ARCHIVED -  Telecom Order CRTC 97-1903

Telecom Order

Ottawa, 22 December 1997

Telecom Order CRTC 97-1903

An application by Stentor Resource Centre Inc. (Stentor) to reform the per-circuit contribution mechanism applicable to Alternate Providers of Long Distance Services (APLDS) for international circuits.

File No.: 8695-51-01/97

1. On 9 June 1997, Stentor, on behalf of BC TEL, Bell Canada (Bell), The Island Telephone Company Limited, Maritime Tel & Tel Limited, MTS NetCom Inc., The New Brunswick Telephone Company, Limited, NewTel Communications Inc. and TELUS Communications Inc., filed an application requesting that the Commission reform the per-circuit contribution mechanism applicable to APLDS' international circuits.

2. Specifically, Stentor requested that the Commission reform the current international per-circuit contribution mechanism by either eliminating the mechanism and increasing the domestic contribution rates by the requisite amounts effective 1 January 1997, or, in the event that the Commission found this proposal inappropriate, by implementing a per-minute mechanism applicable to APLDS' self-reported international long distance minutes, together with improvements to the self-reporting procedures, effective 1 January 1998.

3. Stentor also identified other reform alternatives, including increasing the per-circuit rates by increasing the assumed number of minutes carried per-circuit.

4. Stentor noted that, under the current international contribution regime, the Stentor Operating Companies (SOCs) pay contribution on a per-minute basis while the APLDS pay contribution on a per-circuit basis (i.e., per-circuit rates based on 7,000 minutes per month).

5. Stentor requested reform of the current international contribution mechanism to address its concerns with the favourable treatment accorded to APLDS as compared to the SOCs as well as the magnitude of the implicit discounts and the potential for misreporting in the current system.

6. Stentor stated that the APLDS achieved implicit discounts on international circuits in excess of 48% for 1995, which equates to approximately $24 million and added that the discounts are likely greater today and can be expected to be greater in the future owing to network efficiencies associated with APLDS' increased traffic volumes.

7. Stentor submitted that, with the implementation of price caps, the "going in rates", effective 1 January 1998, will be set to recover contribution shortfalls within the existing per-circuit international contribution mechanism unless a reform of that contribution mechanism is effected prior to the initiation of the price caps regime.

8. Stentor further pointed out that international calling is channelled through only a few gateway points, which serves to maximize traffic efficiencies, particularly on overseas circuits used for international simple resale.

9. Stentor noted that an opportunity for misreporting exists under the current self-reporting international mechanism. Stentor stated that there is an incentive for carriers and resellers to under-report numbers of contribution-eligible circuits which they provide and/or report themselves, since they are not the recipients of contribution payments.

10. Stentor submitted that the self-reporting nature of the current regime, combined with the minimal reporting requirements and lenient penalties for misreporting, impedes the ability of the SOCs to recover adequate amounts of contribution to subsidize basic local service.

11. Stentor submitted that, while the issue of misreporting the number of circuits is currently only an issue in the Canada-United States (U.S.) market where there are a number of providers of international circuits, it foresees similar enforcement difficulties arising in the Canada-Overseas market with the cessation of Teleglobe Canada Inc.'s (Teleglobe) monopoly next year since there will likely be an increase in the number of providers of international contribution-eligible circuits.

12. By letter dated 13 June 1997, Stentor was requested to address the review and vary criteria set out in Telecom Decision CRTC 79-1, 2 February 1979, with respect to previous Commission decisions, including: (1) the Commission's ruling of 17 March 1997 disposing of fONOROLA Inc.'s (fONOROLA) application of 19 January 1996 (the fONOROLA ruling); (2) Competition in the Provision of Public Long Distance Voice Telephone Services and Related Resale and Sharing Issues, Telecom Decision CRTC 92-12, 12 June 1992 (Decision 92-12); and (3) TelRoute Communications Inc. - Bypass Restrictions, Telecom Decision CRTC 95-17, 15 August 1995 (Decision 95-17).

