Telecom Decision

Ottawa, 18 December 1997

Telecom Decision CRTC 97-21

IMPLEMENTATION OF REGULATORY FRAMEWORK FOR QUÉBEC-TÉLÉPHONE AND TÉLÉBEC LTÉE

File No.: 8085-RP0005/97

TABLE OF CONTENTS

Paragraph Numbers

OVERVIEW

I INTRODUCTION 1

II RATE REBALANCING 8

A. General 8

B. 1998 Rate Rebalancing 9

C. 1999 Rate Rebalancing 11

D. Rate Rebalancing for the Years Beyond 1999 18

III SPLIT RATE BASE METHODOLOGY 20

A. Split Rate Base Implementation Date 20

B. Split Rate Base Transitional Period 26

C. Split Rate Base Allocations 29

D. Assignment of Equal Access Services 48

E. Assignment of Settlement Agreement Revenues 54

F. Assignment of Broadband Investment 59

G. Other Split Rate Base Issues 82

IV FINANCIAL ISSUES 96

A. Background 96

B. Utility Segment ROE 98

C. Utility Segment Capital Structure 107

D. Treatment of Excess Earnings 109

V 1998 INTERIM CONTRIBUTION RATES 110

VI TÉLÉBEC SPECIFIC ISSUES 120

A. Accounting Reserve Related to Rental of Poles 120

B. Budget Service Pricing Options 129

C. Affordability Issues 131

VII QUÉBEC-TÉLÉPHONE SPECIFIC ISSUES 134

A. Proposal for Exchange of Fibre Optic Strand Facilities 134

B. Head Start Concerns 141

C. Contribution-eligible Minutes 142

VIII REPORTING REQUIREMENTS 144

A. Financial/Intercorporate 144

B. Construction Program Review 154

C. Phase III Updates 156

IX DEPRECIATION 158

X LOCAL COMPETITION 164

OVERVIEW

(Note: This overview is provided for the convenience of the reader and does not constitute part of the Decision. For details and reasons for the conclusions, the reader is referred to the various parts of the Decision.)

In this Decision, in order to regulate Québec-Téléphone and Télébec ltée (Télébec) in a manner similar to the Stentor Resource Centre Inc. (Stentor) member telephone companies under its jurisdiction, and to foster the establishment of conditions necessary to ensure the competitiveness of the Canadian telecommunications market, the Commission, among other things:

(1) directed that, effective 1 January 1999, Québec-Téléphone and Télébec increase rates for residential primary exchange services by $3.00 per line in order to bring rates closer to costs, unless the companies can demonstrate that a particular rate is already compensatory;

(2) found that, effective 1 January 1999, the companies should also increase rates for business primary exchange services by up to $3.00 per line, unless the companies can demonstrate that a particular rate is already compensatory;

(3) found that it was appropriate for Québec-Téléphone and Télébec to apply the revenues generated by these local rate increases to reduce the contribution component of their respective Carrier Access Tariffs, effective 1 January 1999;

(4) considered that it was inappropriate, at this time, to pronounce on the level of rate rebalancing, if any, that may be required for the years beyond 1999;

(5) approved, effective 1 January 1998, the implementation of a split rate base regime, but found that it was not appropriate to set the date for implementing price cap regulation until the proceeding initiated by Review of the Contribution Regime for the Independent Telephone Companies in Ontario and Quebec, Telecom Public Notice CRTC 97-41, 18 December 1997, is finalized, recognizing, however, the need to implement price cap regulation as soon as practically possible to allow for the anticipated benefits from this form of regulation to be realized;

(6) approved a Utility segment rate of return on average common equity (ROE) range of 10.30% to 12.30% for Québec-Téléphone and 10.40% to 12.40% for Télébec, with the common equity component for both companies not to exceed 55% for the purpose of assessing the Utility segment revenue requirement for each company;

(7) directed Québec-Téléphone and Télébec to assign broadband investments made prior to the implementation of a split rate base regime to the broad service categories according to the existing Phase III cost assignment methodology which is based on relative usage on a working circuit basis;

(8) directed Québec-Téléphone and Télébec to assign broadband investments to be incurred during the split rate base regime as set out in this Decision which generally includes, among other things, that these investments are to be assigned to the Competitive segment, with transfer pricing to be used as applicable; and

(9) approved, effective 1 January 1998, interim 1998 contribution rates of $0.0561 per minute for Québec-Téléphone and $0.0588 per minute for Télébec based on the companies' proposed 1998 forecast split rate base results adjusted to incorporate modifications set out in this Decision.

I INTRODUCTION

1. In Regulatory Framework for Québec-Téléphone and Télébec ltée, Telecom Decision CRTC 96-5, 7 August 1996 (Decision 96-5), the Commission decided that the same basic regulatory framework that applies to Stentor Resource Centre Inc. (Stentor) member companies under the Commission's jurisdiction should be applied to Québec-Téléphone and Télébec ltée (Télébec). This included a price cap method of regulation for their Utility segments. The Commission was of the view, however, that given the timing of the release of Decision 96-5, and in recognition of the rate rebalancing that needed to take place, the implementation plan for a transitional period prior to the implementation of price caps, and associated issues, should be considered in a future proceeding.

2. In Decision 96-5, the Commission required Québec-Téléphone and Télébec to file, no later than 1 May 1997, a proposed implementation plan for a transitional period, setting out the duration of the transitional period, the rate of return range on average common equity (ROE) for the Utility segment, the split rate base methodology, the calculation of the Carrier Access Tariff (CAT) under the proposed split rate base regime, and any rate rebalancing proposals for the years beyond 1998.

3. In Implementation of Regulatory Framework for Québec-Téléphone and Télébec ltée, Telecom Public Notice CRTC 97-16, 30 April 1997 (PN 97-16), the Commission initiated a proceeding to determine the implementation plan for a transitional period, and associated issues, that should apply to Québec-Téléphone and Télébec prior to implementing a price cap method of regulation for their respective Utility segments. Québec-Téléphone and Télébec were made parties to this proceeding.

4. AT&T Canada Long Distance Services Company (AT&T Canada LDS), Bell Canada (Bell), the Canadian Cable Television Association (CCTA), Cogeco Câble Canada inc. (Cogeco), and Gouvernement du Québec (Québec) were also parties to the proceeding.

5. In PN 97-16, the Commission stated that regional public hearings were scheduled to be held in late August or September 1997 in Val d'Or and Rimouski, Quebec, and that it would issue further instructions with respect to the regional hearings. By letter dated 4 September 1997, the Commission cancelled the regional public hearing to be held in Val d'Or as no requests to participate in the hearing were received by the Commission in response to the billing insert notification sent by Télébec to its subscribers.

6. On 17 September 1997, the Commission held a regional hearing in Rimouski, Québec to allow interveners an opportunity to provide comments concerning Québec-Téléphone's proposal. The following parties were either present or represented: M. Gérald Roy, responsible for social pastoral in the Rimouski diocese; Mme Élise Turcotte, on behalf of the municipalities of St-Damase and St-Noël; and M. Daniel Julien, representing Comité du 642. In addition, Mme Guylaine Bélanger and M. Jacques Lemay, both for Regroupement contre l'appauvrissement dans le Bas-St-Laurent, and Révérend Père Wilfrid DesRosiers, S.S.J., presented petitions with approximately 4,000 and 10,000 names, respectively, opposing Québec-Téléphone's proposed local rate increases.

7. The Commission also received numerous interventions from individuals and organizations regarding the companies' proposed rate increases. By 8 October 1997, comments were filed by the Association coopérative d'économie familiale, AT&T Canada LDS, Bell, CCTA, Cogeco, Québec and Télébec. On 15 October 1997, Québec-Téléphone and Télébec filed reply comments.

II RATE REBALANCING

A. General

8. As stated above, in Decision 96-5, the Commission found that the same basic regulatory framework that applies to the Stentor-member companies under its jurisdiction should be applied to Québec-Téléphone and Télébec. This included a price cap method of regulation for their Utility segments. In Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19), and in Implementation of Regulatory Framework - Splitting of the Rate Base and Related Issues, Telecom Decision CRTC 95-21, 31 October 1995 (Decision 95-21), the Commission noted that the benefits of a more efficient regulatory framework based on price regulation could not be fully realized without bringing local rates substantially closer to costs and decreasing the subsidy provided by long distance services. The Commission therefore approved a number of rate rebalancing initiatives for the Stentor-member companies. The Commission also stated that rate rebalancing would foster the establishment of conditions necessary to ensure the competitiveness of the Canadian telecommunications market. As such, consistent with the rate rebalancing initiatives adopted by the Commission in Decisions 94-19 and 95-21 for the Stentor-member companies, the Commission considers rate rebalancing appropriate for Québec-Téléphone and Télébec as outlined below.

