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Telecom Decision
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Ottawa, 29 December 1994
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Telecom Decision CRTC 94-27
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APPLICATIONS BY UNITEL COMMUNICATIONS INC. AND SPRINT CANADA INC. TO REVIEW AND VARY PART OF DECISION 94-19
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I INTRODUCTION
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In Competition in the Provision of Public Long Distance Voice Telephone Services and Related Resale and Sharing Issues, Telecom Decision CRTC 92-12, 12 June 1992 (Decision 92-12), the Commission required all competitors entering the market to pay a contribution charge for each access trunk interconnected to the public switched telephone networks (PSTNs) of the telephone companies. The per-trunk contribution collection mechanism was based on a per-minute amount of contribution required and on certain assumptions regarding the amount of traffic that could be carried over a trunk.
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In Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19), the Commission determined that a per-minute contribution charge would be more suitable than the per-trunk charge, as it would (among other things) result in greater equity among all competitors in the long distance market. The Commission also acknowledged that the average per-minute charge might create disincentives for competitors to carry low-margin traffic, such as off-peak residence traffic, and that it may be necessary to consider de-averaging contribution charges.
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On 30 September 1994 and 3 October 1994, Unitel Communications Inc. (Unitel) and Sprint Canada Inc. (Sprint) filed applications to review and vary, pursuant to section 62 of the Telecommunications Act (the Act), that part of Decision 94-19 applying a per-minute contribution charge to competitors utilizing trunk-side access to the PSTN. Unitel and Sprint also requested a stay of that part of Decision 94-19.
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The criteria by which the Commission determines whether or not to review and vary its telecommunications decisions (see Telecom Decision CRTC 79-1, 2 February 1979) require that, in order for the Commission to exercise its powers under section 62 of the Act, the applicant demonstrate, on a prima facie basis, the existence of one or more of the following:
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(1) an error in law or in fact;
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(2) a fundamental change in circumstances or facts since the decision;
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(3) a failure to consider a basic principle raised in the original proceeding;
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(4) a new principle that has arisen as a result of the decision.
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In addition, notwithstanding the lack of prima facie evidence that any of the above criteria have been met, it is open to the Commission to determine that there is substantial doubt as to the correctness of its original decision and that reappraisal is accordingly warranted. This is not so much a fifth criterion, however, as it is a statement of the residual discretion that exists within section 62 of the Act.
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II THE APPLICATIONS
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In its application, Unitel argued that there is substantial doubt as to the correctness of the Commission's decision to implement a per-minute contribution charge to competitors utilizing trunk-side access to the PSTN. Unitel requested that the Commission rescind that portion of Decision 94-19, at least until the end of the five-year transitional period established in Decision 92-12. Unitel submitted that, if the Commission considered it appropriate at that time to reconsider the contribution mechanism, it should first conduct a public process to consider the adverse effects for consumers and service providers, the appropriate time-frame to permit service providers to adjust business plans, services and networks, and the appropriateness of de-averaging contribution charges. In the alternative, Unitel submitted that the Commission should postpone its decision to implement a per-minute contribution mechanism and initiate a public proceeding to consider these issues.
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In support of its application, Unitel cited the Commission's finding in Decision 92-12 that a per-trunk mechanism was superior to a per-minute mechanism because, among other reasons, it entails less incentive to target or avoid certain markets. In particular, Unitel quoted the following statement from Decision 92-12:
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... 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.
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Unitel submitted that the change to an average per-minute contribution mechanism in Decision 94-19 would discourage competitors from providing off-peak, lower-margin services to residential subscribers. As a result, the change would have a negative impact on consumers. In Unitel's view, the Commission should examine the feasibility of de-averaging per-minute contribution charges before implementing the per-minute contribution mechanism. However, Unitel was concerned that such a review may find de-averaging to be operationally impractical.
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Unitel also argued that it is unfair to change the contribution mechanism "mid-stream", because it changes the terms and conditions under which competitors and their shareholders made the decision to assume the risks of entering the market.
