ARCHIVED -  Telecom Public Notice CRTC 95-15

Telecom Public Notice

Ottawa, 23 March 1995

Telecom Public Notice CRTC 95-15

REGULATORY FRAMEWORK FOR THE INDEPENDENT TELEPHONE COMPANIES IN QUEBEC AND ONTARIO (EXCEPT ONTARIO NORTHLAND TRANSPORTATION COMMISSION)

I INTRODUCTION

On 26 April 1994, as a result of the Supreme Court of Canada's decision in Attorney-General of Quebec et al. v. Téléphone Guèvremont Inc., the independent telephone companies (the independents) in Canada were brought under the Commission's jurisdiction.

In May 1994, the Commission hired two consultants to examine the regulatory regimes for the independents in Ontario and Quebec and to provide recommendations on how to facilitate the transition from provincial to federal jurisdiction. The consultants engaged were Mr. Willie Grieve with respect to the Ontario independents and Mr. Jean-Pierre Mongeau with respect to the Quebec independents. The consultants filed their final reports with the Commission on 30 September 1994. Copies of these reports are now available at the offices of the CRTC listed in Part V of this Public Notice. Commission staff addressed interrogatories, almost identical to those asked of the Ontario independents by Mr. Grieve, to the two independent western companies, i.e., Edmonton Telephones Corporation (Ed Tel) and Prince Rupert City Telephones (Prince Rupert).

The Commission hereby initiates a proceeding to deal with the regulatory framework for the independents in Ontario and Quebec, with the exception of the Ontario Northland Transportation Commission (ONTC). Owing to the unique circumstances of ONTC, Prince Rupert and Ed Tel, the Commission considers that an appropriate regulatory framework for these three companies could better be established in one or more separate proceedings at a later date. Throughout the balance of this Public Notice, the term "independents" will refer only to those independent telephone companies that are the subject of this proceeding.

II PROPOSAL FOR QUÉBEC-TÉLÉPHONE AND TÉLÉBEC LTÉE

The Commission notes that Québec-Téléphone and Télébec ltée (Télébec) are, with regard to Network Access Service (NAS) lines, revenues and number of employees, considerably larger than all of the other independents. Indeed, given the size and complexity of these two companies, the Commission proposes that they be regulated using the same basic framework that applies to the Stentor member companies under the Commission's jurisdiction. TheCommission notes in this regard that la Régie des télécommunications du Québec (la Régie) had adopted a somewhat analogous regime for its regulation of Québec-Téléphone and Télébec. In applying this framework, the Commission would take into account that Québec-Téléphone and Télébec are not full members of Stentor and do not have the same human and financial resources available to them as the larger Stentor members.

III REGULATION OF INDEPENDENTS OTHER THAN QUÉBEC-TÉLÉPHONE AND TÉLÉBEC

In Appendix I to this Public Notice, the Commission has outlined the key features of a suggested regulatory framework for the independents other than Québec-Téléphone and Télébec, setting out some of the main issues to be addressed.

Interested parties are invited to comment on the appropriateness of the framework described in Appendix I. If there are particular variations to this framework, including forms of forbearance that may be more appropriate, parties should identify them, provide reasons for their choices and describe how the variations would be applied.

The Commission is mindful of the workload that regulation may impose, particularly on the smaller independents. Inseeking an appropriate regulatory framework, it is guided by a desire to impose the minimum burden necessary while properly fulfilling its mandate under the Telecommunications Act (the Act). Accordingly, although it has set out a model in Appendix I for comment, the Commission is open to consideration of completely different models that may be appropriate for some or all of the independents in question. For municipal telephone companies, for example, other models might include a social contract form of price regulation, during the term of which the Commission would regulate simply by responding to complaints.

Interested parties proposing models other than outlined in Appendix I are to explain how their model would be consistent with the Commission's mandate under the Act. Any such model must also (1) be accompanied by a detailed plan of implementation, including financial filing requirements, and (2) address the issues set out below in Part IV.

In his report, Mr. Grieve addressed issues related to municipal ownership, focusing on whether it is the Commission or the municipalities that should decide how the financial advantages of municipal ownership should be distributed, i.e., whether the Commission should give municipalities the flexibility to determine whetherbenefits will be passed on to their citizens through lower telephone rates or through lower municipal tax rates. A summary of this portion of Mr. Grieve's report, some observations by the Commission and an outline of the issues raised are set out in Appendix II.

