for planned capital spending will remain in place for investment in the Utility rate base or for any investment that could affect the earnings of that segment.
In their capital plan filings, telephone companies will be expected to identify investments associated with the development of new or enhanced technology platforms and to demonstrate to the Commission that such investments will be cost-effective. To the fullest extent possible, carriers will also be expected to identify any major investments that are not directly associated with the provision of basic telephone service, such as, for example, those associated with the recently announced Stentor Beacon Initiative.
Finally, the Commission is of the opinion that, under price cap regulation, there would no longer be a need for an ongoing assessment of investment. However, the Commission considers that there may still be a need for some examination of investment in the context of price cap performance reviews, given influences depreciation may have on prices over time and the relationship of investment to network modernization and service quality. The need for tools to examine investment will be considered in the 1996 proceeding to implement price caps.
2. Depreciation
Depreciation expense forms a significant part of the revenue requirement, and a review of it has been considered important under rate of return regulation. The Commission's powers with respect to depreciation were explicitly established in the Railway Act. The Telecommunications Act makes no explicit mention of depreciation, but the need and the Commission's authority to examine and rule with respect to issues related to depreciation are implicit in various sections of the Act.
The basic goal of depreciation is to recover the exact original cost of capital invested in plant over its useful life. The Commission established the principles, approaches and procedures governing depreciation in Phase I of the Cost Inquiry (see, in particular, Telecom Decision CRTC 78-1, 13 January 1978, and Telecom Decision CRTC 89-11, 24 August 1989). Depreciation life characteristics have been approved on the basis of studies submitted annually by the telephone companies. In particular, the Commission has verified that estimates of future average service lives and retirement dispersions are based on valid assumptions and supported by valid reasoning.
BCOAPO et al asserted that, unless the telephone companies are compelled to take a capital loss on past investments, recovery of the full difference between Phase III costs and long-run incremental costs (e.g., stranded investment) will be borne by purchasers of monopoly services. AGT replied that the amount of a company's unamortized capital is simply that portion of the original investment that remains to be recovered through the company's service revenues. Investment only becomes stranded if and when a company cannot charge sufficiently high prices to recover the costs of assets over their useful life.
AGT distinguished a firm in full control of its capital investments, whose shareholders must bear the risk of failing to fully recover its capital costs, from entities subject to significant regulatory control over investment, depreciation and pricing decisions. A regulator that has set depreciation rates too low to recover past investments must accept responsibility, and not penalize the company. AGT submitted that, under rate of return regulation, the Commission should allow greater pricing flexibility to obviate the potential for stranded investment. Under price caps or complete forbearance, the risks would, of course, be borne solely by shareholders.
CTA contended that there is nothing inherently unfair about requiring a carrier to remove stranded assets from its rate base. AGT, on the other hand, argued that this would breach the long-standing social compact between the shareholders and investors of regulated utilities and the public (represented by regulators). Stentor contended that obsolete assets are not included in its members' rate bases.
CTA asserted that allowing telephone companies to recover for under-recovery of depreciation in past periods would constitute retrospective rate-making. AGT replied that any unamortized capital must be recovered in the future and that going-forward amortization of the historical depreciation expense shortfall is neither a retrospective nor a suspect accounting practice, particularly under rate base regulation where investors expect to recover their investment as part of the regulatory bargain. Stentor pointed out that this position is consistent with Phase I depreciation directives and contended that accounting practices regarding expense recovery are unrelated to retroactive rate-making.
CTA also proposed that the Commission review telephone company depreciation practices. Stentor pointed out that the Commission has already thoroughly done so.
NAPO stated that telephone companies granted greater regulatory freedom should bear the cost of participating in a deregulated market, including the writing-off of obsolete assets. Stentor replied that, under its proposal, any assets associated with a "deregulated market" would be included in the Competitive segment, not the Utility segment. Accordingly, the companies would indeed bear the costs of any accelerated depreciation relating to assets used to provide competitive services.
In the opinion of the Commission, its current depreciation regime is consistent with established industry practices and there is no record to support a review of its Phase I regime. During the transition to price caps, depreciation will continue to be an important element in determining the appropriateness of Utility rates. However, the Commission recognizes that, during the transitional period, there will be incentives to accelerate depreciation in anticipation of the full implementation of the new regulatory framework. Therefore, the Commission will expect any proposed changes to depreciation practices with significant revenue requirement implications to be fully supported. Further, any such changes will be carefully assessed in light of the impact they may have on initial price levels under price caps.
C. Phase II Studies for Tariff Filings
The City of Calgary (Calgary) commented that the Phase II methodology requires re-examination to ensure that the costing principles and the procedures used are sufficiently rigorous to ensure that subscribers to basic access and local telephone service are not burdened with costs attributable to optional or competitive services. Calgary recommended that a public proceeding be established to re-examine the Phase II methodology in the context of the current telecommunications environment and to develop appropriate procedures to monitor the actual results for individual services.
