ARCHIVED -  Telecom Decision CRTC 95-22

Telecom Decision

Ottawa, 27 November 1995

Telecom Decision CRTC 95-22

CONTRIBUTION REGIME IN ALBERTA

I INTRODUCTION

In AGT Limited - Interconnection of Interexchange Carriers and Related Resale and Sharing Issues, Telecom Decision CRTC 93-17, 29 October 1993 (Decision 93-17), the Commission determined that competitors' toll traffic originating in Edmonton, like toll traffic originating elsewhere in Alberta, should continue to contribute towards non-self supporting services in the rest of the province on the basis of foregone contribution. The Commission also concluded that the most effective method of accomplishing this objective is for interexchange carriers (IXCs) and resellers to make contribution payments to AGT Limited (AGT) for toll traffic which originates and terminates in Edmonton.

On 11 February 1994, Edmonton Telephones Corporation (ETC), filed an application requesting that the Commission review and vary Decision 93-17 pursuant to section 62 of the Telecommunications Act (the Act). ETC requested that the Commission alter the contribution regime to require contribution payments to AGT only where there is interconnection with AGT.

In ED TEL - Application for a Review and Variance of Telecom Decision CRTC 93-17, Telecom Decision CRTC 94-21, 26 October 1994, the Commission denied ETC's request to review and vary Decision 93-17. However, the Commission determined that as a result of the decision of the Supreme Court of Canada in Attorney-General of Quebec et al. v. Téléphone Guèvremont, 26 April 1994, that brought ETC under the Commission's jurisdiction, the Commission would now be in a position to re-examine the contribution regime in Alberta in a manner that took into consideration the local/access shortfall in the operating territory of each company.

In Contribution Regime in Alberta, Telecom Public Notice CRTC 94-51, 26 October 1994, the Commission invited proposals for an alternative contribution approach that would provide a better balance between the contribution requirements of both AGT and ETC and reflect the local/access shortfall of each company in an equitable manner.

Proposals were received from AGT, ETC, Northline Telecommunications Inc. (Northline), the Ontario Telephone Association, Sprint Canada Inc. (Sprint), and Unitel Communications Inc. (Unitel).

In March 1995, AGT's parent, Telus Corporation (Telus) purchased ETC's telecommunications assets from the City of Edmonton, and continued operations under the name ED TEL Communications Inc. (ED TEL).

Comments were received from AGT, the City of Calgary (Calgary), ED TEL, Northline, Sprint and Unitel.

II ED TEL'S CURRENT ARRANGEMENTS WITH INTERCONNECTING CARRIERS

The current settlement arrangements between AGT and ED TEL are based upon a modified Commission and Line-Haul type of settlement, known as Alternate Appendix B (AAB). Under the terms of the settlement agreement, ED TEL collects all revenue from toll calls that originate in Edmonton, retains a fixed percentage derived from a multi-variable formula and remits the remainder to AGT. The retention rate of toll revenues by ED TEL is capped at 20.1%. This has the effect of keeping ED TEL's share of toll revenue at a constant proportion of the total toll revenue generated in Edmonton.

Prior to this Decision, ED TEL and ETC have required Alternate Providers of Long Distance Services (APLDS) with whom they entered into interconnection agreements to pay contribution charges of $0.0556 per minute for traffic originating or terminating in Edmonton. In addition to this, as a result of the Commission's determinations in Decision 93-17, an APLDS paid an additional contribution for traffic originating or terminating in Edmonton. By way of example, for IXCs, this resulted in a contribution rate that was significantly higher than the average contribution rate paid in the territories of the Stentor members other than AGT.

III PROVINCE-WIDE AVERAGE CONTRIBUTION RATE MECHANISM

All parties generally supported the adoption of a blended province-wide average contribution rate.

The Commission agrees with this approach for the Alberta market, primarily because of the relationship between AGT and ED TEL and the relative importance to the Alberta market of traffic originating and terminating in Edmonton. The specific details for the implementation of a blended province-wide average contribution rate are set out below.

ED TEL submitted that, in the absence of an approved costing methodology specifically applicable to a Local Exchange Carrier (LEC) operation, such as ED TEL, the 1994 AAB amount of $40.4 million is an appropriate contribution requirement for 1995 because this amount inherently recognizes both the costs of interconnection, including those associated with switching and aggregation, and the local/access shortfall.

