ARCHIVED -  Telecom Order CRTC 99-75

Telecom Order

Ottawa, 27 January 1999

Telecom Order CRTC 99-75

The Commission received an application from Northwestel Inc. (Northwestel), dated 15 September 1998, proposing local rate group consolidation for residential and business customers, eliminating the differential between rates for different numbers of multi-lines, and lowering long distance promotional rates effective 1 January 1999.

File No.: Tariff Notice 671

1.Northwestel proposed to restructure residential and business local rates by establishing a single rate for primary access services across its four rate groups. According to Northwestel's application, the individual residential and business line rates for Rate Groups 1 to 3 would increase to $20.33 and $38.70 respectively (including touch-tone). These rates are identical to those currently paid by customers in Rate Group 4. Similar consolidations are proposed for residential and business services with two and four party service. In addition, Northwestel proposed a common multi-line business rate of $47.00, regardless of the number of lines a customer subscribes to, for all rate groups.

2.According to the application, individual residential line rates would increase as much as $2.63 or 15%, while individual business line rates would increase as much as $7.00 or 22%.

3.Northwestel argued that many telephone companies have simplified their local rate structures by reducing the number of rate levels. The company submitted that these rate actions are consistent with the development of competitive markets and that the company is proposing to bring the rates charged for local services in certain communities closer to the costs of providing such services.

4.Northwestel further submitted that the proposed rate structure would be easier and less costly to administer.

5.Northwestel proposed that the additional revenues generated from the rate group consolidation would be used for several purposes, including the funding of other rate initiatives (such as long distance promotions) and service upgrades (such as upgrading Cellular 400 Ruraltel Service to Cellular 800 or to other new technologies).

6.In its application of 15 September 1998, Northwestel also proposed a series of bi-monthly weekend toll service promotions to be offered throughout 1999. Northwestel proposed to offer $0.15 per minute toll calling within Canada during weekend off-peak hours (Saturday 3:00 p.m. to Sunday 8:00 a.m.).

7.The company stated that the promotions are intended to meet customer demand for lower long distance rates, stimulate long distance calling and reduce the impact of bypass.

8.Northwestel indicated that the total net revenue impact of these proposed initiatives would increase the company's rate of return on average common equity (ROE) by approximately 0.6% to 9.8% in 1999.

9.Northwestel advised all customers of the proposal by way of a direct mailing, inviting comments on the application. The Commission also invited comments on the application by way of Northwestel Inc. - Rate Group Consolidation and Other Rate Initiatives, Telecom
Public Notice CRTCCRTC 98- 29, 2 October 1998.

10.Comments were received from a number of interested parties including the Government of the Northwest Territories (GNWT), the Yukon Government (YG), the Public Interest Advocacy Centre (PIAC) on behalf of the National Anti-Poverty Organization and the Rev. Mike Gardener, resident of Iqaluit and other parties including several residents and business persons within the company's operating area.

11.Various interveners, including PIAC, noted quality of service problems, especially problems experienced by those in the more rural areas.

12.A majority of subscribers expressed the need for long distance rates comparable to those offered in the South. They noted that they wanted permanent Toll rate reductions as opposed to the limited promotions proposed by Northwestel.

13.Many parties, including GNWT, YG and PIAC, were concerned with the timing of the proposed rate increases. They submitted that the impact of previously approved rate rebalancing, combined with the proposed rate restructuring, would create an unacceptable burden on Northwestel's customers.

14.A number of parties submitted that the application was not revenue neutral.

15.GNWT submitted that while a portion of the revenues generated by rate group compression
could be used to fund the toll promotions, the combined effect would result in an increase to the company's ROE. Further, GNWT did not consider that the record of the proceeding was adequate to establish either an appropriate return on equity for Northwestel or what Northwestel's actual return on equity is likely to be.

16.In reply, Northwestel noted that it was aware of the customer demand for lower long distance rates throughout the North, but argued that it could not afford to offer rates comparable to those in the South.

17.Northwestel also submitted that, on average, customers have benefited from the last two
stages of rate rebalancing and provided information showing that the average residential
customer's total monthly bill has decreased. The company also indicated that during the same period, there were no significant changes in the average monthly bill for business customers.