The Commission notes that methodologies have evolved since the Commission's original decision in Phase II of the Cost Inquiry (i.e., Telecom Decision CRTC 79-16, 28 August 1979). Such ongoing changes are necessary to ensure that costing techniques are consistent with cost causality and strike the appropriate balance between the level of detail required of studies and the costs of performing them. Given its ability to make ongoing changes as necessary, the Commission does not consider that, in the absence of specific concerns, a Phase II review process would be useful at this time.
As noted in Decision 94-13, consequential changes to Phase II costing may result from the Commission's decision in the Phase III Review initiated by Public Notice 94-16.
As to suggestions concerning the development of monitoring procedures, the Commission notes that Phase II studies are typically performed in order to evaluate a decision to introduce a new service or make substantial changes to an existing service. The objective of tracking is not primarily to assess the telephone companies' forecasting accuracy over time, but rather to address concerns over the impact, on the continued appropriateness of rates, of variations in critical variables from their forecast levels over the study period. In the Commission's view, it is reasonable to expect that all forecasts will turn out to be wrong to some degree. The important issue, however, is not whether a forecast will be wrong, but rather the likelihood that a forecast will be sufficiently inaccurate to affect the appropriateness of a decision based on it.
Tracking is one tool employed in Phase II. Another related tool is sensitivity analyses, whereby critical study variables, typically related to demand, are varied from their base case amounts in order to determine the impact on the study results. Sensitivity analysis can also indicate that tracking is unnecessary, or more or less important, by illustrating the sensitivity of the study outcome to variations in the forecast amount in question. Furthermore, this analysis, unlike tracking, takes place prior to approval.
CTA also proposed that there be a Phase II review proceeding, covering, among other things, the determination of a list of Phase II variables that should be tracked and of a methodology for monitoring the forecasting accuracy of telephone companies, as well as the articulation of consequences resulting from consistently poor forecasting. In CTA's submission, this would permit the Commission to determine whether any trends develop in deviations between actual and forecast results. Forecasting accuracy could then be taken into account by the Commission in deciding whether or not to approve new services and repricing proposals that require justification through Phase II studies, and in adjudicating predatory pricing complaints.
With respect to these issues, the Commission would note the following. The regulatory requirement for tracking is based in part on the fact that basic local subscribers would bear the impact of competitive services that are not compensatory due to insufficient demand. Under the transitional regulatory framework, the removal of competitive services from the rate base for purposes of rate of return regulation will remove this concern, provided that the costing methodologies used to remove the competitive services are appropriate and have been properly adhered to. Thus, the consequences of below-forecast performance in competitive services will be borne by shareholders, rather than local subscribers. Tracking therefore becomes less important under the new framework.
As noted above, the purpose of Phase II tracking is not to assess the telephone companies' forecast accuracy per se, but rather to address the concern over the impact of variations in critical economic study variables on the continued appropriateness of rates. Consequently, the choice of variables to be tracked, if any, depends on the service and study in question. In the Commission's view, there is no general rule with regard to that choice that would be appropriate in all cases or that might not impose unwarranted costs on the telephone company. In the Commission's view, therefore, the tracking plan associated with a particular Phase II study can only be assessed on an individual basis. In that regard, the Commission considers that tracking plans should generally be on the public record.
CTA also submitted that, in order to check the validity of the costing approach and the overall accuracy of the original economic evaluation study, the study should be reconstructed based on actual results. As indicated above, sensitivity analyses are intended to address this issue. The Commission further notes that the preparation of reconstructed Phase II studies would impose significant costs on the carriers. In view of the foregoing, the Commission considers that reconstructed Phase II studies are not required for the purposes submitted by CTA.
CTA submitted that its proposed Phase II review should also cover the methodology applicable to the selection of a study period in the case of monopoly and competitive services. CTA stated that a review of Phase II studies filed with the Commission in recent years would reveal that the telephone companies attempt to stretch the study periods for competitive services, while compressing the study periods for monopoly services.
The Commission notes that Decision 79-16 generally provides that the study period shall be the lesser of ten years or the number of years to the end of the service life. Most studies continue to use a ten-year study period, although there are instances of shorter study periods for both competitive and monopoly services. The Commission notes that there are many factors that affect the choice of a study period, for example, (1) equipment life, (2) contract duration, (3) whether there is an alternative use for the equipment, (4) the cost, uncertainty and benefits associated with including forecasts for years further into the future, (5) the product life cycle, and (6) the period necessary to capture any significant changes in cash flows. Thus, it is appropriate that, to the extent that parties or the Commission disagree with the choice of study period, the issue be addressed in the context of the filing in question, rather than through a generic proceeding. The Commission considers therefore that the study period used in economic studies should generally be on the public record.
