|
|
|
|
Telecom Decision CRTC 97-9
|
PRICE CAP REGULATION AND RELATED ISSUES
|
TABLE OF CONTENTS
Para. No.
|
|
|
|
|
|
|
II GENERAL CONCLUSIONS 10
|
|
|
B. The Price Cap Regime 12
|
|
|
|
|
|
|
|
|
|
|
C. Productivity Offset (X-factor) 42
|
D. Exogenous Factors (Z-factor) 101
|
|
|
IV SERVICE BASKETS AND TARIFF MATTERS 118
|
|
|
B. Services Excluded from the Price Cap Regime 142
|
C. Other Pricing Issues 155
|
D. Disposition of Tariff Filings 166
|
V MTS NETCOM INC. SPECIFIC ISSUES 190
|
|
|
|
|
C. Service for the Future Initiative 195
|
VI SELF-CORRECTING MECHANISMS AND REVIEW PERIOD 199
|
VII ANCILLARY REGULATION AND REPORTING REQUIREMENTS 206
|
|
|
B. Phase III/Split Rate Base Results 215
|
|
|
D. Construction Program Review 226
|
|
|
F. Intercorporate Transactions 234
|
G. Phase I Directives (Excluding Depreciation) 238
|
H. Total Factor Productivity Data 243
|
I. Local Competition Review 244
|
VIII RATE REBALANCING AND CONTRIBUTION 249
|
|
|
B. Positions of Parties 254
|
|
|
D. Reporting Requirements 272
|
E. Other Related Matters 275
|
IX DEPRECIATION AND RELATED ISSUES 281
A. Introduction 281
|
B. Factors Impacting on Appropriate Depreciation Life Characteristics 284
|
C. Appropriateness of Bell's Depreciation Life Characteristics 302
|
D. Allocation of Over/Under Accruals Between Utility and Competitive Segments 328
|
E. Recovery of Depreciation Reserve Deficiency 331
|
F. Recovery Period for Depreciation Expense Over/Under Accruals 367
|
G. Phase I Directives and Reporting Requirements for Depreciation 374
|
X OTHER ISSUES RELATED TO GOING-IN RATES 378
|
A. Other Deferred Charges 378
|
B. Utility Segment ROE 385
|
XI FOLLOW-UP PROCEEDING 390
|
|
|
|
|
1. In Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19), the Commission determined that, among other things, earnings regulation would be replaced with price cap regulation for the Utility segment, effective 1 January 1998.
|
2. 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 stated that, commencing in early 1996, it would hold a proceeding to consider the issues associated with the implementation of a specific price cap regime that would apply to BC TEL, Bell Canada (Bell), The Island Telephone Company Limited (Island Tel), Maritime Tel & Tel Limited (MT&T), MTS NetCom Inc. (MTS) (formerly Manitoba Telephone System), The New Brunswick Telephone Company, Limited (NBTel), NewTel Communications Inc. (NewTel) (formerly Newfoundland Telephone Company Limited) and TELUS Communications Inc. (TCI) (formerly AGT Limited) (the telephone companies).
|
3. On 12 March 1996, the Commission issued Price Cap Regulation and Related Issues, Telecom Public Notice CRTC 96-8 (PN 96-8), initiating a proceeding, including an oral public hearing, to determine the form of price cap regulation for the telephone companies' Utility segments to be implemented effective 1 January 1998. The Commission directed the telephone companies to file information and proposals, and invited submissions from interested parties on this matter. The Commission stated that it would examine the third rate rebalancing component (as stated in Decision 95-21) and other issues, such as accelerated depreciation expense, which could have a significant impact on the rates for services in the Utility segment prior to the implementation of price caps (going-in rates). The Commission also stated that it would initiate a follow-up proceeding in 1997 to finalize the going-in rates for each telephone company (the follow-up proceeding).
|
4. On 10 June 1996, Stentor Resource Centre Inc. (Stentor) on behalf of BC TEL, Bell, Island Tel, MTS, MT&T, NBTel, and NewTel filed evidence including proposals regarding the form of price cap regulation to be established. In addition, MTS, although a party to Stentor's submission, filed specific evidence which took into account MTS' structural and economic characteristics. TCI filed a separate submission regarding a proposed price cap regime.
|
5. The following interveners filed evidence: AT&T Canada Long Distance Services Company (AT&T Canada LDS) (formerly Unitel Communications Company); Canadian Business Telecommunications Alliance (CBTA); Canadian Cable Television Association (CCTA); Call-Net Enterprises Inc. (Call-Net); Consumers' Association of Canada, Fédération nationale des associations de consommateurs du Québec and the National Anti-Poverty Organization (CAC/FNACQ/NAPO); Consumers' Association of Canada [Manitoba], and the Manitoba Society of Seniors Inc. (CAC/MSOS); and the City of Calgary (Calgary).
|
6. The Telecommunications Workers Union, the Communications Energy and Paperworkers Union of Canada, the Atlantic Communications and Technical Workers Union, the International Brotherhood of Electrical Workers and the Telecommunications Employees Association of Manitoba filed evidence relating to quality of service. By letter dated 12 September 1996, the Commission indicated that evidence related to the quality of service should be filed in the proceeding initiated by Review of the Quality of Service Indicators, Telecom Public Notice CRTC 94-50, 21 October 1994 (PN 94-50).
|
|
|
7. The public hearing took place in Hull, Quebec, from 21 October to 13 November 1996, before Commissioners David Colville (chairman of the hearing), Françoise Bertrand, Gail Scott, Peter Senchuk and Andrée Wylie.
|
8. The following appeared or were represented during the public hearing: AT&T Canada LDS; The British Columbia Old Age Pensioners' Organization, Council of Senior Citizens' Organizations of B.C., Federated Anti-Poverty Groups of B.C., Senior Citizens' Association of B.C., West End Seniors' Network, Local 1-217 IWA Seniors, B.C. Coalition for Information Access, End Legislated Poverty, Tenants' Rights Action Coalition (collectively, BCOAPO et al.); BC TEL; Call-Net; CAC/FNACQ/NAPO; CAC/MSOS; CCTA; the Canadian Wireless Telecommunications Association; Calgary; Industry Canada - Director of Investigation and Research, Bureau of Competition Policy; Microcell Telecommunications Inc. (Microcell); MTS; NBTel; Québec-Téléphone; Stentor; TCI; and Westel Telecommunications Ltd. (Westel).
|
9. On 13 November 1996, the parties that filed evidence, as well as the Government of British Columbia (B.C.), Microcell and Westel presented oral argument which was supplemented by written argument. In addition, the Consumers' Association of Canada - Alberta Branch filed written argument. During oral argument, BCOAPO et al. and CAC/FNACQ/NAPO (collectively, the Consumer Coalition) made a joint presentation. On 22 November 1996, all parties that had filed written argument filed reply argument.
|
|
|
|
|
10. As stated in Decision 94-19, price cap regulation, in general, allows for more efficient and effective regulation than rate base/rate-of-return regulation. The Commission's regulatory framework in respect of price caps, as set out in this Decision, includes a number of interrelated initiatives which collectively are designed to achieve the objectives and principles described below:
|
(1) to render reliable and affordable services of high quality, accessible to both urban and rural area customers;
|
(2) to foster competition in the Canadian telecommunications markets;
|
(3) to provide incumbents with incentives to increase efficiencies and to be more innovative, and with a reasonable opportunity to earn a fair return for their Utility segments; and
|
(4) to implement a price cap plan that is simple, straightforward, easy to understand and reduces the regulatory burden to the greatest extent possible.
|
11. Highlights of the Commission's determination in this proceeding are listed below. Detailed discussion of the various issues and rationale are set out in Parts III to XI of this Decision.
|
|
|
12. Effective 1 January 1998, a four-year price cap plan, with no earnings sharing overlay, will commence for the telephone companies. The price cap plan will be reviewed prior to the end of the period. Certain of the telephone companies' Utility segment services will be grouped into a single basket of capped services subject, in aggregate, to the Price Cap Index (PCI). The PCI will include the Gross Domestic Product Price Index (GDP-PI) as the inflation measure, a productivity offset (X-factor) of 4.5% and limited exogenous factors arising from events which are beyond the telephone companies' control. The single basket of capped services will be divided into three sub-baskets subject to additional pricing constraints.
|
13. The first sub-basket will be comprised of basic residential local services. The weighted-average annual rate increase for the sub-basket of basic residential local services will not exceed the level of inflation (i.e., GDP-PI) during the price cap period. In addition, no rate element in this sub-basket will increase by more than 10% in any year. This constraint would not apply for primary exchange services within the bands for which local loops are considered non-essential as determined in Local Competition, Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8), which would typically include urban exchanges where local competition will likely evolve more rapidly.
|
14. The second sub-basket comprising single and multi-line local business services will not be subject to an overall sub-basket pricing constraint. However, as with basic residential local service, there will be a 10% constraint in any year on individual rate elements for single-line business services, other than the rates for primary exchange services within the bands for which local loops are considered non-essential as determined in Decision 97-8.
|
15. The third sub-basket will consist of the remaining Utility segment services, which do not qualify as services excluded from price caps nor included in the other sub-baskets. The index of prices for the services included in this third sub-basket will be constrained by the level of inflation (i.e., GDP-PI). The list of services to be included in this sub-basket will be finalized in the follow-up proceeding set out in Part XI of this Decision.
|
16. Services that were priced to maximize contribution prior to the implementation of price caps, such as optional local services, and those services under which a cap on prices would be redundant, such as Special Facilities Tariffs (SFTs), will not be included with capped services.
|
17. Competitor services required by local and toll competitors will also not be included with capped services, but will be priced to recover Phase II costs and make an appropriate contribution to fixed and common costs.
|
18. The rates for 9-1-1 and message relay services will be frozen at the levels approved, as at 1 January 1998, for the duration of the price cap period.
|
19. Tariff filings related to those services, which in the past have been priced to maximize contribution but now will be uncapped services, will generally be treated on an ex parte basis. Further, de-averaging of rates for these services will be permitted.
|
20. Generally, subject to the imputation test requirements, tariff applications for changes to the rates for capped services that meet the price cap constraints will be disposed of without waiting for comments from interveners; however, tariff applications to de-average capped services rates, on the basis of smaller geographic areas than those defined by rate bands, will not be disposed of on the same basis.
|
21. Tariff applications to introduce bundled services and the classification of these bundled services, as capped or uncapped services, will be considered on a case-by-case basis.
|
22. Finally, the telephone companies' regulatory burden will be minimized to the greatest extent possible in order for the companies to achieve the full benefits of moving from rate base/rate-of-return regulation to price cap regulation. To this end, the ancillary regulation and reporting requirements during the price cap period will be reduced. For example, the telephone companies will not be required as they are currently under rate base/rate-of-return regulation to (1) file annual capital plan submissions including any specific broadband costing information, (2) seek approval for accounting changes including those relating to asset lives and associated depreciation rates, (3) file financial forecasts and variance analysis of actuals from budget, and (4) adhere to many of the existing intercorporate transactions policies, rules and procedures.
|
|
|
23. In Decision 95-21, the Commission affirmed the monthly local rate increase of $2 approved in Decision 94-19 for each of the years 1996 and 1997, with the amount of the third rate rebalancing component to be considered in this proceeding. In this regard, the telephone companies are to file applications during the follow-up proceeding for increasing the rates for basic residential local service by a maximum of $3 (on a weighted-average basis), effective 1 January 1998.
|
24. The additional revenues arising from the above-noted applications cannot exceed the revenues required to offset the items noted below. These additional revenues will first be used to reduce toll contribution rates to no less than 2 cents per minute. Any revenues not required to reduce the contribution rates to the 2 cent level will be used to reduce or eliminate any going-in revenue requirement shortfall in setting the going-in rates.
|
25. In the event that a company could not implement rates that would allow for recovery of any revenue requirement shortfall under the going-in rates, the telephone companies will have the opportunity to implement further local rate increases in order to recover this shortfall during the term of the price cap plan. The mechanism to recover any such shortfall will be considered in the follow-up proceeding.
|
|
|
26. The 1997 toll contribution rates will be finalized in the follow-up proceeding. In calculating these rates, the depreciation life characteristics approved as of the date of this Decision will be used. Any changes to depreciation life characteristics proposed during the follow-up proceeding, and the consequent impact on the depreciation reserve deficiency (DRD) or surplus, will be considered for implementation with the going-in rates on 1 January 1998. Any DRD, as determined in the follow-up proceeding, would be reflected in the going-in revenue requirement as of 1 January 1998 by amortizing the DRD on a straight-line basis over the average remaining service life of each company's assets as of that date.
|
27. In addition, the toll contribution rates effective 1 January 1998, which will also be determined in the follow-up proceeding, will take into account, among other things, (1) the revenues from the maximum $3 increase in the rates for basic residential local service as described above, and (2) the determinations made in Telecom Order CRTC 97-590, 1 May 1997, regarding the scope of contribution paying services and the appropriateness of the existing treatment of Direct Access Lines.
|
28. In Decision 97-8, the Commission froze the toll contribution rates for all the telephone companies during the price cap period in order to maintain a subsidy that will allow residential rates in high-cost areas, where competition will likely not evolve as quickly, to remain affordable and, at the same time, will not hinder the development of effective competition. However, in the case of TCI, when its shareholder entitlement (which relates to the additional tax deductions arising from privatization) is completely amortized at the end of 1998, TCI will be required to reduce its contribution rate, effective 1 January 1999, which will then remain frozen for the remaining price cap period.
|
|
|
|
|
29. The price cap formula is composed of three basic components which, in total, reflect changes in the industry's long-run unit costs and determine the maximum allowable change in prices, on an annual basis, for a basket of capped services. These are inflation index, productivity offset and exogenous factors. The formula could also include other factors which relate to the recovery of any going-in revenue requirement shortfall during the price cap period and to quality of service.
|
|
|
30. In PN 96-8, the Commission identified the general criteria to be used to select the appropriate measure of inflation in a price cap plan, namely: (1) it should attempt to accurately reflect the changes in the telephone company's costs; (2) it should be available from an independent source, on a timely basis; and (3) it should not be subject to manipulation.
|
31. In addition to the criteria identified in PN 96-8, Stentor considered that the inflation index should (1) be broad based such that it reflects output price changes of a large bundle of goods and services, (2) be consistent with a total factor productivity (TFP) measure for the economy as a whole and (3) not be subject to significant revisions. Based on these criteria, Stentor proposed that inflation in the price cap formula be measured by the GDP-PI. Stentor stated that this measure is the broadest available measure of output price changes in the Canadian economy and is produced on a timely basis by Statistics Canada. Stentor also stated that the GDP-PI is closely related to the Business Sector TFP produced by Statistics Canada. The economy-wide TFP is discussed below in Section C, Productivity Offset (X-factor). Stentor suggested that, while the GDP-PI is subject to revisions, the impact of revisions to this index has been historically negligible.
|
32. TCI proposed criteria for selecting the measure of inflation that were generally consistent with those proposed by Stentor. However, TCI proposed the use of the Consumer Price Index (CPI) as its inflation measure. TCI stated that the CPI is well-understood by all parties, available from an independent source on a timely basis, and subject to neither periodic revisions nor manipulation by participants in the price cap plan.
|
33. Call-Net stated that the use of the GDP-PI would result in a bias in the PCI. Call-Net also suggested that, if the Commission used Stentor's proposed approach to price caps, Call-Net's proposed input price differential should be included and Statistics Canada's Business Sector Output Price Index should be used as the measure of inflation. Call-Net stated that the Business Sector Output Price Index is a more consistent measure of economy-wide output price growth and is consistent with the Business Sector TFP.
|
34. The Commission agrees with Stentor that using Call-Net's proposed inflation measure and input price differential in the PCI would yield the same results as those derived using Stentor's proposed measures for these variables. The Commission notes that the same results are achieved because a higher (or lower) Business Sector Output Price Index relative to the GDP-PI will generate a higher (or lower) input price differential and X-factor by the same amount, thereby leaving the PCI unchanged. In the Commission's view, the use of the GDP-PI would not result in a bias in the PCI as suggested by Call-Net.
|
35. Further, the Commission notes that the Business Sector Output Price Index (1) is published by Statistics Canada with a significant lag, (2) is not understood as well as the GDP-PI, and (3) is still considered experimental.
|
36. The Commission notes that the GDP-PI is more widely used than other inflation measures in price cap plans for the regulated telecommunications industry in the United States (U.S.).
|
37. The Commission also notes that most parties preferred the GDP-PI to the CPI for two main reasons: (1) the CPI has a narrower coverage in that it measures the average price level of goods and services purchased by consumers, rather than the average price level of domestic output in the economy and therefore, is more volatile than the GDP-PI and more subject to atypical price changes in one or two sectors of the economy; and (2) the GDP-PI, although not directly associated with the Business Sector TFP, is more consistent with this economy-wide TFP measure.
|
38. In light of the above, the Commission is of the view that the GDP-PI is a more appropriate measure of inflation than the other measures that were proposed in this proceeding for the telephone companies' PCIs.
|
39. In Teleglobe - Review of the Regulatory Framework, Telecom Decision CRTC 96-2, 2 February 1996 (Decision 96-2), the Commission approved the use of the CPI as a measure of inflation in the price reduction commitment regime for Teleglobe Canada Inc. (Teleglobe). The Commission notes that, in contrast to the telephone companies' productivity offset, Teleglobe's productivity offset was not calculated using TFP or a TFP differential. Rather, Teleglobe's proposed 6% productivity offset was estimated using the percentage decrease in average unit revenue for telephone services as a whole (which was 3.0%) plus CPI (which was 2.8%) over the period 1989 to 1994. Therefore, the Commission considers that the use of the CPI in Teleglobe's price reduction commitment was appropriate in the context of Decision 96-2.
|
40. With respect to updating the PCI, the Commission notes that Stentor proposed to use as a proxy for the annual change in inflation the percent change in GDP-PI for the fourth quarter of a given year relative to the fourth quarter of the previous year. The Commission is of the view that it would be more appropriate to use the percent change in the GDP-PI over the entire year relative to the previous year to avoid the problem of seasonality. The Commission notes that the figures for the previous year's GDP-PI are generally available at the end of February. Given that a five-year lag generally exists between the initial and final figures of GDP-PI, the Commission would not expect the telephone companies to adjust their PCIs due to revisions in the GDP-PI.