In response to a Commission interrogatory requesting an estimate of its non-toll shortfall, ED TEL filed a Phase III Approximation Study. However, ED TEL noted that the use of the study for any purpose other than an indicator of the reasonableness of the AAB amount noted above would be inappropriate.

Sprint submitted that ED TEL provided, in its Phase III Approximation Study, 1995 local/access shortfall information that would be adequate to derive ED TEL's 1995 contribution requirement.

Calgary submitted that the contribution method should be based on the costs of providing local service and the resulting shortfall, and that the methodology to be employed should be consistent with that enunciated in Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19).

AGT argued, that ED TEL's costing information is not detailed enough for the Commission to estimate the initial province-wide Carrier Access Tariff (CAT), nor is it sufficient to permit the Commission to make specific adjustments to particular cost items. AGT submitted that the Commission should use the AAB amount as a starting point and should adjust it, if necessary, when a proper cost separation study is conducted by ED TEL to identify its toll costs and local/access shortfall.

The Commission has evaluated the methodology and results of the Phase III Approximation Study commissioned by ED TEL and finds that there are major differences between the study as submitted and the Commission's approved Phase III methodology, including inappropriate category assignments, incomplete data with respect to its reports and lack of detail at the account level.

While the Commission agrees with the various parties who submitted that the calculation of ED TEL's local/access shortfall should be cost-based, the Commission is of the view that the Phase III Approximation Study is not adequate for the purpose of calculating a 1995 contribution rate.

Accordingly, the Commission considers that the AAB amount of $40.4 million to be the most reasonable approximation of the local/access shortfall that can be made for 1995, while satisfying the requirements of recovering contribution and switching and aggregation costs.

In order to ensure that a cost-based contribution mechanism is implemented for 1996, the Commission directs ED TEL to: (1) refine its costing methodology so as to be more consistent with the approved Phase III methodology and (2) file its 1996 contribution requirement based on this methodology.

The Commission will follow-up with ED TEL, to outline generally the refinements to its costing methodology that are required.

V SWITCHING AND AGGREGATION

ED TEL submitted that, while switching and aggregation costs are not separately identified under the AAB methodology, ED TEL would be prepared to unbundle its CAT provided that: (1) a suitable costing methodology applicable to LECs is available and (2) the sum of the contribution and switching and aggregation charges maintain the per-minute component of ED TEL's 1994 CAT at $0.0457.

AGT submitted that until ED TEL provides more detailed cost separation information, the current AAB amount should be employed to determine the ED TEL portion of the province-wide CAT. AGT submitted that when ED TEL has completed its cost study, its allocated toll costs will be determined and that these should form the basis for ED TEL's switching and aggregation charge.

Sprint submitted that a separate switching and aggregation rate should be developed for ED TEL. Sprint further submitted that until such time as ED TEL has filed proposed rates and costing information similar to that filed by Stentor members in the proceeding initiated by Equal Access, Telecom Public Notice CRTC 94-26, 24 May 1994 (Public Notice 94-26), ED TEL's switching and aggregation charge should be the same as that established 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).

Unitel proposed that the switching and aggregation rates should be tariffed separately from contribution charges, and that these rates should be based on Phase II costing rules, consistent with the proceeding initiated by Public Notice 94-26. Unitel submitted that, after adjusting for an alleged misallocation of property taxes, the per-minute rate of $0.007 should apply for switching and aggregation services in Edmonton. Consistent with the Commission's decision in Part IV above to adopt the AAB amount of $40.4 million for 1995, the Commission does not consider that it is appropriate to establish a separate switching and aggregation charge for 1995. However, with the implementation of a cost-based contribution charge by ED TEL in 1996, the Commission directs ED TEL to include an explicit switching and aggregation charge of $0.011 per minute in its CAT, to be effective 1 January 1996. Accordingly, AGT and ED TEL are directed to file a proposed contribution requirement for 1996 that includes in the calculation estimated revenue flowing to ED TEL from switching and aggregation charges.

