ARCHIVED -  Telecom Decision CRTC 90-22

Telecom Decision

Ottawa, 3 October 1990

Telecom Decision CRTC 90-22

BELL CANADA AND BRITISH COLUMBIA TELEPHONE COMPANY - RESTRUCTURING OF RATES FOR COMPETITIVE NETWORK SERVICES

Table of Contents

I INTRODUCTION

II THE APPLICATIONS

A. Digital Benchmark

B. Customer Volume Pricing Plan

C. Additional Megastream Terminating Equipment and Local DS-1 Service

D. Megaroute Local

E. IX Megaroute and Megastream

F. Megaplan Rate Increases

G. Dataroute

H. Interexchange Voice Grade Channels

I. Datalink

J. Datapac

III RATE REDUCTIONS - MARKET CONSIDERATIONS

A. Positions of Parties

B. Conclusions

IV CUSTOMER VOLUME PRICING PLAN

A. Positions of Parties

B. Conclusions

V COSTS AND CONTRIBUTION

A. Positions of Parties

B. Conclusions

VI OTHER MEGAPLAN CONCERNS

VII RATE PROPOSALS FOR OTHER SERVICES AND COMPONENTS

VIII DISPOSITION OF THE APPLICATIONS

I INTRODUCTION

On 25 January 1990, Bell Canada (Bell) filed an application under Tariff Notice 3420, as amended by Tariff Notice 3420A, covering a restructuring of rates for its competitive network (CN) services, including a revised discount structure for its high speed digital services. Bell also proposed general tariffs covering the introduction of DS-3 service, capable of providing the equivalent of 672 voice grade channels.

On 1 February 1990, British Columbia Telephone Company (B.C. Tel) filed a similar application under Tariff Notice 2056, as amended by Tariff Notices 2056A, B and C.

On 1 February 1990, the Commission issued CRTC Telecom Public Notice 1990-11 inviting comment on Bell's application. On 9 February 1990, the Commission issued CRTC Telecom Public Notice 1990-15 with respect to B.C. Tel's application.

The following commented with respect to one or both of the public notices: British Columbia Systems Corporation (BCSC); Call-Net Telecommunications Ltd. (Call-Net); Cam-Net Communications Inc. (Cam-Net); Canada Trust; Canadian Bankers' Association (CBA); Canadian Business Telecommunications Alliance (CBTA); Communications Competition Coalition (CCC); Federal Industries Transport Group; Government of Ontario (Ontario); IBM Canada Ltd. (IBM); Marathon Telecommunications Corp. (Marathon); Government of British Columbia (BCG); Royal Bank of Canada (Royal Bank); Telesat Canada (Telesat); Unitel Communications Inc. (Unitel, formerly CNCP Telecommunications); and University of Toronto.

II THE APPLICATIONS

A. Digital Benchmark

Both Bell and B.C. Tel proposed that the DS-0 channel rate provide a benchmark for digital services. The companies stated that this benchmark would recognize the evolution of digital networks toward the 64 kilobit per second (Kbps) standard. Rates for Megaplan (consisting of Megastream/DS-0 service, Megaroute/DS-0 and DS-1 services, and DS-3 service), Dataroute and Interexchange Voice Grade Channel (IXVG) services would be related to this benchmark, taking into account bandwidth, value of service and the relative costs of providing service.

B. Customer Volume Pricing Plan

Current Bell and B.C. Tel discount plans are based on contract duration (1, 3 or 5 years) and channel quantities, on a route-by-route basis. For eligible components of Megaplan services, both companies proposed a Customer Volume Pricing Plan (CVPP), under which discounts would be based on contract duration (1 through 5 years, 10 years) and a minimum monthly billing commitment (bill minimum). For example, if a customer committed to a $0.5 million per month bill minimum for 5 years, a 40% discount would apply. The customer could modify its network however it wished, as long as the bill minimum was maintained. The customer would also have the option of raising the bill minimum and obtaining the related discount. If monthly charges (before the discount) fell below the bill minimum, that minimum, less the related discount, would still be payable. However, if eligible charges fell below the bill minimum because of changes to tariffs initiated by the company, the customer could decrease the bill minimum (and the related discount) without penalty. If the customer contracted for other company services generating equal or greater revenues, it could terminate the CVPP without penalty. Megaplan components eligible for the CVPP would include interexchange (IX) links, IX channels, and channel diversity related to IX DS-O, IX DS-1 and IX DS-3 channels.

Under the companies' proposals, the CVPP would be offered pursuant to a Competitive Business Network Services Contract (CBNSC). The customer would enter into this contract with the members of Telecom Canada, so that the customer's bill minimum would be calculated on eligible Megaplan components provided by all members providing services to that customer.

