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Telecom Decision
Ottawa, 10 November 1988
Telecom Decision CRTC 88-19
BELL CANADA AND BRITISH COLUMBIA TELEPHONE COMPANY - INTRODUCTION OF BETWEEN FRIENDS AND TELEPLUS SUBSCRIPTION SERVICES
I BACKGROUND
On 20 December 1985 and 21 January 1986, the Commission received applications from Bell Canada (Bell) and British Columbia Telephone Company (B.C. Tel), under Tariff Notices 1874 and 1283, respectively, for approval of tariff revisions providing for the introduction of a message toll discount service called Teleplus Subscription Service. On 29 January 1986 and 19 February 1986, respectively, the Commission issued CRTC Telecom Public Notices 1986-10 (Bell) and 1986-14 (B.C. Tel) with regard to those applications.
On 21 July 1986, by letters to Bell and B.C. Tel, the Commission suspended the proceedings associated with the two applications. The Commission decided that it would be preferable to address the issues raised by Bell's application after it had rendered a decision in its review of Bell's revenue requirements for the years 1985, 1986 and 1987. In view of the relationship between Bell's application and that of B.C. Tel, the Commission also decided to suspend the proceeding associated with the latter.
By letter dated 19 February 1987, Bell submitted revised Teleplus economic information reflecting the use of updated demand stimulation assumptions and the revisions to intra-Bell message toll rates ordered in Bell Canada - Review of Revenue Requirements for the Years 1985, 1986 and 1987, Telecom Decision CRTC 86-17, 14 October 1986.
Bell and B.C. Tel also filed applications, under Tariff Notice 2250 dated 19 January 1987 and Tariff Notice 1478 dated 11 December 1986, respectively, providing for the introduction of Between Friends Service, a bulk message toll service aimed primarily at the residence market.
In view of the similar nature of the proposed Between Friends and Teleplus Services, the Commission decided, in CRTC Telecom Public Notice 1987-6, 24 February 1987, to initiate a single proceeding to consider both applications. By letters dated 12 May 1988, the Commission directed the companies to file any revisions to the proposed rates for Between Friends that might be required because of the substantial rate reductions in message toll service (MTS) rates since the filing of the original applications. On 23 June 1988, these rate revisions were filed under Bell Tariff Notice 2250A and B.C. Tel Tariff Notice 1478A.
On 28 July 1988, B.C. Tel filed Tariff Notice 1478B containing further revisions to the proposed Between Friends tariff to reflect the toll rate revisions ordered by the Commission in Association of Competitive Telecommunications Suppliers and CNCP Telecommunications v. Bell Canada and British Columbia Telephone Company, Telecom Decision CRTC 88-9, 14 July 1988.
Both companies indicated that the rates for Teleplus need not be modified to reflect the MTS rate reductions, as the proposed rate structure has a certain degree of flexibility in maintaining rate relationships with MTS.
II DESCRIPTION OF THE SERVICES
A. The Proposed Teleplus Subscription Service
The proposed Teleplus Service is an alternative message toll service available to all residence and business customers. In exchange for a monthly subscription fee, it would provide a discount on customer-dialed MTS billings up to an allowed maximum. The companies proposed two rate plans for each of domestic Canada and Canada to U.S. (excluding Alaska and Hawaii). Plan A consists of a $4 monthly subscription fee and would provide a 15% reduction on eligible MTS charges to a maximum of $100. This plan is designed to appeal primarily to the residence and small business market. Plan B consists of a $10 monthly subscription fee and would provide a 15% reduction on eligible MTS charges to a maximum of $400. This plan is designed to appeal primarily to business customers generating customer-dialed MTS charges of between $140 and $1,000 per month.
The proposed discounts would be applied in addition to the usual MTS time-of-day/week and handicapped discounts. It was proposed that customers would have the option of selecting either or both a Canada plan and a Canada to U.S. plan.
In order to prevent the reselling or sharing of the service among guests, patients or students, the companies did not propose to make Teleplus Service available to hotel, hospital or university residence PBXs.
Bell and B.C. Tel stated that the Teleplus rate structure had been designed to offer discounts to as wide a base of customers as possible, while maintaining an approximately zero economic impact on each of the companies. The economic evaluation studies filed in support of the proposed Teleplus rates indicated a positive net present value (NPV) of $7.6 million for Bell and of $4.2 million for B.C. Tel.