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Finally, Unitel submitted that the 30-day implementation period provided in Decision 94-19 is insufficient to allow competitors to adjust. Unitel submitted that it would need three to six months to effect changes to billing systems to track conversation minutes and provide an audit system of the telephone companies' billings, while network planning and assessments and implementation of service changes would require 12 months, and operational and strategic changes to assess how services can or should be restructured would require four months. Unitel concluded that, overall, it would require at least 12 to 16 months to make all the necessary adjustments.
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In its application, Sprint requested that the Commission rescind its decision to implement a per-minute contribution mechanism for interexchange carriers (IXCs) and resellers until all competitive safeguards in Decision 94-19 are implemented. Sprint noted that these safeguards include tariffs for co-location, open network architecture, the carrier access tariff (CAT) and the split rate base. Sprint also requested that the Commission include contribution mechanism issues in its proceeding to be initiated in 1996 regarding broadening the base of contributing services.
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In support of its request, Sprint submitted that the Commission erred in fact in Decision 94-19 because the decision to move to a per-minute contribution charge was not supported by the evidence in the proceeding and because the Commission failed to conduct a full examination and review of the merits and/or disadvantages of a per-minute mechanism. Further, the Commission did not request and consider material information of the impact of such a change on competitors and consumers or of the appropriate implementation interval.
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Sprint also submitted that the Commission erred in law in that it failed to consider the negative impact of a per-minute contribution charge and its immediate implementation on competitors, contrary to section 7 of the Act and the regulatory objectives set out in the public notice initiating the proceeding leading to Decision 94-19. Sprint further submitted that the Commission did not demonstrate why the change to per-minute contribution was warranted, or why the concern for uniformity and potential trunk over-utilization would outweigh the benefits of a per-trunk contribution mechanism found in Decision 92-12.
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Finally, Sprint argued that there is substantial doubt as to the correctness of the decision because of the impact of the change on competition, consumers and competitors and because of the difference in time frame provided as compared to that afforded the telephone companies for implementing other changes. Sprint stated that a per-minute contribution mechanism would have a substantial impact on its financial operations and would necessitate changes to its network, products and administrative operations. Sprint submitted that the necessary changes to its operations would require at least 12 months to implement.
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In Sprint's view, the implementation of a per-minute mechanism prior to considering and adopting a de-averaged contribution charge will jeopardize the viability of competition in the residential off-peak market, thus giving the telephone companies an unwarranted and unjustified advantage in this market. Sprint noted that, while the Commission expressed concern regarding the impact of an average per-minute charge, it did not address this prior to implementing an average charge, nor has the Commission directed the telephone companies to file de-averaged contribution charges.
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By letter dated 14 October 1994, the Commission granted the requested stay, pending its determination on the applications. In granting the stay, the Commission found that the applicants, on a prima facie basis, brought into question at least the timing of the implementation of the per-minute contribution mechanism. In its letter, the Commission recognized that some delay may be necessary for adapting to the per-minute contribution mechanism, but noted that retaining the existing per-trunk contribution mechanism in a split rate base environment could cause upward pressure on local rates and put the telephone companies' Competitive segments at a disadvantage relative to competitors. Therefore, the Commission stated that it expected to dispose of the applications to review and vary by 1 January 1995, the effective date for the implementation of the split rate base.
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ACC Long Distance Ltd., CAM-NET Communications Inc., Canadian Business Telecommunications Alliance, Competitive Telecommunications Association, National Anti-Poverty Organization, Smart Talk Network, TelRoute Communications Inc. (TelRoute), and Westel Telecommunications Ltd. (Westel) submitted comments that generally supported the applications.