C. Additional Megastream Terminating Equipment and Local DS-1 Service

In schedules 2 and 3 of the CBNSC (applicable to local DS-1 service and Megastream Terminating Equipment, respectively), Bell and B.C. Tel proposed wording specifying that, for those customers receiving service under contract, additional service would be co-terminous with and subject to the same rates applicable to the original Minimum Contract Period (MCP) unless 6 months or less remain in the original contract. In the latter case, non-contract monthly rates would apply. However, if a new contract had been signed, to be effective at the end of the original contract, then additional service for the last six months of the original contract would be provided at the rates applicable to the original MCP.

D. Megaroute Local

For local DS-1 access channels, the companies proposed to eliminate the common equipment charge. In support of this proposal, the companies noted that technological advances have reduced the need for a spare DS-1 channel for maintenance purposes. The companies also proposed to eliminate the Optional Payment Plan related to construction charges. Both companies would, for all new installations, retain the one-time construction charge for initial DS-1 channels. B.C. Tel proposed to raise its one-time construction charge to match Bell's current charge, which would remain unchanged.

Currently, both companies provide DS-1 access channels under 1, 3 or 5 year contracts, with monthly rates decreasing as contract duration increases. Both companies proposed contract durations of 1, 2, 3, 4 and 5 years, with rates decreasing as contract duration and channel quantity increase. They also proposed a monthly non-contract rate.

Both companies proposed a channelizing feature for local Megaroute for the connection of DS-1 to IX DS-0 channels. Thus DS-1 service would provide access for all Megaplan services. A DS-0 IX link is also proposed for local Megaroute.

For DS-1 local channels (used to connect access channels when the latter are in different wire or rate centres), both companies proposed non-contract monthly charges to replace 1, 3 and 5 year contracts. Also, a reduced monthly non-contract rate would replace the existing contract rates for the DS-1 access link. Bell proposed to raise its rate for DS-1 IX links by 20%; B.C. Tel would increase its rate by 2%.

For DS-3 service, Bell and B.C. Tel proposed DS-3 access link and IX link rates for the general tariff DS-3 IX service and for service between wire centres. DS-3 access channels would be provided under special tariffs.

E. IX Megaroute and Megastream

Bell and B.C. Tel proposed to eliminate the 4 channel minimum for IX DS-0s. The companies stated that the original purpose of the minimum was to restrain migration from Dataroute. However, they submitted that there is no further need for the minimum in light of changed market pressures and the deployment of Megaplan technology, giving rise to proposed changes in rating.

Under the proposals, DS-0 channels would be available through both Megastream and Megaroute tariffs. Megastream would be provided in channelized DS-1 increments, as well as in the traditional DS-0 increments.

Intra- and inter-company DS-0 rate/mileage schedules would be merged, as would similar DS-1 rate/mileage schedules. DS-0 IX channel rates would be reduced by approximately 4% to 35%, resulting in an average rate reduction of 20%. DS-1 IX channel rate reductions would vary by approximately 30% to 60%, and would average 50%.

In Telecom Letter Decision CRTC 89-27, 14 December 1989 (Letter Decision 89-27), the Commission directed Bell to file general tariffs for the provision of DS-3 service. Pursuant to Letter Decision 89-27, Bell and B.C. Tel proposed to introduce IX DS-3 (unchannelized high capacity digital) service rated at 108 times the digital benchmark.

Also proposed is the Inter-office Channel Diversity option. It is designed to split Megaplan channels over two or more separate transmission routes, in order to ensure that service is maintained should one route fail.

F. Megaplan Rate Increases

Megastream service charges, link and station rates would rise, with increases varying from 5% to 50%. Bell would cease to offer local DS-0 channels (wire centre to rate centre), replacing them with local DS-1 channels.

The companies also proposed to change the fees for Network Management and Control Systems, currently $250 per month plus charges reflecting the duration of network management activities. These fees would be replaced with a flat fee of $1,100 per month.

G. Dataroute

Bell proposed to apply the Megaplan mileage bands to Dataroute. It also proposed a common intra-company and TransCanada rate/mileage schedule. The mileage charges would follow the DS-0 approach, involving a base charge and per-mile rate. B.C. Tel proposed a similar rate structure, but would retain distinct base charges and per-mile rates for its intra-provincial service.
Based on the DS-0 digital benchmark, both companies proposed rate decreases of up to about 70% for 56 kbps service. This new "Dataroute digital standard" forms the basis for all other proposed Dataroute rates. The companies proposed to implement common mileage bands, resulting in increases and decreases in rates for other Dataroute speeds, including reductions of up to approximately 26% for 19.2 Kbps service.

At present, mileage rates for Dataroute Business Day Service are 10% below those for 24-hour service. Both companies proposed to eliminate Business Day Service and apply their proposed rates to all customers.

Both Bell and B.C. Tel proposed to reduce rates for Dataroute International to the same level as those for TransCanada Dataroute. The companies noted that the International service has been premium-priced in relation to domestic Dataroute, and has not been growing.