|
41. Therefore, the Commission directs the telephone companies, when filing updates to their PCIs (as identified in Part IV of this Decision), to use the most recently published GDP-PI calculated as described above. These submissions are to be filed by 31 March of each year.
|
C. Productivity Offset (X-factor)
|
|
|
|
|
42. The productivity offset or X-factor, in general, includes the following components: (1) the industry TFP; (2) the economy-wide TFP; (3) the input price differential defined as the difference between the industry and economy-wide input price growth rates; and (4) the consumer productivity dividend (stretch factor). The first three components constitute the basic offset. In addition to the above, Stentor and TCI proposed that a competition adjustment be made to their productivity offset for the onset of local competition.
|
43. In reaching its determinations on a reasonable productivity offset, the Commission examined evidence and studies on historical TFP, in order to first establish an accurate productivity baseline, i.e., a level that the telephone companies would be expected to achieve without (1) a change in the form of regulation and (2) the emergence of local competition. The Commission then assessed the impact of a change in regulation from rate base/rate-of-return to price caps and of local competitive entry in order to determine a productivity offset that balanced the interests of consumers and shareholders, while providing the telephone companies with incentives to be more efficient.
|
44. With respect to the measurement of the X-factor, the Commission considers that the time period used to estimate TFP and the various components of the productivity offset should reflect the long term in order to capture the sustained effects of productivity growth and to mitigate the effect of one-time events and short-term fluctuations on annual TFP.
|
b. Industry-wide Versus Company-specific X-factors
|
45. Stentor proposed an industry-wide X-factor of 2.7% rather than company-specific X-factors, in order to set an X-factor that would be independent of any one company's actions. In response to a Commission interrogatory, Stentor stated that, if a company achieved above-average productivity gains in the past, it did not necessarily mean that the company would continue to achieve above-average productivity in the future and, in fact, the company's potential for further gains could be reduced because of the magnitude of past gains.
|
46. TCI proposed an industry-wide X-factor of 1.3% for the period 1998 to 2000 and 0.8% for the period 2001 to 2003. TCI's proposal regarding company-specific stretch factors is described in subsection 5 below.
|
47. No intervener supported company-specific X-factors.
|
48. The Commission considers that a major role of price caps is to establish targets for a company's performance that reflect changes in a company's input costs but, at the same time, are based on measures that are outside of the control of a single company. As a result, an X-factor should be based on data that are independent of the actions of any one individual company. As noted by Stentor, the use of an industry-wide X-factor has major benefits to consumers and the general economy as it will enhance companies' incentives to increase their efficiency. Further, the Commission notes that the use of an industry-wide X-factor rewards those companies that have achieved above-average productivity gains in the past and provides an appropriate incentive to those companies that have had below-average productivity in the past.
|
49. MTS proposed adopting Stentor's industry-wide X-factor of 2.7% and reducing it to 1.5% due to MTS' smaller size, history and geography.
|
50. CAC/MSOS argued that special treatment for MTS by means of a small company productivity offset or special exogenous factors, as discussed in Part V of this Decision, would be inappropriate, and would simply enhance the profitability of the company. As well, the Consumer Coalition submitted that MTS' proposal is contrary to the objective of price cap regulation of promoting efficiency.
|
51. CCTA argued that MTS' historical productivity holds up well against the other telephone companies and has been above average.
|
52. With respect to MTS' proposal that an adjustment to the X-factor is required due to its smaller size, the Commission notes that MTS is approximately in the middle of the range for the Stentor companies in terms of network access lines (NAS). In addition, the Commission notes that, in recent years, MTS' productivity growth has been among the highest of the Stentor companies.
|
53. In light of the above, the Commission is of the view that an industry-wide X-factor is appropriate, and that a small company adjustment is not required for MTS.
|
c. Direct Versus Full Differential Approach
|
54. Call-Net proposed to use the direct approach in its specification of the price cap formula as an alternative to Stentor's proposed differential approach. Under the direct approach, instead of using the economy-wide variables, the PCI is calculated solely in terms of the telephone companies' input inflation and TFP rates. Given that Call-Net supported the use of publicly-available data, it recommended the use of Statistics Canada's estimates of TFP and Statistics Canada's Business Sector Output and Input Price Indices.
|
55. As noted earlier, there are practical limitations associated with the Business Sector Output/Price Index. Further, the Commission agrees with Stentor that the direct approach is equivalent to the full differential approach in calculating the X-factor when (1) an input price differential is included, and (2) the internal consistency among the economy-wide TFP, output and input price growth rates is maintained. The Commission has adopted these conditions in arriving at its X-factor.
|
56. In light of the above, the Commission considers that the differential approach is more practical than the direct approach to implement and, accordingly, approves the use of the differential approach.
|
|
|
|
|
57. The first component of the productivity offset is the industry TFP.
|
58. Stentor proposed using the industry (historical) TFP of 4.2% for the period 1988 to 1995, based on the user cost of capital methodology.
|
59. B.C., CCTA, Calgary and Westel supported Stentor's basic approach, while Call-Net and the Consumer Coalition advocated using the residual rate of return method to measure capital input prices.
|
60. Stentor stated that the method used to measure cost of capital (i.e., residual rate of return or user cost) for purposes of calculating TFP, has little impact on the Stentor companies' TFP growth estimate. However, it stated that the measure used can have a significant impact on the Stentor companies' input price growth, particularly if the period is characterized by a marked deterioration in earnings at the end. Stentor stated that the use of the residual rate of return approach over the period 1988 to 1995 results in a higher input price differential than otherwise and is therefore an inadequate approach for the Stentor companies over this period. Given that several of the companies experienced a marked deterioration in earnings at the end of the 1988 to 1995 period, the Commission agrees with Stentor that the residual rate of return approach is inadequate over the above period.
|
61. In light of the above, the Commission accepts Stentor's TFP methodology based on the user cost of capital approach.
|
|
|
62. Several interveners submitted that the 1995 data should be excluded from Stentor's 1988 to 1995 historical calculation, arguing that the telephone companies had an incentive not to reduce costs in 1995 as this would have resulted in a lower historical TFP estimate. Interveners also suggested that the Commission could include the 1995 results if 1996 and 1997 forecasts were also included.
|
63. The Commission notes that by either excluding 1995 data, or by including data for the years 1996 and 1997, the TFP would be 4.5% rather than Stentor's proposal of 4.2%.
|
64. The Commission is of the view that, if the telephone companies had an incentive not to reduce costs in 1995, they would have had a similar incentive in 1996 and 1997. The Commission is also of the view that it is preferable to use actual TFP data, for consistency and accuracy, rather than a mix of actual and forecast TFP data. For these reasons, the Commission is not convinced that either approach advocated by the interveners is appropriate.
|
65. The Commission notes that the Stentor historical TFP growth of 4.2% for the period 1988 to 1995 is consistent with Bell's long-term TFP of 4.1% (1962 to 1995). Given that Bell's average revenue weight used in calculating the Stentor industry-wide TFP is approximately 67% over the period 1988 to 1995, the Commission notes that Bell's productivity performance has a significant impact on the industry-wide productivity estimate.
|
66. The Commission is of the view that it is reasonable to use Bell's long term TFP as a proxy for all the Stentor companies in determining whether 1988 to 1995 is representative of the long term in calculating the industry-wide productivity. Accordingly, the Commission adopts the 1988 to 1995 period for purposes of calculating the industry (historical) TFP for the telephone companies.
|
3. Economy-wide TFP Growth
|
67. The second component of the productivity offset is the economy-wide TFP.
|
68. Stentor used Data Resources Inc.'s (DRI) forecast economy-wide productivity growth of 0.8% to derive the expected productivity differential for the 1998 to 2002 period. Stentor noted that the recent (i.e., 1988 to 1995) trend of zero percent economy-wide productivity growth will not continue and the economy-wide TFP will revert back, over the 1998 to 2002 period, to its long-term trend. Stentor further noted that the economy-wide TFP, based on Statistics Canada's estimated Business Sector TFP, is 1.0% over the period 1962 to 1995.
|
69. and Call-Net questioned the reliability of DRI's forecasts and several parties, including B.C., Calgary, Call-Net and the Consumer Coalition, disagreed with the way that Stentor mixed the use of an industry (historical) TFP and a forecast economy-wide TFP.
|
70. The Commission agrees with parties that it is preferable, where possible, to avoid mixing the use of an industry (historical) TFP and a forecast economy-wide TFP.
|
71. The Commission notes that the poor economy-wide productivity performance during the 1988 to 1995 period was due, in part, to weak economic conditions and the recession of the early 1990s. However, the Commission also notes that weak economic conditions do not affect the productivity of the Stentor-member companies in the same way that they affect the economy as a whole and therefore the economy's performance over the 1988 to 1995 period is not likely indicative of a lower industry productivity offset than otherwise. The Commission agrees with Stentor that major productivity improvements tend to be driven by technological breakthroughs and industry restructuring which are generally industry-specific.
|
72. As stated earlier, the Commission is of the view that the economy-wide TFP should be determined over the long term in order to average out the impacts of any short-term events on the economy-wide productivity performance.
|
73. In light of the above, the Commission approves the use of Statistics Canada's long-term estimate (1962 to 1995) of 1.0% economy-wide TFP when calculating the basic productivity offset.
|
4. Input Price Differential
|
74. The third component of the productivity offset, which completes the basic offset, is the input price differential (IPD).
|
75. Stentor proposed that the IPD for the period 1988 to 1995 be excluded due to its statistical insignificance. However, Stentor suggested that the IPD be included if the period 1988 to 1997 were used.
|
76. As noted earlier, the Commission is of the view that an IPD, among other things, must be included in the price cap formula in order to eliminate the potential for bias in the PCI.
|
77. The Commission further notes that, during the proceeding, Stentor provided a 0.3% IPD that was based on the long-term period 1962 to 1995 and on Bell's estimate of the input price growth rate. The Commission is of the view that using the long-term period is more appropriate because it is consistent with the use of the long-term economy-wide productivity discussed previously. The Commission is also of the view that the long-term IPD of 0.3%, based on Bell's input price growth, is representative of the telephone industry as a whole.
|
78. Therefore, the Commission finds appropriate to include, in its calculation of the basic productivity offset, a long-term IPD estimate of 0.3% based on the period 1962 to 1995.
|
5. Consumer Productivity Dividend (Stretch Factor)
|
79. The fourth component of the productivity offset is the consumer productivity dividend or stretch factor.
|
80. All parties agreed during the proceeding that a consumer productivity dividend, or stretch factor, should be applied to the basic offset. The stretch factor is intended to provide a dividend to consumers resulting from the streamlining of regulation and increased incentives for efficiency for the telephone companies. The principal issue was the level of the stretch factor that should be applied to the basic offset and whether that adjustment should be revised during the price cap period.
|
81. Stentor stated that, although there is no empirical basis for quantifying a specific value for the stretch factor, it proposed a 0.5% stretch factor for the entire price cap period.
|
82. TCI proposed a 1.0% stretch factor for the first three years and a 0.5% stretch factor for the remaining three years in its price cap plan. Under TCI's proposal, the stretch factor could be adjusted during the follow-up proceeding, depending on the extent of cost-cutting or productivity-improving initiatives undertaken by the companies prior to the onset of the price cap regime. The proposed adjustment would be in the form of a partial or total exemption from the stretch factor (stretch factor exemption).
|
83. The Commission notes CCTA's argument that the Commission established a 1.0% consumer productivity dividend for Teleglobe in Decision 96-2, in recognition of the incentives embodied in a price cap formula to increase productivity.
|
84. The Commission is of the view that it is reasonable for consumers to expect that the benefits to the telephone companies of moving to price cap regulation would be passed on to consumers in the form of price reductions. The Commission notes that TCI's proposal of a 1.0% stretch factor was supported by most interveners, but that its proposal to reduce the stretch factor during the price cap term received little support. The Commission considers that a 1.0% stretch factor is appropriate for the duration of the price cap period.
|
85. In the Commission's view, a stretch factor exemption as proposed by TCI is not necessary, in light of the Commission's determinations in subsection 1.b. above that an industry-wide X-factor rewards those companies that have achieved above-average productivity gains in the past relative to those companies that have had below-average productivity.
|
6. Competition Adjustment
|
86. The fifth component of the productivity offset is the competition adjustment.
|
87. Stentor submitted that local competition will give rise to market share loss and increased sales and marketing expenses, which in turn will raise the unit costs for the telephone companies. Stentor also submitted that local competitors will focus first on high margin services. As a result, Stentor proposed a reduction to the X-factor of 1.2% to reflect these factors.
|
88. TCI submitted that the onset of local competition is likely to render overly optimistic any forecast of productivity gains. TCI proposed a reduction to the X-factor of 0.6%. In contrast to Stentor's adjustment mechanism, TCI derived its competition adjustment by comparing the average rates of output growth for two periods: 1988 to 1995 and 1988 to 1997.
|
89. CCTA, supported by Westel, submitted that the telephone companies' productivity is expected to increase as they begin to face competition in the local exchange market and proposed an additional increase to the basic offset of 0.25%. CCTA submitted that Stentor's proposal sought to emphasize certain increased costs without considering any benefits accruing from offsetting cost savings.
|
90. The Commission agrees with Calgary's argument, supported by Call-Net and the Consumer Coalition, that competition is likely to have a strong effect on incentives to improve productivity beyond those that price cap regulation provides.
|
91. The Commission agrees with B.C.'s argument that, since the average TFP growth for the period includes the introduction of toll competition and is not very different from the long-term TFP, it does not appear that competition has dampened the telephone companies' productivity.
|
92. In Decision 97-8, the Commission set out the terms and conditions for local competition. In the price cap proceeding, parties put forward various views as to the rate of competitive entry into the local market. The Commission considers that the pace of local competition will not proceed as quickly as predicted by the Stentor companies. Although the telephone companies will incur some market share loss as a result of the emergence of local competition, the Commission is of the view that the telephone companies will continue to find innovative ways of reducing costs and increasing their output, thus improving productivity. In light of the above, the Commission is of the view that an adjustment to reflect the impact of competitive entry in the local market is not required.
|
|
|
93. In PN 96-8, the Commission stated that, given that price cap regulation will apply to the Utility segment only, productivity studies for the Utility segment would be desirable. However, the Commission directed the telephone companies to provide estimates of productivity for the entire company in addition to any estimates of the Utility segment productivity.
|
94. TCI separated capped service prices from all service prices. TCI subtracted the estimated inflation rate for non-capped services (3.8%) from its basic offset for all services (4.7%). This resulted in a basic offset of 0.9% for capped services versus Stentor's basic offset of 3.4% for all services which Stentor then applied to capped services.
|
95. The Commission notes that Stentor did not recommend the use of TFP results based on the Utility segment only. Instead, it calculated TFP for all services and applied the TFP results to capped services.
|
96. Calgary argued that TCI's methodology is valid only if there is strong evidence that the growth in TFP has a different impact on the costs of capped and non-capped services. Calgary further stated that Stentor's evidence on Cost Comparisons and Rate Rebalancing, filed in the proceeding leading to Decision 95-21, showed that total company TFP does not have a substantially different impact on local service costs and toll service costs; therefore, there is no need to separate the impact of productivity growth on capped versus non-capped services.
|
97. Calgary also argued that TCI's reliance on the historical price changes of local services and toll services (especially on the relative price changes between these two classes of service) assumes that these relative prices will continue to change at the same rate in the future. Calgary submitted that these relative price changes will not continue to change at the same rate after the third step of rate rebalancing in January 1998.
|
98. The Commission notes that cross-subsidization from toll to local services existed to a great extent during the period 1988 to 1995 and that, as a result, local and toll service prices differed significantly from their respective true costs. Therefore, the Commission is of the view that historical local prices should not be used as a basis for determining the productivity offset for capped services.
|
99. In light of the above, the Commission considers it more appropriate to use the company-wide TFP (as proposed by Stentor) as a proxy for the Utility segment TFP.
|
8. Productivity Offset (X-factor) Summary
|
100. In light of the determinations included in this Section, the Commission approves an industry-wide productivity offset (X-factor) of 4.5% for the telephone companies during the price cap period. This productivity offset is derived as follows:
|
Industry (Historical) TFP 4.2%
less: Economy-wide TFP 1.0%
plus: Input Price Differential 0.3%
Basic Offset (sub-total) 3.5%
plus: Stretch Factor 1.0%
Competition Adjustment 0.0%
Total Target X-factor 4.5%
|
D. Exogenous Factors (Z-factor)
|
101. Most parties agreed that an exogenous adjustment, or Z-factor, should be used to flow-through costs associated with events that result from conditions uniquely applicable to regulated telecommunications utilities.
|
102. TCI proposed a tax-factor (T-factor) to limit the circumstances under which the price cap plan could be varied for exogenous factors. TCI stated that the T-factor in its price cap plan would deal with industry specific taxes or tax-like orders, and changes in its effective tax rate as its additional tax deductions (ATDs) are depleted during the price cap period.
|
103. TCI also noted that in AGT - Issues Related to Income Taxes, Telecom Decision CRTC 93-9, 23 July 1993, and in City of Calgary - Application to Review and Vary Telecom Decisions CRTC 93-9 and 93-18, Telecom Decision CRTC 94-22, 4 November 1994, the Commission stated that it intended to adjust TCI's rates in future years, as necessary, to reflect any difference between the amount of ATDs used for regulatory purposes and the amount ultimately permitted by Revenue Canada. TCI also proposed that the T-factor be used to account for changes in ATDs that could occur through the Revenue Canada appeal process.
|
104. MTS proposed that any future unknown costs associated with the privatization of the company be treated as an exogenous factor to be recovered through an adjustment to the PCI.
|
105. The Commission determines that a Z-factor or exogenous factor adjustment will be considered for inclusion in the PCI for events or initiatives which satisfy the following: (1) they are legislative, judicial or administrative actions which are beyond the control of the company; (2) they are addressed specifically to the telecommunications industry; and (3) they have a material impact on the Utility segment of the company.
|
106. The Commission considers TCI's proposed T-factor, which deals with industry specific taxes or tax-like orders and changes in its effective tax rate as its ATDs are depleted during the price cap period, to be subject to the same criteria applicable to exogenous factor adjustments.