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AGT Limited (AGT), Fonorola Inc. (Fonorola), the Government of Saskatchewan and Stentor Resource Centre Inc. (Stentor) filed comments in opposition to the applications. AGT and Stentor submitted, among other things, that the per-trunk contribution mechanism established in Decision 92-12 provides competitors with an implicit discount on contribution in excess of the explicit discounts established in that Decision. Further, in their view, the per-trunk mechanism is contrary to the goals set out in Decision 94-19 of competitive parity, symmetrical regulation and the reduction of contribution from current levels as soon as possible.
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More particularly, AGT and Stentor submitted that retaining a per-trunk mechanism would be unfair to the telephone companies. They noted that it would put their services at a competitive disadvantage because they would be required to pay contribution on off-peak minutes, while competitors could continue to avoid paying such contribution. AGT and Stentor also noted that retaining the per-trunk mechanism, in particular with the split rate base and with the accelerated market share loss for the Competitive segment, would have a negative impact on telephone company shareholders. AGT added that it would also increase the contribution shortfall, resulting in increased upward pressure on local rates. AGT also argued that Unitel's application ignores both the impact on the telephone companies of retaining the per-trunk mechanism and the benefits for both consumers and competitors of other aspects of Decision 94-19.
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AGT, Sprint, Stentor, TelRoute, Unitel and Westel also filed reply comments. The Commission has taken all submissions into account in arriving at the conclusions set out below.
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III CONCLUSIONS
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In Decision 94-19, the Commission determined that the rate bases of the Stentor members subject to the Decision should be split into Utility and Competitive segments, with both the Competitive segments of the telephone companies and competitors paying to the Utility segments the same explicit charges for contribution (subject to certain transitional discounts for competitors established in Decision 92-12), access to bottleneck services and the recovery of start-up costs. In Decision 94-19, the Commission considered that, with the splitting of the rate base and the establishment of a CAT providing for the recovery of charges from all service providers, a per-minute contribution mechanism would, among other things, result in greater equity between the Competitive operations of the telephone companies and competitors.
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As noted above, the Commission recognized in Decision 94-19 that an average per-minute contribution mechanism may lead to disincentives for the carriage of low-margin traffic. In part because of those disincentives, the Commission stated that it would be prepared to consider proposals to de-average per-minute contribution charges.
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In this proceeding, the applicants and certain other parties have filed evidence that an average per-minute contribution charge at current contribution levels would have a significant negative impact on the incentives for competitors to serve the off-peak (low-margin) market. These submissions have raised serious concerns on the Commission's part regarding the negative impact of the average per-minute contribution mechanism adopted in Decision 94-19 on the level of competition in the residential consumer market, a substantial portion of which is an off-peak market. Accordingly, the Commission acknowledges, as argued by Sprint and Unitel, that there is substantial doubt as to the correctness of Decision 94-19 with respect to the implementation of an average per-minute contribution charge and with respect to the timing of the change in the contribution mechanism.
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However, the Commission remains of the view that a move from a per-trunk to a per-minute mechanism is necessary, particularly in light of other aspects of the new regulatory framework set out in Decision 94-19. Under this framework, contribution charges will make up a substantial portion of the Utility segment's revenues. A per-trunk contribution mechanism of necessity entails assumptions as to the amount of traffic that will be carried on access lines within trunk groups of various sizes. It is now clear that some competitors are able to carry considerably more minutes than assumed in the contribution calculation. Therefore, they are able to obtain greater implicit discounts on contribution than considered reasonable in Decision 92-12. By so doing, these competitors are able to avoid the full impact of the obligation to subsidize local access service. Under the split rate base regime, this would have a negative impact on the earnings of the Utility segment, resulting in upward pressure on local rates. Further, the telephone companies, unlike their competitors, are subject to a price imputation test, which effectively establishes a floor price for their long distance services, based on an average per-minute contribution charge. Thus, under the new regulatory framework, inequities associated with the per-trunk mechanism are exacerbated.