B. 1998 Rate Rebalancing

9. In this proceeding, Québec-Téléphone and Télébec addressed the 1998 rate rebalancing initiatives which were established in Decision 96-5. The Commission further notes that the proposed 1998 rate rebalancing initiatives are outside the scope of this proceeding as PN 97-16 stated that parties were to address any rate rebalancing proposals beyond 1998. The 1998 rate rebalancing initiatives have been approved in Telecom Order CRTC 97-1837, 16 December 1997 (Order 97-1837), for Québec-Téléphone providing for a rate increase of $3.25 per line for residential and business primary exchange services, effective 1 January 1998 and in Telecom Order CRTC 97-1787, 1 December 1997, as amended by Telecom Order CRTC 97-1787-1 dated 4 December 1997 (Order 97-1787), for Télébec providing for a rate increase of $2.00 per line for residential primary exchange services, effective 1 January 1998.

10. The Commission notes that the $3.25 rate increase approved in Order 97-1837 for Québec-Téléphone included the amount of $1.25 per line in order to recover the revenue losses resulting from the elimination of Other Line Charges as directed in Decision 96-5. The Commission also notes that in Telecom Order CRTC 96-1506, 20 December 1996, it approved for Télébec an increase of $1.40 per line applicable to all of Télébec's exchanges, effective 1 January 1998, in order to recover the revenue losses resulting from the elimination of Other Line Charges as directed in Decision 96-5.

C. 1999 Rate Rebalancing

11. Québec-Téléphone proposed that its rates for residential primary exchange services be increased by up to $3.25 per line on 1 January 1999. Télébec proposed to increase its rates for residential primary exchange services by $3.50 per line on 1 January 1999. Neither company proposed to increase rates for business primary exchange services, as both estimated that business rates would, on average, be compensatory in 1999.

12. The Commission finds that both Québec-Téléphone and Télébec need to move local rates closer to costs, particularly rates for residential local services.

13. In light of the above, the Commission directs that Québec-Téléphone and Télébec increase rates for residential primary exchange services by $3.00 per line, effective 1 January 1999, unless the companies can demonstrate that a particular rate is already compensatory. The Commission finds that the companies should also increase rates for business primary exchange services by up to $3.00 per line, effective 1 January 1999, unless the companies can demonstrate that a particular rate is already compensatory. The companies are directed to file Phase II cost studies in support of any exemption being sought.

14. Consistent with Decision 95-21, the Commission considers it appropriate that contribution charges be reduced coincident with the local rate increases and thus reduce the subsidy provided by long distance services.

15. Accordingly, Québec-Téléphone and Télébec are directed to apply the revenues generated by the 1 January 1999 local rate increases to reduce the contribution component of their respective CATs. Québec-Téléphone and Télébec are to file for approval, by 1 October 1998, tariff notices for the above-noted rate increases, with the corresponding reduction to their respective 1998 contribution rates to determine an interim 1999 contribution rate.

16. The Commission notes that residential rates in some exchanges of both companies are high, because of their rate structures for extended area service (EAS). The Commission considers that, as a result of these rate structures, customers located in urban centres or close to an urban centre tend to carry a disproportionate share of the costs of providing local service as their exchanges have more EAS links. Therefore, the Commission considers that local rate increases should not be applied to increase the rates presently charged by Québec-Téléphone and Télébec for EAS service.

17. The Commission has addressed the issue of affordability in Part VI, Sections B and C of this Decision.

D. Rate Rebalancing for the Years Beyond 1999

18. On 18 December 1997, the Commission issued Service to High-Cost Serving Areas, Telecom Public Notice CRTC 97-42, (PN 97-42), dealing with, among other things, telephone service to high-cost areas and Review of the Contribution Regime for the Independent Telephone Companies in Ontario and Quebec, Telecom Public Notice CRTC 97-41, (PN 97-41), dealing with the contribution regime in these independent telephone companies' operating territories.

19. The Commission is of the view that the above-noted proceedings may have an impact on future rate rebalancing initiatives beyond 1999 for Québec-Téléphone and Télébec. Therefore, the Commission considers it inappropriate to pronounce, at this time, on the level of rate rebalancing, if any, that may be required for the years beyond 1999 until decisions have been issued for the above proceedings.

III SPLIT RATE BASE METHODOLOGY

A. Split Rate Base Implementation Date

20. Québec-Téléphone proposed that its rate base be split as of 1 September 1997 and that the duration of the transitional period not exceed 16 months. As such, Québec-Téléphone proposed implementing price cap regulation on 1 January 1999. The company was of the view that its proposed transitional period would enable it to align itself with the Stentor-member companies as quickly as possible. Québec-Téléphone based its transitional period proposal on the assumption that the Commission would approve its application filed on 21 December 1996 for a blended contribution regime.

21. Télébec proposed that its rate base be split as of 1 January 1998 and that the duration of the transitional period be four years. The company submitted that the time required to complete its annual budget plan for 1998, the timeframe required to implement the accounting procedures and systems relating to the split rate base methodology, as well as the introduction of equal access as of 1 January 1998, warranted continuation of the existing regime until the end of 1997. Télébec proposed that price cap regulation, together with local competition, be implemented on 1 January 2002. Télébec submitted that a four-year transitional period was required to bring rates closer to costs and to reduce its Utility segment shortfall to an acceptable level prior to the introduction of a price cap regime and local competition in its territory.

22. AT&T Canada LDS submitted that price cap regulation and local competition should be implemented simultaneously in the territories of Québec-Téléphone and Télébec no later than 1 January 1999.

23. CCTA submitted that the transitional period for the companies should be two years or less and that price cap regulation for both companies should be implemented 1 January 1999.

24. Bell submitted that Québec-Téléphone's and Télébec's transitional period proposals will be affected by the Commission's findings with respect to the 1998 interim contribution regime for Québec-Téléphone and Télébec and the Commission's decision in the proceedings resulting from the round table discussion (held on 21 and 22 October 1997).

25. The Commission considers it appropriate that a split rate base regime be implemented 1 January 1998 for Québec-Téléphone and Télébec in order to allow the companies to benefit from the Commission's determination in Forbearance - Regulation of Toll Services Provided by Incumbent Telephone Companies, Telecom Decision CRTC 97-19, 18 December 1997, to forbear from regulating toll services. Therefore, effective 1 January 1998, Québec-Téléphone and Télébec are to implement a split rate base regime with rate base/rate-of-return regulation applicable to the Utility segment.

B. Split Rate Base Transitional Period

26. The Commission agrees with Québec-Téléphone and Télébec that rates should be moved closer to costs before the implementation of price cap regulation and notes that this is consistent with the Commission's objectives outlined in Decision 94-19.

27. The Commission recognizes the need to implement price cap regulation as soon as practically possible to allow for the anticipated benefits of this form of regulation to be realized. However, the Commission is of the view that the starting date of price cap regulation should not be set at this time, pending the outcome of the proceeding initiated by PN 97-41 dealing with the contribution regime in the Ontario and Quebec independent telephone companies' operating territories.

89. The Commission intends to initiate a process shortly following the decision dealing with the proceeding initiated by PN 97-41, to examine, among other things, the parameters of the price cap regime that would be applicable to Québec-Téléphone and Télébec.

C. Split Rate Base Allocations

1. Split Rate Base Allocations in Accordance with Decision 95-21

29. Québec-Téléphone and Télébec proposed, for the most part, to assign items to the Utility and Competitive segments in accordance with the methodology set out in Decision 95-21 which ensures that costs and revenues attributable to the Utility and Competitive services are appropriately assigned.

30. Accordingly, the Commission approves the assignment methodology proposed by the companies for the following items:

(i) Allocation of Common Costs;
(ii) Allocation of Plant Under Construction Investment;
(iii) Assignment of Local Switches; and
(iv) Treatment of Interest and Income Tax Expenses.

