ARCHIVED -  Telecom Decision CRTC 88-15

Telecom Decision

Ottawa, 29 September 1988

Telecom Decision CRTC 88-15

BELL CANADA - REVISED CRITERIA FOR EXTENDED AREA SERVICE

I BACKGROUND

On 23 May 1986, the Commission issued Bell Canada - Revised Criteria For Extended Area Service, CRTC Telecom Public Notice 1986-34 (Public Notice 1986-34), in which it deferred disposition of an application by Bell Canada (Bell), dated 4 November 1985, to make changes to the qualifying criteria for Extended Area Service (EAS) that would increase the number of eligible EAS links. EAS allows Bell subscribers located in neighbouring telephone exchanges to call one another without incurring long distance charges. Bell stated that it would recover the increased revenue requirement associated with the provision of the new EAS links, estimated to exceed $150 million over a ten year period, by increasing the weighting factors used for determining local rates in exchanges having EAS. These weighting factors are based on the distance between the rate centres of the two exchanges.

The Commission deferred its disposition of Bell's application due to concerns that many subscribers would have had their rates increased without receiving any perceivable benefit. The Commission noted that these subscribers might not have been aware that approval of Bell's application would affect their rates and, without further process, might consider that they had not been given an adequate opportunity to comment. The Commission also expressed concern about considering an application that would affect local rates at a time when the relationship between local and message toll rates was under scrutiny in the context of a rate rebalancing proposal from Bell. The Commission concluded that it would be preferable to dispose of the rate rebalancing proposal before considering Bell's application to alter its EAS criteria.

The Commission also considered that additional information regarding the adequacy of alternatives to EAS, such as Selectel (a subscription based discounted toll service) and Contac (a reverse charge service paid for by municipal governments to provide citizens with toll free access to municipal services), would be required before it could rule on Bell's application.

In response to Public Notice 1986-34 and to the concerns of interested parties, Bell submitted a Report on EAS Alternatives on 31 March 1987. On 30 April 1987, it filed its Update to Proposals for Extended Area Service Qualification Criteria and Weighting Factors (the updated application). In addition, Bell filed its rate rebalancing application on 17 March 1987. The Commission disposed of Bell's rate rebalancing application in Bell Canada - 1988 Revenue Requirement, Rate Rebalancing and Revenue Settlement Issues, Telecom Decision CRTC 88-4, dated 17 March 1988.

On 27 August 1987, the Commission issued Bell Canada - Revised Criteria For Extended Area Service, CRTC Telecom Public Notice 1987-47 (Public Notice 1987-47), seeking comment from interested parties on the updated application. The Commission also directed Bell to issue a billing insert notifying subscribers of its updated application.

The qualifying criteria for the provision of new EAS links that Bell proposed to modify were established in Bell Canada General Increase in Rates, Telecom Decision CRTC 80-14, 12 August 1980, (Decision 80-14). These criteria permit EAS when:

(1) the exchanges are contiguous;

(2) at least 60% of customers in one exchange make calls to those in the other exchange at least once a month [community of interest (COI)];

(3) the distance between the exchanges' rate centres (normally the main switching centre in an exchange) does not exceed 30 miles; and

(4) a simple majority (51%) of customers whose basic local rates would be increased, approve of the new service.

Bell's application for revisions to the EAS qualifying criteria would eliminate the contiguity criterion and reduce the COI requirement from 60% to 50%. Bell estimated that the implementation of the revised criteria would qualify a possible 204 new exchanges for EAS links. It suggested that subscribers in 137 of these exchanges would vote to accept EAS. Bell also estimated that the provision of new EAS links would result in an additional annual revenue requirement of $21 million over a 13 year study period.

In determining the rates for local telephone service, Bell classifies exchanges into rate groups based on the number of telephone numbers that can be reached without incurring long distance charges. Local service rates increase with rate group size. Rate grouping reflects the principle that the greater the number of subscribers that can be reached without incurring long distance charges, the greater the value of local service. At present, there are 18 rate groups.