H. Interexchange Voice Grade Channels

Both Bell and B.C. Tel proposed to establish TransCanada IXVG mileage schedules similar to those for Megaplan and Dataroute. They also proposed to rate TransCanada IXVGs at .98 of the DS-0 benchmark, citing in support the similarity in transmission rate between a DS-0 channel and an IXVG channel. Both stated that this would result in increases and decreases in rates, depending on mileage band.

B.C. Tel proposed to change its intra-company schedule to incorporate a base rate plus a rate per mile, consistent with the TransCanada model and the DS-0 benchmark approach in general. Bell did not propose changes to intra-company IXVG rates or to mileage schedules.

Bell proposed a 100% increase in link service charges, applicable to both intra-company and TransCanada IXVGs. B.C. Tel proposed a similar increase in TransCanada link service charges. Further, it proposed to introduce link charges for intra-company IXVGs at rates and charges matching those proposed for TransCanada IXVGs.

I. Datalink

Bell and B.C. Tel proposed increases in network usage charges, particularly for short-haul mileage bands, in order to bring rates closer to Message Toll Service (MTS) rates and to recognize recent changes in MTS rate schedules. They also proposed increases in service charges for access arrangements and optional features.

J. Datapac

1. General

Bell and B.C. Tel proposed increases ranging from 6% to 14% in network usage charges. They proposed to increase the rate for holding time for Datapac 3305 public dial access from $.10 to $.15 per minute. They also proposed to increase Packet Assembler/Disassembler (PAD) charges from $.65 to $.85 per kilosegment for Datapac 3201 and from $.75 to $.80 per kilosegment for Datapac 3305.

Both companies proposed increases in on-net and off-net charges for certain access arrangements. For example, for Datapac 3101 speeds of 110/300 bits per second (bps), the rate for on-net access would increase from $108 to $170 per month, while the rate for off-net access would increase from $52 to $85 per month. Both companies proposed to reduce the impact on customers by implementing the increases in two stages, with the first effective 10 July 1990 and the second effective 10 July 1991. Certain other Datapac access arrangements would increase by an average of 7%.

Channel Options features would increase by 5%.

Bell and B.C. Tel stated that Datapac 3305 has sustained lower growth than originally forecast. The companies stated that this lower growth is attributable to incompatibility between Datapac 3305 software and customer-provided communications software. They added that equipment vendors are selling products that are incompatible with Datapac 3305 and that support costs will increase as the technology ages. They proposed, therefore, to destandardize Datapac 3305, allowing existing customers to expand until the end of 1990, but not providing the service to new customers. They proposed to withdraw Datapac 3305 entirely on 31 December 1992.

2. Datapac Serving Area Grades

At present, Datapac network usage charges vary depending on the Datapac Serving Area (DPSA) grade. Current definitions of grades are: Grade 1 - direct access; Grade 2 - extended access to Dataroute serving areas;
Grade 3 - extended access to non- Dataroute serving areas.

Bell and B.C. Tel proposed to eliminate these definitions and assign grades solely on the basis of economic viability. Thus, Grade 1 DPSAs would include those containing large packet switches (nodes), as originally intended, but would exclude exchanges containing smaller packet switches providing for direct access. Grades 2 and 3 would consist of those DPSAs having extended access to a Grade 1 DPSA.

III RATE REDUCTIONS - MARKET CONSIDERATIONS

A. Positions of Parties

In support of reductions in rates for digital bandwidth, Bell and B.C. Tel noted that Canadian DS-1 rates have not dropped since they were first introduced into general tariffs in 1987. On the other hand, rates for equivalent American channels have dropped continuously over the same period. Bell noted that recent publications have commented on the price disparity, stating that Canadian DS-1 rates can be up to seven times higher than rates for similar U.S. services. Bell provided information to indicate that, by 1989, the average rate per mile for the IX portion of American Telephone and Telegraph's (AT&T's) DS-1 service was U.S. $13.97, while the IX portion of Bell's service had remained at an average of Canadian $129.30 per mile.

Both companies submitted that lowering Megaplan rates and introducing DS-3 service would allow customers to develop new business applications, which has been impossible to date because of prohibitive digital bandwidth costs. They noted that, in the United States, digital bandwidth rates have been low enough that business customers have been developing new applications for several years. Bell stated that its large business customers had informed it that digital bandwidth prices must come down sufficiently to permit domestic businesses to exploit new high bandwidth applications in order to compete with their American counterparts.

Both Bell and B.C. Tel filed copies of an article entitled U.S. Bypass: A Major Opportunity, published in the 3 March 1990 edition of Canadian Communications Service. The article describes opportunities for telecommunications users to reduce costs significantly by moving their networks to U.S. digital services and bypassing Canadian network services.

