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ARCHIVED -  Telecom Order CRTC 97-571

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 Telecom Order

 Ottawa, 29 April 1997
 Telecom Order CRTC 97-571
 On 31 October 1996, Northern Telephone Limited (Northern) filed an application, under Tariff Notice 60, requesting final approval of the 1995 Carrier Access Tariff (CAT).
 File No.: Tariff Notice 60
1.  By way of background to the current application, the Commission notes that on 30 December 1994, in response to an application from Northern for expedited relief in connection with the notice of termination of the Traffic Interconnection Agreement between Ontario Northland Telecommunications (ONTEL), a division of the Ontario Northland Transportation Commission, and Northern, the Commission ordered that the 1973 Traffic Agreement between Northern and ONTEL, dated 27 November 1973, continue to operate pending resolution of this matter.
2.  In Telecom Order CRTC 95-465, 13 April 1995 (Order 95-465), the Commission approved an interim 1995 Northern CAT of $0.095 per minute (no equal access charge), with a Contribution rate of $0.0817 per minute and a Direct Toll rate of $0.0133 per minute, effective 1 May 1995.
3.  The interim 1995 CAT reflected an eight-month recovery period, based on Northern's estimated 1995 toll settlement requirement, adjusted by the Incentive Mechanism (referred to below, in paragraph 15).
4.  In Order 95-465, the Commission directed that up to 30 April 1995 (inclusive), consistent with the Commission's direction of 30 December 1994, the parties were to settle payments in accordance with the 1973 Traffic Agreement, excluding the Special Temporary Subsidy Settlement (STSS) which expired on 20 December 1994.
5.  In Order 95-465, the Commission stated that the STSS would make up for the difference between Northern's annual toll settlement requirement and the toll settlement provided by the 1973 Traffic Agreement.
6.  In Order 95-465, subject to certain revisions effective 1 May 1995, the Commission granted interim approval to the 1973 Traffic Agreement, without prejudice to the parties negotiating an alternate interim interconnection agreement.
7.  In the process leading to Order 95-465, ONTEL stated that it would be willing to continue settling with Northern pursuant to the existing 1973 Traffic Agreement and to extend the 1994 STSS into 1995.
8.  In Order 95-465, the Commission stated that final arrangements for the exchange of traffic and settlement of payments between the parties would be considered following the Commission's decision in Regulatory Framework for the Independent Telephone Companies in Québec and Ontario (Except Ontario Northland Transportation Commission), Telecom Public Notice CRTC 95-15, 23 March 1995 (the Independents' proceeding).
9.  In Order 95-465, the Commission stated that that Order was issued only for the purpose of settling on an interim basis, the outstanding issues between the parties, and did not constitute a precedent or predisposition on the Commission's part with respect to issues to be addressed in the Independents' proceeding.
10.  In Telecom Order CRTC 95-835, 26 July 1995 (Order 95-835), the Commission gave interim approval to an executed copy of the 1973 Traffic Agreement.
11.  In Regulatory Framework for the Independent Telephone Companies in Québec and Ontario (Except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec ltée), Telecom Decision CRTC 96-6, 7 August 1996 (Decision 96-6), the Commission directed that in order to maintain consistency among all the Ontario independents, a true-up provision that parallels that of the OTA be adopted for the 1995 and 1996 Northern CATs.
12.  In Decision 96-6, the Commission also determined that the interim 1995 Northern CAT should remain in effect until the 1995 Northern CAT could be finalized on the basis of 1995 actual Phase III results to be filed in October 1996.
13.  In its application filed 31 October 1996, Northern requested final approval of a 1995 CAT of $0.0907 per minute, with a Contribution rate of $0.0780 per minute and a Direct Toll rate of $0.0127 per minute.
14.  Northern reported that the actual number of originating and terminating toll minutes for 1995 was 9,112,000 higher than the forecast of 190,000,000 minutes that the company had used to calculate the interim CAT in 1995.
15.  Northern noted that in the calculation of the 1995 interim CAT, it had used a forecast toll revenue requirement of $16,875,000 for 1995, assuming that the company would be allowed to earn a Rate of Return (ROE) of 12.44%, halfway between the bottom and the mid-point of the allowed range for 1995 (the Incentive Mechanism).