The companies employed the results of the Teleplus 200 market trial in estimating demand stimulation under the proposed discount rate structure. The Teleplus 200 market trial provides for a 20% discount on domestic Canada customer-dialed MTS billings up to maximum billings of $100 (Plan A) and $400 (Plan B) in exchange for subscription fees of $5 and $10, respectively.
The companies assumed that the probability that a customer would subscribe (the take rate) to Teleplus is twice that observed for comparable customers in the Teleplus 200 market trial. The companies stated that this assumption was made after considering the impact of the additional advertising and promotion associated with a full service offering, as well as the removal of the uncertainties related to the short-term nature of the trial.
The companies also stated that Teleplus 200 market trial demand and revenue stimulation results were applied directly in the estimation of stimulated demand and revenue. The demand stimulation due to subscription to Teleplus 200 was measured by relative response factors (RRFs) calculated from the market trial results. The RRFs represent the ratio of percentage change in usage to percentage change in average price (net effect of subscription fee and discount). The RRF varied depending on customer bill size, but on average was -1.10.
B. The Proposed Between Friends Subscription Service
Between Friends is a subscription-based message toll service which offers an alternative way to pay for customer-dialed toll calls placed during evenings, nights and week-ends.
In support of their applications, Bell and B.C. Tel claimed that the proposed service would offer a rate plan that would be easy for customers to understand, would improve the ability of customers to plan and budget for long distance expenses because of improved comprehension of the price structure, would offer convenient and easily remembered time periods and would offer savings on long distance charges.
It was the companies' view that Between Friends would increase the level of price awareness of residence customers by eliminating many of the complexities inherent in the MTS rate schedules.
Under Tariff Notice 2250, Bell filed proposed rates for the Ontario and Québec Plan. Under this plan, a customer would have paid a monthly charge of $6.50 for an initial half- hour of calling to locations in Bell territory. Additional calling would have been charged at $0.21 per minute. Under Tariff Notice 2250A, the proposed rates were modified to $5.50 for the initial half-hour and $0.18 per minute for additional calling.
Bell proposed that residential customers who are disabled and use a keyboard to communicate be eligible for a 50% discount on charges associated with the Ontario and Québec plan.
Under the Canada and U.S. plan, according to the rates proposed in Tariff Notice 2250, a customer would have paid a monthly charge of $13 for an initial half-hour of calling to anywhere in Canada (including intra-Bell and intra-B.C. Tel calls) and the contiguous 48 United States. Additional usage would have been charged at $0.43 per minute. Under Tariff Notice 2250A, the proposed rates were modified to $10.00 for the initial half-hour and $0.33 per minute for additional calling.
Bell stated that, due to technical considerations associated with billing business customers, the service would initially be offered only to residence customers. Bell submitted that, because of the requirement that eligible calls be made during off-peak periods, the service would appeal primarily to residence customers. Subscribers would be able to subscribe to both intra-Bell and Canada and U.S. plans.
Bell indicated that it would require 60 days to implement the Between Friends Service. Bell also indicated that, if both services were approved at the same time, the company's preference would be to implement the Between Friends Service first, followed by the Teleplus Service six months later.
According to the rates proposed by B.C. Tel in Tariff Notice 1478, a customer would have paid a monthly charge of $9.00 for an initial half-hour of intra-B.C. Tel calling. Additional time would have been charged at $0.30 per minute. Under Tariff Notice 1478B, the proposed rates were modified to $6.50 for the initial half-hour and $0.22 per minute for additional calling.
B.C. Tel's Canada and U.S. plan, as originally filed, was identical to Bell's offering. Under Tariff Notice 1478A, however, the proposed rates were modified to $11.50 for the initial half-hour and $0.38 per minute for additional calling. Unlike Bell, B.C. Tel proposed to make Between Friends available to residence and business customers and to give its customers the option of subscribing to either the intra-B.C. Tel or the Canada and U.S. plan, but not to both. B.C. Tel stated that this approach would be easier for customers to understand, would prevent customer dissatisfaction arising from the over-utilization of one plan and the under-utilization of the other, and would permit a simpler sales approach.
B.C. Tel stated that, in order to accommodate the changes to the billing system, it would require 120 days to implement either or both services. The company requested an implementation date of 120 days from the date of the Commission's decision.
The economic studies filed by Bell and B.C. Tel in support of the Between Friends Service were based on take rates derived from a survey of residence customers undertaken to determine customer interest in a "block of time" service for off-peak long distance calling. The results of the Teleplus 200 market trial were used in estimating demand stimulation. The economic studies filed in support of the proposed service indicated positive NPVs of $5.1 and $1.5 million for Bell and B.C. Tel, respectively.