In response to Bell(CBTA)26Feb90-2, Bell stated that the proposed reductions resulted from the company's assumptions regarding intensified competition and the continued threat of bypass over the longer term. Bell submitted that lower rates would mitigate the threat of bypass.

Most interveners supported reductions in rates for high speed digital services. They stated that, in order for domestic business to be competitive, telecommunications costs, particularly those for high speed digital services, must be closer to those in the United States. Many parties supported the digital benchmark approach and the elimination of the 4 channel minimum for IX DS-Os.

Some interveners, such as Cam-Net, CBA, CCC, IBM, Marathon and Royal Bank, argued that the proposed rate reductions are insufficient in light of current U.S. rates. Marathon submitted that, given the competitive situation in the United States, AT&T's high speed digital rates are likely close to cost. Marathon suggested that AT&T's cost structure is probably not vastly different from that of Bell or B.C. Tel. On this basis, Marathon submitted that Bell's and B.C. Tel's digital service rates should be no more than 15% to 20% higher than AT&T's.

In its reply, Bell argued that, without economic studies, such conclusions with respect to U.S. rates could not properly be reached. Bell stated that U.S. rates could be at, above or below cost. Bell added that its cost structure could differ substantially from AT&T's, due to differences in markets, in provisioning and maintenance methods and in investment levels.

B. Conclusions

The record associated with Letter Decision 89-27 on unchannelized high capacity transmission services revealed a great deal of concern in the market place over high rates for Canadian high speed digital services. Those concerns are again expressed, with greater emphasis, in this proceeding. Almost all interveners echo the submissions of Bell and B.C. Tel that Megaplan rates must come down, and so permit Canadian businesses to develop the innovative applications that have been available to their U.S. competitors for some time. In this context, the Commission notes Bell's evidence that the average rate per mile for Bell DS-1 service has been Canadian $129.30 since 1987, while the rate for AT&T's equivalent service had declined to U.S. $13.97 per mile by 1989.

The evidence regarding substantial rate disparities between U.S. and Canadian digital services, the submissions on how these high Canadian rates have restricted (if not prevented) access by Canadian business customers to telecommunications benefits available to American businesses and the view expressed by some interveners that the rates are too high and should come down even more than proposed, suggest that Canadian businesses will find other ways of obtaining less expensive services if action is not taken.

In light of the foregoing, the Commission concludes that reduced rates for Megaplan services would improve the competitive position of domestic business and would mitigate the threat of bypass.

IV CUSTOMER VOLUME PRICING PLAN

A. Positions of Parties

In support of the CVPP, Bell and B.C. Tel stated that similar plans have been available in the United States for some time and that the CVPP is essential for maximizing contribution over the long term. They submitted that the CVPP would stimulate new growth in Megaplan services, reduce contract administration costs and stabilize revenue flows over the long term. The companies also submitted that, for the customer, the CVPP would reduce costs and increase cost predictability.

In response to interrogatories B.C.Tel(CRTC)26Feb90-1 and Bell(CRTC)26Feb90-2, the companies stated that the CVPP should not be company-specific. They submitted that, if it were, contract administration costs would rise, Telecom Canada's image as a single national supplier would be weakened and other carriers with national coverage would gain a competitive advantage.

Bell stated that the CVPP discounts are designed to generate revenues equal to those that would result if the proposed rates were subject to the existing Megaplan discount structure.

In response to interrogatory Bell(CBTA)26Feb90-4, Bell stated that the wide range of bill minimum options is intended to provide for networks of all sizes, including the smaller networks that would result from the elimination of the IX DS-0 4 channel minimum. Bell stated further that larger discounts associated with longer contracts and higher bill minimums are designed to take into account the customer's total network commitment on a Telecom Canada basis.

In response to interrogatories B.C.Tel(CRTC)26Feb90-8 and Bell(CRTC)26Feb90-9, the companies submitted that the proposed approach for the addition of local DS-1 access service and Megastream Terminating Equipment (in schedules 2 and 3, respectively, of the CBNSC) would promote network growth and increased revenues, which would be discouraged by the charging of higher rates for further business. They added that this approach would be less costly in terms of contract administration.

Several interveners, including Call-Net, Cam-Net, CBA, CBTA, CCC and Royal Bank, generally supported the proposed CVPP. They noted that similar plans are already available from carriers in the United States. Cam-Net submitted that the CVPP would provide flexibility to modify networks, thus encouraging network efficiency.

Telesat argued that the CVPP would encourage long term commitment in return for billing savings, a characteristic that does not support claims that the CVPP would be compensatory or that it would maximize contribution.

