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Ottawa, 27 June 1985
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Telecom Decision CRTC 85-12
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TERRA NOVA TELECOMMUNICATIONS INC., GENERAL INCREASE IN RATES
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I. INTRODUCTION
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On 14 December 1984, Terra Nova Telecommunications Inc. (Terra Nova), filed an application with the Commission for a general increase in its rates to be effective 1 July 1985. For local telephone service, the company proposed rate increases of 20% for two-party service and 10% for all other classes of basic local service. Extended area service (EAS) and non-recurring service charges were proposed to increase by 15%. The monthly rates for telephone sets were proposed to increase by 10 cents, and all other categories of telephone equipment and miscellaneous services, excluding premium telephones, touch-tone service and custom calling features, were proposed to increase by 6%. The present charge of 25 cents for directory assistance calls was proposed to increase to 50 cents.
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Rate increases of approximately 5.9% were proposed for long distance calls to points within the province, including a one cent increase in the set-up charge for all calls, a five cent increase in the surcharge for person-to-person calls, increases ranging from two cents to six cents in the initial minute rate for all calls and increases ranging from two cents to five cents in the additional minute rate.
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For public mobile telephone service, the company proposed to introduce a network access charge of $5.00 per month, and to reduce by $5.00 the present minimum toll charge for subscribers who provide their own equipment. The monthly rental rate for mobile telephone sets was proposed to increase from the present $61.00 per month to $65.00 per month, and non-recurring installation charges were proposed to increase by 6%. The present local calling rate of 85 cents for the initial three minutes and 23 cents for each additional minute was proposed to change to a rate of 36 cents for each minute of use.
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The rates for competitive services, including private leased services, telex, data telex, telenet and broadband services, were proposed to increase from 6% to 8%. The company proposed a change in the structure of its rate schedule for voice-grade circuits within the province, which would result in proposed rates ranging from a decrease of 2.4% to an increase of 20%, depending on circuit distance.
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The company estimated that the proposed rate changes, if approved effective 1 July 1985, would provide additional revenues of $1.0 million in 1985 and $2.2 million in 1986.
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Terra Nova subscribers, interested parties registered under section 7 of the CRTC Telecommunications Rules of Procedure and other persons identified in the Directions on Procedure issued by the Commission, were notified of Terra Nova's application and a general notice was published in newspapers in the company's service area. Six parties filed comments in response to these notices, of whom The Newfoundland and Labrador Federation of Municipalities (NLFM) and The Town of Glenwood (Glenwood) indicated their intention to participate at an oral public hearing which was tentatively scheduled to commence on 16 April 1985 in Gander, Newfoundland.
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On 15 March 1985, Terra Nova wrote to the Commission recommending that the hearing "be dispensed with and that a decision be rendered based on the merits of the current record".
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In support of its recommendation, Terra Nova noted that only NLFM and Glenwood (the interveners) had expressed an intention to participate at the hearing, that such a hearing is a costly exercise for the Commission, the interveners and itself, and that it would like to avoid these costs and the requirement for its senior operations officers to devote many hours of preparation for their appearances as witnesses.
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On 19 March 1985, the Commission invited NLFM and Glenwood to comment on Terra Nova's recommendation. In reply, both parties agreed to dispense with the hearing.
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In CRTC Telecom Public Notice 1985-29, dated 11 April 1985, the Commission concluded that it was unnecessary to hold an oral public hearing and instead established procedures for completing the proceeding on the basis of written submissions. In compliance with these procedures, Terra Nova filed responses to supplementary Commission interrogatories; Terra Nova and Glenwood filed final argument and Terra Nova filed reply argument.
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II. ACCESS TO AND QUALITY OF SERVICE
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The Commission considers that an assessment of the quality of service provided by a carrier to its customers is an essential element in the determination of just and reasonable rates. In this regard, pursuant to Quality of Service Indicators for Use in Telephone Company Regulation, Telecom Decision CRTC 82-13, 9 November 1982 (Decision 82-13), Terra Nova is required to report details of its performance, on a quarterly basis, for a number of indicators dealing with service provisioning and repair, local and long distance network performance, operator services, directory and billing accuracy, and complaints.
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In Decision 82-13, the Commission established interim standards for certain performance indicators and directed Terra Nova to submit a plan to develop final standards for all indicators. Based on the results of a subscriber survey, the final standards were to be designed to ensure that 90% of subscribers are satisfied with the level of service provided. In its application, the company stated that its subscriber survey was scheduled to commence in January 1985, and that it would be in a position to recommend standards based on the results of recurring monthly surveys for each indicator by June 1986.