31. Discussed below are the split rate base allocations proposed by Québec-Téléphone and Télébec that either differ from the methodology outlined in Decision 95-21 or were not discussed explicitly in Decision 95-21.

2. Assignment of Billing and Postage (Postage and Centralized Mail Remittance)

32. In Decision 95-21, the Commission decided that billing and postage costs are joint in nature to certain billing activities as well as service order activities related to subscribers that are both local and toll subscribers and determined that the costs should be assigned on an equal (50/50) basis between the Utility and Competitive segments. However, in Telecom Order CRTC 97-405, 27 March 1997 (Order 97-405), the Commission approved updates by both BC TEL and TELUS Communications Inc. which allowed the companies to assign these costs other than on a 50/50 basis. The rationale behind the Commission's decision was that the companies were able to identify that certain costs are specific to the Utility segment.

33. Télébec proposed to assign billing and postage costs on an equal (50/50) basis between the Utility and Competitive segments as set out in Decision 95-21. The Commission finds that Télébec's proposal is appropriate.

34. Québec-Téléphone proposed to assign all billing and postage costs that have no toll elements directly to the Utility segment. Any remaining billing and postage costs would be assigned on an equal (50/50) basis between the Utility and Competitive segments.

35. The Commission considers that Québec-Téléphone's proposal is appropriate and consistent with the determination in Order 97-405.

36. Therefore, the Commission approves Québec-Téléphone's and Télébec's proposals.

3. Charges for Recording Customer Profile Information

37. Télébec proposed to assign the costs related to recording customer profile information on an equal basis (50/50) to the Utility and Competitive segments. Québec-Téléphone currently assigns these charges in total to the Phase III Local Broad Service Category (BSC) and proposed to continue to use this practice under the split rate base regime.

38. In Decision 95-21, the Commission found that the costs of recording customer profile information (i.e., name, address, billing information, bill printing, costs related to business office functions) should be assigned in the same manner as postage and centralized mail expenses (i.e., on a 50/50 basis to the Utility and Competitive segments). In that Decision, the Stentor-member companies were then directed to submit a general methodology (which would take into account the companies' operational differences) for the assignment of (1) costs of a joint nature related to the service order expense associated with the recording of customer profile information for in and out orders and change of address activities, (2) the bill printing expense, and (3) other bill mailing costs that are common to both the Utility and Competitive segments.

39. The Commission is of the view that Québec-Téléphone and Télébec should be subject to the same directives as outlined in Decision 95-21. Therefore, the Commission accepts Télébec's proposal and directs Québec-Téléphone to assign such costs in the same manner for 1998. The Commission also directs Québec-Téléphone and Télébec to submit, by 31 March 1998, a general methodology as set out in Decision 95-21, as described above.

4. Allowance for Funds Used During Construction

40. Québec-Téléphone and Télébec failed to address the issue of Allowance for Funds Used During Construction (AFC). In Decision 95-21, the Commission determined that AFC was to be assigned to the Utility and Competitive segments based on the assignment of Plant Under Construction (PUC). Therefore, the Commission directs Québec-Téléphone and Télébec to assign AFC to the Utility and Competitive segments based on the assignment of PUC.

5. Allocation of the "Other" Phase III Broad Service Category

41. Québec-Téléphone indicated that directory advertising revenues and expenses, rental of pole attachments, including their portion of bad debts, and revenues for administrative fees should be assigned to the Utility segment. The remaining revenues and expenses not included in the Utility segment would be assigned to the Competitive segment. Télébec proposed to assign directory advertising to the Utility segment. Third-party rental of poles would be assigned to both segments based on individual characteristics.

42. The Commission finds that the companies have not provided sufficient details in order to make a determination on their proposals. Therefore, the Commission directs Québec-Téléphone and Télébec to file, by 31 March 1998, details of the items to be included in the Utility segment "Other" category under a split rate base regime. These filings will be considered in the context of the ongoing Phase III/Split Rate Base (SRB) Manual Update process.

6. Other Deferred Items

43. Télébec proposed to assign Other Deferred expenses to the Utility and Competitive segments based on individual characteristics. Québec-Téléphone stated that it currently places its Other Deferred charges in a balance sheet account until they are assigned to the appropriate expense account and proposed to continue to do so under the split rate base regime.

44. The Commission considers that Télébec's proposal is consistent with a split rate base methodology and is thus approved. Québec-Téléphone's proposal does not specifically indicate what Other Deferred items will be assigned nor to which of the two segments these items will be assigned. The Commission directs Québec-Téléphone and Télébec to include a description of Other Deferred charges to be assigned to the Utility and Competitive segments when they file their Phase III/SRB Updates on or before 31 March 1998.

7. Internal Telephone Service

45. Télébec proposed to assign Internal Telephone Service (ITS) revenues to the Utility and Competitive segments based on the average net investment base (ANIB) ratios. Québec-Téléphone proposed to continue to use the current method of calculation for the ITS adjustment which uses the same methodology as other telephone companies, except where terminals are included in the rate base; in this case, this investment and the related expenses are assigned to the BSCs on the basis of employee equivalents.

46. The Commission notes that the ITS treatment as outlined in the companies' Phase III Manuals follows the general principles of identifying ITS costs for the services supported in the Utility and Competitive segments. However, consistent with the Official Telephone Service (OTS) methodology adopted for the Stentor-member companies, the Commission is of the view that the Competitive segment should be charged the cost of Utility telephone services on the same basis as their competitors. Accordingly, Télébec's allocation of ITS based on ANIB parameters should be modified to assign its ITS based on tariffed rates and to employ salary and wage ratios as a measure of usage. The use of salary and wage ratios should take into account the removal of salary and wages for personnel who do not use ITS to any extent such as operator services and plant personnel. The Commission notes that the assignment of ITS services should conform to Review of Phase III of the Cost Inquiry, Telecom Decision CRTC 94-24, 18 November 1994, and the response to interrogatory SRCI(CRTC)31May93-318 as filed in the proceeding leading to Decision 94-19. The Commission considers that the methodology for telephone services used within the company should be consistent for all toll carriers i.e., the Stentor-member companies, Québec-Téléphone and Télébec.

47. The Commission directs Québec-Téléphone and Télébec to review and file updates where necessary, by 31 March 1998, in cases where their respective ITS assignment methodology is inconsistent with the Stentor-member companies' OTS methodology.

D. Assignment of Equal Access Services

48. Pursuant to Decision 96-5, Québec-Téléphone and Télébec will be offering equal access services where it is technologically feasible, as of 1 January 1998.

49. Québec-Téléphone and Télébec did not object to the directives set out in Decision 95-21 regarding the classification of the costs and revenues associated with the start-up costs of equal access and with the provision of equal access services between the Utility and Competitive segments.

50. Accordingly, the Commission directs Québec-Téléphone and Télébec to assign:

(1) the start-up costs associated with the implementation of equal access and the revenues associated with the rate established to recover these costs to the Utility segment;

(2) the costs and revenues associated with the provision of Access Tandem Connection service provided to interexchange carriers (IXCs) to the Utility segment;

(3) the costs for toll connecting trunks and related toll switching used by the companies' Competitive segments to their Competitive segments;

(4) the costs and revenues associated with the provision of Direct Connection service to IXCs and the companies' Competitive segments to the Utility segment; and

(5) the costs and revenues associated with the provision of other equal access service components, listed below, to the Utility segment as per Decision 95-21:

(a) 800/888 Carrier Identification Query;

(b) 800/888 Directory Assistance - Database Update and Administration;

(c) 800/888 Directory Assistance - Usage;

(d) Busy Line Verification;

(e) Busy Line Interrupt;

(f) Long Distance Directory Assistance;

(g) Signal Transfer Point Port Connection; and

(h) Bill Number Screening Database Access Query.

51. The Commission notes that Québec-Téléphone and Télébec have filed under Tariff Notice (TN) 189, dated 14 November 1997, and TN 165, dated 25 November 1997, respectively, proposals to unbundle rates for the provision of switching and aggregation services.

52. The Commission also notes that Québec-Téléphone and Télébec have filed under TN 178, dated 1 August 1997, and TN 149, dated 31 July 1997, respectively, proposed rates for the recovery of start-up costs associated with the implementation of equal access and for other equal access services.