|
107. With respect to changes in ATDs that could occur through the appeal process with Revenue Canada, on 10 January 1997, TCI informed the Commission that the company had reached a settlement with Revenue Canada concerning the amount of allowable ATDs. In a letter dated 1 May 1997, the Commission considered that the applicability of the T-factor to any change in allowable ATDs will be dealt with in the follow-up proceeding as discussed in Part XI of this Decision.
|
108. With respect to MTS, the Commission acknowledges that certain costs relating to the privatization of the company may qualify for exogenous treatment. However, the Commission is not prepared to characterize unknown costs as being exogenous (see Part V of this Decision).
|
109. The Consumer Coalition proposed that a minimum dollar impact should be identified for each company below which no adjustment would be allowed even if the cause of the cost change qualified as an exogenous factor. The Commission is of the view that such specific restrictions are not required as the criteria to qualify for the Z-factor adjustment ensures that the event must have a material impact on the Utility segment of the company. The reasonableness of each application pertaining to the Z-factor will be assessed, and will be subject to comments by interveners, to ensure that all requirements for a Z-factor adjustment are met.
|
110. The Commission agrees with Stentor's proposal that the impact of an exogenous event should be determined on a company-wide basis and assigned between the capped and uncapped services on a cost-causal basis. If this is not possible, the telephone company is expected to propose a reasonable allocator at the time it files its application. The Commission considers that, in general, actual data should be used to determine the impact of an exogenous event. Proposed Z-factor adjustments to the PCIs are to be filed with the annual updates to the PCIs as discussed in Part IV of this Decision.
|
111. The Consumer Coalition proposed that interveners be permitted to submit applications for Z-factor adjustments. The Commission does not consider that a specific process is necessary to accommodate such applications. In this regard, the Commission notes that pursuant to the CRTC Telecommunications Rules of Procedure (the Rules), parties will have 30 days to comment on a company's proposed Z-factor adjustment. Further, parties have the option of filing a Part VII application under the Rules as required.
|
|
|
|
|
112. Stentor noted that there may be situations where it is not feasible for a company to set going-in rates which would allow for the recovery of the going-in revenue requirement shortfall. Stentor submitted that each company's financial circumstances are different and that therefore, a specific provision must be made in order to allow for the recovery of costs that are not reflected in the going-in rates. Stentor proposed that this revenue shortfall be explicitly recognized in the price cap formula as factor-A.
|
113. Under Stentor's proposal, the going-in revenue requirement for the Utility segment of each company would be determined. Each company would then assess how much of the revenue requirement could reasonably be recovered through going-in rates. The remaining revenue requirement shortfall divided by the forecast revenues for 1997 would be included as a component of the PCI at the start of the price cap period.
|
114. The Commission notes that, under Stentor's proposal, a company with a factor-A would be able to increase prices during the price cap period to recover the going-in revenue requirement shortfall in a manner that best suits its market conditions. The Commission also notes that, to the extent that a company is required by market conditions to defer implementation of the permitted rate increases, its ability to recover the shortfall would be correspondingly reduced.
|
115. As discussed in Part VIII of this Decision, the telephone companies are permitted to implement weighted-average rate increases for basic residential local service of up to $3 as at 1 January 1998. These additional revenues will first be used to reduce the toll contribution rate to no less than 2 cents per minute. Any revenues that are not required to reduce the contribution rate to the 2 cent level will be used to reduce or eliminate any going-in revenue requirement shortfall.
|
116. The Commission considers that, in the event that a company could not implement rates that would allow for the recovery of any revenue requirement shortfall under the going-in rates, it would be appropriate to provide for an opportunity to recover this shortfall during the term of the price cap plan. However, the Commission considers that it would be more appropriate to consider the mechanism to recover this shortfall during the follow-up proceeding. Consequently, the Commission directs the telephone companies to provide, as part of the follow-up proceeding, the calculation of the proposed mechanism to recover this shortfall, as well as the telephone companies' views as to when they expect to be in a position to implement rates to recover any revenue shortfall and the required rate adjustments.
|
|
|
117. In the interest of ensuring that parties are aware, in a timely fashion, of all components of the price cap formula, the Commission hereby announces that it has decided not to include a quality of service factor, i.e., Q-factor, in the PCI. That determination will be addressed more fully in the decision, to be issued shortly, in the proceeding initiated by PN 94-50 to review the quality of service indicators.
|
IV SERVICE BASKETS AND TARIFF MATTERS
|
|
|
118. In most price cap plans, telephone services are generally grouped into baskets, subject to a price cap index. Generally, services are grouped into baskets based on criteria such as homogeneity and/or similarity in demand price elasticities. The price cap index typically determines the allowable annual weighted-average price change for services subject to the price cap. Prices for individual services may increase or decrease provided that, in aggregate, they conform to the price cap index. Sometimes, additional pricing constraints on services within a particular basket are imposed to further limit the magnitude of the telephone company's pricing actions in relation to the price cap index. These additional constraints can be upper or lower limits to price changes for services within the basket.
|
119. Most parties proposed that basic residential local service be treated differently from other Utility segment services in light of the subsidies flowing to this service. Parties generally proposed that basic residential local service form a basket unto itself and that the pricing of this service be constrained by specified maximum annual price increases.
|
120. Parties' proposals as to the specific basic residential local service pricing constraints varied widely, particularly on the appropriateness of rationalizing rates during the price cap period. Stentor, AT&T Canada LDS and Call-Net based their proposals on the view that rate increases for basic residential local service during the price cap period are necessary and that the subsidies flowing to this service should be reduced. The Consumer Coalition and CCTA based their proposals on the view that rate rationalization during the price cap period would not be in the public interest.
|
121. Parties generally proposed that services provided to competitors that are used in the provision of competitive local and interexchange (IX) services should be subject to separate treatment under the price cap regime in light of the telephone companies' ability to "price squeeze" competitors through their control of both retail and essential/bottleneck services' pricing.
|
122. Parties also proposed that, if a local contribution mechanism was established with the introduction of local competition, the local and the current toll contribution should comprise individual baskets or sub-baskets.
|
123. Stentor proposed that services need not be capped if customers do not require protection from price increases because of market conditions or other factors, or if inclusion of the service under price caps would be redundant or impractical. TCI proposed that only basic residential local and single-line business services considered essential for policy reasons and essential facilities supplied on a non-competitive basis should be capped.
|
124. AT&T Canada LDS and CCTA suggested that most services, other than basic residential and business local exchange service and competitor services, need not be capped. Microcell was of the view that the main characteristic distinguishing capped services from uncapped services should be whether the customer must rely on the dominant incumbent or whether a customer has a choice of suppliers under competitive market conditions.
|
125. Under the price cap plan approved by the Commission, all capped services will form a single basket subject to the PCI as defined in Part III of this Decision. This basket will be sub-divided into three sub-baskets which are (1) Basic Residential Local Service, (2) Single and Multi-Line Business Local Services and (3) Other Capped Services. The aggregate price levels for Basic Residential Local Service and the Other Capped Services sub-baskets will be limited to annual increases equal to the inflation rate. A maximum increase of 10% in any year will apply to individual rates for residential and single-line business basic services in smaller exchanges. Further, certain Utility segment services will not be capped (the uncapped services), and the rates for certain of the Utility segment services not subject to the price cap plan, such as competitor services, 9-1-1 service, message relay service and contribution, will be accorded special treatment.
|
126. In the Commission's view, the framework for the treatment of the Utility segment services set out in this Decision will allow the telephone companies sufficient pricing flexibility to adequately respond to competition. At the same time, this framework facilitates policy objectives such as affordable telecommunications services and non-discriminatory access rates for competitor services and limits the funding of price reductions for services subject to competitive pressures through higher rates for services that are less competitive.
|
1. Basic Residential Local Service Sub-basket
|
127. The Commission, in making its findings related to the pricing of basic residential local service under the price cap regime, is guided by the objectives set out in section 7 of the Telecommunications Act (the Act). The Commission considers that the price cap framework should, among other things, "render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada." AT&T Canada LDS', Call-Net's and Stentor's proposals, in the Commission's view, could possibly allow the rates for basic residential local service, especially for subscribers in rural areas, to rise to unaffordable levels. At the same time, the Commission recognizes that competitive pressures will erode the subsidies from other Utility segment services to basic residential local services. As described in Decision 97-8, the Commission has developed a portable contribution approach to provide an explicit stable subsidy for the maintenance of affordable basic service.
|
128. Furthermore, the Commission has recognized in the past that the rationalization of basic service rates is necessary as telecommunications markets become more competitive. The Commission has approved, on an ongoing basis, telephone company applications to consolidate rate groups since 1992, and, as noted in Part VIII of this Decision, will provide the opportunity for the telephone companies to further consolidate rate groups in conjunction with the third round of rate rebalancing. Given these initiatives and the expectation that local competition will not evolve quickly, particularly in rural areas, the Commission is of the view that the requirement to further rationalize rates for basic residential local services during the price cap plan should be limited.
|
129. Therefore, the Commission determines that the index of prices for the sub-basket comprising basic residential local services will be allowed to increase by, at most, the annual inflation rate, as measured by the GDP-PI, over the term of the price cap plan. The Commission considers that this approach of providing limited rationalization of rates over the price cap period balances the objectives of the Act of fostering increased reliance on market forces with the introduction of local competition, while rendering affordable telecommunications services. The Commission notes, however, that for some of the telephone companies, additional rate increases may be necessary during the price cap period in order to allow the companies to recover costs which the Commission considers to be appropriate for recovery but which are not reflected in the rates effective at the implementation of the price cap regime. The Commission notes that this will be addressed in the follow-up proceeding (see Part III, Section E of this Decision).
|
130. The Commission notes that the above price cap on the average basic residential local service rates permits the telephone companies to implement rate increases greater than the rate of inflation for specific rate elements, provided that the overall average increase does not exceed the rate of inflation. Rates for basic residential local services in smaller exchanges have in some cases increased substantially as a consequence of rate rebalancing and other rate rationalization initiatives. In order to provide these subscribers with more certainty regarding the maximum rates they will be charged during the price cap plan, and to ensure that future increases are kept to an affordable level, the Commission is of the view that individual rate elements in the sub-basket of basic residential local services should be constrained in a manner similar to that proposed by Stentor and TCI. Given the overall cap of inflation on the Basic Residential Local Service sub-basket, the Commission considers that the potential exists, for some telephone companies, to significantly increase rates for residence primary exchange service in smaller exchanges or for other services which are non-optional with residence primary exchange service (e.g., mileage charges). The Commission notes that the smaller, less dense exchanges, were generally characterized as constituting Bands C and D by Stentor in the proceeding leading to Decision 97-8, but that some exceptions exist, for instance, for NBTel. For the purposes of administering the individual rate element constraint, the Commission intends to employ the rate band definitions. The Commission will finalize the rate band classifications in the follow-up proceeding discussed in Part XI of this Decision.
|
131. Therefore, the Commission concludes that, in any year, no rate element in the Basic Residential Local Service sub-basket is to increase by more than 10%. This constraint would not apply for primary exchange services within the bands for which local loops are considered non-essential, as determined in Decision 97-8, which would typically include urban exchanges where local competition will likely evolve more rapidly. For most of the telephone companies, the exemption applies to Bands A and B.
|
132. Services included in the Basic Residential Local Service sub-basket are the basic residence primary exchange services, with the exception of 9-1-1 and message relay services, and any other services which are non-optional with the various grades of basic residence primary exchange services.
|
2. Single and Multi-line Business Local Services Sub-basket
|
133. Most parties proposed that single-line business local service be included in a basket of capped services. Stentor committed to individual rate element constraints for single-line business local service in order to provide assurances for subscribers of these services.
|
134. Stentor proposed that, for Bell and BC TEL, multi-line business local service be included in the capped services basket. Stentor was of the view that it was necessary to include multi-line business local service in the capped services basket to accommodate the companies' proposed rationalization of Utility segment rates. Stentor indicated that, for Bell, multi-line and single-line business local services are not distinguished as separate services. For the other telephone companies, Stentor proposed that multi-line business local service not be capped primarily on the basis that market conditions would protect the interests of users.
|
135. The Commission is not satisfied that, during the initial stages of the price cap regime, market conditions will assert sufficient pricing discipline in all areas of the telephone companies' respective operating territories to provide such protection. Accordingly, the Commission considers it appropriate to include multi-line business local services, with the exception of Centrex-like services, in the capped services basket for all the telephone companies. In order to limit the extent to which business service rate reductions can be offset by increases to other capped Utility segment services, the Commission adopts a sub-basket for single and multi-line business local services. The sub-basket is also to include any additional services which are non-optional, with the various grades of business single and multi-line services, except 9-1-1 and message relay services.
|
136. The Commission is of the view that primary exchange service for single-line business in smaller exchanges should be subject to the same maximum annual rate increase applicable to rural basic residential local services. Accordingly, the Commission finds that increases to individual rate elements for single-line business local customers are not to exceed 10% in any year. As with basic residential local service, this constraint would not apply to single-line business primary exchange services within bands for which local loops are to be treated as non-essential as determined by Decision 97-8.
|
3. Other Capped Services Sub-basket
|
137. Stentor proposed that those services not qualifying as uncapped, or not otherwise included in a sub-basket, should comprise a residual sub-basket. Stentor submitted that services should be excluded from price caps when customers do not require protection from price increases because of market conditions or other factors, or if the inclusion of the service under price caps would be redundant or impractical. However, Stentor proposed that, for Bell and BC TEL, in order for those companies to meet the price cap parameters, certain services be subject to price caps, although these services meet Stentor's criteria for classification as uncapped services. Under Stentor's proposal, the remainder of the Utility segment services would form the other capped services basket, subject to the exceptions noted above. TCI proposed that only basic residential and single-line business services and essential facilities not subject to competition be capped.
|
138. In the Commission's view, it is appropriate to define the services to be included in the Other Capped Services sub-basket as those remaining Utility segment services which do not qualify as services excluded from price caps nor included in other sub-baskets. A discussion of the services to be included in the Other Capped Services sub-basket is set out below in Section B.
|
139. The Commission concludes that the index of prices for the Other Capped Services sub-basket will be capped at the rate of inflation, as measured by the GDP-PI, in order to provide broad protection for the customers of the services in this sub-basket.
|
140. The services to be categorized as Other Capped Services or uncapped services will be finalized in the follow-up proceeding discussed in Part XI of this Decision.
|
141. Stentor argued that, should the Commission decide that optional local services should be outside the price cap basket for Bell, the company should be afforded the opportunity to propose a restructure of its local rates such that a removal of optional local services from the basket of capped services not preclude moving basic residential local rates to appropriate levels over the price cap period. Further rationalization of basic residential local rates will be allowed in accordance with this Part of this Decision and in accordance with the provisions set out in Part VIII of this Decision.
|
B. Services Excluded from the Price Cap Regime
|
|
|
142. The Commission's policy with respect to certain Utility segment services, such as optional local services, has been to price these services to maximize contribution in order to keep rates for basic residential local service as low as possible. Given the discretionary nature of this class of services, the Commission is of the view that an upper pricing constraint is not warranted. Accordingly, the Commission concludes that services priced to maximize contribution are appropriately excluded from the price cap regime.
|
143. As well, the Commission concludes that it would be redundant or impractical to include under price caps certain services, such as services provided under the terms of SFTs. The Commission notes that most parties did not object to this aspect of Stentor's proposal.
|
144. While Stentor and TCI proposed to exclude services from the price cap where customers do not require protection from price increases because of market conditions, the Commission is not satisfied that, particularly during the initial stages of the price cap regime, market conditions will assert sufficient pricing discipline across all areas of each of the telephone companies' respective operating territories. Accordingly, the Commission considers that the services, such as Megalink and Microlink, that Stentor and TCI proposed to exclude on the basis that market conditions would protect customers should generally be included in the Other Capped Services sub-basket at the outset of the price cap plan. Should competition develop to sufficiently discipline pricing over the term of the price cap plan, the Commission notes that the telephone companies can apply to have services removed from under the price cap. The initial inclusion of these services under price caps will provide some price protection for those customers in areas where competition will be slow to develop.
|
145. The Utility segment services to be designated as uncapped services according to the general principles above will be finalized in the follow-up proceeding discussed in Part XI of this Decision.
|
|
|
146. Most parties proposed that competitor services should be treated separately from retail services. Stentor proposed that competitor services be placed into two separate baskets delineated by whether the services are employed for the provision of local or toll services, each subject to the PCI. TCI proposed that these services be priced at Phase II costs plus an approved mark-up.
|
147. AT&T Canada LDS agreed with Stentor's proposal with two exceptions. First, AT&T Canada LDS argued that some toll competitor services are employed only by competitors and not by the telephone companies' Competitive segments. In AT&T Canada LDS' view, grouping these services with services used by the telephone companies' Competitive segments allows the telephone companies to disadvantage competitors by targeting reductions to services primarily used by themselves. AT&T Canada LDS recommended that the competitor services not used primarily by the telephone companies be included in a separate sub-basket subject to the PCI.
|
148. The Commission considers that TCI's proposal to price competitor services at Phase II costs plus an approved mark-up has merit in that it is appropriate that rates for these services recover Phase II costs and make a contribution to the fixed and common costs of the telephone companies, the level of which has been reflected in approved rates. Under such a regime, rates for these services would be subject to change only upon application by the telephone companies, competitors or through a proceeding initiated by the Commission. The Commission considers that the primary rationale for a change in these services' rates would be a change in Phase II costs. The Commission notes that under such a regime it is unnecessary to form a sub-basket of services primarily used only by competitors, as suggested by AT&T Canada LDS, as the telephone companies would not have the opportunity to target rate reductions for specific services primarily used by the telephone companies. Further, the Commission is of the view that it is unnecessary to include competitor services in the basket of capped services, given the pricing regime established in this Decision.
|
149. Competitor services include services utilized by local and toll competitors, including interconnection services required by wireless carriers. They include, for example, all services for which rates were approved in Unbundled Rates to Provide Equal Access, Telecom Decision CRTC 97-6, 10 April 1997 and rates for Directory File Service. The Commission intends to designate the services considered competitor services in the follow-up proceeding discussed in Part XI of this Decision.
|
150. AT&T Canada LDS also argued that an additional basket should be created comprised of telephone company services which are not yet available on a widespread basis from competitive access providers (CAPs), nor designated as bottleneck facilities, and which are used by competitors for direct connection to customers. AT&T Canada LDS considered that, given their virtual monopoly in the supply of access services, the telephone companies have the ability to charge more for stand-alone access, while insulating their own customers from the effects of the increase through bundled service offerings. AT&T Canada LDS suggested that services such as Digital Network Access, Local Megaroute, Co-location tariffs and Support Structures be included in an Access Services Basket.