The number of assigned telephone numbers within an exchange is referred to as its telephone number count. If an exchange has EAS links with other exchanges, its telephone number count is adjusted upwards to reflect the total number count in the free calling area. In making this adjustment, the telephone number count of other exchanges in the free calling area is multiplied by an additional weighting factor based on the distance between the exchanges.

Adoption of EAS by subscribers in an exchange generally results in a local rate increase because it increases the exchange's telephone number count. However, the additional revenues generated by such local rate increases are generally not adequate to cover the full costs of providing EAS.

In Decision 80-14, the Commission approved recovery of the additional costs of providing EAS resulting from the application of Bell's 1980 criteria through a 5% increase in the weighting factors used to determine the telephone number count for exchanges with EAS. In its present application, Bell similarly proposes increasing the weighting factors in order to recover the entire additional annual revenue requirement of $21 million that would result from approval of its proposed revisions to the EAS qualifying criteria.

Bell noted that the proposed increase in weighting factors would accelerate the process of upgrouping which, as a result of population growth alone, is expected in a number of exchanges. Bell stated that any rate increases in exchanges that would not receive new EAS links would range from $0.30 to $1.10 for residence individual line service and from $2.00 to $3.35 for business individual line service. Higher increases would apply in exchanges where additional EAS links were introduced.

In response to Commission interrogatories, Bell also provided the results of an economic evaluation study which assumed that the contiguity criterion would be eliminated but that the COI criterion would remain at 60%. Under this scenario, Bell estimated that a possible 113, rather than 204, new links would qualify and that subscribers in 76, rather than 137, of these exchange pairs would vote to accept EAS. Bell estimated that this scenario would result in an additional annual revenue requirement of $10.7 million over the 13 year study period, rather than the additional $21 million associated with Bell's proposal.

On 4 March 1988, the Commission addressed further interrogatories to Bell concerning the additional costs of extending the distance criterion beyond 30 miles. On 29 July 1988, Bell provided the results of a number of economic evaluation studies which examined extensions to 35 and to 40 miles under various COI assumptions.

II POSITIONS OF PARTIES

In response to Public Notice 1987-47 and to Bell's general billing insert, the Commission received approximately 8,000 pieces of correspondence from subscribers, organizations or other interested parties, representing about 250 communities. This correspondence included approximately 7,000 form letters and coupons, 800 individual letters, 120 resolutions from regional or municipal governments or other local organizations such as Chambers of Commerce, as well as about 2,500 signatures on some 20 petitions.

A. Opposition to EAS Expansion

The Commission received approximately 100 letters from interested parties opposed to expanded EAS. Some of these parties did not expect to benefit from the proposed expansion of EAS links. Accordingly, they opposed the higher local rates associated with EAS expansion for other subscribers. Some stated that rates based on the user-pay concept are more equitable than universal, flat-rated EAS. Others expressed concern about the effect of an EAS-associated local rate increase on subscribers with fixed or low incomes, since many of these subscribers make limited use of toll calling. Finally, some parties were opposed to any rate increase related to the expansion of EAS.

In response, Bell argued that EAS has been designed as an exchange-wide plan, applicable in cases where there is a strong COI and where a majority of subscribers indicate a willingness to pay higher local rates for expanded flat-rate service. The company noted that the implementation of a new EAS link generally benefits some subscribers by lowering telephone bills, while adversely affecting other subscribers who experience billing increases. In Bell's view, the entire body of EAS subscribers should bear the additional costs attributable to the expansion of EAS: those who have benefitted from EAS under various plans in the past, as well as those who may benefit from new company-wide plans in the future.

B. Support For EAS Links That Would Qualify under Bell's Proposal

Approximately 4,000 pieces of correspondence were received in support of Bell's specific EAS proposal or of a particular EAS link that would likely qualify under the proposed criteria. The following EAS links received some of the strongest support: Galt to Kitchener-Waterloo; Aurora to Toronto; and Buckingham, Quyon, and Thurso to Ottawa-Hull.

