ARCHIVED -  Telecom Decision CRTC 96-9

Telecom Decision

Ottawa, 27 September 1996

Telecom Decision CRTC 96-9

Tariffs for Educational and Health Service Entities

I BACKGROUND

In Tariffs for Educational and Health Service Entities, Telecom Public Notice CRTC 95-44, 26 September 1995 (Public Notice 95-44), the Commission directed AGT Limited, BC TEL, Bell Canada, The Island Telephone Company, Limited, Manitoba Telephone System, Maritime Tel & Tel Limited, The New Brunswick Telephone Company, Limited, and Newfoundland Telephone Company Limited (the Stentor companies) to file proposals reflecting the conditions pursuant to which telecommunications services should be offered so as to provide more favourable terms to educational or health (EH) service entities.

The Commission stated that it "considers that, in certain circumstances, telecommunications service tariffs that discriminate in favour of educational or health service entities may be desirable, and not anti-competitive. This would be the case if criteria are developed to determine, among other things, who should benefit from the discrimination. It would also have to be demonstrated that other subscribers are not asked to pay more, and that the prices charged cover the costs. This last criterion would ensure that pricing for educational or health service entities is not detrimental to the development of a fully competitive marketplace."

The Stentor companies filed a common submission through Stentor Resource Centre Inc. (Stentor). ED TEL, Northwestel Inc. (Northwestel) and Telesat Canada (Telesat) also filed proposals in response to the Commission's directive set out in Public Notice 95-44. In this Public Notice, it was also the Commission's preliminary view, that the criterion of "prices charged cover the costs" requires, with respect to the Stentor companies, that the imputation test applicable to competitive services be met in respect of such services offered under any preferential tariff. Also, it stated that with respect to ED TEL, Northwestel and Telesat, the services for which rates now recover causal costs should continue to do so under any preferential tariff.

In Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994, the Commission established the framework for regulating the Stentor companies after the introduction of facilities-based competition in the public long distance voice market. The Commission set out an imputation test (a safeguard against anti-competitive pricing in the interexchange market) and provided the Stentor companies with increased pricing flexibility in the form of "Type 2" customer specific arrangements. A Type 2 arrangement involves bundling services tailored to a particular customer, primarily involving elements available from the general tariff where the purpose is to customize the offering in terms of rate structure or levels. A Type "1" arrangement involves service features or technology that differ from those covered by the general tariff.

In Implementation of Regulatory Framework - Splitting of the Rate Base and Related Issues, Telecom Decision CRTC 95-21, 31 October 1995, the Commission split the rate bases of the Stentor companies into "Utility" and "Competitive" segments. The Commission currently regulates the rate of return on a company's Utility segment, while shareholders bear the risk of the losses and receive the profits associated with the company's Competitive segment.

Parties commenting on the proposals included: those who may benefit from any preferential tariffs (the EH sectors, libraries, and "freenets or civicnets"); competitive suppliers of telecommunications services (for example companies currently competing in the interexchange market, and cable companies); and other interveners, including various provincial governments, and consumer groups.

II PARTIES' PROPOSALS

A. Stentor's Proposal

Stentor proposed a "Third Customer- Specific Arrangement Option" ("Type 3 option or arrangement") that would apply to all market segments, not just to the EH sectors. While Stentor believed that its Type 3 option satisfies the criteria set out in Public Notice 95-44 and is appropriate for general application, its proposal with respect to the EH markets does not depend on the Commission approving the Type 3 option for all market segments. The proposed Type 3 option is not intended to replace the Types 1 and 2 customer specific arrangements or options. Type 3 arrangements would be tariffed. Utility and/or Competitive segment elements could be bundled to create the Type 3 arrangement.

Stentor proposed that each customer specific arrangement approved by the Commission using the Type 3 option would be priced to recover appropriate costs. In developing rates for a specific arrangement, Stentor proposed that Utility segment services may be costed at less than general tariff rates, but would be costed at general tariff rates where that rate is non-compensatory. Where compensatory Utility services are costed at less than their general tariff rates, the net revenues from the Utility services included in the arrangement must maintain or increase the net revenues which would be realized if the Type 3 arrangement was not offered. Stentor would negotiate the procurement of these additional revenues with the customer of the Type 3 arrangement. "Essential" or interconnection components would be costed at their general tariff rate or at a preferential rate which would then be made available to competitors wishing to serve the EH market.

