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Ottawa, 15 February 1990
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Telecom Decision CRTC 90-1
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BELL CANADA AND BRITISH COLUMBIA TELEPHONE COMPANY - INTRODUCTION OF ADVANTAGE DISCOUNT SERVICE
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I BACKGROUND
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On 13 January and 16 January 1989, the Commission received applications from Bell Canada (Bell) and British Columbia Telephone Company (B.C. Tel), under Tariff Notices 2961 and 1846, respectively, for approval of tariff revisions providing for the introduction of a Canada-U.S. message toll discount service called Advantage Service (Advantage). Advantage is a form of Message Toll Service (MTS) that would provide subscribing customers with volume-based discounts on customer-dialed station-to-station calls to locations in the United States, excluding Alaska and Hawaii. The companies proposed that the discounts apply to calls originated in Bell or in B.C. Tel territory between 8:00 a.m. and 6:00 p.m., Monday to Saturday. Customers would be billed at regular MTS rates up to and including $400 per month. Thereafter, the following discounts would apply: 15% to eligible monthly charges over $400 up to and including $1500; 17% to eligible monthly charges over $1500 up to and including $3500; and 20% to eligible monthly charges over $3500. Customers would be required to pay a minimum monthly bill of $400 for each account.
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On 6 March 1989, the Commission issued CRTC Telecom Public Notice 1989-11 with respect to the applications. In response to that Public Notice, the Commission received comments from a number of interveners, including Cam-Net Communications Inc. (Cam-Net), Canadian Business Telecommunications Alliance (CBTA), CNCP Telecommunications (CNCP), Elders Grain Company Ltd., Government of British Columbia, Marathon Telecommunications Corp. (Marathon), and TSI Telequip Services Inc. (TSI). The interveners' comments related primarily to the following areas of concern: (1) economic viability, (2) pre-emption of competition and resale and sharing, and (3) rate discrimination and undue preference. These issues are discussed in turn below.
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II ISSUES RAISED BY INTERVENERS
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A. Economic Viability
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1. Interventions
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CNCP and Marathon were of the view that the proposed service is not economically viable and should therefore be denied. CNCP submitted that the record of the proceeding indicates that the economic viability of Advantage is dependent on the size of the market that Bell and B.C. Tel had estimated for CNCP's Canada-U.S. Broadband Exchange Service (BES), and on the migration of BES customers to Advantage. CNCP's submission that the proposed service is not viable was based primarily on the contention that Bell and B.C. Tel had vastly overstated the size of the Canada-U.S. BES market. CNCP noted that the companies estimated the 1989 BES market at $13.896 million, while its actual 1988 BES revenues amounted to only $2.185 million. CNCP stated that its forecast of 1989 BES revenues also indicates that Bell's estimate for 1989 is overstated. CNCP was of the view that there would not be sufficient take from BES to make Advantage profitable. Marathon noted that the telephone companies' submissions suggest that, without Advantage, significant revenue and contribution erosion would occur as a result of competition from CNCP's BES. Marathon was of the opinion that the companies' forecast of revenue erosion is grossly in error. In Marathon's view, that is sufficient to invalidate the economic studies performed by the companies.
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Marathon also noted B.C. Tel's statement that the company has experienced significant cross-border competitive losses and has become increasingly concerned about its ability to retain contribution. Marathon cited an interrogatory response filed by the company in its last revenue requirement proceeding. In that response, B.C. Tel estimated that, in 1987 and 1988, the market shares of its cross-border competitors were 3.6% and 5.0%, respectively. Marathon was of the view that these market shares do not constitute significant cross-border losses for B.C. Tel and that B.C. Tel's rationale for introducing Advantage is therefore nullified.
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CNCP expressed concerns with the BES growth rates assumed in the economic studies. CNCP stated that it is unrealistic to assume, as Bell and B.C. Tel had done, that BES, once mature, would experience growth rates equal to those for MTS, given all the restrictions and inconveniences associated with BES. CNCP submitted that accounting for these restrictions and inconveniences would reduce the economic viability of Advantage.