III ISSUES RAISED BY INTERVENERS
In response to the public notices on the Teleplus and Between Friends applications, the Commission received comments from a number of interveners, including: Cam-Net Communications Inc. (Cam-Net); CNCP Telecommunications (CNCP); Federated Anti-Poverty Groups of B.C., B.C. Old Age Pensioners' Organization, Council of Senior Citizen's Organizations of B.C., and Senior Citizens' Association (FAPG et al); Ontario Hospital Association; and the Government of Ontario.
The interveners' comments focused on three major areas of concern: (1) rate discrimination, (2) economic viability, and (3) pre-emption of competition.
A. Rate Discrimination
1. Interventions
CNCP, Cam-Net and FAPG et al were of the view that the rates for the proposed services were discriminatory and would be in violation of sections 321(1) and 321(2) of the Railway Act, which read as follows:
321. (1) All tolls shall be just and reasonable and shall always, under substantially similar circumstances and conditions with respect to all traffic of the same description carried over the same route, be charged equally to all persons at the same rate.
(2) A company shall not, in respect of tolls or any services or facilities provided by the company as a telegraph or telephone company,
a) make any unjust discrimination against any person or company;
b) make or give any undue or unreasonable preference or advantage to or in favour of any particular person or company or any particular description of traffic, in any respect whatever; or
c) subject any particular person or company or any particular description of traffic to any undue or unreasonable prejudice or disadvantage, in any respect whatever;
The CNCP argued that the services would benefit only a certain segment of subscribers, who utilize the same facilities as the larger body of subscribers. CNCP stated that the fact that Bell and B.C. Tel purport to show a positive NPV for the services is irrelevant to the question of discrimination.
Cam-Net submitted that, because the services would be most attractive to medium volume long-haul callers, low and high volume users and short-haul callers would be discriminated against.
FAPG et al was of the view that the proposed Teleplus Service was discriminatory, notwithstanding the fact that it was not limited to customers whose bills were a particular size. FAPG et al submitted that subscribers and non-subscribers placing calls over the same route and at the same time of day would pay different rates. It argued that the proposed service would result in discrimination within the long distance class of service, based on customer characteristics. FAPG et al submitted that the customers who would subscribe to the service would be those who would find it economically advantageous. These customers would be those who could afford the subscription fee and the break-even level of long-distance billing.
FAPG et al noted the Commission's preference for ensuring that rates for all subscribers are as low as possible, rather than for approving reduced rates for particular groups of subscribers. FAPG et al submitted that the situation with respect to the proposed services was unlike that of the recently approved discounts for users of Telecommunications Devices for the Deaf. In that case, a reduction in long-distance rates was required to ensure that hearing impaired subscribers obtained the same value of service as hearing subscribers. FAPG et al questioned the companies' argument that the proposed services are not discriminatory because they are similar in nature to other bulk-rated discount services such as Wide Area Telephone Service (WATS) and Telpak.
2. Replies
Bell's and B.C. Tel's position was that the rates for the proposed Teleplus and Between Friends Services are not discriminatory because the companies propose to make both services universally available and to offer them at the same price to any customer who wishes to subscribe. Bell noted that the proposed services are similar in nature to other discount toll services and submitted that they are less restrictive in nature than some of those other services.
With respect to FAPG et al's argument that the proposed Teleplus and Between Friends rates would violate section 321(1) of the Railway Act because subscribers and non-subscribers would be charged different rates for identical calls, Bell and B.C. Tel were of the view that such a comparison is misleading because it fails to take into account the subscription fee paid by the subscriber. In addition, Bell submitted that such a comparison overlooks the choice available to all customers either to subscribe or not to subscribe. Bell and B.C. Tel argued that, just as they cannot be said to be conferring an undue advantage upon callers who frequently rely upon off-peak discount calling relative to callers who freely choose to place their calls during peak periods, a subscriber to a universally available subscription service cannot be said to be gaining an undue advantage relative to a customer who elects not to subscribe.
3. Conclusions
The Commission notes that Teleplus subscribers would have access to usage rate discounts only after paying a monthly subscription fee. Teleplus subscribers would therefore bear a risk not borne by regular users of MTS, namely, that they would not make enough MTS calls to realize a net saving after paying the monthly subscription fee. Consequently, the Commission is of the view that Teleplus subscribers would obtain long distance service under different circumstances and conditions than do regular MTS users.
