Telecom Order
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Ottawa, 30 June 1997
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Telecom Order CRTC 97-927
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On 31 October 1996, the Ontario Telephone Association (OTA) filed an application requesting final approval of the 1995 OTA Carrier Access Tariff (CAT) on behalf of the twenty-seven Ontario independent telephone companies (the companies) (listed in Appendix A to this Order) which are participants in the OTA CAT.
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File No.: Tariff Notice 22
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1. On 31 October 1994, OTA filed, under Tariff Notice 2, a proposed 1995 OTA CAT and in Telecom Order CRTC 94-1360, 17 November 1994 (Order 94-1360), the Commission approved, on an interim basis, a 1995 OTA CAT rate of 11.66 cents per minute (3.03 cents for Direct Toll charges and 8.63 cents for Toll Contribution) plus 0.07 cents per minute for Equal Access (EA), effective 1 January 1995.
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2. The 1995 interim CAT rate was established using each company's actual 1993 Phase III results, projected 1994 financial results and forecasted 1995 financial results.
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3. Each of the companies' 1995 forecast figures was based on (1) an Average Net Investment Base (ANIB) guideline and (2) an operating expense guideline established by the OTA members.
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4. Under the OTA guidelines, for 1995, the increase in each company's ANIB was limited to 8% of the 1994 ANIB projection while increases in 1995 operating expenses were to be limited to an updated operating expense guideline based on approved 1994 operating expenses multiplied by actual Network Access Service (NAS) growth plus 2%.
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5. OTA noted that, although no guideline was established for revenues, each company's 1995 budget for local, miscellaneous and other revenues was determined by increasing the 1994 revenue projection by 4%.
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6. The interim 1995 OTA CAT approved in Order 94-1360 did not include the impact of income taxes for those companies that converted to tax-paying co-operatives in 1995.
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7. In view of the above, OTA in its filing of 23 October 1995 to finalize the 1994 OTA CAT, indicated that the 1995 OTA CAT rate would be higher than the approved interim rate of 11.66 cents per minute (plus 0.07 cents per minute for EA).
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8. In Telecom Order CRTC 96-131, 19 February 1996 (Order 96-131), the Commission finalized the 1994 OTA CAT and accepted the OTA's suggestion that the interim 1995 CAT should remain at its existing level until finalized at a later date.
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9. In Regulatory Framework for the Independent Telephone Companies in Quebec 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 determined that the 1995 OTA CAT that was approved on an interim basis, at that time, should remain so until OTA filed an application for final approval, with supporting documentation, including audited financial statements and actual Phase III results.
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10. In Decision 96-6, the Commission also stated that the final 1995 OTA CAT should be finalized on the basis of 1995 actual Phase III results and in a manner similar to that used to finalize the 1994 OTA CAT as set out in Order 96-131.
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11. In Decision 96-6, the Commission also acknowledged that the final OTA CAT rate for 1995 could be higher than the current interim rate of 11.66 cents per minute (3.03 cents for Direct Toll charges and 8.63 cents for Toll Contribution) once the tax-paying status of the co-operatives was taken into consideration.
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12. In its application of 31 October 1996, OTA requested final approval of a 1995 CAT rate of 12.05 cents per minute (consisting of 2.85 cents for Direct Toll charges and 9.20 cents for Toll Contribution) which was based on actual 1995 Phase III results.
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13. OTA also proposed to eliminate a separate charge for EA by including it with the Direct Toll charge, noting that its proposed final 1995 CAT rate (but not its interim 1995 CAT) included EA in the Direct Toll charge and the effect of the now tax-paying co-operatives.
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14. On 29 November 1996, OTA submitted an amendment to its application stating that as a result of a review by the former auditors of one of its members, North Frontenac Telephone Company, the company had revised its treatment of income taxes on a retroactive basis but that the resulting increased revenue requirement had no impact on the proposed final 1995 CAT rate.
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15. In its 31 October 1996 submission, OTA noted that Gosfield North Municipal Telephone System (Gosfield) and North Renfrew Telephone Company Limited (North Renfrew) exceeded the OTA ANIB guideline and that several companies exceeded the OTA operating expense guideline.
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16. By separate letters which were part of OTA's submission, each respective company provided an explanation for exceeding the OTA guidelines.
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17. With respect to excesses over the ANIB guideline, OTA submitted that it was difficult, particularly for its small member companies without a large plant base, to comply with this guideline each year and that a company should be provided an opportunity to explain and justify why, in a given year, it was unable to comply with the ANIB guideline.
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18. With respect to the operating expense guideline, OTA included, as part of its submission, a comparison of each company's 1995 actual operating expenses to the greater of (1) the operating expense forecast, included in the 1995 interim CAT application (forecast), and (2) an updated operating expense guideline based on approved 1994 operating expenses multiplied by actual NAS growth plus 2% (guideline).