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CNCP raised various objections to the price elasticity assumptions employed by the companies in their economic studies. CNCP submitted that the elasticity estimate used for Advantage is identical to that observed in the Teleplus 200 market trial, and that it is incorrect to use this elasticity estimate for Advantage. In addition, CNCP criticized the fact that the companies had applied the elasticity estimate to the average price change of each account. 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 during a given time period.
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CNCP argued that it is inappropriate for Bell and B.C. Tel to use probabilities of subscription based on the Teleplus 1022 trial in conjunction with elasticity estimates based on the Teleplus 200 market trial. CNCP also questioned the appropriateness of the probabilities of subscription employed to estimate migration to BES. CNCP was of the view that the companies, in their derivation of probabilities of subscription for BES, accounted only for the fact that BES is not offered by a Telecom Canada member and failed to consider other limitations associated with BES. CNCP considered it possible that the economic studies might indicate Advantage to be unprofitable, if a realistic BES take rate was used. CNCP also submitted that the proposed service would not maximize contribution.
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2. Replies
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Bell and B.C. Tel submitted that CNCP's comparison of the companies' estimate of 1989 BES revenues to CNCP's 1988 actual BES revenues is not appropriate. The companies submitted that the economic studies implicitly embody an estimate of 1988 BES revenues of $2.8 million. Bell indicated that, if BES revenues for the 10 year study period are revised downwards so that the 1988 BES implied study value matches CNCP's actual 1988 BES revenues, a positive net present value (NPV) for Advantage results. In addition, Advantage remains economically viable if forecast BES revenues are further reduced over the study period, so that the revenues forecast for BES in 1989 and subsequent years are half those originally estimated.
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Bell was of the opinion that CNCP's 1988 actual revenues understate the current and future market for BES because of two major changes that have significantly increased the attractiveness of BES, namely, a more marketable rate structure and greater access to the Canadian PBX market. Bell also noted that the studies did not include the effects of other competitors, such as resellers, in the Canada-U.S. market. The omission of these elements, Bell submitted, tends to understate Advantage's profitability.
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In defence of its estimate of revenues lost to BES, B.C. Tel noted that BES is priced substantially lower than direct distance dialing (DDD), so that a given amount of revenues lost to BES would result in a significantly lower dollar value in revenues gained by BES.
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With respect to CNCP's contention that assumed BES growth rates are unrealistic, Bell submitted that the differences between MTS and BES would affect only the decision to subscribe. However, there is no reason to assume that, once the decision to subscribe to BES has been made, the customer's usage of BES would differ substantially from the customer's usage of Canada-U.S. MTS, given that BES is being used as an alternative to Canada-U.S. MTS.
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In response to CNCP's argument that it is incorrect to use an elasticity for Advantage based only on information from the Teleplus 200 market trial, Bell stated that the Advantage price elasticity was based on several factors, including econometric model estimates for the market segment, the price responsiveness factors from the Teleplus 200 and Teleplus 1022 trials, and the nature of the proposed service.
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Bell agreed with CNCP that, conceptually, it is more appropriate to apply an elasticity estimate to the marginal price change, rather than to the average price change, in simulating the demand response to a multi-part tariff. Bell noted that this would entail practical difficulties and that CNCP had offered no suggestions as to how elasticities should be applied to marginal price changes. Bell submitted, however, that the use of the average price change produces a lower NPV than use of the marginal price change, thus understating the economic viability of Advantage.