The Commission also finds that the rate structure (as distinct from the rate level) of the Between Friends Service would impose circumstances and conditions for the carriage of traffic that are different from those imposed by the MTS rate structure. Between Friends subscribers would pay for a minimum of one-half hour of use. In addition, Between Friends subscribers would pay a distance-insensitive rate for usage beyond one-half hour. The requirement for a minimum one-half hour payment implies that Between Friends subscribers, like Teleplus subscribers, would bear a risk that users of regular MTS do not. The distance-insensitivity of Between Friends rates means that subscribers would pay more per minute for short-haul calls and less for long-haul calls than do users of regular MTS. As the Between Friends rate structure provides for the carriage of traffic under different circumstances and conditions, the Commission considers that the proposed Between Friends rates would not violate section 321(1) of the Railway Act.
Concerning the question of whether the proposed rates would be unjustly discriminatory or grant an undue preference and therefore be in violation of section 321(2), the Commission notes that both Teleplus and Between Friends would be available to all users at the same rates. Accordingly, the Commission finds that the proposed rates would not violate subsection 321(2) of the Railway Act.
B. Economic Viability
1. Interventions
a. Teleplus
Cam-Net, CNCP and FAPG et al were of the view that Bell's and B.C. Tel's assumption that there would be no changes in MTS rates during the economic study period is unsupportable and casts doubt on the service's economic viability. In addition, CNCP noted that the level of MTS rates has fallen since the Teleplus applications were originally filed. Cam-Net argued that two other assumptions were incorrect. The first assumption was that the members of Telecom Canada would be the sole providers of MTS over the 10 year study period. The second was that cross-border traffic would be settled under the current Telecom Canada-American Telephone and Telegraph (AT&T) Interconnection Agreement. Cam-Net submitted that the first assumption is likely to be wrong and that the second assumption is wrong.
Cam-Net also questioned the use of the Teleplus 200 (domestic Canada) market trial results, rather than those from the Teleplus 1022 (Canada to U.S.) trial, for estimating demand stimulation under the Teleplus Canada to U.S. plans. Cam-Net argued that separate economic studies should have been prepared for each of the domestic and Canada to U.S. Teleplus plans. Cam-Net submitted that, had this been done, the Canada to U.S. plan could be evaluated using stimulation factors from the Teleplus 1022 Canada to U.S. market trial. These results, Cam-Net stated, would not support a proposal for Canada to U.S. Teleplus.
Both CNCP and Cam-Net questioned the validity of the Teleplus 200 market trial results. Cam-Net noted that the Teleplus 200 trial did not evaluate the possible cross-impact on toll services other than Direct Distance Dialing (DDD). Cam-Net was of the view that WATS 10 would appeal to the same target business market as would Teleplus. Cam-Net noted that, for the purposes of resale and sharing, the Commission has ruled that Teleplus 200 is a WATS-type service, by stipulating that the prohibition against resale and sharing for voice services applies to it in the same manner as it does to WATS. Cam-Net argued that the omission of any consideration of the cross-impact of Teleplus on WATS 10 was sufficient to render the carriers' economic studies invalid.
Cam-Net and CNCP argued that Bell's and B.C. Tel's demand stimulation calculations were inconsistent with economic theory. Cam-Net and CNCP submitted that economic theory implies that consumers make consumption decisions based on the price of the marginal (or next) call, and not on the basis of the average price of all calls made during a given time period. Under the proposed Teleplus rate structure, there is a difference between the marginal price discount and the average price discount. The presence of a subscription fee and the caps on eligible billings mean that the average price discount experienced by a particular customer depends on the level of their toll calling. The marginal price discount is 15% below the cap and zero above the cap.
CNCP also noted Bell's statement in the market trial report that "for customers above the cap, interest in the plan may be different for a capped service than for a service in which no cap exists". CNCP was of the view that this implied that, in assessing the reaction of subscribers to the discounts offered in the Teleplus 200 market trial, only the reaction of those subscribers below the cap should be considered. CNCP estimated that the RRF based on the reaction of those subscribers below the cap was approximately -1.2. CNCP was of the view that Bell, who had used RRFs based on the market trial and averaging -1.10, had erred in its estimation of consumer responsiveness. Consequently, in CNCP's view, the results of the economic evaluation are invalid.