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In this proceeding, the Commission has reviewed the company's performance for the period since its last general rate increase application in January 1984. The Commission considers that the company's progress in achieving quality of service improvement is generally satisfactory. The Commission is nevertheless concerned with certain aspects of the company's quality of service as described below.
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A. Outward Toll and Assistance - Speed of Answer
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The Commission notes that the indicator Outward Toll and Assistance - Speed of Answer , which had exceeded normal levels in the third and fourth quarters of 1983, dropped to normal levels in 1984. However, the company's first quarter 1985 report showed that this indicator had again exceeded the company's experimental standard of 7.5 seconds.
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The company explained that it discovered a software design problem in the systems package that generates the speed of answer statistic and that it is currently awaiting a firm quotation from its system supplier for a modification to correct the problem. The company stated that sample manual computations indicate that, except for the first quarter of 1982, it is doubtful whether the 7.5 second standard would have been exceeded in any quarter since the system was installed in 1976.
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The company is directed to report to the Commission, on a monthly basis, on its progress toward effecting a solution to this problem.
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B. Single-Party Service Upgrade Program
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Pursuant to CN Telecommunications, Increase in Telephone Rates in Newfoundland, Telecom Decision CRTC 78-5, 5 July 1978, Terra Nova is required to file semi-annual progress reports on its program to provide single-party service on demand to its telephone subscribers. In these reports, the company includes a list identifying the exchanges which are considered to be completed (single-party service available on demand) on the report date, as well as a list of the exchanges scheduled for completion in the following year.
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During the present proceeding, the Commission noted that "Held Regrades" were being reported for a significant number of the exchanges which were listed as completed in these reports. It is, by definition, inconsistent to report as completed, an exchange for which there are "Held Regrades" outstanding, since a "Held Regrade" refers to an order which could not be completed due to the lack of facilities in an exchange.
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To correct this situation, in future reports the company is directed to identify as completed only those exchanges for which no held regrades have been outstanding for more than 90 days. In addition, since the upgrade program is now nearing completion, the company is directed to include in its future reports, a list indicating the scheduled completion date, by month and year, of all exchanges which have not been completed as at the report date.
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C. Repair Service
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Repair service performance is measured on the basis of four indicators:
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i) Initial Trouble Reports per 100 Stations;
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ii) Subsequent Trouble Reports as a Percentage of Initial Trouble Reports;
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iii) Repeated Trouble Reports as a Percentage of Initial Trouble Reports; and
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iv) Percent of Initial Out-of-Service Trouble Reports Cleared Within 24 Hours.
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The Commission notes that performance for the indicator Initial Trouble Reports per 100 Stations is well within the company's interim standard of 6.5% and continues to show improvement, particularly in the fourth quarter of 1984 and the first quarter of 1985. On the other hand, the remaining three indicators show a continually deteriorating performance, with the indicator "Percent of Initial Out-of-Service Trouble Reports Cleared Within 24 Hours" showing performance well below the interim standard of 60% in the period since June 1983, in particular in the Northern Peninsula and South Coast areas.
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The company explained that the interim standard for this latter indicator is difficult to meet due to the number of communities served, the geography of the company's service area, and the composition of the work force required to economically serve small remote communities. The company pointed out that over the years, the service areas have been realigned to reduce the travel time of maintenance personnel and optimize response time. The company acknowledged that, notwithstanding these efforts, it has been unable to improve the performance for this indicator and is not optimistic of being able to do so in the short term.
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The company reiterated the point stated during the 1984 rate increase proceeding that some improvement is anticipated over the long term as the regrade and other plant improvement programs progress. In its view, these programs should reduce the number of trouble reports and in turn reduce the demands on maintenance personnel, thus permitting faster turn-around time between communities. Finally, the company, submitted that its performance for this indicator is satisfactory in the circumstances, and that the interim standard should be lowered to take the above conditions into account.
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The Commission notes that, despite the gradual improvement in the number of initial trouble reports, the company's repair response time continues to deteriorate indicating a reduced effectiveness in meeting the demand for repair service. The Commission also notes that the increase in n Subsequent Trouble Reports as a Percentage of Initial Trouble Reports could be an indication of subscribers' increasing dissatisfaction with the company's repair service response time. In these circumstances, and considering that the company is currently conducting a survey to determine subscriber satisfaction levels, the Commission does not consider that an adjustment to the interim standard would be appropriate. The Commission expects the company to take appropriate action to effect an improvement in its repair response time, particularly in the Northern Peninsula and South Coast areas.