18.Following the close of the record of the proceeding, Northwestel, by letter dated 4 December 1998, submitted additional reply comments, which modified its proposal.

19.In this further reply, the company noted the opposition to the overall proposal and the views that the proposed toll promotions were too limited. Northwestel accordingly proposed to expand the proposed toll promotion of $0.15 per minute calling to all weekends in 1999.

20.Northwestel indicated that, if approved, its modified proposal would increase the company's ROE by 0.4% in 1999, instead of the 0.6% originally proposed.

21.By letter dated 10 December 1998, YG indicated that it supported the expanded application of the promotions.

22.The Commission considers that both the rate group compression initiative and the proposed toll promotions have merit.

23.Rate group compression brings rates closer to costs while reducing the potential and future need for subsidy from long distance to local services and from large communities to small communities for local service.

24.The toll promotions address the serious issues of by-pass which, if left unattended, could cause significant harm to Northwestel and its ability to continue providing service to its subscribers.

25.The Commission notes that, between August 1997 and August 1999, it has ordered rebalancing initiatives equating to a cumulative increase of $14.00 per subscriber per month for Northwestel. The Commission, however, notes that these approved rate rebalancing increases would be offset by lower toll rates for many subscribers.

26.Information provided by Northwestel revealed that the average total monthly bill for residential customers has decreased since the period prior to the 1 August 1997 rate rebalancing. During the same period, there were no significant changes in the average monthly bill for business customers.

27.The Commission further notes that the local rates resulting from this application are not out of line with those of other telephone companies.

28.With respect to GNWT's view that the record of this proceeding was not adequate to establish either an appropriate return on equity for Northwestel or what the company's actual return on equity is likely to be, the Commission is of the view that Northwestel has sufficiently demonstrated the financial requirement for rate increases.

29.The Commission further notes that Northwestel has proposed to use the additional revenues resulting from the rate group consolidation to finance, in part, other initiatives in 1999 such as upgrading Cellular 400 Ruraltel Service to Cellular 800 or other new technologies and expanding local network capacities in Iqaluit.

30.Accordingly, by majority decision, the Commission orders that:

(1) The tariff revisions proposed by Northwestel under Tariff Notice 671, including the proposed expansion of the toll service promotions outlined in Northwestel's letter of 4 December 1998, are approved effective 1 February 1999.

(2) Northwestel is to issue revised tariff pages to reflect the above approval forthwith.

Secretary General

This document is available in alternative format upon request and may also be viewed at the following Internet site: www.crtc.gc.ca

DISSENTING OPINION OF COMMISSIONER DAVID McKENDRY: NORTHWESTEL TARRIFF NOTICE 671

1.I dissent from the Order that approves Northwestel Inc.'s (Northwestel) application for tariff revisions under Tariff Notice 671 and the company's 4 December 1998 letter to the Commission. These revisions relate primarily to increases in residential and business local service rates outside Whitehorse and Yellowknife.

2.The revenues from the local rate increases will be used to fund:

(a) an increase in Northwestel's profits;

(b) lower long distance rates during specified hours on weekends. Residential customers are eligible for these rates;

(c) reductions in local service rates for certain business customers with eight or more lines; and

(d) some service upgrades.

3.The financial projections provided by Northwestel in connection with the rate revisions also include the impact of 12 other rate initiatives, including revenue reductions forecast to take place in the summer of 1999 with respect to rate reductions for business long distance discount plans and business toll-free service. Some of these initiatives, including the business long distance discount plans' and toll-free service rate reductions, have yet to be submitted to the Commission for approval.

4.In summary, I dissent because:

(a) The Notice of Northwestel's application does not explicitly disclose that a significant outcome of the rate revisions is that subscribers outside Whitehorse and Yellowknife will fund an increase in Northwestel's profits.

(b) Northwestel's application for new and revised tariff pages was submitted under Part II of the CRTC Telecommunications Rules of Procedure (the Rules). However, the company's application is, in fact, an application for a general rate increase; the application should have been made by the company and heard by the Commission under Part III of the Rules.