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Bell maintained that utilizing the Teleplus 1022 probabilities of subscription, rather than those for Teleplus 200, is appropriate for several reasons. First, Bell submitted that the Teleplus 1022 trial results are relevant because they provide data on the actual behaviour of customers offered a discounted Canada-U.S. DDD alternative. Second, comparable amounts of data are available for Teleplus 1022 and Teleplus 200, thus negating any advantage concerning sample size that one data set might have over the other. Third, the company suggested that, if it had considered the fact that the quality of service for Teleplus 1022 is perceived to be below that of DDD, as CNCP suggested, it could have justified probabilities of subscription for Advantage higher than those used in the economic study. Thus, a higher estimated rate of migration from BES to Advantage would have resulted. Bell indicated that this, in turn, would have resulted in a higher NPV for Advantage.
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With respect to CNCP's comment that the target markets for Advantage and Teleplus 1022 are different and that it is inappropriate to assume that the probabilities of subscription for Advantage would equal those for Teleplus 1022, Bell submitted that, if there is a difference in the probabilities of subscription for the two markets, it is reasonable to suppose that the probabilities of subscription would be higher for Advantage than for Teleplus 1022. Bell's rationale was that, all other factors being equal, including percentage savings, the absolute benefit of subscription in terms of dollars saved monthly would be greater for Advantage customers than for Teleplus 1022 customers. This view was based on Bell's expectation that the target market for Advantage would consist primarily of larger users of Canada-U.S. MTS, whereas the target market for Teleplus 1022 also included some smaller users. Higher probabilities of subscription, Bell submitted, would result in higher rates of migration from BES to Advantage.
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With respect to the probabilities of subscription assumed for BES, Bell stated that it did not assume that BES and Advantage are equivalent telecommunications services. The company submitted that it took into account any potential disadvantage that CNCP's BES might face because it is not offered by a Telecom Canada member. In addition, Bell submitted that, by means of a factor reflecting restrictions on the connection of BES to PBXs, which are in turn interconnected to the public switched network, it accounted for other service characteristics that would affect the probability of subscription.
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In response to CNCP's submission that the proposed service would not maximize contribution, B.C. Tel submitted that it is the absence of an alternative to DDD for calling to the U.S. that would render the company unable to maximize contribution.
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3. Conclusions
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Advantage is a form of MTS structured to appeal to medium to large users of Canada-U.S. MTS. As indicated in Bell Canada and British Columbia Telephone Company - Introduction of Between Friends and Teleplus Subscription Service, Telecom Decision CRTC 88-19, 10 November 1988 (Decision 88-19), were such a service to result in a reduction in MTS contribution, it could be argued that the reduction would be more appropriately applied to all MTS rates. Thus, as in Decision 88-19, the issue of economic viability is an important one. The economic studies filed by Bell and B.C. Tel show a positive NPV for the service. In other words, the studies filed by the companies indicate that, over the study period, the service would not result in a reduction in toll contribution.
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Bell and B.C. Tel indicated that Advantage is designed, in part, to reduce the migration of customers to competitors' MTS alternatives for Canada-U.S. calling, and thus to retain their market share and contribution from MTS. The issue of the extent of migration to competitors' MTS alternatives, including CNCP's BES, that has occurred and is expected to occur if Advantage is not offered has an important bearing on the economic viability of Advantage. Specifically, the extent of that migration represents the potential for lost contribution. Therefore, the larger the forecast market for BES and for other MTS alternatives, the greater the potential contribution loss if Advantage is not made available and the greater the likelihood that Advantage will be viable if it is made available.
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If the economic viability of Advantage is examined under the premise that the BES market is substantially smaller than originally forecast by Bell and B.C. Tel, Advantage would still generate positive net cash flows over the study period. As evidence of this, Bell submitted positive NPVs for scenarios in which forecast BES revenues for the 10 year study period are revised downwards so that the 1988 BES implied study value is equal to CNCP's actual 1988 BES revenues and in which the original forecasts of BES revenues are reduced by half for the study period. Further, the companies argued that the viability of Advantage is likely understated due to the fact that effects of competitors other than CNCP in the Canada-U.S. market were not explicitly considered. In addition, stated the companies, BES revenues are likely underestimated, owing to improved marketing of BES and to revised technical restrictions on PBXs that increase the attractiveness of BES.