CTA submitted that another topic that could be covered in its proposed Phase II review is the terms under which interested parties should obtain access to information that, up until now, has been filed in confidence with the Commission in the Phase II process. CTA submitted that it would be appropriate for the Commission to revisit the extent to which the upholding of confidentiality claims should be curtailed to permit more meaningful regulatory interventions by interested parties. CTA submitted that, under a new regulatory regime, the Commission should adopt a much lower threshold for the disclosure of information on the public record. CTA argued that, as competition in the provision of telecommunications services has become more prevalent, the need for interested parties (many of whom are now competitors of the telephone companies) to guard against, and bring to the attention of the Commission, any potentially anti-competitive actions on the part of the telephone companies has increased, creating a significant additional public interest in ensuring that more disclosure of relevant information occurs.
In the Commission's view, with markets becoming more competitive and with competitive services to be removed from the rate base, the harm from disclosure can be expected to increase, and the public interest in disclosure to decrease, due to the reduced likelihood of cross-subsidy, under either price caps or the transitional regulatory framework. In the Commission's view, these factors would suggest that, over time, there should in general be less public disclosure of confidential information, not more. In addition, the Commission considers that the determination as to the information that should be released, or for which general guidelines should be issued, is best handled in the context of specific requests.
In light of the above, the Commission denies CTA's request for a Phase II review proceeding.
D. Phase III Matters
1. Introduction
With certain necessary modifications, Phase III costing will provide the framework and data necessary for the implementation of a split rate base. Moreover, Phase III will provide an important regulatory safeguard during the crucial transition period prior to the introduction of price cap regulation for the Utility segment. The continued use of costing in a price cap environment will be examined in the proceeding to implement price caps.
The issue of modifications to Phase III associated specifically with implementing a split rate base are discussed in Part II, Section F, above. Other Phase III issues that arose in this proceeding are discussed below.
2. Review of Phase III: Public Notice 94-16
Public Notice 94-16 announced the appointment of Commissioner David Colville to act as Inquiry Officer in a review of certain aspects of Phase III raised during this proceeding. That Public Notice indicated that the review would focus on the application of the broad causality principles established in Inquiry into Telecommunications Carriers' Costing and Accounting Procedures: Phase III - Costing of Existing Services, Telecom Decision CRTC 85-10, 25 June 1985 (Decision 85-10), and that the general scope of the review would consist of:
(1) the Phase III misallocations suggested by Unitel in its Exhibit 107 submitted in this proceeding;
(2) the appropriateness of the existing Phase III definition of Access and the implications of this definition for the allocation of investment and expense to the Access BSC;
(3) the appropriateness of certain specific Phase III procedures, with particular reference to existing assignments to the Access BSC; and
(4) the appropriateness of the existing Phase III Manual Update process established in Bell Canada and British Columbia Telephone Company - Phase III Manuals: Compliance with CRTC Telecom Public Notice 1986-54 and Telecom Order CRTC 86-516, Telecom Decision CRTC 88-7, 6 July 1988 (Decision 88-7).
The Public Notice also identified twelve specific agenda items drawn primarily from Unitel's Exhibit 107 filed in this proceeding.
The review meeting was held from 4 to 8 July 1994, following which written final and reply argument were filed. The Inquiry Officer submitted his report co-incident with the release of this Decision. Interested parties are to file comments with respect to his recommendations by 7 October 1994. The Commission will take these comments into account in making its determinations with respect to those recommendations. To the extent that these Phase III Review determinations result in amendments to any of the determinations in this Decision, the Commission will identify those amendments at that time.
3. Issues not Being Addressed in the Phase III Review
a. Inclusion of Proposed Changes to Phase III Methods in Phase III Forecasts
Unitel submitted that, because projected Phase III results may incorporate the effect of proposed changes to specific Phase III assignment methods on which the Commission has not yet ruled, telephone companies are in a position to influence Phase III results in a manner that artificially inflates contribution payments. Stentor argued that the inclusion of proposed changes, which may arise as a result of various factors, increases the accuracy of each company's Phase III forecasts. Stentor also noted that such changes are explained and quantified in the annual submissions of forecast results.
In Order and Guidelines for the Filing of Phase III Manuals by Bell Canada and British Columbia Telephone Company, Telecom Order CRTC 86-516, 28 August 1986 (Order 86-516), the Commission stated that, in the development of forward test year data, individual assignment ratios may require adjustment to reflect anticipated changes that would affect the results of Phase III categories. Such adjustments include anticipated, i.e., proposed, changes to assignment methods. Thus, from time to time, Phase III forecasts incorporate proposed changes to assignment methods with respect to which the Commission has not yet ruled. However, the inclusion of proposed changes does not necessarily lead to an increase in contribution charges to be paid by competitors. Rather, the inclusion of proposed changes that have a detrimental impact on competitors tend to be offset by proposed changes that benefit competitors.
