Telecom Decision CRTC 92-12
Ottawa, 12 June 1992 COMPETITION IN THE PROVISION OF PUBLIC LONG DISTANCE VOICE TELEPHONE SERVICES AND RELATED RESALE AND SHARING ISSUESTable of ContentsI INTRODUCTION II ADVANTAGES AND DISADVANTAGES OF COMPETITION III CONTRIBUTION, INTERCONNECTION COSTS IV ENTRY SCENARIOS V IMPLEMENTATION VI THE ORDER APPENDICES ATTACHMENT I INTRODUCTIONA. GeneralOn 16 May 1990, Unitel Communications Inc. (Unitel) applied to the Commission for an order requiring Bell Canada (Bell), British Columbia Telephone Company (B.C. Tel), The Island Telephone Company Limited (Island Tel), Maritime Telegraph and Telephone Company Limited (MT&T), The New Brunswick Telephone Company Limited (NBTel), and Newfoundland Telephone Company Limited (Newfoundland Tel) (the respondents) to connect Unitel's telecommunications network to their public switched telephone networks (PSTNs) for the purpose of providing public long distance telephone services, and to afford all reasonable and proper facilities for the interchange of public long distance telephone traffic between Unitel's network and those of the respondent telephone companies. On 4 June 1990, Bell and B.C. Tel wrote to the Commission concerning, among other things, the scope of the proceeding to deal with Unitel's application. It was suggested that the proceeding should include consideration of the issues set out in the Public Notice that established the proceeding that led to Interexchange Competition and Related Issues, Telecom Decision CRTC 85-19, 29 August 1985 (Decision 85-19), in which the Commission denied a previous application by Unitel (then, CNCP Telecommunications) to provide public long distance telephone service. In its letter, Bell identified certain other issues related to the impact of competition that it submitted should be addressed in the proceeding. In Unitel Communications Inc. - Application to Provide Public Long Distance Telephone Service: Scope of Proceeding, CRTC Telecom Public Notice 1990-57, 11 June 1990 (Public Notice 1990-57), the Commission sought comments and proposals regarding the scope of the proceeding to consider Unitel's application. On 30 July 1990, the Commission received an application from B.C. Rail Telecommunications (B.C. Rail) and Lightel Inc. (Lightel) (BCRL) for an order requiring Bell, B.C. Tel and Unitel (the BCRL respondents) to connect BCRL's telecommunications network to the PSTNs of Bell and B.C. Tel and to Unitel's telecommunications network for the purpose of providing public switched and dedicated voice and data telephone service, message toll service (MTS) and wide area telephone service (WATS). BCRL requested that the Commission consider its application in the proceeding initiated in response to Unitel's application. B. Scope of the ProceedingThe Commission set out its determinations with respect to the scope of the proceeding, and the applicable procedure, in Unitel Communications Inc. and B.C. Rail Telecommunications/Lightel Inc. - Applications to Provide Public Long Distance Voice Telephone Services and Related Resale and Sharing Issues: Scope and Procedure, CRTC Telecom Public Notice 1990-73, 3 August 1990 (Public Notice 1990-73). The Commission determined that, in view of the substantial similarity between the issues raised by the two applications, it would consider BCRL's application in the proceeding initiated in response to Unitel's application. The Commission also stated that it intended, in the same proceeding, to determine whether or not the resale and sharing rules set out in Resale and Sharing of Private Line Services, Telecom Decision CRTC 90-3, 1 March 1990 (Decision 90-3), should apply in the territories of the four respondents operating in the Atlantic provinces. Moreover, the Commission concluded that the proceeding would provide the appropriate forum in which to determine whether or not to liberalize the resale of WATS in the operating territories of the respondents. In Public Notice 1990-73, the Commission stated that it considered that the focus of this proceeding should be the impact of market entry by Unitel and/or BCRL, and the related issues of resale and sharing. The Commission expressed the view that consideration of Unitel's application would provide an appropriate context for a focused and detailed examination of the social, technical and economic issues associated with various entry scenarios. The Commission stated that, in order for it to determine if approval of the applications, or of more liberal resale, would be in the public interest, it would be necessary to compare the advantages and disadvantages of various market scenarios for lowering long distance rates. In this context, the Commission invited comment on the advantages and disadvantages associated with the market scenarios listed below, individually and in various combinations: (1) the approval of Unitel's application and/or BCRL's application; and
The Commission invited interested persons to address the issues set out below relating to the impact of competition and to the appropriate regulatory regime, taking into account the Commission's findings in Decision 85-19. Specifically, interested persons were invited to indicate the advantages and disadvantages associated with either or both of the applications and with the alternative market scenarios, both with and without rate restructuring by the respondents, in terms of their impact on, among other things, the following: (1) the revenues of the respondent telephone companies; The Commission further requested that interested persons comment on the regulatory regime that would be required in order to maximize any advantages and reduce any disadvantages associated with approval of either or both of the applications and with the alternative market scenarios. Comments were requested, in particular, on the following:
The Commission also stated that it did not intend in this proceeding to consider other applications to offer competing public long distance voice services or specific applications to rebalance rates. C. ProcedureIn Public Notice 1990-73, the Commission announced a central public hearing to be held in Hull, Quebec. The Commission stated that persons who wished to comment on the applications or on associated issues could do so by writing to the Commission prior to the completion of the central hearing. The Commission received approximately 2,000 letters and submissions from individual Canadians, municipalities and other organizations. The Commission also held hearings in each province and territory to accommodate those who wished to make informal oral presentations without having to participate in the central hearing. Transcripts of these hearings form part of the record of this proceeding. Unitel filed particulars with respect to its application on 10 July 1990. Unitel also addressed interrogatories to the respondents, responses to which were filed on 27 July 1990. The respondents filed their answers to Unitel's application on 20 July 1990. Unitel filed its reply on 30 July 1990. On 24 August 1990, Unitel and BCRL each filed evidence, including their Business Plans, in support of their applications. Each BCRL respondent filed its answer to BCRL's application on 20 November 1990. BCRL filed its reply on 30 November 1990. Also on 30 November 1990, the respondents to both applications filed evidence in support of their answers and with respect to the issues set out in Public Notice 1990-73. Unitel and BCRL also filed evidence with respect to the issues set out in Public Notice 1990-73. On 4 March 1991, 21 interveners filed evidence, namely: AGT Limited (AGT), Association des Compagnies de Téléphone du Québec, Association des Consommateurs du Québec Inc., Atlantic Communications and Technical Workers' Union, Canadian Association of the Deaf, Canadian Business Telecommunications Alliance (CBTA), Canadian Federation of Independent Business, City of Toronto (Toronto), Communications and Electrical Workers of Canada (CWC), Communications Competition Coalition (CCC), Consumers' Association of Canada (CAC), Director of Investigation and Research, Bureau of Competition Policy (the Director), Edmonton Telephones Corporation (EdTel), fonorola Inc. (fonorola), Government of Saskatchewan (Saskatchewan), McMaster University and The University of Toronto, Northwestel Inc. (Northwestel), Québec Téléphone (Québec Tel), Telecom Networks International Limited of New Zealand (TNI), Telecommunications Workers' Union (TWU), and U.S. Intelco Networks Inc. (Intelco). The central public hearing took place from 15 April 1991 to 5 July 1991, inclusive, before a panel comprised of Commissioners Louis R. Sherman (Chairman), Fernand Bélisle, David Colville, Beverley J. Oda and Edward A. Ross. The following parties appeared or were represented at that hearing: AGT, B.C. Old Age Pensioners' Organization, Council of Senior Citizens' Organizations, West End Seniors' Network, Senior Citizens' Association, Federated Anti-Poverty Groups of B.C. and local 1-217 IWA Seniors (collectively known as BCOAPO et al), BCE Mobile Communications Inc. (BCE Mobile), Bell, BCRL, B.C. Tel, CBTA, Canadian Cable Television Association (CCTA), Canadian Independent Telephone Association and The Ontario Telephone Association (CITA/OTA), CWC, Toronto, CCC, CAC, the Director, EdTel, fonorola, Government of Alberta (Alberta), Government of British Columbia (British Columbia), Government of Manitoba (Manitoba), Government of Ontario (Ontario), Gouvernement du Québec (Québec), Saskatchewan, Island Tel, MT&T, National Anti-Poverty Organization and Rural Dignity of Canada (NAPO/RDC), NBTel, Newfoundland Tel, Northwestel, Québec Tel, TNI, TWU, Unitel and Intelco. Unitel and BCRL filed final argument on 29 July 1991. By the same date, all parties filed argument on the issues set out in Public Notice 1990-73. Interveners filed final argument on the applications made by Unitel and BCRL by 12 August 1991. By 19 August 1991, all parties filed reply argument with respect to the issues set out in Public Notice 1990-73. By 23 August 1991, the respondents filed final argument on the applications of Unitel and BCRL. On 3 September 1991, Unitel and BCRL filed reply argument. D. The Applications1. Unitel Facilities-based public long distance telephone service (i.e., MTS/WATS) is provided by the respondents on a monopoly basis in their respective operating territories. Unitel requested in its application that it be permitted to provide public long distance telephone service, together with a range of advanced network services, in competition with the respondents. Unitel requested approval for two basic forms of interconnection to the respondents' networks: tandem access to the respondents' class 4 toll offices (toll offices) and local access connection to class 5 local offices (end offices), including local tandem switches. Unitel indicated that it plans a phased roll-out of its service portfolio on a region-by-region basis over a six-year period. Unitel proposed to offer, during its initial years of operation, prices that are, on average, about 15% less than the rates charged by the respondents. It considered that its various proposed pricing options would be a significant attraction to potential customers. Unitel stated that approval of its application would provide a number of benefits for Canadians, including the provision of more efficient service at lower cost, more rapid introduction and diffusion of new services and facilities, and greater supplier responsiveness on the part of both itself and the respondents. Unitel also submitted that its entry into the public long distance telephone market would result in the macro-economic benefits of lower prices and increased domestic consumption resulting from reduced business costs. In its view, entry would also provide innovative services and decreased telecommunications costs, thus enhancing the competitiveness of Canadian businesses. Unitel also stated that approval of its application would entail no threat to universal service at affordable rates. In Unitel's view, its competitive challenge would put pressure on the respondent telephone companies to increase their productivity, thereby lowering the cost of providing service. Moreover, its new service options, lower prices and increased consumer awareness would stimulate demand for services, enlarging the market for long distance services and thus the revenues of the telephone companies. Finally, Unitel noted that it would make payments to the respondents in order to provide a contribution to the maintenance of affordable local rates. Unitel based this conclusion on its model (the Peat Marwick Model) of the respondents' operations. Specifically, Unitel proposed to pay contribution on each inter-office trunk used to connect its toll switches to the respondents' toll or end offices. Unitel proposed that the amount of contribution be flat-rated for administrative ease, and that, in the early years of operation, it be set at a lower level in order to reflect a variety of factors, including the inferior quality of interconnection, the respondents' control of access facilities, geographical coverage, and the lower traffic volume per trunk anticipated in those years. 2. BRL BCRL is a joint venture of B.C. Rail, a provider of dedicated voice and data telephone service in British Columbia (B.C.), and Lightel, a provider of dedicated and switched voice and data telephone service. BCRL indicated that Call-Net Telecommunications Ltd. (Call-Net) would form an integral part of the joint venture. BCRL submitted that its strength would be in information processing for small and medium size business and residential users and in the provision of alternative services for larger corporations. BCRL submitted that there is substantial public demand for alternative telecommunications suppliers and that such suppliers are needed in order to keep the Canadian business community in step with its trading partners in the United States (U.S.) and in the rest of the world. BCRL submitted that its entrance into the public long distance market would challenge the BCRL respondents to become more efficient, thereby lowering their costs and stimulating more innovative services. BCRL also submitted that its entry would stimulate demand for telecommunications services and improve the competitiveness of the Canadian economy. BCRL proposed to make contribution payments to the BCRL respondents, in addition to payments for the use of interexchange facilities. E. The Reference PlansAs noted above, the Commission stated in Public Notice 1990-73 that it would be necessary, in order to determine if approval of one or both of the applications would be in the public interest, to compare the advantages and disadvantages of various scenarios for lowering long distance rates. In its evidence, Bell filed its own plan for reducing long distance rates over the period 1992 to 2002. Initially, rate reductions would be targeted at medium to large-volume users (i.e., users with toll bills in excess of $300.00 per month). B.C. Tel filed two proposals, a Reference Plan and an extended Reference Plan. The latter would provide for general toll rate reductions supported by local rate increases related to the Consumer Price Index (CPI). Newfoundland Tel filed a plan that it referred to as the Better Alternative Plan. NBTel, MT&T and Island Tel did not include specific proposals with their evidence, although they provided information similar to that filed by Bell and B.C. Tel during the course of the proceeding. Saskatchewan filed a Reference Plan for Saskatchewan Telecommunications (SaskTel), while AGT stated in argument that it endorses the Telecom Canada Plan to reduce toll rates. The individual Reference Plans filed varied as to the scope and timing of long distance rate reductions. However, it became evident during the proceeding that the individual proposals represented individual interpretations of an overall strategy by Stentor Canadian Network Management (Stentor), formerly known as Telecom Canada, to reduce Canadian long distance rates. F. General ConclusionsIn Decision 85-19, the Commission considered whether and, if so, to what extent, the long distance telecommunications market should be opened to further competitive entry. The specific applications of CNCP Telecommunications to be permitted to interconnect its facilities with those of Bell and B.C. Tel to enable it to offer MTS/WATS service and of B.C. Rail to be permitted to interconnect its facilities with those of B.C. Tel to enable it to offer certain interexchange private line voice and data transmission services were dealt with in the context of this general issue. In order to determine whether the approval of the applications was in the public interest, the Commission considered whether on balance the potential benefits of granting these applications outweighed any potential disadvantages. In the present proceeding, the Commission is once again considering the introduction of further competition in the long distance telecommunications market. As suggested in Public Notice 1990-73, in order for the Commission to determine if approval of the applications is in the public interest, it must assess the advantages and disadvantages of various scenarios for lowering long distance rates. In making this assessment, the Commission has considered in particular the 11 elements listed in section B above. The Commission's assessment is set out below. Long distance rate levels have been an issue of primary importance in a number of recent Commission proceedings because of the competing interests of heavy users of long distance service, who seek the many benefits of lower long distance rates, and subscribers who desire to maintain current local rate levels and thus resist any lessening of the subsidy that currently flows from long distance revenues towards those rates. The Commission considers that toll rates are higher than is necessary in order to maintain universal access at affordable rates. However, the scope of this proceeding is much broader than just the issue of lower long distance rates versus higher local rates. Rather, the scope of this proceeding includes consideration of how the various market scenarios would affect long-run costs, productivity, choice, responsiveness, competitiveness, bypass and network efficiency as well as a range of other issues set out in Public Notice 1990-73. In assessing each scenario, the Commission must weigh its advantages and disadvantages in regard to all of these issues. In the present proceeding, the Commission has assessed the potential benefits and disadvantages of granting either or both of the applications and/or adopting the respondents' Reference Plans or other market scenarios in terms of the effect on the 11 elements listed in section B above. Based on a thorough assessment of all of the information presented, the Commission has concluded that increased competition, subject to the appropriate terms and conditions, would be in the public interest. In arriving at its conclusions, the Commission determined that toll rates should be reduced to increase affordability of toll services, in general, and the competitiveness of Canadian business, in particular, and to maximize the use of Canadian telecommunications facilities. Although the Commission considers that targeted discounts financed through surplus revenues should be permitted as a means of reducing long distance rates, such proposals would not result in the same level of choice and supplier responsiveness as can be expected in a more competitive environment. While the Reference Plans can contribute to stimulating the competitive marketplace, in the Commission's view, they are not an adequate substitute for competitive entry. The Commission also notes that, because of the effect of toll rate reductions on intercompany transfer payments under the Stentor Revenue Settlement Plan (RSP), most respondents could not match Bell's long distance rate reductions without raising their local rates. Further, the Commission found that the respondents have overestimated projected productivity gains and revenue growth, making it unlikely that they would be able to lower toll rates to the level proposed in a monopoly environment without raising local rates. On the other hand, the Commission considers that competition will increase pressures on the respondents to minimize their costs due to the need to maintain market share. While the Commission considers that allowing increased entry would raise the respondents' costs in the short-run and, absent increased action to minimize costs, would thus reduce their ability to lower rates, any such immediate disadvantages must be assessed against longer-term benefits. The Commission considers that the competition permitted in this Decision will increase pressure on the respondents to minimize their costs and that such measures could offset the costs of entry. More importantly, competition not only can be expected to increase pressure to reduce rates, but increase choice and supplier responsiveness, particularly in terms of the number of price and service packages tailored to address the specific needs and applications of a greater variety of user groups. This increase in responsiveness and choice would reduce initiatives by business and resellers to bypass the Canadian network and would increase the use of telecommunications as a strategic input to increase the efficiency and effectiveness of Canadian business. In the opinion of the Commission, such choice and responsiveness cannot be met in the longer term in a single supplier environment, nor is it reasonable to assume that a single supplier can differentiate in terms of product and price sufficiently to meet the specific needs and multiple demands of different user groups. Even without increased competition, if Canadian long distance rates are to be reduced by any meaningful amount in the future, an action the Commission considers necessary, the effect that this would have on the settled revenues of Stentor members is such that local rates in some respondents' territories will almost certainly have to rise. In the Commission's view, competition need not add any significant increases in local rates if contribution payments are adequate, the market expands and the respondents increase efforts to minimize costs in order to capture or retain market share. The Commission is satisfied that the terms and conditions it has established will address these issues. The Commission is not opposed to some rate restructuring in order to reduce the level of MTS/WATS rates, if it should be demonstrated that competition and productivity improvements are failing to achieve this objective in a timely fashion. However, should rate restructuring be required, the Commission considers that there may be ways, other than across-the-board rebalancing, to address the pricing of local/access service. These are discussed below. Accordingly, the Commission has approved Unitel's application, subject to a number of terms and conditions that the Commission considers appropriate in order to strike a reasonable compromise among the many competing interests and conflicting policy objectives. While the Commission considers that these terms and conditions will provide Unitel with the opportunity to become a viable competitor and should bring about the many benefits of competition, the decision to assume the risks of entry must rest ultimately with the shareholders of Unitel. The Commission is in agreement with most parties that increased competition should not be based on a regulated duopoly market structure. In order to exploit fully the benefits of competition, the Commission considers that it would be in the public interest to provide a framework which would allow other applications for interconnection by facilities-based interexchange carriers (IXCs) that would be subject to federal regulation, if the shareholders of such applicants are prepared to assume the risks and obligations associated with the terms and conditions set out in this Decision. Accordingly, the Commission has indicated its willingness to order the BCRL respondents to interconnect with BCRL, if BCRL wishes to enter on terms and conditions comparable to those approved for Unitel. While the Commission considers that a more open marketplace is more likely to increase the benefits of competition, such entry must ensure that consumers are protected from potential abuses. Accordingly, the Commission has imposed certain restrictions on pay telephone and operator service activities and access to billing and collection and database services to avoid problems such as overcharging that have occurred as a result of unregulated alternative operator service (AOS) activities in the U.S. The Commission does not consider that resale and sharing, absent facilities-based entry, would provide a sufficiently sustainable form of competition, given that reseller viability is so dependent on the rate structures of the respondents. However, in order to ensure greater choice and diversity in the marketplace, the Commission considers that it is in the public interest to permit the resale and sharing of the services of the four Atlantic respondents and to further liberalize the resale and sharing rules in all respondents' territories in order to permit the resale of WATS and other discount toll services. In light of this increased liberalization, coupled with the ability of service providers to mix leased and owned facilities, the Commission has modified the current level of contribution charged to resellers in order to ensure a more equitable treatment of all competitors and to minimize any adverse impact on the level of local rates. Finally, the Commission notes that Unitel and BCRL do not control bottleneck facilities or monopoly revenues and therefore considers that such IXCs need not be subject to the same degree of regulatory scrutiny as the respondents. At the same time, in order to move towards the development of a more competitive marketplace, the respondents must have increased flexibility in setting rates. Accordingly, subject to local rate impact considerations, the Commission has found that plans by the respondent telephone companies to introduce targeted rate reductions are in the public interest, particularly in light of concerns about the competitiveness of Canadian business and bypass of Canadian network facilities. The Commission intends to treat applications for such rate reductions on an expedited basis where the proposed reductions are found, on a prima facie basis, to be compensatory and enabled by surplus revenues rather than by increases in the level of local rates. Details of the Commission findings are set out below. II ADVANTAGES AND DISADVANTAGES OF COMPETITIONA. Long-Run Costs of Supplying Telecommunications ServicesCompetitive entry into the voice long distance market may increase the long-run costs of supplying telecommunications services if there are economies of scale, economies of scope, or if costs are subadditive. In this proceeding, respondents and some interveners opposed entry on the grounds that it would lead to higher production costs, due to the existence of economies of scale or economies of scope and because industry costs are subadditive. These parties submitted that this was a basis for denying entry and preserving the single-supplier environment. The unit costs of a firm decline as output grows if there are economies of scale or, in the short run, if there are economies of fill or plant level economies. If there are economies of scope, one firm supplying both toll and local telecommunications services would have lower costs than separate firms supplying the same level of toll and local output. Industry costs are subadditive if the costs of producing the entire range of services over all production levels are lower for a single supplier than for multiple suppliers. Bell submitted that virtually all econometric studies surveyed in the hearing indicated overall economies of scale in telecommunications. B.C. Tel submitted that its econometric analysis and the results of recent international studies presented by Unitel indicate that industry costs are subadditive. Bell also argued that, in order to estimate the cost impact of entry, the applicants' average unit costs should be compared with the respondents' incremental costs. By providing a comparison of Phase II incremental costs with Phase III embedded costs, Bell also attempted to demonstrate the effect of demand growth on Phase III toll unit costs. Bell suggested that the relation between output and unit costs could also be examined in the context of its financial planning models, which depend on relationships established by historical data, and that its financial models indicate that unit costs are declining as output rises. Because of its view that econometric studies cannot provide conclusive evidence of toll-specific economies of scale, Bell submitted a network engineering model. The model was intended to demonstrate economies of scale in the toll sector by examining the relationship between output, investment, and operating costs in the toll network. Unitel argued that entry should not affect toll unit costs in Canada, since there is no evidence showing economies of scale in the provision of toll services. Unitel argued that toll-specific economies of scale cannot be reliably inferred from evidence of economies of scale for firms producing both local and toll output, since there can be overall economies of scale even if there are no toll-specific economies of scale. Unitel argued that the available econometric evidence on the telecommunications industry as a whole pertaining to economies of scale, economies of scope and subadditivity cannot be used to determine the impact of entry by a toll-only competitor on industry costs, because stand-alone toll service cost functions have not been estimated. Unitel questioned Bell's network evidence, arguing that, while demonstrating declining unit costs, possibly attributable to factors such as economies of fill, it does not establish the existence of economies of scale in the toll sector. Moreover, Unitel argued that this evidence does not take account of Unitel's existing network, and the continued use of respondents' non-toll facilities by Unitel traffic. Unitel further argued that the toll-specific scale economies implied by Bell's financial planning models were unsubstantiated. Unitel also argued that the assumptions made by Bell in its engineering and financial models may not be appropriate to characterize an industry with several toll providers. Unitel acknowledged that its Business Plan displays plant level economies, but stated that these would tend to disappear beyond the short run as output grows. To demonstrate the possibility that economies of scale are not significant in the production of toll services, Unitel cited recent studies of American IXCs indicating that MCI and Sprint have lower unit costs than AT&T. BCRL stated that technology has reduced costs so that scale effects and long-run unit costs are becoming less important. According to BCRL, an entrant with differentiated products that are responsive to customers' needs could be viable even if its costs were higher than average industry costs. BCRL also questioned Bell's submission that entry would increase unit costs because of lost economies of scale. BCRL suggested that a smaller company can have lower unit costs than a larger company. The Commission notes that, in the strict economic sense, it is necessary to consider evidence of both economies of scale and economies of scope in order to determine the effect of entry into a single-supplier market. Therefore, economic theory suggests that the more accurate and comprehensive test would be a test for subadditivity, as the expert witness for B.C. Tel noted. B.C. Tel's witness also agreed with Unitel that, from an economic viewpoint, evidence of declining unit costs obtained either from historical data or through engineering plant studies is not sufficient to allow a determination of the economic merits of competitive entry. It has been argued that entry into the toll market would have a detrimental impact on the long-run costs of supplying telecommunications services in the respondents' operating territories. In the Commission's view, the record of this proceeding does not establish the existence of toll-specific scale economies. The econometric evidence examined in this proceeding was limited, due to constraints on data and as a result of a generally acknowledged degree of volatility in the estimated values in the models. However, regardless of any limitations in the particular models examined in this proceeding, the Commission agrees with Bell that econometric studies have, as yet, been unable to provide conclusive evidence of the relationship to any specific service of any possible overall economies of scale found in telecommunications. The Commission moreover agrees with Unitel that the extent of returns to scale in the provision of toll services alone cannot be inferred from estimates of returns to scale for companies producing both toll and local services. The Commission considers that economies of scale cannot be inferred from a comparison of Phase III embedded costs and Phase II incremental costs. Phase III costs do not define economic values. Rather, they reflect accounting conventions and the results of accounting decisions as to the assignment of costs. Furthermore, the two costing approaches are based on very different methodologies. For example, Phase III costs include historical cost depreciation, while Phase II costs do not; Phase III costs reflect a mix of old and new technologies and relate to all traffic, while Phase II costs represent the costs of serving demand on growth technology. The Commission considers that, to the extent that differences between Phase II and Phase III costs can be expected to diminish over time, this would likely be the result of the convergence of the technologies to which the two costing methods relate, and not necessarily the result of the existence of economies of scale in toll production. The Commission believes that any trends or movements exhibited by historical or forecast data may be the result of the effects of a variety of factors beyond merely economies of scale, including changes in technology, changes in factor prices and factor substitutions, and changes in the economic environment. The Commission is not convinced that Bell's network engineering model incorporates all factors that determine toll costs. For example, the model did not include a detailed discussion or presentation of such telephone company costs as those related to management, accounting, operations, billing or marketing. In the Commission's view, a company's performance with respect to such costs could counter the tendency towards decreasing cost found in Bell's network engineering model. The Commission also notes Unitel's arguments that the network engineering model has excessive switch capacity, and potentially restrictive trunk capacity on specific routes. In light of the above, the Commission considers that, although Bell's network model exhibits declining unit costs for a facilities-based toll carrier, this result is not necessarily indicative of economies of scale in the production of toll services. Therefore, the model cannot be relied upon to determine whether entry into the toll market would increase the long-run costs of supplying telecommunications services. It was argued that entry would be uneconomic because the applicants' evidence indicates that they would have higher cost structures. However, the Commission considers that these higher costs reflect start-up cost phenomena rather than evidence of long-run costs. Since no conclusive evidence of toll-specific economies of scale has been presented in the proceeding, and given the availability of modern switching and transmission technologies, the Commission considers it reasonable to assume that the unit costs of the applicants would decline towards those of the respondents. Thus, any inefficiencies that would arise in the initial stage of entry should be measured against longer-run costs and the potential benefits of competition. In addition to evidence on economies of scale, evidence relating to economies of scope and to cost subadditivity was presented during the proceeding. While such evidence could give an indication as to the impact of entry on industry costs, it would be necessary to examine the stand-alone costs of toll production in order to properly present such evidence. As noted by Unitel, no such information was presented or is available for either the international or the Canadian telecommunications industry. Accordingly, the Commission has not relied on the evidence filed as to economies of scope and subadditivity to determine the impact of entry on the respondents' costs or on industry costs. B. The Reference Plans1. General The respondents' Reference Plans were varied as to the scope and timing of long distance rate reductions and the impact of toll rate reductions on local rates. It became evident during cross-examination that the respondents' proposals were individual interpretations of an overall Stentor strategy to reduce Canadian long distance rates. The respondents generally agreed with the objectives of targeting rate discounts towards large users and the movement of Canadian long distance prices towards the levels in the U.S. In argument, AGT stated that it endorses the Reference Plans of the Stentor members. Saskatchewan submitted that SaskTel, along with other members of Stentor, has already initiated a program of rate restructuring. While the respondents generally agreed with the objectives of the Reference Plans, there was no agreement on either the scope or timing of the rate reductions. NBTel's witness testified that the company reserved the right to diverge from the course mapped in the Stentor Reference Plan. Newfoundland Tel acknowledged that although the company had concerns with the effects of the planned Stentor rate reductions, the industry is moving towards lower toll rates. Bell proposed to match U.S. long distance rate levels for the company's medium and large volume users by 1996. Bell concluded in its argument that the Reference Plan would produce average toll rate reductions of 55% (excluding overseas traffic) by the year 2002. Bell did not assume any overseas rate reductions in the Reference Plan. B.C. Tel proposed rate reductions of magnitudes similar to Bell's, and assumed some reductions to overseas rates. In its argument on the applications, Newfoundland Tel stated that its objective is to lower long distance rates to achieve parity with U.S. rates by 1996, and acknowledged that the company's goal is similar to the objectives of other Stentor member companies. Unitel found it unlikely that the respondents could achieve the Reference Plans, absent entry. Unitel also criticized the targeting of rates at certain user groups. BCRL interpreted what it perceived to be disagreement among the respondents over the specific objectives of the Stentor Reference Plan as an indication that the plan (or some variation) may or may not be implemented. Competitive Telecommunications Association (CTA) was also critical of the lack of a uniform agreement among the members of Stentor regarding the details of the Reference Plan. Quebec submitted that it would appear desirable for the Commission to accept the Bell Reference Plan because the plan is aimed at reducing long distance prices while maintaining existing local rate levels. CCC submitted that it is opposed to the Reference Plans as an alternative to entry, arguing that the plans do not address the issues of responsiveness, innovation and market orientation. CTA suggested that the main disadvantage of the Reference Plans is their failure to address the issues of choice, flexibility and better service. The rating initiatives in the Reference Plans are dependent on the ability of the respondents to generate future earnings which exceed each respondent's respective allowed return on common equity (surplus revenues). Toll rate reductions would be used to reduce the surplus revenues in any given year so that a company would not exceed its regulated return on common equity (ROE). Surplus revenues would be generated primarily through cost efficiencies, market growth and rate changes. Bell submitted that the long distance rate reductions proposed in its Reference Plan could be achieved without any increase in its local rates. Bell indicated that the surplus revenues needed for its Reference Plan would be generated through productivity improvements, network cost efficiencies and operational cost reductions. In its evidence, B.C. Tel noted that its Reference Plan would rely on high levels of market growth, productivity improvements and declining unit costs. B.C. Tel also indicated that its toll rate reductions would be achieved without increasing its local rates. However, the company also proposed an extended Reference Plan that included additional long distance price reductions beyond those contained in its Reference Plan, funded by local rate increases not exceeding the rate of inflation in any given year. In Newfoundland Tel's evidence, the company proposed to implement toll rate reductions while minimizing any impact on local rates. Newfoundland Tel anticipated that the company's toll rate reductions would be funded in part through the lowering of the company's unit costs. Newfoundland Tel acknowledged in its argument that local rates would have to rise in Newfoundland in order to achieve parity with U.S. toll rates and keep pace with the toll decreases that would be occurring nationally. 