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19. OTA defined any expense that exceeded the guideline or forecast, as excess expense and any revenue that exceeded the forecast, as excess revenue.
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20. OTA identified that the 1995 actual operating expenses of 15 of the companies exceeded both their forecasts and the guideline, but submitted that the use of forecasts and guidelines was unfair for contribution calculation purposes as it would penalize companies that had actual expenses that were lower than the forecast or the guideline.
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21. OTA provided a schedule that compared the 1995 actual local, miscellaneous and other revenues to the forecasts and claimed that the additional revenues achieved by each company in 1995 resulted from initiatives which increased operating expenses.
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22. OTA submitted that the Commission should only focus on the amount of excess expenses that are not offset by corresponding revenue increases since a company which has higher than forecast local, miscellaneous and other revenues requires less toll settlement.
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23. OTA also submitted that the Commission could consider adjustments to the allowable expense and revenue for the CAT calculation if it was not satisfied with the explanations and justification provided by the company.
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24. On the basis of its proposed 12.05 cents per minute CAT rate, OTA calculated that approximately $1.6 million in additional revenue was due from AT&T Canada Long Distance Services Company (AT&T Canada LDS) and Bell Canada (Bell).
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25. On 2 December 1996, AT&T Canada LDS and Bell filed comments on OTA's application.
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26. AT&T Canada LDS submitted that the proposed final 1995 OTA CAT rate should be denied because it does not comply with Decision 96-6.
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27. AT&T Canada LDS noted that each OTA member's 1995 operating expenses were calculated according to three measures: (1) the forecast expenses included in the 1995 interim CAT application; (2) the budgeted expenses, based on approved 1994 operating expenses multiplied by actual NAS growth plus 2%; or (3) the actual 1995 operating expenses.
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28. AT&T Canada LDS submitted that, if OTA used the lowest of the three operating expense measures to calculate the final 1995 CAT and adjusted its members' contribution requirements to exclude excess operating expenses, the contribution portion of the final 1995 OTA CAT rate would be 8.82 (not 9.21) cents per minute.
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29. In AT&T Canada LDS' view, by not adjusting the companies' contribution requirements to reflect overspending, OTA's approach would allow the companies to over-recover operating expenses from toll carriers.
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30. AT&T Canada LDS also submitted that OTA's proposed tariff should be changed to equalize the bill due dates between OTA and the toll carriers and to revise terminology related to changing a customer's primary interexchange carrier.
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31. In reply comments dated 12 December 1996, OTA submitted that it finalized its 1995 CAT on the basis of 1995 actual results and in a manner not only similar but virtually identical to that used to finalize the 1994 OTA CAT.
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32. OTA acknowledged, however, that the only exception was in comparing the 1995 actual operating expenses of each CAT participant to (1) the operating expense forecast and (2) the updated operating expense guideline.
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33. OTA stated that, where actual expenses exceeded the greater of their forecast or the guideline, the respective companies provided explanations.
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34. OTA reiterated that it would be unfair to penalize a company if its actual expenses were less than its forecast or guideline.
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35. With respect to AT&T Canada LDS' other proposed changes to the OTA tariff, OTA submitted that these were matters beyond the scope of this application and should be addressed in the context of the 1997 CAT application.
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36. In its comments, Bell submitted that based on the information filed by OTA in support of its 1994 and 1995 CAT applications, 13 of 27 companies proposed to increase their 1995 CAT rates in contrast to the general trend to lower contribution rates.
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37. Bell expressed the view that the OTA CAT rate must be reduced if there is to be effective toll competition in the territories of the independents.
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38. Bell also stated that toll carriers should not be required to make up the shortfall of the companies that exceed the guidelines established by the OTA and that such incremental spending should be absorbed as a reduction to the companies' achieved rate of return.
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39. In Bell's view, the Commission should deny OTA's application on the basis that individual members cannot increase their contribution rates or exceed their spending guidelines except to account for the new tax-paying status of the co-operatives.
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40. In reply, OTA submitted that Bell's approach represents an imbalance in the application of a true-up as it implies that the applicant must absorb any excess expenses incurred but must pass along the benefit of any under-expenditures in the CAT calculation.
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41. OTA also submitted that Bell ignored the fact that some companies generated excess revenues greater than their excess expenses, resulting in a lower CAT rate.
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42. The Commission notes that the fundamental objection raised by AT&T Canada LDS and Bell relates to OTA's proposed method of finalizing its 1995 CAT.