IV REGULATORY ISSUES FOR INDEPENDENTS OTHER THAN QUÉBEC-TÉLÉPHONE AND TÉLÉBEC

The Commission is of the view that the following issues must be addressed in this proceeding, and arise notwithstanding the details of any particular regulatory regime.

A. Competition Issues

1. Interexchange Competition

The Commission proposes that there be competition in the provision of long distance telecommunications services for the subscribers of the independents in accordance with the principles 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), and in other decisions, including Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19).

In Interim Interconnection of Interexchange Carriers with Quebec Independent Telephone Companies and Related Resale and Sharing Issues, Telecom Public Notice CRTC 95-4, 27 January 1995 (Public Notice 95-4), the Commission initiated a proceeding to consider an interim competitive regime for the Quebec independents. The Commission invited parties to comment on the interim regime proposed therein, pending the establishment, in the proceeding initiated by this Public Notice, of final terms and conditions governing interconnection and resale by competitors.

Consistent with the above, the Commission seeks comment on the final terms and conditions to govern interexchange competition in the territories of the independents.

2. Local Competition

The Commission approved the principle of local competition in Decision 94-19. In doing so, the Commission expressed the view that local competition will lead to benefits such as productivity improvements and the introduction of even more innovative services. Consistent with this view, the Commission proposes that local competition be permitted in the territories of all independents, noting that issues such as unbundling andco-location will have to be considered. The Commission invites comment on this proposal, and on the appropriate approach to related issues.

B. Settlement Mechanism

In Telecom Order CRTC 94-1360, 17 November 1994, the Commission approved, on an interim basis effective 1 January 1995, a Carrier Access Tariff (CAT) for most of the Ontario independents. The Ontario Telephone Association (OTA) CAT sets out per-minute charges related to the provision of toll service, contribution and equal access. These charges are established annually on an industry-wide basis for the 27 independents to which the CAT applies. The sum of the toll and contribution rates is obtained by dividing the sum of the forecast toll settlement requirement for all participating independents by the total forecast toll originating and terminating conversation minutes in the independents' territories. The equal access rate is based on the results of a resource cost study which estimates the annual revenue requirement of providing equal access for all participating independents. The actual rate is obtained by dividing this revenue requirement by the total forecast originating and terminating conversation minutes.

The toll and contribution charges are based on forecast Phase III results derived from the companies' budgets. These budgets are established by a committee of the OTA, which establishes expense and investment guidelines. The Commission notes that, in any given year, it may not agree that the forecasts are reasonable and/or may find that one company can justify increases that are not consistent with the guidelines.

In light of the above, the Commission invites comment on (1) the OTA's Phase III Costing Manual, which provides the basis for costing information used to derive the OTA CAT, and on whether the OTA's Phase III assignment methods are acceptable, (2) how the Commission should deal with issues of expense and investment forecasts, (3) when expense increases should trigger increases in rates other than the CAT, and (4) whether the Commission should establish average and/or company-specific guidelines for increases in expenses and investment. The Commission also invites comments regarding the OTA's equal access charge.

The following Ontario independents do not have a CAT in place: Northern Telephone Limited (Northern), Cochrane Public Utilities Commission (Cochrane) and Abitibi-Price Inc. Northern has been negotiating a CAT with ONTC, which carries Northern's long distance traffic. In his report, Mr. Grieve recommends that a CAT rate be adopted for the payment of contribution to Northern, Cochrane and Abitibi-Price Inc., subject to the outcome of negotiations between Northern and ONTC.

Following a breakdown in negotations between ONTC and Northern, OTA filed Tariff Notices 5 and 6 which, if approved, would have the effect of including Northern in the OTA CAT and replacing the existing settlement agreement between ONTC and Northern with an interconnection agreement. The Commission will, in the near future, be issuing an interim ruling with respect to OTA Tariff Notices 5 and 6.

In light of the above, the Commission seeks comment on the appropriateness of:

(1) establishing individual CATs for Northern, Cochrane and Abitibi-Price Inc.; or

(2) including these companies in the OTA industry-wide CAT (should an industry-wide approach be adopted).