Stentor further proposed that the imputation test may not always be met in a Type 3 arrangement; it would be applied to the entire arrangement regardless of the number of service elements, or the number of participating Stentor companies. If a proposed arrangement did not satisfy the imputation test, Stentor would provide justification for the exception. Resale would be prohibited. Stentor also requested certain changes to the sharing group rules and other rules.

Stentor proposed criteria to identify EH entities which would be eligible for a Type 3 arrangement. Where an EH entity meets Stentor's proposed criteria, it would be eligible to negotiate a Type 3 arrangement with Stentor; that is, Stentor's proposal does not guarantee that an eligible entity will receive any preferential terms or treatment.

Stentor proposed that eligible educational entities would be schools, colleges, universities and public libraries. Such entities must be non-profit, and either be government accredited (or a non-profit agent of such an entity) or provide a government approved curriculum/program (or be a non-profit agent of such an entity). Such entities would be eligible to negotiate a customer-specific arrangement for any or all of their telecommunications services. In addition, according to Stentor's proposal, other non-profit entities which offer accredited/approved educational curriculum/programs, but which are not themselves schools, colleges, universities or public libraries, would also be eligible to negotiate a Type 3 arrangement for the telecommunications services. This arrangement would be "designed to promote learning" and would "directly benefit" either a school, college, university or public library.

Stentor proposed criteria for health entities dealing with human health. Hospitals and regional health boards would be eligible for a Type 3 arrangement with respect to all their telecommunications needs. Non-profit telemedicine network providers (TNPs), which provide remote diagnostic information and non-profit community health information networks (CHINs), which disseminate community health information would be eligible, but only for telecommunications services directly related to a "health application" they are responsible for developing and maintaining. A "health application", as used by Stentor, is an application directly related to the delivery by medical professionals of health services to patients. Individual medical professionals would also be eligible under Stentor's proposal, but only as a TNP or for CHIN to access the health application. Because Stentor would consider a "medical professional" as a person licensed by a professional association and eligible to receive payments from the provincial medicare program, the exact inclusion of a given medical professional in this category would depend on provincial regulation.

In general, educational entities considered that Stentor's proposal did not respond adequately to their desire for reduced rates since it did not provide, for example mandatory discounts from general tariff rates. Various parties, including educational entities and competitors, expressed concerns with the potential anti-competitive implications of the proposal. Parties also expressed various positions with respect to the scope of Stentor's proposed eligibility criteria, with some parties arguing that they are too broad and others that they are too narrow. Telecommunities Canada submitted that community networks should be included, and the Government of Québec argued that cultural, linguistic and social concerns were not adequately reflected.

B. Proposals of ED TEL, Northwestel and Telesat

ED TEL submitted that two criteria should be added to those set out in Public Notice 95-44: maintaining shareholder value, and requiring a positive business case for preferential rates. ED TEL also considered that preferential treatment should go beyond rates and could include, for example, billing cycles tailored to the EH sectors. ED TEL would offer a service at preferential rates only if the service has certain economic characteristics. ED TEL would make all components of the arrangement available to competitors at general tariff, not preferential, rates. ED TEL also considered that requiring resale of preferential tariffs would be premature.

Northwestel generally agreed with Stentor's overall position, but noted that its customer base in the EH sectors includes the territorial and federal governments or agencies funded by them. Northwestel did not want to separate the EH segments from the customer base of the territorial and federal governments, arguing that to do this would not serve the best interests of its EH customers. Rather, Northwestel proposed to extend Stentor's proposed Type 3 approach to include the government sector.

Telesat submitted that it would not be appropriate to require Telesat to offer preferential rates because, given its current regulatory treatment, other subscribers would have to pay more. Telesat indicated that its role will continue to be to provide RF channel service.

ED TEL and Telesat generally endorsed Stentor's criteria for identifying eligible EH entities.