2. Measurement of Historical Productivity Growth Rates and Projection of Future Productivity Growth Parties to the hearing discussed problems in estimating and projecting rates of productivity growth in regulated industries, and how future productivity gains should be projected. Parties agreed that future toll rate reductions with no or minimum local rate increases depend on productivity gains. Unitel noted that a measure of aggregate output is required when estimating productivity. Aggregate output may be obtained by weighting each individual output by its marginal cost or by its price. Unless prices of all outputs are proportional to their respective marginal costs, different measures of aggregate output may be obtained depending upon whether individual outputs are weighted by their respective prices (revenue weights) or by their respective marginal costs (cost weights). To assess the plausibility of its Reference Plan, Bell compared the productivity gains implied by the Reference Plan to productivity gains realized in the past. Unitel argued that this methodology will overstate future cost and rate reductions, because Bell used revenue weights instead of cost weights to estimate productivity gains. Unitel suggested that historical productivity growth should be estimated using cost weights. Unitel argued that the use of revenue weights overestimates past productivity growth since toll output has been growing more quickly than local output and since the practice of pricing toll well in excess of costs has resulted in toll unit revenues exceeding toll unit costs. The Director supported the use of cost weights when estimating gains in total factor productivity. Bell and B.C. Tel argued that productivity growth rates estimated using revenue weights are realistic. Bell suggested that revenue weights are appropriate for estimating productivity growth if the objective is to project the impact of cost savings on the company's rates. Bell stated that cost weights are appropriate for studying questions related to economic efficiency. Bell indicated that its productivity growth estimated with revenue weights is about twice what it would be if estimated with cost weights. However, Bell noted that the required marginal cost weights often are not available. Bell also pointed out that the cost information for productivity studies is based on accounting information, and that accounting costs may not correspond to the economic concepts. In addition Bell, B.C. Tel, and AGT argued that in a regulated industry with many products, where prices frequently deviate from marginal cost, revenue weights may be best theoretically. Bell suggested that total factor productivity could also be measured by comparing the rates of increase of input and output prices. Bell noted that this method is used in the U.S. to estimate the productivity offset for AT&T price cap regulation. Unitel argued that the rate of total factor productivity gains used for price cap regulation in the U.S. indicates the potential magnitude of future productivity gains. According to Unitel, the Federal Communications Commission (FCC) is using productivity growth of 4% per year in regulating AT&T. Unitel also noted that an average rate of 3.8% per year was estimated for Canadian telecommunications for the period from 1953 to 1989. Certain respondents (for example, MT&T and Island Tel) stated that their cost projections are very conservative when compared to historic cost decreases. Certain interveners (including British Columbia, CCC, CTA and NAPO) stated that the respondents may have projected excessively high productivity gains for the future. 3. Unit Toll Costs To project future toll costs underlying its Reference Plan, Bell assumed that, without changes in demand resulting from changes in rates or other factors, Phase III toll costs would be approximately 16% of the company's total costs. Total toll costs were adjusted for increased demand due to lower prices by assuming that Bell's incremental toll costs were $0.048 per minute. This methodology results in declining unit toll costs, as toll plant costs are spread over increasing volumes. Bell anticipated that its unit toll costs will decline from $0.109 per minute in 1991 to $0.072 per minute by the year 2002. Bell attempted to assess the reasonableness of the cost forecast through comparisons with various criteria. For example, Bell projects that total factor productivity will improve by 6.2% per year, compared to annual gains of 6.5% realized in the late 1980s. Bell also stated that the predicted decline is reasonable when compared to unit cost reductions predicted by its network engineering model. This model suggested that with modern technology unit costs would decline because of improved trunking efficiencies, as volumes increase, and because of economies of fill as embedded costs are spread over larger volumes. Bell argued that Unitel has overestimated Bell's toll costs using the Peat Marwick Model. According to Bell, the Peat Marwick Model uses a scale factor of 1.7 for capital, and 1.3 for operating expenses, and costs estimated with these scale factors are substantially higher than Bell's historical costs. Bell also stated that in the historical period it achieved operating expense productivity gains higher than those assumed by Unitel in forecasting Bell's costs. B.C. Tel expected its toll costs to decline from $0.136 per minute in 1991 to $0.087 per minute by the year 2002. B.C. Tel suggested that the projected decline in unit toll costs is reasonable, since costs are projected to decline by 8% per year, compared to actual declines of 10% per year during the period 1986 to 1991. B.C. Tel also stated that its total productivity grew by 5% per year during the 1980s, compared to a projected productivity gain of 4.9% per year during the Reference Plan period. Unitel stated that Bell's and B.C. Tel's Reference Plans are unrealistic. As concerns Bell's Reference Plan, Unitel noted that Bell has projected output growth in excess of 6% per year, while projecting that inputs required to support this growth would grow by less than 0.5% per year. Unitel stated that the productivity growth projected in Bell's Reference Plan is unreasonably large when compared to historic productivity improvements it has achieved. Unitel noted that, during the period 1953-1989, Bell's input grew by 4% per year while its output grew by 7.9% per year. Unitel argued that Bell underestimated input growth, since Bell assessed the reasonableness of the Reference Plans by comparing the productivity improvements implied by the Reference Plan to recent historical productivity growth estimated with revenue weights. Unitel noted that Bell agrees that use of revenue weights would overestimate past productivity improvements. Thus, according to Unitel, Bell's future costs are understated, because they imply an excessively high rate of productivity improvements. Unitel also argued that Bell's recent high productivity growth reflects reductions in income taxes and financial costs, and that no similar reductions are projected for the Reference Plan period. Further, Unitel argued that Bell had not substantiated the productivity improvements in its Reference Plan. Unitel argued that during the proceeding Bell had documented cost reductions of $1.5 billion, but not of $4.5 billion as implied by the productivity gains in the Reference Plan. Unitel also submitted that the Reference Plans imply a significant acceleration in cost reducing technological change, which Bell and other respondents have not substantiated. Unitel argued that future productivity growth should be similar to historic productivity growth estimated using cost weights. Unitel suggested annual productivity gains of 2.6% to 3.3% per year for Bell, and about 3.7% per year for B.C. Tel. 4. Operating Revenues In argument, Unitel suggested that Bell's Reference Plan incorporates forecasts of demand and revenues which cannot be reconciled with earlier Bell forecasts. In response to Unitel's initial set of interrogatories in June 1990, Bell provided demand and revenue forecasts which were based on the company's 1990 January View. Bell's Reference Plan (filed in November 1990) and the company's responses to December 1990 interrogatories, were updated to reflect the company's 1991 January View. Unitel, in argument, raised several questions about the changes between the two forecasts and questioned the reliability of Bell's forecasting process. Unitel expressed concerns over Bell's explanation for approximately 49% of the change in demand which Bell attributed to a residual category. Unitel argued that the testimony of Bell's witness on this subject raised more questions than it answered. Bell argued that not all changes from one forecast to another can be quantitatively related to specific variables. The company noted that there was a substantial deterioration in expectations regarding the economy in the 1991 View as compared to the 1990 View. The view-over-view variations in the early years of the forecast, when projected through the entire forecast period, produced a significant difference in the latter years of the forecast. In reply, Unitel criticized Bell's approach to forecasting which projected the variations between the forecasts in the early years through the remainder of the forecast period. Unitel argued that Bell would have been more prudent to use an average of the long-term trend in growth. In Unitel's view, this would have made the latter year projections less volatile between forecasts. Unitel argued that B.C. Tel's Reference Plan incorporates an unrealistic forecast of the growth in overseas traffic because the company's forecast projects a continuation of the strong growth in overseas traffic, that B.C. Tel has experienced recently, throughout the life of the Reference Plan. Furthermore, Unitel suggested that if B.C. Tel's forecast is accurate, B.C. Tel will derive the largest portion of toll revenues from the overseas market instead of the intra market which currently accounts for the largest portion of the company's revenues. Unitel also noted that Bell does not anticipate a comparable continuation of past growth rates in the overseas market. B.C. Tel argued that the company expects the historically strong growth in the overseas market to continue because of the importance of the Pacific Rim to the B.C. economy. The company also argued that the proportion of overseas MTS revenue as a percentage of total MTS revenue doubled during the years 1981 to 1991. B.C. Tel suggested that the company's estimate of a large proportion of revenues in the overseas settlement at the end of the Reference Plan is a function of the relatively high overseas average revenue per minute and not of the company's estimate of overseas minute growth. In reply, Unitel argued that B.C. Tel draws flawed conclusions when it compares the growth in overseas revenues during the period 1986 to 1990 with the growth forecast in the Reference Plan, because of the importance that the overseas rate reductions after 1988 had on the traffic growth. Unitel notes that B.C. Tel did not respond to Unitel's point made in argument that Bell does not believe that the historical rates of growth can continue. Finally, Unitel suggested that B.C. Tel is inaccurate in its submission that the high proportion of overseas revenues in the Reference Plan is mainly a function of the average revenue per minute. Unitel argued that Bell's forecast of Monopoly Local (ML) revenues is unrealistic and inconsistent with past experience. Unitel noted that Bell's estimated 4.4% per year growth in ML revenue per Network Access Service (NAS) was approximately four times B.C. Tel's estimate of 1.1% per year. Unitel submitted that, since Bell proposed to maintain existing local rate levels with the company's Reference Plan, growth in ML revenue per NAS must therefore come from growth in optional services (such as Call Management Services (CMS) and Custom Calling Features) or Extended Area Service (EAS) upgroupings. Unitel also noted in argument that, according to Bell's Reference Plan, the ML surplus will exceed the Monopoly Toll (MT) surplus by the year 2002, which is a result of the ML revenues growing at a rate of approximately 4% per year while ML costs grow by approximately 1.5% per year. The surplus in the ML category can then be applied to toll rate reductions. Bell noted in its technical papers that approximately two-thirds of the growth in ML revenues will come from optional services which can be provided at low costs as a result of its technology base. Bell argued that the actual growth in ML revenue per NAS over the period 1987 to 1990 was 4.5% and the forecast growth during the Reference Plan period is in line with the company's past experience. Unitel termed this comparison misleading, noting that the three-year historical period included an upgrouping of the Toronto exchange as a result of EAS. Unitel argued that the upgrouping was the major reason for the growth in ML revenues during the years 1987 to 1990 and this would not continue over the life of the Reference Plan. B.C. Tel argued that its forecast of ML revenues may have been too conservative, stating that the company did not consider including revenue growth from optional services. Bell also noted in its argument that B.C. Tel indicated that the company's forecast may have been pessimistic. Unitel replied that B.C. Tel had not originally anticipated the steep revenue growth which Bell has forecast and considered B.C. Tel's willingness to back away from its original ML forecast a reason to question the stability of all of B.C. Tel's forecasts. 5. Conclusions The rating initiatives in the Reference Plans depend in part on long-term forecasts of surplus revenues which are above the respondents' allowable earnings. Surplus revenues can result from a number of sources, including reductions in interest rates, cost efficiencies, growth in demand and increases in revenues from discretionary and competitive services and activities. The Commission notes Unitel's concerns arising as a result of the two differing forecasts of toll demand and revenues submitted by Bell over the course of the proceeding. However, the Commission agrees with Bell that there was a substantial deterioration in the generally held expectations for the economy between the dates when the company's two budget views were prepared. While the Commission considers that the effect of such a short-term deterioration in demand would not necessarily reflect the rate of longer-term growth, it has accepted Bell's revised forecast of toll demand as a basis for its analysis, since the January 1991 View provides a more accurate point of departure. The Commission agrees with those parties who supported reducing Canadian long distance prices so as to narrow the difference between U.S. and Canadian toll rates. Moreover, the Commission considers that targeted discounts, such as those proposed by the respondents, represent a reasonable approach to reducing long distance rates. However, the Commission is not persuaded that the objectives contained in the respondents' Reference Plans could be fully achieved without the requirement to raise local rates. The Commission is of the view that Bell and B.C. Tel have overestimated future productivity gains, and underestimated future toll costs in their respective Reference Plans. For example, the Commission has concerns that Bell's ratio of inputs and outputs is too low for the rate of growth projected, and that the forecasted rate of acceleration in technological change may be too high. Productivity studies are used to identify reasons for historical unit cost changes and to aid in projecting likely future unit cost levels. Future rates such as those projected in the Reference Plans are estimated in part from projected future costs. Given rapid growth in toll output, and the significant contribution from toll revenues to access costs, use of revenue weights to aggregate outputs could distort and overstate historical productivity growth. The overestimate may be sizable, as indicated by Bell's statement that its productivity growth estimated using cost weights is only about half of its productivity growth estimated using revenue weights. The Commission recognizes that the required cost weights may not always be available. Nonetheless, for the reasons noted above, the Commission considers that productivity growth is more accurately estimated using cost weights to aggregate outputs. The Commission considers that a realistic estimate of future productivity growth rates likely to be realized by the respondents can be obtained by extrapolating historical productivity growth rates, estimated with cost weights, over a reasonably long period of time. The Commission agrees with Unitel that a portion of the productivity gains realized by Bell and B.C. Tel in the years 1986 to 1990 is due to changes in income taxes and interest rates, and thus the productivity gains realized in this period by Bell and B.C. Tel are not completely indicative of the more general trend likely to be exhibited in future productivity growth. The Commission also agrees with British Columbia that Bell and B.C. Tel have not substantiated all future cost reductions built into the Reference Plans. In the opinion of the Commission, productivity growth at historic rates can also be reflected in a forecast of future toll costs if future unit costs are estimated by extrapolating unit cost reductions achieved by respondents in the past. This methodology extrapolates historical productivity gains from changes in scale and technology to the future, to the extent that both scale and technology may have contributed to productivity gains in the past. For Bell and B.C. Tel, historical costs can be obtained from Five Way Split or Phase III studies filed in this proceeding. The Commission is aware that difficulties may arise when extrapolating Five Way Split and Phase III cost trends. However, the Commission has taken this into account in making its assessment of the respondents' costs. Bell's historical unit toll costs, as calculated on a Five Way Split and Phase III basis, have decreased from $0.2292 per minute in 1979 to $0.1006 per minute in 1990, or at an average rate of decline of 7.2% per year. B.C. Tel's unit toll costs decreased from $0.2517 per minute in 1980 to $0.1409 per minute in 1990, or at an average rate of 5.7% per year. However, the Commission notes that the data for B.C. Tel are incomplete, and that, as a result, the average rates for B.C. Tel could in fact be somewhat higher than those shown here. The Commission has taken this into account in projecting future unit costs. Somewhat greater cost declines were observed more recently. Bell's unit toll costs declined by 10.5% per year and B.C. Tel's by 8.4% per year during the period 1986 to 1990. To project toll costs for the financial analysis of the applications, based on the trend in historical cost levels, the Commission assumed that Bell's costs per minute would decline by 7.5% per year in real terms, commencing in 1993, and B.C. Tel's costs would decline by 7% per year, also beginning in 1993. The Commission did not attempt to preserve the observed historic relationship between cost decline rates for Bell and B.C. Tel because, as noted above, the data for B.C. Tel are less complete than for Bell. With the inflation rate of 5% per year assumed by both applicants and respondents, Bell's toll costs decline to $0.088 per minute by 2002, and $0.078 per minute by 2007. B.C. Tel's costs are estimated to be $0.111 per minute by 2002, and $0.101 per minute by 2007. Further, the Commission has concerns about the differences in the local revenue growth rates employed by Bell and B.C. Tel and the implications this has for the accuracy of the forecasts of surplus revenues. While the Commission accepts that Bell's ML revenues will increase in the early years of the Reference Plan, due to the growing importance of optional local services, the record does not support the conclusion that ML revenue per NAS will continue to grow at a rate that exceeds 4% in the long term. Accordingly, the Commission has assumed that Bell's growth rate will stay at or below 4%. With respect to B.C. Tel, the Commission notes that the company suggested at the hearing that it may have underestimated growth in this area. The Commission agrees that B.C. Tel's forecast is too conservative and considers that an average annual growth over the life of the Reference Plan of 2% in B.C. Tel's ML revenue per NAS is a more appropriate estimate. While a 2% rate of growth is still well below Bell's, the Commission does not consider that the record supports adjusting the rate for either respondent in order to reduce the difference further. In Teleglobe Canada Inc. - Regulation After the Transitional Period, Telecom Decision 91-21, 19 December 1991 (Decision 91-21), the Commission ordered certain reductions to overseas rates. The Commission notes that, except for B.C. Tel, the respondents did not include any overseas rate or settlement reductions in their Reference Plans. Under the amendments to the Interconnection and Operating Agreement between Teleglobe and Stentor approved by the Commission in December 1991, Stentor's settled revenue per minute was reduced. The Commission anticipates that overseas rates will continue to decline due to anticipated reductions in the amounts retained by Stentor and in foreign accounting rates. Reductions in the amounts retained by Stentor will divert surplus revenues that would have otherwise been used to fund the rate reductions in the Reference Plan. This also applies to some lesser extent to B.C. Tel's Reference Plan, as the reductions included were not as great as those expected by the Commission. For the reasons outlined above, the Commission is of the view that, if the Stentor Reference Plan were implemented, the overall pricing objectives of the plan would not be fully achieved within the time frames anticipated by the respondents. The Commission does not agree with Bell that average rate reductions of 55%, exclusive of overseas rates, are attainable by the year 2002 (equivalent to 46% average over all settlements, assuming no decreases in overseas rates). A cumulative rate reduction of approximately 40%, affecting all settlements including overseas, is more realistic in the Commission's view. Finally, the Commission acknowledges that Stentor members generally support the rating initiatives included in the Reference Plans filed during this proceeding. The Commission is mindful that the respondents appear to lack an agreement on specific rate reductions. Based on the financial forecasts provided during this proceeding, it would appear that Bell will be able to generate relatively more surplus revenues and reduce rates more frequently than the other respondents. Therefore, the Commission anticipates that Bell would initiate many of the long distance rate reductions. While the Commission agrees with Bell that it could reduce its toll rates without increasing its local rates, the Commission is of the view that Bell's toll reductions would cause some of the other respondents and non-respondents to increase local rates. The Commission notes that MT&T, Island Tel and Newfoundland Tel have indicated that they would likely have to increase local rates to offset revenues lost through the RSP because of toll rate reductions implemented by Bell. The Commission considers that more benefits would be achieved if the respondents were to implement their pricing strategies, but in a more competitive environment. Competition would not only provide a strong incentive for the respondents to continue to minimize costs, but would also offer users a level of choice and supplier responsiveness that cannot be replicated in a facilities-based monopoly environment. Moreover, competition would result in a more dynamic, responsive and market driven pricing structure than proposed under the Reference Plans. While the most lucrative customers would be primary targets in either a single-supplier or competitive environment, the dynamic interplay amongst suppliers and potential customers is more likely to spread the benefits of lower prices and choice to other user groups as suppliers more quickly respond to underserved market segments in order to capture market share. In this proceeding, the respondents contended that adopting the Reference Plan presented a better alternative to increased competition. The Commission does not agree with this position. The Commission considers that competition spurs companies to reduce costs. In fact, the Commission considers that the threat of facilities-based entry and the current resale environment as well as bypass opportunities have been factors that have contributed to recent productivity improvements. If the Commission determined that it would not permit entry in this proceeding, it would not only diminish the threat of future entry but also diminish the degree of competition currently in place under the Decision 90-3 Resale rules, since the Reference Plan rate reductions are aimed at some of the same market segments served by resellers. C. Effect of Entry on ProductivityUnitel argued that its entry would result in pressure on the telephone companies to achieve greater increases in efficiency than had been accomplished during the current monopoly environment. Unitel submitted that productivity gains resulting from entry would help to counteract the impact of entry on the respondents and reduce the need for any local rate increases. BCRL submitted that new technology would diffuse more quickly in a competitive environment than under the respondents' Reference Plans. Consequently, it expected the respondents' productivity and costs to improve with competition. Unitel provided a number of recent documents from several of the telephone companies (including Bell, B.C. Tel, SaskTel, Newfoundland Tel and NBTel), in which reference was made to the cost-reducing and performance-enhancing effect of the more competitive environment in which these companies perceive themselves to be operating. Unitel stated that productivity in the U.S. grew faster during the ten-year period after the 1977 court decision that permitted MCI to provide private line service in competition with AT&T's interstate MTS and WATS than during the ten year period prior to the decision. In order to determine the source of observed productivity growth, Unitel examined both an index of productivity in the U.S. telecommunications industry and regression equations correlating this index to indices of industry output, technological change and competition. Unitel concluded that, after allowing for the effect of output growth and technological change, competition had improved productivity. Unitel reached the same conclusion from its analysis of cost functions estimated for the American telecommunications industry. Unitel also submitted a study showing that competition and privatization were a major source of productivity improvement for Nippon Telephone and Telegraph (NTT), Japan's dominant domestic telecommunications service provider. The Director submitted a study that suggested that competition in the U.S. long distance market began in about 1972. According to the Director's witness, during the period 1971-1983, the FCC allowed customers to connect their own terminal equipment and also allowed entry by new long distance carriers. The study concluded that productivity growth has increased by about 0.2% per year since that time. The study also estimated that, following the Commission's decision to permit competition in the terminal equipment market, Bell's productivity increased by about 0.6% per year. Bell and AGT stated that the evidence of the Director was inconclusive because of, among other things, uncertainty as to the date at which competition actually started in the U.S. The respondents argued that their past productivity performance in the single-supplier environment has been very high, and that this performance could be expected to continue into the future. The respondents and Saskatchewan maintained that competitive entry would, in fact, reduce the incumbents' productivity because of factors such as: (1) the incurring of network modification costs; (2) increased operations, administrative, connection and regulatory costs; and (3) slower reductions in unit costs due to foregone economies of scale. Bell, B.C. Tel, and others noted that 1972 and 1977 are the most likely dates at which competition could be said to have started in the U.S. These parties stated that, if Unitel's productivity data are examined beginning in 1951, average annual productivity growth rates for the period without competition are not less than those for the period with competition, regardless of which date is used. Bell suggested that Unitel's underestimation of recent technological changes and its failure to adjust its data to reflect changes in U.S. rate structures may be responsible for its finding that competition (as opposed to technological change) has improved productivity in the American industry. Both Bell and B.C. Tel raised methodological concerns with respect to Unitel's regression equations relating productivity to output, technology and competition. B.C. Tel, Bell, and AGT stated that the cost functions do not satisfy all conditions normally required by economic theory. Unitel replied that its productivity conclusions are substantially unchanged if the equations are re-estimated to satisfy the conditions required by economic theory. Several parties noted that Unitel's interpretation of the experience of Japan, as well as the United Kingdom (U.K.), with privatization and competition does not permit a separate assessment of the effect of competition and of the impact of privatization on productivity. The Commission is of the view that the econometric or statistical evidence related to the effect of entry in other countries is inconclusive, due to factors such as the simultaneous occurrence of other events in those countries that may have affected the results (for example, modernization, liberalization and rate restructuring), problems with the quality of the data, and/or the effect of macroeconomic influences. For example, while the Director's evidence suggests that productivity growth in the U.S. was higher during the 1970s than in earlier or later decades, it is unclear the extent to which growth during this period was due to technology, output growth, or competition. Since the statistical or econometric evidence is inconclusive, the effect of entry on the respondents' productivity cannot be forecasted with accuracy. However, competition is a fundamental characteristic of the market structure in Japan, the U.K. and the U.S. Moreover, the Commission notes that government policy in these countries with respect to competition is proactive and the incumbent carriers would, of necessity, have had to respond to this. As discussed above, the Commission is of the view that competition would lead the respondents to increase their efforts to minimize costs and improve productivity. The Commission considers this view to be consistent with economic theory and supported by qualitative evidence filed in the proceeding, particularly the documents filed by Unitel indicating the recognition of this influence by the respondents, and the statements by some of the respondents to this effect. The Commission has therefore incorporated this into its analysis. D. Non-Price Market StimulationUnitel submitted that non-price market stimulation would help to counteract any negative impact that competitive entry might have on the respondents, thus reducing the need for any local rate increases. Unitel's position was that competing companies strive to offer customers better products and services, and to communicate more effectively through improved sales and advertising. Unitel submitted that customers respond by increasing their purchases, resulting in market expansion over and above any growth caused by rate reductions. In support of its position, Unitel submitted evidence which stated that the market is expanded as new users are attracted by increased marketing efforts and as existing users find new uses for services or increase the frequency or level of usage. Unitel also cited several papers that examined market demand in the U.S. and one that examined Bell's market for terminal equipment. Unitel submitted that the demand models examined in these papers had incorporated a new variable capturing market stimulation as an aid to more accurately predicting market growth. Disputing the conclusions that Unitel drew from the demand model papers cited, Bell took the position that the market is already being stimulated by non-price factors, and that competitive entry would have little, if any, additional effect. Bell presented criticisms by the authors of the demand model papers cited by Unitel, in which those authors declared that Unitel had misrepresented their findings, either with respect to the inclusion of, or need for, a new variable, or with respect to other effects, such as technological advance, captured by these variables. With respect to its own Demand Model, Bell maintained that the effect of the introduction of competition on its new variable could not be divorced from other factors. Bell countered Unitel's evidence regarding increased growth related to competitive entry by asserting that Canadian growth rates, absent competition, have outstripped U.S. growth rates, with competition. Bell examined market growth patterns in the U.S. from the time of divestiture and concluded that competition did not have a stimulative effect in the U.S. B.C. Tel presented a similar analysis of U.S. minute growth, and found that no new variable was required to explain growth. Unitel disagreed with the methodology employed by Bell and B.C. Tel and, specifically, with Bell's conclusions based on American data during the period of divestiture. Bell also examined demand and revenue growth patterns for AT&T and the Other Common Carriers in the U.S. and for Bell in Canada over the period 1985 to 1989, and concluded that neither message, minute nor revenue growth in the U.S. exceeded Canadian growth rates. B.C. Tel performed a similar comparison of U.S. minute and revenue growth rates against its own over the period 1984 to 1989, and concluded that the U.S. market did not expand faster than the B.C. market. Unitel performed its own analysis, which, it submitted, indicates that such comparisons are unreliable. Bell submitted that the evidence regarding causation and quantification of market stimulation is speculative, and that no empirical evidence had been submitted to support Unitel's proposition. Bell was supported in this view by Newfoundland Tel, Alberta, British Columbia, Ontario, Quebec, Saskatchewan, AGT, BCOAPO, the City of Calgary and CWC. The Commission notes that there was considerable disagreement about the means of ascertaining the causes of market growth. The Commission agrees with Saskatchewan that attempts to ascertain precise causal relationships in the international arena are frustrated by the fact that other events coincided with the introduction of competition. However, the Commission notes that Bell, B.C. Tel, NBTel, Ontario and CAC recognized the phenomenon of competitively-induced, non-price market stimulation. Bell acknowledged that one of the variables in its own Demand Model was designed to capture growth resulting from structural changes following Bell Canada - Interim Requirements Regarding the Attachment of Subscriber-Provided Terminal Equipment Telecom Decision CRTC 80-13, 5 August 1980 (Decision 80-13). In past decisions, the Commission has also recognized the phenomenon of competitively induced non-price market stimulation. In the opinion of the Commission, the need for competitors to capture market share will result in increased sales and marketing efforts and consequently increased information in the marketplace. In order to gain market share, suppliers will have to be more responsive to the variable needs of individual market segments. The result will be greater product differentiation in services and an increased number of price options. Increased awareness of more attractive and user-specific packages and prices should result in users maximizing telecommunications inputs and could, in turn, accelerate the process of substitution of telecommunications for other inputs in the production process to enhance competitiveness. The Commission notes concerns regarding the use of any estimate of non-price market stimulation in any financial analysis. However, in the Commission's judgment, there would be some positive non-price stimulation in the market as a result of entry and this should therefore be incorporated into the Commission's analysis. E. The Costs of Entry and Respondents' Cost of Capital1. Costs of Entry Respondents argued that entry would increase industry costs because of lost economies of scale or scope and because of the required network modification costs, and ongoing switching and aggregation costs. In addition, respondents submitted that there would be additional cost or revenue requirement effects attributable to entry. For example, in its financial model, Bell assumed that marketing, advertising, sales and administration costs would not decline as a result of lost market share. MT&T, Island Tel, NBTel, and Newfoundland Tel argued that Unitel's entry would increase their costs, since nearly all of Unitel's minutes would be carried by the companies' networks. The companies also stated that the efficiency of network design and planning would decrease, leading ultimately to a less efficient network and higher costs. Several interveners, including Ontario and CWC, agreed with respondents that entry by Unitel and BCRL would increase telecommunications costs because of network and switch modification costs and higher operating costs. NAPO also suggested that competition and equal access would cause some cost increases and duplication of facilities. Ontario argued that competitive entry could increase advertising and marketing expenditures, expenditures that could otherwise have been used to modernize the network. The Commission is of the view that entry will increase industry costs because of the required network modification costs and ongoing switching and aggregation costs. To the extent that the respondents face shortfalls due to contribution discounts or are required to absorb start-up costs, particularly in the short term, they would experience downward pressure on their net operating revenues. However, most ongoing costs related to carrying entrants' traffic would be recovered through tariffed rates. The Commission's views on the recovery of start-up and ongoing costs are set out below in Part III. The Commission agrees with respondents that some costs such as marketing and sales may increase in a competitive environment. However, the Commission notes that it has found the evidence in this proceeding on economies of scale and other characteristics of the costs of producing telecommunications services to be inconclusive. In view of this, the Commission is unable to conclude that the respondents' unit cost levels would necessarily increase with reductions in output. The Commission also notes that Bell indicated that the effect of entry on toll costs could depend on how the book value of existing toll plant is reduced in a competitive environment. The Commission cannot therefore conclude that a market structure change from the single supplier environment will of itself necessarily raise the unit cost levels for the respondents. 