With respect to a settlement mechanism for the Quebec independents, the Commission, in Public Notice 95-4, proposed (among other things) interim access rates based on the interim access tariff approved in Telecom Order CRTC 95-75, 26 January 1995 (Order 95-75), for several members of the Association des Compagnies de téléphone du Québec inc. (ACTQ) for interconnection with Bell Canada (Bell).

In its letter of 21 December 1994 requesting approval of the interim access tariff, ACTQ stated that the proposed interim tariff would remain in effect for the first three quarters of 1995, and that, in the fourth quarter of 1995, access tariffs derived from Phase III type cost studies would come into effect conforming to the interconnection agreement with Bell.

Consistent with the above, the Commission directs the members of ACTQ to file, by 23 May 1995, a proposed CAT and a copy of the Phase III cost studies used to derive the CAT. The Commission invites comment on the proposed CAT and on the underlying cost studies.

Finally, in light of all of the above, the Commission seeks comment on whether industry-wide interconnection charges are desirable and on the advantages and disadvantages for service providers interconnecting with the independents in having industry-wide charges. Further,the Commission seeks comment on whether there are appropriate criteria, for example, the size of the independent, that should be used to determine whether specific companies should participate in an industry-wide CAT (if the Commission were to adopt an industry-wide approach). The Commission also seeks comment on whether such industry-wide charges should be set according to particular geographic regions of the country.

V PROCEDURE

As already noted, the Grieve and the Mongeau Reports are available to the public as of 23 March 1995. The opinions expressed in the Reports are those of the authors and do not necessarily reflect the views of the Commission. The reports may be examined at the offices of the CRTC in the following locations:

Central Building
Les Terrasses de la Chaudière
1 Promenade du Portage
Room 201
Hull, Quebec

Bank of Commerce Building
1809 Barrington Street
Suite 1007
Halifax, Nova Scotia

Place Montréal Trust
1800 McGill College Avenue
Suite 1920
Montréal, Quebec

Standard Life Centre
121 King Street West
Suite 820
Toronto, Ontario

275 Portage Avenue
Suite 1810
Winnipeg, Manitoba

800 Burrard Street
Suite 1380
Vancouver, British Columbia

A. General

1. ACTQ, OTA and the independents listed in Appendix III are made parties to this proceeding.

2. Other persons wishing to participate in the proceeding must notify the Commission of their intention to do so by writing to Mr. Allan J. Darling, Secretary General, CRTC, Ottawa, Ontario, K1A 0N2, fax: 819-953-0795, by 27 April 1995. The Commission will issue a complete list of parties and their mailing addresses.

3. Persons wishing to comment in this proceeding, but who do not wish to participate otherwise, may do so by writing to the Commission by 30 August 1995. Copies of any such letters will be placed on the public record.

4. Where a document is to be filed or served by a specific date, the document must be actually received, not merely mailed, by that date.

B. Proposal for Québec-Téléphone and Télébec

5. Québec-Téléphone and Télébec are directed to file comments as to why the regulatory framework set out in Decision 94-19 or any particular aspect of that framework should not apply to them. The companies should include comments as to the start and duration of any transitional period before the implementation of price caps. In the event the companies consider that any part of the regulatory framework established in Decision 94-19 should not apply to them, where relevant, they should identify alternatives, providing reasons for their choices and describing how these alternatives should be applied. In addition, the companies are to file comments on the competitive issues identified in Part IV, Section A. These comments are to be filed with the Commission and served on all other parties by 23 May 1995.

6. Other parties may file comments on the matters noted in paragraph 5, serving copies on all other parties, by 23 May 1995.

7. Parties may address interrogatories to Québec- Téléphone and Télébec, as well as to any party providing comments pursuant to paragraph 6. Any such interrogatories must be filed with the Commission and served on the party or parties in question by 21 June 1995.

8. Parties are to file responses to any interrogatories, serving copies on all other parties, by 21 July 1995.

9. Requests by parties for further responses to their interrogatories, specifying in each case why a further response is both relevant and necessary, and requests for public disclosure of information for which confidentiality has been claimed, setting out the reasons for disclosure, must be filed with the Commission and served on the party or parties in question by 28 July 1995.