VI CONTRIBUTION DISCOUNTS

ED TEL noted that in Telecom Order CRTC 95-534, 2 May 1995, the Commission denied an application by Bell Canada (Bell) for approval of tariff revisions to flow through to APLDS the settlement costs associated with calls between APLDS and the independent telephone companies using Bell facilities. ED TEL was of the view, that the Commission supported a non-discounted CAT for LECs and submitted that similar treatment should be afforded ED TEL. ED TEL further submitted that the conditions cited by the Commission in Decision 92-12 as the basis for establishing a contribution discount are not applicable to EDTEL.

Sprint argued that, given the nature of the relationship between AGT and ED TEL, it is appropriate that a contribution discount apply in deriving the contribution rate paid by IXCs and resellers in ED TEL's operating territory. Sprint further submitted that the discount would recognize the tremendous market and structural advantages enjoyed by AGT in ED TEL territory.

Unitel submitted that the two factors of (1) telephone company dominance and (2) minimal competition, identified by the Commission in Decision 92-12, apply equally in the Edmonton market. Unitel submitted that there is currently minimal long distance competition in Edmonton, with AGT continuing its historically dominant position.

In reply, ED TEL submitted that if contribution discounts are allowed, then ED TEL would be unable to recover its entire access shortfall with the result that ED TEL would not be kept whole.

The Commission notes that, currently, (1) all default traffic automatically transfers to AGT as a result of an AGT-ED TEL agreement, (2) the billing and collection functions are simultaneously carried out by ED TEL for the company's own provision of local service as well as for AGT's long distance services and (3) AGT enjoys certain marketing advantages, such as the inclusion of AGT billing inserts with the bill that ED TEL sends to its customers.

The Commission also notes that, while the companies are separate legal entities, they are affiliated through Telus. In the Commission's view, the nature of ED TEL's relationship with AGT allows AGT to achieve a market and structural advantage in the Edmonton market.

In light of the above, the Commission considers that, in order to foster a fully competitive long distance market in Edmonton, contribution discounts should apply in ED TEL territory consistent with the Decision 92-12 methodology. Finally, because the long distance market has been open to competitors in Edmonton since 1993, the Commission concludes that the same contribution discount schedule should apply for ED TEL's operating territory as that currently in place for IXCs and resellers interconnecting with AGT. By way of example, for IXCs operating in Alberta, a 25% discount will apply until 30 June 1996.

VII DIRECT ACCESS LINES

For reasons similar to those noted above regarding contribution discounts, ED TEL submitted that Direct Access Lines (DALs) used by all toll service providers are measurable and should be subject to contribution payments consistent with ED TEL's current CAT. ED TEL stated that the company's position is consistent with the treatment afforded all LECs in Canada.

AGT and Calgary also submitted that contribution should be payable on traffic carried on DALs.

Sprint and Unitel submitted that the contribution regime should be consistent with, and be based on, the principles established in Decision 92-12, i.e., contribution should not be payable on DALs.

The Commission is of the view that the contribution mechanism applied to carriers interconnecting with ED TEL should mirror the contribution regime implemented in Decision 92-12. The Commission considers this to be particularly important given the size of the Edmonton market. Furthermore, in the Commission's view, the contribution regime in Edmonton should be similar to that which applies to AGT, in order to encourage toll providers to interconnect with ED TEL directly, rather than through AGT's facilities.

Accordingly, the Commission concludes that long distance carriers competing with AGT should be allowed to originate or terminate traffic in Edmonton using DALs and should not pay contribution on traffic carried using DALs. The Commission also considers that the application of a 2% DAL surcharge in the calculation of ED TEL's contribution rates is appropriate as was established in Decision 92-12.

Finally, consistent with Decision 92-12, the Commission considers that all of AGT's long distance traffic should continue to attract contribution regardless of whether the traffic is carried over DALs. The Commission believes that this treatment is appropriate because the relationship between AGT and ED TEL confers benefits to AGT that are not available to other competitors. The above determinations recognize that the principles established by this contribution regime should be consistently applied province-wide.

VIII CONTRIBUTION COLLECTION MECHANISM

ED TEL submitted that Decision 92-12 has been superseded by Decision 94-19 in which the Commission advocates the adoption of a per-minute contribution collection mechanism. ED TEL further noted that should the Commission adopt the per-trunk rate in Edmonton, ED TEL would be unable to recover its entire access shortfall.

AGT submitted that a per-trunk mechanism would leave ED TEL with a Commission imposed revenue requirement shortfall. AGT further stated that if the Commission determines that a per-trunk mechanism should be applied in Edmonton, then it should be applied equally to all toll providers.