III CONCLUSIONS

The Commission considers that telephone company shareholders should not be required to bear the cost of new preferential tariffs for the EH sectors. As expressed in Public Notice 95-44, the Commission continues to be of the view that it would not be appropriate to require subscribers to pay more for other services to finance preferential tariffs for the EH sectors. The Commission therefore considers that a mandated uniform discount from general tariff rates would not be appropriate. In developing these views, the Commission has taken into account the current framework for competition, and the importance of reducing the amount by which Utility segment service revenues fall short of the costs of providing those services (the Utility segment shortfall).

While Stentor opposed the imposition of mandatory discounts from general tariff rates, it stated that telephone company shareholders would be prepared to support preferential tariffs where they believed positive returns would result. In the Commission's view, it is appropriate to provide the Stentor companies with increased pricing flexibility to offer services to the EH sectors.

However, the Commission has concerns with various aspects of Stentor's proposal, including its suggestion to cost Utility segment elements of services offered to eligible EH sector customers at less than general tariff rates. Costing compensatory Utility service components at less than general tariff rates may be expected to increase the Utility segment shortfall, even when the service component is priced at or above incremental cost. This would result in other subscribers having to pay more to offset the Utility segment shortfall.

To address concerns that preferential rates would cause other subscribers to pay more, Stentor proposed to negotiate increased Utility segment demand to replace revenue lost through preferential rates.

The Commission notes that various interveners took issue with Stentor's proposed approach to recovering revenues which would be foregone through preferential Utility segment rates, by negotiating increased demand, arguing that the educational sector's goal is to reduce its overall telecommunications costs. However, in the Commission's view, even if it is assumed that Stentor could recover foregone revenue in the manner it suggested, its proposal does not adequately ensure that other subscribers may not be asked to pay more to finance preferential rates.

To address concerns with respect to competitive equity, Stentor proposed that where it costs a bottleneck Utility segment component at a preferential rate, it would make that component available to competitors at the same preferential rate in order to provide services to the EH sectors. However, this approach would result in an increased Utility segment shortfall because revenues received by Stentor from competitors for their use of these facilities would not make up the Utility segment loss that Stentor would realize by pricing the component at less than general tariff rates. The Commission therefore concludes that, when providing preferential rates to the EH sectors, Utility segment services should continue to be costed at general tariff rates.

Stentor proposed that the imputation test would not necessarily be met in all cases. A number of parties argued that the imputation test, as currently formulated, should continue to apply. Stentor also requested changes to the sharing group rules to permit it to deal directly with sharing group members, and changes to billing arrangements. The Commission shares the concerns expressed by certain parties regarding the potential anti-competitve impact of the requested changes to the sharing group rules and modifications to the applications of the imputation test, and denies these requests. In reference to Stentor's requested changes to billing arrangements, the Commission notes that a determination, with respect to the circumstances in which a number of entities represent a single customer, will be made in the proceeding dealing with the definition of a customer initiated by Definition of Customer in the General Tariffs of the Telephone Companies, Telecom Public Notice CRTC 95-54, 13 December 1995.

Under the current tariff framework, where a customer-specific pricing arrangement includes services available under the general tariff, those services (whether Utility or Competitive) are costed at their general tariff rates for the purpose of developing the rates for the arrangement. As noted above, the Commission considers that it would be appropriate to provide Stentor with additional pricing flexibility in the use of Type 2 customer-specific arrangements for the EH sectors, subject to the condition that each such arrangement provide for the recovery of costs as defined below.

Stentor companies may also, if they choose, offer a discount from general tariff rates to the EH sectors for Competitive services, subject to the conditions associated with the use of customer-specific arrangements designed for the EH sectors.

For the reasons discussed above, in developing rates for an arrangement for an eligible customer in the EH sectors, all Utility segment components (including bottleneck services) must, as is the case now, be included at a cost equal to the general tariff rate (including, as applicable, start-up cost recovery and contribution charges). However, the Commission has determined that Stentor companies may cost Competitive segment components in customer-specific arrangements for the EH sectors at their Phase II causal cost. In general, the Phase II cost for a Competitive segment component will be less than its general tariff rate, permitting lower rates for services provided to the EH sectors. For other customers, as noted above, these components must be costed at their
general tariff rates in order to avoid price discrimination with respect to the use of these components.