10. Written responses to requests for further responses and for public disclosure must be filed with the Commission and served on the party making the request by 4 August 1995.

11. The Commission will issue a determination with respect to requests for further responses and for disclosure as soon as possible.

12. Parties may file replies to any comments, serving copies on all other parties, by 14 September 1995.

C. Independents Other than Québec-Téléphone and Télébec

13. The Commission has addressed interrogatories to OTA regarding OTA Tariff Notice 2, in which OTA proposed 1995 CAT charges. OTA is directed to serve copies of its responses to the interrogatories, together with copies of Tariff Notice 2, on all parties by 23 May 1995.

14. The members of OTA are directed to file with the Commission the latest version of their Phase III Costing Manuals, serving copies on all other parties, by 23 May 1995.

15. The members of ACTQ are directed to file with the Commission a proposed final CAT and a copy of the Phase III Cost Studies noted in Part IV, serving copies on all other parties, by 23 May 1995.

16. Parties may file models or proposals (addressing, where applicable, the matters outlined in Appendix II vis-à-vis municipally-owned companies), with accompanying details, serving copies on all other parties, by 23 May 1995.

17. Parties may address interrogatories to the independents and to any party filing a model or proposal pursuant to paragraph 16. Any such interrogatories must be filed with the Commission and served on the party or parties in question by 21 June 1995.

18. Parties are to file responses to any interrogatories, serving copies on all other parties, by 21 July 1995.

19. Requests by parties for further responses to their interrogatories, specifying in each case why a further response is both relevant and necessary, and requests for public disclosure of information for which confidentiality has been claimed, setting out the reasons for disclosure, must be filed with the Commission and served on the party or parties in question by 28 July 1995.

20. Written responses to requests for further responses and for public disclosure must be filed with the Commission and served on the party making the request by 4 August 1995.21. The Commission will issue a determination with respect to requests for further responses and for disclosure as soon as possible.

22. Parties may file comments, serving copies on all other parties, by 30 August 1995.

23. Parties may file replies to any comments, serving copies on all other parties, by 29 September 1995.

Allan J. Darling
Secretary General

Appendix I

1. Framework for Assuring Reasonableness of Monopoly Rates

Under the model described in this Appendix, the Commission would move to reliance on a form of price cap regulation for the independents. Issues to be considered in this regard include (a) when such a regime should be implemented, (b) to which services it should apply, and (c) whether, and if so over what time period, a transition period between the current regulatory regime and price cap regulation is required.

In general, if a transition period is found appropriate, the return ranges for both the Ontario and Quebec independents during the transition period would be based on their existing allowed rates of return. Further, the ranges would be widened to 200 basis points. For the Quebec independents other than Télébec and Québec- Téléphone, a maximum rate of return on average common equity (ROE) of 13% would be proposed as the top of the new 200 basis point range. This maximum ROE of 13% is consistent with the maximum return of 13% ratified by the Commission on 17 February 1995 in Telecom Order CRTC 95-186 for the Quebec independents named therein. During the transition period, any earnings in excess of the widened ranges would go into a deferral (reserve) account. Use of the reserve would require Commission approval.

Issues to be considered in this regard include (a) whether any amount in the deferral account should be dealt with at the end of the transitional period (as prescribed in Decision 94-19) or at the end of each year of the transitional period, and (b) how the amount, if any, in the deferral account, at the beginning of the transitional period, should be treated for regulatory purposes.

The Commission notes that the establishment of a CAT and the implementation of any rate rebalancing during the transition period could reduce the risk faced by the independents, because it would lessen their dependence on settlement revenues, which are subject to downward pressure due to long distance rate reductions. This raises the further issue of whether the existing ROE of each company should be reduced and, if so, by what amount.

As noted in Mr. Grieve's report, there are currently seven subscriber-owned telephone companies in Ontario, six of which have been converted to co-operative corporations, while the other (Gosfield North Municipal Telephone System) is proceeding towards a new structure. Since the Ontario Telephone Service Commission did not set an explicit rate of return for these companies, theywould have to be set by the Commission. Issues to be considered in this regard include (a) how the return ranges for these companies should be determined, and (b) whether any significant resulting rate increases should be phased in and, if so, over what period of time.