53. The Commission directs Québec-Téléphone and Télébec to file, by 31 March 1998, updates to their respective Phase III Manuals which reflect the above directives.

E. Assignment of Settlement Agreement Revenues

54. In Decision 95-21, the Commission considered it appropriate to remove the revenues settled between the members of Stentor from the calculation of the contribution in order to break the link between toll and local rates. Costs and revenues associated with the settlement process were to be assigned to the Competitive segment.

55. The Commission notes that, in the split rate base regime established by Decision 95-21, the Competitive segment is required to pay contribution to the Utility segment on contribution-eligible minutes of traffic including those that are subject to settlement.

56. Consistent with Decision 95-21, Québec-Téléphone proposed to assign the costs and revenues associated with the settlement process to the Competitive segment.

57. Télébec proposed to assign the costs and revenues associated with the settlement process based on the terms of the settlement agreement currently in place between the Stentor-member companies. Under the Stentor settlement agreement, companies are first compensated based on their Utility segments' rates for interconnection with IXCs and the remaining costs/revenues are considered to be part of the Competitive segment. The Commission notes that, while Télébec's proposal may appear to be inconsistent with Decision 95-21, it would in fact result in the same amounts being assigned to the Utility and Competitive segments.

58. The Commission considers it appropriate to have all the companies under its jurisdiction assign the costs and revenues associated with the settlement process on a consistent basis. Accordingly, the Commission approves Québec-Téléphone's proposal and directs Québec-Téléphone and Télébec to assign the costs and revenues associated with the settlement process to the Competitive segment.

F. Assignment of Broadband Investment

59. Québec-Téléphone proposed that broadband investments made prior to the implementation of the split rate base regime be assigned to the Utility segment. In the case of broadband investments incurred prior to split rate base implementation and which will subsequently be used for broadband services after the commencement of the split rate base regime, Québec-Téléphone stated that these investments would continue to be assigned to the Utility segment and that the Competitive segment would be charged a transfer price by the Utility segment. In its submission, Québec-Téléphone indicated that it had used, as part of its proposal, a transfer price based on near Phase III costs to calculate the associated expense to the Competitive segment and the corresponding revenue to the Utility segment.

60. Télébec proposed to allocate broadband investment incurred prior to the split rate base regime to the respective segments in accordance with Phase III cost assignment procedures. The company proposed to transfer to the Competitive segment at gross book value broadband investments incurred prior to split rate base implementation, and which will subsequently be used for broadband services after the commencement of the split rate base regime.

61. Both companies proposed to assign broadband investments made subsequent to the split rate base implementation date to the Competitive segment and to use transfer pricing in instances where broadband-capable equipment and facilities are used for the provision of Utility segment services.

62. Cogeco submitted that all past and future broadband investments made by Québec-Téléphone should be assigned to the Competitive segment. Cogeco further submitted that the Utility segment should be charged by the Competitive segment for broadband capable equipment and facilities used for the provision of Utility services, as directed in Decision 95-21.

63. Cogeco also submitted that Québec-Téléphone should provide competitors with non-discriminatory access to its broadband facilities. Further, Cogeco requested the Commission to direct Québec-Téléphone to develop a Video Access Tariff (VAT) to be implemented when the company begins offering its own broadband services and submitted that the cost of such services should be imputed at VAT rates.

64. CCTA stated that Québec-Téléphone's proposal to assign all pre-split rate base broadband expenditures to the Utility segment is contrary to the directions in Decision 95-21.

65. CCTA recommended that Québec-Téléphone's Utility segment fibre investments be frozen at the year-end 1994 levels, as reported for the Access and Local BSCs, and that the remaining balance of the expenditures flow to the Utility or Competitive segments by applying the rules established in Decision 95-21.

66. In reply to Cogeco's request for a VAT, Québec-Téléphone stated that it had filed TN 130 which was approved by the Commission on 25 November 1996 in Telecom Order CRTC 96-1349 (Order 96-1349).

67. In Decision 95-21, the Commission was of the view that Utility segment subscribers must be protected from bearing the risk associated with the telephone companies' new broadband investment. If this was not assured, the Utility segment rate base could be inflated, resulting in upward pressure on local rates. In view of this, the Commission determined that, in general, the most appropriate regulatory treatment for broadband initiatives is to require the telephone companies to assign to the Competitive segment all new investments and related expenses associated with the deployment of fibre, coaxial cable, opto-electrical equipment, asynchronous transfer mode switches and video servers.

68. The Commission considers that this is the appropriate approach to adopt with respect to Québec-Téléphone and Télébec. For the purposes of this Decision, new broadband investments and related expenses are those incurred as of the start of the split rate base regime, i.e., incurred after 31 December 1997. Broadband investments incurred during the transitional period are to be assigned in accordance with the specific requirements set out in Decision 95-21 and further clarified in Telecom Order CRTC 97-144 (Order 97-144), 31 January 1997, for the Stentor-member companies.

69. Further, Québec-Téléphone and Télébec are to assign all costs associated with fibre optic transmission systems (FOTS) equipment and facilities installed prior to 1 January 1998 in accordance with the existing Phase III costing procedures. If the companies later decide that any such investments assigned to the Utility segment as of 1 January 1998 become useful for the provision of Competitive segment services, these investments must be re-assigned to the Competitive segment at gross book value.

70. The Commission also concludes that any investment or related expenses, including research and development expenses, whether incurred prior to 1 January 1998, or during the split rate base regime, for any broadband-related market or technical trials must be allocated to the Competitive segment.

71. For the purposes of this Decision, fibre feeder cable is defined as the fibre facilities used for communications between a central office, or a remote of a central office, and an opto-electrical device that interfaces with copper facilities in the distribution portion of the loop for the provision of Utility segment services. For the purposes of this Decision, the distribution portion of the loop is defined as the facilities between the opto-electrical device and the demarcation device on the subscriber's premises.

72. The Commission considers it reasonable for Québec-Téléphone and Télébec to charge a transfer price to the Utility segment in those circumstances where Utility segment services, such as basic local service and bottleneck services provided to competitors, are provided through shared use of broadband facilities assigned to the Competitive segment.

73. In the Commission's view, because the provision of Utility segment services, such as basic local telephony, does not require the capability inherent in the broadband infrastructure, the transfer price established for such services should be based on the Phase II incremental costs incurred by the Competitive segment to provide these services, with an appropriate mark-up. There will be, however, circumstances where the incremental costs are negligible. Further, the Commission considers that the level at which the transfer price is set should allow for some reasonable portion of the cost savings associated with delivering Utility segment services over the broadband infrastructure to flow to the Utility segment. Québec-Téléphone and Télébec are directed to file, at least 120 days prior to the proposed effective date, proposed tariffs for the transfer prices.

74. With respect to Cogeco's request for a VAT, the Commission notes that the VAT filed as TN 130 and approved in Order 96-1349 provides for the provision of interexchange point-to-point video transmission and is not intended to provide switched broadband video access for point to multi-point applications.

75. While third party access to broadband distribution systems remains a concern, the Commission is of the view that this issue can best be dealt with on a case-by-case basis, and that a determination on this issue is not required to implement a split rate base regime.

76. The Commission is of the view that, during the period prior to the implementation of a price cap regime, the telephone companies should be required to identify and track, for each of the Utility and Competitive segments, all capital investment and expenses associated with the placement of new broadband-capable equipment and facilities, i.e., those incurred after 31 December 1997. The Commission also considers it necessary to identify and track, during the transitional period, capital expenditures associated with the ongoing deployment of FOTS equipment and facilities in the access network and the local inter-office portion of the trunk network.

77. Québec-Téléphone and Télébec are directed to include the following detailed information with their annual capital plan submissions:

(1) actual and forecast cost data indicating, at an equipment/facility sub-category level of detail, the annual capital expenditures associated with broadband initiatives (comprising the annual forecasts for two years and actual results for each of the previous two years);

(2) the proposed Utility/Competitive segment assignment of such expenditures, including a report outlining all changes in Utility segment FOTS equipment and facilities (i.e., transfers from the Utility to the Competitive segment), identifying the associated investments, explaining the related drivers and outlining the economic justification for such investments;

(3) actual-over-forecast comparisons for expenditures in each of the previous two years, including a detailed explanation of any significant expenditure variances;

(4) actual and forecast cost/demand ratios for Utility segment growth (demand) expenditures (comprising the annual forecasts for two years and actual results for each of the previous two years), with adjustments applied for major trend variations, where possible, and including detailed explanations of major trend variations;

(5) an indication of the actual number of Network Access Services (NAS) (or access lines) which are served by access network broadband facilities that have FOTS equipment and facilities in place and the proportion of the total NAS served in this manner; and

(6) reports providing investment data (at gross book value), as of year-end 1997, indicating the actual aggregate costs of FOTS equipment and facilities deployed in each of the access network and the local inter-office portion of the trunk network.