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III. CONSTRUCTION PROGRAM
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A. General
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In its application, Terra Nova estimated that its construction program expenditures for the period 1985 to 1989 would total $67.7 million. The current capital plan does not include any major changes in expenditures relative to the 1983 View (revised), as approved in Terra Nova Telecommunications Inc., General Increase in Rates, Telecom Decision CRTC 84-20, 30 July 1984 (Decision 84-20).
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The estimated expenditures for each year and the allocation of total expenditures by usage category are set out below.
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Year $ Million
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1985 11.2
1986 11.2
1987 12.1
1988 16.0
1989 17.2
67.7
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Usage
Category %
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Growth 47
Modernization 41
Replacement 5
Support 7
100
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B. Major Programs
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Terra Nova stated that, by 1987, it expects to complete the upgrade of its plant so that single-party telephone service can be provided on demand within base or island rate areas. The company is devoting approximately 38% of its forecast construction program expenditures for the years 1985 to 1987 to this program.
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The company's capital plan includes funds to improve the quality and operating efficiency of its plant through programs such as the replacement of open wire lines with more reliable radio or cable systems, the replacement of step-by-step telephone exchanges with new digital exchanges, the provision of Automatic Number Identification equipment at additional exchanges and the installation of solid state ring and tone interrupters.
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C. Conclusion
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The Commission notes that the company's construction program forecasts are consistent with forecasts of demand for its services, and reflect reasonable expenditures for the replacement and upgrading of its plant. The Commission concludes that the proposed capital expenditures for the years 1985 to 1989 are reasonable.
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IV. FINANCIAL
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A. Revenue Forecasts
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In its application, Terra Nova estimated that its operating revenues for 1985 and 1986, without rate increases, would be $41.0 million and $42.4 million respectively, representing increases of 7.3Z and 3.4% compared to forecast revenues for 1984 and 1985. In subsequent evidence filed on 1 March 1985, these estimates were revised as follows:
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Revenues Percent
($ Million) Increase
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1984 Actual 38.189
1985 Forecast 41.051 7.5 %
1986 Forecast 42.490 3.5 %
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The rate increases proposed were estimated to generate additional revenues of $1.0 million in 1985 and 2.2 million in 1986.
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The Commission finds the company's revenue forecasts to be consistent with its forecasts of demand for 1985 and 1986, and therefore reasonable, except in the case of forecast long distance revenues for 1986. The Commission notes that long distance revenues for 1986 were forecast to increase at a much lower rate than the forecast growth in toll message volume. In the Commission's view, Terra Nova has not justified the decline in the average revenue per message inherent in its revenue forecast. Accordingly, the Commission has decided to increase the company's estimated revenue for 1986 by $250,000.
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B. Operating Expense Forecasts
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In its application, Terra Nova estimated that its operating expenses would total $30.0 million in 1985 and $32.2 million in 1986, representing increases over the previous year of 8.1% and 7.2% respectively. In subsequent evidence filed on 1 March 1985, these forecasts were reduced to $29.8 million for 1985 and $31.6 million for 1986, representing increases over the previous year of 6.7% and 6.0% respectively.
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In interrogatories addressed to Terra Nova, the Commission requested details and explanations for the forecast increases in a number of specific expense categories. The company provided satisfactory explanations for the forecast increases on certain of these categories. However, the Commission is not satisfied that the forecasts for the expense categories set out below have been fully justified. Accordingly, the Commission has reduced the company's allowable expenses for 1985 and 1986 by the amounts detailed below:
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Expense Category 1985 1986
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Purchasing & Materials Management $50,000 $ 52,000
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Public Message Service/Job Security 50,000 45,000
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Telephone Service - Other 15,000 15,000
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Roads, Grounds & Towers 85,000 90,000
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Budget Project Maintenance 100,000 100,000
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Total $300,000 $302,000
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Taking the above adjustments into account, the company's operating expense forecasts for 1985 and 1986 have been revised to $29.5 million and $31.3 million, representing increases over the previous year of 5.6% and 6.1% respectively.
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C. Rate of Return
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In its evidence, the company described its financial objective as being a continuing improvement in its financial performance by means of further productivity improvements combined with judicious rate increases, with a goal of achieving a fair rate of return on average common equity (ROE) within about five years.
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In its subsequent evidence filed on 1 March 1985, Terra Nova estimated that, without rate increases, its ROE would be 8.5% in 1985 and 7.0% in 1986. These compare to an actual ROE of 7.4% in 1983 and 8.7% in 1984. The company estimated that the rate increases proposed to take effect 1 July 1985 would result in an ROE of 9.6% in 1985 and 9.0% in 1986.
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Taking into account the adjustments to the company's revenue and expense forecasts outlined in the foregoing sections, Terra Nova's estimated ROE, assuming approval of the proposed rate increases effective 1 July 1985, would be 10.0% in 1985 and 9.6% in 1986.