(c) It cannot be said that the revised rates are just and reasonable based on the record of the proceeding.

Disclosure in Notice not adequate

5.The Public Notice of Northwestel's application, Telecom Public Notice CRTC 98-29, does not contain all the information necessary for an individual to be able to know the case he or she must meet and to be able to present his or her own case.

6.The Notice does not disclose that the tariff revisions will fund an increase in Northwestel's profits. Due to the lack of disclosure in the Notice, customers and others who relied on the Notice to understand the purpose of the tariff revisions could not present a case to the Commission as to whether or not the company has accurately forecast its profits, whether or not the forecast profits are reasonable, and whether or not the proposed level of profits could be achieved by means other than raising local rates for subscribers outside Whitehorse and Yellowknife. This matter is important because a significant outcome of the rate revisions is to transfer income from these subscribers to Northwestel's shareholders.

7.The Notice also does not disclose that the tariff revisions will fund a local rate reduction for certain business customers with eight or more lines. As discussed above, the customers who are the source of these funds and others should have had notice of this component of the application.

8.I acknowledge that the Public Notice states "that the revenues generated from the rate group consolidation would be used, in part, to fund other rate initiatives such as long distance promotions and service upgrades." (Emphasis added). To accept that this is adequate disclosure, one must accept that a reader is alerted by the words "in part" and, as a result, can further examine the record in order to discern the other facets of Northwestel's case. In order to persist with this view, one must overcome the lack of disclosure in Northwestel's application, ultimately taking comfort in the fact that the impact of the tariff revisions on Northwestel's profits is disclosed in the company's response to a Commission interrogatory. I do not accept this view because most subscribers are unsophisticated with respect to tariff revisions before the Commission; they would not likely examine the responses to the Commission's interrogatories, particularly after no mention of the impact on profits was made in the Notice and the company's application.

9.I also acknowledge that the Public Notice discloses that subscribers in three of the four rate groups will incur rate increases. To accept that this is adequate disclosure, one must accept that individuals do not need to be advised in the Notice about the reasons for the rate increases. Without the reasons, one cannot know the case he or she must meet.

Disclosure is a good thing regardless of legal requirements

10.With respect to whether or not the Public Notice meets the legal requirements for disclosure, I agree with Robert Macaulay and James Sprague who stated in their book, Hearings Before Administrative Tribunals: "... it should be noted that, legal requirements aside, disclosure is a good thing. It speeds proceedings up by avoiding surprise, it allows for the best case to be before the agency, and it generally contributes to a co-operative and productive atmosphere. Full disclosure should be practice wherever it will not impede the proper functioning of the agency." (Emphasis in original). The proper functioning of the Commission would not have been impeded if the Public Notice had disclosed that the tariff revisions would fund an increase in Northwestel's profits and local service rate reductions for certain customers with eight or more lines.

General rate increase in a tariff revision's clothing

11.Northwestel's application for new and revised tariff pages was submitted under Part II of the Rules. However, the company's application is, in fact, an application for a general rate increase. The application should have been made by the company and heard by the Commission under Part III of the Rules.

12.Part III of the Rules sets out the rules for dealing with applications for a general increase in rates. Part III requires the applicant to state the purpose and scope of the application, including particulars useful in explaining the purpose and scope. In addition, the company must send a notice to subscribers that has been approved by the Commission. The notice must also be published in newspapers. The notice must state the estimated revenue increase on an annual basis, a key matter that was not disclosed in the Notice and application with respect to Northwestel's tariff revisions. Part III allows interested parties to address interrogatories to the company, an opportunity not included in the procedures with respect to Northwestel's tariff revisions.

13.Why are the proposed tariff revisions, in fact, a general rate increase?

(a) Subscribers in three of Northwestel's four rate groups face significant local rate increases.

(b) The rate increases will fund an increase in Northwestel's 1999 profits. As discussed below, the company's level of profits or rate of return on common equity (ROE) is an issue.

(c) The tariff revisions are intertwined with other proposed rate initiatives in the company's 1999 financial projections.

(d) The application raises issues with respect to access to and quality of service.

(e) The application raises issues with respect to the company's rate structure. For example, subscribers in Yellowknife and Whitehorse are excluded from rate increases.