Accordingly, the Commission considers it appropriate that the telephone companies continue to recognize proposed changes to assignment methods in annual Phase III forecasts. The Commission notes that, once price caps have been implemented, the current method for calculating contribution, based on Phase III forecasts, will no longer be required.
b. Comparisons of Canadian and U.S. Data
Unitel presented, in various exhibits filed in this proceeding, considerable material comparing Canadian and U.S. costs and related productivity measures. These cost comparisons, derived by Unitel from a number of U.S. consulting reports, were used to support its argument that Phase III cost assignments overstate the local/access shortfall. Unitel also used the comparisons to call into question Bell's relative efficiency and productivity performance.
AGT and Stentor objected to the introduction of these comparisons as exhibits, rather than in evidence, arguing that they had not been provided with an adequate opportunity to examine and test all the assumptions and conclusions. AGT noted that the appropriate witnesses would have been the authors of the various U.S. reports. Stentor presented, in final argument, a detailed critique of certain aspects of the comparisons derived by Unitel.
The Commission notes that, to the extent that these comparisons, among other things, were used to call into question the existing Phase III assignments, Unitel's suggested misallocations are being addressed in the Phase III Review initiated by Public Notice 94-16. In the context of this proceeding, the Commission is unable to arrive at any definitive determinations regarding comparisons of Canadian and U.S. category costs. First, the Commission would note that the manner in which this information was introduced, i.e., in exhibits, rather than in evidence, was not conducive to a full examination. More importantly, in order to ensure that the comparisons are meaningful, a very detailed assessment would be required of differences in network configurations, accounting practices, definitions of service and settlement arrangements, among other things. The underlying information that would permit the Commission to undertake that assessment was not included in the information provided by Unitel.
In light of the above, the value and utility of Canadian/U.S. cost comparisons remain, in the Commission's mind, an open question. The Commission does not discount the possible value of properly documented and tested evidence on this subject in future proceedings.
c. Adequacy of Phase III Control Processes
Evidence and testimony with regard to the Phase III control processes was provided primarily by the Price Waterhouse panel presented by Unitel and the Deloitte & Touche panel presented by Stentor. A review of the record suggests that concerns with the Phase III control processes can be grouped into four categories, as follows:
(1) insufficient documentation in the existing Phase III Manuals, coupled with an apparent reliance on supplementary documentation such as the "Desk Guides";
(2) insufficient detail in the existing presentation of Phase III results;
(3) inadequate internal controls in the production of Phase III results; and
(4) inadequate external audit controls and, associated with that, a proposal that forecast results be audited.
As to the first point noted above, in Order 85-516, the Commission directed that the Phase III Manuals be designed to meet audit standards and that they describe assignment procedures in a manner that was suitably documented to permit validation of Phase III results, as required. However, the Commission recognized that there would likely be a specification of the processes required to derive Phase III information at the working level within each company, which need not be spelled out in the Manuals.
The Commission does not consider it unusual for the companies to provide their employees with additional material, such as the Desk Guides, instructing them on the operational detail involved in the application of Phase III procedures. Further, having considered the submissions of the parties, the Commission considers that, in most cases, the Manuals provide sufficient detail to permit an assessment of the assignment procedures set out in them. Accordingly, the Commission will not require the companies generally to provide greater detail in the Manuals. However, in this context, the Commission notes Stentor's statement that the companies would provide more detail, where it was proven to be warranted. Finally, as suggested by the Deloitte & Touche panel, the Commission does consider it appropriate to expand the description of the procedures used to produce forward test year results.
In light of the above, Bell and BC TEL are directed to expand the documentation in their respective Phase III Manuals with respect to the procedures followed in the production of forward test year results. The companies are directed to include this documentation in their update submissions of 15 January 1995.
During the proceeding, Bell indicated a willingness to include in its Manual an overview of those assignment processes that make use of organizational analysis. The Phase III Review included a further examination of the desired level of detail with respect to the costing analysis embodied in Bell's organizational analysis. A determination in this matter will be rendered in the Phase III Review decision.
In response to the second concern expressed by parties, i.e., insufficient detail in the existing presentation of Phase III results, Stentor noted that the detailed account-by-account format recommended by Price Waterhouse would require each carrier to provide an analysis of variances for each account at the BSC level; in Bell's case, this would involve several hundred function and field codes.
As noted elsewhere in this Decision, the Commission intends to commence a price cap proceeding in the first half of 1996. The Commission is not persuaded that, given the shift to price regulation, the cost and effort of providing information disaggregated to the extent suggested by Unitel's panel would be offset by the usefulness of the information.
With respect to the third concern, inadequate internal controls in the production of Phase III results, the Commission is simply not persuaded by the record of this proceeding that amendments are required. In this context, the Commission notes in particular Stentor's submission that Deloitte & Touche evaluate Bell's internal controls with every audit to ensure that the control environment for Phase III results does not differ from that for the company's statutory financial statements.