CNCP also noted that Bell had conducted the market trial using only subscribers within its operating territory. CNCP argued that, given that Bell and B.C. Tel have consistently derived differing price elasticity estimates for their respective markets, it is not appropriate to use the Teleplus 200 market trial stimulation results in the estimation of B.C. Tel's demand stimulation. CNCP noted that recent evidence indicated that the average intra-Bell DDD price elasticity is in the order of -0.5 and that the overall market elasticity for intra-B.C. Tel toll is in the order -0.6.
CNCP noted that both Bell's and B.C. Tel's estimates of overall MTS elasticity differed from the RRFs derived from the Teleplus 200 market trial. CNCP submitted that Bell and B.C. Tel should reconcile these conflicting estimates of price elasticity.
Cam-Net argued that the imposition of the 10% telecommunications sales tax could affect demand for Teleplus and Between Friends differently from the demand for MTS. Cam-Net was of the view that updates to the Teleplus and Between Friends economic studies were required in order to assess the impact of the tax on the services' viability.
Cam-Net also questioned the carriers assumption that, for every two price stimulated messages to the U.S., one callback stimulated message from the U.S. would be received.
b. Between Friends
CNCP argued that the proposed Between Friends Service should be denied on the grounds that the results of the Between Friends economic evaluation are founded upon faulty or unsupportable assumptions.
CNCP claimed that there are two flaws in the Between Friends economic study. According to CNCP, the first flaw concerns the methodology used to predict the probability of subscription. Bell and B.C. Tel stated in the economic evaluation studies that it was assumed that a subscriber would select the plan or plans (intra-company or Canada and U.S. or both) that would provide the greatest percent savings.
CNCP provided a numerical example illustrating that, according to Bell's methodology, unless the percentage savings from each of the two plans are identical, a customer will never choose both plans and, in some circumstances, will choose the plan that minimizes absolute savings. CNCP submitted that the assumption that a subscriber would select the plan or plans that would provide the greatest percentage savings is unrealistic and understates the take rate for the service.
According to CNCP, the second flaw in the Between Friends economic evaluation studies concerns business take rates. Bell and B.C. Tel stated that it was assumed that business take rates would be similar in structure to residence take rates, but 50% lower. The companies based this assumption on the fact that evening, night and week-end calling will typically represent only a small proportion of a business customer's toll charges. Also, promotional material will be primarily directed towards residence customers. CNCP noted that, while Bell-originated evening business DDD traffic to points within Canada and the U.S. is a relatively small proportion of overall business toll charges, it nevertheless represents over $100 million of revenue annually. CNCP submitted that the business take rate assumption will, therefore, have a significant impact on the service's economic study results. CNCP was of the view that this assumption is unsupportable and likely understates the probability of subscription to the service.
With respect to Tariff Notices 2250A and 1478A, CNCP was of the view that sufficient justification for the revised proposed Between Friends rates had not been provided. CNCP was of the view that Tariff Notices 2250A and 1478A should be denied, or that a public notice should be issued to allow parties to obtain more information on these filings.
2. Replies
With respect to the interveners' concerns over MTS rate reductions subsequent to 1 January 1987, Bell noted that its analysis indicates that these toll rate reductions do not significantly alter the reliability of the economic results provided in support of Teleplus. With respect to Between Friends, both carriers provided revised proposed rates to maintain the viability of this service.
With respect to Cam-Net's concern over the impact of the 10% telecommunications sales tax on the viability of Teleplus and Between Friends, Bell noted that the tax would apply to regular MTS, as well as to the proposed services. Accordingly, Bell submitted that the imposition of the tax is unlikely to diminish the attractiveness of the services relative to MTS, and is therefore unlikely to affect their viability.
With respect to the use of RRFs based on average price changes, rather than marginal price changes, Bell agreed that, in general, the marginal price change is the appropriate one to use in stimulating demand response. However, in the case of Teleplus, Bell chose to use the average price change in estimating Teleplus stimulation. In Bell's view, this approach best explained the stimulation observed in the market trial. The company noted that it had indicated in response to an interrogatory that the economic viability of the service would not change if the analysis was based on the marginal price change for subscribers below the cap and the average price change for subscribers above the cap.
With respect to CNCP's argument that it is not appropriate for B.C. Tel to make use of the Teleplus 200 market trial results given that the trial was conducted in Bell territory and that Bell's and B.C. Tel's overall intra MTS elasticity estimates differ, B.C. Tel submitted that the difference in estimates is one of degree, rather than an indication of fundamental differences in market behaviour. B.C. Tel was of the view that its use of the market trial results was therefore valid.
