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Ottawa, 21 November 1991
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Telecom Decision CRTC 91-16
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MEGAPLAN RATE REDUCTIONS AND RELATED PROPOSALS
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I INTRODUCTION
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On 8 January 1991, the Commission issued CRTC Telecom Public Notice 1991-5 Restructuring of Rates for Certain Competitive Network Services announcing a proceeding to deal with applications filed by members of Telecom Canada (the telephone companies) for approval of rate reductions for Megaplan services and Dataroute 56 kbps service. These applications were filed by: AGT Limited under Tariff Notice (TN) 8; Bell Canada (Bell) under TN 3772; British Columbia Telephone Company (B.C. Tel) under TN 2244; Island Telephone Company Limited under TN 50; Maritime Telegraph and Telephone Company Limited under TN 80; New Brunswick Telephone Company Limited under TN 45; and Newfoundland Telephone Company Limited under TN 50.
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The telephone companies proposed:
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(1) reducing Megaplan interexchange (IX) rates (DS-0, DS-1, DS-3) and Dataroute 56 rates while maintaining the rate relationships established in Bell Canada and BritishColumbia Telephone Company - Restructuring of Rates for Competitive Network Services, Telecom Decision CRTC 90-22, 3 October 1990 (Decision 90-22);
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(2) introducing a DS-2 rate option, to compete with Unitel's DS-2 and fractional DS-1 rate options, at a rate relationship of 35 DS-0s to one DS-2;
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(3) adding minimum monthly billing commitments (MMBCs) of $5,000, $15,000, and $150,000 to existing MMBCs which range from $2,500 to $1,000,000;
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(4) increasing certain customer volume pricing plan (CVPP) discount levels;
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(5) adding to the CVPP
- Megaplan access
- Megastream Terminating
Equipment (MTE), other
terminations and local
links; and
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(6) increasing monthly rates for Megaplan local components that are to be included in the CVPP.
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Bell filed a revenue impact analysis with its application. It subsequently filed an economic evaluation study in support of the telephone companies' proposals. These documents covered the applications of all the telephone companies and were adopted by them.
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The procedure announced in the public notice included an interrogatory process. The Commission and three parties addressed interrogatories to Bell and B.C. Tel, to which the two companies responded on 12 March 1991. The Commission posed supplementary interrogatories to Bell on 17 May 1991. Bell responded on 3 June 1991.
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The Government of British Columbia (BCG) and Unitel Communications Inc. (Unitel) provided comments on 18 June 1991. Bell and B.C. Tel replied on 15 July 1991.
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II RATE REDUCTIONS
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The telephone companies' position was artuculated primarily by Bell.
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Bell noted that, in Unitel Tariff Notice 539: Mach III Rate Restructuring Telecom Letter Decision CRTC 90-15, 24 October 1990 (Letter Decision 90-15), the Commission approved tariff revisions filed by Unitel under TN 539 proposing a restructuring of Mach III Service rates. Bell stated that approval of TN 539 had put it at a significant competitive disadvantage. Bell's position was based on the assumption that a price differential of at least 15% in Unitel's favour is required in order to migrate customers from Bell's services to those of Unitel. It stated that, using the existing Bell customer base, IX rate comparisons between Mach III and Megaplan Services show an average 18% price differential in Unitel's favour. Bell further stated that IX rate comparisons between Mach III and the telephone companies' Dataroute and interconnected interexchange Voice Grade (IXVG) Service show price differentials that exceed 70% in Unitel's favour. Bell submittedthat, with these price differentials, there will be significant migration to Mach III if the companies' proposals are not approved. Bell stated that approval would result in migration from IXVG and Dataroute Services to Megaplan Services rather than to Mach III, and that this would prevent prohibitive revenue losses by the telephone companies.
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In its reply argument, Bell noted that Decision 90-22 described the concerns of business users of high speed digital services who submitted that the reductions proposed in that proceeding were insufficient in light of rates in the United States. It also noted the view expressed by the Commission in Teleglobe Canada Inc. - Resale of Transborder Services, Telecom Decision CRTC 91-10, 26 June 1991 (Decision 91-10), that the most effective way to control U.S. bypass is to reduce Canadian rates, thus reducing the economic incentive to bypass. Bell further noted Unitel's position in that proceeding, that the persistence or increase of U.S. bypass would have significant adverse effects on revenues and contribution for all Canadian carriers.
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In response to interrogatory Bell(CRTC)5Feb91-13 CBN3, the company set out its general pricing approach for competitive network (CN) services. Bell stated that its general intention is to offer flexible purchasing options and to ensure that its digital services remain internationally competitive by aligning rates more closely with U.S. rates for similar services. In response to Bell(CRTC)5Feb91-16 CBN3, Bell indicated that digital IX service rates continue to be determined in relation to analogue and to potentially competitive services, and are set to maximize contribution while minimizing cross effects. However, Bell stressed the increasing influence of U.S. prices and the need to give its customers competitive rates in the context of the global economy.
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In interrogatory Bell(CRTC)5Feb91-6 CBN3 and 17May91-17 CBN3, the Commission asked Bell to provide end-to-end price comparisons of Mach III with Megaplan, Dataroute and IXVG services in order to supplement the comparisons filed with its application, which focused on IX segments only. Bell's responses indicate that Unitel's price advantage is much lower when comparisons are on an end-to-end basis; in fact, in some cases the telephone companies have the price advantage. In response to interrogatory Bell(Unitel)5Feb91-26 CBN3, Bell stated that end-to-end Megaplan prices would be 11% higher than Mach III prices, using Bell's Megaplan customers as the basis for comparison.