2. Respondents' Cost of Capital A number of respondents stated that their business risk would increase as a result of competition. The respondents made different assumptions about the impact that this increase in business risk would have on their respective costs of capital. Bell, for example, stated that the company's cost of capital would likely increase. However, it did not provide an estimate of that increase. The company stated only that the magnitude of the increase would depend upon the specific terms and conditions of entry. In its evidence, B.C. Tel estimated that its ROE would need to increase by 50 to 100 basis points to offset the increase in business risk as a result of competition. The company estimated that a 50 to 100 basis point increase in its ROE would translate to a revenue requirement increase in the order of $20 to $40 million per year, five years after entry was allowed. B.C. Tel referred to a Bell exhibit in which Bell had compared its risk premium over long-term Government of Canada bond yields to the risk premium of the U.S. Bell Operating Companies over U.S. treasury bonds and concluded that this analysis alone indicated that there could be an increase in Bell's required rate of return in the order of two to three percentage points in a competitive environment. In final argument, MT&T and Island Tel stated that their costs of capital would increase with the increase in business risk that they would bear with competition. Both companies noted further that an increase in the percentage of common equity in their capital structures would be required as well, to mitigate some of the increased business risk. British Columbia argued that B.C. Tel's ROE should not be increased given that part of the company would still be a monopoly. British Columbia admitted, however, that it might be necessary to allow a higher ROE for that portion of the company subject to competition. Unitel stated that, in its opinion, no respondent provided an adequate basis for predicting an increase in its cost of capital as a consequence of Unitel's entry. In Unitel Exhibit 173, Unitel noted that there had not been an upward trend in either AT&T's allowed rate of return or in the proportion of its common equity from 1984 to 1990, during which time divestiture occurred. Ontario noted that 24% of the additional revenue required by B.C. Tel in its analyses resulted from B.C. Tel's assumption as to the effect of increased risk on the company's cost of capital. Ontario noted that MT&T had also increased its cost of common equity. Ontario stated that such increases, due to increased risk, have not yet been found to be just and reasonable. The Commission considers that in order to assess whether, as a result of competition, the respondents' costs of capital should increase, it would be necessary to take into account all the changes to the companies' level of risk as a result of competitive entry. For example, the level of risk might vary depending on such factors as the actual rate of market share lost and the rate of growth in market demand that is anticipated by investors. In determining the companies' allowed ROEs following entry, the Commission would also have to consider any changes in the economic and operating environments since allowed ROEs were last set. F. Revenues of the Respondent Telephone Companies, Affordability and Accessibility of Local ServiceUnitel considered that universally affordable telephone rates could be higher than existing local rates without any reduction in the penetration rate. However, it was Unitel's position that revenue migration from the respondent telephone companies to Unitel as a result of competitive entry would be mitigated by a combination of: (1) increased market size due to non-price market stimulation; (2) reduced costs to the telephone companies due to productivity gains and to reductions in traffic-sensitive costs; and (3) contribution payments from Unitel. BCRL argued that higher local rates need not threaten universality. BCRL noted that no decrease in penetration has been measured as a result of significant rate increases arising from upgroupings due to the implementation of EAS. BCRL also contended that revenues from new optional local services, combined with its proposed contribution payments, would obviate the need for local rate increases. The respondents argued that entry, particularly as proposed by the applicants, would cause significant shortfalls in net operating revenues, resulting in pressure to raise local rates. Among the causes cited by the respondents were: increased costs due to entry, loss of market share, contribution discounts and adjustments and contribution avoidance. The respondents argued that there was no evidence to support conclusions that revenue erosion would be offset by productivity gains and market stimulation due to entry. Newfoundland Tel declared that, while Unitel is not proposing to actively market its services in Newfoundland until 1995, it would experience revenue losses prior to that date through the RSP. The respondents took the position that the current level of contribution is not sustainable in a competitive environment and that rate rebalancing would be inevitable. Bell estimated that, in addition to the monthly charge for local service, a subscriber line charge of $8.75 per month would be required from all subscribers in order to bring interexchange carrier contribution down to the American level. There are a number of factors that influence the revenue shortfalls that the respondents may experience as a result of entry. These include productivity improvements, market stimulation, costs of entry, loss of market share and the level of contribution payments. The annual impact on the total operating revenues of the respondents, including the non-toll operations, would vary, particularly in the short-run, due to expenses associated with the unrecovered start-up costs and contribution discounts. The Commission notes that there are a number of different factors that affect the companies' revenues and costs, notably the RSP-related impacts of the planned rate reductions of the Reference Plans. As noted above, the Commission considers it reasonable to assume that there would be an entry-related productivity impact, as respondents will have a greater incentive to increase efficiency and minimize costs. As well, expansion of the market due to entry will help to offset the revenue impact of entry on the respondents. While the Commission cannot predict with certainty the extent to which the respondents may be able to minimize their costs in response to entry or the extent to which total market demand could increase due to non-price market stimulation, the Commission has examined quantitative estimates of the effects of productivity improvements and market stimulation for each of the respondents. Assuming only a productivity improvement arising from competition, the Commission estimates that the shortfalls in the respondents' revenue requirements remaining after compensation for contribution and the costs of entry could be offset by annual productivity improvements of less than 0.5% annually from 1993 to 1997. Assuming only non-price market stimulation arising from competition, the Commission estimates that such shortfalls could be offset by non-price stimulation of approximately 1% annually from 1993 to 1997. The Commission notes the analysis by Ontario which indicated that, for most respondents, the impact of entry on local rates is marginal when the respondents' estimates are adjusted to reflect projected inflation. In particular, Ontario noted that the nominal increase in local rates projected by Bell would be less than Bell's forecasted rate of inflation. The Commission also agrees with Ontario that the impact of entry on local rates is difficult to separate from the impact of the Reference Plans in conjunction with the RSP. However, the Commission does not consider that any possible local rate increases attributable to entry, once adjusted for inflation, would cause any diminution of universally affordable service. In fact, the record of this proceeding demonstrates that the plans of the Stentor members to lower toll rates could, through the RSP, have a more dramatic impact than entry on the local rate levels of some of the respondents. Competition, under these circumstances, and particularly with adequate contribution payments, should not reduce penetration levels or increase local rates by any significant amount. Furthermore, even if contribution payments were set so low as to result in large local rate increases, the Commission is of the view that penetration need not decrease. Evidence with respect to the U.S. indicates that penetration rates rose slightly after the FCC decided that it would rebalance rates and imposed a subscriber line charge. Affordability becomes a greater concern if rate rebalancing is undertaken. However, the Commission does not consider that the terms and conditions for entry set down in this Decision will lead inevitably to extensive rate rebalancing. As stated by Unitel, although MTS/WATS competition was introduced in the U.S. in 1977, it was not until 1984 that rate rebalancing was adopted. In this context, Unitel noted the testimony of its witness on contribution and on the experience in the U.S., who stated that rate rebalancing was an explicit policy choice in the U.S. and that it does not necessarily accompany competition. The Commission considers that rate rebalancing would involve an explicit policy decision that is quite separate from a decision to allow competition. In this proceeding, CAC raised the issue of how best to measure affordability. CAC considered the existing indicators of affordability and accessibility (penetration rate and the level of the local rate for basic service) inadequate. CAC suggested that affordability should be examined using a broader indicator that would include all elements of the subscriber's telephone bill, such as optional services, maintenance charges, installation charges and long distance charges. In the opinion of the Commission, the best measures of affordability are the charges for basic monthly service and for installation, since it is these charges that determine an individual's ability to access the network. Contrary to the argument of CAC, optional services are, by definition, discretionary. As such, they may or may not be more valuable to consumers than long distance or non-telephone purchases. The Commission also considers that an assessment of the total bill for basic and toll service, particularly in terms of the impact on low-income subscribers, would provide a useful measure for assessing affordability. While universal accessibility and affordability may not be threatened by higher local rates, the concern of some parties is whether low income groups, which already have lower penetration rates, could be forced to shift a greater proportion of disposable income towards telephone service under a scenario involving competition and rebalancing. The Commission considers that, with contribution charges set at an adequate level, the impact of competition on local rates will be minimized sufficiently that there will be no need to address targeted subsidies. G. Independent Companies and Non-Respondent Members of Stentor1. Independent Companies Unitel indicated that it would, where feasible, terminate its calls in the independents' serving territories through the respondents' toll switches or via WATS. Unitel viewed these arrangements as interim measures until it obtained interconnection with each of the independents. Unitel indicated that it will not originate long distance interconnected switched voice traffic within independents' serving territories while negotiations are underway. Unitel stated that the method of interconnection and level of compensation should be a matter for negotiation. Unitel also stated that the method of interconnection may vary depending on the circumstances but could include interconnection at the independents' respective end offices and indirect interconnection at the toll office serving the independent. Unitel stated that it intends to compensate the independents at the same level, although not necessarily on the same basis, as the independents would be compensated by their respective connecting carriers. Unitel submitted that mandated or predetermined interconnection arrangements with independents are inappropriate in the context of this proceeding. BCRL stated that it intends to pursue negotiations concerning interconnection agreements with independents once its application is approved. BCRL stated that if such agreements are not reached prior to the initiation of any service which results in BCRL-originated traffic being terminated in independent exchanges, such traffic will be terminated using resold WATS. BCRL stated that it will not offer services in the territory of any independent, nor knowingly provide service to a customer of an independent, unless there is in place an approved agreement between the independent company and BCRL for the interconnection and carriage of such traffic. Bell stated that, under existing settlement arrangements with independent telephone companies, any scenario with lower toll rates, including the Bell Reference Plan, may eventually have certain adverse effects on these companies. Bell further stated that, as regards facilities-based entry, it appears unlikely that existing settlement arrangements designed in a monopoly environment would survive unchanged. In Bell's view, MTS rate reductions could be considered to be the major potential influence on independents' settled revenues. EdTel considered that a relatively small settlement revenue impact would result from the approval of the applications. EdTel and CITA/OTA requested that, should the applications be granted, the Commission direct that no traffic be accepted from or delivered to any subscriber of an independent until an interconnection agreement is reached between the IXC and the independent. EdTel and CITA/OTA also requested that certain terms of interconnection and compensation be met and that the IXC be directed to pay compensation to the independents at the level which they now receive from their existing toll carriers. EdTel also requested that the Commission prohibit termination of WATS traffic without compensation to the independent. Ontario submitted that Unitel's plan did not account for the use of the independents' facilities for the termination of traffic and that Unitel appeared to be relying on arrangements between Bell and the independents to compensate these companies. Ontario submitted that BCRL had made no attempt to consider appropriate mechanisms by which to adequately compensate non-respondent telephone companies and ensure their subscribers' rates remain affordable. Ontario argued that the Commission should require any IXC to pay the costs for the use of an independent's local network and to pay the necessary contribution to the support of the local service. Quebec submitted that the positions of the applicants regarding the independents are ambiguous. Consequently, Quebec argued that the Commission should order any successful applicant to negotiate and reach agreement with the independent companies prior to beginning the operation. Québec Tel submitted that the Commission should set terms of compensation and contribution applicable between the applicants and Québec Tel. Long distance rate reductions are likely to result in reductions in independent settled revenues. However, as long distance rate reductions are expected to occur absent entry, the Commission is of the view that this impact cannot be attributed to entry. The Commission considers that it would be inappropriate to require Unitel or BCRL to negotiate interconnection agreements with independents prior to beginning their operations. The Commission notes that it does not regulate the independents, and does not have the authority either to impose settlement or interconnection arrangements on the independents or to establish tariffs to be charged by the independents for the interconnection of IXCs to their local networks. A requirement for Unitel or BCRL to negotiate interconnection agreements with independents prior to entry could result in a lengthy delay in the implementation of the Commission's decision to permit entry. Concerning the terms of any such interconnection, the Commission considers that these are appropriate matters for negotiation between any successful applicant and the independents. The Commission notes that Unitel indicated that it will commence negotiations with the independents as soon as it receives approval of its application and that it would propose to compensate them at the same level as would apply to their existing connecting carriers. In addition, the Commission notes that, as identified by Bell, it is possible that Unitel's or BCRL's traffic could be originated or terminated in independents' territories, in the absence of interconnection agreements between entrants and independents, via Direct Access Lines (DALs), resale or interconnection with respondents' facilities. The Commission notes, as set out below, that it has imposed restrictions on the use of 800 Service to originate competing long distance traffic in non-respondent territories. The Commission expects the applicants to meet their commitments not to originate traffic within the independent territories by any other means. If the Commission's view, any potential impacts on the independents attributable to traffic arrangements would be best dealt with through negotiations between the IXCs, independents and their existing connecting carriers, subject to whatever regulatory approvals are required, rather than through limitations imposed by the Commission. Based on the above, the Commission concludes that no further action is required at this time with respect to compensation and interconnection arrangements between the applicants and independents. 2. Non-Respondent Members of Stentor Unitel proposes to pay contribution surcharges on each switched access line connected to the respondents' PSTNs in order to compensate non-respondent Stentor members for the loss in settled revenue. Bell noted that Unitel's proposal would help to defray part of the impact of competition, but argued that there would remain a shortfall for the non-respondent members. Additionally, these companies would suffer, to some extent, the negative impact of the costs incurred by the respondents in order to accommodate entry, which would be reflected in the revenue settlement process. Saskatchewan submitted that, over the period 1993 to 2002, SaskTel's total revenue requirement shortfall due to entry by Unitel and resellers would be in excess of $200 million. Saskatchewan stated that, given the magnitude of the subsidy from message toll to local/access, such a decrease in SaskTel's ability to subsidize basic service would affect subscribers in rural and remote areas to a greater degree than urban subscribers. In addition, SaskTel would experience many potential cost increases as a result of competitive entry. Such cost increases would be attributable, among other things, to the increased complexity of Stentor operational support systems, which would require modification in order to function in a competitive environment. AGT stated that it is particularly vulnerable to entry under the terms proposed by Unitel because of AGT's high level of dependence on toll revenues. AGT stated that approval of Unitel's application would cause AGT to lose $6.8 million in settled revenues during the 1993 to 1995 period, as a result of RSP impacts arising from the respondents' lost market share. The Commission notes that, as indicated by Unitel, Saskatchewan did not adjust its costs to reflect a decrease in traffic transiting Saskatchewan. The Commission also notes that, in its analysis, Saskatchewan assumed that the respondents would not provide any compensation for lost contribution to the non-respondent members. The Commission considers that the impact of competition on Stentor members, including non-respondent members, can be mitigated by a contribution mechanism that is based on an amount associated with revenues settled between members of Stentor through the RSP, and therefore better reflects the manner in which member companies settle revenues among themselves. The Commission is of the view that this approach would reduce the revenue impact estimated by Saskatchewan and AGT. This is discussed in Part III below. H. International Competitiveness, Interexchange Service Rates, Choice, Supplier Responsiveness, R&D and InnovationUnitel expressed concern that, if public long distance voice competition is not introduced, Canada could become less innovative and less productive than countries that have introduced such competition. Unitel and BCRL both noted that, throughout the regional hearings, companies of all sizes discussed the importance of telecommunications to their operations and to their positions relative to competitors located in the U.S. All respondents submitted that there is a need to lower long distance rates to ensure international competitiveness. Their proposed Reference Plans were designed to deliver lower rates. Respondents submitted that allowing entry would jeopardize this goal. The respondents considered that, overall, price levels in Canada compare favourably with those in countries where long distance competition has been introduced. They noted that the mix of services used by Canadian residential subscribers is priced lower in Canada than in the U.S., while Canadian business customers who use high volumes of long distance services pay more than in the U.S. Bell, B.C. Tel, MT&T and Island Tel considered parity between Canadian and U.S. interexchange rates for high volume users to be a very important goal, and a key benefit, of their Reference Plans. Newfoundland Tel also supported parity between Canadian and U.S. toll rates. Bell argued that Unitel and BCRL have made no commitment to delivering lower rates comparable to those set out in its Reference Plan. Unitel submitted that the benefits of competition are not exclusively, or even primarily, related to the lowering of long distance rates, and argued that competition would play an important role in providing needed services. Unitel and BCRL further argued that the Commission must assess whether the alternative scenarios can satisfy broader and equally important requirements, including the introduction of new services and improved supplier responsiveness. Unitel and BCRL considered the respondents' Reference Plans short-sighted in their focus on prices. They submitted that the Commission has heard, in submissions at the regional and central hearings, that adjustments to pricing alone cannot meet the requirements of Canadian telecommunications users. Some parties argued that telecommunications costs may not be a significant cost for many businesses. This was not the message that the Commission received from the unprecedented number of business users and organizations that appeared before it at regional hearings and at the central hearing. Further, unlike many inputs used by business, the price of telecommunications is artificially high for public policy reasons, and can be adjusted for policy reasons. It is likely that a reduction in the price of long distance service will induce users to substitute telecommunications for higher-cost, but currently lower-priced, inputs. This will permit users to utilize telecommunications more effectively as a strategic input to outperform rival firms. Subject to whatever policy constraints may be required to maintain universal access at affordable rates, the Commission considers it essential that the telecommunications market optimize the competitiveness of Canadian business by providing users with the most efficient, responsive and cost-effective service possible. As discussed above, the Commission considers that competition in the MTS/WATS market will improve the respondents' productivity. The Commission anticipates that, while the cost of entry will constrain the ability of the respondents to reduce rates in the short run as sharply as proposed in the Reference Plans, productivity improvements will ultimately be reflected in lower MTS/WATS rates. Given its conclusion that there is no evidence to suggest that competition will cause any significant decline in the rate of improvement in the respondents' unit costs, the benefits of lower rates should be enhanced by competition, since Unitel proposes to charge, during its initial years of operation, prices that are, on average, about 15% less than the lower rates likely to be charged by the respondents. The Director submitted that the single integrated monopoly provider has failed to respond fully to the diverse needs of its customers. In the Director's opinion, choice means that users can control and more effectively use telecommunications as a strategic input in order to outperform rival firms. No matter how benignly disposed a single supplier is, or how technologically advanced it strives to be, it cannot differentiate adequately enough or quickly enough to service the particular requirements of a variety of customers. The Director noted that, once competition is permitted, the incumbent firm has an incentive to pre-empt new competition by developing new products and services. Parties argued that, in the U.S. competitive environment, customers have a greater variety of WATS and 800 Services, as well as access to offerings such as banded WATS, Virtual Private Networks, Switched T1, detailed consolidated billing, and customer equipment co-location. In addition, services such as Integrated Services Digital Network (ISDN) and Automatic Number Identification (ANI) were introduced earlier. Referring to the evidence of Ms. Elizabeth Angus, Unitel submitted that most new voice services introduced in the U.S. are not introduced in Canada until five or six years later. Quebec submitted that it is difficult to conclude that the introduction of competition is the principal explanation for the great choice of services in the U.S. The introduction of certain services or options has been delayed somewhat in Canada because of Stentor's decision not to implement Common Channel Signalling 6 (CCS6). Quebec also considered that there is a greater range of services in the U.S. because of the greater number of IXCs and the size of the market. Quebec submitted that the services Unitel proposes to offer are essentially new tariff options and personalized billing options, principally for business subscribers rather than true innovations. Bell submitted that, in the 1990s, its technology platforms will place it in an advantageous position, relative to the U.S., to offer new services. Bell considered that, in the past years, the U.S. network moved ahead of the Canadian network in deploying new services because Canadian carriers chose to defer implementation of digital signalling until CCS7 became available. Therefore, they did not adopt the previous generation technology (CCS6). Bell disputed the accuracy of Elizabeth Angus' evidence and Unitel's submission that indicates that more services are available in the U.S. than in Canada. Bell argued that Ms. Angus used terms (such as "WATS") that vary between Canada and the U.S., and that she did not use basic service characteristics in her comparisons. Bell submitted that many of the services listed by Ms. Angus duplicate each other, and that many others involve only variations in billing approaches or ways of aggregating existing services, rather than true service innovations. B.C. Tel argued that 56 kilobits per second (kbps) service is less costly in Canada and that ISDN deployment is expected to proceed on an integrated basis according to international standards, without the compatibility and jurisdictional issues that arose in the U.S. Bell also argued that switched 56 kbps service is more widely available in Canada than in the U.S., and at a lower price. Bell was of the view that, rather than promoting increased innovation, competitors would likely concentrate on gaining market share by offering discounts in relation to the prices charged by the incumbents. Bell disputed that the repackaging or repricing of existing services could be seriously considered as innovations. Bell contended that competition would have the following effect on Research and Development (R&D) activities: (1) it would decrease overall R&D spending, since revenues would be diverted to suppliers who would spend proportionately less than Bell; (2) R&D spending would become more fragmented and, as a result, less likely to generate significant technological improvements; and (3) R&D efforts would tend more to the development of applications of technology developed elsewhere, rather than continuing to involve Canada in the creation and marketing of major technological advances. The Commission notes the unprecedented participation of business organizations and individual businesses in the 12 regional hearings held across the country, and notes the importance of telecommunications as a productivity enhancer and an enabler to these businesses. While cost was of greater importance to these users, the Commission notes that choice was also fundamental. Ultimately, the ability of Canadian businesses to obtain network services and prices that best conform to their needs will better enable them to maximize telecommunications inputs, thus enhancing their domestic and international competitiveness. With a few notable exceptions, business users urged the Commission to increase competition in order to provide users with a greater variety of service packages and prices tailored to meet the demands of the marketplace. The Commission believes that competition will result in greater choice, supplier responsiveness and service diversity, particularly in the business sector and on high density routes, as a result of the repackaging and repricing of services in order to meet the specific needs of a variety of users and user groups. The proliferation of innovative pricing and service packaging, regardless of whether accompanied by the development of new technologies, was considered important by business users appearing at the regional hearings. While Unitel's proposed expenditures on R&D are not large, the Commission considers that a more competitive environment need not diminish R&D expenditures in the industry as a whole. However, telephone companies may decide, based on a cost/benefit analysis of their R&D expenditures, to cut some expenses, or re-target or increase existing expenditures, based on their considerations as to the value and payback of new or existing projects. Moreover, in assessing the impact of facilities-based entry on R&D efforts, it is important to consider the manufacturing and software-development sectors, as well as the impact on transmission. In the Commission's view, facilities-based entry may well benefit these sectors by opening up new markets for their products. I. Facilities BypassDespite the views expressed by certain parties that the extent of the bypass problem is unknown, evidence such as that relating to the decline in revenues for cross-border services suggests that the bypass of Canadian facilities occurs and that, notwithstanding Teleglobe Canada Inc. - Resale of Transborder Services, Telecom Decision CRTC 91-10, 26 June 1991 (Decision 91-10), incentives to bypass continue to exist. Certain parties have argued that competition in the public long distance market may lead to entry by affiliates of American-based carriers, and thus to an increase in the bypass of Canadian network facilities. It has also been argued that entry may increase such bypass, because it would increase the number of routes that could be used to bypass. Currently, there are no prohibitions on the entry of resale affiliates of U.S. carriers where resale is permitted. In the opinion of the Commission, bypass can be reduced through the introduction of increased competition. For instance, WATS resale will decrease incentives to resellers to bypass traffic. Increased choice should also reduce bypass by those seeking attractive service and pricing packages. The Commission notes that the entry of U.S. carriers on a facilities basis is subject to existing requirements of the Department of Communications and that the operations of any such IXCs who fall under federal jurisdiction will be subject to the Commission's regulatory supervision. In this regard, the Commission notes that, in Decisions 91-10 and 91-21, it ordered the carriers to include in their tariffs provisions intended to restrict activity resulting in the bypass of Canadian network facilities. A number of persons appearing at the regional hearings spoke of the detrimental impact that the current level of Canadian interexchange rates has on their businesses. Businesses interested in improving their competitive position, both domestically and internationally, have an incentive to do so by bypassing Canadian facilities through the U.S. The Commission has previously acknowledged the importance of reducing rates as the most effective long-term solution to bypass. In the Commission's view, the importance of reducing Canadian interexchange rates towards levels in the U.S. is clear. Such rate reductions would assist in achieving the two important and related objectives of enhanced international competitiveness and reduced incentive to bypass Canadian network facilities. Since competition would not only result in lower interexchange rates in the long run, but also in greater choice in terms of price and service packages, the dual objectives of increased competitiveness and reduced bypass would be more readily achieved in a competitive environment. J. Obligation to Serve, Route-Averaged Pricing, Regional Differences and Different Classes of SubscribersWhile none of the respondents suggested that they would attempt to reduce their obligations to serve as a consequence of the introduction of competition, some concerns were expressed that the respondents would have less freedom to enter and exit a market than competitors. Further, some respondents noted that, given that the obligation to serve resides with them, compensation from competitors should be sufficient to maintain the level of service provided. Certain interveners considered that competition may lead respondents to focus their marketing efforts on high density/urban routes to the detriment of rural and low density routes. In order to minimize the impact on rural/low density routes, they argued that the Commission should make it clear that the introduction of competition will not change the respondents' obligation to serve. BCRL does not propose to provide universal toll services. Unitel stated that its service would be available to all subscribers of the respondents. Unitel also stated that the only restriction on its ability to offer universal service will be its inability to obtain interconnection. Unitel stated that, through the maintenance of route-averaging and ubiquity of service, all classes of subscribers, regardless of geographical location, will be served. The Commission does not consider that competition will fundamentally alter the respondents' obligation to provide basic local exchange service, although competitive pressures may shift some capital and human resource priorities to the most contestable market segments. The Commission considers that insisting that only the respondents provide universal service is reasonable, since the respondents have the benefit of an ubiquitous infrastructure already in place. Accordingly, the Commission has decided not to require IXCs to provide universal service as a condition of entry. To the extent that the respondents are obligated to implement specific programs or improvements, their revenue requirements should be set to recover associated expenses. In this context, the Commission notes that IXC contribution payments would be directed in part to any program costs allocated to the ML or Access categories. Many parties were concerned that entry would put pressure on competitors to depart from route-averaging, resulting in pressure to increase rates on low volume routes. BCRL considered that small, non-dominant, IXCs should not be required to route-average. BCRL considered, however, that its basic MTS rates would be effectively route-averaged because it would tie its rates to the respondents' MTS schedules. Some respondents and Unitel contended that all competitors should route-average. Unitel noted that, if BCRL did not extensively market its services throughout a respondent's territory, the principle of route-averaging would have no meaning. Contrary to some arguments, the Commission does not consider that targeted volume-based discounts are a departure from route-averaging, since such discounts are generally available on a company-wide basis under general tariffs. Moreover, the Commission expects the respondents and IXCs to adhere to the policy of route-averaging for basic MTS and volume discount services. However, it also recognizes that some services resulting from competition (for example, those based on new technologies) may only be rolled out on high volume routes. The Commission does not currently impose route-averaging on resellers, and does not intend to do so after facilities-based entry. Such a policy would unduly limit the benefits associated with resale, particularly the servicing of pent-up demand in niche markets. As respondents and IXCs are expected to route-average basic MTS and volume discount services, subscribers in rural or low density areas should not be made worse off by entry and would benefit to the extent that the respondents implement general rate reductions in response to competitors' services. The Commission recognizes, however, that subscribers in more urban locations and on high density routes are likely to receive a higher share of the benefits of competition. However, the Commission notes that, even in the current environment, the treatment of different subscribers inevitably varies to a certain extent. For example, CMS, Touch-Tone and single party service have all been introduced first in urban locations. Collection of contribution on a pre-settled basis also helps to offset the impact on high cost areas served by net receivers under the RSP. The Commission has also taken the needs of rural subscribers into account in establishing a contribution mechanism based on a per trunk rate and switching and aggregation charges using averaged rates for transport. K. Quality of Service and Efficiency of Network Planning and DesignThe quality of the service provided by the respondents is generally rated high in terms of customer satisfaction and technical performance. However, some business users suggested that the telephone companies are not always as responsive as possible and that they are not always able to provide a variety of state of the art services. Given that both respondents and IXCs will have cost-based network platforms with which to provide state of the art services, the introduction of competition should ensure that the market will be more responsive in delivering services tailored to user demands on a timely and competitively-priced basis. Bell and B.C. Tel submitted that service quality in Canada appears to be comparable or superior to that of nations with competitive systems. Bell, B.C. Tel and Newfoundland Tel referred to the experience in the U.S., citing a decline in service quality, increased confusion and the difficulties that customers experienced in using the telephone network after competition was introduced. Bell submitted that, while satisfaction ratings have recently improved somewhat, problems in the U.S. nonetheless remain. In particular, the respondents noted difficulties associated with "slamming" (i.e., the practice of switching a customer to another long distance carrier without the customer's authorization) and with the provision of Alternate Operator Service (AOS). Bell stated that competition in the operator services market in the U.S. evolved without initial regulatory guidelines or controls, and led to much consumer dissatisfaction over rates and practices, particularly with respect to operator services on calls from pay telephones, hotels and other public locations. Bell was of the view that dealings between customers and the telephone company would necessarily become more complex in a competitive environment, leading to customer confusion and uncertainty. Quebec also considered that, in the short term, confusion on the part of subscribers would decrease the perceived quality of service. However, in the medium term, perceived quality of service would at least equal, if not exceed, that existing now. In the Commission's view, while some confusion may arise with respect to billing or repair, it should not be as significant as was the case in the U.S. since competition will not involve divestiture or a subscriber balloting process. The ability of a subscriber to remain with the single integrated supplier suggests that quality of service problems, if they arise, would be associated with subscribers who choose to switch to another supplier. In these circumstances, if quality is below par, the competitor may lose the customer. Thus, service providers will have incentives to provide superior service in order to capture or retain market share. In the Commission's view, problems with service quality or lower grade of service are more likely to arise with respect to operator services. The Commission is aware of problems occurring in the U.S. with respect to some AOS providers. The Commission considers that access to pay telephones, billing and collection and related databases has to be restricted in order to safeguard consumers from the problems that have arisen in the U.S. The Commission does not intend to permit Unitel, BCRL or other future IXCs to provide pay telephone service or have access to billing and collection and databases until the Commission has approved a detailed operator service tariff that adequately addresses the conditions and concerns discussed below. All of the respondents considered that, with competitive entry, network planning and design would become more complex, thus reducing the efficiency of the process. The Commission agrees with Quebec that, from a technical perspective, the quality of service offered by Unitel could be comparable to that offered by the respondents. BCRL submitted that, in a competitive market, increased participation in network planning and design may result in increased efficiency through the input of a wider range of ideas. Unitel argued that the overall increase in its traffic would require similar increases in the capacity of its facilities, thus increasing its ability to enhance Canadian network survivability. Bell submitted that the networks of Unitel and BCRL would provide minimal incremental survivability, since most of their traffic would be partially routed over the respondents' networks. Bell stated that its vision of "an intelligent, survivable, end-to-end digital network ... controlled by an integrated administration and surveillance structure" would yield sufficient survivability. More particularly, Bell noted that inter-working with other networks, including the development and implementation of appropriate standards, would become more complex with facilities-based entry. B.C. Tel contended that facilities-based long distance competition would lead to substantially increased requirements in the areas of network planning and design, or would potentially add costs and delay technological advances. MT&T and Island Tel contended that, in smaller markets, the network would consist of even smaller switches and smaller trunk groups, with attendant decreases in efficiency. Newfoundland Tel submitted that administrative costs would increase. The Commission agrees that facilities-based entry would make the process of network planning and design more complex, due in part to an increase in the number of participants. The approach to network planning and design in a multiple entry facilities-based competitive environment may well be different than in a monopoly environment. However, the Commission is not convinced that competition, in and of itself, results in inefficient network planning and design. Indeed, the situation may benefit users by providing them a greater variety of options. In addition, there may be some additional survivability, although the Stentor network will have a high degree of redundancy. Furthermore, telecommunications networks already interconnect with telecommunications systems in other countries, and many potential issues have been resolved, or are currently being addressed, in the U.S. The usual practice for dealing with inter-networking issues is to establish technical coordinating committees. This is discussed further in Part V of this Decision. Given the projected level of digital technology, fibre transmission and CCS7 architecture in the PSTN, the diversion of investment into private networks and away from the development of public networks is less of a concern in Canada than in the U.S. III CONTRIBUTION, INTERCONNECTION COSTSA. Contribution1. General With the exception of tariffed access arrangements associated with Competitive Network services, there are no recurring charges for access to the telephone network. Rather, the cost of access is recovered by means of contribution, primarily from the MT and ML categories. When respondents lose market share to competitors, the contribution associated with the lost traffic is also lost. Accordingly, to the extent that the access cost subsidy is to be maintained, competitors in the long distance market must also pay some level of contribution. Therefore, the contribution requirement of competitors, and the manner in which it is to be collected, are important considerations. 2. Definition of Contribution Unitel proposed that contribution payments should be established by the Commission to reflect the fact that IXCs make use of the respondents' access facilities to provide long distance services. Thus, Unitel proposed that it not pay contribution when its calls access or egress the PSTN via Direct Access Lines (DALs). In addition, Unitel suggested that the Commission's approach in CNCP Telecommunications - Interconnection with Bell Canada, Telecom Decision CRTC 79-11, 17 May 1979 (Decision 79-11), i.e., that contribution should be paid only to replace contribution that is foregone as a result of entry, should be applied in this proceeding. Therefore, it was Unitel's view that there should be no payment for new traffic created as a result of its lower prices. BCRL based its contribution proposal on the assumption that it would compensate the respondents only for the contribution lost as a result of competition, and stated that paying more would constitute a subsidization of the respondents. BCRL argued that its market share would be less than 4% after 5 years, and contended that any contribution erosion not fully recovered through its proposed monthly contribution charges would be readily recovered through efficiency gains by Bell and B.C. Tel, increased demand for MTS/WATS and growth in revenues from optional local services. The respondents generally argued that contribution should be seen in terms of a social subsidy obligation to maintain universal telephone service at affordable prices. Based on this view, the respondents argued that Unitel should pay amounts of contribution equivalent to that paid by the respondents. The respondents argued that contribution payments should not be based on the use of access facilities. Bell viewed the proper operation of the contribution scheme as requiring an equitable sharing of the subsidy payment among all traffic and providers of voice long distance services. Bell disagreed with BCRL's assumption that all facilities-based entrants need not pay equal contribution. Bell maintained that BCRL had implicitly assumed only two entrants (BCRL and Unitel) in its contribution calculation. Bell submitted that, if there were an additional competitor with a 5% market share, BCRL's method of determining contribution would result in a shortfall. The Commission agrees with the view that the contribution from the MT category to the Access category represents a subsidy from long distance telephone services in Canada. The Commission is of the view that the contribution scheme in Canada operates independent of access cost causality. Therefore, the Commission rejects Unitel's approach of basing contribution payments on the use of the respondents' access facilities in providing long distance services. The Commission has traditionally determined the contribution payments required from service providers in light of the particular circumstances of their business and service offerings and their potential impact on local rates. The Commission therefore does not agree that the respondents' view, which would require an equal payment from all providers, accurately characterizes the Commission's historical treatment of contribution obligations in the long distance market, or that this should necessarily become the principle for the Commission's future treatment of this issue. The Commission considers that the adoption of an approach such as Bell's, irrespective of the decision to allow facilities-based competition, would have a significant financial impact on existing service providers and users who have developed their businesses based on the Commission's traditional treatment of contribution. The Commission has examined Unitel's proposal to pay contribution based on the amount of foregone contribution that arises as a result of its entry. In particular, the Commission has reviewed the likely impact of such a proposal on local rates. The Commission finds that, under this proposal, IXCs would pay sufficient contribution to ensure that the principle of maintaining local rates at affordable prices is not jeopardized in any of the respondents' territories. In the case of BCRL's proposal, the Commission finds that the proposed level of contribution would not provide adequate compensation for foregone contribution. The Commission therefore finds Unitel's approach reasonable for contribution by IXCs and has incorporated it into its calculation of contribution. 3. Level of Contribution Most parties to this proceeding acknowledged that Phase III results should be used to identify the level of contribution arising from long distance services. However, parties have expressed different views regarding the quantification of this contribution based on Phase III results. The options advanced by the parties to this proceeding involved basing the level of contribution on:
The Commission notes that ensuring contribution payments are based on the most current information available implies the use of forecast data. The Commission also notes that, with adjustments to net out the surpluses from other broad service categories (BSCs), and taking into account the forecast contribution payments to be received by respondents, a targeting of the Phase III MT surplus is equivalent in financial terms to a targeting of the Phase III local service shortfall. The Commission considers that the Phase III results are appropriate for determining the contribution level and, if properly adjusted for use in the calculation of contribution, would not require a significant increase in resources to administer. Given the above, in the Commission's view, there is merit to B.C. Tel's more detailed approach, because in targeting the access shortfall it also allocates Common and PUC costs and excludes competitors' contribution payments, after netting out BSC surpluses and deficits other than MT. However, the Commission considers that one modification is required in order that the approach be more reflective of the actual subsidization process. In the B.C. Tel approach, while the contribution requirement would be reduced by surpluses from certain categories (other than MT), it would also be increased by any contribution deficits from competitive categories. In the Commission's view, it would not be appropriate to require competitors to contribute towards categories that exhibit a contribution deficit or towards Common and PUC costs that may be assigned to categories that do not produce a surplus. Therefore, the Commission considers that any such deficits (after the Common and PUC cost adjustments, discussed elsewhere) should not be included in the calculation of the level of contribution required. The Commission concludes that, subject to several adjustments discussed below, the target level of contribution will be calculated as follows: Target Contribution = Access shortfall (excluding all contribution payments established in this Decision) + surpluses from all other BSCs except MT For those respondents who do not yet file Phase III results, the Commission considers that approximate contribution calculations can be based, for an interim period, on RSP information. Until appropriate costing methodologies and results are determined, the Atlantic respondents are to approximate MT costs by employing the RSP Basic Toll (TT) costs, and applying corresponding RSP-to-Phase III conversion factors based on a 5-year average of the combined Bell and B.C. Tel toll costs. Common and PUC costs are to be estimated by use of a combined Bell and B.C. Tel 5-year average of Common and PUC to MT cost ratios. It is expected that Phase III results will be available for MT&T in September 1993 and for NBTel and Newfoundland Tel in September 1994. 4. Adjustments to the Level of Contribution (a) General Parties proposed several adjustments to the results produced by the Phase III process in order to calculate the appropriate contribution. The three primary adjustments are discussed below. (b) Common and Plant-Under-Construction Costs Unitel argued that a portion of the MT surplus, on which it based its contribution calculations, contributes to the recovery of the Common category costs. Unitel deducted an amount from the MT surplus that it considered should be available to recover Common costs. In determining the appropriate amount of this adjustment, Unitel considered that only categories with a surplus could contribute towards the recovery of Common costs. Therefore, Unitel determined the MT category's share of Common costs as being in direct proportion to the MT surplus divided by the sum of the surpluses from all categories. Bell argued that Common costs should not be allocated to the BSCs for the purposes of determining contribution payments. However, it stated that if the Commission deems it necessary to allocate Common costs, this allocation should be based on the ratio of expenses for each category. B.C. Tel argued that Common costs are incurred as a result of all of the business activities of the company and, for the purpose of establishing appropriate contribution levels, all BSCs should bear some portion of these costs. B.C. Tel argued that Unitel's proposed treatment of Common costs would take advantage of the artificially high pricing of toll services to support lower pricing of basic local services. Based on its approach, B.C. Tel argued that a portion of Common and PUC costs are associated with the provision of access and, as such, it is appropriate that toll contribute towards these costs. B.C. Tel proposed to allocate PUC costs based on Net Plant Investment in each BSC (except for Common and Investments in Subsidiaries and Affiliates (ISA)) and to allocate the Common category costs based on BSC expense ratios (except ISA). This method of attributing Common costs is similar to the formula prescribed in Participation of Bell Canada and British Columbia Telephone Company in the Multiline and Data Terminal Equipment Market, Telecom Decision CRTC 86-5, 20 March 1986. With respect to the treatment of the Common category costs, MT&T and Island Tel agreed with B.C. Tel. The Commission considers that Common and PUC costs should be considered in some manner for the purposes of calculating the contribution obligation and that their treatment is an important consideration in the establishment of the appropriate contribution obligation of competitors. In the Commission's view, competitors should not be forced to pay an unreasonable proportion of the respondents' Common costs, given that they have their own Common costs. Moreover, such an approach would not provide the respondents with sufficient incentives to minimize such costs. The Commission therefore concludes that, for the purposes of this Decision, PUC and Common costs should be allocated on the basis of surpluses. The Commission considers that such an allocation will require competitors to contribute only to that portion of the respondents' Common costs that are allocated to categories other than MT that produce surplus revenues. (c) Gross Receipts Tax Unitel noted that Bell's MT costs include an allocation of the Gross Receipts Tax (GRT) levied by Ontario and Quebec on behalf of the municipalities in those provinces. Unitel stated that although the tax payable is calculated and levied on the basis of revenue, these taxes have been allocated to Phase III categories on the basis of capital invested. Unitel argued that, as a result, MT costs for Bell have been underestimated and, therefore, MT contribution has been overestimated. Therefore, Unitel proposed to reduce its contribution payments by 6%. The Commission agrees with Bell that the taxes are caused by the company's ownership of certain investment and that levying the taxes on revenues is a substitute for property taxes. Therefore, the Commission considers that, for the purposes of establishing contribution, no adjustment to the Phase III treatment of the GRT is warranted. The Commission considers that, in its Business Plan, Unitel may have overestimated its GRT payable. However, it appears that IXCs' status under both provincial acts may not be resolved prior to their entry into the long distance market. In order to ensure parity in the treatment of GRT for Bell and its potential competitors, the Commission considers that an interim adjustment is required to reduce the monthly contribution payment submitted by the competitor(s) to Bell until the status of the competitor(s) under both provincial acts is resolved. The Commission is of the view that this adjustment should be 6% of the total monthly payment. The Commission notes that, should competitors be permitted to deduct contribution payments for tax purposes prior to calculating the GRT payable, the adjustment would be discontinued. (d) Revenue Settlement Plan Unitel calculated the contribution loss in the territories of the non-respondent members of Stentor (AGT, SaskTel and Manitoba Telephone System) resulting through the RSP following the introduction of competition in the respondents' territories. Unitel proposed to add a surcharge to the respondents' contribution rate in order to compensate the non-respondents for their lost toll contribution. BCRL stated that the RSP provides a mechanism for ensuring that any contribution paid is shared among respondents and non-respondents and, therefore, it is not necessary to develop a sharing mechanism. Bell and B.C. Tel argued that the level of contribution payable to them should reflect the contribution shared with other members of Stentor through the RSP process. The RSP is an internal accounting process designed to share revenues derived from inter-company traffic. As a result of this process, an impact on the revenues of one company, whether resulting from rate changes such as contemplated under the Reference Plan or from revenue erosion resulting from entry, can have a positive or negative impact on the revenues of other member companies. In the Commission's view, a uniform surcharge on contribution payments to respondents in order to compensate non-respondents is not appropriate. First, it does not reflect the fact that, under the RSP, both respondents and non-respondents are impacted by revenue changes in another member company's territory. Second, the Commission does not consider that the introduction of competition in one member company's operating territory automatically requires compensation for other members not directly impacted, anymore than approval of a rate reduction in one member company's territory automatically obliges that member to fully compensate other members for shortfalls subsequently arising in their territories as a result. The Commission notes that, under the current resale rules, Bell and B.C. Tel are not obligated to share contribution payments with other member companies. However, the Commission does consider that if contribution were based on surplus revenues before settlement under the RSP rather than on originated revenues, then all members would have the opportunity to share contribution revenues according to the same settlement principles deemed reasonable under the RSP. The Commission therefore concludes that the level of contribution for each respondent should be based on the non-toll deficit prior to settlement and therefore should be adjusted to reflect the estimated amount associated with revenues settled between members of Stentor through the RSP. The Commission accordingly expects the respondents to make the contribution payments they receive available to compensate other respondent and non-respondent Stentor members according to the settlement principles of the RSP. 5. Direct Access Lines Competitive message toll providers have two ways to gather traffic from their customers: (1) switched access using the respondent's local switched network; and (2) dedicated DALs. Unitel maintained that contribution is intended to recover the costs associated with the use of the respondents' access facilities and that, accordingly, it is inappropriate to assess contribution where traffic is carried on DALs. The respondents generally argued that contribution must be viewed in terms of a social subsidy and that therefore all traffic must contribute regardless of how it reaches Unitel's network. The Commission is of the view that, in principle, the application of contribution charges should not be affected by the physical means of connection and has therefore incorporated estimates of DAL usage in its calculation of contribution. However, directly applying a contribution charge to traffic carried on DALs would be administratively difficult, if not impossible. Competitors can acquire DALs from a number of sources, including the local telephone company, cable television providers or any other company that has local transmission circuits. If the competitor is located in a large office complex, DALs could be provided using the building's inside wiring. In this case, the only party that would know the number of DALs in use would be the competitor who is supplying the service. In view of the difficulties that would arise from attempts to identify the specific number of DALs carrying traffic eligible for contribution payments, the Commission does not consider it feasible to levy a contribution charge on actual DAL traffic. Nonetheless, some provision should be made to take into account such traffic when assessing contribution. Therefore, the Commission considers that an increase in the contribution charge for switched access should be assessed on all competitors in order to compensate for the use of such facilities. In the Commission's view, the average amount of traffic travelling over DALs is likely to be significantly less than over switched lines, given the dedicated nature of such access. In view of the foregoing, the Commission considers the application of a 2% contribution surcharge to be appropriate. The Commission considers that this 2% surcharge will allow some recuperation of revenues that may be lost through DAL usage, while not distorting the economic advantages or incentives of using switched versus dedicated facilities. 6. Treatment of WATS Traffic In its application, Unitel argued that the Phase III MT surplus should be adjusted downwards to reflect the contribution that it will be paying when it uses the respondents' WATS. Bell objected to Unitel being granted an exemption for WATS traffic, while the respondents' WATS traffic will implicitly pay full contribution. However, Bell acknowledged a past mismatch of Phase III revenue and cost assignments for WATS and 800 services, which would have been equal to a 1.7% reduction of the 1989 Phase III toll contribution. If competitors resell WATS (or any other message toll service) to complete calls off their networks, the potential exists for an over-charging of contribution. This could occur if the contribution inherent in the rates for WATS is larger than the per end contribution that would have been charged if WATS had not been used for the delivery of long distance voice traffic. The Commission notes that it is not proposing to charge any contribution on circuits connecting IXCs to WATS given the differences in the level of contribution in WATS and other discount toll services like Advantage. Moreover, the Commission finds that to attempt an adjustment to account for the possible over-charging would, at this time, involve parties in an excessive amount of administrative and measurement activity. However, in recognition of the possible mismatch of revenue and cost assignments for WATS and 800 services, and for the purposes of calculating contribution until such a possible mismatch is corrected, the Commission has made an adjustment of 1.7% to Phase III toll or equivalent contribution levels. 7. Mechanisms to Collect Contribution Several contribution mechanisms have been proposed in this proceeding, including: (1) per minute approaches put forward by the respondents; (2) per trunk approaches put forward by the applicants; and (3) a market share allocation approach put forward by ETI, external consultants to the Commission. In assessing the various contribution recovery proposals, the Commission has considered several basic criteria. These include:
The Commission considers that there is no readily available way to determine exactly the level of contribution generated by any particular call or type of call. Therefore, there is no practical basis on which to categorize calls for the purpose of developing a disaggregated contribution mechanism. Moreover, if such a categorization were possible at present, IXCs would presumably introduce different service offerings and pricing plans that would have to be categorized into one of the contribution classifications identified for respondents' services. As a result, IXCs would generally be forced to follow the rating strategies of the respondents, thereby minimizing one of the important potential benefits of the competitive marketplace. While a disaggregated contribution charge would provide greater accuracy in the recovery of contribution, it would cause certain constraints and administrative problems that an aggregated or averaged charge would lessen. For example, the likelihood for significant and numerous rate revisions in a competitive environment would require changes to the contribution charges to reflect the revenue/cost relationship for specific services or groups of services. However, the use of an average measure would likely encourage competitors to target those areas of the market that generate an above average level of contribution. As a result, they might gain a larger proportion of that market, while the respondents would be left with a larger proportion of the low contribution market. While the Commission could establish a mechanism based on market share, such a mechanism would require initial and ongoing estimates of the market shares of all participants. It would also require an adjustment to the contribution charges to reflect the effect of new entrants as well as of competitors leaving the market. In an environment with many competitors, such activities would require a significant amount of ongoing regulatory involvement and, in the Commission's view, would not meet the Commission's criterion of administrative efficiency. In the Commission's view, a per access trunk mechanism would likely result in the least introductory and ongoing regulatory involvement. Like the average per minute approach, the per access trunk approach would result in far less pressure to react to individual rate changes than would a disaggregated per minute mechanism, since the charge would reflect the average contribution derived from all of the respondents' services. The Commission considers the per access trunk approach superior to the average per minute approach, because the per access trunk approach entails less incentive to target or to avoid certain markets, given the need to specify and establish the trunked network. For example, as with the average per minute approach, competitors under the per trunk approach would be inclined to fill a trunk with a mix of traffic that provides a level of contribution above that assumed in the per access trunk charge. However, to the extent that spare capacity may exist on a trunk at any given time, and in view of the unavoidable cost of the contribution payment and the cost of running overflow traffic, the Commission believes that there could be a greater economic incentive under the per access trunk approach to carry "lower" contribution traffic than under the average per minute approach. The Commission considers that, relative to a per interexchange circuit mechanism, a per access trunk mechanism provides a better measure of traffic diverted from the networks of the respondents, since traffic carried over the access trunk must be carried at 64 kbps. On the other hand, an interexchange circuit can be configured to take advantage of compression techniques to carry large and varying amounts of traffic. It would also be difficult to identify interexchange circuits in a multi-supplier environment, particularly where IXC's are mixing owned and leased facilities between their switches. In light of the above, the Commission concludes that a per access trunk charge is the most appropriate mechanism for the collection of contribution from all those who compete with the respondents in the provision of long distance services. The Commission also considers that it is possible to specify per access trunk contribution charges that increase with the amount of traffic carried, thus enabling a more accurate recovery of the contribution inherent in both high and low volume trunk traffic. Accordingly, the Commission will employ a variable per access trunk contribution charge that will increase with the size of the trunk group. 8. Contribution Discount Unitel argued that there are several circumstances that must be taken into account in setting its required level of contribution. These include:
Accordingly, Unitel proposed that it be allowed the following contribution discounts:
While not specifying any amount, BCRL proposed that there be an "appropriate" contribution discount for non-equal access. The respondents argued against allowing any contribution discounts, on the grounds that it would encourage uneconomic entry, create unfair competition, and potentially result in a permanent subsidy. The Commission considers that the respondents currently hold a market advantage over all competitors in the long distance voice market, both as a result of their control of the local networks and as a result of their historically dominant positions. The Commission is of the view that a contribution discount of limited duration is appropriate in these circumstances. The Commission notes that unequal ease of access and market coverage will further limit competitors, particularly in the initial years. The Commission considered ways in which the obvious competitive disadvantages facing competitors might be offset to some degree, particularly in the crucial early years of entry. It accepts the discount schedule proposed by Unitel as reasonable. Under this proposal, the discount is phased out as the competitive disadvantages are reduced and competitors have an opportunity to capture greater market share. Therefore, the potential for contribution erosion is minimized because the greater discounts only apply in the early years when competitors are expected to have relatively small market shares. The annual discount schedule, set out above, will take effect for the geographic area encompassing all respondents' territories from the first day of 1993, and will apply to all competitors, regardless of the date of their entry. 9. Cross-Border and Teleglobe Traffic Since the level of the respondents' contribution from cross-border and overseas traffic is included in the calculation of the contribution charge, the Commission considers that contribution charges should also apply to this traffic. The contribution mechanism established for domestic traffic in this Decision entails contribution charges at both the originating and terminating ends of a call. It is not possible to collect contribution at an originating or terminating point that is outside of the country. Accordingly, contribution will be assessed on competitors' circuits accessing Teleglobe Canada (Teleglobe) services on the same basis as it is assessed on domestic PSTN access circuits. However, contribution will also be assessed on cross-border circuits at the international boundary. In this case, however, a flat per circuit contribution charge, based on an average per trunk usage of 7,000 minutes per month, will apply. The Commission considers this approach more administratively feasible than the variable per trunk charge applied elsewhere. The collection of the contribution will involve the respondents, IXCs, Telesat Canada (Telesat) and Teleglobe. 10. Filing Requirements Based on the above determinations, the Commission directs that, with their annual filings of Phase III forecasts in December of each year, the respondents provide estimates of the appropriate contribution charges for the following year, to come into effect on 1 April of the following year, and the underlying calculations, in the format shown in the Attachment to this Decision. The respondents are also to provide the forecast information on which their estimates and calculations are based. Respondents who do not yet produce Phase III results are to provide, each December, their best estimates in accordance with the guidelines discussed above, until such time as their Phase III results are available. The above information and estimates will be used to determine whether changes to the contribution tariff are required. 11. Contribution Calculation The Commission has calculated the appropriate level of contribution to be paid by IXCs obtaining equal access interconnection according to the conclusions set out above and based on the most recent data available to the Commission for 1993. The per-minute levels for each of the respondents are shown below. The corresponding calculations are shown in the Attachment to this Decision.
B. Costs of Interconnection1. Identification of Costs Respondents and applicants have agreed that providing interconnection to IXCs will necessitate changes to respondent company networks, systems and procedures which will cause additional costs to be incurred. Some of the costs, for example the cost of modifying the respondents' switches, will occur once, generally near the outset of competitive entry. These costs are referred to collectively as start-up costs. The ongoing costs are primarily those associated with aggregating and terminating competitors' traffic for delivery to and from the IXCs' networks (switching and aggregation costs). Other ongoing cost components are associated with customer and operator services and carrier billing functions. The magnitude of these costs is largely a function of the nature of the interconnection arrangements requested and the traffic generated. The Commission notes that the information provided by respondents regarding start-up and ongoing costs varied in content and in degree of precision. As a result, the aggregated values referred to in this section should be considered only as indicators of the magnitude of the costs. It is also noted that the cost values used are estimates based on the Business Plans and market forecasts of the applicants and respondents and that they could vary significantly if competition unfolds differently than forecasted. The objectives for the review of these costs is to establish a benchmark from which to establish initial rates for recovery of start-up and ongoing costs and then to assess the impact of various cost recovery scenarios on respondents and applicants. With respect to the appropriate basis for establishing these costs, Bell, B.C. Tel, Unitel and BCRL generally favoured the use of a Phase II methodology. Island Tel, MT&T, Newfoundland Tel and Saskatchewan submitted that these costs should be calculated using Phase III costing principles, or otherwise fully reflect the cost of providing the service. They argued that embedded costs must be used to establish rates if the cost of the existing jointly-used network is to be allocated fairly. MT&T submitted that the embedded average cost is the cost actually faced by the incumbent telephone company, and that payment of anything less by a competitor would amount to cross-subsidization of the competitor's service from monopoly revenue. Unitel submitted that, as Phase II costing includes variable common costs causal to the service in question, rates based on Phase II studies should avoid any shortfall. In certain circumstances, the respondents and other parties proposed to use existing tariffs, such as MTS rates or premium rates rather than cost-based rates, for the recovery of ongoing expenses. Unitel argued that it has already proposed to make very substantial contribution payments to the respondents, and that the use of MTS tariffs would result in Unitel paying excessive contribution. The Commission considers that rates for services that respondents provide to IXCs should be based on Phase II causal costs rather than Phase III embedded costs. Phase II costs are intended to reflect prospective incremental or economic costs in contrast to accounting costs prescribed in Phase III. In the opinion of the Commission, economic costs more accurately reflect the causal costs, including variable common costs, of providing new services required by the new entrants. Based on the information provided by the respondents, the estimated total start-up costs are approximately $336 million and the estimated total ongoing costs are approximately $1.4 billion for the ten year study period. The Commission finds that these estimates require certain modifications as discussed below. The Commission has reviewed the estimates provided by the respondents. The Commission finds that certain costs will not be incurred. For example, it will not be necessary for B.C. Tel to equip the GTD5 switches in its network with CCS7 software and the company's expenditures for DMS-10 modifications will be less than estimated because fewer of these switches will be used than had been anticipated. In Bell's case, the requirement for Billed Party Preference is not supported by the Commission; therefore, the estimated cost will not be incurred. The Commission concurs with a number of the arguments of the applicants regarding respondents' estimates of administrative, planning, operational, training activity and information system costs. The Commission agrees that the respondents' estimates could have been substantially lower had the potential for adapting existing systems and for co-operative action been considered. The Commission also concurs with arguments that some costs estimated by respondents are for current activities and that the changes required to adapt the existing systems, procedures and resources to support competitors will not be as extensive as the respondents assumed. The Commission also agrees that the level of activity for certain services (e.g., operator services) has been overestimated in terms of person years, contact time and training. The Commission has reduced respondent cost estimates for activities of this nature. For the reasons noted above, the Commission considers costs for the following items were overestimated: Bell's ongoing standards activities; Bell's cutover co-ordination centres; Bell's software development for various systems for trouble identification, analysis and control; and respondents' operator services, subscriber services and Carrier Access Billing. After reviewing the estimates from the perspectives discussed above, and noting that the details available from most of the respondents were limited, the Commission finds $240 million to be a reasonable estimate of the respondents' start-up costs and $1.2 billion a reasonable estimate of the ten-year ongoing costs. The charges for the recovery of start-up and ongoing costs are discussed below. 2. Recovery of Start-Up Costs With respect to the recovery of start-up costs, Unitel submitted that it should not pay for the one-time costs associated with modifying the respondents' switches and operating systems to convert from a monopoly to a competitive environment. Unitel viewed the development of a competitive market as a benefit to all telephone subscribers, not just to Unitel subscribers, and submitted that it is therefore appropriate to recover these costs from the general body of subscribers. To support its position, Unitel noted the arguments of both Bell and B.C. Tel in the proceeding leading to Decision 85-19, that the costs of switch modifications "are a general cost to the body of subscribers" and as such, "it would be inappropriate to charge the switch modification costs to CNCP". Unitel noted that the switch modifications would afford access not only to initial IXCs, but also to future IXCs who may subsequently be permitted to compete in the long distance market. Unitel submitted it would be unfair to charge only the initial IXCs with these one-time costs. Unitel submitted that productivity improvements and market expansion caused by competitive entry would cover these start-up costs many times over. Unitel stated that since the respondents would also receive benefits, the present applicants should not be required to bear all the costs. BCRL submitted that each long distance service provider must bear its share of the costs of providing these services. BCRL proposed that each participant pay a pro-rata share of the start-up costs based on the participant's share of total long distance traffic. The respondents submitted that the start-up costs are causal to entry and therefore should be borne by those competing in the market. B.C. Tel submitted that these costs are based on actual data, whereas there was no reliable evidence to support Unitel's claims of increased productivity or non-price market expansion due to entry. Various respondents submitted that, to the extent that the general body of subscribers are required to bear these costs, local rates may have to be increased. The Commission considers that the fundamental restructuring of the Canadian long distance market contemplated by this Decision will result in benefits such as increased choice. Respondents will also be more responsive and will increase efforts to minimize costs. Accordingly, the Commission is of the view that the public interest would be best served if the start-up costs were shared by the IXCs and the respondents. The Commission considers that it is appropriate to allocate the start-up costs based on an approximation of the long-run market share of all competitors, including the respondents. Accordingly, the Commission has determined that the IXCs will pay 30% of the start-up costs through tariffed charges and that the remaining 70% will be allocated to the respondents. With respect to the recovery of the start-up costs, BCRL proposed that they be amortized over a 20-year period and that recovery be based on traffic in minutes. BCRL maintained that a 20-year amortization period is reasonable and consistent with the cost recovery practices of the respondents for assets of equivalent life. Bell proposed that these costs be recovered over a three-year period with the costs allocated on each IXC's share of the minutes in that year. Bell submitted that the three-year recovery period would prevent IXCs who joined the marketplace shortly after initial entry from avoiding such charges. The respondents submitted that they should not have to provide financing of start-up costs for IXCs over a prolonged period of time. Bell noted that recovering these costs over a longer period of time would inherently involve the acceptance by the respondents of some of the business risk of the IXCs. The Commission recognizes that a transition period is needed to arrive at a fully competitive marketplace and that IXCs may be handicapped by assigning an excessive level of the start-up cost recovery to the early years of competition. To avoid overburdening the initial entrants, the Commission concludes that a fair and reasonable period for amortization of the start-up costs is 10 years. The Commission notes that several parties recommended the use of a per minute recovery mechanism. The Commission favours this approach, as opposed to a per line method, since the per minute mechanism will lower the payment requirements of the initial IXCs in the early years of the transition period when their traffic is low. At the same time, the IXCs' payments will more accurately reflect the proportion of market share captured by competitors. The Commission has taken all of the above into consideration, including the estimates of the start-up costs and traffic volumes associated with each respondent, and has established the following per minute charges applicable to all trunk side access minutes that originate or terminate on the respondents' networks:
3. Recovery of Ongoing Costs Both Unitel and BCRL indicated that they are prepared to pay for the network and connection facilities costs incurred by the respondents to gather traffic destined for the competitor's network and deliver it to the competitor. The respondents proposed that the costs of these services be recovered by applying existing tariffs whenever applicable, or by developing new tariffs where appropriate. A number of cost recovery methodologies were proposed by the parties. Unitel submitted that the switching and aggregation charges should be distance insensitive, thereby promoting universal access to competing carriers from remote and rural regions. Unitel cited the testimony of Dr. Langin-Hooper and Dr. Schink in support of this incentive to overcome geographic disparities. BCRL proposed a flat-rate scheme which, in its view, was less costly and less cumbersome than a per minute, distance sensitive, traffic sensitive approach. Newfoundland Tel proposed charging MTS rates where the toll office is located outside the EAS of the originating end office switch. Newfoundland Tel maintained that the cost characteristics of the Newfoundland region are different, because in some instances traffic will have to be carried hundreds of miles before it is delivered to a Unitel point of presence (POP). B.C. Tel submitted that additional elements should be incorporated into the tariffs to compensate the company for providing facilities to remote areas where the costs of providing service are significantly greater than the average. Saskatchewan submitted that transmission costs should be distance-sensitive and route-averaged within the operating territories of the respondents in order that service promotion to rural areas by all market participants is not discouraged. Saskatchewan shared the concerns raised by Dr. Langin-Hooper and Dr. Schink that no carriers should be discouraged from serving the rural areas. Saskatchewan submitted that the use of an average charge which is not distance-sensitive will encourage bypass of the PSTN through the use of DALs on those routes, such as short-haul routes, where the cost of bypass is less than the average charge. Bell submitted that, where an IXC chooses not to connect to an end office, the IXC's Direct Distance Dial (DDD) and WATS traffic beyond the bottleneck switch should be carried at existing MTS or private line rates. Unitel submitted that the respondents' proposal to charge MTS rates, which themselves embody contribution, would result in Unitel paying double contribution. The Commission notes that, in general, the applicants have requested interconnection with the respondents' toll offices, as well as certain end offices. The record of the proceeding indicates that there is a cost difference between using solely toll office connections and a mix of toll and end office connections. The Commission accepts the fact that switching and aggregation costs are to some extent distance-sensitive and that a distance-sensitive rate is attractive from the perspective of recognizing costs. On the other hand, a single average distance-insensitive rate has the advantage of being less complex to administer. As well, the Commission is of the view that the use of an average rate will better promote the roll-out of competitive services to rural and remote areas. Accordingly, the Commission finds it appropriate to adopt an averaged rate plan for the recovery of switching and aggregation costs. There are a variety of functions, such as operator services, customer services, carrier billing and network operations and administration associated with competitive entry, other than the specific switching and aggregation functions. The Commission is of the view that there should be separate rates for all of these functions and that the respondents should apply existing tariffs to recover the costs of these functions where applicable. The Commission notes that tariffs already exist for the circuits that would be used for the connection of the respondents' switches to Unitel's or BCRL's networks. Pending the development of appropriate rates, the Commission has concluded that during the introductory stages of competition, charges for switching, aggregation and related ongoing network sources and arrangements, including those discussed in Part V below, will be rolled into one aggregate network charge. The respondents' ten-year ongoing costs associated with the interconnection arrangements have been discussed above. The Commission has applied the adjustments discussed previously to the cash flows provided by Bell for the Unitel mix of switch connection, excluding those cash flows related to the connections between the respondent switch and the Unitel POP, to estimate an average per minute network cost. Accordingly, it is the Commission's judgment that an initial rate of $0.011 per minute per end is appropriate under current conditions for the respondents to recover the ongoing costs of entry (excluding connection costs). While the Commission has relied primarily on Bell cost data to develop this rate, it expects that the respondents will subsequently propose unbundled rates for the specific functions associated with interconnection that may better reflect their particular circumstances. 4. Overflow Traffic Unitel has requested that the respondents carry its overflow traffic from end offices to toll offices. Unitel indicated that it was willing to cover the respondents' costs for this function. Saskatchewan submitted that this arrangement would provide an economic incentive for Unitel to underprovision its network. Saskatchewan submitted that a premium rate be charged for the carriage of overflow traffic to encourage IXCs to provision their networks with suitable capacity to handle peak loads. The Commission finds that the respondents should be required to carry overflow traffic where requested. The Commission, however, shares the concern that IXCs could exploit the availability of overflow traffic carriage in an attempt to minimize the total number of trunks in use. Since IXCs have the ability to minimize overflow traffic by ordering additional trunks, the Commission considers that a tariffed rate for carriage of overflow traffic should be developed separate from the averaged network charge and should reflect any additional costs. The Commission considers that this will encourage IXCs to use appropriate engineering criteria in the design of their networks. IV ENTRY SCENARIOSA. Unitel1. General Unitel's Business Plan contains a general description of its expectations of the market environment and of its marketing approach, as well as extensive financial information. The financial information details its assumptions regarding its market share, revenues and costs, as well as its expectations concerning demand for the respondents' services, their revenues, costs and rate levels. With its Business Plan, Unitel provided a calculation of the Net Present Value (NPV) of the forecast revenue and cost cash flows over the 15-year period of the plan. Unitel calculated an NPV of $115 million (in 1993 dollars), with an after-tax rate of return of 14.0%. Unitel concluded that it would be a viable competitor in the long distance market and that significant long distance rate reductions could be achieved with competition, without increasing local rates. In March 1991, in response to interrogatory Unitel(CRTC)28Dec90-2402R (interrogatory 2402R), Unitel revised its methodology for calculating contribution payments and incorporated additional data provided by the respondents. With this revised methodology, Unitel calculated the NPV of its Business Plan to be $80.7 million. The financial health of a competitor is directly related to three broad considerations: (1) the demand, revenue and cost picture of the respondents; (2) the demand, revenue and cost picture of the competitor; and (3) the terms and conditions of entry set by the Commission. Unitel employed the Peat Marwick Model to predict the impact of its entry on the respondents and on non-respondent members of Stentor. As part of this exercise, Unitel estimated the surplus revenues of the respondents and the associated rate changes if Unitel did not enter the long distance market. Bell submitted that Unitel's modelling exercise was flawed with respect to the mechanics of determining prices for local and long distance services. Bell stated that the model incorporated assumed MTS/WATS price reductions for the respondents and then assumed that any surplus revenues would be applied first to reduce local revenues per NAS towards 1986 levels. As a result, Bell argued that the model incorrectly predicted reductions in local revenues per NAS beyond 1992 and understated toll rate reductions. Bell also argued that Unitel's assumptions on local revenues were inconsistent with Bell's projected increases in local revenues from optional services. Unitel replied that the assumption of moving local revenues per NAS towards 1986 levels was made in order to create a reasonable base case from which to measure the impact of competition. In its view, if local revenues per NAS went up in the base case, it would be confusing, in light of Unitel's contention that competition would not result in higher local rates. The Commission is of the view that the model's use of surplus revenues to first lower local revenues per NAS undermines its ability to predict reasonable toll rate reductions in both the base case and competitive entry case. As noted in Part II of this Decision, the Commission does not fully accept the estimates contained in the Reference Plan. However, the Commission is of the view that, subject to the adjustments to demand, revenues and costs discussed in Part II, the respondents' forecasts more closely predict what will occur over the next 10 years than do Unitel's projections based on the Peat Marwick Model. The Commission has therefore relied on the Reference Plan forecasts, subject to the changes noted in Part II of this Decision, to provide the context for evaluating the impact of entry. The Commission considers that the adjusted Reference Plan, or the broad elements of it, will likely be implemented with competitive entry. The Commission expects that, in the early years of competition, surplus revenues predicted by the respondents may be used to offset any negative effects that the respondents may experience as a result of entry; specifically, negative effects due to the contribution discount specified in this Decision and any start-up costs that will not be recovered from Unitel or other IXCs. As competition unfolds and the respondents begin to experience the positive impact of competition-induced productivity improvements and market expansion, toll reductions by some respondents may be larger than estimated in the Reference Plan. These benefits may then be passed on to the respondents' customers through long distance rate reductions. As noted above, Unitel's revised Business Plan (filed in March 1991) yielded an NPV of $80.7 million. This NPV is calculated based on Unitel's estimate of the financial outlook for the respondents. It is inconsistent with the Commission's own projections of the respondents' costs and revenues (set out in Part II). The Commission notes the discrepancy between respondents' toll rate reductions as forecast by Unitel and as forecast by the respondents. In response to interrogatory Unitel(CRTC)28Dec90-2403R (interrogatory 2403R), in which Unitel was asked to replace the pricing assumptions contained in its evidence with the Reference Plan price reductions proposed by Bell and B.C. Tel, Unitel calculated the NPV of its Business Plan to be $28 million. The Commission is of the view that the response to interrogatory 2403R provides information that is more consistent with the Commission's view of the financial outlook of the respondents than Unitel's Business Plan as revised in March 1991. However, since the Commission does not agree totally with the respondents' own forecasts, the response to interrogatory 2403R does not fully represent the Commission's evaluation of the respondents' position in the market prior to entry. Rather, that response must be considered in light of the Commission's findings with respect to the Reference Plan in Part II of this Decision. NBTel cautioned the Commission to recognize the limitations of forecasts with respect to the time frames under consideration in this proceeding. In its argument, NBTel went on to submit that Unitel's reliance on such forecasts to determine that entry would have no impact on local rates must be questioned. The Commission acknowledges the difficulties associated with forecasts extending over 10 and 15 years. However, the Commission considers it a necessary part of establishing the appropriate terms and conditions of entry to attempt to quantify, given these limitations, the impact of entry to the extent possible. This type of analysis necessitates the use of long-term forecasts. Further, the Commission has taken into consideration other assumptions employed by Unitel in assessing its Business Plan. The Commission does not agree with certain other assumptions that Unitel has used to arrive at its own financial forecasts. The Commission's findings with respect to these other assumptions are set out below. 2. Estimates of Unitel's Market Share Unitel based its estimates of market share on survey information, the experience in the U.S. and its own judgment. Unitel adjusted its take rates to take into account its roll-out plan and the percentage of the market that it could serve at any given time. It estimated separate take rates for residence and business services on a national basis. Bell and B.C. Tel noted that they and Unitel agree that competitors would take approximately 30% of the MTS/WATS/800 Service market over the long term. However, Bell stated that Unitel relied on observations of customer behaviour in the U.S. to predict its performance in the Canadian market. Bell submitted that this limited Unitel's ability to provide detailed estimates of market share for scenarios departing from the U.S. experience. Some parties expressed concern that Unitel did not develop different take rates for each respondent's territory. Unitel stated that the market survey results indicate that support and interest in competitive services were relatively consistent across the country, regardless of region. Therefore, given the level of detail incorporated in its Business Plan, the assumption was made that an aggregate take rate applied uniformly across the country would be consistent. In the Commission's view, differences in take rates across the operating territories of the respondents have been reflected in Unitel's adjustments for its roll-out of service and for the percentage of the market that it could serve at any given time. However, the Commission notes that, although Unitel acknowledged that there would likely be other competitors (both facilities-based and resellers), it did not specifically take this factor into account in its analysis. Furthermore, Unitel relied on survey responses to measure the likelihood of customers switching to its network. As raised by Bell in its discussion of the Choice Demand Model, those who respond to surveys may overstate their likelihood of switching, given that they are not actually faced with the potential costs or other factors entailed. The respondents, Saskatchewan and AGT submitted estimates of the percentage of market share that they would expect the respondents to lose to Unitel and other competitors. These estimates were based on the Choice Demand Model developed by Bell. This model calculates market share loss based on the price and non-price characteristics of the services offered by competitors, in conjunction with the size of the market and the ability of the competitors to offer service to the market. Two key determinants in the model are the price discounts to be offered by competitors and the supplier preference factor, the latter being one of the non-price characteristics. As noted by BCRL and Unitel, the market share loss estimates produced by the model have been shown to be fairly sensitive to these factors. The respondents assumed that Unitel would offer a price discount of 15% as set out in its application. Bell submitted that it did not vary the price discount by customer groups because Unitel had not done so. In Bell's view, this resulted in an understatement of market share loss. Bell noted that it based its measures for the supplier preference factor on a survey study of customers in the U.S. Bell stated that the study shows that, in the U.S., the reputation of the supplier has become a relatively minor factor in determining customers' selection of long distance carrier. Bell assumed that supplier preference with respect to Unitel would follow a similar pattern over the 10-year study period. The respondents also assumed that Unitel would achieve quality of service characteristics similar to those of the respondents. BCRL noted that the market share estimated by the model is very sensitive to fluctuations in the values used for the supplier preference factor, and submitted that the values chosen by the respondents were judgmental. BCRL argued that, because of the differences in the supplier preference values selected by different respondents, the supplier preferences and market share information provided by the Choice Demand Model should be viewed with scepticism. The Commission agrees that the Choice Demand Model is sensitive to changes in the supplier preference factor and notes that the factor was chosen based on judgmental evidence. However, the Commission considers that the Choice Demand Model can be employed to provide reasonable estimates of market share because it is able to take into consideration how subscribers will choose among competing services based on detailed service and market entry characteristics. The Commission concludes that the overall market share lost to competitors will approximate that predicted by the Choice Demand Model, following adjustments to reduce the supplier preference employed for BCRL and to lower the price discounts assumed for BCRL and resellers. The Commission also adjusted the model to reflect what it considers to be the appropriate price elasticity for competitors' services, as discussed later in this section. The Commission notes that changes to the price and non-price characteristics of other competitors modify the market share obtained by Unitel. Overall, the Commission expects that the market share lost by respondents will be approximately 30% by the year 2002. The Commission notes that its view of Unitel's market share in Bell's and B.C. Tel's territories is very similar to that predicted by Unitel, except in the first three years, when the Commission's view is lower. In this regard, the Commission notes that Unitel stated that its own estimates in these years were "aggressive". The Atlantic respondents did not provide estimates of the market share loss they would experience under a combined market entry scenario involving both Unitel and resale, including WATS resale. However, based on estimates provided by Bell, B.C. Tel and Saskatchewan, the Commission considers that the market share captured by Unitel from the Atlantic respondents would be 5% to 10% less than that estimated by the respondents under the Unitel-only scenario, when full consideration is given to the likelihood of other competitors and the nature of their entry. 3. Price Elasticity Unitel assumed a price elasticity of demand of -1.2 for all of the services in its Business Plan. To support this position Unitel quoted statements made by Bell in the proceeding leading to Bell Canada and British Columbia Telephone Company - Introduction of Between Friends and Teleplus Subscription Services, Telecom Decision CRTC 88-19, 10 November 1988 (Decision 88-19), which suggested that one significant difference between the proposed Teleplus service and MTS was the necessity for Teleplus customers to take the action necessary to subscribe to the service. Unitel also quoted Bell as stating that the process of self-selection should result in a level of price responsiveness among those who choose to subscribe that is significantly greater than that for the DDD market as a whole, because customers who select Teleplus are likely to be more sensitive to price than customers who do not opt for the service. Unitel noted that, in Decision 88-19, the Commission concluded that it was reasonable to expect Teleplus 200 subscribers to be more aware of and responsive to price, because subscription to the service required a conscious decision. Unitel stated that there were no relevant differences between Teleplus and its proposed services. Unitel submitted that all of its services will require subscription in the sense that every customer will have to make a conscious decision to be a subscriber to any Unitel service. Unitel also justified the use of a single elasticity for all of its services and market segments on the grounds that it proposes to offer similar price discounts across all services. Unitel argued that, consistent with the consulting report prepared by Steven Globerman Associates Ltd. for the Sherman Task Force, to ascribe different price elasticities to particular market segments would give a misleading sense of precision to the exercise. Unitel assumed elasticity values for the respondents that equalled the midpoint of the range cited in the Globerman report. Unitel stated that it had selected the midpoints of the ranges cited by the Globerman report for the respondents' elasticities because these were the estimates used in the financial simulations conducted by the Sherman Task Force. These estimates, when averaged across settlements, imply a weighted average price elasticity of approximately -0.7. Unitel also stated that the actual price elasticities for the respondents' services may be higher than these estimates and that the more recent elasticity estimates supplied by the respondents were incorrectly calculated. The respondents argued that the reason for the higher price elasticity for Teleplus was due more to the subscription fee characteristic than to the self-selection phenomenon. In particular, Bell submitted that the demand responsiveness observed in the market trial was due, not only to a price discount, but also to the nature of the service, which involves a subscription fee and a limit on total billings eligible for the discount. Unitel replied that it is not the presence of a recurring subscription fee that is the determining factor, but rather the self-selection process. The Commission agrees with Unitel that an important part of the relatively high Teleplus price elasticity measure of -1.2 is due to the self-selecting nature of the service. The Commission notes in this regard that all of Unitel's subscribers can be considered self-selecting. The Commission notes further that, in the Teleplus proceeding, both Bell and B.C. Tel stated that, since Teleplus subscribers represent a relatively small, self-selected subset of the total DDD market, it would be reasonable to expect that the responsiveness of this market segment would differ from that of the DDD market as a whole. However, the Commission also agrees with those parties who suggested that, as a result of differences in the business versus residence categories, settlement category, and service type, the aggregate Teleplus price elasticity does not provide the most reliable foundation for establishing a price elasticity estimate for Unitel's entire range of services. Based on the evidence filed as to the elasticities for the respondents' individual services, the Commission believes that the market segments for the entire range of services proposed by Unitel will, on average, exhibit a price elasticity of less than the weighted Teleplus price elasticity of -1.2. The Commission considers that the use of a single elasticity estimate ignores the different demand characteristics and different price elasticities that all parties agree are likely to be exhibited by different market segments. Moreover, although Unitel's Business Plan calls for a given price discount on average, it does not specify that similar discounts will apply to all market segments. However, the Commission considers the use of a single elasticity estimate necessary, in view of the insufficient data available with respect to the impact of Unitel's service offerings in different market segments. In light of the above, the Commission finds that a price elasticity estimate of -1.0 would represent a reasonable overall aggregate price elasticity estimate for Unitel's entire range of services over the life of the Business Plan. This value represents the Commission's view of the average price elasticity calculated for the entire range of Unitel's services over the life of the Business Plan, and is not representative of the Commission's view of any particular Unitel service or service segment. The Commission agrees with the respondents that the more recently available elasticity studies for their services in Canadian markets provide a greater degree of accuracy and a more sophisticated analysis than those studies cited by the Globerman report. These include, for example, the price elasticities used in Bell Canada - 1988 Revenue Requirement, Rate Rebalancing and Revenue Settlement Issues, Telecom Decision CRTC 88-4, 17 March 1988, and in British Columbia Telephone Company - Revenue Requirement for the Years 1988 and 1989 and Revised Criteria for Extended Area Service, Telecom Decision CRTC 88-21, 19 December 1988. Bell argued that the introduction of Unitel's service offerings would lead to a reduction in price elasticities for the services of the respondents, since those customers most sensitive to price considerations would be those most likely to subscribe to Unitel's services. The Commission is not convinced that this would prove to be the case. Since price elasticity reflects a number of complex and interrelated factors, including a reflection of consumer tastes and the availability and prices of substitutes, increased competition would not necessarily make demand for the respondents' services less elastic. The Commission is therefore of the view that the most recently available price elasticity estimates for the respondents' services, which were filed in this proceeding and have been accepted by the Commission in recent proceedings, should be used in any financial analysis. The Commission agrees with those parties that, if the data and information were available, a higher level of accuracy in the usage of price elasticity estimates could be attained by calculating a yearly estimate. However, given the degree of approximation that would be required in such a calculation, the Commission does not consider that it would in fact yield any significant benefit. 4. Productivity For the reasons noted in Part II, the Commission has included in its analysis of the viability of Unitel's Business Plan a cumulative productivity gain on the part of the respondents of 1% over the period 1995 to 1998. The Commission has reduced Unitel's projection of productivity by 50%, due to the inconclusive nature of the quantitative evidence. While respondents are likely to attempt to minimize costs prior to 1995, and may continue to cut costs as competition increases, savings in the early years are likely to be offset by the impact of the incursion of start-up costs and the size of contribution discounts. 5. Costs In Part II, the Commission made certain findings as to Unitel's costs. The Commission would add the following. As noted above, the Commission is of the view that Unitel's response to interrogatory 2403R, in which it calculated an NPV of $28 million, is an appropriate scenario upon which to base an evaluation of the viability of the Business Plan. B.C. Tel argued that Unitel's calculations included drastic reductions in Unitel's costs compared to its previous evidence. B.C. Tel submitted that the response to interrogatory 2403R casts doubt on the reliability of Unitel's cost estimates. Bell submitted similar conclusions with respect to Unitel's response to interrogatory 2402R. Unitel replied that, in its response to interrogatory 2403R, it had assumed it would be able to match the productivity gains forecast by Bell. Unitel stated that this was justified since Bell had not identified any substantive cost components where Unitel would not have similar access to the more efficient inputs. Unitel also stated that, for similar reasons, it had used Bell's forecast of future technological change. The Commission concurs with Unitel that the company should be able to benefit from lower cost inputs in the same way as other Canadian telephone companies. Therefore, in assessing the viability of Unitel's Business Plan the Commission assumed that, in the later years of its Business Plan, once Unitel has achieved sufficient utilization of its network, it will be able to approximate the productivity improvements that the Commission considers Bell likely to achieve over the life of its Reference Plan. While the Commission recognizes that an IXC has the opportunity available to it to achieve similar cost reductions, its performance in achieving this objective ultimately rests on the managerial efficiency and strategic decisions of the firm. Since the achievement of lower costs is critical in achieving profitability, the Commission considers that the risks of entry have to be assumed by shareholders. 6. Non-Price Market Stimulation For the reasons noted in Part II, the Commission included in its analysis of Unitel's Business Plan a 2% market growth effect attributable to non-price market stimulation. The Commission assumed in its analysis that this market growth would be spread over the years 1995 to 1998, and would occur at the rate of 0.5% in each of those years. Due to inconclusive data, the Commission reduced Unitel's estimate by 50%. As discussed in Part II, the Commission is of the opinion that market growth will occur and that it would be inappropriate to exclude this factor from its analysis. 7. NPV Sensitivities In addition to the financial evidence provided with its application, Unitel responded to several interrogatories requesting information regarding scenarios based on assumptions that differed from those used in the development of its Business Plan. During the proceeding, there was considerable disagreement between Unitel and the respondents as to the financial outlook for the latter over the next 10 years. With regard to these scenarios, Saskatchewan argued that reasonable changes to Unitel's assumptions reduce the NPV of Unitel's Business Plan, producing a negative value under conditions that Saskatchewan considered likely. B.C. Tel argued that the results of numerous sensitivities show that Unitel's Business Plan cannot withstand scrutiny. Bell stated that changing any or all of the assumptions had a negative impact on the NPV, and concluded that the NPV of Unitel's Business Plan must be negative. In response to such arguments, Unitel criticized the assumptions used in scenarios yielding negative NPVs. Unitel argued that its shareholders alone bear the risk of its application. Saskatchewan expressed concern, however, that if Unitel's Business Plan is not viable, its entry would cause regulatory problems for the Commission; specifically, that Unitel may seek relief from the Commission, abandon some of its commitments or exit the market. Unitel denied that such would be the case. Unitel stated that, if future conditions were not as good as it had estimated, it would imply nothing more than a lower rate of return for its shareholders. Unitel also submitted that the only condition that must be satisfied in order for it to remain in the marketplace is that it cover its variable costs. The Commission shares the concerns of those parties who expressed the view that an IXC whose Business Plan proves to be unviable might seek changes to the competitive regime established in this Decision. The Commission agrees with Unitel that it is not likely to exit the market, at least in the short term, as long as its variable expenses are covered. However, the Business Plan would have to be viable in the longer term, or the rationality of Unitel's continued presence in the market becomes questionable. 8. Conclusions Based on revisions to the respondents' forecasts of demand, costs and revenues; conclusions on economies of scale, productivity improvements, non-price market stimulation and elasticity; Unitel's market share and revenues; and contribution adjustments, switching and aggregation charges and payments for the recovery of start-up costs, the Commission is satisfied that, under the terms and conditions of entry established in this Decision, Unitel is likely to become a viable competitor and bring about the benefits of competition anticipated by the Commission. The Commission notes that, under these assumptions, Unitel's viability is highly dependent on its ability to reduce its unit costs to levels comparable to those of the respondents. The closer Unitel can bring its unit costs towards those of Bell, the better off it will become. As noted above, Unitel's access to the same technology as the respondents would permit it to achieve the same levels of productivity improvements as the respondents in the long run. Whether it can reach these targets is ultimately dependent on its corporate performance and how it adjusts its business plan to reflect the Commission's terms and conditions and the realities of a competitive marketplace. Should it prove unable to do so, the risk is indeed that of the company's shareholders. B. BCRL and Future Applications1. BCRL's Application BCRL's Business Plan builds from existing regional facilities and a resale customer base, and assumes a mix of owned and leased facilities. Unitel, on the other hand, proposed to use its extensive national network to provide a universally available alternative public long distance service in the operating territories served by the respondents. While Unitel did not oppose entry by other IXCs, it suggested that they be subject to certain obligations. Unitel contended that BCRL should be required to pay a comparable contribution, route-average its prices and actively market its services over a geographic area of significant size. BCRL's application represents an example of a less ubiquitous form of entry, wherein potential competitors would have greater latitude to pick and choose the markets they serve, based on their judgment as to the need to respond to customer demands and the viability of expanding or limiting service. Given the costs of entry that would be associated with constructing extensive new facilities, the BCRL approach to building on the existing telecommunications infrastructure represents a less capital intensive alternative to competition provided through the established national networks of the respondents or Unitel. In assessing BCRL's application, the Commission has taken into consideration the BCRL Business Plan and the implications that approval of the application would have as a precedent for open entry and the treatment of future applications. In its evidence, BCRL provided projected financial statements for 1992 to 1996 based on the assumption that its application would be approved. The statements included the operations of B.C. Rail, Lightel and Call-Net. BCRL stated that it based its revenue projections for itself on its plans for pricing, product offerings and sales efforts. BCRL also stated that it expects to attract subscribers by offering value-added services and products, such as Call Detail Account Recording, and other products designed to serve specialty market niches. BCRL predicted that, after five years, it would obtain 3.7% of the total market for long distance services in Bell and B.C. Tel territory. Various parties indicated their opposition to BCRL's application as filed. Some took issue with the contribution payment proposed by BCRL. It was argued that, if BCRL were required to pay adequate contribution, BCRL's Business Plan would not be viable. Unitel, while prepared to provide interconnection to BCRL, indicated that it and BCRL should be treated equally. CBTA, CCC and CTA supported approving BCRL's application. Bell argued that BCRL did not use a reasonable process for calculating its own projected revenues. In particular, Bell considered somewhat arbitrary BCRL's use of Call-Net's past experience as a basis for calculating its own future revenues. B.C. Tel considered BCRL's estimate of a 3.7% market share by 1996 to be low. B.C. Tel submitted that BCRL could achieve a market share of 3% well before 1996, and could be expected to continue to increase its market share after 1996. Bell also submitted that BCRL had understated its costs, because BCRL's cost-per-minute estimates did not include traffic switching and aggregation charges, billing expenses, installation costs, R&D expenditures, bad debts, interest expense, income taxes and return on investment. Bell submitted that BCRL did not provide cost data at a sufficiently disaggregated level to permit detailed analysis. BCRL replied that Bell used inappropriate assumptions in calculating BCRL's costs. It noted that Bell had used disaggregated data that BCRL had provided in response to an interrogatory, based on assumptions BCRL has contended would generate unreliable data. Furthermore, it stated that Bell had attempted to estimate a cost-per-dollar of revenue for BCRL based on Phase III methodology, which BCRL considered inapplicable to a competitive business such as itself. BCRL provided a range of NPV figures based on cash flows over the period from 1992 to 1996. It calculated an NPV of $37 million based on the implementation of the Master Agreement and draft Traffic Interchange Agreement which set out the financial and operational arrangements between B.C. Rail, Lightel and Call-Net. BCRL assumed in its calculations a cost of both equity capital and debt of 16%. It also took into account equity infusions, notional investment and notional disposition. Excluding notional investment and disposition from its cash flows, but including equity infusions, it calculated an NPV of $13.7 million. Bell and B.C. Tel argued that, according to Phase II methodology, equity infusion, notional disposition and notional investment should not be included in the calculation of an NPV. Bell submitted that BCRL's NPV excluding notional investment, notional disposition and equity infusions would be negative $3.5 million. BCRL replied that, when calculating an NPV for the purposes of determining the viability of the Business Plan, the practice of including notional disposition and notional investment is supported by financial theory. BCRL calculated its NPV to be $19.8 million, including notional investment and disposition but excluding equity infusions. BCRL stated that it included equity infusions because it considered them useful for comparing two cash flows. However, it did not mean to suggest that they should be included in the calculation of NPV for determining the viability of an enterprise. With respect to its owned facilities, BCRL considered an appropriate contribution charge to be $200 per interexchange circuit per month, the same amount as established in Decision 90-3 for the resale of private lines for joint use. BCRL was of the view that its entry would cause only a small amount of contribution erosion and that, therefore, a $200 charge would be sufficient compensation. In the Commission's view, BCRL's proposal to pay $200 per month for each interexchange circuits is inappropriate. As stated in the previous Part, the purpose of contribution is to provide an overall subsidy for the provision of local access. While this may not require all market participants to pay equivalent contribution, all competitors' proposed payments must be assessed in terms of, among other things, the likely impact of their entry on local rates in Canada. In the Commission's view, BCRL's proposed contribution payment of $200 does not represent sufficient contribution to ensure minimal impact on local rates. Rather, the Commission considers it appropriate that all IXCs should pay the same contribution for equal access interconnections on toll switches. The appropriate contribution for resellers is discussed below. The Commission considers that, by relying on Call-Net's experience for its revenue projections, BCRL failed to take into consideration differences between Call-Net's operations and the circumstances under which BCRL proposed to enter the market. For example, prior to May 1990 (when Decision 90-3 took effect), Call-Net's growth in market share was limited by restrictions on its ability to resell services on a joint-use basis. After that time, other restrictions applied under the rules established in Decision 90-3. The Commission notes, in particular, that BCRL would not face the geographic restrictions applicable under the resale regime set out in Decision 90-3. The Commission is of the view that the expanded geographic territory where resale is permitted and the ability to resell WATS would allow BCRL to experience revenue growth beyond that indicated by the past experience of Call-Net. The Commission notes that the respondents' estimates of market share, which they based on the Choice Demand Model, are similar in 1996 to the market share predicted by BCRL itself. The respondents' estimates indicate that BCRL's market share will continue to increase beyond 1996. BCRL based its cost estimates on the amount of traffic that it expected to carry, which was determined on the basis of its revenue projections. It did not identify individual cost elements. As noted by Bell, BCRL's aggregate projection prevented a more detailed analysis of its costs. However, the Commission agrees with Bell that BCRL's cost projections appear to have omitted specific cost items. As a result, the costs included in BCRL's financial statements are likely underestimated. The Commission does not consider it reasonable to include values for notional investment and notional disposition in the calculation of an NPV, nor should equity infusions be included in evaluating the viability of the venture. BCRL did not dispute Bell's NPV of $17.2 million as the value of the equity infusions included in BCRL's calculations. It is also noted that BCRL's Exhibit 31 indicates that excluding notional investment and disposition lowers the NPV by $23.3 million. In the Commission's view, the exclusion of equity infusions, notional investment and notional disposition would likely result in a negative NPV over BCRL's five-year study period, assuming that BCRL would enter under the terms and conditions it proposed. The Commission further notes that BCRL's NPV estimates assumed contribution payments of $200 per month on all interconnected interexchange circuits, whether leased or owned. The Commission therefore considers that, at the level of contribution set in this Decision, BCRL's Business Plan is unlikely to produce a positive NPV by the end of 1996. 2. Treatment of BCRL and Future Applications In the opinion of the Commission, approval of the Unitel application will result in the end of the current single facilities-based supplier model for long distance service. While a regulated duopoly structure could result in an increase in choice, supplier responsiveness and price and service offerings, the benefits of competition are likely to be enhanced if other service providers are permitted to enter those market segments that they consider offer viable business opportunities. Such entry would bring greater discipline to the marketplace in terms of pricing and supplier responsiveness, and is more likely to result in the provision of specialized services to market niches that may otherwise not be fully served by more ubiquitous service providers. In developing the terms and conditions for entry, both for resellers and IXCs, the Commission has attempted to establish a framework that will stimulate competition while maintaining local service rates at an affordable level. The Commission has established charges for contribution and interconnection costs that it considers reasonable. While the Commission has found that BCRL is unlikely to produce a positive NPV by the end of 1996 under these terms and conditions, it is of the opinion that the framework established in this Decision would provide an opportunity for BCRL, and other potential IXCs, to develop into effective players in the marketplace in the long run. In the Commission's view, such IXCs, including BCRL, should be permitted to enter the marketplace where their shareholders are prepared to assume the risks and obligations entailed. Future IXC applicants will not be required to demonstrate their financial viability since, in a more competitive environment, it is the applicant who must assume the risk of entry. Accordingly, the Commission is predisposed to approve, under similar circumstances, future applications for entry by IXCs, should such service providers be willing to abide by the terms and conditions established in this Decision. As discussed below, some of the terms and conditions have been established, in part, on the basis that the IXC is subject to the Commission's jurisdiction, as a "company" within the meaning of the Railway Act. In the case of BCRL, the Commission is satisfied that the corporations that would be created as a result of the implementation of the Master Agreement and the draft Traffic Interchange Agreement would be companies within the meaning of the Act. If the parties to the Master Agreement file documentation demonstrating that this Agreement and the Traffic Interchange Agreement have been implemented in all material respects, the Commission will order the BCRL respondents to issue tariff pages providing for the interconnection of the BCRL respondents' systems with those of the companies which result from the implementation of the agreements. C. Resale and Sharing1. General Some parties argued that, if increased entry is permitted, it should be limited to more liberalized resale, since this would have a less negative impact on the respondents. The Commission considers that resale can provide many benefits, but it is not a substitute for facilities-based entry. Facilities-based entry permits sustainable and more broadly-based competition, thereby increasing the benefits to be derived from competition. A facilities-based carrier has more control over its facilities costs. Since a reseller leases its underlying facilities and operates at the margin provided for in the price of leased facilities and services, a reseller is at risk wherever carriers can reduce these margins. Since resellers have less control over their costs, a resale market that operates solely on arbitrage opportunities, without providing value-added services, may not be sustainable over the long run. However, resellers can complement facilities-based competition by providing price discipline, ensuring greater responsiveness and serving niche markets. 