13. Stentor responded to this request in a letter dated 27 June 1997 and submitted that its application should not be treated as an application to review and vary the above noted Commission decisions as:

(i) the grounds submitted in support of fONOROLA's application were based mainly on administrative burden and, therefore, were different from those submitted in support of this application;

(ii) with regard to Decision 92-12, it would be inappropriate to require parties seeking to change long established policies to meet the criteria for a review and vary application; and

(iii) the requests to reduce the overseas contribution rate in Decision 95-17 were presented as a means of reducing bypass of the overseas facilities of Teleglobe.

14. However, Stentor also stated that, if the Commission determines that its application is a review and vary application, then its application should be granted based on the following:

(i) a new principle has arisen as a result of the fONOROLA's ruling, i.e., if the fONOROLA ruling is interpreted as a bar to reform of the international contribution mechanism, the contribution mechanism is not designed to recover an appropriate amount of contribution to subsidize the Utility segment shortfall and is not required to be competitively neutral;

(ii) there has been a fundamental change in circumstances since Decision 92-12 as competitors are able to carry considerably more minutes over these circuits than originally assumed, resulting in a competitive advantage to the APLDS; and

(iii) there has been a fundamental change in circumstances since Decision 95-17 as the reduction in contribution rates, coupled with the move to deaveraged per-minute rates for connections other than international circuits, and the broadening of the base of contribution payers, decreases the magnitude of the additional burden that other contribution payers would have to shoulder should the contribution rates for international circuits be eliminated.

15. In addition, Stentor submitted that there is substantial doubt as to the correctness of these decisions since the system designed to recover appropriate amounts of contribution to subsidize local/access service fails to do so and affords competitors the advantage of paying less than their fair share of contribution.

16. AT&T Canada Long Distance Services Company (AT&T Canada LDS), Call-Net Enterprises Inc. (Call-Net), fONOROLA, Teleglobe and Westel Telecommunications Ltd. (Westel) filed comments on 18 July 1997 and Stentor filed its reply comments on 28 July 1997.

17. AT&T Canada LDS, Call-Net, fONOROLA, and Westel submitted that Stentor's application should be treated as a request to review and vary the previously noted Commission decisions and submitted that Stentor had not met the criteria.

18. With respect to whether Stentor's application is an application to review and vary past Commission decisions, the Commission notes that Stentor's preferred relief, i.e., elimination of contribution on international circuits, is the same as that requested in fONOROLA's application of 19 January 1996. In the fONOROLA ruling, the Commission determined that fONOROLA's application was an application to review and vary Decisions 92-12 and 95-17. The Commission denied fONOROLA's application, which requested that contribution on international circuits be eliminated, stating that it was not persuaded that any of the criteria for a review and variance had been met at that time.

19. Given that only a short period of time has passed since that determination, and the very same relief was considered, the Commission is of the view that Stentor's application is a request to review and vary the fONOROLA ruling and, accordingly is a request to review and vary Decisions 92-12 and 95-17. The Commission notes, in this respect, that while five years have passed since Decision 92-12, the grounds invoked by Stentor to support its application challenge the very correctness of Decision 92-12 itself. In these circumstances, the Commission is of the view that Stentor's application should be treated as a review and vary application.

20. The Commission has considered the new arguments put forward in favour of reforming the current per-circuit mechanism and is of the view that there is substantial doubt as to the correctness of the decisions which created and upheld the current contribution regime for international circuits. The Commission considers that the current circuit loading of 7,000 minutes per-circuit is no longer appropriate as it results in significant implicit discounts which give competitors an undue competitive advantage and results in local subscribers of the telephone companies unduly subsidizing the loss of contribution due to implicit subsidies that are inherent in the existing mechanism.

21. In light of the above, the Commission concludes that the decisions that established and upheld the current contribution regime for international circuits should be varied to reform the existing mechanism.

22. With respect to the various reform proposals, the Commission agrees with Stentor and interested parties that the following three alternatives proposed by Stentor are not viable: (1) recovery of international contribution through recognition of international traffic on interconnecting circuits; (2) shifting the contribution burden to domestic traffic through de-averaging or surcharges; and (3) extending the per-circuit mechanism to the SOCs.

23. With respect to eliminating contribution on international circuits, Stentor stated that this alternative would simply entail eliminating the double counting of international minutes in the calculation of per-minute contribution rates and that all contribution would be recovered from all competitors on a per-minute basis applied to domestic traffic, thereby eliminating the implicit discount.