With respect to Cam-Net's argument that Teleplus 1022 market trial stimulation factors should have been used in evaluating the viability of the Canada to U.S. Teleplus plan, B.C. Tel noted that the Teleplus 1022 market trial is structured quite differently from the proposed Teleplus Service. In the Teleplus 1022 trial, additional dialed digits are required, customers do not have a choice of subscription levels, the break-even point is higher, the discounts vary with distance called and there is no limit on the volume of calling eligible for the discount. B.C. Tel submitted that, on the other hand, the Teleplus 200 market trial is similar in design to the proposed Teleplus Service.
With respect to CNCP's view that there is an apparent inconsistency between the Teleplus 200 RRFs and Bell's and B.C. Tel's overall MTS elasticity estimates, Bell submitted that recent evidence filed in the rate rebalancing proceeding provided continued support for its overall intra-company elasticity estimates. Bell submitted that the demand responsiveness observed in the Teleplus 200 market trial is due, not only to a price discount, but also to the nature of the service, which involves a subscription fee and a limit on total billings eligible for the discount. Both carriers noted that, since Teleplus subscribers represent a relatively small, self-selected subset of the total DDD market, it would be reasonable to expect that the responsiveness of this market segment may differ from that of the DDD market as a whole. Bell stated that the process of self-selection should result in a level of price responsiveness among those who chose to subscribe to Teleplus that is significantly greater than that for the DDD market as a whole, because customers who select Teleplus are likely to be more sensitive to price than customers who do not opt for the service. Bell stated that, while the proposed Teleplus Service might be expected to be attractive to any subscriber whose toll billings are above the break-even point for Teleplus, it estimated that not all of these customers would take the service.
CNCP argued that it is not appropriate to assume that a subscriber will choose the Between Friends plan or plans that would maximize percentage rather than absolute savings. In reply, the carriers submitted that they expect some customers to choose a plan on the basis of percentage savings and some to choose a plan on the basis of absolute savings. The carriers noted that, in the majority of cases, the plan selected with the objective of maximizing absolute savings will also maximize percentage savings. In this regard, B.C. Tel indicated in response to a CNCP interrogatory that 96.3% of customers are expected to choose the plan that maximizes their absolute savings, as well as their percentage, savings. B.C. Tel added that, since each of the approaches tends to result in the same choice of plan, the percentage savings approach was chosen for the economic study on the basis that customer-directed advertising commonly features percentage savings.
With respect to their assumption concerning the business take rate for Between Friends, Bell and B.C. Tel submitted that, given the off-peak nature of the service, it is reasonable to assume that a business customer would be less likely to subscribe. Using marketing judgement, Bell and B.C. Tel used a factor of 50% to estimate a business customer's reduced likelihood of subscribing.
3. Conclusions
The proposed Teleplus and Between Friends Services can be considered a repackaging of MTS to attract a particular segment of toll users. Were such a repackaging to result in a significant reduction in MTS contribution, it could be argued that the reduction would be more appropriately applied to all monopoly toll rates. As a result, the question of the economic viability of the proposed services is an important one. The economic studies filed by Bell and B.C. Tel indicate a positive NPV for the services. This implies that, over the study period, the services will not result in a reduction in toll contribution.
The aspect of the services' viability that has generated the most concern is the approach used by Bell to estimate the demand stimulation arising from subscription to the proposed services. In estimating the demand and revenue stimulation due to subscription to the services, the companies used an RRF that varied depending on customer bill size, but which averaged -1.10. Such a figure differs substantially from the estimates of price elasticity of overall demand for Bell and B.C. Tel intra-company MTS, which are in the neighbourhood of -0.5 to -0.6.
In the Commission's view, there is no reason to expect the price elasticity of various market segments to be identical to the aggregate or average elasticity. Therefore, there is not necessarily an inconsistency between Bell's Teleplus 200 RRFs and Bell's and B.C. Tel's estimates of overall price elasticity of demand for MTS. In addition, the Commission agrees with Bell that it is reasonable to expect Teleplus 200 subscribers to be more aware of and responsive to price, because subscription to the service requires a conscious decision. This argument is reinforced by the observation that not all subscribers who were offered Teleplus 200 and who stood to benefit from subscription did, in fact, subscribe. It is reasonable to infer that those who chose to subscribe did so because they were more concerned with price than those who did not.