16.  Northern stated that its actual ROE for 1995 was 12.83%, based on actual toll revenues of $16,937,000 received from ONTEL.
17.  Northern submitted that, because its actual ROE of 12.83% was within the allowed range of 12.25% to 13.00%, the criterion of meeting an approved mid-point ROE was replaced by the criterion of being within the approved ROE range.
18.  While acknowledging that its operating expenses were $29,600 over the Ontario Telephone Association (OTA) 1995 Operating Expense guideline, Northern argued that because local and miscellaneous revenues had increased by $556,000 over what it had forecast, the increased marketing and commercial departmental expenses should not be disallowed by the Commission for the purpose of calculating a final 1995 CAT rate.
19.  ONTEL filed comments on 2 December 1996 and 22 January 1997.
20.  ONTEL proposed various wording changes to Northern's proposed tariff which included, among other things, a change in the reference from Ontario Northland Telecommunications Commission to either Ontario Northland Transportation Commission, or ONTEL.
21.  ONTEL submitted that: (a) because Northern did not explain how the excess expenses contributed directly to any increase in revenues; and (b) to the extent that the excess expenses were incurred to provide Northern's competitive Internet service, $29,600 in operating expenses over the 1995 OTA Operating Expense guideline should be disallowed.
22.  In its comments of 2 December 1996, ONTEL submitted that no true-up of Northern's toll revenue requirement should apply and that, based on the actual toll revenues reported by Northern of $16,937,000 and Northern's 1995 forecast of such revenues of $16,875,000, ONTEL was entitled to a refund of $62,000.
23.  In its comments of 22 January 1997, ONTEL argued that payments made under the 1973 Traffic Agreement have never been subject to any true-up mechanism based on Northern's rate of return and, therefore, the first four months of 1995 should be treated without a true-up.
24.  ONTEL argued that if the Commission were to take into account any payments made by ONTEL to Northern during the first four months of 1995 for the purpose of setting a final CAT rate attributable to the last eight months of 1995, such an action would amount to "retroactive rate-making".
25.  Based on this modified view, ONTEL argued that it was entitled to a refund of $833,108 calculated as the difference between the actual payments it made to Northern for 1 May to 31 December 1995 and Northern's toll revenue requirement for 1995, prorated for the eight-month period 1 May to 31 December 1995, less the expenses over the 1995 OTA Operating Expense guideline.
26.  Northern filed reply comments on 12 December 1996 and 28 January 1997.
27.  Northern agreed that the wording of its tariff pages should be changed to reflect the name of ONTEL, but did not agree that the other changes requested by ONTEL were necessary.
28.  Northern maintained its original position that the excess expenses were warranted as evidenced by the increased revenues generated.
29.  Northern stated that, in Order 95-465, the Commission had ordered that the parties were to settle in accordance with the 1973 Traffic Agreement up to 30 April 1995 and that only the interim Northern CAT was based on the forecast 1995 toll settlement.
30.  Northern submitted that it had not proposed to change the rates payable by ONTEL to Northern during 1 January to 30 April 1995 under the 1973 Traffic Agreement, thus ONTEL's comments in relation to retroactive rate-making should be dismissed as incorrect in law.
31.  The Commission notes that ONTEL has not shown that the wording of Northern's tariffs has caused problems with respect to the CAT and finds that the changes proposed by ONTEL, other than to correct ONTEL's name, are not needed.
32.  In Telecom Order CRTC 96-131, 19 February 1996 (Order 96-131), the OTA CAT participants, in determining the final OTA CAT for 1994, had agreed to utilize an operating expense level which was to be the lowest of each company's: (a) updated 1994 projected operating expenses based on a 2% plus Network Access Service growth guideline; (b) budgeted 1994 operating expenses; or (c) actual 1994 operating expenses.
33.  Furthermore, consistent with the approach taken in Order 96-131, any excess expenses claimed over the lowest of the guidelines must be fully justified by the company claiming them, and are subject to Commission review.