C. Support For EAS Links That Would Now Qualify Under Bell's Proposal

Approximately 3,500 parties requested EAS between exchanges that would not qualify under the revised criteria proposed in Bell's application. In some of these cases, the COI is below 50%. In some, the distance between the exchanges' rate centres exceeds 30 miles. Correspondence from some interested parties, including approximately 1,400 form letters from subscribers in St-Calixte-de-Kilkenny located about 35 miles from the Montreal exchange centre, advocated a change in the distance criterion to allow EAS links beyond 30 miles. Other parties requested toll-free calling from a location within a certain prescribed radius of an exchange. The Commission received a number of letters and resolutions from municipal and regional governments requesting EAS for regional municipalities and geographic regions. Support for regional EAS came from, among other regions, the Niagara Peninsula, the Outaouais and greater Ottawa-Hull, the Saguenay and Lac St-Jean, the Toronto region, and the Regional Municipalities of Sudbury and Waterloo.

In response, Bell noted that, under any qualifying criteria, there will be pressure from subscribers in non-qualifying exchanges for additional extensions of EAS or for exceptions. The company stated that the additional changes requested by interested parties would significantly increase rates for the majority of EAS subscribers.

Bell noted further that its Selectel service is intended to provide toll discounts on calls within a 40 mile limit from exchanges with at least a 50% COI with terminating exchanges.

With regard to its proposal to change the COI criterion, Bell submitted that a 50% COI requirement is based upon equitable principles. It argued that a majority of subscribers in an exchange must demonstrate, through calling patterns, a need for extended EAS because the local rates in the exchange may increase for all subscribers. The 50% COI criterion would, Bell suggested, ensure that the special calling interests of a minority of subscribers in an exchange are not used as the basis for increasing the local rates of the majority of subscribers.

With regard to the request for regional EAS or for toll-free calling for all calls within a prescribed radius of an exchange centre, Bell noted that such approaches could result in rate increases in exchanges with a low COI with neighbouring exchanges in order to support the toll calling patterns of exchanges with a strong COI with those neighbouring exchanges. It further expressed its concerns about the cost implications and additional rate increases associated with any further extension of EAS on the basis of regional considerations.

D. Other Concerns

A few interested parties, such as the Corporation of the City of Cambridge and the Regional Municipality of Sudbury, requested some form of exceptional treatment. Sudbury urged the Commission to authorize the introduction of EAS on an ad hoc basis, where warranted by special considerations. It contended that it would be discriminatory not to consider the special circumstances of a given community. The City of Cambridge requested that EAS be introduced, on an exceptional basis, between the five exchanges encompassed by the City, so that calls both within its municipal boundaries and between the Galt and Kitchener-Waterloo exchanges would be toll-free.

In its reply, Bell stated that its proposal represents an equitable solution to a variety of requests for additional EAS links. The company noted that this proposal would likely qualify more than 200 new links in an objective and non-discriminatory manner. It added that, if eligibility criteria were modified to allow municipalities or regions to qualify for EAS according to geographic boundaries, it would be conceivable that, in certain exchanges, the majority of subscribers within these boundaries would be unwilling to pay rate increases for local service. The reason is that some of these exchanges, although served by the same municipal or regional government, have a low COI. Bell, therefore, argued again that a community of interest must be demonstrated by a majority of the subscribers in an exchange and a majority of the subscribers must also indicate a willingness to pay for the immediate rate increase resulting from a new EAS link.

The company further noted that any attempt to align exchange boundaries with municipal or regional boundaries would entail considerable costs because of the need to rearrange local loop facilities to allow telephone service from another exchange. Bell stated that, as a result, subscribers would be required to absorb significant additional revenue requirements.

Bell further noted that its Contac service has been designed to provide subscription-based toll-free calling to municipal and emergency services and that Contac service therefore meets the demands of parties seeking additional EAS for this purpose.