Nonetheless, there is some doubt as to the appropriateness of applying the Teleplus 200 market trial RRFs to the estimation of demand stimulation due to subscription to the proposed Teleplus Service. As noted earlier, the RRFs are based on average price change, whereas economic theory suggests that it is the price of the marginal call that influences consumer behaviour. The Commission notes that the rate structure of the Teleplus 200 market trial differs from that proposed for Teleplus Service. The higher marginal price discount in Teleplus 200 implies that customers' demand stimulation observed in conjunction with a given average price reduction would be greater under Teleplus 200 than under the proposed Teleplus Service.
Bell conceded that it is possible that the use of Teleplus 200 market trial RRFs for the proposed Teleplus Service might overstate demand stimulation. However, the Commission notes Bell's statement that it had re-estimated Teleplus demand and revenue using the marginal price change for subscribers under the cap and the average price change for subscribers over the cap. Bell stated that demand and revenue stimulation were affected, but not enough to change the economic viability of the Teleplus Service. In addition, the Commission notes that, in response to Commission interrogatories, Bell indicated that, should the actual responsiveness of demand be as much as 30% lower than that assumed, the combined NPV of Between Friends and Teleplus would be negative $11.7 million. On an annual basis, this would amount to a reduction in toll contribution in the order of $1 to $2 million. In the Commission's view, given the current significant contribution made by MTS, the percentage reduction in toll contribution attributable to Between Friends and Teleplus would not be significant in relation to the total MTS contribution, even under a pessimistic view of demand stimulation.
Cam-Net argued that the assumption in the Teleplus and Between Friends economic studies that all cross-border traffic would be settled under the current Telecom Canada-AT&T Interconnection Agreement is incorrect. Teleplus and Between Friends cross-border traffic may, in fact, be settled under agreements with MCI Communications Corporation and U.S. Sprint Communications Company. However, these agreements contain the same settlement rate as the agreement with AT&T. Therefore, the economics of the services would not be seriously affected if the assumption proved incorrect. Accordingly, the Commission is of the view that the assumption was not critical in arriving at the conclusion that these services are viable. The Commission is also of the view that the results of the economic study are not critically affected by assumptions concerning the monopoly provision of MTS by Telecom Canada members.
The Commission considers that the results of the economic study concerning the viability of the services are not affected by the assumptions concerning the level of MTS rates and the impact of the 10% tax. Rather, the Commission considers that the central question is whether discount toll services can be structured so that no reduction in toll contribution results. The answer to this question is influenced by the attractiveness of the new services in relation to MTS, and therefore by the rate relationships between the new services and MTS, rather than by the absolute level of rates for one or the other of these services. This is due in part to the fact that displaced MTS revenues represent a significant cost of offering Between Friends and Teleplus. MTS rate reductions decrease the amount of the MTS revenues displaced. As a result, the Commission is of the view that there is no need for revised economic studies for Between Friends in order to reflect the new rate proposals contained in Tariff Notices 2250A, 1478A and 1478B, since these proposals are based on the same rating principles as the previous proposals.
The Commission is also of the view that the carriers' assumption concerning the stimulation of callback messages from the U.S. does not result in any meaningful overstatement of the viability of the proposed services. The Commission considers it very likely that there will be some callback stimulation. However, given the magnitude of the incremental southbound traffic relative to the overall Canada-U.S. market, assumptions concerning callback are unlikely to have a significant effect on the results of the economic studies.
With respect to Cam-Net's criticism of the failure of the Teleplus economic studies to account for cross-impacts on WATS 10, the Commission is of the view that WATS 10 and Teleplus Service are not substitutes for each other. The Commission considers that WATS 10 appeals to larger business customers than would Teleplus. Therefore, the introduction of Teleplus would be unlikely to have any impact on WATS revenues.
Regarding CNCP's concerns with respect to the Between Friends take rate for business subscribers, the Commission is of the view that the assumption that the business take rate will be one-half that of residence subscribers is reasonable given the off-peak nature of the service and the fact that promotion of the service will be directed primarily towards residence customers.
The Commission also considers reasonable the assumption that percentage savings, rather than absolute savings, would dictate a customer's choice of Between Friends plans. The Commission notes that there are arguments in favour of both approaches and that, in many cases, they will yield the same result.
With respect to CNCP's request for a public notice concerning Tariff Notices 2250A, 1478A and 1478B, the Commission is of the view that these tariff notices raise no new issues and create no requirement for further information. The Commission therefore denies CNCP's request.