78. Québec-Téléphone and Télébec are also directed to file the following information as a separate submission, at the same time as the 31 March 1998 Phase III Manual Update filing, serving copies on the parties to this proceeding:

(1) a detailed description of any contemplated changes to Phase III costing studies to reflect the capture and assignment of all new broadband expenditures and expenses;

(2) a proposed supplementary schedule to be included with actual and forecast Phase III results as set out in Order 97-144;

(3) updated Phase III Manuals with respect to broadband (FOTS) equipment and facilities; and

(4) a detailed description of the proposed methodology for tracking and reporting investments, expenses and transfer price payments related to the provision and use of new broadband access equipment and facilities, including a description of the separate broadband tracking accounts or field codes for investments and expenses.

79. Parties may file comments with regard to the above information, serving copies on the companies, by 30 April 1998. The companies' replies are to be filed, and copies served on parties who filed comments, by 15 May 1998.

80. Québec-Téléphone and Télébec are also directed to file, coincident with the filings required in the annual contribution proceeding, forecast information pertaining to inter-segment transfers relating to broadband initiatives, including transfers or other tariff payments from the Utility segment to the Competitive segment for the use of the resources in that segment and vice-versa.

81. The Commission notes that, once price cap regulation is implemented, the reporting requirements set out above may no longer be necessary. However, the Commission will expect Québec-Téléphone and Télébec to retain such records as will be required for the purposes of any price cap review conducted at the end of a price cap period. The level of detail necessary for such reviews will be considered further in the proceeding to establish price caps.

G. Other Split Rate Base Issues

1. Integrality of Directory Operations

82. Québec-Téléphone and Télébec submitted that the earnings related to the directory operations from their respective integral affiliates would be assigned to the Utility segment.

83. The Commission agrees with Québec-Téléphone and Télébec that earnings from their affiliates related to their respective directory operations should be included with their Utility segment earnings. The Commission notes that this is consistent with Decision 95-21.

84. The Commission notes that Québec-Téléphone and Télébec included $952,000 and $900,000, respectively, as deemed earnings before tax in their Utility segment earnings. The Commission considers it appropriate to use these amounts for the purpose of calculating the 1998 interim contribution rates.

85. The Commission notes that the record of this proceeding was not sufficiently conclusive in order to assess the amount of deemed earnings. Therefore, the reasonableness of the deemed earnings will be addressed in the proceedings to finalize Québec-Téléphone's and Télébec's 1998 contribution rates.

2. Impact of the Settlement Agreement on Local Rates

86. Québec-Téléphone submitted that the Commission should consider the impact of any reduction in net settlement proceeds (following negotiations on the settlement agreement with Bell) on the company's Competitive segment's ability to contribute to the Local/Access shortfall, thereby putting upward pressure on local rates.

87. Québec-Téléphone also submitted that the Commission should maintain its oversight of the settlement process until the settlement agreement with Bell has been re-negotiated and the decisions on the proceedings on the contribution regime in the independents' territories and service to high-cost areas, as discussed in the round table consultation, have been issued.

88. Québec-Téléphone further submitted that upward pressure on local rates would be lessened if the Commission were to decide to establish a regime whereby a subsidy would flow from urban centres towards less densely populated areas.

89. Bell noted that the settlement is a payment from its Competitive segment to Québec-Téléphone's Competitive segment and therefore does not affect the earnings of Québec-Téléphone's Utility segment. Bell also noted that, under a split rate base regime, the Competitive segment is no longer subject to rate base/rate-of-return regulation and thus the earnings of that segment are not regulated beyond contribution payments, to either subsidize local service rates or ensure a certain level of earnings for the entire company. Bell submitted that, although Québec-Téléphone's long distance surplus would be reduced as a result of a negotiated reduction in the settlement, it would not be eliminated.

90. In reply, Québec-Téléphone noted that it assigns settlement costs and revenues to the Competitive segment because they arise from the use of toll facilities. The company also noted that, in a split rate base environment, these revenues are first assigned to the Competitive segment, and are then, for the most part, transferred to the Utility segment in the form of contribution payments. Québec-Téléphone further noted that settlement revenues help reduce the Utility segment shortfall and the contribution component of the CAT. Québec-Téléphone submitted that, without this significant subsidy, which the company estimates to be one part of the total subsidy which should flow from urban areas to rural areas, the CAT would be higher than it is currently. The company noted that, in order to lower the CAT, it would have to further raise local rates.

91. Québec-Téléphone also submitted that Télébec's proposal to increase its local rates to levels that are 50% more than those that prevail in urban areas is counter to the Commission's position enunciated in paragraph 162 of Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, 1 May 1997 (Decision 97-9), wherein the Commission stated:

With respect to basic residential local service and single-line business local service, the Commission is of the view that, as suggested by the Consumer Coalition, it is appropriate to maintain rural rates at levels which are not greater than the rates paid by urban customers, unless it can be demonstrated that circumstances warrant higher rates in rural areas.

92. The Commission notes that, under a split rate base regime, the contribution rate is set so as to allow the regulated company's Utility segment an opportunity to earn the midpoint of its approved rate of return range. The Commission notes that, under such a regime, any settlement that is paid beyond contribution, equal access start-up and switching and aggregation rates will remain in the Competitive segment.

93. The Commission notes that the average settlement rate on traffic terminated by Québec-Téléphone on behalf of Bell exceeds the sum of Québec-Téléphone's approved contribution, equal access start-up and switching and aggregation rates. The Commission disagrees with Québec-Téléphone's claim that most of the settlement is transferred to the Utility segment to pay contribution charges. The Commission finds that, under a split rate base regime, any of the Bell/Québec-Téléphone revenue settlement that exceeds the sum of contribution, equal access start-up and switching and aggregation rates is, in fact, a subsidy from Bell's Competitive segment to Québec-Téléphone's Competitive segment. The Commission notes that maintaining this subsidy to Québec-Téléphone's Competitive segment would provide Québec-Téléphone with a competitive advantage over other toll providers.

94. The Commission disagrees with Québec-Téléphone that, without the subsidy from the settlement, the contribution component of the CAT would be higher than it is currently. The Commission notes that the contribution rate currently is, and will be under a split rate base regime, calculated independently of settlement costs and revenues.

95. The Commission is of the view that it would be inconsistent with the objectives of the split rate base regime to consider the impact of any reduction in the settlement on Québec-Téléphone's local rates. The Commission considers that, under a split rate base regime, responsibility for the Competitive segment's and total company earnings should fall to Québec-Téléphone. Québec-Téléphone's proposal that it be compensated for any reduction in the settlement is thus denied.

IV FINANCIAL ISSUES

A. Background

96. In Decision 94-19 and re-iterated in Decision 95-21, the Commission considered it appropriate to reflect for the Stentor-member companies the relatively lower risk of their Utility segments in those segments' allowed ROE ranges for the transitional period. Accordingly, the Commission concluded that, for purposes of determining an allowable ROE range for the Utility segment of the Stentor-member companies, a downward risk adjustment of 50 basis points should be made to the midpoint of the approved company-wide ROE range. This adjustment was made to reflect the lower risk of the Utility segment relative to the Competitive segment. The Commission also widened the allowed ROE range for the Utility segment to 200 basis points, 100 points on either side of the new midpoint.

97. In Decision 96-5, the Commission found that the same basic framework set out in Decisions 94-19 and 95-21 for the Stentor-member companies should be applied to Québec-Téléphone and Télébec. The Commission directed Québec-Téléphone and Télébec to propose by 1 May 1997 an ROE for the Utility segment to be used at the commencement of the transitional period prior to price cap regulation.