More than good faith required

14.Section 27(1) of the Telecommunications Act requires that every rate charged by a Canadian carrier for a telecommunications service be just and reasonable. The record of this proceeding is deficient because:

(a) The evidence supporting Northwestel's financial projections is not sufficient. Financial projections have been put forward without adequate explanation, including rate initiatives that have not been filed with the Commission and for which there is no basis to include the revenue impacts in the company's 1999 revenue requirement.

(b) The examination or testing of the evidence is not adequate. The company's assertion that subscribers outside Yellowknife and Whitehorse should fund the revenue increase, including the revenues to increase the company's profits and to fund local rate reductions for certain subscribers with eight or more lines, is an example of a matter that requires further examination in order to be satisfied that the revised rates are just and reasonable.

15.As a result of these deficiencies, one cannot conclude that the proposed rates are just and reasonable. An application under Part III of the Rules would have allowed these deficiencies to be overcome because further information could have been obtained and the evidence could have been adequately tested.

16.One might argue that none of this matters because the 1999 ROE forecast by the company is below the ROE approved by the Commission in 1993 when it last conducted a detailed examination of Northwestel's revenue requirement. One might further argue that the forecast ROE is sufficiently below the 1993 ROE that errors in forecasting expenses and revenues would not plausibly cause the ROE to exceed the ROE approved in 1993. However, these arguments would founder for at least two reasons:

(a) One cannot be satisfied that the ROE approved in 1993 is appropriate today. Perhaps a different ROE would be sufficient to attract adequate capital on reasonable terms. Northwestel's cost of capital may be significantly different in 1999 than it was in 1993.

(b) Assuming the 1993 ROE fairly reflects the company's cost of capital in 1999, a detailed examination of the company's financial projections, usually known as a "revenue requirement proceeding", might disclose that for regulatory purposes the company is earning the ROE approved in 1993. This is because the examination could reveal adjustments to expenses, revenues, and capital structure that should be made for regulatory purposes. For example, the 1999 revenue reductions relating to rate initiatives not yet filed with the Commission might be excluded from the 1999 revenue requirement, causing the forecast ROE to increase.

17.I cannot rely on good faith with respect to the company's financial projections in order to be satisfied that the company's proposed rates are just and reasonable.

DISSENT BY COMMISSIONERS BARBARA CRAM AND ANDREW CARDOZO:
NORTHWESTEL TARIFF NOTICE 671

1.Given both the fact of the impending toll discounts for business and the fact that telephone costs are paid with 'pre-tax' dollars by businesses, we agree with Northwestel's proposed rate compression and rate changes for the business rate groups.

2.We cannot agree with the proposals for residential rate increases nor the special residential toll reduction at this time.

3.Consolidation of the rate groups may be a laudable goal; however, at this particular time, there still appears to be some basis for the distinction between the groups themselves, this presumably the basis for their separation in the first place. Various intervenors, individuals, companies and PIAC on behalf of NAPO et al., refer to disparities in quality of service with the more remote communities having problems such as poor quality lines, squeaking, and lack of access to toll lines. Intervenors also refer to the age of equipment and lack of upgrades in the smaller communities. For example, Mr. Bruce Gunderson of Baker Lake, NWT, said in his intervention:

They say in their proposal that the revised rates will be similar to those charged elsewhere in Canada. That's fine except that nowhere else in Canada where I have lived have I ever had such terrible service. The phone lines here are awful. It takes 5 - 10 minutes at times to get a long distance line and the lines will often go dead in the middle of a conversation or fax or Internet connection. The lines are often filled with static or squeals. Often, the phone will ring, you pick it up and you can't hear anyone. The connection was made but the voice isn't being transmitted due to some equipment problem.

4.As to age of the equipment and servicing, Mrs. Teresa Jesudason of Resolute Bay, NWT stated in her intervention:

In the larger centers where Northwestel keeps manpower on call 24 hours to deal with problems then I can understand how their costs would be higher. However in the smaller communities such as ours where no technician is available immediately, we often go days or weeks before problems are resolved. Another problem which Northwestel has not addressed here is the use of antiquated equipment which of course, is bound to give them more troubles. If any new technology is utilized in their system, you can be sure it does not come to Resolute first, if at all.