With regard to the final point noted above, Unitel argued that the existing external audits of Phase III processes and results should be more rigorous. Unitel also observed that the fact that historical results are audited provides no assurance that projected results are reliable. Unitel therefore proposed that projected results also be subject to audit.
Stentor noted that Deloitte & Touche routinely conduct both Phase III and statutory financial audits for Bell, and maintained that the controls adopted by the Commission are comprehensive, effective and, in many respects, stronger than those in other countries, including the United States. Stentor also noted that projected Phase III results consist of two elements, a company's budget and its Phase III ratios from the previous calendar year. Stentor, on behalf of Bell, acknowledged that forward test year results could be audited, but that such an audit would not apply to the key input to those results, namely, the budget.
The Commission is satisfied that each company's existing Phase III external audit arrangements remain appropriate. The reports of the auditor hired under contract by the Commission have confirmed that the audit processes employed by Bell and BC TEL since 1987 are reasonable and effective. With respect to the proposal that projected Phase III results be audited, this would, in the Commission's view, be of questionable value, given the uncertainties inherent in the forecasting process.
4. Adaptation of Phase III Results
By 30 September 1994, each Stentor member company, with the exception of Island Tel, Manitoba Tel and SaskTel, will have its Phase III Manual and will possess the capability of producing Phase III results. These Manuals and results will reflect the category definitions and the general conceptual framework established by the Commission in Decision 85-10 and Order 86-516. As the new regulatory framework is developed and implemented, there will be changes and adaptations in both the category definitions and certain aspects of the Phase III conceptual framework.
Prior to the implementation of a split rate base, adaptations to Phase III will arise from two primary sources:
(1) routine update submissions filed by carriers (pursuant to Decision 88-7 and Proposed Revisions to the Phase III Manual Update Procedure, Telecom Letter Decision CRTC 89-26, 1 December 1989); and
(2) determinations resulting from the Phase III Review announced in Public Notice 94-16.
Adaptations resulting from routine update submissions will be dealt with using the existing processes, subject to changes in those processes that may arise from discussions in the Phase III Review. Any adaptations resulting from specific determinations in the Phase III Review will be dealt with by means of special update submissions.
E. Quality of Service
The quarterly quality of service reports that the telephone companies currently file include indicators for toll service, which is now competitive. The Commission agrees with all parties that, where toll competition exists, i.e., where a customer can choose among alternative toll service providers, quarterly quality of service reports for toll services are unnecessary. However, in situations where there is only one provider of toll service, the Commission is of the view that the reporting of the toll quality of service indicator should continue, even if the toll market as a whole is generally competitive.
Therefore, for the present, quarterly quality of service reports should continue to include toll indicators. However, in regions where the telephone company can substantiate that other toll service providers are actively marketing their services, the Commission would be prepared to consider applications for permission to discontinue the filing of toll quality of service indicators for that region.
The Commission agrees with all parties that, under the new regulatory framework, there remains a need to monitor the quality of essential Utility services and bottleneck facilities. Moreover, under price caps, there must also be mechanisms to ensure that the telephone companies do not let service deteriorate in order to increase profits. Accordingly, under the new regulatory framework:
(1) as in the past, a proper determination of just and reasonable telephone rates will involve an assessment of the service quality provided by telephone companies to their subscribers;
(2) the Commission will continue to monitor the quality of service of all the telephone companies under its jurisdiction, with respect to essential Utility services, bottleneck facilities, and toll service in regions where the telephone company is the sole provider actively marketing such service;
(3) in regions where the telephone company is the sole provider actively marketing toll service, the Commission will continue to take into account the dependence of remote and rural communities on long distance service, due to population dispersal and distance from essential services; and
(4) the Commission will ensure that the telephone companies maintain the quality of services discussed in this Section.
As stated in earlier decisions, the Commission will hold a general proceeding on quality of service regulation for the telephone companies. The Commission will use the points noted above as guidelines, taking into account the particular circumstances of individual companies, in considering quality of service indicators, standards and other related matters. A public notice will be issued shortly in connection with that proceeding.
F. Machine Readable Filings
Currently, all documents filed in a proceeding must be submitted in hard copy (paper) format. The filing of copies of documents in machine readable format, using diskettes, occurs on a voluntary basis, typically by the major parties in large proceedings.
The Commission notes that all parties to this proceeding who commented on the subject were strongly in favour of the Commission developing a process for machine readable filings.
The Commission agrees that a process of this nature would help streamline the telecommunications regulatory process. Accordingly, Commission staff is commencing a pilot project for machine readable filings which will include input from telephone companies and other interested parties. It is expected that this project will lead to the establishment of a system that will permit all documents in Commission telecommunications proceedings to be both filed and accessed through an online computer system.