In reply, Bell reiterated that the CVPP discounts are designed to have no revenue effect in comparison to the existing approach for Megaplan discounts. Bell agreed with Telesat that the purpose of the CVPP is to encourage long term customer commitment. Bell submitted that the Commission supports this objective, and cited Telecom Letter Decision CRTC 89-16, 9 August 1989 (Letter Decision 89-16), wherein the Commission stated the following with respect to Megastream and Megaroute:

In particular, it is appropriate to provide greater volume discounts under the 3 and 5 year contracts than under the 1 year contract and the monthly non-contract option. This approach provides an additional incentive to contract for a longer period of time, thus contributing to the stability of Bell's revenues and reducing its risk.

Telesat noted the response to interrogatory Bell(CBTA)26Feb90-5, in which Bell stated that the CVPP is designed to ensure that rate components eligible for discounts will recover costs from the total CVPP customer base. Telesat referred to a Commission ruling, issued by letter dated 31 August 1989, concerning a proposed Telesat VSAT earth station special assembly service. Telesat submitted that the Commission stated in that ruling that the service as a whole should be compensatory; however, the Commission also stated that, with a terminal offering having various payment options, each option should also be compensatory. Telesat also submitted that the Commission had stated that the rates should be demonstrated to be compensatory for each operating term at each range of quantities. Telesat stated that the same rules should apply to the CVPP, so that each discount level, with associated bill minimum and MCP, should be compensatory.

In reply, Bell argued that it would be more appropriate to compare the CVPP to Telesat's space segment discounts, rather than to discounts for the sale or rental of terminal equipment. Bell also stated that an important reason for the denial of the VSAT earth station discount plan was that rates would not cover costs over the operating term.

Unitel argued that the CVPP would give Bell unfair advantages. It stated that, since Unitel does not have the right to interconnect with the public switched telephone network (PSTN) in the Prairies or in most of Atlantic Canada, customers there would lease Ontario and Quebec services from Bell in order to get the best CVPP results.

Bell replied that over 90% of current Megaplan services are provided in provinces where Unitel has the right to interconnect with the PSTN. Bell and B.C. Tel both argued that Unitel's 5% price differential was designed to accommodate differences in coverage. Bell added that, in any case, the limits on Unitel's interconnection rights are not relevant to the CVPP proposal.

Unitel submitted that, in Letter Decision 89-16, the Commission, in stating that "rates should reflect the length of the customer's commitment", had explicitly rejected volume discount plans where the customer does not commit to a specific contract period for a specific route. Unitel argued that the CVPP would violate the Commission's prohibition. In reply, Bell and B.C. Tel submitted that no such requirement is to be found in Letter Decision 89-16.

Unitel also argued that the only cost savings from the CVPP would be in contract administration and that, therefore, the CVPP is solely a marketing device. In reply, Bell and B.C. Tel stated that the CVPP is also designed to reflect the reduced risk to the telephone company and increased stability in its revenues. Bell added that a customer with small quantities of circuits in many
cross-sections should have the same opportunity to contract for discounts as the customer with the same total number of circuits in one or two large cross-sections.

CBTA objected to the proposed discounts associated with 10 year contracts, arguing that they constitute an undue preference. In reply, Bell submitted that the 10 year discount is designed to encourage long term commitment and is consistent with the commitment required from customers choosing the option. Bell also noted that any of the contract periods are available to any customer.

B. Conclusions

Unitel contended that, because it does not have interconnection rights in all Telecom Canada territories, the CVPP should be denied. The Commission notes Bell's reply that 90% of Megaplan connections are in provinces where interconnection is permitted. Since that reply, interconnection of Unitel's interexchange private line services has been effected in the Maritime provinces. Moreover, it is open to Unitel to propose competitive responses to the CVPP.

Unitel also contended that the CVPP runs contrary to Letter Decision 89-16. However, the Commission made no finding in Letter Decision 89-16 that would require a customer to make a commitment for specific contract lengths for specific routes in order to obtain volume discounts. The determination cited by Unitel, that "rates should reflect the length of the customer's commitment", makes no mention of specific routes and is not inconsistent with the CVPP as proposed.

Telesat objected that the CVPP will reduce customer bills over the long term, thus making it less likely that the services would be compensatory. In this context, the Commission notes the statement in Letter Decision 89-16 that "rates should reflect the length of the customer's commitment". The Commission has long accepted the principle that a carrier may reduce rates in order to reduce risk and increase revenue stability; further, the greater the reduction in risk and the increase in revenue stability, the more rates may be reduced, provided that the service remains compensatory and provides an appropriate contribution.

On the basis of the Commission's ruling of 31 August 1989 with respect to Telesat's proposed VSAT earth station service, Telesat argued that each CVPP discount level should be compensatory. In that ruling, the Commission stated that the service as a whole must be compensatory and that, "in the case of a terminal offering ... each payment option should also be compensatory."

In the Commission's view, it is more appropriate to compare the proposed CVPP to Telesat's space segment services, which are network services, rather than to a terminal equipment offering. The Commission does not require each and every rate element of a competitive network service to be compensatory.