2. Filing Requirements

Under this model, the independents (other than Québec-Téléphone, Télébec and ONTC) would be required to file (a) forecast financial statements (balance sheet, income statement, statement of retained earnings and statement of changes in financial position) for each calendar year by 31 January of the year in question, and (b) actual financial statements within 60 days of the end of the preceding calendar year. With this level of financial reporting, the Commission has endeavoured to strike an appropriate balance between the need to minimize the regulatory burden on the independents and the need for sufficient information to permit the Commission to adequately monitor the companies and ensure that rates remain just and reasonable.

3. Quality of Service

In Review of the Quality of Service Indicators, TelecomPublic Notice CRTC 94-50, 21 October 1994, the Commission initiated a proceeding
to consider, among other things, the appropriate quality of service regulation for the largest of the independents, specifically, Ed Tel, Northern, Québec-Téléphone, Télébec and Thunder Bay Telephone (Thunder Bay Tel). The issue of quality of service for these companies will continue to be dealt with in that proceeding. For the balance of the independents, i.e., those with less than 25,000 NAS, issues pertaining to quality of service would be addressed via complaints lodged concerning a particular independent.

4. Terms of Service

Under this model, the independents would be required to adopt the Terms of Service of either Bell or The Island Telephone Company Limited (Island Tel), allowing for some minor variations to account for particular operating requirements, i.e., where such differences respond to particular operating requirements and unique service characteristics.

It is the Commission's policy that a telephone company's Terms of Service, or a summary thereof, be published in its telephone directory. However, certain independents do not publish their own telephone directories; rather, their subscribers are listed in the Bell directory for the area(s)nearest them. Should an independent that relies on Bell directories choose to adopt Island Tel's Terms of Service, subscribers would be informed in Bell's directory that Terms of Service similar to those set out in the directory apply and that copies of those Terms can be obtained from the independent in question.

5. Extended Area Service

With respect to Extended Area Service (EAS), the Commission notes that the current criteria for the establishment of EAS links in the territories of Bell, Québec-Téléphone and Télébec are:

(1) at least 60% of subscribers in one exchange must call customers in the other exchange at least once a month, for two months in a twelve-month period;

(2) the distance between the exchanges' switching centres must not exceed 40 miles or 64 kilometres; and

(3) a simple majority of subscribers experiencing a rate increase as a result of a new EAS link must agree to the implementation of EAS.

In addition, in order to mitigate the potential for a large exchange defeating an EAS vote, in the territories of Québec-Téléphone and Télébec, the Commission does not require that a vote be held where the associated individual-line residential rate increase would be one dollar or less per month.

Under this model, the above approach would also apply to the establishment of new EAS links within the territories of the other independents, or between their territories and that of a neighbouring telephone company.

In Bell Canada - Neighbourhood Calling Plan, Telecom Decision CRTC 92-22, 9 December 1992, the Commission stated that it was prepared to consider departures from the EAS criteria for the creation of toll-free calling areas. However, the Commission was of the view that the incremental costs of any such departures should be borne primarily by subscribers within the affected regions. Furthermore, subscribers faced with a local rate increase should have the opportunity, through some form of vote, to express their views on the proposal in question. In addition, the Commission considered that it may be appropriate for the region or municipality affected by the proposal, rather than the general body of subscribers, to bear some of the costs of such a vote. Under this model, this approach would provide some flexibility in cases where proposed new EAS links did notmeet the established criteria.

Appendix II

Issues Related to Municipal Ownership

While recognizing the unique nature of the Public Utilities Companies (PUCs), Mr. Grieve pointed out that telephone service is different from other municipal services in two important respects: (1) municipal telephone service providers serve customers outside of municipal boundaries, and (2) municipal telephone service providers receive contribution payments from interconnecting carriers.

In summary, Mr. Grieve recommended that the Commission set a rate of return for the municipally-owned companies, just as it would for the investor-owned companies. Since most of these companies pay no income tax and have no debt in their capital structures, this may require that the Commission impute income tax expense and a cost of debt. As Mr. Grieve pointed out, this approach would raise the allowed revenue requirement of the PUCs. Further, in the absence of any requirement to do otherwise, these independents would likely pass on the higher costs directly to toll carriers in the form of increases to CAT charges.