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The Commission notes that the telephone companies' proposed tariff revisions were filed primarily having regard to price comparisons with Unitel. On this basis, the Commission finds little to support the proposed tariff revisions. Moreover, to the extent that Bell took end-to-end price comparisons into account in developing its migration estimates, clear analytical connections should have been drawn between price differentials based on the end-to-end comparisons and the company's conclusions on migration.
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Nevertheless, the Commission finds other support for the proposed rate revisions. As stated in Decision 90-22:
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The record associated with Telecom Letter Decision CRTC 89-27, 14 December 1989 on unchannelized high capacity transmission services revealed a great deal of concern in the marketplace 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 rateper 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 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.
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These views were echoed in Letter Decision 90-15, in which the Commission stated:
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Most parties supported Unitel's proposals, including the elimination of the 5% price differential, without reservation. Many submitted arguments similar to those advanced in the proceeding leading to Decision 90-22, i.e., that rates for high speed digital services are much higher in Canada than in the United States. They contended that, if domestic business customers are to compete in the increasingly competitive global economy, particularly given the Canada-U.S. Free Trade Agreement, Canadian prices for these kinds of telecommunications services must be reduced sharply. They submitted that approval of Unitel's application would help to meet this necessary objective.
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In Decision 91-10, the Commission noted the support expressed by the carriers, including both the telephone companies and Unitel, that Canadian traffic should make maximum use of the facilities of Canadian carriers. The Commission also noted the carriers' view that the use of Canadian facilities for Canadian traffic might well decrease in future:
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The carriers generally believed that the potential for bypass has increased in the last few years and will continue to increase.
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In Decision 91-10, the Commission also noted the general consensus among carriers and interveners that the most effective remedy for bypass is rate action. In this regard, the Commission stated:
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Virtually all who commented submitted that the most effective long-term solution for the reduction of bypass is the lowering of Canadian rates. The Commission endorses this view.
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As reflected in the foregoing, there is substantial support for the position that rates for domestic high speed digital services must be reduced (1) to facilitate the competitive position of Canadian business in the context of freetrade and global competition, (2) to encourage innovation in the use of digital services (with the consequent demand stumulation), and (3) to reduce bypass of domestic carrier services and networks through the use of lower priced U.S. networks and services.
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III CONCERNS REGARDING PHASE III REVENUE/COST RELATIONSHIP FOR THE CN CATEGORY
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BCG and Unitel submitted that Phase III updates should be filed which take direct account of the applications. Both argued that there is a likelihood of cross-subsidization occurring, particularly if the applications are approved. Unitel argued that economic justification considers net revenue effects but not cost effects, and thus does not provide sufficient support for the proposals.
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Bell and B.C. Tel replied that Phase III was never designed or intended for evaluating individual tariff filings; therefore, updates are not required. Bell noted that its latest Phase III results filed with the Commission show a large CN category surplus for 1991. The company submitted that the revenue effects forecast for its application, taken with the 1991 forecast surplus, guarantees no category shortfall.
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B.C. Tel stated that its latest Phase III results show a CN category surplus for 1991 with approval of the present proposals. The companystated that denial would adversely affect the category.
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The Commission shares the concerns of interveners regarding Phase III results for the CN category, particularly for B.C. Tel. Nevertheless, the Commission is satisfied that Phase III results are not required in support of individual tariff filings. In the Commission's view, the preferred approach is for Bell and B.C. Tel in their annual Phase III submissions, to file forecasts for the upcoming year that reflect planned tariff filings. Moreover, the Commission considers that the preferred approach for improving CN category results is to reduce associated costs, rather than to maintain the current gap between U.S. and Canadian Megaplan Service rates and the attendant potential for bypass.
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IV EXPANSION OF THE CVPP
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In expanding the CVPP, the telephone companies seek to include in it, among other things, DS-0 and DS-1 access charges. In response to Unitel's objection that this would effectively reduce access prices without any cost justification, Bell argued that it has filed cost/revenue ratios showing the profitability of Megaplan. It also noted the Commission's statement in Decision 90-22 that not every element of a CN service must be compensatory.
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The Commission notes that there is nothing on the record to indicate whether the DS-0 and DS-1 access channels would be compensatory if included in the CVPP. The Commission notes further that costs and revenues for Megaplan servicescovered by the current CVPP are reported in the CN category, whereas costs and revenues for Megaplan access channels are reported in the Access category. Accordingly, the Commission's statement in Decision 90-22 does not apply.
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In view of the foregoing, the Commission finds that the telephone companies have not furnished sufficient information to support the reduction of prices for access channels that would ocur with their inclusion in the CVPP.
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V REGULATED RATE DIFFERENTIALS
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Unitel suggested that, in approving Bell TN 3420 in Decision 90-22 and Unitel TN 539 in Letter Decision 90-15, the Commission had approved new regulated rate differentials for high speed digital services. In Letter Decision 90-15, the Commission noted that, with the introduction of the CVPP, the telephone companies are no longer predicating their discounts for competitive high speed digital services on cross sections, and that there is therefore nothing on which to base an administered price differential. The Commission reiterates its finding in Letter Decision 90-15 that, in respect of competitive high speed digital services, it is no longer appropriate to maintain a regulated price differential.
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VI DISPOSITION OF THE APPLICATIONS
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In light of the above, the Commission approves the telephonecompanies' applications as filed, except for the inclusion of Megaplan access channels in the CVPP. The tariff revisions proposed for Megaplan access channels are denied.
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Allan J. Darling
Secretary General
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