During the proceeding, it was pointed out that EAS links that would otherwise qualify are sometimes not implemented because a majority of subscribers in a larger exchange refuse to accept the rate increases associated with the proposed link to a smaller exchange. Bell estimated that approximately 20 links that would otherwise qualify under its proposed criteria would not be implemented within the six year roll-out period because they would be rejected by subscribers in the larger exchange. Bell indicated that the Galt/Kitchener-Waterloo link would likely be rejected for such a reason.

Similarly, the Commission received approximately 1,900 form letters in support of a link between St. Thomas and London. Bell noted that these communities could have qualified for an EAS link in 1984. However, London subscribers had rejected the link with St. Thomas because it would have resulted in an immediate rate increase for the London exchange.

Bell has forecast that London will be upgrouped in 1990 as the result of natural population growth, and that the St. Thomas-London link will then be accepted because London subscribers will not face any further immediate rate increase.

Some parties expressed concern that exchanges that are subject to seasonal population fluctuations could be denied EAS links. Most correspondence expressing this concern was from the Parry Sound, Port Carling and Muskoka Lakes regions.

In reply, Bell submitted that the EAS criteria should reflect the exchange-wide nature of the service. Since all customers in the exchange would be charged any higher rates associated with EAS, the measurement of COI, as well as the approval vote, should be exchange-wide.

E. EAS With Exchanges Served By Independent Telephone Companies

The Québec Minister of Communications noted that some links between Bell exchanges and those served by independent telephone companies would qualify for EAS under the proposed eligibility criteria, while others would not. Accordingly, the Minister suggested that the telephone companies and their regulatory bodies discuss the establishment of a coherent EAS policy that would take into account the characteristics of Québec telephone service and the needs of all subscribers.

Bell stated that it is willing to discuss such problems with other telephone companies and, through the Commission, with their regulatory bodies. It noted that such a discussion could prove beneficial because special cases may arise for which arrangements other than EAS, such as optional calling services, may be appropriate. Bell stated that discussions or negotiations with independent companies regarding these special cases should be predicated on the condition that any agreement be subject to approval by the respective regulatory bodies and that any such agreement not place additional burdens on Bell subscribers. The company further noted that it had been negotiating recently with Québec Téléphone in respect of the latter's provision of optional one-way toll-free or discount services to some of the exchanges identified by the Québec Minister of Communications.

III CONCLUSIONS

In assessing the appropriateness of the current EAS criteria and whether certain changes should be made, the Commission has examined and attempted to reconcile several important, and often conflicting, considerations. Moreover, the Commission has been cognizant of the fact that any determination as to who shall and who shall not be eligible for EAS must, by its very nature, leave some subscribers dissatisfied. Regardless of the particular criteria established, some subscribers will receive EAS, while others will narrowly miss receiving it.

In considering Bell's application, the Commission has remained mindful of its duty under the Railway Act to ensure that rates do not discriminate unjustly and that no one is granted an undue or unreasonable preference or advantage. In the Commission's view, it has a responsibility to ensure that any EAS criteria it establishes can be applied uniformly throughout the company's operating territory. The Commission cannot establish criteria that will permit exceptions for particular communities merely on the basis of strong vocal pressure within those communities

In any particular exchange there are subscribers whose calling patterns are such that they would benefit from the introduction of EAS, and other subscribers whose telephone bills would be higher. In the Commission's view, the EAS criteria must attempt to balance the benefit to the one group against the disadvantage to the other.

In setting EAS criteria, the Commission must also take into account the fact that EAS is perceived as a benefit by a majority of subscribers and that there exists a strong demand for this service. In this regard, the Commission notes that, while EAS generally results in an increase in local rates for the smaller exchange in an exchange pair, such rate increases only partially recover the costs of providing EAS. Therefore, further extension of EAS entails rate increases for other EAS subscribers. In addition, the EAS rating structure recovers usage sensitive costs on a non-usage sensitive basis. Therefore, EAS is less efficient in an economic sense than short-haul toll calling. This inefficiency compounds the upward pressure on rates for all EAS subscribers. Accordingly, the criteria must ensure that any additional cost burden placed on EAS subscribers in general, and the upward pressure on their local rates that results, is justified.