|
151. Stentor argued that the services comprising an Access Services Basket are subject to competitive conditions and should not be capped. Stentor noted that local high bandwidth services offered by Rogers Network Services and Vidéotron ltée compete with the services offered by the telephone companies.
|
152. As noted earlier, the Commission is not satisfied that market conditions will assert sufficient pricing discipline across all areas of the telephone companies' respective operating territories. Accordingly, for these services to be classified as uncapped services rather than form a separate basket as proposed by AT&T Canada LDS, the Commission generally finds it appropriate to include services which were characterized by AT&T Canada LDS as Access Services in the Other Capped Services sub-basket.
|
3. 9-1-1 and Message Relay Services
|
153. The Commission notes that 9-1-1 and message relay services are generally rated on the basis of Phase II costs and a mark-up which reflects the nature of these services. Given the manner in which the rates for these services have been determined and the nature of these services, the Commission considers it appropriate to freeze the levels of these rates, as approved at 1 January 1998, for the duration of the price cap period.
|
|
|
154. As discussed in Part VIII of this Decision, the Commission concludes that toll contribution should be treated as a special category, with rates not subject to change during the price cap period.
|
|
|
155. Stentor and TCI proposed that an imputation test be employed to limit downward pricing rather than establishing pricing constraints on specific services. Stentor was of the view that floor price levels determined by the imputation test are superior to a service pricing band and would provide the companies with greater flexibility.
|
156. TCI proposed to file imputation test information with all tariff applications other than those for market trials and promotions. Stentor proposed that the telephone companies simply attest to the passing of the imputation test.
|
157. The Commission notes the requirement for imputation tests as determined in Decision 97-8. Recognizing the use of the imputation test as a price constraint, the Commission notes that existing Phase II information requirements for Utility segment services need to be maintained. Further, the Commission considers that an attestation is not sufficient to demonstrate that rates meet an imputation test, given that judgment is exercised when determining whether a service has passed the imputation test. Therefore, the Commission concludes that any required imputation test information must be filed with tariff applications.
|
158. The Commission has also determined that price changes for services that are currently priced below cost should generally not move rates further from costs. The Commission considers that this is consistent with its policies relating to anti-competitive pricing.
|
159. Stentor and TCI submitted that the telephone companies require the ability to de-average rates because consumer demand, and the costs of meeting that demand, can vary by geographic location. Stentor argued that, if competitors are targeting services and pricing in consideration of geographic factors, the companies need this flexibility as well. TCI submitted that there is no expectation in competitive markets that prices in all locations or all sub-markets will be uniform even when costs are the same.
|
160. CCTA expressed the view that the Commission must maintain a policy of uniform pricing of services in various geographic areas within the rate bands in order to prevent targeting of rate reductions on a geographic basis. In CCTA's view, the rate bands embody areas with similar cost characteristics, and deviation from average pricing policies is not justified and will discriminate against subscribers. CCTA stated that it accepts price de-averaging based on cost differences as recognized in the telephone company rate bands.
|
161. The Commission notes that, for many of those services which will now be uncapped services, the Commission's policy in the past has been to maximize contribution. The Commission is of the view that given that the roll-out of local competition will likely not occur uniformly across geographic regions of a particular Stentor company's territory, allowing the companies to de-average rates for uncapped services would permit them to continue to maximize contribution from these services. The Commission therefore finds that, subject to imputation test requirements, the telephone companies should have the flexibility to de-average rates on a geographic basis for uncapped services which, in the past, have been priced to maximize contribution.
|
162. 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. The Commission concludes that any application proposing to increase rates for rural basic local service to levels higher than urban rates will not be disposed of without waiting for comments from interested parties, as discussed below in Section D. The Commission also concludes that any application which does not meet current rating criteria, such as the Extended Area Service criteria, will generally be dealt with on the same basis.
|
163. For multi-line business local and the other capped services, the Commission considers that applications to de-average rates, on the basis of smaller geographic areas than those defined by rate bands, will not be disposed of without waiting for comments from interested parties. Among other things, the Commission is concerned that a policy of pricing these services at de-averaged rates, as the Stentor companies have proposed, would permit the companies to impose excessive increases in exchanges that are not likely to experience, in the near term, the benefits of local service competition.
|
164. Stentor and TCI submitted that the bundling of services within the Utility segment and the bundling of certain of those services with Competitive segment services will be required in order to satisfy customers' needs and to compete effectively, and that service bundling should not be a concern as long as the bundled price meets the appropriate imputation test.
|
165. The Commission notes that interveners generally did not comment on matters concerning service bundling. The classification of a bundled service as a capped or an uncapped service will be considered on a case-by-case basis, similar to the assignment process for all new services, as discussed in the following Section.
|
D. Disposition of Tariff Filings
|
|
|
166. A number of parties submitted proposals for streamlining the tariff disposition process addressing such considerations as the length of time required to dispose of tariff applications, the use of an ex parte process for the filing of tariffs for Utility segment services and the extent to which information filed in support of Utility segment services should be held in confidence.
|
167. The Commission notes that pre-determining aggregate price levels over a multi-year period significantly reduces the regulatory burden by eliminating revenue requirement proceedings. Earnings regulation proceedings are replaced with a streamlined regulatory process for the disposition of price changes that comply with the price cap formula and other pre-determined pricing constraints. In addition, under the price cap regime, the Commission does not consider that it should impose on the telephone companies a requirement to notify customers of proposed price changes to basic local services as is frequently required at present. However, the Commission would expect the telephone companies to notify customers of price changes to basic local services, consistent with their current practices.
|
2. Timeframes for the Disposition of Tariff Filings
|
168. The Commission notes that the actual price index (API) for the basket of capped services is to remain less than, or equal, to the overall PCI. The Commission has also approved pricing constraints for the Basic Residential Local Services and Other Capped Services sub-baskets set at the inflation rate. These constraints are referred to as service band limits (SBLs). The APIs for these sub-baskets necessary to ensure compliance with the SBLs are referred to as service band indices (SBIs).
|
169. Stentor and TCI proposed that tariff filings for price changes which comply with the PCI and the SBL constraints and which meet imputation test requirements be allowed to be implemented within seven days and five days, respectively. CCTA recommended that such proposed tariff revisions be effective upon filing. Other parties argued that interested parties should be given a fair opportunity to comment on any proposed pricing change, change in terms and conditions or the introduction of a new service.
|
170. Stentor proposed that tariff filings which would cause an SBL to be violated be accompanied by justification for non-compliance and disposed of within 30 days. Stentor also proposed that filings for the introduction of new price elements, new services or new conditions related to service elements other than price approval be disposed of within 14 days.
|
171. Stentor and TCI argued that, as the filing requirements for uncapped services should be no more onerous than those for capped services, a similar filing regime should be instituted for uncapped services.
|
172. Stentor and TCI submitted that the Commission could establish internal procedures to ensure that individual tariff applications which comply with the price cap constraints are approved within the proposed timeframes. Alternatively, Stentor suggested that the Commission could conditionally forbear from the application of section 25 of the Act to allow any individual tariff filing which complies with the price cap parameters to come into effect without an explicit determination. Stentor also submitted that the Commission could retain its powers to suspend or disallow any tariff that the Commission subsequently determined did not comply with the price cap parameters.
|
173. TCI argued that the Act provides that the Commission may establish a range of prices for telecommunications services, including a maximum or minimum price, or both. In TCI's view, the imputation test establishes the price floor and the price cap constraint establishes the upper limit of the price range. Prices within that range, according to TCI, should pose no problem for the Commission, either in terms of issuing expeditious approval or of being deemed approved within five days of being filed.
|
174. The processes contemplated by Stentor and TCI under which no explicit disposition is involved would require that the Commission specifically disallow a proposed tariff application prior to a set date expiring or suspend the tariff once the Commission had made a determination that section 27 of the Act was violated. The Commission is of the view that the timeframes suggested would: (1) preclude an analysis of the information provided and of any additional concerns related to, for example, unjust discrimination, consumer safeguard or privacy issues; (2) be inconsistent with the requirement that the Commission be satisfied that the rates are just and reasonable and are not unjustly discriminatory and do not give an undue preference prior to either interim or final approval; and (3) essentially require that the Commission give automatic approval to filings for Utility segment services. The Commission also considers that suspending or disallowing tariff initiatives once implemented would cause greater uncertainty for consumers and in the marketplace than would a positive approval scheme.
|
175. The Commission considers TCI's view, that no actual determination need be issued, to be problematic in that the range of prices defined by the imputation test and the price cap parameters would not be clearly defined for a particular service. For instance, the maximum rate for a particular service depends on the rates charged for other services in the basket.
|
176. The Commission considers that determinations of whether proposed price changes comply with the PCI and other pricing constraints will in most cases not be difficult. However, the Commission must be satisfied that, where applicable, the imputation test requirements are met and that there are no other concerns such as those relating to unjust discrimination, consumer safeguard or privacy issues and issues relating to essential/bottleneck facilities are present. Subject to these considerations, it is the intention of the Commission to grant final approval to tariff filings, without waiting for comments from interveners, where it is satisfied that the corresponding price cap parameters are met. As well, the Commission intends to expeditiously dispose of tariff applications for uncapped services.
|
|
|
177. Stentor proposed that filings for revisions to existing services and the introduction of new services be allowed on an ex parte basis. Under TCI's proposal, tariff applications proposing rate changes only would be filed in confidence with the Commission until such time as the proposed rates become effective.
|
178. In Decision 94-19, the Commission established a general policy for the disposition of tariff filings on an ex parte basis. The Commission recognized that there are several considerations to be balanced in a determination to permit ex parte tariff filings. These include traditional public interest concerns, such as (1) the procedural rights to notice to interveners adverse in interest, (2) the public interest in an open regulatory process and (3) the benefit to the regulatory process derived from comment by interveners.
|
179. In Decision 94-19, the Commission found it appropriate to consider an ex parte process for interim disposition only for discount toll and 800 Service tariff filings, and only if these filings met all of the Commission's tariff criteria concerning the imputation test, bottleneck services, consumer safeguards and privacy.
|
180. In Tariff Filings Relating to Promotions, Telecom Decision CRTC 96-7, 18 September 1996 (Decision 96-7), the Commission broadened its general policy for the use of ex parte procedures to permit the specified details of the ex parte applications to remain confidential during the interval from interim disposition to the effective date of the amendments. In addition, the Commission expressed the view that maintaining confidentiality for the specific details of denied ex parte filings for discount toll and 800 Service promotions is generally in the public interest.
|
181. The Commission considers that, as in the case of the ex parte process for tariff applications for toll services, a general policy for ex parte consideration of Utility segment tariff filings should have regard to the benefits of an open regulatory decision-making process weighed against the harm to the telephone companies from advance knowledge given to competitors of their initiatives. The Commission is of the view that the greatest harm to the telephone companies will likely occur in the context of tariff applications for uncapped services, such as Centrex. The Commission therefore considers it appropriate that ex parte tariff filings for uncapped services be considered under a process, similar to that established in Decision 96-7, if they meet all the Commission's criteria concerning matters such as the imputation test, consumer safeguards and privacy.
|
182. The Commission considers that the presence of market forces and regulatory safeguards and the opportunity to comment after interim disposition are sufficient, in these instances, to ensure that parties are not unduly prejudiced by an ex parte process, and to address concerns related to the impact of the adoption of an ex parte process on the benefits derived from comments by interveners. The Commission is of the view that the above approach is consistent with the telecommunications policy objectives in section 7 of the Act.
|
4. Information Requirements
|
183. Stentor and TCI proposed that, for tariff filings for capped services, the telephone companies would demonstrate compliance, with the PCI and SBL constraints. In situations where the SBL constraint is violated but the API remains in compliance with the PCI, or in exceptional circumstances where the PCI is violated, Stentor proposed to file justification for non-compliance. The Commission agrees that justification for non-compliance with the constraints must be submitted with the filing.
|
184. Stentor proposed that, at the implementation date of price caps, each of the PCI, API, SBLs and SBIs would be set to an index of 100, where the corresponding rates reflect 1 January 1998 rate rebalancing and any rate adjustments from the 1997 implementation proceedings. Stentor and TCI proposed processes for submitting information with respect to updating the PCI, API, SBLs and SBIs and any rate changes required to meet annual commitments as set out by the price cap constraints. Stentor also proposed that, on 31 March of each year, the companies would file updates to the relevant PCIs as well as any proposed rate changes that may be necessary to ensure that the companies' rates will be in compliance with the PCI and the SBL constraints. The proposed rates would be effective 1 May of each year. TCI proposed a similar process where required information would be filed by 1 December and proposed rates would be effective 1 January.
|
185. The Commission notes that other parties in the proceeding generally did not comment on the outlined processes for submitting annual information with respect to price cap constraints and indices. The Commission is of the view that the dates and process as outlined by Stentor for submitting information with respect to the filing of the PCI, API, SBLs and SBIs and resulting changes are generally appropriate.
|
186. Compliance with the PCI and SBL involves a demonstration of the impact of individual rates on the relevant price indices. The Commission also notes that, where relevant, the telephone companies are required to demonstrate compliance with the individual rate element constraints.
|
187. Stentor proposed that new services be subject to Commission review and approval, whether bottleneck/essential or otherwise. The new service would be subject to the constraint that it could not be priced below the minimum level as indicated by the imputation test. Stentor and TCI noted that, if it is deemed that a new service was required to be included in the basket of capped services, they would require sufficient time to accumulate actual revenue and cost information on new services before the new service was subject to price cap regulation. Stentor and TCI also noted that, under their proposals, very few new services would require price cap regulation as they would generally be offered based on competitive need.
|
188. The Commission agrees with Stentor's submission that information will need to be gathered prior to the inclusion of new services in the capped sub-baskets. The Commission notes that where debate exists as to whether or not a new service should be included in a basket of capped services, the time required to accumulate the pertinent revenue information will provide sufficient time to resolve the issue.
|
189. Stentor proposed that re-classifying services as competitive could be done by making an application to the Commission. Removal of the service from the overall basket will have no impact on the price index for capped services until the annual PCI update. TCI proposed that the telephone company be responsible for the burden of proof that a service should be removed from the basket of services. The Commission considers that applications to remove services from the basket of capped services should take the form of a Part VII application as outlined in the Rules, and the applicant will be required to provide justification as to the basis for the request.
|
V MTS NETCOM INC. SPECIFIC ISSUES
|
|
|
190. MTS proposed a price cap plan that was essentially the same as that proposed by Stentor, except for certain differences that account for its structural and economic characteristics. MTS proposed to adopt Stentor's X-factor of 2.7%, but to reduce it to 1.5% to account for MTS' smaller size, its history and geography. This issue was dealt with in Part III, Section C of this Decision. MTS also proposed that costs relating to the Government of Manitoba's decision to privatize MTS' parent company, The Manitoba Telephone System, as well as those relating to a major provincial initiative to improve rural telephone service in Manitoba (Service for the Future) should be reflected in the price cap plan applied to MTS.
|
|
|
191. On 27 May 1996, the Government of Manitoba introduced legislation to privatize The Manitoba Telephone System. One of the objectives of privatization was to bring MTS' capital structure in line with the other Stentor-member companies.
|
192. MTS proposed that the Commission reflect the impact of all known costs of privatization in setting MTS' Utility segment going-in rates. MTS further requested that the Commission indicate in this Decision that it would reflect the impact of any unknown costs of privatization which cannot be recognized in setting the Utility segment going-in rates as an exogenous cost in setting its PCI.
|
193. CAC/MSOS submitted that any costs of privatization should be fully scrutinized in a public hearing process. MTS indicated that virtually all costs of privatization should be known prior to setting the going-in rates for the Utility segment.
|
194. The Commission is of the view that any issues related to privatization can be fully dealt with in the follow-up proceeding, rather than in a separate process which would add additional cost and administrative burden. Accordingly, the Commission will examine the impact of privatization on MTS' Utility segment during the follow-up proceeding. The Commission is of the view that in the absence of full details of the costs of privatization it would not be appropriate, in this Decision, to determine whether any unknown costs not included in the going-in rates should be treated as an exogenous factor. Therefore, any unknown financial impacts of privatization which cannot be addressed during the follow-up proceeding and which meet the criteria for exogenous treatment outlined in Part III, Section D of this Decision, may be addressed as part of the annual updates to the PCI.
|
C. Service for the Future Initiative
|
195. MTS submitted that part of its public mandate has been to provide low-priced residential and business services anywhere in Manitoba. As a result of this public mandate, the Minister responsible for MTS announced in September 1988 the Service for the Future initiative. MTS noted that this initiative will be completed in 1997. MTS further submitted that this initiative has resulted in rural rates being very heavily subsidized by revenues from other sources. MTS proposed that any unrecovered costs related to this initiative which are known, quantifiable and verifiable and which cannot be addressed during the follow-up proceeding should be treated as an exogenous variable for the purposes of setting MTS' PCI.
|
196. MTS' definition of "unrecovered" costs relates to costs not specifically recovered from customers who subscribe to the services within the Service for the Future initiative. The Commission notes that all costs associated with this initiative are expected to be incurred prior to the implementation of price caps. In addition, the Commission notes that MTS' forecast rate of return on average common equity (ROE) for the Utility segment for 1997 is expected to be within the currently-approved range. Therefore, the Commission considers that all costs associated with the Service for the Future initiative are expected to be recovered from MTS' general body of subscribers.
|
197. The Commission further notes that the definition of exogenous variables outlined in Part III, Section D of this Decision envisages a revenue shortfall/surplus caused by circumstances beyond a company's control. The Commission agrees with CAC/MSOS that MTS has not demonstrated that a shortfall has occurred or will occur as a result of the Service for the Future initiative.
|
198. In light of the above, the Commission denies MTS' request to treat costs related to the Service for the Future initiative, which cannot be addressed during the follow-up proceeding, as an exogenous variable.
|
VI SELF-CORRECTING MECHANISMS AND REVIEW PERIOD
|
199. In PN 96-8, the Commission identified a number of self-correcting mechanisms which could be used to minimize the impact of errors that may occur in setting the price cap parameters incorrectly or of distortions in the parameters that may occur due to rapid unforeseen change.