2. Extension of Resale and Sharing to Atlantic Canada In Decision 90-3, the Commission allowed the resale of the private lines of Bell, B.C. Tel, Unitel and Telesat for the provision of voice services on a joint-use basis. This has resulted in the provision of MTS/WATS type services by resellers, particularly in the operating territories of Bell and B.C. Tel. In Decision 90-3, the Commission established a contribution charge of $200 per interexchange channel with the expressed purpose of limiting the possibility of significant revenue erosion, while promoting the provision of value-added services. Currently, none of the telephone companies in the Atlantic provinces permit the resale of any of their services, either local or interexchange, data or voice. On 2 April 1990, the Commission received an application from Call-Net requesting that resale and sharing be permitted utilizing the facilities of the telephone companies operating in the Atlantic provinces. Call-Net suggested in its application that extending the rules established in Decision 90-3 to the Atlantic telephone companies would provide the benefits that the Commission identified in that Decision as associated with liberalized resale. BCRL stated that extending Decision 90-3 to the Atlantic telephone companies could provide an opportunity to introduce a more limited form of competition into these territories. MT&T and NBTel were generally in agreement that extending the resale and sharing rules established in Decision 90-3 could be beneficial, if it resulted in the provision of value-added services and if the appropriate terms and conditions were established. Newfoundland Tel did not support the extension of Decision 90-3. Island Tel submitted that extension of resale to its services should be given special consideration, similar to that given to Northwestel, which was exempted from the resale rules established in Decision 90-3. MT&T estimated that extending resale as permitted under Decision 90-3 and Applications by Fonorola Inc. and ACC Long Distance Ltd., Telecom Decision CRTC 90-19, 4 September 1990, which allowed resellers direct access to Teleglobe's services, would result in the company losing 5% market share by 2002. MT&T stated, however, that it considered its estimate of the impact of extending Decision 90-3 to be conservative, upon reconsidering the assumptions underlying its analysis. The market impact estimates provided by Island Tel were similar, indicating market share losses of 4.5% by 2002. Based on information provided by NBTel and Newfoundland Tel, the Commission estimated that the impact of permitting joint-use resale would result in a market share loss, by 2002, of approximately 4% for NBTel and 3% for Newfoundland Tel. The Commission notes that these estimates of market share loss assume no facilities-based entry. As discussed below in the section on the resale of WATS, the Commission expects that resellers would have a lower market share in an environment with facilities-based competitors. Island Tel submitted that it should be given special consideration, as was Northwestel in Decision 90-3. The Commission is of the view that the grounds for exempting Northwestel from the rules established in Decision 90-3 are not applicable to Island Tel. Specifically, the circumstances of Island Tel are not, in the Commission's view, substantially different from those of the other Atlantic telephone companies, nor is there a lack of information specific to Island Tel regarding the impact on revenue and contribution erosion. The record of the proceeding indicates that the impact of permitting joint-use resale to Island Tel would be similar to the expected impact on the other Atlantic telephone companies. Accordingly, the Commission does not consider it appropriate to exempt Island Tel, as it did in the case of Northwestel. In Decision 90-3, the Commission found that joint-use resale would increase the number of suppliers in the market, resulting in greater supplier responsiveness in terms of service availability and pricing flexibility and would stimulate the development of integrated voice/data and value-added services. It was also expected that resellers would offer lower-priced substitutes that would have the potential to stimulate demand and generate new revenues and contribution. The Commission also stated, however, that these benefits had to be assessed against any possible adverse effects, such as significant contribution erosion and uneconomic entry. The Commission is of the view that resale of the facilities of the Atlantic telephone companies would provide benefits similar to those anticipated in Decision 90-3. Moreover, as was found to be the case in Decision 90-3, any negative impact on local rates can be controlled, either through the level of contribution payments or through price restructuring on the part of the Atlantic companies, based on their own cost-benefit analyses for particular market segments. Accordingly, the Commission finds that it is in the public interest to permit the resale and sharing for joint use of the private line services of the Atlantic telephone companies. The four Atlantic telephone companies and Bell supported increasing the contribution payment on joint-use private lines, if resale were extended. The Commission considers an increase reasonable in light of the changes to the geographic area where resellers can obtain public switched access. The Commission notes that MT&T and Island Tel identified potential increases in local service rates of up to 2% per year in order to recover lost contribution. Any revenue erosion will be less, given the increase in the contribution amount. The Commission considers that the impact may also be reduced by increases in productivity and by stimulation in revenues attributable to resellers offering lower rates and value-added services. In light of the above, the Commission does not consider that there will be any associated increases in local rates. The specific contribution payments for resellers are discussed below. The Commission notes that the rules set out in Decision 90-3 explicitly cover other forms of resale by incorporating certain of the rules established in Resale to Provide Primary Exchange Voice Services, Telecom Decision CRTC 87-1, 12 February 1987, and Tariff Revisions Related to Resale and Sharing, Telecom Decision CRTC 87-2, 12 February 1987. The Commission is of the view that resale of the services of the Atlantic respondents should include local, data and non-interconnected resale, under the terms set out in Decision 90-3. MT&T, Island Tel and NBTel raised concerns regarding the possible impact of permitting local resale. They cited the experience of Bell with respect to resale between EAS areas (see Bell Canada - Application to Deny Resale of Centrex III Service by Distributel Communications Limited, Telecom Decision CRTC 89-2, 7 February 1989, and Bell Canada v. Distributel Communications Limited et al and London Telecom v. Bell Canada - Resale of Local Services, Telecom Decision CRTC 91-6, 10 May 1991) and noted the potential impact on their revenues. Data traffic was also considered to be somewhat vulnerable to resellers. MT&T stated that it might find it necessary in the future to restructure rates for specific services such as Centrex. The Commission notes that the Atlantic telephone companies may file revised tariffs to amend their local service rate structures to address any impact of local resale, but that any such filings would have to establish the need for changes and provide support for the argument that there is potential for uneconomic entry. The Commission considers that insufficient information has been provided in this proceeding to support such tariff revisions prior to permitting the resale and sharing of local services. 3. Resale of WATS In Decision 90-3, the Commission explicitly maintained restrictions on the resale of WATS. In arriving at a contribution charge for the resale of private lines for joint use, the Commission noted that the services provided by resellers would have a lower value than those of the respondents because, among other things, of the absence of the lower-priced universal termination available through WATS. The Commission has also prohibited resale of other discount toll services such as Advantage and Teleplus. All the respondents were opposed to permitting the resale of WATS and other discount toll services. Parties opposed to WATS resale argued, among other things, that it would prevent the lowering of toll rates required to enhance Canadian competitiveness, limit the respondents' ability to offer discount services, undermine route-averaging, result in contribution erosion, introduce competition into non-respondent territories, reduce value-added services offered by resellers, and increase opportunities for uneconomic entry by resellers. CBTA, CCC, CTA, the Director and fonorola all supported resale of WATS and other discount toll services. They argued, among other things, that it would distribute the benefits of lower rates more broadly, achieve parity with U.S. rates more rapidly than the respondents' rate plans, ensure that the respondents do not offer services at rates below cost, and promote the efficient use of telecommunications facilities. Saskatchewan submitted that it would be inappropriate to allow Unitel to resell WATS or 800 Service to terminate or originate traffic in the Prairie provinces until the Commission can determine that there is a technical means of preventing Unitel 800 Service customers from using that service to place calls originating from the Prairies and carried on competing networks. OTA also submitted that BCRL should be prohibited from using WATS and 800 Service to reach independent territories. Bell, B.C. Tel and AGT submitted that the continued viability of the resale industry and the benefits that it is expected to provide do not depend on the ability to resell WATS or other discount toll services. Bell and B.C. Tel submitted information detailing resellers' costs under the existing resale rules and with the addition of WATS resale. Both companies found that WATS resale would reduce resellers' costs to terminate traffic beyond the coverage of their networks of leased private lines. Bell employed its estimates of resellers' costs to predict the price discount resellers would be able to offer. The price discount and the supplier preference factor are key inputs for predicting lost market share using the Choice Demand Model. Other respondents also analyzed market share loss using this model. Unitel questioned Bell's estimates of resellers' market share predicted by the Choice Demand Model. Unitel submitted that, if resellers are unable to provide the 15% price discount assumed in the model, their market share would be reduced to as little as 2%. BCRL submitted that Bell's analysis of resellers' costs overstated the market share that would be attained by resellers and the ability of resellers to use compression technology. BCRL stated that, when B.C. Tel re-estimated resellers' market share using BCRL's forecast compression ratios, the market share lost to resellers declined from 23% to 6.6% in 2002. BCRL submitted that B.C. Tel substantially overstated resellers' cost margins by assuming that resellers would have the same mix of traffic as B.C. Tel and by defining the margins as the difference between a reseller's costs and B.C. Tel's revenue per minute, rather than the rate per minute. BCRL was of the view that the supplier preference factor values assumed by the Atlantic respondents to estimate market share were inflated and, therefore, that the reseller market shares for the WATS resale scenario were overestimated. BCRL also argued that, because of differences in the supplier preference factors for resellers assumed by Bell and B.C. Tel under an identical market entry scenario, these supplier preference values should be viewed with scepticism. The Commission notes Bell's submission that the supplier preference factor is based on judgment. The Commission further notes that respondents varied the values for this factor depending on the market entry scenario modelled. The Commission considers that the selection of different supplier preference factors for different market scenarios has not been justified and considers that, as a result, the market share values predicted by the model for resellers may be overestimated. The Commission does not accept the method used by B.C. Tel to estimate the price discounts that would be offered by resellers. B.C. Tel's analysis compared resellers' costs per minute to the company's MTS revenue per minute, which B.C. Tel projected would rise under the Reference Plan. The Commission is of the view that the appropriate measure to which reseller costs should be compared is not revenue per minute, but rather rate per minute. The Commission concludes that B.C. Tel overestimated the price discounts that resellers could offer. The Commission considers that, with the facilities-based entry established in this Decision, the impact attributable to WATS resale would not be substantial. While Bell estimated that it would lose in excess of 15% of its market share if WATS resale was permitted, the market share loss attributable to resellers under a scenario including facilities-based entry was projected to be less than 5% by 2002. The Commission expects that similar ratios would result with respect to other respondents. The Commission notes that these estimates assumed resellers would pay $200 per interexchange channel. The impact of WATS resale would be less if the private-line contribution required of resellers was adjusted upwards to reflect greater geographic coverage and lower off-net costs. The Commission is of the view that WATS resale would enable resellers to increase their geographic coverage at reduced costs. While this could result in an increase in the opportunity for uneconomic entry by resellers, the Commission considers that implementation of lower MTS rates, as indicated in the Reference Plans, and an appropriate contribution payment would serve to limit such entry. It has been the Commission's finding in past decisions that resellers can provide certain benefits and that resale is in the public interest where it does not result in substantial contribution erosion. Such benefits include greater supplier responsiveness, both in terms of service innovation and service and pricing flexibility. The Commission is of the view that resellers could deliver benefits to subscribers in certain niche markets that may not be served by facilities-based competitors. Moreover, in the absence of WATS resale, the Commission considers that resellers would be limited in their ability to offer alternatives to facilities-based competitors. In the opinion of the Commission, resale can increase the price responsiveness of the marketplace. Whenever there are significant differences in rates charged to end users, resellers have the opportunity to take advantage of available margins to respond to portions of the market that would not otherwise be able to benefit from various rate discounts. The respondents have the opportunity to respond to the reseller by reducing margins or beginning to serve such pent-up demand as identified by the reseller. The need for the reseller to continually respond to underserved market segments creates a dynamic marketplace. Such dynamic pricing can be considerably reduced if carriers can restrict access to volume discounted services. In such circumstances, not only can the reseller be limited in targeting pent-up demand, but respondents could use restrictions on access to target the resellers' customer bases with lower rates than the resellers can obtain. For instance, if the reseller is limited to off-net traffic at MTS rates, while the respondents can offer the resellers' customers a discount using Advantage, then the respondents would obtain a significant advantage and, as a consequence, the benefits of lower prices might not be as broadly based. In light of the above, the Commission concludes that resale of WATS and other discount toll services offered by the respondents is in the public interest, and that limitations on the resale of these services should be removed except as noted below with respect to non-respondent territories. With regard to non-respondent telephone companies, the Commission considers that the resale of WATS and other discount toll services would result in a shifting of revenues away from MTS to those discount services for traffic that originates in the respondents' territories. The total settled amount received by the non-respondent telephone companies would therefore be reduced. In order to limit the introduction of indirect competition in non-respondent territories, the Commission considers that, while 800 Service can be used to provide access to national accounts, competitors should not be permitted to use 800 Services to originate competing long distance traffic in non-respondent territories. 4. Contribution for Non-Equal Access (a) Treatment of Resellers Bell submitted that, for traffic terminated using resold WATS, an explicit originating contribution charge should be applied where the call is originated, but that there be no explicit terminating charge, since the WATS tariff would apply. Unitel supported establishing a contribution level for WATS resellers that gives consideration to the amount of contribution embedded in the WATS tariff, while maintaining affordable local rates. BCRL argued that no contribution should be required for calls carried over resold WATS, above and beyond that already embedded in the tariffed rates. The Commission considers that the existing rates for WATS and other discount toll services generate an adequate level of contribution and that it is not appropriate to charge resellers an explicit contribution on WATS and other discount toll services. However, the Commission notes that, in Decision 90-3, the contribution charge on private lines was based in part on a higher cost structure for the reseller and thus a more limited opportunity for revenue erosion than would have been the case if WATS resale had been permitted. Therefore, to continue to limit the potential for revenue erosion, contribution payments required from resellers of joint-use private lines must be adjusted. The Commission notes that the $200 contribution on private lines resold for joint-use took into consideration the geographic coverage that resellers would be able to obtain and the fact that the prohibition on the resale of WATS would limit the ability of resellers to originate or terminate traffic universally at rates below MTS. The Commission's determination to permit resale of Atlantic telephone company private lines for joint-use, as well as to permit WATS resale throughout the respondents' territories, will allow resellers to attract more customers through lower rates and the ability to handle more of their customers' traffic. Resellers will also be able to expand more readily into areas with lower density traffic. In establishing the contribution for resellers in a competitive environment that includes facilities-based entry, there are two important considerations. The first consideration is to establish a contribution for resellers that is appropriate given the nature of their operations and Commission objectives. The nature of resellers' operations has been to obtain end office non-equal access interconnection. The Commission considers it appropriate to charge resellers less for such access than for trunk-side access to the toll office switch on an equal access basis. However, the Commission considers that resellers should not be provided with an uneconomic price advantage over facilities-based competitors. The second consideration is whether the difference in the contribution charged to resellers and to IXCs would introduce a substantial opportunity for contribution avoidance. The Commission notes that a contribution charge for resellers that would protect against significant contribution erosion may be less than that which is appropriate for IXCs. However, if resellers were to be charged a substantially lower amount, the difference would provide a strong incentive for IXCs to take advantage of the lower reseller contribution, even though the quality of access would be inferior. In the Commission's view, any difference greater than 15% could provide sufficient incentive to offset the lower quality. However, a differential of only 15% would mean a substantial change in the economic circumstances under which resellers operate. The Commission is of the opinion that the benefits of competition would be maximized if service providers could choose the mix of leased and owned facilities best suited to their market strategies. However, this would require that differences in contribution should reflect the type of access obtained rather than the type of service provider. Therefore, the Commission considers it reasonable to establish a transitional period during which the contribution charge required from resellers would increase from the minimum level necessary to protect against significant contribution erosion to within 15% of the contribution charges to facilities-based carriers. A transitional period would provide resellers with an opportunity to restructure their activities to take the different contribution charge into account. The Commission has determined that a five-year transitional period, during which the amount of contribution required from resellers is gradually increased, would limit uneconomic entry while minimizing the impact on resellers' viability. In establishing the transitional period for resellers' contribution, the Commission has taken into consideration the current contribution established under Decision 90-3, reductions in resellers' costs, and the additional benefits that will result from permitting WATS resale and resale of the services of the Atlantic respondents. Accordingly, the Commission has determined that the contribution for an end office non-equal access interconnection shall be set, in 1993, at 65% of the contribution charged to facilities-based carriers in 1993 as set out in the Attachment to this Decision. The applicable discount will decline by 5% per year from 35% in 1993 to 15% in 1997, at which time resellers will pay 85% of the then-applicable contribution charge for equal access toll office interconnection. In order to give effect to the further liberalization of resale in 1992, the Commission will apply the 1993 contribution rate in 1992. (b) Treatment of BCRL, Hybrids and Unitel The Commission considers the transitional period important for the establishment of a more competitive market. However, the Commission notes that it could result in significant revenue erosion if Unitel's traffic were to be assessed the contribution rate for resellers. In order to prevent this, the Commission will prohibit Unitel from using resellers to aggregate or terminate traffic on its behalf using a discounted line-side connection. Further, during the transitional period, Unitel will be required to pay a contribution rate equal to 85% of the rate for equal access for any line-side connections obtained. The appropriate rate to be charged to other potential IXCs will depend on the network of the future applicant. Due to the fact that the facilities that would be used by BCRL during the initial part of its Business Plan would be primarily leased, the Commission does not have similar concerns about BCRL obtaining line-side connections at the transitional rates, since the differential will be reduced as the facilities base of BCRL expands. However, BCRL would be required to pay full contribution on any equal access connections. The Commission notes that BCRL requested that it be exempted from the affiliate rule established in Decision 90-3. This rule was put in place to prevent existing companies under the Railway Act from entering the long distance market through an affiliated reseller. It is the intention of the Commission to review the need for the affiliate rule as a result of this Decision. However, the Commission has considered it necessary to preclude Unitel from using a reseller to aggregate or terminate its traffic using discounted line-side connections to prevent potential contribution bypass. The Commission is of the view that BCRL faces different circumstances and that applying the transitional period contribution charge for line-side connections to BCRL would not result in substantial revenue erosion. Accordingly, the Commission does not consider it necessary to apply to BCRL either the affiliate rule or the restrictions placed on Unitel in this respect. V IMPLEMENTATIONA. Regulatory Safeguards1. General The principal issue confronting the Commission, in a mixed monopoly and competitive environment, is how best to ensure fair competition in the MTS/WATS market when some of the competitors control access to bottleneck facilities and have the ability to sustain non-compensatory rates. Alternatively, the imposition of regulatory constraints on incumbent firms should not be so burdensome as to mitigate the beneficial effects of competition. The benefits of competition cannot be fully realized if the respondents are not able to reduce rates to respond to competition, particularly where such reductions are generated by revenue surpluses arising out of productivity improvements or new or more attractive service offerings. The applicants generally argued that the market dominance of the respondents demands the institution of regulatory safeguards consistent with the principles embodied in section 340 of the Railway Act. The Commission is of the view that the respondents have very strong advantages associated with established market presence in their respective monopoly areas. Their role as provider of local monopoly services allows them to control access to and information about subscribers in their respective territories. This provides them with not only a significant competitive advantage, but with both opportunity and incentive to engage in anti-competitive behaviour. Accordingly, the Commission is of the view that regulatory safeguards need to be established with respect to: (1) access to bottleneck facilities; (2) anti-competitive pricing practices; and (3) the disclosure or use of competitively sensitive information. Item (2) is addressed in section B below. The other two items are addressed in this section. 2. Determining Equivalent Access Unitel maintained that in order to compete effectively with the respondents in the public long distance market, it would require provisions for access to local exchange facilities and related services comparable to that which the respondents furnish to their own long distance operations. Unitel argued that the Commission has ample authority, pursuant to sections 336(1), 340(1) and (2) of the Railway Act, to ensure that the respondents do not use their monopoly position in the local exchange market to confer undue advantage on their own long distance operations or to discriminate unjustly against Unitel. The respondents maintained that all competitors should have access to monopoly services and facilities, but they also maintained that they should be under no obligation to provide access for competitors to services and features which are not bottleneck in nature. Bell further argued that the Commission should not accept requests for safeguards that go beyond what is necessary to serve the interests of customers efficiently, as opposed to serving the interests of the applicants. The Commission agrees with the view expressed by Unitel that comparable, non-discriminatory access to local exchange facilities and related services and information extends not only to physical interconnection arrangements and dialing plans, but also to ancillary local facilities and services such as billing and collection services, emergency services, directory services, and pay telephones. However, as noted below, the Commission considers that access to certain of these services may be restricted in light of other regulatory concerns such as adequate consumer safeguards. The Commission acknowledges that technically the local bottleneck may be at the end office switch, but such a demarcation is of little utility in developing principles of fair competition in the long distance market. If the Commission were to require respondents to provide competitors with access only to monopoly services and facilities, it would be granting the respondents an unfair competitive advantage flowing from their provision of monopoly local telephone service. The Commission considers that safeguards should focus on equivalent access to the type of services and facilities that the telephone companies require in order to provide their own long distance services. Unitel and BCRL requested that the respondents treat all IXCs (including their own interexchange operations) on an equal basis in their dealings with the local exchange network. Specifically, the applicants requested that the respondents: (i) handle questions and referrals on interexchange services at their local business offices impartially; (ii) inform customers that they have a choice of interexchange carriers and can indicate it at that time; (iii) include, with the next bill after a service change, an insert describing how to select an alternative carrier; and (iv) supply weekly reports of the names and addresses of all new subscribers and those changing their address. The Commission agrees with the respondents that some of the applicants' requests go beyond what is necessary to ensure that the respondents do not have an unfair advantage. Specifically, the Commission does not intend to put into place safeguards aimed at addressing advantages such as the public's familiarity with the respondents, resulting from their previous monopoly position in the long distance market. In the Commission's view, these advantages have been reflected in the contribution charges. For example, the Commission does not agree with Unitel and BCRL that respondents should provide a billing insert describing how to select a competing carrier, or that they should refer customers wishing to subscribe or wishing further information on a competitor's service to a competitor's service number. Instead, the respondents should only have to provide information as to the existence of alternative suppliers if in the provision of access service (new subscribers, moves, changes) they actively promote their own long distance services. Meanwhile, the Commission expects questions and referrals at respondents' business offices to be handled on an impartial basis. With regard to the supply of weekly reports, the Commission considers that the respondents should provide this information on a tariffed basis. Finally, the Commission considers that safeguards should not only protect the interests of the respondents and competitors, but also the consumer. Accordingly, the Commission has imposed restrictions and regulatory obligations in the area of operator services, pay telephones, billing and collection and database access. These restrictions are discussed below. 3. Pricing of Access Services and Facilities While all parties agree with the principle that competitors should have non-discriminatory access to monopoly facilities and services, there is disagreement as to the pricing of "bottleneck" services and other services which at present may not be tariffed. In general, parties other than the applicants to the proceeding argued that rates should recover the causal costs plus a "reasonable" or "appropriate" mark-up. Bell, for example, proposed that tariffs be set based on causal costs plus a mark-up, generally expected to be 25%. Bell cited the following factors to support a 25% mark-up: (1) the requirement to make a contribution to the company's fixed common costs; (2) mark-up levels associated with other services offered by Bell; (3) previous decisions by the Commission with regard to mark-ups; and (4) the relationship between causal current costs developed following Phase II guidelines and causal embedded costs as identified using Phase III guidelines. Both Unitel and BCRL submitted that there should be no additional mark-up on the costs for interconnection. Unitel submitted that no mark-up above causal cost should be permitted on the basis that it is proposing to make very substantial contribution payments to the respondents on a separate basis. In its view, to add any additional mark-up would result in Unitel paying an excessive level of contribution to the respondents. The Commission considers the mark-up could be seen as providing a contribution to: (1) Common category costs; (2) Access category costs; and (3) in cases where embedded costs exceed current costs, the difference between the two. Under the contribution mechanism adopted by the Commission in this Decision, IXCs will be required to contribute significant amounts towards the recovery of Access costs and a smaller amount towards the portion of the Common category costs allocated implicitly to the ML category under the revenue surplus approach to allocating common costs. The Commission notes that Unitel, under the approach established in the Decision, will make a very substantial contribution payment in respect of its access to the PSTN, and that the addition of a mark-up may result in it paying an excessive level of contribution to the respondents. Further, the Commission notes that, in the context of tariff filings, the telephone companies have not to date initiated, in either the costing or rating of competitive services, any consideration of the differences between embedded and current costs. Given that, under the contribution process, IXCs would be explicitly contributing substantial amounts to the recovery of Access and Common category costs, new tariffs for facilities and services required for equivalent access shall not include a mark-up. 4. Protection of Competitor Information The applicants raised a concern that the respondents could take advantage of competitive information in their possession. Most parties in the proceeding maintained that procedures should be implemented to restrict the flow of information between the respondents' monopoly and competitive service personnel in order to ensure that information provided by competitors to a company in its capacity as a monopoly service provider is kept confidential. Unitel and BCRL specifically requested the respondents establish interexchange carrier groups to coordinate the delivery of facilities and services to competitors. As noted by Bell, such a group would be responsible for the developing and marketing of services to competitors; forecasting and tracking of network access requirements; processing and tracking of network access service requests; network provisioning interface; processing of pre-subscription orders received from competitors; billing enquiry and collections; equal access coordination; contract administration; and safeguarding of competitor information. The Commission notes that the applicants and respondents agree that Interexchange Carrier Groups are required for a separation of monopoly and competitive activities of the respondents. Accordingly, in Part VI of this Decision, each respondent is directed to establish such a group. B. Tariff and Pricing PrinciplesWith a change in the provision of facilities-based public message toll service from a monopoly to a competitive market, several issues arise with respect to the regulation of the competitors and the respondents. To achieve the greatest benefits from competition, the regulatory regime must allow for tariff applications in respect of competitive services to be processed as expeditiously as possible, while at the same time ensuring an environment that is as fair as practicable for all participants. As well, the Commission considers that it is important that the regulatory regime should also ensure that competitive activities do not adversely affect the policy objective that affordable rates be maintained for local monopoly subscribers. The Railway Act requires that the Commission approve all tolls prior to their being charged. In assessing such tolls, the Commission must ensure that they are just and reasonable and that they are not unjustly discriminatory and do not confer an undue preference or advantage, in accordance with section 340. While the rates of all of the companies under the Commission's jurisdiction must meet these requirements, the Commission notes that the method by which it determines whether these requirements are met may differ according to the nature of the services or of the service provider. With respect to the regulation of the respondents, Unitel proposed that there is no need for significant change to the existing regime. The respondents generally submitted that, if competition is allowed, there should be equivalent regulatory scrutiny applicable to all market participants. They also argued that the regulatory scrutiny should be minimized and that the regulatory process should be streamlined. Other parties submitted that regulation of the respondents should be more stringent than for competitors because of the various inherent advantages enjoyed by the respondents. The Commission notes that the respondents will, for the foreseeable future, continue to be dominant in the market. Also, they control bottleneck facilities, and have the ability to sustain non-compensatory rates. While there is little possibility that the MT category as a whole would not recover its costs, it would be possible for certain more highly competitive segments of the toll services to be cross-subsidized by other segments which are less competitive. As well, changes to rates for competitive services may have significant effects on the rates for local monopoly services. For these reasons, the Commission finds it appropriate that, in general, the present regulatory framework continue to apply to the respondents. This framework includes rate of return regulation and the requirement to provide supporting information for proposed tariff revisions. Some revisions to current practices will however be appropriate to ensure fairness to the competitors while at the same time permitting the respondents to compete effectively. In assessing the respondents' rates for competitive services the Commission generally relies on Phase II studies to determine if the rates are just and reasonable. In making such a determination, the Commission requires that the proposed rates are compensatory and set at a level that maximizes contribution. In this proceeding, Unitel has proposed that the respondents continue to be subject to the requirement that rates maximize contribution, while the respondents have proposed that the requirement be eliminated. It is the current policy of the Commission to exempt optional message toll services (e.g., Advantage Canada) from any requirement to maximize contribution. The Commission considers that this policy should apply to all message toll services once the market becomes competitive, since to require that toll rates maximize contribution would be inconsistent with a policy that toll rates in general should be reduced. Many parties submitted that toll rate reductions by the respondents could potentially have a significant effect on the level of local rates. The Commission is of the view that any such effect is an important factor in determining the appropriateness of proposed tariff revisions. With the introduction of competition in the toll market, the Commission is of the view that the respondents will have a justifiable right to expect prompt action by the Commission on applications involving the newly competitive services. In light of this, the Commission believes that it would be appropriate to establish criteria for interim approval of applications filed by the respondents for toll services. In order to establish such criteria, the Commission has had regard to two considerations; namely, whether the proposed rates should be required to be compensatory, and the potential impact of the proposed rates on local rates. With respect to the first consideration, the Commission finds it appropriate to require proposed rates for toll services to be compensatory on the basis that the revenues for the service exceed the causal costs. Cross-effects on existing competitive services are to be excluded from this determination. Further, subject to any considerations concerning unjust discrimination or undue preference, the Commission finds that it would be appropriate to grant ex parte interim approval to proposed rates for toll services where it is satisfied on a prima facie basis that the contribution loss will not be significant. This will require that the applicant file economic information showing the forecasted change in contribution, including cross-effects. The Commission will similarly grant ex parte interim approval to proposed toll rates that will result in a significant reduction in contribution where the company indicates that the reduction in contribution amounts to the elimination of surplus revenues. The Commission recognizes that there are interdependencies