While arrangements developed for eligible customers in the EH sectors need not be made generally available to other customers, such arrangements must be available to other eligible customers in the EH sectors with the same requirements where the cost to provide the arrangement is not greater, and the customer will meet the terms associated with the particular customer-specific arrangement. The Commission has further concluded that resale of such a customer-specific arrangement will not be allowed. The Commission agrees with Stentor that, if resale is required, the arrangement would have to be priced to take account of costs other than those associated with offering it to an eligible EH entity. The Commission also agrees with those who commented that resale would create a need to ensure that only those meeting the eligibility criteria benefit from the preferential terms.

The Commission considers Stentor's eligibility criteria to be generally acceptable. In considering these criteria, the Commission has had regard to the fact that under its approach to customer-specific arrangements for the EH sectors, preferential terms will be offered with respect to Competitive segment services only and so will not be funded by other subscribers. In view of this, the Commission considers that Stentor should not be required to add to its criteria individuals in their homes, electronic community networks, or social and cultural organizations. However, the Commission notes that Stentor did not set out its proposed criteria comprehensively in this proceeding, and the Commission considers that this should be done before making a final decision with respect to them. The Commission therefore invites Stentor on behalf of its members to file for approval, within 45 days, proposed tariff pages setting out its eligibility criteria with respect to the EH sectors.

The Commission also notes that various parties suggested that increased use could be made of the pricing flexibility now available to the Stentor companies in Type 1 and 2 arrangements to tailor services to the needs of customers in the EH sectors, and the Commission encourages such use where it would be appropriate. The Commission agrees with Stem-net/Canadian Educational Network Coalitions (Stem-net/CENC) that it is appropriate for the imputation test to reflect the reduced costs to the telephone companies of any service restraints accepted by the customer.

With respect to Stem-net/CENC's submission as to the appropriateness of requiring customers to pay higher rates for analogue interexchange private line services in circumstances where a digital alternative is not available, the Commission notes that these rates are reflected in the general tariffs of the companies and, as such, concerns respecting their application may be raised with the Commission in the normal course.

With respect to ED TEL, the Commission notes that ED TEL provides local services only. In the Commission's view, consistent with the approach adopted for Stentor's Utility segment service components, ED TEL should continue to cost such components at general tariff rates. However, in the Commission's view, it is appropriate to extend to ED TEL, for the EH sectors, the pricing flexibility provided by Type 2 customer-specific arrangements. Resale of such customer-specific arrangements for the EH sectors would not be allowed.

The Commission agrees with those parties who commented that consistency of eligibility criteria is appropriate, where possible. The Commission therefore considers that, if ED TEL wishes to proceed as outlined above, it should include public libraries and non-profit agents of eligible educational entities and should file for approval, within 45 days, proposed tariff pages setting out its eligibility criteria with respect to the EH sectors.

Northwestel emphasized the benefits which its EH customers derive from its current serving approach, and the Commission agrees that it should not be required to separate its EH customers from the governments and agencies which fund them. However, in the Commission's view, the approach put forward by Northwestel in this proceeding to adapt Stentor's proposal to its own regulatory circumstances does not satisfy the criteria set out in Public Notice 95-44. The Commission notes that, because a split rate base form of regulation has not been adopted for Northwestel, there remains a potential for preferential rates to be financed by other subscribers. The Commission would, however, be prepared to consider for Northwestel tariff filings in the nature of Type 2 arrangements.

With respect to Telesat's submission, the Commission agrees with Telesat that it should not be required to offer preferential rates on its space segment services to EH entities. In the Commission's view, unless sufficient new demand was stimulated, customers of other space segment services would have to pay more to enable the same rate of return on equity for the space segment as a whole.

IV Submissions of ONTC and Télébec

Consistent with the Commission's conclusion that telephone companies should not be required to offer preferential discounts, but should be permitted to do so and to restrict them to the EH sectors, the Commission would be prepared to consider proposals from the Ontario Northland Transportation Commission (ONTC) which discriminate in favour of students in the toll market. The Commission would also be prepared to consider, should ONTC wish to do so, proposals from ONTC to establish a separate class of service for the EH sectors.

With regard to Télébec and other independents, the Commission would be prepared to consider proposals for the provision of preferential terms to EH sector entities, provided they respond to the criteria set out in Public Notice 95-44.

Allan J. Darling
Secretary General

DEC96-9_0