ARCHIVED -  Telecom Decision CRTC 95-7

Telecom Decision

Ottawa, 1 May 1995

Telecom Decision CRTC 95-7

MARITIME TEL & TEL LIMITED - APPLICATION FOR INTERIM RATE INCREASES AND TARIFF NOTICE 501

On 1 February 1995, Maritime Tel & Tel Limited (MT&T) filed in confidence an application for interim rate increases to take effect on 3 April 1995. At the same time, MT&T filed proposed directions on procedure for a proceeding to consider an application to make the interim rate increases final effective 1 October 1995.

On 20 February 1995, MT&T placed its proposed directions on procedure on the public record, along with an abridged copy of its interim rate increase application. By letter dated 21 February 1995, interested parties were invited to comment on a request by MT&T that all existing Utility segment rates be made interim, prior to the Commission's decision as to whether or not to grant any interim rate increases. No comments were received from interested parties on this matter, and existing Utility rates were made interim effective 16 March 1995.

In its application, MT&T requested, among other things, monthly interim increases of (1) $2.95 for residence one-party and two-party service, (2) between $5.60 and $9.30 for business single-line service, (3) between $10.40 and $14.25 for business multi-line service, and (4) $2.00 per Centrex line.

Without rate increases in 1995, MT&T forecast that its Utility segment would earn a rate of return on average common equity (ROE) of 6.0%, while its company-wide ROE for the year would be 6.4%. MT&T expected that its proposed rate increases would generate approximately $18 million in revenue in 1995, if in effect on an interim basis on 3 April 1995, and $24 million in 1996. With approval of the interim rate increases, to take effect on a final basis on 1 October 1995, MT&T forecast that its Utility segment would earn ROEs of 8.3% in 1995 and 11.2% in 1996, with company-wide ROEs of 8.1% in 1995 and 8.7% in 1996.

The Commission did not consider that an effective date of 3 April 1995 for MT&T's proposed interim rate increases would permit a meaningful public process. Therefore, the Commission issued Telecom Public Notice CRTC 95-9, 24 February 1995 (Public Notice 95-9), inviting comment on MT&T's proposed interim increases, with an effective date of 1 May 1995.

In Public Notice 95-9, the Commission also raised the question of whether a meaningful proceeding with regard to final 1995 rates could be held prior to the Commission's decision in the proceeding initiated by Implementation of Regulatory Framework - Split Rate Base, 1995 Contribution Charges, Broadband Initiatives and Related Matters, Telecom Public Notice CRTC 94-52, 1 November 1994 (the Split Rate Base proceeding). Accordingly, the Commission invited MT&T and interested parties to comment on (1) whether a proceeding with regard to final 1995 rates should be held before or after the Commission's decision in the Split Rate Base proceeding, and (2) in either event, the nature and scope of the review that should take place. The Commission advised that it was deferring its decision as to MT&T's proposed directions on procedure.

In response to Public Notice 95-9, a number of parties submitted letters objecting to MT&T's proposed interim rate increases. In addition, more specific comments were received from the following interveners: the Canadian Federation of Independent Business, Dalhousie University, Rogers Cantel Inc., the Maritime Centrex Users' Group, the Metropolitan Halifax Chamber of Commerce, the Nova Scotia Consumers' Coalition (NSCC), Sprint Canada Inc. (Sprint), and Unitel Communications Inc. (Unitel).

No party supported MT&T's request for interim rate increases. In general, interveners were of the view that MT&T had failed to demonstrate that its financial problems relate to the Utility segment of its business or that the company meets the test the Commission uses in considering proposed interim rate increases.

NSCC, Sprint and Unitel filed comments with respect to the questions of (1) whether a proceeding with regard to final 1995 rates should be held before or after the Commission's decision in the Split Rate Base proceeding, and (2) the nature and scope of the review that should take place. These parties were in favour of holding a proceeding after a decision in the Split Rate Base proceeding. NSCC, however, qualified its position by suggesting that the Commission proceed immediately to have a full rate hearing if the Commission grants interim rate increases.

In its reply, MT&T reiterated its need for interim increases, noting that approval of the interim rates requested in their entirety with an effective date of 1 May 1995, rather than 3 April 1995 as proposed by the company, would only produce $15.9 million in additional revenue in 1995 and an ROE for the Utility segment of 8.1%. The company stated that granting its requested interim rate increases would permit a proceeding regarding final 1995 rates to take place after the Commission's decision in the Split Rate Base proceeding without damage to the company's interests. However, it submitted that the proceeding regarding final 1995 rates should proceed in tandem with the Split Rate Base proceeding.

The test used by the Commission in considering interim rate increases was first enunciated in Bell Canada, General Increase in Rates, Telecom Decision CRTC 80-7, 25 April 1980, as follows:

 The Commission considers that, as a rule, general rate increases should only be granted following the full public process contemplated by Part III of its Telecommunications Rules of Procedure. In the absence of such a process, general rate increases should not in the Commission's view be granted, even on an interim basis, except where special circumstances can be demonstrated. Such circumstances would include lengthy delays in dealing with an application that could result in a serious deterioration in the financial condition of an applicant absent a general interim rate increase.

After reviewing the evidence filed in this proceeding and considering the split rate base regulatory regime established in Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994, the Commission concludes that special circumstances exist with respect to MT&T's current situation. First, the Commission finds that there will be a significant delay before any final decision on MT&T's Utility rates can be taken. In addition, the Commission considers that, on a prima facie basis, MT&T's Utility segment ROE for 1995 will be inadequate in the absence of interim rate increases. The Commission, therefore, concludes that interim rate increases are appropriate.