B. Utility Segment ROE

98. Québec-Téléphone and Télébec proposed that, because the telecommunications market has become much more competitive and riskier since Decision 95-21 was released, the midpoint of the ROE for their Utility segments be maintained at the levels approved for their sectors currently subject to rate of return regulation. These sectors represent approximately 90% of Québec-Téléphone's and Télébec's assets, and their midpoint ROEs are currently set at 11.8% and 11.9%, respectively. In support of their proposals, the companies examined forecast interest rates and the level of risk faced by the Utility segment.

99. Québec-Téléphone was of the opinion that companies such as itself, with territories contiguous to those of the large Stentor-member companies, are particularly at risk. Québec-Téléphone concluded that its risk is thus higher than that of other independent telephone companies of similar size and geographic make-up.

100. Télébec suggested that the long-term risk for its Utility segment is essentially the same as that of the Competitive segment because investors will consider the impact of local competition for the Stentor-member companies and will extrapolate their findings to Télébec's operating territory.

101. CCTA was of the view that competition in the local market is unlikely to develop as quickly as it had in the toll market. CCTA also argued that, due to the combined effect of a 200 basis point reduction in interest rates since Québec-Téléphone - Development Plan for 1995-1999 and Revenue Requirement for 1995, Telecom Decision CRTC 95-1, 25 January 1995 (Decision 95-1), was released and the lower risk inherent in the Utility segment, an appropriate midpoint for the Utility segment ROE for Québec-Téléphone and for Télébec should be 9.25% and 9.50%, respectively, with an ROE range of 200 basis points.

102. AT&T Canada LDS agreed with CCTA's comments regarding the ROE range for the Utility segment.

103. In Decision 95-21, the Commission accepted the existing ROEs for the Stentor-member companies and adjusted these ROEs downwards by 50 basis points to account for a perceived lower Utility segment risk. In this proceeding, consistent with the approach it adopted in Decision 95-21, the Commission has first assessed the appropriateness of the currently allowed ROEs and then considered the appropriateness of adjusting these ROEs downwards to account for a perceived lower Utility segment risk.

104. The Commission notes that CCTA stated that there had been a 200 basis point reduction in interest rates since Decision 95-1. However, the Commission notes that the inherent interest rates used in originally setting the ROEs for Québec-Téléphone and Télébec would result in a much smaller reduction in interest rates than that assumed by CCTA. In addition, the Commission considers that the effect of any interest rate reduction is mitigated by the fact that risk premiums tend to increase as interest rates fall, and vice versa.

105. The Commission agrees with CCTA that local competition is unlikely to develop during the transitional period to the extent found in the toll market. In addition, the Commission is of the view that investors would consider the period before meaningful local competition exists in the companies' territories when assessing the cost of capital for their respective Utility segments. Further, the Commission notes that both Québec-Téléphone and Télébec may request a change in their Utility segment ROE during the split rate base regime should market conditions warrant.

106. The Commission is of the view that the combined impact of lower interest rates, the overall increase in risk of the companies' currently regulated activities and the lower Utility segments' risk relative to the Competitive segments' risk merits a reduction of 50 basis points from the midpoint of the currently approved ROEs ranges to arrive at each company's Utility segment cost of equity. The Commission also agrees with Québec-Téléphone and Télébec that their ROE ranges should be widened to 200 basis points as outlined in Decision 95-21 and accordingly approves a Utility segment ROE range of 10.30% to 12.30% for Québec-Téléphone and 10.40% to 12.40% for Télébec.

C. Utility Segment Capital Structure

107. Both Québec-Téléphone and Télébec supported the determinations made in Decision 95-21 regarding capital structure.

108. The Commission approves the use of the forecast company-wide capital structure for the Utility segment, provided that the common equity component does not exceed 55%. If it does, Québec-Téléphone and Télébec are directed to impute a maximum common equity component of 55% for the purposes of assessing their Utility segments revenue requirements.

D. Treatment of Excess Earnings

109. Consistent with the determination in Decision 94-19, the Commission directs Québec-Téléphone and Télébec to accumulate the excess earnings, in a deferral account, should the Utility segment achieve earnings above the upper limit of the allowed ROE range during the split rate base regime. The Commission will determine, at a later date, how to deal with the deferral account. Any excess earnings for 1997 arising from the current form of regulation should be dealt with in the proceedings to finalize Québec-Téléphone's and Télébec's contribution rates for 1998.

V 1998 INTERIM CONTRIBUTION RATES

110. In PN 97-16, the Commission indicated that the scope of this proceeding would include the calculation of the CAT under the proposed split rate base methodology. The implementation of a CAT is to provide, among other things, for the recovery, by the Utility segment, of charges for contribution, switching and aggregation and start-up costs. The switching and aggregation and start-up costs portion of the CAT are dealt with in Part III, Section D of this Decision.

111. In Telecom Order CRTC 97-573, 29 April 1997, the Commission approved for Québec-Téléphone an interim 1997 contribution rate of $0.0754 per minute effective 1 January 1997. The Commission intends to issue a public notice initiating a proceeding to finalize Québec-Téléphone's 1997 contribution rate.

112. In Telecom Order CRTC 97-313, 6 March 1997, the Commission approved for Télébec an interim 1997 contribution rate of $0.0944 per minute effective 1 January 1997. In Télébec - 1997 Contribution Charges, Telecom Public Notice CRTC 97-29, 31 July 1997, the Commission initiated a proceeding to finalize Télébec's 1997 contribution rate.

113. The Commission notes that the companies' 1997 contribution rates will not be finalized until 1998 and, therefore considers that it would be appropriate, in this proceeding, to set on an interim basis the 1998 contribution rates for Québec-Téléphone and Télébec to be effective 1 January 1998. The Commission will issue public notices initiating proceedings to finalize the 1998 contribution rates.

114. In response to Commission interrogatories, Québec-Téléphone and Télébec filed their forecast 1998 contribution rates under a split rate base methodology. In calculating their 1998 contribution rates, the companies incorporated, among other things, assumptions regarding: the Utility segment ROE midpoint; the amount of local residential and business rate rebalancing effective 1 January 1998; the recovery of switching and aggregation and start-up costs; total market minutes for calculating the contribution rate; allocation of Phase III revenues and expenses in a split rate base regime; utilization of the accounting reserve in the case of Télébec; and the general allocation of broadband investments made prior to, and after, the implementation of a split rate base regime.

115. Bell stated that the transitional plan for Québec-Téléphone and Télébec should include a company-specific CAT and generally should incorporate the split rate base methodology imposed on the Stentor-member companies in Decision 95-21.

116. The Commission notes that Québec-Téléphone and Télébec have generally adopted the methodology for the calculation of the contribution rate as set out in Decision 95-21.

117. The Commission is of the view that it is appropriate to use Québec-Téléphone's and Télébec's proposed 1998 forecast split rate base results adjusted to incorporate the modifications as discussed in various Parts of this Decision and in Orders 97-1787, and 97-1837 to calculate the interim 1998 contribution rates.

118. Based on the above, the Commission approves, on an interim basis, a per-minute per-end contribution rate of $0.0561 for Québec-Téléphone and of $0.0588 for Télébec, to be effective 1 January 1998.

119. Québec-Téléphone and Télébec are directed to issue forthwith revised tariff pages incorporating the approved interim per minute contribution rates.

VI TÉLÉBEC SPECIFIC ISSUES

A. Accounting Reserve Related to Rental of Poles

120. Télébec has accumulated an amount in an accounting reserve resulting from a long standing dispute with Hydro-Québec over amounts due for the shared use of poles between the two companies. The balance in the accounting reserve is the residual difference between what Télébec had provisioned for the rental of poles and the actual amount incurred for that expense between 1982 and 1996, subsequent to a settlement with Hydro-Québec.

121. In a letter to Télébec dated 22 July 1997, the Commission made a determination as to the appropriate balance of the accounting reserve as at 31 December 1997 related to the rental of poles. In that letter, the Commission made reference to adjustments to the balance proposed by the company which had an impact on Télébec's 1998 split rate base results originally filed by the company in this proceeding.

122. In response to interrogatory Télébec(CRTC) 8Sept97-2401, Télébec revised its 1998 split rate base results to account for this determination. Télébec proposed that the balance of the accounting reserve should be used in 1998 to reduce the Utility segment shortfall and in turn reduce the contribution rate. However, the company did not adjust its equity rate base in 1998 to account for all of the Commission's determinations in its letter of 22 July 1997.