CBTA objected to the 10 year option under the CVPP, suggesting that it might confer an undue preference. In the Commission's view, the availability of the 10 year option to any customer who chooses to commit to the required bill minimum serves to ensure that any preference inherent in it is not undue within the meaning of section 340 of the Railway Act.

The Commission also notes Bell's submission that, under the current system, a customer with a large number of Megaplan channels in one or two cross-sections can obtain discounts by making a long term commitment. On the other hand, another customer, who leases the same number of channels spread over many cross-sections, cannot obtain the same benefit. With the CVPP, which is based on revenue commitment and on contract period, these two customers could obtain the same benefits.

In light of the above, the Commission is satisfied that the CVPP concept generally conforms with the principle that discounts should reflect the length of commitment required from the customer and the extent to which the company's risks are reduced and its revenue stability increased.

However, the Commission has concerns with respect to the relationship between the application of the CVPP and the existing revenue settlement arrangements among the members of Telecom Canada. Specifically, Bell and B.C. Tel proposed that the CVPP apply throughout Telecom Canada territory. A customer who acquired from one Telecom Canada member sufficient services to meet its bill minimum and its MCP could apply the resulting discount to any eligible services acquired from another Telecom Canada member. For example, the customer could meet its commitment solely with services acquired from one company, and then lease a single Megastream channel from a second company and apply the discount to it. Thus, the second company would offer the discount without obtaining similar reduced risk and increased revenue stability, as should arise from such arrangements.

The Commission's understanding of current Telecom Canada revenue settlement arrangements is that Megaplan revenues for services provided on an intra-company basis are not subject to settlement. In the Commission's view, this fact supports a company-specific CVPP, whereby a customer would enter into a contract with a specific company, and the bill minimum, the MCP, and the resultant discount would apply only to services provided by that company. The Commission considers that a Telecom Canada CVPP would require changes to revenue settlement arrangements so that all Megaplan service revenues would be subject to settlement (as is the case, for example, with Datapac and Dataroute revenues). Thus, through revenue settlement arrangements, the benefit of the reduced risk and the increased revenue stability afforded by the CVPP would be shared among all member companies.

V COSTS AND CONTRIBUTION

A. Positions of Parties

In response to interrogatories Bell(CRTC)26Feb90-10 and B.C. Tel(CRTC)26Feb90-9, the companies provided, in confidence, cost/revenue ratios (calculated in accordance with the methodology established in Phase II of the Cost Inquiry) for all existing CN services affected by the filings. In response to Bell(CRTC)26Feb90-5 and B.C.Tel(CRTC)26Feb90-4, the companies noted that they had not provided costing information in support of the proposed introduction of DS-3 service. They both submitted, however, that typical cost efficiencies associated with larger bandwidths would likely result in a DS-3 cost/revenue relationship that was comparable to, or more favourable than, that for DS-1 service. Bell and B.C. Tel both added that the levels of contribution for IX DS-0, DS-1 and DS-3 services are sufficiently high that they were able to set rates and rate relationships based largely on the requirements of the domestic market.

In response to interrogatories Bell(CRTC)26Feb90-29 and B.C. Tel(CNCP)7Mar90-38, Bell and B.C. Tel acknowledged that rate decreases could be expected to reduce contribution in the short term, while customers took time to react. Bell submitted that lower rates would mitigate the threat of bypass, which, combined with the development of new business applications, would maximize CN category contribution in the medium to long term. B.C. Tel indicated that, in the longer run, decreases could be expected to maximize contribution by stimulating demand and generating new applications or by protecting market share.

Bell forecast that its proposed rate reductions, if effective 10 July 1990, would result in an $8.6 million reduction in CN category revenues, while an effective date of 1 January 1990 would have resulted in a $16.9 million reduction. An updated forecast filed in response to interrogatory Bell(Telesat)26Feb 90-9 indicates that the proposed rates, if effective 10 July 1990, would result in a category surplus of $8.2 million for 1990.

Information filed by B.C. Tel indicates a CN category increase of $1.09 million, based on an effective date of 10 July 1990, while an effective date of 1 January 1990 would have resulted in an increase of $1.89 million. In response to B.C.Tel(CNCP)7Mar90-53, the company stated that, based on a $1.09 million increase, there would be a CN category surplus of $0.55 million for 1990. B.C. Tel stated further that, if its application were denied, this $1.09 million would not be realized and a 1990 shortfall of $0.54 million would result.

A number of interveners, including some who generally supported reductions in high speed digital rates, expressed reservations with respect to the impact of Bell's and B.C. Tel's proposals on their respective Phase III results. BCSC stated that it supported the proposed digital service rate reductions only on the condition that B.C. Tel's CN category remain compensatory.