between the rates of the respondents, depending on the manner in which settled revenues are affected by toll reductions. In the Commission's view, prior to the completion of a public process, a respondent's local rates should not be raised in order to permit that respondent to implement agreed-upon Stentor rates unless it can be determined that: (1) by not adopting agreed-upon rates, resultant monthly local rate increases due to a reduction in settled revenues would be approximately equal or even greater; or (2) the resultant total service bill for the average residence subscriber would decrease even if local rates rise. The Commission would be prepared to grant ex parte interim approval to applications which it has determined on a prima facie basis meet one of these conditions. This will require that the applicant file all information necessary to demonstrate that one or both of the conditions has been met. The Commission notes that these limitations are not intended to apply to rate actions by a respondent having no local rate impacts in its own operating territory, even if the consequence may be upward pressure on local rates elsewhere. Under the competitive environment that is being established by the Commission, competitors are required to pay contribution relative to the level of contribution generated by the respondents. To the extent that toll reductions are included in a company's annual Phase III/RSP forecasts, contribution payments can be established that reflect the anticipated toll reductions. For toll reductions that were not included in the annual Phase III/RSP filing, the respondents would also be required to file an estimate of any change in the contribution charge which would arise, using the contribution formula established in this Decision, so that the Commission can ensure that the contribution charge established in the annual process remains appropriate. With respect to regulation of the rates of the applicants, the Commission considers that these companies will not have market power and generally have no sources of monopoly revenues. For these reasons, the Commission is of the view that, in general, more reliance can be placed on the competitive market to ensure that the rates for services offered by these companies comply with section 340 of the Railway Act and that there is no need to specify, in advance, what particular information must be filed in support of their proposed rate levels. This would also be the case with respect to any other competitors that are considered non-dominant. The one exception to this rule is that any operator services tariff would require detailed information to ensure that consumer interests are adequately safeguarded. As part of its application, BCRL requested access to Unitel's services. The Commission finds it appropriate that all carriers under its jurisdiction allow access to their facilities and services on a non-discriminatory basis. The Commission would therefore be predisposed to approving that part of BCRL's application requesting interconnection to Unitel, should BCRL file documentation indicating that it has implemented its Master Agreement and the draft Traffic Interchange Agreement in all material respects. The appropriateness of continuing a policy of route-averaging was raised by many parties. The principle of route-averaging requires that long distance calls of the same duration that are carried over the same distance, during the same time period, under similar circumstances, be priced at the same level regardless of their geographic location. While it is reasonable that IXCs serving more than one respondent territory may apply different rates in each territory, the Commission finds that current general policies regarding route-averaging should be maintained within the boundaries of each territory. Several parties to the proceeding submitted that Unitel wanted a regulated price differential. This would require that a differential between Unitel's rates and the respondents' rates be maintained through the regulatory process. In the proceeding, Unitel submitted that it should be allowed to price below the respondents' rates. Under cross-examination, however, Unitel stated that it only wanted the flexibility to price under the respondents and not a regulated price differential. It is noted that the regulatory regime outlined above would provide considerable price flexibility for competitors. While the respondents would not have as much price flexibility, the Commission is of the view that the level of respondents' rates should in no way be constrained by the level of competitors' rates, nor by their ability or inability to price below the respondents' rates. Finally, a number of the respondents in this proceeding suggested that a necessary complement to the introduction of facilities-based competition would be a program of rate rebalancing. In particular, B.C. Tel, in its extended Reference Plan, proposed rebalancing as a way to lower long distance rates for all subscribers. In Public Notice 1990-73, the Commission indicated that it did not intend to deal with specific rate rebalancing applications in this proceeding. This remains the position of the Commission. The Commission does not view extensive rate rebalancing as a necessary outcome of competition, even though competition will create added pressure to reduce rates priced well in excess of costs. Therefore, the Commission does not consider it necessary to explore targeted subsidies as a result of implementing competition. Contribution payments will minimize the potential for significant impacts on local rates. In the near term, local rate increases are more likely to result from Stentor toll rate reductions, such as those that were proposed in the Reference Plans. To the extent that some members of Stentor cannot generate the same relative magnitude of surplus revenues as Bell, toll rate reductions by Bell may have to be supported through local rate increases in the territories of other members. The Commission is not opposed to some form of rate restructuring to further reduce MTS/WATS rates if it should be demonstrated that competition and productivity improvements are not achieving this objective in a timely fashion. However, the Commission considers that, given the variety of factors influencing local service prices (access cost recovery, rate group pricing, EAS initiatives and new optional services), there may be alternative ways to generate increased revenues from local/access service other than across-the-board rebalancing. The Commission intends, therefore, within its existing resource constraints, to initiate a process to study the most efficient and equitable way of pricing local and access services. The Commission may re-examine across-the-board rate rebalancing if there is some evidence over time to indicate that toll rates are not moving downwards at a reasonable speed. To assume rates must be rebalanced across-the-board commensurate with the introduction of competition could serve only to stifle entry in the short run, should respondent price responses be funded by revenue transfers from monopoly local service rather than productivity improvements. C. Interconnection Arrangements1. General In its application, Unitel requested interconnection using tandem access via the respondents' toll offices; supplementary direct end office access connection; connection of its signal transfer points (STPs) to those of the respondents using standard protocols; and permission to terminate calls in regions not served by the respondents through their WATS services. Unitel also recommended that the Commission establish joint technical committees comprising representatives of IXCs and respondents to address and resolve technical and operational problems. Unitel maintained that the type and level of interconnection selected will significantly affect such factors as quality of service, cost of service, universality of service, network efficiency, and the range of services provided by a competitor. Therefore, according to Unitel, the arrangements approved will have an impact on its ability to compete effectively in the long distance market. In its application, BCRL requested interconnection with the facilities of Bell and B.C. Tel at two levels; tandem access via the respondents' toll offices and local access. BCRL also requested direct access to Unitel for the purpose of terminating traffic to points not on the BCRL network. 2. Network Interconnection (a) Trunk Connections Unitel requested interconnection with the respondents via dedicated digital trunk facilities at all of their toll offices, as well as selected end offices. BCRL requested interconnection with Bell and B.C. Tel at most toll and selected end offices and also requested toll terminating connections to Unitel's long distance network. i. Toll Office (Tandem) Access The applicants preferred tandem access in which their traffic would be transported by the respondents between the respondents' end and toll offices (the "access tandems"). Calling line identification (Caller ID) and answer supervision would be provided via the toll offices for call detail recording. In Unitel's view, this method would provide universal access in a timely and uniform manner, and at the same time ensure high quality connection and minimize disruption to the existing network. All the respondents indicated that they could provide tandem access. Bell maintained, however, that its method of dynamically controlled routing (DCR) would in certain cases force the use of dedicated trunk groups for competitors' traffic between end offices and access tandem switches. Newfoundland Tel submitted that tandem access would reduce the overall cost of interconnection and least affect the operational, administration and maintenance systems already in place. Saskatchewan agreed with Bell on the inefficiencies associated with tandem access in a DCR environment and submitted that tandem access would be administratively complex. EdTel and CITA/OTA expressed concern that tandem access would allow bypass of the independent telephone company networks. CITA/OTA requested that the Commission note particularly Unitel's stated intention to negotiate interconnection agreements with independent telephone companies at existing compensation levels, whether the connection is direct or indirect. Unitel questioned any need for separate trunk groups, contending that Caller ID could be transmitted through Bell's network via CCS7. Unitel therefore argued that Bell could readily accommodate its tandem access plan in a DCR environment without any significant departure from its ongoing routing requirements. The Commission accepts that DCR will demand dedicated trunk groups for competitors' traffic. However, the Commission does not consider that this would impede provision of tandem access, nor would tandem access be "administratively complex and pervaded with regulatory pitfalls". The Commission notes that independent company concerns about bypass would be assuaged if Unitel abides by its stated intention on compensation for interconnection, and expects Unitel to keep this commitment. The Commission will allow IXCs to interconnect their networks with those of the respondents at the latter's toll offices, and expects the interconnecting parties to negotiate the details in conformity with Part VI of this Decision. ii. End Office Access The applicants stated that they would employ direct access to end offices when it makes economic and technological sense. The local switch would route IXC traffic on dedicated digital trunk facilities to or from the POP. The end office would also provide Caller ID and answer supervision to the POP for billing and authorization. The applicants associated the advantages of reduced post dial delay and increased survivability with local access. However, Unitel pointed out several factors that now militate against selecting only local access. In Unitel's view, use of local access should follow equal ease of access modifications. Unitel assumed that its traffic would be entirely handled through tandem access arrangements in the first two years of its service. In the third year, Unitel projects that 4% of traffic will flow directly to or from end offices, increasing linearly until year seven in which 20% of traffic will use local access connections. The applicants also sought provision of alternate routing, sending call attempts via the tandem switch when all local access facilities were occupied. Some parties proposed that local access be mandated where it was available, rather than being offered as an option to IXCs. Unitel contended that this would limit its flexibility and could impose a cost penalty. No respondent refused to offer local access, although Newfoundland Tel would prefer not to. Moreover, Unitel indicated its willingness to negotiate overflow arrangements with the respondents. The Commission sees no need at present to mandate the type of interconnection with independent telephone companies; this should be negotiated when a carrier seeks interconnection with such a company. Obviously, if an independent company has no tandem switches, only local access is possible. The Commission will allow IXCs to interconnect their networks with the networks of the respondents at the respondents' local offices and expects the interconnecting parties to negotiate the interconnection details in conformity with Part VI of this Decision. (b) Signalling Connections The respondents are currently introducing CCS7 into their networks to provide greater circuit efficiency and to enable enhanced service provision. This method of signalling uses a separate dedicated signalling network to deliver call control information. Unitel provided the following definitions of the key elements of the CCS7 architecture. Switching offices equipped with CCS7 are called signalling points (SPs). Messages are sent between SPs via message switches called STPs. STPs also query databases, known as service control points (SCPs), through particular message switches called service switching points (SSPs). CCS7 has a control protocol consisting of independently specified layers, each exploiting those below it. The central services organization of the Bell operating companies in the U.S., Bell Communications Research Inc. (Bellcore), has developed associated standards that are in general use in North America. Two main Bellcore technical references govern connection-oriented services such as voice calling: TR-TSY-000317 (TR-317) for call set-up and release within a single network; and TR-TSY-000394 (TR-394) which applies to interconnected networks. The applicants requested interconnection with the respondents' STPs in order to exchange CCS7 information. They proposed to connect to CCS7-unequipped toll switches using standard multi frequency (MF) signalling with ANI and answer supervision. BCRL also requested interconnection with Unitel's STPs. Bell acknowledged that, although technically feasible, interconnecting CCS7 systems via STP gateways would require thorough verification testing for compatibility. Bell pointed out that its CCS7 network only has the capability of TR-317, which differs in important ways from TR-394. Bell stated that, by employing software conforming to TR-394, it could provide the additional CCS7 capabilities requested but it does not need them itself. Bell would continue to require TR-317 capability and would as well have to modify TR-394 software. Bell submitted that, under DCR, it could not pass ANI through an intermediate switch using MF signalling. Thus, it would need dedicated final trunk groups to the access tandem to aggregate traffic requiring ANI. B.C. Tel stated that, where deployed, it would offer CCS7 interconnection to entrants, but pointed out limitations of the GTD family of switches, which will continue to provide toll access to about 20% of its customers. GTD-5 switches would also require SVR 1.6.4.1, which B.C. Tel stated it does not currently need. B.C. Tel stated that 95% of its customer lines do not forward ANI on DDD calls. NBTel proposed MF signalling with ANI initially in lieu of CCS7 with Caller ID. NBTel maintained that CCS7 interconnection is not a prerequisite to competition, hence it should not be viewed in the same context as access to the basic network. AGT maintained that CCS7 interconnection would not be necessary to facilitate competition. AGT stated that, although the network is evolving to CCS7, problems remain to be solved and interconnection should be considered after implementation is complete, through STP gateways. The Commission sees no unresolvable problems respecting the proposed CCS7 interconnection, but agrees that TR-394 software must be modified for Bell's use. Since Unitel will accept in-band MF signalling from switches not equipped with CCS7, the Commission will not now compel B.C. Tel to implement SVR 1.6.1.4 on its GTD-5 switches. Contrary to NBTel and AGT, the Commission views CCS7 as the new signalling standard; hence it would be unjustly discriminatory to prevent the more advanced CCS7 interconnection. No respondent stated that it could not provide answer supervision when employing MF signalling. Although Bell does not forward ANI itself, it indicated that ANI could be forwarded by using dedicated trunk groups. Accordingly, the Commission will allow IXCs to interconnect their STPs to those of the respondents via CCS7 gateways. The Commission will also allow IXCs to interconnect their networks using MF signalling wherever CCS7 is not available. Detailed requirements are to be negotiated between the interconnecting parties in conformity with Part VI of this Decision. (c) WATS and 800 Service Connections Unitel requested the right to use WATS to terminate message toll traffic throughout the Prairies and Northwestel territory until it can conclude interconnection arrangements with the non-respondent telephone companies. BCRL similarly requested use of WATS and MTS bulk discount services to terminate traffic in the operating territories of non-respondent telephone companies. Bell pointed out that it would have to design, cost and file tariffs for such a "trunk side" service, since it does not currently exist. No other respondents addressed this issue. The applicants also requested the right to use the respondents' 800 Services to access their 800 Service numbers throughout Canada. Unitel outlined its proposed interconnection topology and contended that it would only require modification of respondents' equipment. BCRL stated that it would use 800 Service to enable a travel service. Saskatchewan expressed concern about the use of WATS and 800 Service to introduce competition in the Prairies. Saskatchewan deemed it inappropriate to allow termination of traffic in non-respondents' territories using WATS until improper use can be technically prevented. Saskatchewan submitted that the Commission should specifically restrict any WATS use for terminating MTS traffic originating in respondent territory and any 800 Service use for providing nationwide access for the applicants' 800 Service customers in respondents' territories. Bell and B.C. Tel stated that they could provide 800 NXX screening via the SSPs coincident with entry. The Commission notes that no respondent objected to these proposals, although some suggested that Unitel should first negotiate with the non-respondent telephone companies about 800 calls. The Commission agrees that these services should not be used to both originate and terminate an individual call in non-respondent territory. As described above in Part IV, the Commission has liberalized the rules governing resale of WATS and other discounted toll services subject to certain restrictions. Accordingly, the Commission will allow IXCs to interconnect to the respondents' WATS to terminate traffic originating in the respondents' territories and to offer 800 Service with nationwide origination, terminating in the respondents' territories in some cases via a variant of the respondents' 800 Service. However, 800 Service may not be used to originate competitive traffic out of a non-respondent's operating territory. Interconnecting parties are to negotiate the interconnection details as required, in conformity with Part VI of this Decision. (d) Test Facilities Unitel and BCRL requested that the respondents furnish all permitted types of connections for testing. BCRL made a similar request of Unitel. Bell stated that it would need to initiate trials to validate network interworking. The Commission agrees that tests will be necessary. Accordingly, IXCs are to be permitted access to interconnection facilities, for the purpose of testing their networks, in conformity with Part VI of this Decision. 3. Technical Requirements Related To Equitable Access Requirements (a) Numbering Plan i. Administration Unitel submitted that its need for numbering resources raises some unique public policy issues. The numbering plan used in Canada is the North American Numbering Plan (NANP), covering not only Canada but also the U.S. and some parts of Mexico and the Caribbean. Bellcore administers the NANP, with Stentor acting as its Canadian agent. Unitel stated that it would accede to these existing administrative arrangements as long as its interests were not prejudiced. Bell contended that the record did not identify any unique public policy issues, nor did the experience in coordinating number resources since the NANP's inception. Bell agreed that the NANP must be administered in the public interest and promised to work with the industry to protect the numbering resources and to ensure the availability of appropriate codes for all carriers. Bell indicated that Stentor had proposed the establishment of an industry group to address Canadian numbering issues, and that Unitel supported the establishment of this group. B.C. Tel maintained that such a group should control NANP assignment in Canada. CCC submitted that control of the numbering plan should be vested in the regulator. The Commission supports the establishment of an industry group to address Canadian numbering issues. The Commission notes that Unitel would accept the existing arrangements if its interests were not prejudiced and expects that IXCs will use these arrangements until changed by industry consensus or regulatory intervention. The Commission expects Stentor to treat all numbering applicants, including Stentor members, equitably. ii. Carrier Identification Codes Unitel and BCRL each requested to have three three-digit carrier identification codes (CICs) assigned to them. These codes are used in dialing to identify the particular carrier desired. They contended that this was reasonable and conformed to Bellcore policy. Unitel stated that it would require at least one CIC to be assigned prior to commencing service. Bell stated that three-digit CICs are projected to exhaust soon and that Bellcore, with industry consensus, is aggressively reclaiming them and applying strict assignment procedures that grant new carriers only one CIC. Bell contended that Unitel and BCRL ignored this fact. Bell indicated that it too would need a CIC so customers of IXCs could call on its network. Unitel contended that it had not ignored Bellcore policies and that CICs in Canada should be administered according to Canadian requirements and Canadian public policy. Unitel also suggested that the Commission should be available to adjudicate disputes. Unitel contended that its request for three CICs is reasonable and is consistent with the above policy objectives. The Commission expects the IXCs to consult with and apply for CICs through the Canadian NANP administrator (currently Stentor) in accordance with the industry-approved guidelines. iii. Service Access Codes and Telephone Numbers Unitel and BCRL requested dedicated NXX codes within the 700, 800 and 900 blocks of service access codes (SACs), initially seeking at least one NXX in each block. They argued that without equal access to these SAC blocks they would be unable to compete effectively. Unitel maintained that these codes are a public resource and should be equally available to all authorized IXCs. The respondents generally supported the requests for 800 and 900 NXXs, contending the existing administration could be used. Bell stated that the 700 SAC was unique because the assignment of NXXs was not currently coordinated between carriers. Bell contended that coordination would improve utilization in Canada, and suggested that the use of the 700 SAC in Canada be considered by the proposed numbering group. The Commission expects that IXCs will apply to the Canadian administrator for number resources and anticipates that Stentor will assign discrete NXXs within the 800 and 900 SACs in accordance with industry practice. The Commission finds Bell's position on the 700 SAC reasonable. iv. 800 and 900 Number Portability Unitel maintained that it would require number portability (i.e., a particular number assigned to a customer could be transferred from carrier to carrier) to compete effectively, since certain businesses establish significant public recognition and goodwill with their 800 and 900 numbers. Unitel requested the Commission to direct the respondents to provide such portability and to file tariffs for performing ancillary database look-ups. BCRL also requested number portability to give customers the freedom of carrier choice while retaining an existing number. Bell and B.C. Tel stated that they would assume responsibility for determining the carrier currently serving the number. The Commission notes that parties generally supported number portability; only the time frame was in dispute and therefore encourages the respondents to develop 800 and 900 number portability as soon as possible. (b) Dialing Plans i. Pre-Subscription (1+ Dialing) (1) General Unitel and BCRL stated that they want equal ease of access (EEA) so their subscribers can access their networks as easily as most customers now access long distance service provided by the respondents, i.e., dialing either 0 or 1 plus a seven-digit or ten-digit telephone number. Interexchange users would have to select a primary long distance carrier, such as Unitel, BCRL, or a Stentor member, in advance ("pre-subscription"). Parties were in agreement that balloting as a means of selection would be inappropriate. For each 0+ or 1+ call, the respondents' switches would have to recognize the pre-subscribed carrier and route the call to that carrier. BCRL suggested two possible EEA methods, switch-based (distributed database) and SCP-based (centralized database). Bell stated that the respondents would use the Feature Groups developed in the U.S. as fundamental building blocks for interconnection because they are well-documented and software exists to implement them. Bell considered that features not currently available in the U.S. (thus requiring software development) would be impractical to implement in the first few years of interconnection. B.C. Tel maintained that EEA should be provided to IXCs as soon as possible and should be the initial form of access from the company's digital end offices. MT&T and Island Tel agreed that network interconnection should be realized using EEA and contended that, where available, EEA should be the only mode of interconnection. NBTel proposed not to offer EEA to competitors upon their initial entry, wishing first to gauge the initial effects of competition. It contended that the terms of entry should minimize, to the extent possible, risk to its customers and shareholders. NBTel submitted that an access method that least disrupted its operations and diverted its resources, while offering a superior dialing arrangement to the U.S. method known as Feature Group B (FGB), would best achieve this goal. (2) Distributed Database (Switch-Based) BCRL stated that using a distributed database would mirror the U.S. method known as Feature Group D (FGD). Unitel pointed out that its concept of EEA differs; FGD uses in-band MF signalling, whereas Unitel has stipulated CCS7 signalling. Unitel contended that FGD is now outmoded and unacceptable. BCRL viewed with concern the possibility of the respondents administering the switch databases. BCRL maintained that this would run counter to competition, since the respondents would know each subscriber's selected IXC. Bell, MT&T and Island Tel preferred FGD access because it is well understood. Bell proposed to offer FGD from digital switches and remotes on a scheduled roll-out. Bell stated that FGD provides both ANI and answer and disconnect supervision to the IXC. Bell contended that FGD would supplement existing protocols within its network. Bell submitted that FGD was designed to convey calls to an IXC either directly from an end office or through a single access tandem, and that FGD does not support DCR. Consequently, separate trunk groups for competitors' traffic would sometimes be required between end offices and an access tandem. Bell and B.C. Tel noted that CCS7 is not an integral part of FGD. Bell estimated that implementation of FGD with CCS7 could start 24 months after a decision and be substantially completed 12 months later. B.C. Tel also proposed to use FGD for EEA and could provide it from all its digital end offices. It noted that FGD is the only currently available switch software for EEA interconnection. It submitted that furnishing CCS7 would be expensive and expected system development and modifications for FGD to take 12 to 18 months. B.C. Tel maintained that accelerating EEA availability from non-digital switches could not be economically justified and that, if competitive equity compelled it, the costs should be borne by IXCs. Bell does not plan to implement Local Automatic Message Accounting (LAMA) or CCS7 on DMS-10 switches, both of which are needed for FGD with CCS7. Bell projected a one-time causal cost of $64 million for FGD on the DMS-10s, compared with $86 million for all its other digital switches. Since DMS-10s serve only 2% to 3% of its network access lines, Bell finds EEA on DMS-10s difficult to justify and if deemed to be in the public interest, it should recover all causal costs from IXCs. (3) Centralized Database (SCP-Based) BCRL mentioned that Stentor's existing SCPs could provide EEA with very few modifications: first, a file would be added to the database associating the pre-subscribed carrier identification with each telephone number; second, all 1+ calls would be routed to the SCP to identify the carrier; and third, the toll office would route traffic selectively based on the CIC returned by the SCP. BCRL insisted that an impartial party administer the file containing the pre-subscription data to avoid giving the respondents a significant competitive advantage. BCRL preferred such a method because, as mentioned, it lends itself to administration by a neutral third party, it would allow EEA from all switches regardless of technology and it would give Canada world leadership in network capability and provide a better platform for innovative services. Intelco stated that it had issued a Multi-Service Networks (MSN) specification that furnished EEA using a centralized database accessible via CCS7. According to Intelco, MSN provides a set of intelligent network capabilities that satisfy present and future EEA requirements, as well as many new features enabling significant operational savings and new revenue generating services. Intelco submitted that, given the current state of the Canadian network, carrier selection via a CCS7 centralized database would be in the public interest. Intelco acknowledged that this capability would have to be developed by manufacturers. Intelco further noted that the database could be owned and managed by a third party to create a level playing field. Bell and B.C. Tel maintained that a centralized database architecture for EEA was not cost effective. Bell submitted that to implement EEA in this fashion, it would have first to implement FGD and then spend an additional $175 million to set up the database and modify the switches to allow them to access it. Bell submitted that this would take significantly more time than implementing FGD with switch data-bases. (4) Conclusions The Commission is of the view that equal ease of access through 1+ dialing is essential in a competitive environment and expects all respondents to provide it in a timely fashion. The Commission agrees that balloting to pre-select a preferred interexchange carrier is unnecessary. The Commission is not satisfied that the proposed centralized database method has been sufficiently explored to be implemented in a timely fashion; in particular, switch vendors do not currently support it. Moreover, it is not satisfied that its cited benefits could be achieved. The Commission has therefore determined that FGD, augmented with CCS7 where available, should be used initially for EEA. The Commission accepts the submissions that modifying analogue switches and Bell DMS-10s for EEA is not cost-effective, and therefore will not dictate it. ii. Casual Calling (10XXX Dialing) In order to permit customers pre-subscribed to a particular carrier to use another carrier's services (casual calling), Unitel proposed dialing 10XXX plus a seven-digit or ten-digit telephone number where XXX is the CIC of the desired carrier. BCRL maintained that such casual calling would give an alternative means of calling in the event of a network failure. The Commission notes that casual calling will be possible with the prescribed EEA method using CICs. iii. Interim Arrangement (1+950-0XXX Dialing) Unitel acknowledged that not all switches can be converted to EEA, calling such switches "non-conforming" (the others are "conforming"). To provide access from all non-conforming switches and, pending conversion to EEA, from conforming switches, Unitel and BCRL proposed two-stage dialing: first 1+950-0XXX (where XXX is the CIC of the carrier to be used), and, after a second dial tone, the ten-digit number of the called party. This requires tone signalling and parallels the FGB arrangement. According to Unitel, this could be implemented without significant switch modifications. Unitel anticipated that this would be available at start-up, and would be phased out with the introduction of EEA. BCRL also requested Bell and B.C. Tel to offer optional routing between toll offices under this arrangement to allow customers to reach BCRL from regions where it has no toll access. Bell expected to be able to implement FGB with ANI forwarding and in-band signalling six to twelve months after the decision, and anticipated that billing modifications for FGB could be completed at about the same time. According to Bell, FGD with in-band signalling would not be available for an additional six months. B.C. Tel proposed to provide FGB only for non-digital end offices and only through a tandem. It stated that ANI would generally not be forwarded, necessitating entry of an authorization code at the second dial tone as well as the number. B.C. Tel contended that supplying FGB from digital switches would be contrary to the public interest for several reasons, particularly since the company estimated it would only take 12 to 18 months to totally roll out FGB in analogue offices and FGD in digital offices, compared to 12 months for FGB in all offices with subsequent conversion of digital offices to FGD alone. MT&T and Island Tel contended that FGB should be considered only an interim step towards EEA and not tariffed as an alternative form of interconnection. NBTel proposed not to offer FGB access, contending that FGB would be redundant. Newfoundland Tel stated that it could support 1+950-0XXX calling. The Commission is of the view that competition should occur as soon as possible. Therefore the Commission directs the respondents to implement FGB, augmented with CCS7 where installed, as an interim interconnection arrangement wherever FGD cannot be implemented by the time the applicants desire interconnection. (c) Operator Services (0+/0-) Unitel proposed to provide operator assistance with its operators handling calls such as collect calls and calls charged to a third party or an account card. Blocking access to a competing carrier would be prohibited, the caller would select the carrier and Unitel would employ double branding i.e., informing both callers and recipients of Unitel's involvement. Bell proposed to continue to carry all 0 prefix traffic to a Toll Operator Position System (TOPS) switch to determine the carrier preference. Bell furthermore proposed that the billed party should choose the carrier. This is known as billed party preference (BPP). AGT, B.C. Tel, MT&T, Island Tel and Saskatchewan also supported this concept. B.C. Tel proposed to handle all 0- calls itself and employ BPP for 0+ calls. Bell maintained that using pre-subscription to select the carrier for 0+ traffic favours site owners over the billed party. Bell and B.C. Tel stated that some operator service providers in the U.S. (where pre-subscription is used) have excessively high rates and provide poor service. This has in turn instigated an unprecedented volume of complaints requiring extensive regulatory attention, culminating in legislation proscribing blocking access to a customer's preferred carrier. Bell contended that implementing BPP would eliminate such pitfalls and that without BPP, 0+ competition would not be in the public interest. Bell and B.C. Tel argued that one could regard BPP as offering EEA for 0+ calling, just as FGD does for 1+ calling. Both Bell and B.C. Tel recognized that BPP would necessitate software development, entailing a significant cost and some time delay. Bell stated that it would take approximately two years to provide BPP. B.C. Tel accepted Bell's evidence on the technical feasibility of BPP, but indicated that it needed further study to determine its costs and implementation interval. The Commission considers that the positive features of BPP are outweighed by its projected costs and uncertain availability. BPP implementation costs would amount to about $26 million in Bell and B.C. Tel for start-up alone. Moreover, Unitel would not be able to offer operator services while BPP is being developed, at least two years from a decision. Accordingly, the Commission has determined that operator services shall be provided by the pre-subscribed carrier of the originating line and that BPP will not be introduced at this time. However, as noted above, the Commission will not permit any IXC to connect pay telephones or obtain access to billing and collection or related databases until it has approved a detailed operator services tariff that incorporates adequate consumer protection in respect of rates, access and confidentiality of consumer information. (d) Pay Telephones Unitel intends to use direct access lines to connect pay telephones to its network for interexchange service. Unitel and BCRL also requested that the respondents provide casual calling access to their respective networks from the respondents' pay telephones. Unitel offered reciprocity; viz., customers could make casual calls from Unitel pay telephones through the respondents' networks. Bell opposed Unitel's proposal, recommending instead that each IXC be accessible from its pay telephones, with BPP required for all 0+ calls. Bell argued that pay telephones connected by direct access lines should not be allowed since they would be incompatible with BPP, could target high profit locations only, and might confuse and inconvenience customers. The Commission agrees that the networks of all IXCs and respondents should be accessible from pay telephones. The Commission will only permit Unitel, BCRL and any future IXC to connect pay telephones after the Commission has thoroughly examined and approved an operator services tariff. 