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The Commission considers that a de-averaged per-minute contribution mechanism could provide a reasonable means of reconciling the need to move to a per-minute mechanism with the need for appropriate incentives for competition in the off-peak market. In particular, a de-averaged contribution charge can be applied equally to all service providers and, at the same time, would mitigate any negative impact on incentives for competitors to serve the off-peak market that may result from moving from a per-trunk to a per-minute mechanism.
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Therefore, the Commission proposes the adoption of a de-averaged per-minute contribution mechanism with two components, a peak and an off-peak charge. The Commission would set the off-peak charge at one-half the charge for the peak period, with the peak period charge adjusted upwards accordingly. The peak contribution charge would apply to originating minutes switched at the point of origination between 8 a.m. and 5 p.m., Monday to Friday. Similarly, for terminating traffic, the time of day at the terminating point would determine whether the peak or the off-peak contribution charge would apply.
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Under the Commission's proposal for de-averaged per-minute contribution charges, the differential between peak and off-peak per-minute contribution charges is primarily based on an assessment of the relative levels of subsidy that should be borne by traffic carried in the peak and off-peak periods, respectively. It is not related to the level of contribution implicit in the telephone companies' peak and off-peak toll rates. Thus, the de-averaged per-minute contribution charges proposed here would be consistent overall with the framework established in Decision 94-19.
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In this context, the Commission notes that the framework established in Decision 94-19 is designed to break the link between local rates and the level of contribution to local service implicit in long distance rates. Thus, under the new regulatory regime (in particular, with the CAT and the split rate base), contribution charges are set based only on the Utility segment revenue requirement, independently of the level of contribution implicit in telephone company toll rates and of the revenues generated by those rates.
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In Decision 92-12, the Commission expressed concerns with respect to proposals for a contribution mechanism entailing per-minute charges de-averaged according to a variety of factors affecting toll prices. The Commission noted that such a mechanism would result in administrative problems and would cause certain pricing constraints for competitors. Unitel raised similar concerns in its application in this proceeding, noting that de-averaged contribution charges may be found to be operationally impractical. However, the Commission is of the view that a more simply structured de-averaged mechanism, such as that described above, could minimize these concerns.
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The Commission notes that, under its proposal, contribution charges would continue to be set based solely on the Utility segment revenue requirement and would not be affected by changes to telephone company peak and off-peak toll rates. Thus, peak and off-peak contribution charges would not have to be subject to constant readjustment. Further, because the contribution charges would be simply structured, with only peak and off-peak components, they would afford competitors some flexibility to recover their contribution costs across a broad range of markets and services.
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The Commission agrees with those parties to this proceeding who submitted that a public process should be held with regard to a move to de-averaged contribution charges. Accordingly, the Commission is initiating, by separate public notice, a proceeding to consider its proposed de-averaged per-minute contribution mechanism and the impact associated with its implementation. That proceeding will also consider the appropriate timing of adopting such a contribution mechanism. The Commission anticipates that the record of the proceeding with be complete by mid 1995. Until a final determination is made with regard to the Commission's proposal, trunk-side connections of IXCs and resellers will continue to be charged contribution on the basis of the per-trunk mechanism currently in place.
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The Commission notes that Stentor and Fonorola raised other issues in the course of this proceeding. Stentor requested that, should the Commission decide to adopt per-minute contribution, competitors should be charged per-minute contribution effective back to 16 October 1994. Given the findings above, and in light of its initial decision that a stay should be granted, the Commission rejects this request.
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Fonorola requested that the Commission immediately initiate its proceeding to consider broadening the base of contributing services to include cellular, public cordless telephone service and line-side data. With the contribution requirement at its current level, the Commission remains concerned with the potential impact of such a change on the providers of such services. Accordingly, the Commission considers it more appropriate to examine this issue in the time frame originally discussed in Decision 94-19.
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Fonorola also suggested various changes to the procedure by which annual contribution charges are set. The Commission notes that proposals not unlike those advanced by Fonorola have been considered and rejected by the Commission in the course of past annual contribution charge proceedings.
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Allan J. Darling
Secretary General
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