In order to prevent the increased revenue requirement being recovered entirely throughCAT charges to toll carriers, Mr. Grieve recommended that the local/access shortfall for these companies be calculated based on the assumption that their local rates are the same as local rates in comparable Bell exchanges. Since Bell's rates are generally higher, this would lower the contribution requirement and, therefore, the contribution portion of the CAT charges. Mr. Grieve suggested that, under this approach:

(1) changes in Bell's local rates would prompt an adjustment to the CAT rate;

(2) PUCs would be free to raise or not raise local rates actually charged to customers, as they thought appropriate; and

(3) the Commission would, in effect, cap the local rates of the PUCs at Bell's level.

The benefit of this plan, in Mr. Grieve's view, is that it eliminates the need for the Commission to consider issues relating to the appropriate rate of return for PUCs. Further, the municipality would have the freedom to keep local rates low, or to increase the local rates actually charged to customers to Bell levels in order to keep municipal taxes low.

The Commission notes the following with respect to Mr. Grieve's proposal:

(a) Under Mr. Grieve's proposal, the Commission would have to address a number of new issues, including the ongoing calculation of CAT charges using imputed tax and debt cost factors. Therefore, it is questionable whether the process of setting rates of return and CAT charges would be any simpler using his approach.

(b) If Mr. Grieve's proposal is implemented, contribution payments could be increased by the tax and debt cost factors that would be added to the calculation.

(c) Use of the contribution mechanism in the manner proposed by Mr. Grieve seems contrary to the purpose of contribution, as charges would be based on an imputed cost structure, rather than on the actual cost structures of the companies in question.

(d) The proposal, as put forward by Mr. Grieve, does not address the possible need to rebalance rates, as it gives the PUC the flexibility to keep rates at existing levels.

Issues to be considered with regard to the above include:

(a) the degree of flexibility municipalities should be afforded to determine the distribution of the financial advantages associated with the status of the PUCs, and

(b) the appropriate mechanisms for providing municipalities with that degree of flexibility, taking into account the following:

(i) the capital structure of the PUCs, which is characterized by little or no debt;

(ii) the debt costs for PUCs which are generally lower than debt costs for similar investor-owned companies; and

(iii) the income-tax-exempt status of the PUCs.

Appendix III

ONTARIO

Abitibi-Price Inc.

Amtelecom Inc.

Brooke Telecom Co-operative
Limited

Bruce Municipal Telephone System

Cochrane Public Utilities Commission

Coldwater Communications Inc.

Dryden Municipal Telephone System

Durham Telephones Ltd.

Gosfield North Municipal Telephone System

Hay Communications Co-operative Limited

Huron Telecommunications
Co-operative Limited

Hurontario Telephones Limited

Keewatin Municipal Telephone System

Kenora Municipal Telephone System

The Lansdowne Rural Telephone Co. Ltd.
Manitoulin Tel Inc.

Mornington Communications
Co-operative Limited

Northern Telephone Limited

North Frontenac Telephone Co.

North Norwich Telephones Limited

North Renfrew Telephone Co. Ltd.

Otonabee Telephones Ltd.

People's Telephone Co. of Forest Ltd.

Quadro Communications
Co-operative Inc.

Roxborough Telephone Company Limited

Bruce Municipal Telephone System

Thunder Bay Telephone

Tuckersmith Communications
Co-operative Limited

Westport Telephone Co. Ltd.

Wightman Telephone Ltd.

QUEBEC

Co-op de téléphone de Valcourt

La Cie de Téléphone de Courcelles Inc.

La Compagnie de Téléphone de Lambton Inc.

La Compagnie de Téléphone de
St-Victor

La Compagnie de Téléphone Upton Inc.

La Compagnie de Téléphone de Warwick

Le Téléphone de St-Liboire de Bagot Inc.

Le Téléphone de St-Éphrem Inc.

La Corporation de Téléphone de la Baie (1993)

Québec-Téléphone

Télébec ltée

Téléphone Guèvremont Inc.

Téléphone Milot Inc.

Compagnie de Téléphone Nantes Inc.

Sogetel Inc.