BCG and Unitel suggested that additional demand would likely lead to additional costs, which could wipe out category surpluses. Unitel and Ontario stated that Bell projected a category surplus of $2 million for 1990, a surplus that could easily be eliminated by cost increases. Unitel noted that B.C. Tel forecast that approval of its proposals would improve category revenues by $1.09 million, resulting in a surplus of $.55 million. Unitel stated that B.C. Tel's forecast contrasts sharply with Bell's expectation that category revenues would be reduced. Unitel acknowledged that different product mixes can lead to different results. However, it submitted that both filings would exacerbate or give rise to shortfalls, resulting in cross-subsidization from monopoly subscribers.

Although it acknowledged that the gap between Canadian and U.S. CN service rates disadvantages Canadian industry in several ways, Ontario expressed concern over Bell's proposed reductions. Ontario stated that the CN category as a whole must maximize contribution. Ontario and Telesat argued that Bell had not provided evidence that the proposed rates would ever maximize contribution.

Telesat submitted that Bell's filing is properly subject to the costing rules set out in Phase II of the Cost Inquiry. Telesat stated that Bell had not complied with those rules since, for example, it had not provided 10-year economic studies. In support of this position, Telesat noted that the Commission had stated in its decision on Phase II that the definition of a "new service" for Phase II purposes includes substantial additions and alterations to existing services. Telesat added that, if Bell's application is properly considered a Phase III filing, there is no evidence that the proposed CN portfolio would be compensatory.

In its reply, B.C. Tel reiterated that its Phase III submissions of 15 December 1989 and 15 May 1990 show a projected surplus of $.55 million for 1990. It stated that Megaplan costs would increase, but would be offset by reduced costs due to reduced demand for other services in the CN category, or to migration from higher-cost services to lower-cost services or to services offering improved bandwidth utilization with a consequent reduction in facility usage.

B.C. Tel also replied to Unitel's submissions contrasting B.C. Tel's forecast CN revenue increase to Bell's forecast decrease. B.C. Tel submitted that, as Unitel itself had acknowledged, there are differences between the two companies in terms of product mix. B.C. Tel also stated that the two companies' existing rates are not identical.

In reply to Unitel's and Ontario's contention that Bell's $2 million CN category surplus could be eliminated by cost increases, Bell stated that both interveners were basing their comments on the wrong figure. Bell stated that the amount of $2 million, which comes from the response to interrogatory Bell(Telesat)26Feb90-2, does not take into account other filings that raise its surplus. Bell stated further that recent expense cuts, including a management workforce reduction of 1,300, will improve all Phase III category results.

In reply to Ontario's and Telesat's arguments that it had not demonstrated that the filing would maximize contribution in the long term, Bell stated that it had fully discussed the issue in response to interrogatory Bell(CBTA)26Feb90-2 and in the filing itself. Bell added that Megaplan rate reductions would stimulate new business applications that are not now viable, thus stimulating demand for high bandwidth.

B. Conclusions

Bell and B.C. Tel stated that, given the high level of contribution from Megaplan services, they had set the proposed rates on the basis of market considerations. Both companies filed, in confidence, cost/revenue ratios for the existing CN services affected by the applications. No specific Phase II costing information was filed for the proposed DS-3 service. However, the Commission accepts Bell's and B.C. Tel's submissions that there are cost efficiencies associated with larger bandwidth and that, therefore, the cost/revenue ratio of the DS-3 service would be at least as good as that for DS-1 service.

B.C. Tel's evidence indicates that approval of its application would result in an increase of over $1 million in CN category revenues. While Unitel questioned the validity of this evidence, noting that Bell's category revenue is forecast to drop, the Commission notes B.C. Tel's reply that, not only is there a difference in product mixes between B.C. Tel and Bell, but that a number of B.C. Tel's rates differ from Bell's. For example, B.C. Tel's Megaroute construction charge of $5,100 will rise to $9,000 to match Bell's. Also, B.C. Tel's short-haul intra-provincial Megastream and Megaroute rates, already lower than Bell's, will not drop as far to meet the new common rate schedule (up to 500 miles). Further, the evidence filed by the companies indicates that, with approval of the applications, Bell's IXVG revenues would drop while B.C. Tel's would climb; Bell's analogue data revenues would drop while B.C. Tel's would climb.

As to the concern that a $2 million Bell surplus could be wiped out by increased costs, the Commission notes Bell's original evidence and reply that, with other filings that have been approved, its surplus is, in fact, forecast to be $8.2 million.

In light of the above, the Commission is not persuaded that approval of these filings would lead to CN category shortfalls.

Ontario and Telesat submitted that there is no evidence to suggest that these filings would maximize contribution in the long term. In the Commission's view, the evidence presented indicates that failure to approve Megaplan rate reductions could pose a risk of increased bypass with a consequent loss of contribution. Approval of the proposals would mitigate this risk. In addition, it would facilitate the development of new business applications, ultimately resulting in greater bandwidth utilization and increased contribution.