24. Stentor also stated that this method would result in a competitively equitable mechanism, eliminate avoidance opportunities associated with the self-reporting aspect of the current international contribution mechanism and eliminate the administrative overhead associated with the current international mechanism.

25. Teleglobe agreed with Stentor that contribution charges on international circuits should be eliminated.

26. AT&T Canada LDS, Call-Net, fONOROLA and Westel opposed the elimination of contribution on international circuits as it would increase the domestic contribution rate.

27. The Commission notes that, while elimination of the international contribution mechanism for both the APLDS and the SOCs would eliminate the implicit discount and reduce the administrative burden associated with the current regime, this option would result in higher domestic contribution rates and, for subscribers of some of the SOCs, in higher local rates. The Commission also notes that, given the anticipated higher growth in international traffic over domestic traffic with the introduction of competition in the Canada-Overseas market in late 1998, elimination of the international contribution mechanism would reduce the amount of contribution remitted to the Central Fund which will be used to subsidize local service to high cost areas.

28. In addition, the Commission notes that this option would result in a narrowing of the scope of contribution eligible minutes and accordingly, would run counter to the Commission's objective, among others, of increasing the base of contribution paying services.

29. In light of the above, the Commission considers that eliminating contribution on international circuits is not appropriate.

30. With respect to a self-reported per-minute mechanism, Stentor stated that this mechanism would require all providers of cross-border circuits to measure contribution eligible minutes. Providers would be required to purchase traffic measurement equipment, modify or implement new billing systems and rigorously administer these systems on an on-going basis. Stentor submitted that such systems would likely be more costly and complex than the current mechanism.

31. Stentor submitted that, since this approach requires self-reporting of minutes, measures to significantly reduce contribution evasion opportunities would be required. Stentor submitted that these measures should apply to all APLDS including resellers and not just to providers of contribution-eligible international circuits. According to Stentor, the Commission could: (1) require a sworn affidavit from a senior officer of each APLDS to support its monthly contribution reports; (2) subject the APLDS to random audits with respect to self-reported contribution-eligible traffic; (3) issue a mandatory order pursuant to section 51 of the Telecommunications Act (the Act) requiring all APLDS to make full disclosure with respect to self-reported contribution-eligible traffic and registration of the order with the Federal Court of Canada pursuant to subsection 63 (1) of the Act; and (4) adopt a policy to prosecute non-compliance with the self-reporting regime or, alternatively, provide consent to prosecute to other parties.

32. Teleglobe supported Stentor's alternative request for a per-minute contribution mechanism while AT&T Canada LDS,
Call-Net and fONOROLA opposed this alternative.

33. Call-Net and fONOROLA stated that the required tracking, billing and additional administration costs outweigh any benefits to be gained from changing the existing regime to a self-reported per-minute mechanism.

34. In reply, Stentor noted that all major APLDS which participate in the annual contribution proceedings routinely provide reports of their double counted Canada-U.S./Overseas minutes.

35. The Commission notes that, while the implementation of a self-reporting per-minute mechanism for the APLDS would likely eliminate the implicit discount, it agrees with Stentor and other parties that such a mechanism would result in tracking and billing costs and would likely result in additional administrative costs to some of the service providers. In the circumstances, and noting that, as indicated below, the international contribution collection mechanism is under review in a separate proceeding, the Commission considers that a self-reporting per-minute mechanism is not appropriate at this time.

36. With respect to increasing the number of assumed minutes per-circuit used in calculating the per-circuit international contribution rates, Stentor stated that, based on its conservative estimate of implicit discounts of 48%, eliminating these discounts would require nearly a doubling of the number of minutes per-circuit used in the calculation of the per-circuit rates (i.e., from 7,000 minutes per-circuit to 14,000 minutes per-circuit).

37. In addition, Stentor asserted that the adjustment to the number of assumed minutes per-circuit would have to allow for non-reporting APLDS, which would further increase the amount of the adjustment.

38. Stentor stated that, since this adjustment would be based on an average estimated circuit load, it was likely that some larger competitors would achieve greater implicit discounts owing to their economies of scale while it may be burdensome for smaller competitors.