Sprint submitted that the ED TEL contribution regime should be consistent with and be based on the principles established in Decision 92-12.

Unitel submitted that contribution among the Stentor companies, including AGT, should be collected through a per-trunk mechanism. Unitel also stated that pending the outcome of the proceeding initiated by De-averaged Per-Minute Contribution Mechanism, Telecom Public Notice CRTC 94-59, 29 December 1994 (Public Notice 94-59), it would be premature to implement an average per-minute mechanism in Edmonton.

The Commission notes that the concerns raised by Sprint and Unitel in Applications by Unitel Communications Inc. and Sprint Canada Inc. to Review and Vary Part of Decision 94-19, Telecom Decision CRTC 94-27, 29 December 1994 (Decision 94-27), with respect to the necessity of reconfiguring their networks as the result of changing from a per-trunk mechanism to a per-minute mechanism, do not apply in ED TEL territory. At present, ED TEL's tariff is calculated on a per-minute basis; thus, the networks would already be configured accordingly.

In the circumstances, the Commission considers that ED TEL's contribution should continue to be collected on a per-minute basis. Since no modifications to the APLDS' networks are required under this scenario, the Commission considers it appropriate that the per-minute mechanism be effective in ED TEL territory effective 1 January 1995.

The Commission further notes that, in Public Notice 94-59, it proposed adoption of a de-averaged per-minute contribution mechanism. While the Commission has yet to render its decision with respect to the proceeding initiated by Public Notice 94-59, it notes that if a de-averaged per-minute rate is adopted, or if the per-trunk mechanism is retained for the Stentor companies, then ED TEL's contribution collection mechanism may be revised.

In Order-in-Council P.C. 1994-1779, 25 October 1994, the Governor in Council issued a directive to the Commission, pursuant to section 75 of the Act, regarding the regulation of ED TEL and ETC during the transitional period ending 25 October 1998 (the Directive). Pursuant to the Directive, the Commission was required to (1) approve a 200 basis point range of regulated return on common equity with a mid-point of 12.5%, (2) include a minimum of 12% of the shareholder entitlement (as defined in the Directive) in ED TEL's annual revenue requirement, and (3) treat the operations of ED TEL Directory Inc. as being partially integral to the operations of ED TEL, such that the Commission is restricted as to the extent to which ED TEL Directory Inc.'s revenues may be included in calculating ED TEL's revenue requirement.

Calgary submitted that the higher rates of return that are allowed as a result of the Directive would unduly discriminate against AGT subscribers if the Directive's provisions were included in the contribution requirement. Calgary also submitted that higher rates of return should not be available to ED TEL at the expense of AGT subscribers outside the city of Edmonton.

Calgary also submitted that the Commission should not allow the citizens of Edmonton to benefit a second time and should therefore exclude the shareholder entitlement from the contribution calculation.

With respect to directory revenues, Calgary argued that the Commission should ensure that its decision in this proceeding is consistent with its treatment of other telephone companies.

ED TEL replied that the Directive was implemented to facilitate a smooth transition to federal regulation and private ownership. ED TEL submitted that any reduction of ED TEL's CAT by an amount equivalent to the potential annual benefit of the Directive as proposed by Calgary would result in a local rate increase in Edmonton. Since the local rates in Edmonton currently include the costs of the Directive, ED TEL submitted that such an increase would result in double recovery of the Directive costs from local subscribers.

The Commission considers that it would be contrary to the objectives of the Directive if the Commission were to set a contribution rate for ED TEL based on a revenue requirement that did not reflect the terms of the Directive. Accordingly, for 1995, the Commission is of the view that no adjustments are required because it has adopted the AAB amount. In light of the Commission's direction set out above to utilize Phase III-equivalent methodology to calculate contribution in 1996, issues related to the Directive will be examined within the framework of that proceeding.

X IMPLEMENTATION DATES

AGT and ED TEL submitted that all of their internal budgeting, planning, system processes and filings in the proceeding leading to Implementation of Regulatory Framework - Splitting of the Rate Base and Related Issues, Telecom Decision CRTC 95-21, 31 October 1995 (Decision 95-21) have been based on a 1 January 1996 implementation date.

Sprint submitted that the new Alberta contribution rate should be applied retroactively to the date on which ED TEL's CAT received interim approval, i.e., 1 January 1995.