G. Inquiry Officer and Staff Mediation Processes
Parties were invited to comment in final argument on the desirability of the Commission placing greater reliance on the Inquiry Officer and staff mediation processes. Most parties who commented urged the Commission to make greater use of these mechanisms.
In the Commission's view, the regulatory process would be more efficient if it were to place greater reliance on these processes. The Commission notes that the Act has clarified the powers of the Inquiry Officer, who can now rule on confidentiality matters and hold in camera hearings. In the Commission's view, the Inquiry Officer process can be usefully applied to an examination of both policy issues and disputes between parties. The Commission notes that it has implemented such a process to review certain aspects of Phase III.
In the case of disputes between parties, the Commission considers that, in certain instances where the facts are in dispute, there are considerable advantages to an Inquiry Officer conducting a short oral hearing. In such hearings, factual disputes can often be resolved and the remaining contentious issues narrowed in a relatively short period of time.
The Commission is also of the view that non-binding staff mediation is a useful alternative dispute resolution mechanism. The benefits of such a process include: (1) an informal atmosphere conducive to parties coming to grips with the pivotal issues, (2) speedy identification of issues and of the details underlying the dispute, and (3) the facilitation of a timely and less costly resolution of some, if not all, of the contentious points. The Commission notes that it has recently made use of this process to address issues concerning the implementation of equal access in the long distance market, and, earlier this year, to deal with a billing dispute between Unitel and Newfoundland Tel. The Commission also notes that this process generated a positive response from the parties involved.
H. Northwestel
1. Form of Regulation for Northwestel
In final argument, Northwestel stated that it would be in favour of a regime that expanded the company's existing ROE range by 50 basis points on either side, with a sharing range of 100 or 150 basis points above the extended upper limit. The company agreed that, under such a proposal, any earnings in a 100 or 150 basis point range above the expanded upper limit (i.e., 13.25%) would be shared equally between its shareholder and its subscribers. The company stated that the mechanism for returning the subscribers' share of excess earnings would depend on the amount of earnings to be returned and could be determined later.
The company stated that, among other things, a widened ROE range would increase incentives for it to be more productive and reduce the number of revenue requirement proceedings, while encouraging it to undertake a progressive capital program to introduce innovative services on a more timely basis.
Northwestel stated that the risks associated with a price cap regime, given that the parameters might not be set up correctly, were too great for the company, due to its small size and high-cost operating area.
The Commission notes that, unlike the Stentor members, Northwestel has no major competitor in its long-distance service markets; further, there is limited competition in Northwestel's private line services and terminal equipment markets. Therefore, in the Commission's view, there would be little benefit to be gained from splitting the company's rate base. The Commission therefore considers that a different form of regulation from that applicable to the Stentor members should apply to Northwestel.
The Commission agrees with the company's concerns that, under any incentive earnings regime which contemplates a widened range, the lower limit of its expanded ROE range should not be set in a manner that could adversely affect the company's financial viability. At the same time, the Commission considers that a wider ROE range will provide the company with greater incentive to be more productive. However, if the company's ROE range is expanded by too much at the upper end, it could earn supranormal profits. The proposal to widen the company's present ROE range by 50 basis points on either end will balance the interests of shareholders and subscribers by requiring the company's shareholders to assume more risk in return for the opportunity to achieve and retain higher earnings. Widening the ROE range will also permit some reduction in regulatory burden.
The Commission considers that the current company-wide ROE range could be used as a reasonable starting point for an expanded range, given that the range was determined in a recent revenue requirement proceeding. Expanding this range by 50 basis points at either end results in a widened range of 11.25% to 13.25%.
The Commission also considers that a sharing range of 100 basis points above the top of the expanded range will allow both shareholders and subscribers to benefit from any increased operating efficiencies that the company may achieve.
The particular sharing mechanism can be determined should the company earn between 13.25% and 14.25%. The Commission contemplates that any earnings in excess of 14.25% would be returned to subscribers.
2. Northwestel Tariff Regulation
Northwestel submitted that the "contributory" criterion should be left to the company's management. The company stated that it is too fragile and vulnerable not to take advantage of all resources necessary to contribute to common costs and to access costs.
Northwestel also suggested that consideration could be given to other approaches to evaluating the company's tariff filings, particularly where the company proposes to provide a new service that is already offered by other federally regulated companies or that may be proposed by other companies simultaneously. For example, Northwestel stated that, instead of preparing and filing a detailed economic evaluation study, the company could file comparisons of prices charged or to be charged in other jurisdictions or prices charged by competitors in its operating area. Northwestel stated that it may also be appropriate for the company to bench-mark some rates.
Northwestel proposed that there be a time limit for disposing of an application. The company suggested that 30 days might be appropriate in instances where a filing does not entail a public notice. The company noted that it is particularly important for it to receive expeditious approval for special assemblies.