39. Stentor also noted that doubling the per-circuit contribution rate would provide additional incentives to misreport and to increase circuit efficiencies, particularly when international circuits may be multiplexed, resulting in huge implicit discounts.

40. AT&T Canada LDS submitted that Stentor's request to double assumed circuit loadings is not supported by any evidence that this level is appropriate, adding that it likely does not achieve average cross-border loadings of the magnitude suggested by Stentor, i.e., 14,000 minutes per month.

41. Call-Net stated that this mechanism imposes the least administrative cost and risk on both Stentor and the APLDS and provides for the continued collection of contribution from international carriers thereby minimizing inequities and resulting in far less distortion in the market than the other proposals considered in Stentor's application.

42. Call-Net submitted that there is no concrete evidence as to the number of minutes each individual service provider is able to achieve and, therefore, any increase in the international circuit loading factor would necessarily be arbitrary.

43. Call-Net recommended that, should the Commission decide to reform the international contribution regime, the per-circuit loading factor should be increased to 9,310 conversation minutes per month as was proposed by Stentor in a 1995 application and that the SOCs could be made subject to the per-circuit regime.

44. Call-Net further requested that the Commission provide competitors with six months lead time commencing from the release of the Commission's decision on this application, for implementing the new loading factor.

45. In response, Stentor submitted that Call-Net misrepresented the proposals of its 1995 application noting that the 9,310 minutes per-circuit increase was only the first stage of its proposal to increase per-circuit rates applicable to all circuit types.

46. Stentor also submitted in reply that the per-circuit rates would need to be increased to reflect at least 17,500 minutes per month since the implicit discount is likely greater today than it was in 1995.

47. In Competition in the Provision of International Telecommunications Services, Telecom Public Notice CRTC 97-34, 2 October 1997 (PN 97-34), the Commission initiated a proceeding to consider the regulatory regime that should apply to the provision of international telecommunications services, effective 1 October 1998, when Teleglobe's monopoly terminates. In PN 97-34, the Commission requested comments from parties on how the contribution collection mechanism should apply in a competitive environment.

48. The Commission notes that increasing the per-circuit rates to reflect a higher number of assumed minutes per-circuit reduces the implicit discounts to the APLDS and is relatively easy to implement, thereby resulting in minimal additional administrative costs. As in previous decisions resulting in changes to the contribution regime, the Commission considers that six months lead time commencing from the date of this Order is sufficient time for the implementation of an increased loading factor.

49. In light of the above, the Commission considers that increasing the per-circuit rates is the appropriate approach, at this time.

50. With respect to the issue of contribution avoidance, the Commission is of the view that additional reporting safeguards are required and, therefore, considers that a mandatory order pursuant to section 51 of the Act is appropriate. In addition, the Commission considers that a sworn affidavit by a senior officer of an APLDS as to the number of international circuits will reduce the likelihood of contribution mis-reporting.

51. Further, the Commission recognizes the importance of random audits and notes that the Report of the CRTC Interconnection Steering Committee, Central Fund Sub-Working Group to the Commission, submitted 29 August 1997, includes proposals for auditing and verification of the contribution reports. Such measures, if approved, would assist in reducing contribution avoidance opportunities associated with self-reporting the number of contribution eligible circuits.

52. In light of the foregoing, the Commission orders that:

(a) effective 1 July 1998, the monthly per-circuit contribution rates for the APLDS be increased to reflect carriage of 14,000 minutes per-circuit per month, and that, prior to 1 July 1998, the SOCs are to issue tariff pages to reflect this increase;

(b) effective 1 July 1998, a senior officer of each APLDS is to provide a sworn affidavit to support its monthly contribution reports for Canada-U.S. circuits to the relevant Local Exchange Carrier under the existing process or to such other party that may be determined in the disposition of the proposed interim Central Fund Agreement dated 16 October 1997. The Commission notes that the requirement to provide a sworn affidavit is to continue once the Central Fund contribution mechanisms are in effect and that the need for a similar requirement for Canada-Overseas traffic will be examined in the proceeding initiated by PN 97-34; and

(c) pursuant to section 51 of the Act, all APLDS are to make full disclosure with respect to self-reported contribution-eligible international circuits.

Laura M. Talbot-Allan
Secretary General

This document is available in alternative format upon request.