Unitel submitted that the new blended province-wide contribution mechanism should not be imposed effective 1 January 1995. Unitel stated that it would be unfair to penalize competitors that did not originate or terminate significant traffic in Edmonton, by effectively raising the contribution charges for AGT territory. Unitel proposed that the current contribution regime should be maintained for each IXC and reseller from 1 January 1995 up until the date that the IXC or reseller in question entered the Edmonton long distance market. Alternatively, Unitel proposed that the Commission select 1 July 1995 as the implementation date, submitting that this would not require a separate calculation for each competitor and would recognize that most competitors were not active in the Edmonton market in the first half of the year.

The Commission considers that a blended contribution rate for the province of Alberta using the AAB amount for 1994 as a proxy for the 1995 contribution requirement should be implemented as of 1 January 1995, the same date the contribution rates are to take effect as directed in Decision 95-21.

Based on the determinations made in this Decision, the Commission gives final approval to the following contribution rates for AGT and ED TEL in 1995:

Line 5c) (Non-Discounted)

1995 Contribution Per Minute Per End ($)

AGT ED TEL TOTAL

0.04440 .0070 0.0515

For each call originating or terminating in Edmonton, ED TEL will collect from AGT, IXCs and resellers, $0.0515 per minute per end, $0.0367 per minute per end, and $0.0275 per minute per end, respectively. ED TEL will then remit to AGT the requisite amount to cover AGT's contribution requirement. For example, an IXC originating or terminating a call in Edmonton would pay ED TEL $0.0367 per minute per end. Of the $0.0367 collected by ED TEL, $0.0317 would be remitted to AGT and the remainder, $0.0050, would be kept by ED TEL.

Similarly, for each call originating or terminating in AGT territory, AGT will collect from IXCs and resellers, $0.0367 per-minute per end converted to a per-trunk rate, and $0.0275 per-minute per end converted to a per-trunk rate, respectively. AGT will then remit to ED TEL, the requisite amount to cover ED TEL's contribution requirement. For example, an IXC originating or terminating a call in Edmonton would pay AGT $0.0367 per minute per end converted to a per-trunk rate. Of the $0.0367 collected by AGT, the equivalent of $0.0050 would be remitted to ED TEL and the remainder, $0.0317, would be kept by AGT.

The Commission also directs ED TEL and AGT to issue revised tariff pages to reflect the new contribution rate and make the necessary adjustments in their billing as expeditiously as possible.

The calculation of 1995 contribution charges are shown in the Attachment to this Decision.

Allan J. Darling
Secretary Genera

ATTACHMENT

CALCULATION OF 1995 CONTRIBUTION RATES FOR AGT AND ED TEL

AGT ED TEL TOTAL

A. Contribution Requirement ($ Millions):

1. Level of Contribution Requirement 255.2 40.4 295.6

B. Toll Minutes Calculation
(Millions):

2. Telco Orig. & Term. Minutes
    5270.4 5270.4 5270.4
3. a) Entrant Minutes
    507.9 507.9 507.9
b) Entrant Stim. Minutes Ratio to Total Minutes
    0.0678 0.0678 0.0678
c) Deduct Entrant Stimulated Minutes
    34.4 34.4 34.4
4. Total Market Orig. & Term. Minutes
    5743.9 5743.9 5743.9
5. Contribution Rate per Min. Per End
    0.0444 0.0071 0.0515

C. Multiplicative Adjustments:

6. Gross Receipts Tax 1 1 1
7. DAL Surcharge 1.02 1.02 1.02
8. Discount 0.75 0.75 0.75
9. Stim. Min. Factor 0.9322 0.9322 0.9322
10. Contr. Per Min. Per End - FBC ($)
      0.0317 0.0050 0.0367
11. Reseller Discount 0.75 0.75 0.75
12. Contr. Per Min. Per End - Reseller ($)
      0.0238 0.0037 0.0275

Explanation of Attachment Line Items:

A. Contribution Requirement: For AGT, the $255.2 million was derived in Decision 95-21; for ED TEL, it is the AAB Amount of $40.4 million.

B. Toll Minute Calculation - The minutes approved as the forecast in Decision 95-21 for AGT are the minutes used in this Decision.

(Minor Differences Due to Rounding)