C. Pre-emption of Competition
1. Interventions
CNCP argued that the introduction of Teleplus and Between Friends represents an attempt to pre-empt competition. CNCP submitted that the market segment targeted by Teleplus is particularly susceptible to competition and that the introduction of the service would make this market segment less attractive to competitors. CNCP argued that, by offering discounts on calls terminating anywhere in Canada, Bell would be compelling potential competing services to offer the same points of termination.
CNCP submitted that the Teleplus offering presents the same difficulty that led the Commission to deny CNCP's interconnection application. CNCP submitted that, in Interexchange Competition Related Issues, CRTC Telecom Decision 85-19, 29 August 1985 (Decision 85-19), the Commission stated that, if CNCP were to enter the long distance market, benefits would accrue only to a small number of primarily high-volume toll users. CNCP argued that the Commission had denied its application on that basis and could not now approve Teleplus Service.
Cam-Net submitted that the Teleplus Canada to U.S. plan is targeted at those B.C. Tel subscribers who are the most likely users of the services Cam-Net offers. Cam-Net was of the view that the goal of a separate Canada to U.S. Teleplus plan is the destruction of Cam-Net.
2. Replies
Bell and B.C. Tel noted that both the Teleplus 200 and 1022 market trials were developed and filed prior to both CNCP's application for interexchange competition and the inception of Cam-Net's service. Bell and B.C. Tel were also of the view that it would be unreasonable to deny their customers the opportunity to receive the benefits of a subscription-based toll discount service pending the outcome of all attempts by CNCP to enter the MTS market.
3. Conclusions
In Decision 85-19, the Commission expressed concern that there would be a number of disadvantages associated with approval of the CNCP interconnection application and that these disadvantages would offset any benefits of allowing competition. The Commission is of the view that none of these disadvantages would arise from the approval of the Teleplus and Between Friends Services, as they differ substantially from the service proposed by CNCP. Accordingly, approval of these services would not be inconsistent with the denial of CNCP's application for interconnection in Decision 85-19.
The Commission considers that both Teleplus and Between Friends will more than cover their associated costs and, accordingly, that the applications raise no concerns with regard to possible cross-subsidization. While it may be argued that the introduction of the Teleplus and Between Friends Services will reduce the attractiveness of uneconomic entry into certain segments of the MTS market, it is the Commission's view that neither service can be considered anti-competitive.
D. Teleplus for Hotel, Hospital and University Use
The Ontario Hospital Association noted that the proposed tariff for Teleplus states that Teleplus would not be furnished on a hotel, hospital or university residence PBX system.
In its reply, Bell stated that this restriction is intended to prevent hotels, hospitals and university residences from sharing or reselling the service among guests, patients or students. Bell noted that the Commission had previously stipulated that the Teleplus 200 market trial service could not be resold or shared.
Bell stated that, subject to the requirement that these institutions configure their PBXs in such a way that Teleplus could not be accessed by guests, patients or students, it would not object to a provision allowing them Teleplus for administrative use only.
The Commission is of the view that the provision suggested by Bell would be consistent with the Commission's treatment in Tariff Revisions Related to Resale and Sharing, Telecom Decision CRTC 87-2, 12 February 1987, of Teleplus 200 and other volume discount toll services, as well as with the treatment prior to that decision of resale by hotels, hospitals and university residences.
IV DISPOSITION OF THE APPLICATIONS
In light of the conclusions in Part III above, the Commission considers that approval of the applications would be in the public interest. The effect of the plans will be to provide subscribers with greater choice in the purchase of message toll services without any significant negative impact on the general body of subscribers, even under a pessimistic scenario of demand stimulation.
Based on the foregoing, the Commission approves Bell Tariff Notices 1874 and 2250 as modified by Tariff Notice 2250A, and B.C. Tel Tariff Notices 1283 and 1478 as modified by Tariff Notice 1478B.
Bell is directed to issue, within 14 days, approved tariff pages for Between Friends Service, with an effective date 60 days from the date of this decision. Bell is also directed to issue, within 14 days, approved tariff pages for Teleplus Subscription Service, with an effective date 6 months thereafter.
B.C. Tel is directed to issue, within 14 days, approved tariff pages for Between Friends Service and Teleplus Subscription Service, with an effective date 120 days from the date of this decision.
The Commission also orders that a provision be included in the carriers' tariffs allowing the provision of Teleplus Service to hotels, hospitals and universities, for their administrative use only.
Fernand Bélisle
Secretary General
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