The Commission considers that an interim rate increase of $11.2 million, over the period 1 May 1995 to 31 December 1995, is appropriate at this time. This interim award reflects the Commission's view that, on a prima facie basis, the company's 1995 expense forecast is overstated by $4.4 million, $3.4 million with respect to depreciation and $1.0 million for Rents and Other. The Commission notes that, with this expense adjustment, additional revenues of $11.2 million in 1995 should result in a Utility segment ROE of approximately 8.0%. This is an ROE similar to that forecast by the company for the Utility segment with proposed rates implemented on 1 May 1995.

MT&T proposed to increase Network Exchange Service (NES) rates by $2.95 per month for one-party and two-party residence customers (including Charitable single-line customers). The company proposed increases for one-party and two-party business single-line customers ranging from $5.60 to $9.30 per month; increases ranging from $6.50 to $7.75 for business Message Rate service; increases ranging from $10.40 to $14.25 for business multi-line NES; and increases for Charitable Key and Charitable PBX service of $6.65 and $9.30 per month, respectively.

In support of these proposed increases, MT&T stated that it believes that rates should be more uniform and should no longer be based upon traditional value of service arguments, as the value of service is similar for all the company's subscribers. The company stated that the proposed rate revisions will permit the company to better recover costs from the services in question while minimizing the impact on services priced below cost.

The Commission notes that, in the proceeding leading to Maritime Telegraph and Telephone Company Limited - Revenue Requirement for 1994, Telecom Decision CRTC 94-9, 29 April 1994 (Decision 94-9), MT&T proposed, within each of single-line one-party and two-party residence NES, business single-line one-party and two-party NES and business multi-line NES, a uniform increase in rates to apply across all rate groups, effectively reducing the percentage differential between rate groups for each of these services. In Decision 94-9, the Commission stated that, in general, it considered MT&T's approach in reducing relative rate differentials appropriate. The Commission notes that, in its present application, the company proposes a flat rate increase for all single-line one-party and two-party residential rate groups.

In view of its determination with respect to the company's revenue requirement, the Commission does not consider increases of the extent proposed to be necessary. The Commission considers the continued reduction of relative percentage rate differentials for all NES to be appropriate. Accordingly, the Commission approves, effective 1 May 1995 on an interim basis, (1) residence NES increases for one-party and two-party service (including Charitable single-line service) of $2.10 per month; (2) one-party and two-party business single-line NES increases of $6.00 per month; (3) business Message Rate service increases of $5.35 per month; (4) business multi-line NES increases of $9.70 per month; and (5) Charitable Key and Charitable PBX increases of $4.85 per month.

The Commission considers that, in developing future rate proposals for NES, the company should have regard to the appropriateness of reducing the relative rate differentials for NES, taking into account the outcome of the Split Rate Base proceeding.

As noted above, MT&T proposed to increase Centrex service rates by $2.00 per line, on the assumption that the Commission would approve the restructuring of Centrex service proposed in Tariff Notice 501, dated 7 November 1994.

The Commission notes that, in Decision 94-9, it concluded that the company's proposed Centrex rates would not maximize contribution. The company was directed to increase Small Centrex and Centrex Business service rates by 10% over the company's proposed levels. Subsequently, in Tariff Notice 470 dated 15 July 1994, MT&T proposed to restructure and reduce the rates for Centrex service. Tariff Notice 470 proposed the introduction of Centrex Feature Networking and a restructuring of Centrex service into Exchange Centrex and Provincial Centrex in conjunction with reductions to Small Centrex and Centrex Business service. In Telecom Order CRTC 94-1054, 9 September 1994 (Order 94-1054), the Commission denied Tariff Notice 470 stating that the company did not provide the net revenue impact resulting from the proposed restructuring or supporting information to demonstrate the impact on contribution. Tariff Notice 501 proposed revisions similar to those in Tariff Notice 470. With Tariff Notice 501, the company provided supporting information addressing the concerns raised in Order 94-1054. In addition, the company argued that the rate reductions were necessary to mitigate migration from the service.

In light of the approved increases to business single-line and multi-line NES, the Commission is not persuaded that the rate reductions proposed in Tariff Notice 501 are necessary to maintain Centrex contribution levels. However, the Commission notes that the company's proposed interim increase of $2.00 per line for Centrex service is based upon approval of the reduced rates proposed in Tariff Notice 501. The Commission considers that, without the approval of Tariff Notice 501, an increase to Centrex rates could alter the rate relationship between Centrex and Key/PBX alternatives with the effect that migration from Centrex could reduce the contribution from Centrex service. Accordingly, the Commission denies both Tariff Notice 501 and the proposed $2.00 increase to Centrex service proposed in the interim application.

The Commission considers the restructuring of Centrex service into Exchange Centrex and Provincial Centrex to be generally acceptable and would be prepared to consider an application by the company that proposes this restructuring, without an overall reduction in rates.

MT&T is directed to issue revised tariff pages, effective 1 May 1995 on an interim basis, incorporating the rates approved by the Commission above. All interim rates are subject to final approval.

The Commission notes that these interim increases, if they remain in effect throughout 1996, are estimated to result in additional revenues of $17.3 million and a Utility ROE for 1996 of approximately 10.25%, the bottom of MT&T's approved ROE range.

With respect to the company's construction program, the Commission expects the company to continue with its planned rollout of the Single Party Development Program.

After considering the comments of parties, the Commission is not persuaded that a meaningful proceeding with regard to final 1995 rates can be held prior to the Commission's decision in the Split Rate Base proceeding. Accordingly, MT&T's proposed directions on procedure are denied. Rather, the company is directed to file revised forecasts for 1995 and 1996, incorporating the determinations made in the Split Rate Base proceeding, within a period of 30 days following issuance of the Commission's decision in that proceeding. At that time, the Commission will establish the nature and scope of the final review of MT&T's Utility rates.

Allan J. Darling
Secretary General