Northwestel submitted that the tariff filing process could be considerably streamlined if greater reliance was placed on the complaint process. The company argued that, for competitive or optional service filings, the Commission could grant immediate or almost immediate interim approval, dispense with the requirement for detailed economic evaluation studies and grant final approval after a certain interval if no complaints arise. The company stated that, where complaints do arise, the Commission could determine whether a prima facie case was made that the rates, terms or conditions were not just or reasonable or were unjustly discriminatory. Northwestel submitted that, if a prima facie case was made, the Commission could take immediate interim action, if necessary, pending further investigation.
The company submitted that it should not be required to produce an abridged version of information provided in support of tariff filings, unless the tariff filing goes to public notice or a member of the public requests a copy.
The Commission notes that its current approach to Northwestel's tariff filings takes into account the company's small size. Filings are rarely delayed unless they deal with significant changes to monopoly services, or involve situations where the Commission has concerns as to potentially anti-competitive factors or whether competitive or optional service rates are compensatory.
The Commission considers that competitive and optional services should be compensatory and should, in general, be priced to maximize long-run contribution to fixed common costs and the maintenance of low basic exchange service rates, with the exception of certain optional services where the requirement to maximize contribution may not be appropriate. The Commission notes that, generally, there is no current requirement for costing support for rate increases for competitive services or for rate increases for those optional services where it is appropriate to maximize contribution. The Commission agrees that, in the case of Northwestel, it may be appropriate to rely on relationships with rates approved in other territories, particularly in the case of rate increases for optional services where the maximization of contribution may not be appropriate. With respect to new competitive and optional services and competitive and optional service rate reductions, the Commission considers that current requirements for economic support should, in general, continue.
The Commission notes in this regard that the company's Phase III results have shown shortfalls in its terminal categories and that, under the regulatory framework adopted for Northwestel, competitive and optional services would remain part of the rate base for revenue requirement purposes. Local subscribers would therefore not be insulated from the financial performance of competitive and optional services. In the Commission's view, the company's narrow base of demand and volatile environment heighten concerns over the potential for cross-subsidization. In addition, the relative lack of competition in Northwestel's territory casts doubt on the effectiveness of reliance on a complaint process, in the absence of costing support for tariffs, to bring to the Commission's attention potentially non-compensatory rates.
With respect to the form of economic support for new optional and competitive services or rate reductions for those services, the Commission considers that economic studies should conform to the Phase II principle that the detail, cost, size and effort should be commensurate with the nature, size and significance of the service. Given the company's size, the Commission is prepared to consider exceptions to the requirement for studies and/or, in specific instances, to rely on relationships with rates approved in other telephone company territories. With respect to Northwestel's concern over the narrative requirements of economic studies, the Commission does not consider this information optional, in that it describes the service and major study assumptions. Presumably, this information is also needed for internal company purposes. There is no need, however, for any of this information to be duplicated in the covering letter accompanying the tariff filing.
The Commission considers that Northwestel should continue to be required to file, for the public record, an abridged version of economic studies that accompany tariff filings. In the Commission's view, it is a basic requirement of the public process that information should be on the public record, unless the company makes a claim of confidentiality with respect to it.
As noted earlier in this Decision, the Commission does not consider it appropriate to have regard to any specific timeframes for tariff disposition other than those set out in the Act. The Commission, however, is prepared to consider requests for expedited disposition, where circumstances warrant it.
VII IMPLEMENTATION OF TRANSITIONAL REGIME
A. Split Rate Base
1. Process
The Commission intends to issue a public notice in November 1994 to initiate a proceeding to split the rate bases of AGT and the other Stentor companies (the telephone companies) and to establish final 1995 contribution rates.
The Commission directs each telephone company to submit, by 31 January 1995, a proposal to split its rate base. The telephone companies are to use the approach described by Stentor in response to interrogatory SRCI(CRTC)31May93-318 RRF as the basis for their proposals.
In its public notice, the Commission will direct AGT, Newfoundland Tel and NBTel to file forecast 1994 and 1995 Phase III results by 31 January 1995. Island Tel will be directed to file corresponding Phase III equivalent results by the same date. Bell, BC TEL and MT&T will be directed to file updated 1994 forecasts and 1995 forecasts, also by the same date.
AGT, Bell, BC TEL, MT&T, NBTel and Newfoundland Tel will be directed to restate their 1993 Phase III actuals, for bench-mark purposes, using their proposed methodologies for splitting their rate bases.
If, as a result of its decision in the Phase III Review proceeding, the Commission requires the telephone companies to file special Phase III updates, it will also require that the split rate base proposals to be submitted on 31 January 1995 reflect those updates.