Applying these general considerations to the COI criterion, the Commission finds that a lowering of the COI from 60% to 50% at an annual cost of approximately $10 million would not strike the appropriate balance between the interests of the body of EAS subscribers and the interests of particular groups of subscribers who wish to see EAS extended to their exchanges. The Commission notes that COI represents a measure of the social and commercial ties between subscribers in two exchanges. In the Commission's view, a very substantial social and commercial dependency, and thus a strong COI, must be demonstrated in order to protect the interests of the general body of EAS subscribers whose local rates may ultimately be affected by further extension of EAS. Accordingly, the Commission considers that the COI should remain at 60%. The Commission notes that potential EAS links presently excluded on the basis of this criterion will qualify in future if social ties between the exchanges, as reflected in calling patterns, increase to the requisite level.

Applying its general considerations to the contiguity criterion, the Commission finds its removal, as proposed by Bell, to be justified. The removal of this criterion, at an annual cost of approximately $10.7 million, will ensure that all EAS links of similar distance and exhibiting at least a 60% COI will be treated equitably. Removal of the contiguity criterion will also eliminate any perception of discrimination in those exchanges heretofore excluded by the particular characteristics of exchange boundaries, over which subscribers exercise no control.

The Commission notes that the 30 mile distance criterion is perceived by many subscribers to be unnecessarily restrictive. It can be argued that, even beyond 30 miles, a strong COI justifies the provision of EAS. For this reason, the Commission asked Bell to provide additional economic evaluations concerning the extension of the EAS distance limit to 40 miles. Those evaluations indicated that the extension of the limit to 40 miles while maintaining the COI criterion at 60% would add some $2.3 million to the company's annual revenue requirement. As a result of this extension, an additional 34 EAS links could qualify, of which 22 are expected to vote in favour of EAS.

In the Commission's view, the existence of a strong COI between some exchanges whose rate centres are more than 30 miles apart, and the relatively small incremental cost of increasing the limit, justify the extension of the distance limit to 40 miles. The removal of the contiguity criterion and the extension of the distance criterion will significantly reduce barriers to the extension of EAS to exchanges exhibiting a strong COI.

The criteria also demand that a majority (51%) of subscribers whose local rates would increase as a result of EAS must vote in favour of its introduction. As indicated above, in any particular exchange pair, there are subscribers whose total telephone bill would decrease if EAS were introduced and others whose total bill would increase. This final criterion is intended to prevent the introduction of EAS in those exchanges where a majority of subscribers believe that they would be disadvantaged thereby. The Commission continues to consider that this vote should be conducted on an exchange-wide basis, as this is the basis upon which EAS is implemented. If the vote was to be conducted on some other basis, taking into account geographical or political boundaries or seasonality, situations could arise where a majority of subscribers in an exchange would be obliged to accept EAS and its associated rate increases, regardless of their wishes. This would defeat the purpose of the criterion.

Finally, the Commission has no objection to special agreements between Bell and independent telephone companies in relation to EAS links. It considers, however, that such agreements should not burden Bell subscribers with costs that they have not caused.

In light of the above determinations, the Commission approves the following criteria for the introduction of EAS between exchanges within Bell's operating territory:

(1) at least 60% of subscribers in one exchange must call the other exchange at least once a month:

(2) the distance between the exchanges' rate centres (normally the main switching centre in an exchange) must not exceed 40 miles; and

(3) a simple majority (51%) of subscribers whose basic local rates would be increased must approve of the new service.

Bell is directed to file, by 28 November 1988, proposed adjustments to its weighting factors to permit the recovery of costs associated with the provision of EAS under the new criteria. In addition, Bell is directed to file by the same date a revised roll-out plan identifying the exchange links qualifying for EAS under the new criteria and establishing a schedule for the implementation of EAS between the exchanges in question.

Fernand Bélisle
Secretary General