4. Access to Other Services and Facilities (a) Operator and Emergency Services i. Directory Assistance Unitel and BCRL sought, for themselves and their customers dialing a 1+NPA+555-1212 code, access to the respondents' directory assistance services. Unitel stated that it would transport such calls to the terminating Numbering Plan Area (NPA), where it would pass them to the respondent. Unitel intends to handle directory assistance for 800 Service (1+800+555-1212 calls) similarly. Unitel maintained that this would circumvent local directory database inquiries, would support creation of a comprehensive national database for 800 numbers and would require no special interconnection arrangements. Unitel stated that the mechanics of call hand-off would be relatively easy to resolve and proposed to supply Stentor with the necessary data on its 800 Service subscribers. Bell and B.C. Tel agreed to provide access to directory assistance as described by Unitel. Bell contended that direct IXC access to the directory assistance databases was not necessary and would not be provided. Bell proposed to add Unitel's 800 Service numbers to the Stentor centralized database and to address 800 directory assistance via 1+800+555-1212. The Commission notes that the applicants and respondents generally agree on the handling of directory assistance calls. Accordingly, the Commission directs the respondents to provide the applicants with long distance and 800 Service directory assistance as proposed by Unitel. ii. Busy Line Verification and Operator Barge-in Unitel proposed to provide operator barge-in service for its callers, recognizing that this would require specific arrangements with the respondents. Unitel proposed to compensate the respondents for this service in accord with existing arrangements. The Commission notes that the parties generally agree on this issue. Accordingly, the Commission directs the respondents to provide the applicants with access to local operators for busy line verification and barge-in services. iii. 911 Service Unitel proposed to offer local 911 access from its pay telephones, using a line-to-number translation in the Unitel switch to route calls to the appropriate 911 service provider. Unitel stated that it would provide coin-free emergency access from all its pay telephones at no charge. Bell pointed out that the 911 emergency service is provided to municipalities and that it routes 911 calls over dedicated networks to municipal emergency reporting centres. Bell also noted that with interconnection, the IXCs would require 911 access from their operators. Bell maintained that IXCs should negotiate how municipal reporting centres would accept emergency calls originated on their networks with the municipalities. Bell stated that, in the public interest, it would assist both the IXCs and the municipalities to expedite this. B.C. Tel expressed concern that if Unitel's pay telephones did not have a telephone number or equivalent, the emergency agency would have difficulty in locating the caller. Unitel responded that it would obtain 10-digit telephone numbers for its pay telephones or assign a location-identifier if required. The Commission is of the view that 911 access should be available from the IXC's pay telephones and that the respondents should cooperate in routing 911 calls from such telephones to the appropriate 911 response centre. iv. Other Emergency Services Unitel plans to offer its customers other access to community emergency services. For calls to a Unitel operator placed by dialing "00" from a pre-subscribed line or "0" (or "911" in an area not served by 911) from a pay telephone, the operator would ascertain the nature of the emergency and route the call to the relevant local agency. Unitel stated that this resembled Bell's current practice in districts without 911 service. B.C. Tel contended that if Unitel's operator were remote from the caller, delays could result in locating the telephone number of the responsible agency in the caller's locality. Unitel maintained that the location of its operator would not affect the ability to provide emergency service as the operator would possess all the necessary information. The Commission deems it in the public interest to facilitate access to emergency services and therefore supports Unitel's proposal to have its operators accept emergency calls and route them to the appropriate agency. (b) Billing and Collection Services Unitel stated that it would bill and collect for calls when the billed line is pre-subscribed to it. Unitel asked that the respondents be directed to bill and collect for its services when the billed line is not pre-subscribed to Unitel, when a respondent's calling card is used or when a non-Unitel subscriber makes a casual call. Unitel anticipated furnishing call records in an acceptable format and paying a tariffed rate for these services. Unitel contended that incorporating these charges in a monthly telephone bill would be far less expensive than billing such isolated calls itself. MT&T and Island Tel argued that Unitel must assume responsibility for billing all long distance calls carried over its facilities regardless of who places them. AGT, Bell, B.C. Tel, MT&T and Island Tel denied any obligation to bill and collect for a competitor. MT&T and Island Tel might voluntarily negotiate a billing services agreement; Bell and AGT do not consider it an attractive business opportunity, and Newfoundland Tel rejected it completely. AGT noted that, under Unitel's proposal, the non-respondent telephone companies would be providing such a service without direct compensation. B.C. Tel stated that it considers its billing and collection systems integral to its operations and public image. B.C. Tel stated that it would not wish to respond to queries and complaints resulting from use of its billing system by others. MT&T and Island Tel envisaged many problems with Unitel's proposal, citing several specific examples. Bell proposed to provide competitors with the requisite data to bill for casual and 900 calls and contended that the associated billing and collecting costs should be considered a cost of doing business. Bell stated that it would support joint planning to develop a system to supply the necessary billing information to IXCs. Unitel noted that the Southern New England Telephone Company provides billing services to all IXCs who have ordered equal access from it, and contrasted this with the views of the respondents. Unitel argued that to permit competition to flourish without divestiture, all users of local exchange services would have to be treated equally, including with respect to billing and collection services. Unitel stated that all respondents perform such services for U.S. companies. Unitel contended that the respondents are refusing to make a similar arrangement with Unitel mainly because they do not wish to bill on behalf of a competitor. Unitel submitted that failure to grant it the same type of services afforded to other carriers would constitute unjust discrimination pursuant to section 340(2) of the Railway Act. Unitel contended that it would also curtail casual calling on any network and nullify the increased survivability that competition would bring. Bell and B.C. Tel disputed the assertion that refusal to enter into a collection and billing agreement would constitute unjust discrimination. They noted that U.S. companies do not compete with them, as would be the case with Unitel. Unitel maintained that mere provision of a name and address is not a practical solution to its problems in billing infrequent calls. It pointed out that its billing of particular calls would not be cost-effective, in contrast to a marginal addition to a monthly bill. Bell considered that the ability to perform a function at lower cost did not warrant compelling it to undertake it on behalf of a competitor. The Commission has considered three possible courses of action for respondents with respect to calls not billed to a pre-subscribed line: (i) to bill and collect for and on behalf of all competitors desiring such a service; (ii) to bill and collect only for IXCs desiring such a service; or (iii) to provide sufficient data for all competitors to bill for themselves, either through direct database access or a report. The Commission has carefully evaluated these alternatives, balancing competitive equity versus safeguards against excessive and unreasonable charges and privacy considerations, and has reached the following conclusions. First, the Commission is of the view that the respondents have been able to develop billing and collection systems by virtue of the fact that they have had a monopoly in the provision of local and long distance telephone service. Accordingly, those who wish to compete in the long distance market do not have ready made access to billing and collection information about each telephone subscriber. In contrast, the respondents, as integrated telephone companies, do have the billing data readily available and use it in their own long-distance business. If their long-distance business were structurally separate, the respondents would require the local affiliate either to provide sufficient data for its own billing or to bill on its behalf. However, the respondents benefit from integrated operations and thus have access to the billing and collection functions developed largely by virtue of the provision of monopoly telephone services. In these circumstances, the Commission has concluded that the respondents will confer a preference on themselves if they refuse to provide billing and collection services to regulated IXCs that have an operator services tariff approved by the Commission. The Commission notes that allowing long distance providers access to the billing data bases would raise security and privacy concerns and the respondents oppose it. The Commission also considers that building a billing and collection system for infrequent calls where essential billing data come from another company would be unnecessarily expensive and an inefficient use of resources. At the same time, the Commission considers that the respondents should not be required to bill and collect for charges over which they or the Commission have no control and bear the brunt of customer complaints, in the case of unreasonable rates. The Commission notes that it exercises control over the rates of regulated companies; the major concern about unreasonable charges has arisen with respect to unregulated companies providing, for example, AOS. In light of the above, the Commission has concluded that, by refusing to provide IXC's, whose operator service tariffs have been found to contain sufficient consumer safeguards, with access to the billing and collection services that the respondents make available to themselves, they are giving themselves an undue preference, contrary to section 340 of the Railway Act. Accordingly, the Commission considers the respondents should bill and collect, on behalf of IXCs for casual calls and calls charged to a line not pre-subscribed to the carrier handling the call. (c) Database Access i. Calling Card Database Unitel stated that it intended to honour non-Unitel account cards and, to effect this, it would require access to the respondents' SCPs or another database where the calling card could be validated. BCRL contended that, since non-competing carriers have access to the respondents' calling card databases, there is no technical barrier to providing this service to IXCs. Bell and B.C. Tel considered their calling cards to be an integral part of their long distance service portfolio. Thus Bell opposed charging calls carried by a competitor to its own card. Bell stated that it would offer neither direct nor indirect access to the Bell/Stentor calling card database. Bell contended that use of its calling card by competitors would diminish the card's value and limit its ability to deliver differentiated service packages to consumers via the card. Bell, MT&T and Island Tel noted that IXCs in the U.S. do not accept each other's cards. B.C. Tel contended that the calling card databases are proprietary and confidential and that access to them by competitors would infringe on its marketing and operations strategies. B.C. Tel maintained that allowing Unitel to honour B.C. Tel's calling card would be tantamount to allowing it to use B.C. Tel's name and reputation to promote its own services. Unitel contended that the proceeding disclosed that subscribers use calling cards for local as well as for long distance service and that other carriers access the calling card database. Unitel pointed out that in the U.S., the regional Bell operating companies must honour all IXCs' account cards for intra-LATA long distance calls. Unitel also maintained that refusal to allow Unitel to honour the respondents' calling cards is discriminatory, especially since U.S. service providers can access the billing validation system. Unitel argued that denying it similar access is clearly discriminatory and contrary to the Railway Act. The Commission considers that cards have been developed primarily for long distance and could be characterized as a competitive tool. Further, the Commission considers that the purpose of allowing U.S. service providers access to databases to validate the card is to extend the card's usefulness while respondents' subscribers are travelling outside Canada. Accordingly, the Commission does not consider that denying Unitel access to the respondents' SCPs or other databases for the purpose of calling card validation is unduly discriminatory and denies its request. ii. Billed Number Screening Database Unitel sought access to the respondents' line information database (LIDB) to enable it to verify the location and credit status of subscribers either making casual calls, being charged for collect calls or charging calls to a third party. The Commission notes that none of the respondents advanced specific arguments or rationale for opposing IXC access to the LIDB. This contrasts with the calling card database where they clearly argued their opposition. This omission may stem from the fact that the integrated LIDB in the U.S. has no Canadian counterpart, or alternatively from presupposing BPP. As Bell noted, certain database elements that might be included in a LIDB are included in the SCPs. To maximize customer choice and convenience, casual calling must be allowed without undue preference to any carrier. Call validation is important to minimize fraud, and to do this, IXCs need access to the respondents' databases. Denying the IXCs automatic access to those databases would favour the respondents because they can validate all calls from their access lines. Using validation lists would be slow and make call set-up inefficient. Thus database access should be allowed. Respondents might object to automatic database access on the grounds of privacy and protection of subscriber information. This is a manageable concern, provided that strict rules are in place to ensure privacy. In this regard, a third party database administrator, to ensure neutrality and database protection, is one possible alternative. Another alternative is structural separation (separating database management from access and use) for which one could also make the case of equity of database access. However, only Intelco and BCRL pursued the concept of the third party database administrator (in a different context) and no one addressed structural separation. In the absence of defined and workable alternatives, the respondents could continue as database administrators, provided that IXCs with EEA have access to the database and the costs are equitably shared. Accordingly, the Commission considers it appropriate for IXCs to have access to the nearest Canadian equivalent to the LIDB, either the billed number screening database in the SCP or several databases from which one can assemble the requisite information if a centralized database does not contain all of it. The Commission will permit an IXC access once the Commission has approved an operator services tariff and a general tariff item similar to Article 11 of the Bell Terms of Service to protect the confidentiality of subscriber information. 5. Administration (a) Information Exchange Unitel requested that the respondents supply, and annually update, information on their networks for its own network planning. This covered the locations, functional capabilities and homing arrangements of switches, CCS7 network architecture and CCS7 signalling specifications to access certain databases. Unitel sought timely notice in writing of any network changes affecting any of the contemplated interconnection or access arrangements. Unitel desires the earliest possible notice of outages and timely restoration of any problems affecting its services. Unitel also wished the respondents to convey to it, in the same time frame, any information on local operations given to their own interexchange business units. Finally, Unitel sought confidentiality and safeguards on the use of any of its operational data measured by the respondents. BCRL made similar requests. Bell stated that it would provide a report, containing only telephone number information, for verifying pre-subscription, using central office translation data rather than billing records. Bell stated that it would provide IXCs with the network information they requested except for CCS7 specifications for accessing databases. Given its determination on database access, the Commission accepts Bell's view on this issue and directs the respondents to provide the information requested with the exception of the CCS7 signalling specifications for access to the respondents' calling card and line information databases. (b) Joint Technical Committees Unitel and BCRL requested each respondent to establish a Joint Technical Committee (JTC) with them. Unitel maintained that an effective liaison between carriers must be established to enhance relations and provide for the orderly introduction of new services. The respondents acknowledged the need to establish JTCs. The Commission recognizes the need for JTCs and supports their establishment. Part VI of this Decision therefore directs that they be established. (c) Canadian Carrier Liaison Committee Unitel, supported by BCRL, suggested formation of a Canadian Carrier Liaison Committee (CCLC) to consider national operational and technical standards, particularly those that would give all competitors equitable access to the local network. In Unitel's view, the CCLC would address technological and administrative issues and, through arbitration if necessary, reach binding decisions on technical interface specifications and mode of implementation. Within the CCLC umbrella, Unitel envisaged an Order and Billing Forum to explore methods to exchange billing records, order circuits and facilitate carrier selection; a Network Operations Forum to address inter-carrier operational issues; and an Industry Carriers Compatibility Forum to exchange technical interconnection information. In particular, Unitel expected performance standards for SCP database integrity and security to be set by the CCLC and monitored by the Commission. The Commission encourages the development of operational and technical standards and encourages the respondents and the applicants to cooperate in this endeavour, possibly through the formation of the CCLC as proposed by Unitel. VI THE ORDERBased on the findings in this Decision, the Commission has set out below the requirements applicable to the respondents and Unitel. The Commission notes that the arrangements set out in this Decision will affect Teleglobe, Telesat and B.C. Rail inasmuch as it is envisioned that they would be required to collect contribution charges. The Commission therefore considers it appropriate to allow these parties an opportunity for comment on the arrangements to be applicable to them, set out in Appendices III, IV and V. Accordingly, Teleglobe, Telesat and B.C. Rail may file any such comments within 20 days. A. Respondents1. The respondents are each directed to issue tariff pages incorporating Appendix I modified as necessary to reflect the specific services offered by them, within 30 days of the date of this Decision. 2. The respondents are each directed to file proposed availability intervals by switch type for the implementation of 1+ and 1+950 access, indicating any specific exemptions, within 30 days of the date of this Decision. 3. The respondents are each directed to file proposed tariffs for overflow routing, consistent with the findings in this Decision, within 120 days of the date of this Decision. 4. Unitel may file a request for interconnection with each of the respondents, serving a copy on the Commission. 5. (a) The respondents are each directed to establish a Joint Technical Committee with Unitel, as described in this Decision, within 15 days from the receipt of Unitel's request for interconnection.
6. (a) The respondents are each directed to establish an Interexchange Carrier Group, as described in this Decision, within 30 days from the receipt of Unitel's request for interconnection.
7. (a) Upon receipt of a request from Unitel for specific information exchanges and reports, such as a supply of weekly reports of names and addresses of all new subscribers and those changing their addresses, the respondents are each directed to negotiate the details of such reports or information exchanges consistent with the findings in this Decision.
8. Island Tel, MT&T, NBTel and Newfoundland Tel are each directed to issue tariff pages incorporating Appendices II, III and IV, modified to reflect the specific services offered by the Company, within 60 days of the date of this Decision. 9. Bell and B.C. Tel are each directed to issue revised tariff pages incorporating Appendices II, III and IV, to replace their existing resale and sharing tariffs within 60 days of the date of this Decision. 10. B.C. Tel is directed to issue revised tariff pages incorporating Appendix V, within 60 days of the date of this Decision. 11. The respondents are each directed to include in the revised tariff pages referred to in 1, 9, 10 and 11 above, any required "housekeeping" revisions, including the deletion of tariff Items, resulting from the implementation of this Order. B. Unitel1. Unitel is directed to issue tariff revisions incorporating Appendix VI, modified as necessary to reflect the specific services offered by Unitel, within 60 days of the date of this Decision. 2. Unitel is directed to include in the revised tariff pages referred to in 1 above, any required "housekeeping" revisions, including the deletion of tariff Items resulting from the implementation of this Order. Allan J. Darling APPENDIX ITARIFF FOR INTERCONNECTION WITH UNITEL1. Definitions For the purposes of this tariff item: "Circuit" means a voice-grade analog channel or a 64 kbps (DS-0) channel. "Circuit Group" means a group of equivalent circuits. "Data Service" means a telecommunications service other than a voice service. "Dedicated Service" means a telecommunications service which is dedicated to the private communications needs of a user where one end of the facility used to provide the service is terminated at equipment dedicated to the user. "Interconnecting Circuit" means a circuit that connects a facility of Unitel to a facility of the Company to provide access to the Company's public switched telephone network (PSTN). An interconnecting circuit may connect (1) a Unitel facility to a Company central office to which subscriber lines are directly connected (end office); or (2) an interexchange circuit to a Company Centrex switch; or (3) a local circuit from a Unitel switch to a Company Centrex switch; or (4) a Unitel facility to a Company central office to which end offices are directly connected in order to originate or terminate toll traffic (toll office). "Interexchange Service" or "Interexchange Facility" means a service or facility configured to operate between any two exchanges for which Message Toll Service charges would apply, including overseas and international services and facilities. "Joint-Use Basis" means on a basis in which a circuit is not dedicated to a single user. "Overseas Access Circuit" means a circuit which connects to a service or a facility of Teleglobe for the purpose of providing overseas service. "Resale" means the subsequent sale or lease on a commercial basis, with or without adding value, of a telecommunications service leased from the Company. "Reseller" means a person engaged in resale. "Sharing" means the use by two or more persons, in an arrangement not involving resale, of a telecommunications service leased from the Company. "Sharing group" means a group of persons engaged in sharing. "User" means a person or a member of a sharing group using a telecommunications service or facility for the person's or member's private communications needs. "Voice Service" means a two-way telecommunications service involving direct real-time voice communication between two or more natural persons, but does not include a service the purpose of which is limited to the co-ordination or setting up of a data service. 2. General (a) The facilities and services of Unitel may be interconnected to the Company's facilities and services, subject to their availability, in accordance with the terms and conditions set out in this tariff. (b) Unitel may not use the Company's services to originate competitive public switched interexchange voice services in the operating territories of telephone companies other than Bell Canada, British Columbia Telephone Company, The Island Telephone Company Limited, Maritime Telegraph and Telephone Company Limited, New Brunswick Telephone Company Limited or Newfoundland Telephone Company Limited. (c) Unitel may not provide local public pay telephone service. (d) Where Unitel offers shared tenant services, it must provide the Company with direct access, under reasonable terms and conditions, to tenants who choose to receive service from the Company rather than, or in addition to, service from Unitel. (e) Unitel traffic may not be aggregated or terminated using the switched services of a reseller or a sharing group. 3. Requirement to Furnish Test Facilities (a) The Company shall furnish to Unitel, interconnecting circuits, CCS7 connections and WATS and 800 connections, with appropriate ANI or Caller ID signalling, for the purpose of testing its network. (b) Connections furnished to Unitel pursuant to this section shall be restricted to testing functions. Unitel shall not use these connections to carry any of its administrative or commercial traffic. (c) Contribution charges shall not apply to facilities designated as test facilities. 4. Notice of Network Changes The Company shall provide Unitel with at least two years' notice in writing of any changes in its network that could affect any of the interconnection or access arrangements contemplated in this tariff. Where it is not possible to give Unitel two years' notice, the Company shall advise Unitel as soon as a decision to proceed with the change has been made. 5. Notice of Network Outages The Company shall provide Unitel with the earliest possible notice of all network outages affecting the operation of Unitel's network. 6. Interconnection Charges (1) Interconnecting Circuits
(2) Network Charges
(3) Recovery of Start-Up Costs
7. Contribution Charges (a) Interconnecting Circuits
(b) Overseas Access Circuits
(c) Canada-U.S.A. Circuits
8. Exemptions (a) Where an interconnecting circuit is used solely to access the Company's MTS/WATS services, the contribution charges specified in Item 7 shall not apply. (b) Where an interconnecting circuit associated with line side access, a Canada-U.S.A. circuit or an overseas access circuit is used by Unitel for the purpose of providing a dedicated service, the contribution charges specified in Item 7 shall not apply. (c) Where an interconnecting circuit associated with line side access, a Canada-U.S.A. circuit or an overseas access circuit is used to provide a data service, the contribution charges specified in Item 7 shall not apply, provided that Unitel applies to the Commission on a case by case basis and provides evidence satisfactory to the Commission that by reasons of the technical, economic or operational characteristics of the service, it is unlikely that the connections will be used significantly for voice service. (d) Where an interconnecting circuit associated with line side access, a Canada-U.S.A. circuit or an overseas access circuit is used by a reseller or a member of a sharing group to provide a joint-use interexchange voice service, the contribution charges specified in the Company's General Tariff - Resale and Sharing shall apply in place of the contribution charges specified in Item 7. Unitel shall collect the contribution payment from the reseller or sharing group pursuant to Unitel's tariff and shall remit the payment to the Company. APPENDIX IIGENERAL TARIFF - RESALE AND SHARING1. Definitions For the purposes of this tariff item: "Affiliate" means any person that controls or is controlled by the Company or that is controlled by the same person that controls the Company. "Circuit" means a voice-grade analog channel or a 64 kbps (DS-0) channel. "Circuit Group" means a group of equivalent circuits. "Control" includes control in fact, whether or not through one or more persons. "Data Service" means a telecommunications service other than a voice service. "Dedicated Service" means a telecommunications service which is dedicated to the private communications needs of a user where one end of the facility used to provide the service is terminated at equipment dedicated to the user. "Interconnecting Circuit" means a circuit that connects a facility of a reseller or sharing group to a facility of the Company to provide access to the Company's public switched telephone network (PSTN). An interconnecting circuit may connect (1) a facility of a reseller or a sharing group to a Company central office to which subscriber lines are directly connected (end office); or (2) an interexchange circuit to a Company Centrex switch; or (3) a local circuit from a switch of a reseller or a sharing group to a Company Centrex switch. "Interexchange Service" or "Interexchange Facility" means a service or facility configured to operate between any two exchanges for which Message Toll Service charges would apply, including overseas and international services and facilities. "Joint-Use Basis" means on a basis in which a circuit is not dedicated to a single user. "Overseas Access Circuit" means a circuit which connects to a service or a facility of Teleglobe for the purpose of providing overseas service. "Resale" means the subsequent sale or lease on a commercial basis, with or without adding value, of a telecommunications service leased from the Company. "Reseller" means a person engaged in resale. "Sharing" means the use by two or more persons, in an arrangement not involving resale, of a telecommunications service leased from the Company. "Sharing group" means a group of persons engaged in sharing. "User" means a person or a member of a sharing group using a telecommunications service or facility for the person's or member's private communications needs. "Voice Service" means a two-way telecommunications service involving direct real-time voice communication between two or more natural persons, but does not include a service the purpose of which is limited to the co-ordination or setting up of a data service. 2. General (a) The Company's telecommunications services may be shared or resold in accordance with the conditions in this tariff. (b) Resellers and sharing groups are required to register with the Company and the Commission prior to receiving service. (c) Resellers and sharing groups may not use the Company's services to originate competitive public switched interexchange voice services in the operating territories of telephone companies other than Bell Canada, British Columbia Telephone Company, The Island Telephone Company Limited, Maritime Telegraph and Telephone Company Limited, New Brunswick Telephone Company Limited or Newfoundland Telephone Company Limited. (d) The provision of public pay telephone service by resellers and sharing groups is not permitted. (e) Where a reseller offers shared tenant services, it must provide the Company with direct access, under reasonable terms and conditions, to tenants who choose to receive service from the Company rather than, or in addition to, service from the reseller. (f) Interexchange services shall not be provided to an affiliate of the Company, or to a sharing group which involves one or more persons who is an affiliate of the Company, where such services would be resold on a joint-use basis or shared to provide interexchange interconnected voice services, except where such services would be used only to provide portable communications services. 3. Interconnection Charges The Company will furnish interconnecting circuits at rates specified in the Company's tariffs. 4. Contribution Charges (a) Interconnecting Circuits
(b) Overseas Access Circuits
(c) Canada-U.S.A. Circuits
5. Exemptions (a) Where an interconnecting circuit is used solely to access the Company's MTS/WATS services, the contribution charges specified in Item 4 shall not apply. (b) Where an interconnecting circuit, a Canada-U.S.A. circuit or an overseas access circuit is used to provide a dedicated voice or data service, a local service, or a joint-use interexchange data service, the contribution charges specified in Item 4 shall not apply, provided that the reseller or the sharing group applies to the Commission on a case by case basis and provides evidence satisfactory to the Commission that by reasons of the technical, economic or operational characteristics of the service, it is unlikely that the connections will be used significantly for joint-use interexchange voice. APPENDIX IIITARIFF FOR DIRECT CONNECTION WITH TELEGLOBE CANADA INC.Contribution Charges Teleglobe shall remit to the Company the applicable contribution payments for each overseas access circuit, as specified in the Company's General Tariff - Resale and Sharing or in the Company's Tariff for Interconnection with Unitel. APPENDIX IVTARIFF FOR INTERCONNECTION WITH TELESATContribution Charges Telesat shall remit to the Company the applicable contribution payments for each interconnecting circuit, Canada-U.S.A. circuit and overseas access circuit, as specified in the Company's General Tariff - Resale and Sharing or in the Company's Tariff for Interconnection with Unitel. APPENDIX VTARIFF FOR INTERCONNECTION WITH B.C. RAILContribution Charges B. C. Rail shall remit to the Company the applicable contribution payments for each interconnecting circuit, Canada-U.S.A. circuit and overseas access circuit, as specified in the Company's General Tariff - Resale and Sharing or in the Company's Tariff for Interconnection with Unitel. APPENDIX VI<UNITEL> GENERAL TARIFF - RESALE AND SHARING1. For the purposes of this tariff item: "Affiliate" means any person that controls or is controlled by Unitel or that is controlled by the same person that controls Unitel. "Circuit" means a voice-grade analog channel or a 64 kbps (DS-0) channel. "Circuit Group" means a group of equivalent circuits. "Control" includes control in fact, whether or not through one or more persons. "Data Service" means a telecommunications service other than a voice service. "Dedicated Service" means a telecommunications service which is dedicated to the private communications needs of a user where one end of the facility used to provide the service is terminated at equipment dedicated to the user. "Interconnecting Circuit" means a circuit that connects a facility of a reseller or sharing group to a telephone company switch to provide access to the telephone company's public switched telephone network (PSTN). An interconnecting circuit may connect: (1) a facility of a reseller or a sharing group to a telephone company central office to which subscriber lines are directly connected (end office); or (2) an interexchange circuit to a telephone company Centrex switch; or (3) a local circuit from a switch of a reseller or sharing group to a telephone company Centrex switch. "Interexchange Service" or "Interexchange Facility" means a service or facility configured to operate between any two exchanges for which Message Toll Service charges would apply, including overseas and international services and facilities. "Joint-Use Basis" means on a basis in which a circuit is not dedicated to a single user. "Overseas Access Circuit" means a circuit which connects to a service or facility of Teleglobe for the purpose of providing overseas service. "Resale" means the subsequent sale or lease on a commercial basis, with or without adding value, of a telecommunications service leased from the Company. "Reseller" means a person engaged in resale. "Sharing" means the use by two or more persons, in an arrangement not involving resale, of a telecommunications service leased from Unitel. "Sharing group" means a group of persons engaged in sharing. "Telephone Company" means Bell Canada, British Columbia Telephone Company, Island Telephone Company, Maritime Telegraph and Telephone Company Limited, New Brunswick Telephone Company Limited, or Newfoundland Telephone Company Limited. "User" means a person or a member of a sharing group using a telecommunications service or facility for the person's or member's private communications needs. "Voice Service" means a two-way telecommunications service involving direct real-time voice communication between two or more natural persons, but does not include a service the purpose of which is limited to the co-ordination or setting up of a data service. 2. General (a) Unitel's telecommunications services may be shared or resold in accordance with the conditions in this tariff. (b) Resellers and sharing groups are required to register with Unitel and the Commission prior to receiving service. (c) Resellers and sharing groups may not use Unitel's services to originate competitive public switched interexchange voice services in the operating territories of telephone companies other than Bell Canada, British Columbia Telephone Company, The Island Telephone Company Limited, Maritime Telegraph and Telephone Company Limited, New Brunswick Telephone Company Limited or Newfoundland Telephone Company Limited. (d) Interexchange services shall not be provided to an affiliate of Unitel, or to a sharing group which involves one or more persons who is an affiliate of Unitel, where such services would be resold on a joint-use basis or shared to provide interexchange interconnected voice services, except where such services would be used only to provide portable communications services. 3. Contribution Charges Contribution charges shall apply for each interconnecting circuit within a circuit group, overseas access circuit within a circuit group, or Canada-U.S.A. circuit provided by Unitel to a reseller or a sharing group, at terms and conditions specified in the general tariffs for resale and sharing of the telephone companies within whose territory the above-mentioned circuits are located.
* See explanations on following pages. Some numbers have been rounded. EXPLANATION OF ATTACHMENT LINE ITEMS - SEE ALSO DECISION PART III1. Non-toll expenses = Total company expenses excluding Monopoly Toll expenses and any expenses of competitive categories (CN, CTMD, CTO) recording an annual deficit; Atlantic companies can approximate non-toll expenses by subtracting Phase III equivalent monopoly toll expenses and excluding equivalent competitive category deficits, if any, from total company expenses. 2. Non-toll revenues = Total company revenues excluding Monopoly Toll revenues and any revenues of competitive categories (CN, CTMD, CTO) recording an annual deficit; Atlantic companies can approximate non-toll revenues by subtracting Phases III equivalent monopoly toll revenues and excluding equivalent competitive category deficits, if any, from total company revenues. 3. WATS Revenue Reclassification: An adjustment to the level of contribution equal to 1.7% of the Phase III (or equivalent) Toll surplus. 4. Common/PUC: An adjustment to the level of contribution equal to Phase III (or equivalent) Monopoly Toll's share of Common/PUC (or equivalent) costs, as determined according to percentage of Monopoly Toll to total Phase III (or equivalent) surpluses. 5. Settlement: An estimate of contribution revenues flowing to/from other members of Stentor through the RSP. 6. Level of Contribution Required: Contribution requirement net of additive
adjustments; equates to: 7. Respondents Switched Orig. & Term. Toll Minutes: Total forecasted originated and terminated switched toll minutes of the respondent. 8. (a) Entrants Switched Orig. & Term Toll Minutes: Sum of facilities-based and reseller originating and terminating switched toll minutes forecasted in the respondent's territory. (b) DALS Loading factor is specific to each respondent and represents the multiplicative factor to convert the entrant's switched toll minutes to the entrant's total switched and non-switched minutes. This factor is to be held constant over time and has been based on the economic averages of the estimated entrant non-switched minutes and entrant total toll minutes over the study period. (c) Equates to {8.(a) * 8.(b)}. (d) Entrant Stim Mins to total Mins ratio represents the factor used to estimate the stimulated toll minutes resulting from the entrants expected price discounts. This factor is to be held constant over time and has been based on the economic averages of the estimated entrant toll price-stimulated minutes and the entrant total toll minutes over the study period. (e) Equates to {8.(c) * 8.(d)}. 9. Equates to {7. + 8.(c) - 8.(e)}. 10. Contribution per Minute per End before Multiplicative Contribution adjustments; equates to {6. / 9.}. 11. Gross Receipts Tax: Equates to {1 - % Gross Receipts Tax Adjustment}. 12. DAL Surcharge: Equates to {1 + % DAL Surcharge Adjustment}. 13. Contribution Discount: Equates to {1 - % Contribution Discount}. 14. Stim. Mins Discount: Equates to (1 - % Entrant Stim. Mins to total Mins ratio) refer to 8.(d) for explanation. 15. Contribution per minute per End-FBC: Represents the net contribution per minute charge per end applicable to switched minutes of the facilities-based entrant; equates to {10. * 11. * 12. * 13. * 14.}. ACRONYMS AND ABBREVIATIONS USED IN THIS DECISIONAGT - AGT Limited DISSENT OF COMMISSIONER EDWARD A. ROSSAlthough this dissent will not change the majority's decision, I feel compelled to explain why I do not support the decision. The evidence and arguments presented in the proceeding by the applicants in favour of competition in the provision of long distance voice services were compelling. However, no absolute assurance can be given that rates for local service will not be impacted by allowing this competition. Because of the subsidy provided to local services by long distance services, in allowing competition one can foresee millions of ordinary Canadians paying for the cost of competition through higher rates for local telephone service. The United States is an example of a country where with long distance competition there have been significant increases in local rates. Further, the trucking and airline industries are examples of regulated sectors of the economy where policies favouring competition have not always achieved the desired effect. Canadian business leaders argue that long distance rates are too high. They submit that we need to achieve parity with the long distance rates in the United States in order for Canadian businesses to compete on a more level playing field with their American competitors. Improvement of the competitive position of Canadian business is a worthy aim, but the cost of long distance services is only one element among many that impacts upon this. Furthermore, the cost of long distance services has been dramatically reduced, for example, by approximately 51 per cent since 1987 for Bell Canada subscribers, and further reductions are planned. During this proceeding, some members of Telecom Canada, now known as Stentor Canadian Network Management (Stentor), introduced reference plans. Under these plans, there would be new services, productivity improvements and reduced network costs which are to result in further long distance rate reductions without the need for the increases in local rates that can be foreseen to result from the granting of the applications. Given the world class telecommunications system Canada currently has, and which these companies have contributed to, I am persuaded that the public interest would be better served at this point by permitting the introduction of these plans rather than by granting the applications before us. In conclusion, I reiterate that I consider the cost of allowing these applications to be too high because of the increases in the cost of basic telephone service, something that is a necessity not a luxury for Canadians, including the millions of Canadians living on pensions and fixed incomes. We have been well served to date and the proposals put forward by Stentor members would see further improvements to assist all users, including business. |
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