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43. The Commission notes that, in approving the 1994 final OTA CAT in Order 96-131, the Commission generally accepted OTA's proposed method of determining the allowable level of operating expenses to be included in each company's contribution requirement as the lowest of:
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(a) the updated 1994 projected operating expenses for each company based on a 2% plus actual NAS growth guideline,
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(b) the forecasted 1994 operating expenses, or
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(c) the actual 1994 operating expenses.
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44. In Decision 96-6, the Commission stated that the 1995 CAT should be finalized on the basis of the 1995 actual Phase III results and in a manner similar to that used to finalize the 1994 OTA CAT.
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45. The Commission notes that the intent of imposing an ANIB guideline and of selecting the lowest of the three operating expense measures to calculate the contribution requirement is to control cost increases and increases to the CAT.
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46. The Commission notes that, although the small companies may have difficulty staying within a capital guideline, OTA, on its own initiative, developed and agreed to specific guidelines which it proposed to use on an annual basis to control the flow through of costs to be recovered from toll carriers through the CAT.
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47. The Commission agreed to this initiative in Order 96-131 and, in Decision 96-6, reduced the then allowable 8% year over year ANIB increase to 5% effective for 1996.
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48. In the Commission's view, OTA did not provide sufficient reasons, in this proceeding, to warrant a change to the methodology referred to above.
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49. Therefore, the Commission considers that the method used to finalize the 1994 OTA CAT should also be used to finalize the 1995 OTA CAT.
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50. The Commission concurs with Bell that, over time, the per-minute CAT rates must be reduced if there is to be effective toll competition in the territories of the independents.
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51. The Commission also notes that OTA members had excess expenses of approximately $1.3 million based on the OTA method of calculation but, as noted by AT&T Canada LDS, if OTA had used the lowest of the three operating expense measures specified in Order 96-131, the excess expenses would have been approximately $1.9 million.
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52. The Commission also notes that, in Order 96-131, when it allowed the excess expenses for Dryden Municipal Telephone System in finalizing the 1994 OTA CAT, the expenses claimed were considered justified and only had a modest impact on the final CAT rate.
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53. In OTA's application to finalize the 1995 CAT, the Commission notes that 12 of the 27 companies forecasted their 1995 operating expenses to be lower than the guidelines but incurred actual expenses which exceeded either their 1995 forecasts or the guidelines.
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54. The Commission notes that, the use of the OTA guidelines allows the companies to include annual cost increases for CAT purposes, without providing detailed supporting information.
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55. The Commission considers, however, that, where the companies' expenditures exceed the guidelines, the expenditures over and above the previous year's approved costs should be fully supported with detailed explanations, and that the excess expenditures should, generally, not be allowed unless they are justified.
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56. The Commission also notes that for Gosfield and North Renfrew, the two companies that exceeded the 8% ANIB guideline, the excess was due to facilities replacement, upgrades to improve service quality and unexpected cost overruns.
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57. The Commission considers that these expenditures were under management control and that the excess investment of these two companies should have been covered by the overall 8% increase and therefore disallows the excess investment for purposes of the 1995 CAT.
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58. In reviewing OTA's application for a final 1995 CAT, the Commission has taken into account the reasons provided for exceeding the guidelines and considers that a certain number of expenditures could have been foreseen and/or funded within the allowable annual increases in expenditures, based on the methodology set out in Order 96-131, or were subject to management discretion or have not been adequately substantiated, and therefore, are denied for CAT calculation purposes.
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59. For example, the Commission considers that the decision to incur expenditures for services such as Internet and promotion of optional local services was not imposed upon and external to, but rather within the control of each company.
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60. As a further example, with respect to Bruce Municipal Telephone System, the Commission notes that although additional costs may be incurred during unplanned work stoppages, at the same time, savings are also realized for wage and salary and other related costs and that these additional savings were not identified in the company's explanations.
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61. Similarly, with respect to the increases in taxes, particularly gross receipts taxes, claimed by North Renfrew and Otonabee Telephones Ltd. (which did not become co-operatives), the Commission considers the explanations provided for these expenses to be inconsistent and inadequate.
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62. Moreover, the Commission denies the claims of two companies that claimed increased OTA dues as part of their excess expenses.
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63. To the extent that these claimed expenses constitute part of the OTA administration costs, which are added separately to the total revenue requirement before calculating the industry-wide OTA CAT, the Commission considers that OTA should ensure that for all companies these costs are not double counted.
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64. Nevertheless, the Commission is of the view that it is not unreasonable for the companies to experience certain over-expenditures which may be eligible for recovery through the CAT, subject to Commission review and approval.
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65. In light of the above, the Commission has reviewed the explanations provided by the companies and concludes that, of the total $1.9 million, which is the amount in excess of the lowest of the operating expense measures, $0.6 million, as set out in Appendix B, is eligible for recovery through the 1995 CAT.