34.  In Decision 96-6, the Commission directed that the final 1995 OTA CAT should be determined in a manner similar to that used to finalize the 1994 OTA CAT.
35.  The Commission notes that, while Northern's excess operating expenses over the OTA guideline are modest, the increased marketing and commercial departmental expenses, primarily for increased customer focus initiatives, were foreseeable in nature and were under Northern's control.
36.  In any event, the Commission is not persuaded that the increased local and miscellaneous revenues were necessarily attributable to the additional expenses that Northern incurred and finds that the increased expenses of $29,600 should be disallowed for the purpose of calculating the CAT.
37.  In Decision 96-6, the Commission directed Northern, in determining its 1995 and 1996 CATs, to use a true-up provision that parallels that used to finalize the 1994 OTA CAT (which included the OTA's Operating Expense Guideline) using the mid-point of the approved ROE range.
38.  The Commission considers that the direction provided in Decision 96-6 modifies that of Order 95-465 and that Northern should have calculated its 1995 Toll Settlement/revenue requirement based on the true-up provision, using the mid-point of the approved ROE range.
39.  In response to a Commission interrogatory, Northern recalculated its 1995 Toll Settlement/revenue requirement to be $16,831,000, using the mid-point ROE of 12.625% and actual revenues and expenses.
40.  The Commission concludes that the amount of Toll Settlement revenues received by Northern from ONTEL for 1995 was $16,936,559 (Toll revenues of $4,903,226 for 1 January to 30 April 1995 as per Northern's response to a Commission interrogatory plus Toll revenues of $12,033,333 for 1 May to 31 December 1995 as per Order 95-465).
41.  With respect to ONTEL's claim of retroactive rate-making, the Commission stated in its letter dated 30 December 1994 that, pending its disposition of an application for expedited relief in connection with the notice of termination of the 1973 Traffic Agreement between Northern and ONTEL, the 1973 Traffic Agreement was to continue to operate.
42.  The Commission approved an interim 1995 Northern CAT rate effective 1 May 1995 in Order 95-465 and in Order 95-835, the Commission gave interim approval to an executed copy of the 1973 Traffic Agreement.
43.  In Decision 96-6, the Commission stated that the current 1995 Northern CAT should remain in effect until it can be finalized on the basis of 1995 actual Phase III results, to be filed in October 1996.
44.  The Commission considers that two interim regimes were in place throughout 1995 dealing with the interconnection and settlement of traffic between Northern and ONTEL, namely the 1973 Traffic Agreement which continued to operate and was also made in 1995 and the CAT which was approved on an interim basis through Order 95-465.
45.  Accordingly, the Commission considers it appropriate to take all of 1995 into account in setting the final 1995 Northern CAT without any retroactive or retrospective rate-making occurring.
46.  The Commission finds that for 1995 ONTEL is entitled to a refund from Northern in the amount of $135,159 for the overpayment of Toll Settlement/CAT revenues [$16,936,559-($16,831,000+$29,600)].
47.  In light of the foregoing, the Commission orders that:
 a) Tariff Notice 60 is approved, in part, subject to modifications being implemented to reflect the following:
 (i) The revised tariff is to state that the CAT is a Northern tariff to be paid by ONTEL, a division of Ontario Northland Transportation Commission;
 (ii) The revised tariff is to state that the final 1995 Northern CAT rate is $0.0844 per minute, with a Contribution rate of $0.0726 per minute, and a Direct Toll rate of $0.0118 per minute, being in force from 1 January to 31 December 1995; and
 (iii) The revised tariff is to state that the final 1995 Northern CAT was established using Northern's 1995 toll settlement requirement based on the mid-point of the approved rate of return range for Northern (true-up provision).
 (b) Northern is to issue, by 8 May 1997, revised tariff pages to reflect the final 1995 Northern CAT rate.
 (c) The $29,600 in excess expenses over the 1995 OTA Operating Expense guideline are disallowed for the purposes of calculating the final 1995 Northern CAT.
 (d) Northern is directed to refund the amount of $135,159 to ONTEL for 1995.
 Allan J. Darling
 Secretary General
 This document is available in alternative format upon request.

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