|
200. Both Stentor and TCI proposed a true price cap plan (i.e., with no earnings sharing overlay or other self-correcting mechanism). Stentor proposed a five-year price cap plan while TCI proposed a six-year plan. Other parties suggested that any approved price cap plan should be reviewed after a period ranging from two to five years.
|
201. Some interveners advocated the adoption of an earnings sharing mechanism to address concerns surrounding the difficulty of calculating an appropriate X-factor and the impact on customers and shareholders of errors in setting the productivity offset. The Consumer Coalition proposed that the telephone companies have the option of choosing either a relatively higher X-factor which would not include an earnings sharing mechanism or a lower X-factor which would include some form of earnings sharing. Stentor submitted that, if the Commission decided to adopt the Consumer Coalition proposal, its members should also have the option of choosing to remain with the current form of rate base/rate-of-return regulation.
|
202. The Commission is of the view that allowing the Stentor-member companies to operate under different regulatory regimes would complicate the regulatory process and create confusion and uncertainty in the industry. Further, in the Commission's view, any form of earnings regulation for the Stentor-member telephone companies would negate the regulatory streamlining benefits inherent in price cap regulation, since most of the details relating to the current reporting requirements would have to be maintained. Further, the Commission is of the view that an earnings sharing mechanism may run counter to the objectives of price caps by reducing a telephone company's incentive to cut costs and improve productivity.
|
203. In light of the above, the Commission considers that, rather than implementing an earnings sharing mechanism, the length of the price cap plan should be used as the only self-correcting mechanism to allow the benefits of a true price cap plan to be realized. The Commission notes that a longer price cap period would provide a greater opportunity for the benefits of price cap regulation to materialize, while a shorter price cap period would reduce the cumulative effects of any error in setting the price cap parameters.
|
204. In view of the commencement of local competition during the price cap period, the Commission's decision to freeze toll contribution during the price cap period and the fact that this is the first time for the Commission to implement price cap regulation for the telephone companies, the Commission considers that a four-year period for the price cap plan will result in an appropriate balancing of the factors noted above. Therefore, the Commission approves for the telephone companies a true price cap plan for a period of four years commencing 1 January 1998, with a review to be completed prior to the end of the period.
|
205. The Commission agrees with Stentor and TCI that the focus of a review of the price cap parameters prior to the end of the period, should be the performance of the Canadian telecommunications market in terms of pricing and the competitive nature of the industry. However, as stated in Part VIII of this Decision, the Commission is of the view that the magnitude of the contribution requirement remaining at the end of the price cap period will also need to be examined. The Utility segment financial results will therefore be one of the factors examined in re-setting the price cap parameters.
|
VII ANCILLARY REGULATION AND REPORTING REQUIREMENTS
|
|
|
206. The Commission has traditionally relied on a number of procedures, processes and ongoing reporting requirements in carrying out its mandate under rate base/rate-of-return regulation.
|
207. Currently, the Commission requires the telephone companies to file ongoing financial and operating information. The Commission is thus able to ensure that the telephone companies are earning an ROE which is within their allowed rate of return ranges, that their operating expenses are at a reasonable level, and that they are making prudent plant investments. Further, the Commission requires intercorporate transaction reports to guard against any cross-subsidies from the telephone companies' operations to those of affiliates. Phase III and cost separation studies are used to monitor against any cross-subsidies from near-monopoly to competitive services.
|
208. Both Stentor and TCI submitted that the regulatory reporting requirements established under rate base/rate-of-return regulation no longer serve any purpose under price cap regulation and should therefore be abandoned.
|
209. The Consumer Coalition recommended that the Commission maintain its current reporting requirements and identified additional requirements which it believed would be necessary for the Commission to ensure that the telecommunications policy goals of the Act are being met.
|
210. Other interveners proposed that the Commission maintain most of the current regulatory requirements only if an earnings sharing mechanism were adopted.
|
211. In Decision 94-19, the Commission concluded that price caps would allow for more efficient and effective regulation in a number of ways. The Commission noted that, among other things, price caps could eliminate the need for regulatory assessment of investment, expenses and earnings between price cap reviews. The Commission recognizes that the telephone companies will be operating in a different environment during price cap regulation and believes the telephone companies' regulatory burden should be minimized to the greatest extent possible in order to give them a reasonable opportunity to achieve the full benefits of price cap regulation.
|
212. At the same time, the Commission notes that it has a statutory obligation to ensure that rates remain just and reasonable regardless of the form of regulation adopted and considers it prudent during the first cap period to reduce the need for regulatory reporting requirements in a gradual manner, rather than all at once, as suggested by Stentor and TCI.
|
213. Furthermore, the Commission is of the view that there is a continued need for sufficient information to allow the monitoring of the price cap parameters to ensure that its objectives are being met and to review the price cap parameters at the time of the price cap review.
|
214. The following Sections outline the specific reporting requirements which the Commission has determined are necessary during the price cap period. Reporting requirements related to the PCI updates and tariff filings, contribution and depreciation are discussed in Parts IV, VIII and IX respectively, of this Decision.
|
B. Phase III/Split Rate Base Results
|
215. Currently, the telephone companies file, for a given year, annual historical Phase III/Split Rate Base (SRB) results on 30 September of the following year, along with an external Auditor's Report indicating whether the statements filed are in accordance with the assignment procedures described in the telephone companies' approved Phase III Manuals. Any proposed revisions to the methodologies used to produce these results are filed by the telephone companies for Commission approval, normally four times annually, and are subject to a public process. The telephone companies file, on a quarterly basis, any revisions to their Accounting Manuals in support of Phase III Manual revisions. The telephone companies file forward test year Phase III/SRB results annually in conjunction with the annual contribution proceeding.
|
216. As noted in Part VIII of this Decision, the Commission considers that there is a need to maintain some Phase III/SRB monitoring and reporting, in order to allow the Commission to review the magnitude of the contribution requirement remaining at the end of the price cap period. This will allow the Commission to determine what changes to contribution rates and/or local rates may be appropriate at that time.
|
217. The Commission concludes that, during the price cap period, the telephone companies are to continue to file annual historical Phase III/SRB results on or before 30 September of the following year. However, commencing with the 1996 Phase III/SRB results, the Commission finds that there is no further requirement for an external audit to be conducted.
|
218. In Telecom Order CRTC 97-144, 31 January 1997 (Order 97-144), the telephone companies were directed to file their 1995 audited Phase III/SRB results by 1 April 1997. In light of the delayed filing requirements for the 1995 Phase III/SRB results, the Commission directs the telephone companies to file their 1996 Phase III/SRB results by 31 December 1997.
|
219. In light of the number of changes required to ensure the Phase III costing system and SRB results reflect the operations of the telephone companies in providing services/products to its customers, the Commission considers it appropriate that the telephone companies file Phase III/SRB updates periodically rather than updates in aggregate at the end of the price cap period. Therefore, the Commission directs the telephone companies to file their Phase III/SRB Manual updates with the Commission either annually on 31 March, or twice a year on 31 March and 31 October, according to each company's preference. Any changes to the telephone companies' Accounting Manuals are to be filed at the same time.
|
220. Effective 30 June 1997, the telephone companies are required to file copies of their Phase III/SRB Manual updates with the Commission only, with copies to the public examination rooms. The Phase III/SRB Manual updates will be subject to a public process on a case-by-case basis, as determined by the Commission. After 60 days from the filing of the updates, unless the Commission indicates otherwise, the Phase III/SRB Manual updates are to be considered approved.
|
221. The Commission stated in Decision 95-21 that those telephone companies that have reported Phase III Access sub-category results are directed to maintain the capability of producing such results, at least until the price cap regime has been implemented. The Commission considers that there is no longer any requirement to maintain this breakdown. In addition, in view of the fact that there will be no annual contribution proceeding during the price cap period (see Part VIII of this Decision), the Commission considers that there is no requirement to file annual forward test year Phase III/SRB results. However, the Commission notes that forward test year Phase III/SRB results for the year 2001 may be required at the end of the price cap period in order to assess the contribution requirements at that time.
|
|
|
222. In Decision 95-21, the Commission stated that, during the transition period before the implementation of price caps, the telephone companies were required to identify and track, for each of the Utility and Competitive segments, all capital investment and expenses associated with Beacon and any other new broadband initiatives, i.e., for investment incurred after 31 December 1994. The telephone companies were also directed to include detailed information regarding broadband investment levels in their annual construction program review (CPR) submissions.
|
223. In Decision 95-21, the Commission also stated that, once price caps are implemented, the reporting requirements noted above may no longer be necessary. However, the Commission stated that it expected the telephone companies to retain such records as would be required for the purposes of reviewing the price cap plan at the end of the price cap period. The Commission stated that the level of detail necessary for such a review would be considered further in the price cap proceeding.
|
224. The Commission notes the concern raised in Decision 95-21, namely, that Utility segment subscribers must be protected from bearing the risk associated with the telephone companies' new broadband investments, and that, if this is not assured, the Utility segment rate base could be inflated, resulting in upward pressure on rates. However, with the implementation of price cap regulation, as noted below in Section D, the Commission considers that there is a reduced incentive for the telephone companies to inflate the Utility segment rate base with new broadband investments. Further, the Commission considers that it is unnecessary to require the telephone companies to file specific broadband costing information at the time of the price cap review as long as the procedures, set out in Order 97-144, remain in place. Accordingly, subject to the above requirements, the Commission will not require the telephone companies to file specific broadband costing information effective 1 January 1998.
|
225. Notwithstanding the above, the Commission notes Stentor's statement that the telephone companies intend to maintain investment records at the account level by vintage in any event during the price cap period. The Commission considers that this level of detail should be sufficient for review purposes, should any broadband information be required either during, or at the end of the price cap period.
|
D. Construction Program Review
|
226. Stentor proposed that the requirement of annual CPRs be eliminated once price cap regulation was implemented. However, BC TEL proposed to continue reporting on the status of provisioning of service to unserved and underserved areas under its Service Extension Program and, similarly, to report regularly on the progress of its Rural Upgrade Program until the program has been implemented. Bell proposed to file a report on the percentage of customers satisfied with the availability of facilities for new services outside the Base Rate Area, as well as the percentage of customers satisfied with the availability of facilities for service regrades outside the Base Rate Area.
|
227. In Decision 94-19, the Commission was of the opinion that, under price cap regulation, there would no longer be a need for an ongoing assessment of investment. However, the Commission considered that there may still be a need for some examination of investment in the context of price cap performance reviews, given the influence depreciation may have on prices over time and the relationship of investment to network modernization and service quality. Having reviewed the evidence in this proceeding, the Commission remains of the view that the incentive to over-invest under price cap regulation is reduced and therefore, there is no longer a need to require reports to assess the telephone companies' levels of investment during the price cap period. Therefore, the telephone companies will not be required to file annual construction program submissions beginning in 1998.
|
228. Notwithstanding the above, in order to assess any changes that may be required to capped service rates after the initial price cap period, the Commission may require the telephone companies to file forecast Utility segment capital plans at the time of the price cap review.
|
229. The Commission agrees with the concerns raised by B.C. and CAC/FNACQ/NAPO regarding reductions in capital investment in unserved and rural areas of BC TEL's territory, and therefore accepts BC TEL's proposal to continue filing annual progress reports for its Service Extension and Rural Upgrade Programs until completion. The Commission also accepts Bell's proposal to report on customer satisfaction with respect to availability of facilities for new services/service regrades outside its Base Rate Area.
|
|
|
230. In order to assist the Commission in monitoring financial performance, the telephone companies have traditionally filed, in confidence, yearly financial forecasts and monthly year-to-date actual financial results along with explanations for significant variances. Commencing with 1996, these financial reports were filed on a quarterly rather than on a monthly year-to-date basis. The telephone companies were also requested to file other information, such as planned tariff filings, demand and productivity data, and a description of the general economic outlook and major underlying assumptions used to produce its forecasts.
|
231. The Commission considers that the focus during price cap regulation should be on the level of prices and the development of competition in the local exchange market. However, as discussed in Part VI of this Decision, the Commission is of the view that Utility segment results will be one of the factors examined during the review of the price cap parameters given that the magnitude of the contribution requirement remaining at the end of the price cap period will need to be examined.
|
232. The Commission also recognizes that the telephone companies will be operating in a different environment during price caps and is of the view that financial performance for any particular year should not be examined in isolation to determine whether the price cap parameters result in just and reasonable rates.
|
233. In light of the above, the Commission considers that the requirement to file yearly financial forecasts and quarterly year-to-date actual financial results can be further streamlined. Therefore, the telephone companies will only be required to file with the Commission actual financial results for the Utility and Competitive segments on a semi-annual year-to-date basis. This information is to be filed 45 days after the end of each period, in the format provided in Attachment B of Decision 95-21.
|
F. Intercorporate Transactions
|
234. The Commission has recently reviewed intercorporate transactions policies, rules and procedures under the current rate base/rate-of-return regulation in a separate proceeding which led to Review of Intercorporate Transactions Policies, Rules and Procedures, Telecom Decision CRTC 97-5, 21 March 1997 (Decision 97-5). In that Decision, the Commission reduced the regulatory burden of the telephone companies by, among other things, eliminating intercorporate transactions rules and procedures relating to the telephone companies' Competitive segments.
|
235. The Commission is of the view that the telephone companies' regulatory burden should be streamlined as much as possible during the price cap period in order for them to achieve the full benefits of price cap regulation. In this regard, the Commission finds that the intercorporate transactions requirements approved in Decision 97-5 can be further streamlined.
|
236. Therefore, the telephone companies will be required to file with the Commission intercorporate transactions reports relating to the Utility segment or integral affiliates and non-integral affiliates, as prescribed in Parts II and III of Decision 97-5, on a semi-annual basis. The remaining directions outlined in Decision 97-5 relating to the telephone companies are no longer applicable. These changes are effective beginning with the year 1998.
|
237. The telephone companies are required to file the above-noted information for the six-month report by 1 October of each year and the annual report by 1 April of the following year.
|
G. Phase I Directives (Excluding Depreciation)
|
238. In Inquiry into Telecommunications Carriers' Costing and Accounting Procedures - Phase I: Accounting and Financial Matters, Telecom Decision CRTC 78-1, 13 January 1978 (Decision 78-1), the Commission established, among other things, a number of accounting and costing directives known as the Phase I Directives. These Phase I Directives were initially established to (1) recognize the need for greater consistency in matching revenues to expenses through uniform accounting practices and procedures, and (2) make meaningful comparisons among the various carriers.
|
239. Since Decision 78-1 was issued, the Commission has updated these Phase I Directives in various decisions and has also prescribed a number of regulatory accounting procedures in the context of other proceedings.
|
240. Both Stentor and TCI proposed that, during the price cap period, the Commission not direct the telephone companies to continue using Phase I Directives. Instead, in the price cap regime, Stentor and TCI proposed to follow Generally Accepted Accounting Principles (GAAP) in accounting for such items.
|
241. The Commission is of the view that, with the change to price cap regulation, some of the Phase I Directives and those accounting procedures derived after the Phase I Directives may not conform with GAAP for financial reporting purposes since the link between prices for services and the underlying costs may be difficult to establish.
|
242. The Commission has decided to allow the telephone companies to use GAAP for regulatory reporting purposes. However, the telephone companies are required to inform the Commission of any changes during the price cap period to their accounting practices which deviate from current Phase I Directives and those accounting procedures derived after the Phase I Directives, along with the financial impact of any such changes on the company's Utility segment. The Commission will notify the telephone companies in the event that it wishes to review these accounting change proposals for regulatory purposes.
|
H. Total Factor Productivity Data
|
243. All of the telephone companies, with the exception of NBTel and NewTel, provided company historical TFP data. The Commission is of the view that all of the telephone companies, including NBTel and NewTel, should be prepared to provide the Commission, at the end of the review period, annual total company TFP results for the period 1995 to 2000, calculated in a manner consistent with the method of calculating productivity approved in this Decision.
|
I. Local Competition Review
|
244. TCI proposed that the Commission conduct a review of the state, extent and intensity of competition in the local telecommunications market during the price cap period. Under TCI's proposal, the Commission would collect and analyze data from incumbent telephone companies, new entrants, suppliers and foreign jurisdictions. With this information, TCI considered that the Commission would have the necessary tools, at the end of the price cap period, to assess whether the price cap parameters had been set properly, and realign or correct them, if necessary.
|
245. Stentor supported TCI's competition review proposal.
|
246. Most interveners agreed that the Commission should review the state of competition at the end of the price cap period, but objected to the suggestion that the Commission should collect as much data as TCI recommended. They were of the view that TCI's review (1) was intrusive, (2) would increase the regulatory burden, (3) would be costly, (4) would mainly benefit incumbent telephone companies, and (5) would deter competitive entry. Calgary also stated that deciding the scope and nature of the review going into price caps was premature.
|
247. In the Commission's opinion, an important goal of price cap regulation is to reduce the regulatory burden. While the Commission agrees that it will need to assess the competitiveness of the local market at the end of the price cap period, it does not consider that a regulatory process as extensive as the one proposed by TCI is warranted. The Commission also agrees with Calgary that it is premature to decide the nature and the scope of such a review in the present proceeding.
|
248. At the same time, the Commission is cognizant that it will need a certain amount of information to review the price cap plan at the end of the price cap period. In this regard, the Commission notes that the telephone companies' service-by-service review to classify new services or re-classify existing ones will provide some evidence on the competitiveness of the local market. In addition, the Commission plans to monitor the evolution of competition by requiring the filing of information with respect to, among other things, the number of residential NAS served by each Local Exchange Carrier (LEC), by band, as described in Part VIII below.
|
VIII RATE REBALANCING AND CONTRIBUTION
|
|
|
249. In Decision 94-19, the Commission stated that price regulation would not produce anticipated benefits, such as reduced regulation and increased incentives to reduce costs, until rates were closer to costs.
|
250. In Decision 95-21, the Commission commenced its rate rebalancing initiative. The process entailed three annual increases in rates for local service, with corresponding decreases in rates for toll contribution. The Commission ordered a monthly rate increase of $2 for basic residential local services for each of the years 1996 and 1997. The Commission also stated that it would consider the magnitude of the third round of rate rebalancing in this proceeding.