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66. Consistent with the determinations made in Decision 96-6, the Commission considers that the expenses related to co-operative conversions should be recoverable from the CAT.
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67. With respect to depreciation methodology, the Commission concludes that, since the Commission approved the requests of both Hurontario Telephones Limited and North Norwich Telephones Limited to implement Equal Life Group (ELG) depreciation in 1995, the resulting increased depreciation expense would not have been included in the 1995 OTA guidelines.
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68. The Commission further considers that, in the cases of Gosfield and North Renfrew, certain staff additions that were required are reasonable and notes that other employee remuneration obligations related to retirements may be recovered through the 1995 CAT.
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69. Finally, the Commission has allowed for CAT purposes in 1995 only some expenses related to activities that were imposed upon and beyond the companies' control.
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70. With respect to revenues, the Commission notes that, although OTA stated that initiatives taken to achieve these additional revenues resulted in increased expense, no direct relationship was claimed or evidenced between the individual expense explanations and any increased revenue.
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71. In the Commission's view, those OTA members that are continually experiencing excess increased expenses should consider seeking rate relief in the future rather than relying on the toll carriers to meet budget deficits or to fund new services.
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72. With respect to OTA's proposal to eliminate a separate access charge for EA start-up costs by including it in the Direct Toll charge, the Commission notes that this approach was approved in Decision 96-6 for 1997 onwards when the OTA is to submit company specific rates for the recovery of switching and aggregation costs and EA start-up costs.
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73. The Commission also notes that the start-up costs for EA are to be recovered over a ten-year period, with the expectation that some of the costs would likely be incurred in 1995.
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74. The Commission is of the view that OTA's proposal is acceptable as long as these costs are recovered over a ten-year period and separately identified to include only the amortized portion in each year's operating expenses.
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75. With respect to AT&T Canada LDS' proposal to change the OTA CAT tariff pages regarding bill due dates and terminology related to changing a customer's primary interexchange carrier, the Commission concurs with OTA that the matters identified are beyond the scope of this application and can be addressed in the proceeding to finalize the OTA's 1997 CAT application.
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76. In light of the foregoing, the Commission orders that:
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The proposed 1995 final OTA CAT of 12.05 cents per minute (2.85 cents for Direct Toll charges and 9.20 cents for Toll Contribution) filed under Tariff Notice 22 is denied.
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OTA is to file for approval by 21 July 1997, a 1995 final OTA CAT calculated to exclude:
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(a) all excess operating expenses (except for those expenses specifically identified in Appendix B) that exceed the lowest of each OTA CAT participant's:
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(i) 1995 projected operating expenses based on the 2% plus actual 1995 NAS growth guideline,
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(ii) forecasted 1995 operating expenses, or
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(iii) actual 1995 operating expenses, and
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(b) all excess investment over the 8% ANIB guideline.
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77. OTA is also to ensure that the OTA administration expenses are only included once in the revised final 1995 CAT calculation.
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78. OTA is to eliminate the separate charge for EA start-up costs by including it in the Direct Toll charge, provided these start-up costs are recovered over a ten-year amortization period, for purposes of finalizing the 1995 CAT.
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79. AT&T Canada LDS' request to have OTA revise its CAT tariff pages with respect to bill due dates and terminology related to changing a customer's primary interexchange carrier can be addressed in the OTA 1997 CAT proceeding and is therefore denied.
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80. OTA is directed to file for approval, by 21 July 1997, a revised final 1996 OTA CAT filed on 27 March 1997 under Tariff Notice 28, taking into account the Commission's determinations set out in this Order.
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Laura M. Talbot-Allan
Secretary General
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This document is available in alternative format upon request.
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Appendix A
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Amtelecom Inc.
Brooke Telecom Co-operative Limited
Bruce Municipal Telephone System
Coldwater Communications Inc.
Durham Telephones Limited
Dryden Municipal Telephone System
Gosfield North Municipal Telephone System
Hay Communications Co-operative Limited
Huron Telecommunications Co-operative Limited
Hurontario Telephones Limited
Keewatin Municipal Telephone System
Kenora Municipal Telephone System
The Lansdowne Rural Telephone Company Limited
Manitoulin Tel Inc.
Mornington Communications Co-operative Limited
North Frontenac Telephone Company Limited
North Norwich Telephones Limited
North Renfrew Telephone Company Limited
Otonabee Telephones Ltd.
The People's Telephone Company of Forest Limited
Quadro Communications Co-operative Inc.
Roxborough Telephone Company Limited
South Bruce Rural Telephone Company Limited
The Corporation of the City of Thunder Bay
(Telephone Division)
Tuckersmith Communications Co-operative Limited
Westport Telephone Company Limited
Wightman Telephone Limited
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Appendix B
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