5.Based on the record, we consider that there is still a valid basis for retaining the separation of the original rate groupings.

6.Northwestel may have merit in stating that they are in need of monies from some source to support upgrading and improvement to provide quality service to these remote areas. This is one of the purposes of the ongoing proceeding being undertaken by this Commission in the High Cost Proceeding, as was stated in Decision 98-1, and therefore, it is our belief we should await the outcome of that proceeding prior to any further rate increases.

7.We agree that rate rebalancing is necessary; however, this goal must be balanced against other factors, including the issue of rate shock. The cumulative effect upon the residential user of 4 rate increases within a period of 24 months is more than substantial. The total impact on the RG1 (residential group 1) is an increase in their monthly bill of $16.63 from August 1997 to August 1999 or a 170% increase. In the previous proceeding leading to Decision 98-1, GNWT stated that it "believes that local rate increase of $10 a month over two years are at the upper end of the range that is feasible if undue negative customer impacts are to be avoided". We agree.

8.In Decision 98-1, the Commission ordered two rate increases, one effective August 1998 and the other as of August 1999. Even before the entirety of this Order has been implemented, Northwestel is, in effect, requesting that the second rate increase be increased. Although this application is not technically a "review and vary" application, it is difficult to distinguish the difference. The impact and effect of this present proposal is to vary the previous decision.

9.Based on the record, we agree that there is substantial pressure by Northwestel's consumers to reduce toll rates and that substantial toll bypass is occurring. Northwestel asserts that it is necessary to provide special promotions to retain toll traffic. In order to fund, among other things, these promotions, it is necessary to increase residential rates. There are two significant problems with this assertion:

(a) Toll rate relief or reduction coupled with access rate increases to finance toll reduction has, to date, failed to maintain toll traffic. Residential toll traffic has with each local access rate increase declined to the point that there is now a net average reduction in toll minutes of 20%.

(b) The very purpose of the rate increase already ordered to be implemented in August 1999 is to allow for toll rate relief. Presumably the Advantage and toll-free rate reductions referred to in this application by Northwestel will have some impact on residential users. Neither the increase nor the reductions have yet to be implemented and as such it cannot be ascertained if such changes will have the impact both the Commission and the company expected. It would be prudent in the circumstances to await this development.

10.It seems that coupling toll rate reduction with substantial increases in residential local access rates have not, to date, had the desired effect. Once again it would appear the decoupling of toll and access rates, at least to the degree necessary to effect any change in bypass, can only come with the result of the High Cost Proceeding presently before the Commission.

11.It is correct that Northwestel's projected revenues for 1999 are well below the previously authorized ROE range. This does not appear to be caused by declining income from local access subscriptions and indeed Northwestel will be receiving an increase in income from residential subscribers with the mandated local access increase in August 1999.

12.It should also be noted that the ROE was established by this Commission in 1993. It may well be that circumstances have changed in the intervening time.

13.It is difficult to ascertain any real benefit to the residential consumer as implied or asserted by Northwestel. Over the past two years company data has shown, notwithstanding $8.00 per month local access rate increases, that the 'average' monthly bill has decreased by 20%. While it is correct that the cost of toll has decreased, at the same time the 'average' number of toll minutes has reduced by the same amount, i.e. 20%. It appears, therefore, that at least to some extent, it is the actions of residential users themselves, and not of the company, that have reduced their monthly bills. This may well be because of the issue of affordability that has driven this 'benefit' to the residential user. If this is in fact the case, then NAPO et al. may well be correct that this increase in local rates "may well lead to reduced penetration due to affordability problems". This is all the more crucial for the rural residential subscriber. As stated by Margrit Wozniak, Chief Administrative Officer, of the Village of Mayo, Yukon:

People in communities outside of Whitehorse have to use their phone for numerous occasions, booking doctor or dentist appointments, to order items needed for home or business, to make reservations for repairs, etc. It seems that the residents of rural Yukon get penalized for living outside the main centre of Whitehorse.

14.For these reasons, we respectfully dissent.