123. Télébec projected rental of poles expense in 1997 and noted that a settlement for the shared use of poles with Hydro-Québec was anticipated prior to the end of the year. The company noted that, starting in 1998, this expense would be treated as all the other operating expenses as it intended to end the rental of poles settlement agreement with Hydro-Québec and purchase poles by the end of 1997.

124. The Commission notes that the balance in this account, as at 31 December 1997, represents a source of revenue which will not recur in subsequent years. If it is used to reduce the contribution shortfall in 1998, the contribution rate would need to increase by an equivalent amount in the following year, unless the company was able to generate additional revenue or streamline its expenses by an equivalent amount.

125. The Commission is of the preliminary view that the utilization of the balance of the accounting reserve should be spread over time to lessen the impact of this non-recurrent source of revenue on the contribution rate. Therefore, the Commission considers that it would be appropriate, for the purpose of calculating the 1998 interim contribution rate, to amortize the balance of the accounting reserve over a two-year period. The amortization period will be finalized in the proceeding to finalize Télébec's 1998 contribution rate.

126. The Commission is also of the view that, for the purpose of determining Télébec's 1998 interim contribution rate, Télébec's retained earnings must be adjusted to fully take into consideration the Commission's 22 July 1997 decision. This results in a downward adjustment to Télébec's 1 January 1998 Utility segment equity component.

127. The Commission notes that, if there should be a difference between the company's forecast and the actual expense incurred for the shared use of poles with Hydro-Québec in 1997, the treatment of this difference should be considered in the proceeding to finalize the 1997 contribution rate. As previously noted, Télébec intends to purchase poles by the end of 1997. The need to maintain the accounting reserve will then be re-evaluated in the context of the 1998 contribution proceeding.

128. Therefore, for purposes of calculating the interim 1998 contribution rate, the Commission has adjusted Télébec's 1998 average Utility segment equity component downward to reflect the Commission's 22 July 1997 decision. In addition, the balance of the accounting reserve, as at 31 December 1997, will be amortized over a two-year period in order to lessen the impact on the 1998 interim contribution rate.

B. Budget Service Pricing Options

129. Télébec proposed three optional budget services to assist those customers who might not be able to afford telephone services.

130. In Local Service Pricing Options, Telecom Decision CRTC 96-10, 15 November 1996 (Decision 96-10), the Commission concluded that a targeted subsidy program would be the preferred approach for addressing problems of affordability of telephone service, should an affordability problem arise in Canada. The Commission determined that budget services did not provide for the elements of basic telephone service that interested parties considered essential, increased the revenue shortfall of the Utility segment and did not effectively target low-income customers. Furthermore, as noted in the Commission's letter dated 18 December 1997, the Commission determined that Télébec should be subject to the same filing requirements as the Stentor-member companies and Québec-Téléphone under the affordability monitoring plan. In view of this, the Commission denies Télébec's proposed budget services as they would not appropriately respond to the needs of customers who would have an affordability problem.

C. Affordability Issues

131. The Commission notes that Québec-Téléphone was party to Decision 96-10, and is also subject to the filing requirements of the affordability monitoring plan approved by the Commission in Telecom Order CRTC 97-1214, 29 August 1997. In the Commission's view, the affordability monitoring plan in place will assist the Commission in determining whether the rate rebalancing initiatives undertaken by Québec-Téléphone will negatively affect the affordability of residential local service in its territory.

132. With regard to Télébec, the Commission is aware that its rates are substantially higher than those of other Canadian telephone companies. However, in Decision 95-21, the Commission indicated that what increasingly mattered to consumers was the total telephone bill and the package of services they require to meet their individual needs.

133. Furthermore, by letter dated 18 December 1997, the Commission determined that Télébec should be subject to the same filing requirements as the Stentor-member companies and Québec-Téléphone under the affordability monitoring plan. Following the Commission's direction, in Decision 96-10, that all independent telephone companies that provide basic local telephone service provide any reasons why bill management tools should not apply to them, Télébec has also filed an application under TN 159 dated 30 September 1997 and TN 159A dated 6 October 1997 for the provision of bill management tools to help subscribers access and remain on the telephone network. The Commission intends to issue a determination on these Tariff Notices shortly. Therefore, the Commission is of the view that it will have the necessary information to determine whether the rate rebalancing initiatives undertaken by Télébec will negatively affect the affordability of residential local service in its territory and enable it to take the appropriate steps to protect customers, if necessary.

VII QUÉBEC-TÉLÉPHONE SPECIFIC ISSUES

A. Proposal for Exchange of Fibre Optic Strand Facilities

134. Câble-Axion Québec inc. (Câble-Axion), an entity partially owned by Le Groupe Québec Téléphone inc. (Groupe QuébecTel), the parent company of Québec-Téléphone, recently was granted authorities for broadcast distribution undertakings in Decision CRTC 97-635 dated 14 November 1997 (Decision CRTC 97-635), subject to certain terms and conditions.

135. In this proceeding, Québec-Téléphone indicated that it had proposed a specific arrangement to exchange optical fibre strands with Câble-Axion. In Decision CRTC 97-635, the Commission stated that the exchange of fibre would be formalized by a leasing contract which is to be filed for approval in accordance with the Telecommunications Act (the Act).

136. Québec-Téléphone stated that, under the proposed arrangement:

(1) no dedicated construction is planned by the company for the needs of Câble-Axion, and accordingly, no investment or additional costs are contemplated by Québec-Téléphone for this shared fibre cable infrastructure;

(2) an agreement would be put in place whereby Câble-Axion will make available to Québec-Téléphone, as required, an equivalent quantity (fibre metres) of optical fibre in its new cable network. Each company would operate its optical fibre network independently, and since the sharing of fibre strands would be on an equitable basis, each company would maintain the infrastructures it owns;

(3) should the optical fibres subject to the exchange agreement be included in the Utility segment rate base, a transfer price will be charged by the Utility segment to the Competitive segment for use of these fibres by Câble-Axion, which would reduce the Utility segment shortfall;

(4) no FOTS equipment will be provided by Québec-Téléphone for the use of Câble-Axion;

(5) in the event of an imbalance in the quantities of fibre strands exchanged, one company will bill the other for the difference based on market value; and

(6) no joint use (in terms of providing service) of the same optical fibre strands is currently contemplated.

137. Cogeco stated that, in 1995, Québec-Téléphone declared that they had included spare fibre strands in their feeder network for leasing/sharing with cable television undertakings. Québec-Téléphone submitted that the quantities involved were relatively small.

138. Cogeco noted that Groupe QuébecTel is already active in the broadcast sector in the province of Quebec and that it owns the maximum equity position in Câble-Axion allowed by law. Cogeco also noted that approximately 50% of the territory which would be served by Câble-Axion would use Québec-Téléphone's existing network according to the terms of a fibre exchange agreement between the company and Câble-Axion.

139. The Commission notes that, under Québec-Téléphone's proposal, a transfer price will be charged by the Utility segment to the Competitive segment in instances where the costs associated with fibre strand facilities to be used by Câble-Axion have been previously assigned to the Utility segment.

140. However, the Commission is of the view that Québec-Téléphone should treat Câble-Axion in the same manner as any other customer who wishes to make use of the company's fibre facilities and should recover the associated costs through a Special Assembly Tariff (SAT). Accordingly, the Commission expects Québec-Téléphone to file a SAT addressing the proposed means for the recovery of all costs associated with the provision of fibre strands to Câble-Axion. Consistent with subsection 25(1) of the Act, Québec-Téléphone is to file for approval the SAT before providing a telecommunications service to Câble-Axion.

B. Head Start Concerns

141. The Commission notes that issues raised by Cogeco in this proceeding with respect to the application of the "head start" policy (the telephone companies' entry into cable) to Québec-Téléphone has been dealt with in Decision CRTC 97-635.

C. Contribution-eligible Minutes

142. In Decision 96-5, the Commission was of the view that, as a result of Québec-Téléphone's and Télébec's contribution rates being significantly higher than Bell's contribution rate, all switched traffic, including entrant stimulated traffic minutes, should be included in the contribution rate calculation.

143. The Commission notes that Québec-Téléphone excluded entrant stimulated minutes from its contribution calculation. As this is inconsistent with the directives in Decision 96-5, the Commission directs Québec-Téléphone to include entrant stimulated minutes in calculating its contribution rate. The Commission has reflected this adjustment in setting the interim 1998 contribution rate.