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Having considered the company's goal of a gradual improvement in its ROE, its progress in improving quality of service performance generally, including its progress toward providing single-party service on demand, and the general level of the company's rates compared with the rates charged by other telephone companies in the Atlantic provinces, the Commission has decided to approve increases in the company's rates sufficient to provide the requested ROE of 9.6% for 1985. Further, in light of the above considerations and considering the rate revisions necessary to produce the required additional revenues of $0.7 million for 1985, the Commission has decided to reduce the proposed rate increases for basic exchange service and EAS to 6%, and to set an effective date of 1 August 1985 for all rate changes approved in this decision. On the basis of the current forecasts of 1986 performance, these changes are estimated to produce additional revenues of approximately $1.% million, and an ROE of 9.3%, in 1986.
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V. TARIFF REVISIONS
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A. Introduction
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Except where otherwise noted in this decision, the Commission approves the rates as proposed by Terra Nova in its application. However, as indicated in the foregoing section, all rate changes approved are to take effect on 1 August 1985 rather than 1 July 1985 as proposed in the application.
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B. Basic Exchange Service
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In its application, Terra Nova proposed increases of 20% for two-party service and 10% for all other basic exchange service rates. In support of the higher increases proposed for two-party service, the company stated that its present two-party rates are significantly below those of the other telephone companies in the Atlantic provinces. It also pointed out, that it has invested over $30 million in the past six years to provide single-party service on demand. In Terra Nova's view, by increasing two-party rates by a higher percentage than that applied to individual, four-party, multi-party and PBX trunks, the company is attempting to reduce the differential between single-party and two-party service in recognition of both the increased capital investment and the industry norm.
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The Commission acknowledges the company's progress in its program of providing single-party service on demand. However, given the evidence which indicates that subscribers in a significant number of exchanges are still unable to obtain single-party service, the Commission is not persuaded that the differential between single-party and two-party rates should be reduced at this time. For the reasons stated in the foregoing section on Rate of Return, the Commission approves increases of 6% for all basic exchange service rates.
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C. Extended Area Service
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In support of its proposed increases of 15% for EAS rates, Terra Nova stated that it believes the rates for this service to be non compensatory and that the continuous demands made for expanded EAS routes make it necessary to increase rates for this service at a faster rate than for other services.
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In its 1984 rate application, the company proposed two modifications to its EAS rate structure, as follows:
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a) using the aggregate of telephone numbers within an EAS complex to determine the applicable
rate group, effective 1 July 1985; and
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b) eliminating the multi-point discount factor applicable to multi-point EAS complexes, effective 1
July 1986.
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In its decision on that application, Decision 84-20, the Commission stated that it was prepared to consider these two modifications as follow-up items, but that certain information concerning traffic volumes between EAS exchanges was required in order to assist in its final determination on this matter.
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In response to Commission interrogatories in the present case, Terra Nova provided partial data in respect of the information required, but expressed reservations as to the reliability of this data. In these circumstances, the Commission is not prepared to accept the company's responses as meeting the requirements of Decision 84-20 and, consequently the proposed modifications are not approved at this time. For the same reasons, and taking into account increases approved for basic exchange service, the increases approved for EAS in the present proceeding are limited to 6%.
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D. Message Toll Service
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The proposed rates for the various components of message toll service represent, on average, increases of 5.9%.
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The company's present rate schedule for message toll service includes a message set-up charge and identical per-minute usage rates for the initial minute" and "each additional minute". In its application, Terra Nova proposed increases in the "initial minute rate which are one cent higher than those proposed for the "additional minute" rate. This would create a three-element message rate for calls greater than one minute. In the Commission's view, Terra Nova has not justified this added complexity to its rate structure and, accordingly, directs the company to revise its rate schedule to include only a "per minute" usage rate.
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The Commission approves the increases proposed for the "additional minute" rate to be applied to the new per minute" rate, and an increase of two cents in the set-up charge. The proposed five cent increase in the surcharge for person-to-person calls is also approved.
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E. Mobile Telephone Service
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The Commission approves the company's proposed changes in mobile telephone service rates, except for the minimum toll charge applicable to manual mobile telephone subscribers who provide their own equipment. Since subscribers who rent their equipment from the company are not required to pay this charge, in the Commission's view such a charge is unjustly discriminatory against subscribers who provide their own equipment. Accordingly, the Commission directs Terra Nova to remove this item from its tariff.
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F. Tariff Filings
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The company is directed to file tariff revisions by 19 July 1985, with an effective date of 1 August 1985, to give effect to the rate changes approved in this decision.
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Fernand Bélisle
Secretary General
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