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Although CNCP expressed concern that the elasticity assumed for Advantage is inappropriate, it did not comment on whether a higher or lower elasticity would be more appropriate. The Commission considers it likely that the price elasticity for Advantage is higher than that for Canada-U.S. MTS, as subscription to the service requires a conscious effort. The Commission notes that the companies employed an elasticity of -0.7 for Advantage, whereas current estimates of the unidirectional price elasticity of overall demand for Bell and B.C. Tel Canada-U.S. DDD are in the range of -0.4 to -0.6. Since, from the consumer's perspective, Advantage is virtually identical to MTS except for the level and structure of its rates, it is reasonable to assume that consumers who subscribe to Advantage do so exclusively because of the potential price reductions. Consequently, it is expected that these consumers would have a high awareness of the Advantage price discounts. Further, the companies demonstrated that if unidirectional Canada-U.S. price elasticities are employed in the studies, NPVs of $3.0 million and $1.9 million result for Bell and B.C. Tel, respectively.
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Bell conceded that it is more appropriate to apply the elasticity estimate to the marginal price change, rather than to the average price change, in simulating the demand response to a multi-part tariff. However, Bell indicated that, if the elasticity is applied to the marginal price change, the NPV for Advantage is greater than if the elasticity is applied to the average price change. Thus, to the extent that the application of the elasticity to the average rather than the marginal price change results in an incorrect NPV estimate, the tendency is towards underestimation.
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CNCP expressed concerns over the companies' use of the probabilities of subscription from the Teleplus 1022 market trial, rather than those from the Teleplus 200 market trial, for the purpose of estimating subscription to Advantage. The Commission notes that, like Advantage, Teleplus 1022 was an uncapped Canada-U.S. discount message toll service. Alternative probabilities of subscription, approximately one half those of the Teleplus 1022 trial, stemming from the Teleplus 200 market trial were available. However, unlike Advantage, Teleplus 200 was a capped discount message toll service applicable only to calls within Canada. In addition, the Commission notes that, if probabilities of subscription equal to one half those from the Teleplus 1022 market trial are employed in the economic studies, a positive NPV for Advantage is maintained.
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As indicated previously, assumptions concerning BES market size, elasticity, and probability of subscription can be varied individually with the result that Advantage remains viable. In addition, in assessing the viability of Advantage, the Commission has considered a number of pessimistic scenarios, some of which involved the variation of a number of assumptions. In the worst case scenario, Bell's monopoly toll contribution, which amounts to approximately $2 billion per year, would be reduced by approximately $1 million per year.
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In light of the above, the Commission concludes that the proposed Advantage Service would be economically viable.
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B. Pre-emption of Competition/ Resale and Sharing
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1. Interventions
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Cam-Net argued that Advantage makes sense in a competitive MTS/WATS environment, but appears premature in an environment where resale and sharing to provide MTS/WATS is not allowed. Cam-Net expressed the opinion that the Commission should not approve Advantage until it has completed the proceeding initiated by Resale and Sharing of Private-Line Voice Services, CRTC Telecom Public Notice 1989-1, 11 January 1989 (Public Notice 1989-1), and determined whether to allow the resale of private-line services for joint use. Cam-Net argued that the introduction of Advantage at this time could have an adverse impact on the development of a competitive market, if the Commission decides that it is in the public interest to allow wider resale activity.
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Cam-Net and TSI noted that the proposed tariff for Advantage prohibits the resale and sharing of the service to provide MTS or other interexchange voice services, and that this is inconsistent with the Commission's policy on the resale and sharing of MTS and with Tariff Revisions Related to Resale and Sharing, Telecom Decision CRTC 87-2, 12 February 1987 (Decision 87-2).