|
251. In PN 96-8, the Commission invited comments on the amount of, and the criteria to evaluate, the third round of rate rebalancing. The Commission also asked parties whether further local rate increases beyond the third round of rate rebalancing would be necessary and, if so, how these increases should be dealt with under price cap regulation.
|
252. In PN 96-8, the Commission also stated that, under price cap regulation, any contribution mechanism should be: (1) streamlined to the extent possible; (2) sustainable during the evolution to a more competitive marketplace; and (3) simple to administer and update on a going-forward basis without the requirement for an annual contribution proceeding.
|
253. The Commission further stated that, to the extent that the third rebalancing amount does not fully recover the local/access shortfall, an issue to be considered in this proceeding will be how the remaining shortfall should be recovered under price cap regulation.
|
|
|
254. Stentor submitted that, while full rate rebalancing should precede price cap regulation, it could not be achieved in one step in 1998. The telephone companies proposed monthly rate increases for residential and business local services, ranging between $2 and $3, to take effect on 1 January 1998, along with corresponding reductions in toll contribution rates. Stentor maintained that these increases would significantly reduce the gap between local rates and costs and move rates to more rational levels. Stentor also stated that the proposed increases took into account customer rate shock and served to reduce toll contribution rates to more sustainable levels.
|
255. Stentor did not propose further explicit rate rebalancing during the price cap period. Stentor proposed that rates for basic residential local services be constrained by inflation plus a company-specific increase factor necessary to achieve the telephone companies' needs. Stentor submitted that this proposal would provide the telephone companies with the pricing flexibility necessary to restructure and rationalize rates within the basket of capped services to offset the increases. Thus, rather than reducing toll contribution rates by an amount equivalent to local rate increases, the telephone companies would have the flexibility to reduce any source of contribution for capped services that they deemed was most appropriate to respond to competitive entry in the local market.
|
256. TCI proposed to freeze its going-in rates for two years at the 31 December 1997 levels if the Commission approved the company's then pending application for general rate increases. If the Commission denied TCI's general rate application, the company proposed to increase its monthly rates for basic residential local services by $5, as its third round of rate rebalancing, subject to market conditions.
|
257. TCI further proposed one basket of capped services and that rates for residential basic local services, within that basket, be allowed to increase, on average, by no more than the rate of inflation plus 1%, starting in the third year of the plan and for the remaining years of the price cap period. In addition, TCI proposed to reduce toll contribution rates by an amount equivalent to revenues from rate increases for basic residential local services.
|
258. AT&T Canada LDS, CCTA and CAC/FNACQ/NAPO were opposed to both Stentor's and TCI's plans. AT&T Canada LDS submitted that toll contribution rates had to be reduced to a level of 0.5 cents per minute before other sources of contribution were reduced. For AT&T Canada LDS, while the long distance market was almost effectively competitive, it was too early for the Commission to give telephone companies total flexibility to target the source of contribution that best suited their competitive interest. In AT&T Canada LDS' view, introducing local competition at the expense of the inroads made in the long distance market would be counter-productive.
|
259. AT&T Canada LDS maintained that local rate increases had to be offset by equivalent toll contribution rate reductions. The company proposed that the rates for basic residential local service be increased by at least $3 going into price caps. It also recommended that toll contribution rates be ramped down by 20% from the previous year, for five years, and that telephone companies be allowed, if they chose to do so, to increase their residential rates by an amount proportionate to the scheduled 20% reduction. AT&T Canada LDS submitted that, once toll contribution rates are at or below a sustainable level of 0.5 cents per minute, other sources of contribution could be reduced proportionately with the remaining toll contribution rates. The company considered that toll contribution rates should only be at a level sufficient to implement a targeted subsidy program, if necessary.
|
260. CCTA, while not specifying an appropriate amount for the third round of rate rebalancing, submitted that any rate increase for basic residential local services should be passed on, dollar for dollar, to toll customers in the form of rate reductions.
|
261. CCTA proposed three service baskets segregated by types of services each subject to the PCI. To prevent the telephone companies from cross-subsidizing services where competitive entry occurred with increases in bands where subscribers had no competitive alternatives, CCTA proposed that the residential basket be subject to a separate upper price ceiling of 5% above the PCI for each of the telephone companies' service bands. For the business basket, CCTA proposed a one-time rate restructuring plan prior to price caps. If the Commission did not adopt the one-time rate restructuring plan, CCTA submitted that the business basket be also subject to an upper price ceiling of 5% by band.
|
262. CAC/FNACQ/NAPO proposed that rates for basic residential local service be frozen at the 1997 levels for the first three years of the price cap period. They further contended that, if the Commission ordered a third round of rate rebalancing, the monthly increase should be no greater than $2 and that the revenues generated should be used to reduce low volume residential toll rates, so as to maximize the number of ratepayers who would experience some offsetting rate reductions. CAC/FNACQ/NAPO also proposed limits on the telephone companies' pricing flexibility to prevent inelastic services from subsidizing elastic services.
|
|
|
263. The Commission considers that the price cap plan must find the proper balance between greater reliance on market forces, both in the local and long distance market, and the necessity to maintain affordable service. Basic telephone service should remain affordable as local competition evolves and traditional subsidy sources are eroded.
|
264. In Decision 97-8, the Commission stated that a certain level of contribution must be maintained to ensure that local exchange rates in high cost areas permit continuation of universality of access while minimizing distortion of the competitive market. The Commission noted that local competition is expected to erode the implicit subsidy that currently flows from contribution-generating local services, such as optional local and some business services, to basic residential local service, both through market share loss and downward pressure on rates. As a result, the Commission determined that, at least for the price cap period, toll contribution will remain the only explicit source of subsidy for basic residential local services.
|
265. In Decision 97-8, the Commission concluded that, in order to maintain an adequate overall source of contribution revenue, given that competition will be emerging in the local services market, the contribution rates will be frozen for all the telephone companies at the going-in rates, effective 1 January 1998, for the price cap period. However, in the case of TCI, the Commission notes that, as discussed in Part X of this Decision, TCI's contribution rate is generally higher due to its income tax situation. As a result, the Commission considers it appropriate that, when the shareholder entitlement is completely amortized in 1998, TCI's going-in contribution rate be reduced accordingly and frozen for the remainder of the price cap period.
|
266. In determining the level at which IX toll contribution should be maintained, the Commission considers it appropriate to set targets towards which toll contribution rates are to move at the start of the price cap period. In the Commission's view, these targets should not hinder the implementation and the growth of an effective competitive market and should generate sufficient revenues to maintain rates for local service that permit continuation of universality of access in high-cost areas.
|
267. In light of the above considerations and to further reduce the cross-subsidy from toll services to basic residential local services, the Commission considers that the telephone companies should be allowed a basic residential local service weighted-average rate increase of up to a maximum of $3 at the start of the price cap regime. The telephone companies are therefore directed to file applications to restructure their basic residential local service rates in the follow-up proceeding discussed in Part XI of this Decision.
|
268. The additional revenues arising from the above-noted applications cannot exceed the revenues required to offset the items noted below. These additional revenues will first be used to reduce toll contribution rates to no less than 2 cents per minute, where they will be frozen for the duration of the price cap period (except for TCI as discussed earlier). If the rate increase for basic residential local service is not sufficient to reduce toll contribution rates to the 2 cent level, telephone companies' toll contribution rates will be frozen for the duration of the price cap period at the level attained with the $3 weighted-average rate increase. Any revenues not required to reduce the contribution rates to the 2 cent level will be used to reduce or eliminate any going-in revenue requirement shortfall for the telephone companies. Based on the evidence provided by the telephone companies in this proceeding, the Commission expects that most of the telephone companies will be able to fully implement the rate increases referenced above.
|
269. In light of the fact that the Commission is freezing toll contribution rates effective 1 January 1998, and that the rates for basic residential local service in aggregate can increase annually up to the rate of inflation during the price cap period (see Part IV of this Decision), there will be no further mandated rate rebalancing during the price cap period following the maximum $3 weighted-average rate increase effective 1 January 1998. Among other things, the Commission will consider, during the review period, whether the toll contribution rate targets, to be established in the follow-up proceeding, are appropriate.
|
270. The Commission considers that this mechanism will streamline the regulatory process by eliminating the need for annual contribution proceedings. In addition, in the Commission's view, this approach provides some certainty for the telecommunications investment market with respect to some of the costs of providing telecommunications services.
|
271. The Commission notes that some interveners, such as CAC/FNACQ/NAPO and CCTA, proposed that mandated local rate increases be offset by long distance rate reductions. Given the level of competition and market forces that exist in the toll market, the Commission considers that such an approach would detract from reliance on those market forces. Therefore, the Commission concludes that long distance rate reductions will not be mandated to offset local rate increases.
|
D. Reporting Requirements
|
272. As discussed in Decision 97-8, the Commission notes that, with entry in the local services market by competitive local exchange carriers (CLECs), the interexchange carriers (IXCs) will pay toll contribution to the CLECs as well as to the Incumbent Local Exchange Carriers (ILECs). In order to streamline the administration of this process, the Commission expects that all contribution will be remitted to a central fund administrator/clearing house and paid to the LECs based on the number of residence NAS that they serve in high-cost bands and the toll contribution available per NAS. Until the central fund administration is established, the ILEC's will serve as the fund administrators in their respective territories.
|
273. To monitor the evolution of competition in the local and toll markets under the new contribution regime, the Commission will require that the following quarterly information be filed by the fund administrator within 60 days of the end of each quarter for each ILEC's respective territory: (1) originating and terminating toll conversation minutes by peak and off-peak; (2) the total amount of toll contribution paid to the LECs by the IXCs; (3) the amount of toll contribution due the LECs; and (4) the number of residential NAS served by LEC by band.
|
274. The Commission further considers that certain periodic reporting of accounting information, as described in Part VII of this Decision, will be required from the telephone companies in order to allow the Commission to review the magnitude of the contribution requirement remaining at the end of the price cap period.
|
|
|
|
|
275. As discussed in Section C above, the toll contribution rate will be frozen during the price cap period. As a result, toll contribution rates will be a separate tariffed rate outside of any service basket and will not be subject to the PCI.
|
276. In 1996 Contribution Charges, Telecom Decision CRTC 96-11, 10 December 1996 (Decision 96-11), the Commission stated that the follow-up proceeding to set the going-in rates will also finalize the 1997 contribution rates. In order to reduce the contribution rates as much as possible prior to the implementation of price caps, the Commission has directed the telephone companies, in Part IX of this Decision, to use the depreciation life characteristics approved as of the date of this Decision in calculating their 1997 contribution rates.
|
2. Bell's Final 1996 Contribution Rate
|
277. In Decision 96-11, as amended by Telecom Decision CRTC 96-11-1, 16 December 1996 (Decision 96-11-1), the Commission approved the 1996 contribution rate of $0.0236 per minute for Bell (as set out in Attachment A of Decision 96-11-1) on an interim basis. The Commission stated that Bell's 1996 contribution rate would remain interim until a decision had been rendered in this proceeding with respect to appropriate depreciation life characteristics. In light of the determinations made in Part IX, Section C of this Decision, the Commission gives final approval to Bell's 1996 contribution rate as shown in Attachment A of Decision 96-11-1.
|
|
|
278. The Commission notes that TELUS Communications (Edmonton) Inc. (TCI Edmonton) was not a party to this proceeding. However, given that TCI Edmonton will not be under price cap regulation effective 1 January 1998, and given the contribution mechanism approved in Contribution Regime in Alberta, Telecom Decision CRTC 95-22, 27 November 1995, the Commission notes that TCI Edmonton's contribution rate will have to be recalculated annually and combined with TCI's contribution rate to derive a blended Alberta rate. The Commission intends to initiate a separate annual contribution proceeding during the price cap period for TCI Edmonton in order to derive the blended Alberta rate.
|
|
|
279. In Decision 95-21, the Commission froze NewTel's toll contribution rate at the level set in 1994. The Commission stated that the freeze would be removed once the company's Utility segment ROE was forecast to equal or exceed the midpoint of the company's approved ROE range, or would be reviewed with the implementation of price caps.
|
280. The Commission notes that, in the evidence provided during this proceeding, NewTel's Utility segment ROE forecast for 1997 is approaching the midpoint of its approved ROE range. The Commission therefore considers it appropriate to remove the freeze from the company's contribution rate prior to the implementation of price caps. Based on the evidence filed in this proceeding, the Commission is of the preliminary view that removal of the freeze should be effective 1 January 1997. A final determination will be made in the follow-up proceeding discussed in Part XI of this Decision.
|
IX DEPRECIATION AND RELATED ISSUES
|
|
|
281. The Commission has developed its depreciation policy and practice within the Phase I Directives. The Directives were designed to promote intergenerational equity between customers. The main thrust of the Directives is to recover the investment in plant and equipment equally over its useful service life.
|
282. The Commission has issued specific directives on the procedures to be used by the carriers to determine how depreciation rates are calculated and how to account for over/under accruals. To date, the Commission has encouraged carriers to develop depreciation life characteristics based on their own particular circumstances. The Commission has emphasized two main factors when determining depreciation life characteristics: historical retirement patterns and future expectations.
|
283. During this proceeding, the Stentor companies maintained that, due to competitive and technological factors, there is a need to substantially reduce the service lives of their existing plant prior to the implementation of price caps. This gives rise to a DRD as the recovery of the value of the assets to date would be less than what would have been recovered had the proposed service lives been implemented when the assets came into service.
|
B. Factors Impacting on Appropriate Depreciation Life Characteristics
|
1. Effect of Local Competition on Service Life Estimates
|
284. Stentor estimated that the telephone companies' local subscriber line loss would be 15%, on average, by 2002. The forecast of losses was based on the assumption that the rules for both local interconnection and price caps would be established in accordance with the proposals put forward on behalf of the telephone companies.
|
285. Stentor argued that it is important, when examining depreciation lives, to look at future markets and the effect of competition on revenue generation. Stentor contended that, if regulation fails to take into account the effect of competition and prescribes depreciation rates that are inadequate when future revenue will be constrained by competition, then capital recovery will be denied.
|
286. Stentor argued that competition in local markets has a significant impact on the viability of existing technology. Stentor submitted that in a monopoly market, the incumbent need not move immediately to introduce new generations of technology and may indeed skip generations, thus producing a lower overall cost of service while delaying the provision of new features. Stentor submitted that competition has the effect of making the life cycle of an asset much closer to its technological life cycle. In Stentor's view, if a competitor deploys a new generation of technology, all suppliers in the marketplace must match it or suffer a competitive disadvantage, which leads to a shortening of asset life cycles in a competitive market.
|
287. In its assessment of the effect of competition, CCTA stated that the actual development of local competition is expected to be a lengthy process, even after the rules have been established. CCTA noted that telecommunications experts in the U.S. have predicted a period of at least 10 years for effective competition to develop, particularly for residential and small business customers. CCTA submitted that the reasons for the slow evolution of a competitive market include (1) the continued subsidization of local service, (2) significant technical barriers to entry, including the fact that some technology platforms for the provision of competitive local telephony (such as number portability) remain in testing phases and have not yet reached the marketplace, and (3) interconnection and unbundling requirements for the provision of competing local service are more complicated than for enhanced and long distance services.
|
288. The Consumer Coalition noted that the shorter depreciation service lives claimed to be necessary by the telephone companies are premised on their particular view of the development of local competition and new technology. The Consumer Coalition argued that the basis for the higher rates of depreciation was highly suspect, i.e., the technological forecast was unreasonable, and the forecast technological changes required to meet competition and service demands are not necessary to provide the basic services required by ordinary subscribers.
|
289. As noted in Part III of this Decision, the Commission does not share the Stentor companies' views regarding the pace at which competition will unfold in the local market, at least during the initial price cap period. In order for the Commission to assess the depreciation studies to be filed during the follow-up proceeding for each account, the telephone companies have been requested, in interrogatories dated 1 May 1997, to indicate the impact of varying market share loss estimates on each company's DRD as of 1 January 1998. The telephone companies have also been requested to file with the Commission the historical data used in each depreciation study.
|
290. Further, the Commission directs that the telephone companies' depreciation life characteristics approved as of the date of this Decision, including approval of Bell's proposed 1996 depreciation life characteristics on a final basis, as set out in Section C below, be used to determine the depreciation expense component of their 1997 financial forecasts. Any proposed changes to depreciation life characteristics introduced during the follow-up proceeding, and the consequent impact on the depreciation reserve deficiency/surplus, will be taken into account in setting the going-in rates for price caps on 1 January 1998.
|
2. Asset Lives Driven by Broadband Investment
|
291. In Decision 95-21, the Commission considered that Utility segment subscribers should be protected from the impact of the Stentor companies' broadband initiatives, and therefore, it was not prepared, in general, to approve increases in depreciation expense that arise solely from the telephone companies' investment in broadband facilities. However, the Commission was of the opinion that there are circumstances which may arise during the transition to price caps where changes in depreciation life characteristics are warranted, independent of any broadband initiatives.
|
292. AT&T Canada LDS argued that in proposing to shorten Utility segment asset lives prior to price caps and estimating a significant DRD as of 1 January 1998, the companies have failed to address the Commission's concerns in Decision 95-21 respecting the impact of new fibre deployment on Utility subscribers. Moreover, AT&T Canada LDS submitted that, because the forecast demand for broadband services is the driving force for the deployment of fibre in the network and the shortening of Utility segment asset lives, Stentor's DRD proposal also fails to meet the tests established in Decision 95-21 for determining whether changes to Utility segment depreciation life characteristics are appropriate. In AT&T Canada LDS' view, neither Stentor nor its witness, Dr. L. Vanston of Technology Futures Inc. (TFI), provided any evidence to demonstrate that fibre is currently the most cost-effective technology for the provision of Utility narrowband services.
|
293. In argument, CCTA outlined the test that in its view must be satisfied before ratepayers be required to bear the costs of accelerated depreciation; either historical mortality information must support the acceleration of depreciation or evidence of a reasonable expectation of technological obsolescence must exist. In CCTA's view, this test has not been met by the telephone companies in this proceeding. Referring to the Commission's determinations in Decision 95-21, CCTA noted that the Utility segment subscribers are to be isolated from the impact of the Stentor companies' broadband competitive ventures.