The Commission anticipates that its decision in the split rate base proceeding will be issued during the summer of 1995. Within 30 days of the issuing of that decision, each telephone company will file, for the purpose of establishing the Utility rate base and 1995 contribution charges, 1995 Phase III forecast results (in the case of Island Tel, forecast 1995 Phase III equivalent results) based on methodology approved in the decision. In this context, the Commission notes that, prior to the release of its split rate base decision, it will have issued decisions with respect to the Phase III Manuals of AGT, NBTel and Newfoundland Tel.
2. Revenue Requirement
Effective 1 January 1995, only the Utility segment will be subject to rate of return regulation.
In the event that a telephone company considers it necessary to request interim or final rate relief with an effective date between 1 January 1995 and the date of the final splitting of telephone companies' rate bases, the Commission will require that the need for such relief be demonstrated at the time relief is requested, based on the company's proposed split of its rate base and taking into account the Commission's determinations in this Decision respecting the earnings range on the Utility segment.
In the event that a telephone company requests rate relief with a proposed effective date before 1 January 1995, the Commission will implement the mechanism described in Part IV, Section G above, in connection with the insulation of local rates from the negative effects of toll rate reductions, through the use of Phase III or Phase III equivalent forecasts.
B. Contribution Component of the CAT
The Carrier Access Tariff (CAT) will take effect in mid-October 1994 when each telephone company issues tariff pages reflecting the Commission's directions in this Decision. The CAT will be based on existing contribution charges and bottleneck charges, including the per-minute charge for the recovery of start-up costs and the current bundled charge for switching and aggregation. Initially, the CAT will be used for purposes of the price imputation test and toll filing streamlining. The modifications to the price imputation test made in this Decision will take effect coincident with the implementation of the CAT.
The Commission considers it necessary, for reasons of competitive equity, that the CAT be revised effective the beginning of each year to reflect contribution charge reductions flowing from the Commission's rate rebalancing initiative. Accordingly, the Commission has directed the telephone companies to file, as part of their rate rebalancing proposals, proposed interim contribution rates for each of the years 1995, 1996 and 1997, no later than 1 December of the previous year.
The revised contribution charge is meant to give immediate effect to the reduction in the CAT arising from rate rebalancing, and will therefore be based on the previous year's data. Final contribution rates will continue to be subject to a more detailed examination in the annual contribution proceedings held in 1995, 1996 and 1997.
The revised contribution charge to give effect to the annual rebalancing initiative will be based on the previous year's contribution requirement and total market minute estimates, the former being reduced by the increase in Utility revenues associated with the next year's local rate increase, as applied to the previous year's Network Access Service count.
To calculate the contribution requirement of its Utility segment during the transition period, each telephone company will use its forecast ROE or its mid-point ROE (approved in Part II, Section F of this Decision), whichever is less. In the Commission's view, this will permit it to carry out its policy of reducing contribution rates as quickly as possible. The Commission also expects that, in circumstances where earnings fall below the allowed rate of return, contribution charges will not be increased to increase earnings. The per-minute contribution charge is to be calculated to generate sufficient revenue to allow the Utility segment to earn the above ROE before the contribution discount is applied to the per-minute rate to be paid by competitors.
The Commission would expect each year to give expeditious approval to the rate rebalancing filings and expeditious interim approval to the revised contribution component of the CAT, to take effect 1 January of each year, subject to the criteria and requirements set out in this Decision (including those in Part II, Section B above) being met, and subject to the provision of sufficient information to demonstrate that they have been met.
The public notice initiating the split rate base and 1995 contribution charge proceeding will direct each telephone company to file, by 31 January 1995, proposed final 1995 contribution rates based on its forecast Utility segment results (using its proposed methodology based on interrogatory SRCI(CRTC)31May93-318 RRF for splitting the rate base). The Decision 92-12 contribution methodology, as modified in this Decision, will be used to determine the 1995 contribution requirement.
Because the Commission will be examining the methodology used to split the rate base, the Commission will also require, for comparative purposes, that proposed 1995 contribution charges and other estimates be provided based on the current Phase III or equivalent methodology, assuming no splitting of the rate base.
Within 30 days of the release of its decision in the split rate base proceeding, the telephone companies will file proposed final 1995 contribution rates based on the forecast of 1995 Utility segment results, using the methodology approved in the split rate base decision. Since evidence on toll demand and market share will have been considered in the split rate base proceeding, the Commission expects to give expeditious final approval to 1995 contribution rates.
C. Price Cap Proceeding
Commencing in the first half of 1996, the Commission will hold a proceeding to determine the mechanics of its price cap regime (e.g., service baskets, productivity and inflation offsets, exogenous variables, review period and contribution). Since the emphasis of price caps is on price levels, rather than earnings, it will be necessary in that proceeding to consider what regulatory tools (e.g., depreciation, costing, financial reporting) have to be modified or replaced. The proceeding will also focus on what data are necessary to assess performance at the first review of price caps and what approach should be used to assess performance.
Allan J. Darling
Secretary General
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