VIII REPORTING REQUIREMENTS

A. Financial/Intercorporate

144. Québec-Téléphone submitted that it would file, on an annual basis, a Split Rate Base Surplus/Shortfall Report, the details of the rate base for both Utility and Competitive segments and a Split Rate Base Capitalization Report as illustrated in Attachment B to Decision 95-21.

145. In response to a Commission interrogatory, Québec-Téléphone was of the view that the rules and procedures for intercorporate transactions established in Review of Intercorporate Transactions Policies, Rules and Procedures, Telecom Decision CRTC 97-5, 21 March 1997, should apply to the company for the split rate base regime.

146. Télébec submitted that, under a split rate base regime, it would file projected split rate base results on an annual and quarterly basis in the same format outlined in Attachment B to Decision 95-21, but that the level of operating expense would need to be adapted to the company's accounting structure.

147. Télébec also submitted that the actual split rate base results would be filed 45 days after each quarter on a non-audited basis and the audited annual results on 31 October of the following year. These actual results would be filed with the same level of details as their projected results. The company proposed filing the 1998 annual projections on 28 February 1998.

148. Télébec proposed to continue filing its quarterly reports on intercorporate transactions between the company and its cellular services subsidiary. Télébec submitted that it would not be practical to allocate these transactions between the Utility and Competitive segments and proposed to either continue its current reporting requirement, or to limit the reporting to those affecting only the Utility segment.

149. The Commission is of the view that, under a rate base/rate of return form of regulation, sufficient reporting requirements are necessary to monitor Québec-Téléphone's and Télébec's financial performances and for the Commission to react to fundamental changes to the companies' projected results in a timely fashion. Further, the Commission is of the opinion that the companies must also be required to report their intercorporate transactions to guard against any cross-subsidies from the telephone companies' Utility segment operations to the companies' affiliates.

150. In order to assist the Commission in monitoring the companies' financial performance, Québec-Téléphone and Télébec are directed to file, for total company, yearly estimated non-consolidated financial statements as well as yearly audited consolidated financial statements.

151. The Commission also directs Québec-Téléphone and Télébec to file Phase III/SRB results as illustrated in Attachment B to Decision 95-21, adjusted to adapt to their respective accounting system for operating expenses. Annual forecasted Phase III/SRB results are required to be filed along with their annual contribution filing. The annual audited Phase III/SRB results are to be filed on 31 October of the following year. These results are to include a supporting schedule indicating the distribution of common costs to the Utility and Competitive segments. The forecast Phase III/SRB results and supporting schedules are to replace the current filing requirements for Phase III effective 1 January 1998. Actual non-audited results on a quarterly year-to-date basis are to be filed within 45 days of the end of each quarter.

152. The Commission is of the view that both companies should report all intercorporate transactions between the total company and their affiliates. The Commission is of the view that it is not appropriate at this time (i.e., the start of the split rate base regime) to consider the streamlining of the reporting on intercorporate transactions and that it would not be too onerous for the companies to continue to provide this information.

153. Therefore, the Commission directs Québec-Téléphone and Télébec to continue their current quarterly intercorporate reporting requirements, at this time.

B. Construction Program Review

154. Currently, Québec-Téléphone and Télébec file their capital plans annually, with supporting documentation, for internal Commission review.

155. The Commission is of the view that, as long as regulation continues to focus on earnings, it is necessary to continue a thorough review of projected capital expenditures and technology deployment plans. Moreover, it will be essential to carefully monitor investments as the companies: (i) prepare for price cap regulation; (ii) consider whether to accelerate depreciation; and (iii) prepare to invest considerable amounts in broadband infrastructure. This is necessary to ensure that the Utility segment rate base is not inflated prior to moving to price caps, to control the impact of investment and depreciation on local rates during the transition to a price cap regime and to assess the reasonableness of investment levels in the Utility segment infrastructure. Accordingly, Québec-Téléphone and Télébec are directed to continue filing their capital plans for the Utility segment on an annual basis during the split rate base regime.

C. Phase III Updates

156. Revised procedures will be required to reflect changes to the Phase III methodology such as the allocation and re-assignment for recording customer profile information, Other Deferred items, treatment of remote switches, AFC, ITS, and Other Revenue and Expense. The Commission directs Québec-Téléphone and Télébec to file related updates in their respective 31 March 1998 Phase III/SRB Update filings. The filing requirement for procedures related to the assignment of broadband facilities is discussed in Part III, Section F of this Decision.

157. The Commission requires that effective reporting procedures be implemented to ensure the appropriate tracking of the revenue and cost streams that arise from the Competitive segment use of Utility-related facilities at tariffed rates as outlined in Decision 95-21. Accordingly, the Commission directs Québec-Téléphone and Télébec to submit, at the time of the filing of the regular 31 March 1998 Phase III/SRB Updates, a proposal for the tracking of costs and revenue streams that will ensure the auditability of the split rate base results.

IX DEPRECIATION

158. Télébec estimated that its overall (combined Utility and Competitive segments) depreciation rate will rise from 7.8% in 1998 to 9% by the year 2001. The company's forecast for the 1998 Utility segment depreciation expense is $34.7 million. Télébec estimated its total company depreciation reserve deficiency (DRD) to be approximately $35 million at year-end 1997 and that, by the year 2001, the DRD for the Utility segment would equate to one year's depreciation expense for that segment. Télébec indicated that it is not currently in a position to state how the DRD will be eliminated. Télébec also indicated that it plans to submit depreciation studies on an annual basis during the split rate base regime.

159. Québec-Téléphone estimated its Utility segment depreciation expense at $52.7 million for 1998. The company was not in a position to provide a forecast of its DRD. However, the company stated that it would provide the information with its next depreciation filing. In response to a Commission interrogatory, the company was of the view that any DRD should be recovered in the manner set out in Decision 97-9. The company planned to file depreciation studies during the split rate base regime.

160. The Commission notes that Télébec's forecast depreciation expense for 1998 takes into account the company's proposed changes to depreciation life characteristics which were approved in Telecom Order CRTC 97-1488, 16 October 1997 (as amended in Telecom Order CRTC 97-1488-1, dated 22 October 1997). Furthermore, Québec-Téléphone's estimated depreciation expense for 1998 was determined using the currently-approved depreciation life characteristics. Accordingly, the Commission is of the view that the depreciation expense forecasts for 1998 provided by Québec-Téléphone and Télébec should be used in determining the interim 1998 contribution rate for each company.

161. The Commission is of the view that, during the split rate base regime, the companies may apply for changes to their depreciation life characteristics in accordance with the Phase I directives. The Commission is also of the view that, consistent with Decision 95-21, applications to significantly accelerate depreciation expense should entail a full review of the impact on rates, including contribution rates. Any such review should also include an assessment of any potential impact on the initial price levels under price caps.

162. With respect to the DRD, the Commission considers that it is important to monitor the level of the DRD before price cap regulation is implemented in order to determine the potential impact on rates. Therefore, the Commission directs Québec-Téléphone and Télébec to comply fully with the Commission's Phase I directives and in particular with Directive 7, which requires that the DRD amount, and the underlying calculations, be filed annually.

163. Québec-Téléphone and Télébec are directed to file the information set out in Directive 7 based on year-end financial data for the previous calendar year, by 30 June of the following year. The companies are also directed to provide, at the same time, the companies' estimate of the portion of the total company DRD (reserve variance) that would be allocated to each of the Utility and Competitive segments.

X LOCAL COMPETITION

164. Québec-Téléphone and Télébec indicated that they would be in a position to introduce local competition after their transition plans.

165. AT&T Canada LDS and Cogeco argued that the Commission should permit local competition in Québec-Téléphone's and Télébec's territories on or before 1 January 1999.

166. The Commission notes that the terms and conditions for local competition in Québec-Téléphone's and Télébec's territories were not within the scope of this proceeding. In Decision 96-5, the Commission stated that, following the release of the decision with respect to the terms and conditions of local competition in the territories of the Stentor-member companies, it intended to issue a public notice to determine the applicability of those terms and conditions for local competition in the territories of Québec-Téléphone and Télébec. As noted in PN 97-41, the Commission intends to issue that public notice in the winter of 1998-1999.

Laura M. Talbot-Allan
Secretary General

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