|
294. Similar points were raised by B.C. and the Consumer Coalition during argument.
|
295. In reply argument, Stentor submitted that the Commission should ensure that its policy enunciated in Decision 95-21 does not have the unintended effect of preventing or discouraging deployment of the most up-to-date technology for Utility segment subscribers. Stentor noted that the Commission has not impeded the development of new technology in the past and Canadian customers, in particular Utility segment subscribers, have benefited from an advanced public switched telephone network. Stentor submitted that acceptance of interveners' arguments to deny recovery of past prudent investments would discourage future investment. Stentor further submitted that the companies' position regarding the shortening of lives of its existing narrowband plant is premised on sound reasoning and realistic assumptions with respect to the future local market in which they will participate.
|
296. A number of interveners provided evidence suggesting that the use of fibre optic cable in the access network is not required and that the continued use of paired copper is all that is necessary to provide service to customers.
|
297. The Commission considers that the evolution of technology has enhanced the service quality and features available to customers. The introduction of new switching technology has provided improved service quality and additional features. Furthermore, the Commission notes that fibre optic digital transmission technology provides advantages over paired copper facilities in many areas, particularly in the case of interexchange and feeder transmission facilities. As with any new technology, digital fibre transmission facilities have the potential to provide a broader range of services than paired copper. Fibre cable multiplexed in a narrowband format is a new and evolving technology that brings the advantages of digital technology closer to the customer.
|
298. In the Commission's view, the deployment of narrowband multiplexed fibre transmission in the feeder portion of the access network is appropriate from a cost and service quality perspective.
|
3. Relevance of Depreciation Life Characteristics Used in Other Jurisdictions
|
299. In argument, AT&T Canada LDS stated that the same factors that are currently driving the extent and pace of changes in technology in the U.S. are manifest in Canada. AT&T Canada LDS suggested that a comparison of the asset lives proposed by Stentor versus those adopted by the Federal Communications Commission (FCC) would therefore be of assistance to the Commission. In AT&T Canada LDS' view, the FCC's prescribed lives provide a more objective and realistic benchmark for assessing Stentor's proposed asset lives.
|
300. Stentor noted that the majority of FCC life ranges (22 of 30 accounts) were released in June 1994 and are based on FCC service life prescriptions covering the period 1990 to 1992 (the other eight were released in May 1995 and are based on FCC life prescriptions covering the period 1991 to 1993). Stentor noted that these lives have not been recently updated, and that they do not reflect the needs of the U.S. LECs, all of which have deemed it appropriate to reflect more realistic economic lives of their network assets on their financial books. In Stentor's view, with impending competition and convergence, a more realistic and objective benchmark for the telephone companies' proposed asset lives would be obtained by comparisons with the U.S. long distance carriers. Stentor submitted that the lives proposed by TFI provide a more realistic benchmark than those proposed by the FCC.
|
301. While service life estimates from independent studies (e.g., TFI's study based on the Fisher-Pry model) or other jurisdictions are useful as a guide in developing depreciation service life estimates for the telephone companies, it is the Commission's view that the circumstances of each individual carrier should be taken into account when determining appropriate depreciation service life estimates. In the Commission's opinion, service life analysis must be a balance between historical data and an assessment of the future, the latter being based on the companies' plans which are primarily driven by technology and customer demand. In the Commission's view, the Phase I Depreciation Directives provide appropriate guidance in determining depreciation service life estimates prior to the implementation of price caps.
|
C. Appropriateness of Bell's Depreciation Life Characteristics
|
|
|
302. In Telecom Order CRTC 96-1122, dated 9 October 1996 (Order 96-1122), modified by Telecom Order CRTC 96-1122-1, 15 October 1996 (Order 96-1122-1), the Commission approved, on an interim basis, certain of the depreciation life characteristics proposed by Bell. The Commission also noted that the depreciation life characteristics listed in Table 2 (of Order 96-1122-1) warranted further review during the proceeding initiated by PN 96-8.
|
303. In argument, Stentor included Bell's comments on the proposed depreciation life characteristics set out in Table 2 of Order 96-1122-1. Bell noted that Digital Multiplex Systems (DMS) switching is a modular technology that has evolved gradually over time and that, in the short term, the major driver of DMS retirements is not the substitution by new technology, such as Asynchronous Transfer Mode (ATM) Switching, but rather internal DMS modular evolution. Bell also stated that ATM switches will be installed by the companies and/or competitors to provide broadband capability and, as this network is expanded, cost pressure will eventually result in the migration of narrowband services to the ATM platform. According to Bell, whether this migration is to the network of the company or that of a competitor, the economic value of DMS technology will have been exhausted.
|
304. With respect to the average service life (ASL) for outside plant copper cables, Bell noted that the rate at which new technology is developed and made available to the industry is an important factor in assessing the life of copper. However, Bell added that its significance needs to be understood relative to its rate of implementation and roll out which are influenced by other drivers such as new services, customer demand and competition. Bell was of the view that there is compelling evidence to demonstrate that all of the necessary drivers will materialize in sufficient strength over the next several years to hasten the demise of copper plant.
|
305. In arriving at its conclusions with respect to the composite ASL for Central Office Equipment (COE) - Transmission Equipment, Bell noted that most of the interlinked drivers that support life reductions for DMS and outside plant copper are also present to support decreased lives for COE - Transmission Equipment. Bell considered the recent introduction of Synchronous Optical Network protocol to be a major driver of transmission lives.
|
306. In argument, CCTA contended that Bell is over-estimating the penetration of fibre in the access network and is placing too much reliance on the TFI analysis. CCTA also contended that the historical data related to DMS switching does not support Bell's proposed depreciation service lives. CCTA pointed out that when the transaction band is extended from the years 1991-1993 to include 1992-1994, the historical service life moves from the 14 to 16-year range to the 16 to 19-year range. In CCTA's opinion, this analysis indicates that the service life should be extended rather than shortened.
|
307. CCTA noted that Bell, in its 1995 depreciation study, proposed to reduce the ASL for the account COE - Common Equipment based on the survivor curve for underground copper cable. Based on its analysis of Bell's proposed treatment of copper plant, CCTA recommended that the proposal to reduce the ASL to 21 years in 1996 should be denied.
|
308. The Commission recognizes two major trends in Bell's service life analysis of its digital switching and paired copper transmission technology. The first relates to the continued upgrading of the components within the digital switches which decreases the service life of the individual components. However, the Commission also notes that replacing individual components prolongs the service life of the complete switching machine. The second trend is the deployment of fibre-based digital transmission technology. The inter-exchange transport network in Bell is now 90% fibre-based digital transmission technology. Digital fibre technology continues to be deployed in the access feeder network as a replacement for paired copper.
|
|
|
a. Account 221.7-500 (577C) Multiplex System - Local
|
309. Bell requested a service life reduction of 1.5 years for its local DMS switches in 1996 to 18 years. The dispersion is changed from a GM-5 to an Iowa R-2. Using a least squares mathematical fit, Bell noted that the 1991 to 1993 experience band indicates a 14 to 16-year service life. The 1992 to 1994 experience band indicated a 16 to 19-year service life.
|
310. In the Commission's view, the mortality data for both experience bands referenced above is supportive of Bell's proposed 18-year service life and an Iowa R-2 dispersion. Accordingly, the Commission approves for 1996 Bell's proposed depreciation life characteristics for this account.
|
b. Account 221.7-600 (377C) Digital Multiplex System - Toll
|
311. Bell combined Account 577C Local and Account 377C Toll for mortality-analysis purposes. Account 377C Toll comprises approximately 10% of the total investment in the two accounts. In effect, one set of common life characteristics has been developed for these two accounts.
|
312. The Commission considers that the analysis for Account 577C, which produced an 18-year service life and an Iowa R-2 dispersion, is also applicable to Account 377C, and therefore approves the proposed depreciation life characteristics for 1996 for this account.
|
c. Account 221.8-100 (107C, 407C) COE - Common Equipment
|
313. This account includes the equipment required to terminate paired copper cable plant entering a Central Office.
|
314. The Commission notes that the observed retirements indicate a very long service life that is unrealistic for the future, considering that the transition from paired copper feeder to fibre feeder is becoming more predominant.
|
315. The service life of distributing frames will ultimately be controlled by the service life of the paired copper cables that are connected to the protector assemblies. Bell proposed to use the service life of underground cable as a proxy for protector equipment and main frames.
|
316. In the Commission's opinion, this approach is reasonable, considering the reliability of the current main distributing frame/intermediate distributing frame retirement data. The Commission finds reasonable and approves Bell's proposed 21-year, Iowa R-2 depreciation life characteristics for 1996 for this account.
|
d. Account 242.1 (2C, 12TC, 22C, 32C, 82C, 832C) Aerial Cable - Metallic
|
317. The historical analysis for this account indicated a service life in the range of 29 to 31 years. Bell indicated that the historical analysis for this account is not indicative of its future service life. In Bell's opinion, while new services and competition were among the factors that reduced the service life of paired copper, the main factor was evolving technology.
|
318. In the Commission's opinion, fibre-based digital transmission technology will continue to move further out into the network as service demand and technology develop, shortening the service life of paired copper plant. Therefore, the Commission finds reasonable and approves Bell's 21-year, Iowa R-2 service life estimate for 1996 for this account.
|
e. Account 242.2 (5C, 15TC, 25C, 85C, 815TC) Underground Cable - Metallic
|
319. Bell proposed to reduce the service life of this account by 10 years. Bell stated that the historical analysis for this account indicated service lives in excess of 47 years extending to a maximum of 100 years. In Bell's opinion, the historical analysis for this account is not indicative of the future service life of the plant. Approximately 70% of Bell's underground cable is used as feeder.
|
320. Bell's interexchange transport network currently comprises 90% fibre and 10% paired copper; the 10% copper in the interexchange transport network represents 30% of the plant in this account.
|
321. In the Commission's view, the majority of plant in this account will face retirement in the near term as fibre-based digital technology moves closer to the customer and the modernization of the interexchange transport network is completed. Accordingly, the Commission finds reasonable and approves Bell's 21-year, Iowa R-2 depreciation life characteristics for 1996 for this account.
|
f. Account 242.3 (65C, 75TC, 175TC, 265C, 865C, 775TC, 875TC) Buried Cable - Metallic
|
322. Bell's historical analysis for this account indicated a service life in the order of 27 years. The maximum service life experienced was over 45 years. Approximately 75% of the cable in this account is used in the feeder portion of the access network with the remainder in the distribution portion.
|
323. As in the case of the previous account (Underground Cable - Metallic), the Commission is of the view that the majority of the plant in this account will face retirement earlier as fibre-based digital technology moves closer to the customer. Accordingly, the Commission finds reasonable and approves Bell's 21-year, Iowa S-1 depreciation life characteristics for this account for 1996.
|
g. Account 242.4 (55C, 855TC) Submarine Cable - Metallic
|
324. Bell's study indicated that the historical service life of this account is in the range of 27 years and extends as far out as 45 years. Approximately 55% of the plant serves as feeder, 35% serves as distribution and 10% serves as inter-office transport.
|
325. For the reasons outlined above for the other cable accounts, the Commission finds reasonable and approves Bell's 21-year, Iowa R-2 depreciation life characteristics for this account for 1996.
|
|
|
326. In approving Bell's proposed depreciation life characteristics for 1996 for the seven accounts listed above, the Commission notes the company's position that its depreciation studies for these accounts support much shorter average service lives than those requested (e.g., in the case of Account 242.2 - Underground Cable - Metallic, Bell's depreciation study result indicates an ASL of 14 years). Under Bell's proposal, the ASLs are to be reduced over a three-year transition period due to financial constraints.
|
327. As noted earlier, the Commission is of the view that competition in the local market will not unfold at the pace anticipated by the telephone companies. Accordingly, the Commission has concerns with the future ASLs proposed by Bell for these accounts. However, the Commission considers the requested ASLs for 1996 to be reasonable. Any further proposed changes to depreciation life characteristics for Bell, and the other Stentor-member companies, will be assessed as part of the follow-up proceeding.
|
D. Allocation of Over/Under Accruals Between Utility and Competitive Segments
|
328. TCI claimed that the total company DRD is a direct result of rate-of-return regulation and therefore should be recovered from the Utility segment under price cap regulation. The other Stentor-member companies have allocated their over/under accruals between the Utility and Competitive segments.
|
329. In TELUS Communications Inc. - General Rate Increase 1996 and 1997, Telecom Decision CRTC 96-13, 13 December 1996, the Commission stated that it is more appropriate to assign the DRD to both the Utility and Competitive segments on the basis of Average Net Investment Base, and adjusted TCI's 1997 depreciation expense accordingly. In that Decision, the adjustment to TCI's DRD was made using the best information available.
|
330. The Commission directs that the allocation of all over/under accruals between the Utility and Competitive segments be based on individual account splits. In the Commission's view, in accounts where plant is used for both Utility and Competitive services, the portion of the investment used for Utility services should be split out to afford the opportunity for completely separate depreciation studies for the Utility and Competitive segments. In the Commission's opinion, this is more representative of the telephone companies' operations.
|
E. Recovery of Depreciation Reserve Deficiency
|
|
|
331. The right to recovery of any DRD during the price cap period results from what Stentor views as being one of the obligations borne from the social contract or "regulatory bargain" between the Utility customers, represented by the regulator, and the telephone companies.
|
332. Stentor and TCI were of the view that, since the depreciation rates have been insufficient to recover the full costs of assets employed in the performance of the regulatory bargain, they are entitled to be reimbursed for those costs. They contended that failure of the regulator to live up to its side of the bargain would result in a reluctance by investors to invest capital in the companies.
|
333. Stentor and TCI submitted that, given this regulatory bargain, no DRD should be borne by the telephone companies' shareholders but should be reflected in establishing going-in rates or, if not practical, explicitly in the price cap formula.
|
2. Existence of a Regulatory Bargain and Assurance of an Opportunity to Recover Any Depreciation Reserve Deficiency
|
334. Stentor and TCI submitted that the existence of the regulatory bargain is evident under the form of rate base/rate-of-return regulation practiced by the Commission, under the statutory mandate of "just and reasonable" rates, and as an incident of the obligation to serve at common law.
|
335. Stentor and TCI submitted that, to the extent that depreciation rates have been insufficient to recover the full costs of assets employed in the performance of the regulatory bargain, the telephone companies are entitled to reimbursement of those costs. Stentor maintained that depreciation rates were kept at levels deemed appropriate by the Commission to meet the objectives of Decision 78-1, in particular Directive 8, so as not to create an undue burden on subscribers or have an undue impact on the carriers' revenue requirements.
|
336. In TCI's view, the Commission has an obligation to ensure recovery of TCI's investment and a reasonable opportunity to earn a reasonable rate of return. Stentor maintained that the telephone companies should be provided with an "opportunity" to recover prudently invested capital. Stentor emphasized that, without such an understanding, the telephone companies could not reasonably have been expected to make investments related to the provision of non-compensatory services.
|
337. AT&T Canada LDS maintained that, even if a regulatory bargain did exist in the past, it can only be relevant in a rate base/rate-of-return environment. It submitted that the transition to price caps severs the link to rate-of-return regulation and subsection 27(5) of the Act authorizes the Commission to establish a price regulation regime that does not tie the level of rates to the recovery of capital, depreciation, a return on capital, or any of the other concepts traditionally associated with rate base/rate-of-return regulation.
|
338. The Consumer Coalition submitted that the approval of depreciation rates and the findings by the Commission in the CPR process that proposed expenditures are reasonable do not entitle the telephone companies, as a right, to collect large DRDs going into price cap regulation.
|
339. CBTA took the position that neither Stentor nor TCI presented any evidence of the existence of a regulatory bargain. Calgary, however, concurred that there is an established regulatory bargain that should be respected and, that accordingly, investors should receive a fair return of their investment and a return on their invested capital.
|
340. In setting rates which are just and reasonable, the Commission has traditionally balanced the interests of customers with the requirement that the regulated company have a reasonable opportunity to recover both operating and capital costs which have been reasonably incurred in providing service to the public.
|
341. In addition, the Commission concurs with Stentor and TCI that the Commission has set depreciation rates at levels deemed appropriate to meet the objectives of the Phase I Directives and that, pursuant to this approach, all investment which had been reasonably incurred in the provision of Utility services would eventually be recovered through subscriber rates in accordance with the recovery periods prescribed by the Commission.
|
342. The Commission has historically held the view that, as long as regulation continues to focus on the earnings of the telephone companies, it was necessary to undertake annually a thorough review of projected capital expenditures and technology deployment through the CPR process, given that such investment decisions have a significant subsequent impact on the revenue requirement through depreciation expense.
|
343. The Commission notes that no evidence has been presented during this proceeding which would demonstrate that the telephone companies were "guaranteed" recovery of their investments, nor is any such guarantee embodied in the regulatory process. The Commission notes that, if shareholders were assured, rather than merely allowed, recovery of all prudently incurred investments, they would be permitted a fair and reasonable return on their equity equivalent to the level of a highly-rated bond, reflecting the fact that no risk of loss was assigned to shareholders. However, this has not been the case, as risk premiums have continually been a consideration when establishing allowed ROE equity ranges.
|
344. Accordingly, the Commission considers that, through the regulatory process described above, the telephone companies have been given a reasonable opportunity to recover through rates the direct costs of an investment deemed reasonable by the Commission, including a fair rate of return, as well as the associated operating costs.
|
3. Retrospective Rate-making
|
345. AT&T Canada LDS submitted that the Commission would be in breach of the principle against retroactive ratemaking if the Commission were to allow increased rates during the price cap regime to compensate the telephone companies for the historical under-depreciation of their assets.
|
346. The Commission concurs with Stentor and TCI that depreciation adjustments do not amount to retroactive or retrospective ratemaking. The Commission notes that the regulatory process provides for an opportunity to recover past investment. In the event that capital has been inadequately depreciated in the past, the regulatory process allows for the adjustment of rates prospectively in order to recover the total amount over a shorter future period. The Commission made such a determination in AGT - Issues Related to Income Taxes, Telecom Decision CRTC 93-9, 23 July 1993, when it stated that "... the setting of AGT's rates in future years to take into account any additional expense (or credit) would not constitute retrospective rate-making ... any more than do other changes in accounting estimates such as those related to depreciation or deferred tax liability".
|
347. The Commission also concurs with Stentor that the proposed amortization of the DRDs advanced by the telephone companies are prospective accounting changes based on current views of depreciation lives as well as on the historical accumulation of depreciation at depreciation rates lower than those now determined appropriate.