On the basis of the record of this proceeding, including the cost/revenue ratios filed by the companies, the Commission is satisfied that, subject to the concerns expressed above with respect to revenue settlement, the proposed tariff revisions are appropriate and would maximize contribution.

VI OTHER MEGAPLAN CONCERNS

CBTA submitted that the proposed elimination of local DS-0 channels would force customers to local DS-1s, needed or not, which would substantially increase their costs. CBTA considered insufficient Bell's rationale, set out in interrogatory Bell(Unitel)26Feb90-9, that the deployment of equipment had not gone according to plan, thus restricting Bell's ability to supply local DS-0s. Bell replied that increases on the local side would be off-set by proposed IX decreases.

In the Commission's view, Bell's deployment difficulties are not sufficient to justify the withdrawal of local DS-0 channels. The Commission notes that deployment has not posed problems with respect to IX DS-0 channels. Further, in the Commission's view, the argument that increases in the customer's local costs due to the withdrawal of the local DS-0 service would be offset by reductions in IX costs is not material to the question of whether or not the company should continue to provide local DS-0 service. In light of the above, the Commission agrees with CBTA's submission that the withdrawal of local DS-0 channel service would disadvantage smaller customers. Therefore, the Commission concludes that Bell should continue to provide this service.

Unitel addressed interrogatories to both companies concerning costs for the installation and removal of local Megaroute service. Unitel noted the possibility that the proposed
non-contract monthly rates might be insufficient to cover such costs where local Megaroute acquisitions were of short duration. Bell and B.C. Tel filed estimates of these costs in confidence. Based on that evidence, the Commission is satisfied that the proposed non-contract rates, taken together with construction charges, would be sufficient to cover the costs of the provision of local Megaroute at non-contract monthly rates.

The proposals filed by the companies provide for the addition, under existing contracts, of local DS-1 service and of Megastream Terminating Equipment. The relevant provisions do not form part of the CVPP, which applies only to IX services. Rather, they are found in schedules 2 and 3 of the umbrella contract, the CBNSC, because they are required for CVPP services to operate.

Both Bell and B.C. Tel argued that the proposed provisions will promote network growth and lead to increased contribution. In the Commission's view, the proposed wording is consistent with the CVPP itself, which permits the deletion or the addition of service at the same discount rates, at any time, as long as the bill minimum is met. The Commission concluded above that the approach reflected in the CVPP supports the maximization of contribution over the long term. The Commission also concludes that, in supporting the operation of the CVPP, the proposed provisions would help to maximize the long term contribution from Megaplan services. The Commission therefore concludes that the wording proposed in schedules 2 and 3 with respect to the addition of local DS-1 service and Megastream Terminating Equipment should be approved.

VII RATE PROPOSALS FOR OTHER SERVICES AND COMPONENTS

Many parties who supported the proposed rate decreases for Megaplan services disagreed with increases proposed for other services and service components, including Dataroute, Datapac, IXVG and Megaplan station and link components.

Royal Bank argued that the public record does not justify the proposed increases. It noted Bell's response to interrogatory Bell(Unitel)26Feb90-1 that the increases are directed generally at CN services and service components that are less profitable and less open to competitive erosion and by-pass in the longer term. Royal Bank stated that, where there is little or no competition, Bell customers bear the full burden of a monopoly market. IBM suggested that the proposed increases be denied until there had been a full review of costs to ensure that they are not inflated.

In reply, Bell and B.C. Tel summarized their pricing considerations, including the size of a service's market and revenue base, its level of maturity, the availability of competitive alternatives and relationships with other CN services. Bell submitted that the selective increases and decreases were designed to improve the profitability of services and components. Bell stated that, as CN competition matures, there would be more price increases and decreases for various service components.

CBTA suggested that increases in Datapac rates are not cost-justified and should be limited to a maximum 5% inflation adjustment. In reply, Bell stated that the proposed increases are designed to improve cost/revenue relationships and maximize long term contribution.

Commission policy does not require that CN service rate increases be restricted to the extent of cost increases. Rather, the services should provide as much contribution as is feasible, taking account of the market environment.

VIII DISPOSITION OF THE APPLICATIONS

In light of the above, the Commission approves the proposed tariff revisions, provided that (1) Bell continues to provide local DS-0 channels and (2) adequate provision is made to respond to the Commission's concerns with respect to the relationship between the CVPP and the Telecom Canada revenue settlement arrangements. Specifically, with regard to (2) above, Bell's and B.C. Tel's final tariff pages may implement the proposed tariff revisions as set out in their respective applications, provided that revenue settlement arrangements between Telecom Canada members are such that all Megaplan revenues will be subject to settlement; in the alternative, Bell and B.C. Tel are to issue tariff pages providing for a company-specific CVPP.

Bell and B.C. Tel are directed to issue, as soon as possible, final tariff pages implementing the above decision.

Alain-F. Desfossés
Secretary General