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2. Replies
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In response to Cam-Net's comment that approval of Advantage would inhibit the development of competition and should be delayed until completion of the resale and sharing proceeding, Bell submitted that the cross-border market at which Advantage is targeted includes a number of competitive MTS alternatives, one of which is offered by Cam-Net. B.C. Tel submitted that the effective discount level of Advantage, in comparison to regular MTS, is less than that currently offered by competitors' MTS alternatives and, further, that it is significantly less than the discount that a reseller could be expected to offer under a more liberal resale and sharing regime. Bell and B.C. Tel expressed the view that the Advantage filing is independent of the issues under review in the proceeding initiated by Public Notice 1989-1 and that it is not appropriate to delay the approval of Advantage because of concerns related to resale and sharing.
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With respect to arguments that the prohibition of the resale of Advantage is inconsistent with Decision 87-2, Bell submitted that Advantage is a bulk-priced form of MTS, similar to Wide Area Telephone Service (WATS), and that it is aimed, in part, at the same market segment that would normally be a target for WATS. Bell noted that Decision 87-2 allows the resale of MTS, but prohibits the resale of WATS. The company submitted that to prohibit the resale and sharing of Advantage is consistent with the treatment of Teleplus Subscription Service approved by the Commission in Decision 88-19.
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3. Conclusions
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Based on its findings in Section A, the Commission concludes that the proposed service would more than cover its associated costs. Therefore, the service raises no concerns with regard to possible cross-subsidization. Accordingly, the service would not confer an undue competitive advantage on Bell and B.C. Tel. In addition, Advantage is designed to limit contribution erosion due to cross-border MTS substitutes currently being offered by competitors. Accordingly, the Commission is of the view that the Advantage applications should be considered independently from the proceeding initiated by Public Notice 1989-1.
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In Decision 87-2, the Commission permitted the resale of MTS to provide MTS. However, it prohibited the resale or sharing of WATS, a domestic bulk discounted toll service, to provide MTS or other interexchange voice services. Similarly, in Decision 88-19, the Commission approved tariffs for Teleplus Subscription Service that prohibit its resale or sharing to provide MTS or other interexchange voice services. Consistent with the above, the Commission concludes that the resale or sharing of Advantage to provide MTS or other interexchange voice services should be prohibited.
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C. Rate Discrimination/Undue Preference
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1. Interventions
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Marathon, Cam-Net and TSI were of the view that the rates for the proposed service are discriminatory and would be in violation of sections 340(1) and 340(2) of the Railway Act, which state in part:
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340.(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.
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(2) A company shall not, in respect of tolls or any services or facilities provided by the company as a telegraph or telephone company,
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(a) make any unjust discrimination against any person or company,
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(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
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(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.
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Cam-Net submitted that approval of the proposed tariff would result in Canada-U.S. message toll traffic carried over the same route, at the same time of day, on the same network, being charged at different rates to different persons. Cam-Net was of the opinion that, since the discounts are not based on cost savings realized in the provision of service to large users, the proposed tariff contravenes section 340(1) of the Railway Act. TSI was opposed to the introduction of Advantage because it gives an unfair advantage to large users of DDD service to the U.S., in relation to small users. Cam-Net also argued that to deny resellers access to Advantage discounts, by prohibiting resale of the service, appears contrary to section 340(1) of the Railway Act.
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Marathon submitted that the proposed service accords Bell and B.C. Tel an undue and unreasonable preference or advantage contrary to paragraph 340(2)(b) of the Railway Act, because Advantage does not require a dedicated access line and because access from any subscriber equipment is permitted without partitioning requirements. These requirements are imposed on Marathon's users by the Commission's current resale and sharing restrictions. Marathon argued that, if Advantage is approved, the Commission should allow subscribers to connect to Marathon's network on terms similar to those under which subscribers connect to the networks of Bell and B.C. Tel.