|
4. Previous Compensation for Depreciation Reserve Deficiency
|
|
|
348. The Consumer Coalition, supported by CBTA and Westel, argued that there is no need to provide for recovery of any DRD since shareholders have already been compensated for their risks of non-recovery or under-recovery through the risk premium awarded in previous return on equity decisions, as well as through the use of a normalized income tax treatment by the Commission.
|
349. Several parties also submitted that there should be no recovery of any DRD where the market value of a telephone company's shares exceed their book value, as compensation has been achieved.
|
|
|
350. Stentor and TCI maintained that the Commission never compensated the companies for the risk of non-recovery or under-recovery, as there is no discussion in any Commission decision of building some form of "extra premium" into the telephone companies' allowed rates of return to compensate them for the possibility that the Commission would, in the future, deny recovery of prudent investments and return thereon.
|
351. In assessing appropriate ROE ranges for the telephone companies, the Commission has considered business risk when examining the risk premium component of the required return. The Commission has compensated the telephone companies, where it deemed appropriate, for increased business risk due to such factors as increased competition and technological change.
|
352. However, in setting the ROE ranges, the Commission has not specifically addressed the possibility of non-recovery or under-recovery of capital investments given that there exists a process which determines how reserve deficiencies are treated. The Commission concurs with Stentor that the Phase I Directives explicitly prescribe accounting practices which attempt to achieve exact recovery of the original capital as well as to recognize changes in the estimates of service lives, as approved annually by the Commission, and changes in the retirement patterns of assets.
|
353. Accordingly, the Commission considers that the shareholders have not been specifically compensated through a risk premium for the risk of non-recovery or under-recovery of any DRD.
|
c. Normalized Income Tax Treatment (Deferred Taxes)
|
354. The Commission notes that normalized tax accounting as implemented by the Commission requires that the deferred income tax liability be re-calculated in accordance with enacted tax rates and laws and reflects the currently expected future tax liability. The Commission also notes that normalized income tax accounting does not remove the carrier's ultimate liability to pay the deferred taxes.
|
355. Based on the foregoing, the Commission finds that the shareholders have not been compensated through deferred income tax for the non-recovery or under-recovery of any DRD.
|
|
|
356. While a comparison of market-to-book (MTB) value is an accepted indicator of a company's general financial value, the Commission is mindful of the inherent flaws of relying on MTB ratios in determining regulatory policy. These include the difficulty of isolating or quantifying the portion of market value representing investor expectations about the DRD, the circularity of using MTB ratios in reaching a regulatory decision which itself will have an impact on the market value, and the subjectivity which would be involved in deriving a market value for an entity, such as the Utility segment of a company, which may itself not even be publicly traded. The Commission is of the view that the problems are significant enough to render a MTB test ineffective as a determinant in the appropriate treatment of DRDs.
|
357. The Commission notes that in British Columbia Telephone Company - Revenue Requirement for the Years 1988 and 1989 and Revised Criteria for Extended Area Service, Telecom Decision CRTC 88-21, 19 December 1988, it did not consider it appropriate or feasible to target MTB ratios in rate-of-return regulation. In the Commission's view, the move from rate base/rate-of-return regulation to price cap regulation does not render the use of MTB ratios any more viable as a regulatory tool.
|
5. Responsibility for Recovery
|
358. Stentor and TCI maintained that any DRD should be recovered fully from subscribers. TCI noted that all local customers, whether connected to TCI or an alternative local service provider, must contribute to the capital recovery of investment stranded as a result of competition.
|
359. AT&T Canada LDS, CBTA, CCTA, the Consumer Coalition and Westel stated that neither the Commission nor any previous regulator has ever denied an application by a Stentor company for revised rates of depreciation, nor is there evidence that the Commission has ever imposed depreciation rates on the telephone companies. By failing to request depreciation life changes before the end of rate base/rate-of-return regulation, these parties maintained that the regulatory bargain is not applicable or that the Commission does not have any obligation to guarantee the recovery of that capital investment.
|
360. In response, Stentor and TCI stated that, in light of concern for the impact on rate increases, it is not reasonable to suggest that the companies ought to have advanced life changes earlier and, consequently, have relinquished their right to recover such costs.
|
361. If the Commission were to find that a DRD exists that should be explicitly recovered, AT&T Canada LDS recommended that any such recovery should be permitted through Utility segment rates as opposed to wholesale charges, such as toll contribution or other interconnection charges.
|
362. The Consumer Coalition proposed that any authorized recovery should take place through an equitable mechanism, such as a contribution mechanism that is applicable to all services and all competitors.
|
363. CBTA submitted that as a fair balancing of interests, a 50/50 apportionment of responsibility should be recognized between subscribers and shareholders. CBTA recognized that the telephone companies may have been reluctant to implement more aggressive depreciation schedules for some assets, in the belief that the Commission would not accept such proposals because of their potential impact on subscriber rates.
|
364. The Commission notes that the contribution charges applicable to all interexchange carriers, including the telephone companies themselves, have been subsidizing, to some extent, the recovery of any DRD. The Commission concurs with AT&T Canada LDS, as well as the telephone companies, that contribution rates should not be increased to contribute to the recovery of these costs. The Commission notes that, as indicated in Section B above, any proposed changes to the depreciation life characteristics will be taken into account in setting the going-in rates for price caps on 1 January 1998.
|
365. Recognizing that the telephone companies have incurred costs under the Commission's current form of regulation, and that the Commission has reviewed and approved the depreciation rates as well as the capital expenditures themselves, the Commission is of the opinion that the telephone companies should continue to have a reasonable opportunity to recover any DRD that results from a change in depreciation life characteristics. In light of the above, the Commission is of the view that it would be inequitable for the shareholders to bear full responsibility for any DRD. Further, the Commission concurs with Stentor and CBTA that customers have benefited from the delayed introduction of asset life reductions through prices that are lower than they otherwise might be.
|
366. Accordingly, the Commission considers that the telephone companies have, and will continue to have during the transition period, a reasonable opportunity to recover the original capital cost of their assets through subscriber rates. The Commission is of the view that the approach set out in this Decision regarding the telephone companies' depreciation practices balances the interests of all parties and provides a reasonable opportunity for the telephone companies to recover any DRDs.
|
F. Recovery Period for Depreciation Expense Over/Under Accruals
|
367. In argument, Stentor expressed the view that a five-year amortization period is reasonable, given the telephone companies' assessment of depreciation lives and the future environment. The five-year amortization period was chosen as a reflection of how quickly the companies believe events will unfold. Stentor maintained that it did not consider a longer amortization period to be appropriate as it is far from certain that rates can be maintained at a level sufficient to provide for such recovery by the end of the five-year period.
|
368. As noted in its argument, TCI's six-year amortization period for the DRD was based on its forecast growth of local competition. In the event that competition develops more rapidly, TCI submitted that it should be allowed to petition the Commission to accelerate the recovery schedule upon showing that the rate at which competition is advancing renders the initial recovery schedule infeasible.
|
369. Both Stentor and TCI proposed to assume the risks associated with any future DRDs after the implementation of price caps, i.e., those that have not arisen at the onset of price cap regulation in 1998, provided that the Commission accepts their respective price cap plan proposals.
|
370. With respect to the appropriate period of recovery, AT&T Canada LDS submitted that, rather than recovering any DRD over a five-year or six-year amortization period, the remaining life approach traditionally used by the Commission to reflect the impact of shorter lives in the revenue requirement already provides a sufficient means to recover any DRD. Noting that the remaining life approach is specifically designed to achieve recovery over the useful life of the investment, AT&T Canada LDS submitted that this approach should be adopted by the Commission for the recovery of any demonstrated DRDs under price cap regulation.
|
371. The Commission notes that the current Phase I Directives stipulate that reserve over/under accruals are to be amortized over the remaining life of the plant. The Stentor companies' service life estimates indicate that the majority of their plant will remain in service well past the initial price cap period. In the Commission's view, the remaining life directive should remain as the basis for amortization of over/under accruals. The Commission considers the principle of recovery at the rate of consumption just as valid under price cap regulation as it has been under rate-of-return regulation.
|
372. In the Commission's view, the principle of allowing for the recovery of any under accruals over the remaining life of the plant affords the telephone companies a reasonable opportunity to recover any DRDs which exist. Furthermore, allowing any DRDs to be amortized as suggested by Stentor and TCI could, in the Commission's view, unnecessarily increase going-in rates. Therefore, the Commission denies the requests of Stentor and TCI to amortize their DRDs, as of 1 January 1998, over five years and six years, respectively.
|
373. However, the Commission notes the concern of AT&T Canada LDS that should the going-in rates for a company incorporate an amount relating to any DRDs based on current Phase I Directives, the revenue requirement associated with recovery of any DRD would be reduced in each year of the price cap period from the level incorporated in the going-in rates. Thus, the telephone company could benefit in the form of additional earnings based on the depreciation life characteristics in effect on 1 January 1998. Therefore, the Commission has decided that any DRDs of the telephone companies as of 1 January 1998, as determined in the follow-up proceeding, should be amortized, for regulatory purposes, using the core composite average remaining service life of each company's assets as of that date. Using this approach, the amortization of the DRDs would be on a straight-line basis for regulatory purposes, thus ensuring that the amount included in the going-in rates would not change relative to the amounts reflected in the rates for subsequent years of the price cap plan.
|
G. Phase I Directives and Reporting Requirements for Depreciation
|
374. Stentor contended that Phase I Directives and practices should not be required under price cap regulation. However, Stentor indicated that this did not mean that the telephone companies would no longer follow procedures currently set out in the Phase I Directives. Rather, the telephone companies would be following GAAP and, to the extent that a directive mirrors sound business practice, the telephone companies would continue to account for depreciation expense and to keep depreciation records as specified in the Phase I Directives. However, Stentor was of the view that there was generally no need for the Commission to specifically impose such methodologies or accounting practices on the telephone companies under a price cap regime.
|
375. Stentor and TCI took the position that, under price caps, reporting of depreciation activity was not required. In general, interveners who considered that some reporting was required did so in the context of (1) the inclusion of an earnings sharing mechanism as part of the plan, and (2) the length of the price cap plan.
|
376. The Commission is of the view that, under price cap regulation, the provisions of GAAP should provide sufficient guidance to the telephone companies in determining, for regulatory reporting purposes, the asset lives during the initial price cap period. As a result, changes to the telephone companies' depreciation life characteristics during the price cap period will not require Commission approval.
|
377. The Commission recognizes, however, that to effect a successful transition from rate base/rate-of-return regulation to price cap regulation, some residual regulation is still required. In this regard, the Commission requires that any future change that deviates from the current Phase I Directives or the depreciation life characteristics to be implemented on 1 January 1998, along with the financial impact of any such change, must be reported to the Commission. In addition, in light of the impact of potential changes to the telephone companies' depreciation life characteristics on their respective contribution requirements, the Commission considers that, at the time of the price cap review, it may review the telephone companies' depreciation studies. A review would be based on the principles of the currently-approved Phase I Directives.
|
X OTHER ISSUES RELATED TO GOING-IN RATES
|
A. Other Deferred Charges
|
378. In general, expenses incurred by a telephone company in any given year are recovered from subscribers in that year. However, when recovery of certain extraordinary expenses (e.g., downsizing, shareholder entitlement) in one year are too onerous to impose on subscribers, the Commission has allowed the telephone companies to defer and amortize these costs over several years. Since the telephone companies' current rates are set to recover these costs, completion of the approved amortization schedules would result in higher earnings for the companies, all other things being equal.
|
379. Stentor proposed that deferred costs, resulting from regulatory decisions existing on the books of the telephone companies as at 31 December 1997, be amortized over a five-year period, beginning 1 January 1998. Stentor further proposed to terminate the policy of capitalizing costs which are primarily supported by regulatory decisions. Stentor submitted that the five-year amortization period was chosen as a reflection of how quickly the companies believe events will unfold. In Stentor's view, a longer amortization period would not be appropriate as it is not certain that rates can be maintained at a level sufficient to provide for such a recovery by the end of the five-year period.
|
380. TCI proposed to recover the other deferred expenses through a special amortization factor in its price cap plan (the A-factor). Under TCI's proposal, when an expense has been recovered, the PCI would be reduced accordingly. TCI also proposed that the company be required to file a proposed amortization schedule with the Commission for each approved A-factor adjustment. In addition, TCI submitted that the company be permitted to petition the Commission to accelerate an approved recovery schedule if the advancing rate of competition renders the initial recovery schedule infeasible.
|
381. The Commission notes that Stentor's proposed amortization procedure would only apply to those deferred charges that arose from regulatory decisions. Costs deferred as a result of business decisions such as leasehold improvements and software expenditures would continue to be deferred and amortized on the basis of GAAP.
|
382. The Commission considers that, if deferred charges are amortized more rapidly, this could have a significant impact on going-in rates. The Commission also considers that, once the initial prices are set, there will not be another opportunity for a review of the impact of the amortization of any deferred charges and the impact on rates until the end of the initial price cap period. Therefore, the Commission is of the view that it would be appropriate to amortize the remaining balance of all regulatory deferred charges, except as noted below, over a five-year period.
|
383. However, the Commission notes TCI's special circumstances with respect to shareholder entitlement and the fact that the company's contribution rate is generally higher as a result of its income tax situation. Consequently, when the shareholder entitlement is completely amortized in 1998, TCI is directed to reduce its contribution rate accordingly.
|
384. The telephone companies are directed to provide, in the follow-up proceeding, a schedule of all regulatory deferred charges that will be amortized in the going-in rates. In addition, TCI is directed to provide a schedule showing the derivation of the contribution rate reduction, as at 1 January 1999, that results when the shareholder entitlement is completely amortized.
|
|
|
385. In Decision 94-19, the Commission adjusted the midpoint of the telephone companies' ROE ranges downward by 50 basis points, for the transitional period prior to the implementation of price caps, to reflect the lower risk of the Utility segment relative to the total company. In Decision 95-21, the Commission subsequently confirmed that the downward risk adjustment of 50 basis points was still appropriate.
|
386. Stentor proposed that rates going into the price cap period to be set in the follow-up proceeding should reflect the removal of the 50 basis point downward adjustment. Stentor's main objection to the 50 basis point adjustment was that the rationale underlying the Commission's original determination does not hold for the future price cap period due to the expectation of significant competition in the local services market. TCI supported removal of the downward adjustment in principle, but proposed to deal with it as part of establishing appropriate ROEs during the follow-up proceeding.
|
387. The Commission notes that local competition is only one of a number of factors that could be considered when adjusting the current Utility segment ROE level. Further, the Commission notes that both Stentor and TCI supported the idea of setting an appropriate ROE during the follow-up proceeding, in order to have the most timely reflection of capital market and industry conditions in determining the level of local rates required going in to price caps. The Commission is of the view that these factors would be more properly examined as part of the follow-up proceeding.
|
388. The Commission notes that past proceedings, in which a determination was made to establish an appropriate ROE in the context of a revenue requirement proceeding, have involved significant expenditure of time and resources by all parties involved. The Commission further notes that there are already significant time constraints involved in completing the follow-up proceeding in order to have a timely implementation of the new form of regulation as of 1 January 1998. As well, the Commission is concerned about the applicability of many of the traditional methodologies used to estimate cost of capital, under a split rate base regime.
|
389. The Commission is of the view that, since it will be determining an appropriate ROE level for more than one telephone company in the same proceeding, this process would be ideally suited to some form of benchmarking. In addition, in an effort to streamline the process, the Commission intends to restrict its focus to changes in conditions since Decision 95-21, in which the existing ROE level was confirmed to be still appropriate. Therefore, when filing their ROE evidence in the follow-up proceeding, the telephone companies, and interested parties that choose to file evidence, are directed to quantify, with supporting rationale, any proposed changes to the telephone companies' current ROE level in terms of the separate impact on the Utility segment ROE. These adjustments could reflect changes in capital market and economic conditions, as well as changes in a company's business risk, financial risk and regulatory risk.
|
|
|
390. In Implementation of Price Cap Regulation, 1997 Contribution Charges and Related Issues, Telecom Public Notice CRTC 97-11, 25 March 1997 (PN 97-11), the Commission initiated a proceeding to determine, among other things, the appropriate going-in rates for each telephone company's Utility segment. In PN 97-11, the Commission outlined the scope of the proceeding as it relates to 1997 financial forecasts, split rate base results and contribution charges.
|
391. The Commission also stated that it intended to issue decisions in several other proceedings (in addition to this proceeding) that could impact on the telephone companies' going-in rates, by 1 May 1997. In light of the above, the Commission stated that it would set out the remaining scope of the proceeding initiated by PN 97-11 in this Decision. Therefore, the Commission hereby outlines the remaining scope of the proceeding initiated by PN 97-11.
|
392. In Decision 97-8, the Commission approved a central fund approach to accommodate the evolution of the local market from a monopoly to a competitive environment. The contribution scheme approved in Decision 97-8 requires the remittance of all toll contribution to a central fund and the distribution of proceeds to all LECs based on subsidy requirements per residential NAS by rate band. The telephone companies' subsidy requirements by residence NAS for each rate band will be considered in the proceeding initiated by PN 97-11.
|
393. As outlined in this Decision, the Commission will also consider the following issues in the context of the proceeding initiated by PN 97-11:
|
(1) the establishment of the going-in revenue requirement (including an appropriate ROE) and rates (including contribution) for each telephone company effective 1 January 1998;
|
(2) the mechanism to recover any revenue requirement shortfall which cannot be recovered from going-in rates during the price cap regime (see Part III of this Decision);
|
(3) proposals to increase basic residential service rates effective 1 January 1998 (see Part VIII of this Decision);
|
(4) the depreciation life characteristics to be implemented 1 January 1998 (see Part IX of this Decision);
|
(5) the Utility segment services to be designated as uncapped services and as competitor services (see Part IV of this Decision);
|
(6) the finalization of rate band classifications (see Part IV of this Decision);
|
(7) any potential financial impacts of privatization on MTS' Utility segment (see Part V of this Decision);
|
(8) the applicability of TCI's T-factor to changes in allowable ATDs (see Part III of this Decision); and
|
(9) the removal of the freeze on NewTel's contribution rate prior to the implementation of price caps (see Part VIII of this Decision).
|
394. As noted in PN 97-11, the telephone companies are to file their evidence and submissions relating to these issues by 13 June 1997.
|
Allan J. Darling
Secretary General
|
This document is available in alternative format upon request.
|