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CBTA did not share Marathon's, Cam-Net's and TSI's view that Advantage would be unjustly discriminatory. CBTA noted that residential subscribers have a discount calling service to the U.S. in the form of Between Friends, and that Teleplus Subscription Service is available for business and residential customers with low to medium volumes of Canada-U.S. toll traffic. CBTA submitted that, accordingly, it is fair and appropriate that large volume toll customers have access to Advantage.
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2. Replies
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Bell and B.C. Tel submitted that the Advantage tariff is not unjustly discriminatory and would not violate section 340(1) of the Railway Act.
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The companies noted that the Commission ruled, in Decision 88-19, that the rate structures of Teleplus and Between Friends provide for carriage of traffic under circumstances and conditions different from those provided for under the MTS rate structure and, as a result, do not violate the Railway Act. B.C. Tel submitted that Advantage subscribers would be required to bear the risk of a monthly minimum bill of $400, a risk that regular MTS users are not required to assume. Both companies were of the opinion that the proposed rates for Advantage would not be contrary to section 340(1) of the Railway Act, since the terms and conditions of the service impose circumstances and conditions for the carriage of traffic that differ from those imposed by MTS.
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In response to Marathon's argument that Advantage accords Bell and B.C. Tel an undue preference, Bell stated that the scope, terms and conditions under which resellers obtain access to and resell the company's services have been established by the Commission in Interexchange Competition and Related Issues, Telecom Decision CRTC 85-19, 29 August 1985, and in Decision 87-2. Bell submitted that, as with Between Friends and Teleplus Subscription Service, the filing of proposed tariffs for Advantage does not justify revision or variation of the scope, terms and conditions for resale established by the Commission in those decisions.
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The companies noted that Advantage would be available to all subscribers, even though the features and conditions of the service are designed to appeal to a certain market segment.
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3. Conclusions
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In Decision 88-19, the Commission found that Between Friends and Teleplus Subscription Service, because of their rate structures, provide for the carriage of traffic under circumstances and conditions different from those for the carriage of regular MTS traffic and that, as a result, the discounts provided by those services do not violate section 340(1) of the Railway Act.
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Advantage subscribers would pay a minimum $400 monthly bill regardless of whether they generate a corresponding volume of traffic, thereby bearing a risk that users of regular MTS do not. Therefore, as is the case with Between Friends and Teleplus Subscription Service, Advantage would impose circumstances and conditions for the carriage of traffic that are different from those imposed by MTS. As a result, the Commission finds that the proposed Advantage rates would not violate section 340(1) of the Railway Act.
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With respect to arguments raised by Marathon and Cam-Net, the Commission notes that certain restrictions apply to the resale of carrier-provided facilities and that these restrictions have been found to be in the public interest. The purpose of the restrictions is to prevent resale activity from significantly eroding monopoly toll contribution. The Commission is of the view that the introduction of Advantage does not alter the need for these restrictions and, therefore, that Advantage does not grant Bell and B.C. Tel an undue preference in relation to resellers who provide competing cross-border services.
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With respect to arguments that the proposed rates would be unjustly discriminatory or grant an undue preference to users of the service, the Commission notes that Advantage would be available to all users at the same rates. In addition, Advantage subscribers would face circumstances and conditions for the carriage of their traffic that differ from those faced by regular MTS customers. Accordingly, the Commission finds that the proposed rates would not violate section 340(2) of the Railway Act.
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III DISPOSITION OF THE APPLICATIONS
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In light of the determinations in Part II of this Decision, the Commission concludes that approval of the applications is in the public interest. Advantage will provide subscribers with greater choice in the purchase of MTS, without causing a reduction in monopoly toll contribution. The Commission therefore approves Bell Tariff Notice 2961 and B.C. Tel Tariff Notice 1846.
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Bell is directed to issue, by 22 February 1990, approved tariff pages for Advantage Service, with its requested effective date of 16 May 1990.
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B.C. Tel is directed to issue, by 22 February 1990, approved tariff pages for Advantage, with an effective date of its own choosing.
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Fernand Bélisle
Secretary General
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