I Introduction and Background
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In an application dated 15 October 1996,
Call-Net Enterprises Inc. (Call-Net), requested that the Commission order Northwestel Inc.
(Northwestel) (i) to show cause why the general framework regarding the terms and
conditions of interconnection to the public switched telephone network (PSTN) and resale
and sharing of interexchange voice services established in 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) should not be made applicable to Northwestel; and (ii) to implement immediately the
terms and conditions of interexchange interconnection and resale and sharing based on
Decision 92-12, on an interim basis, in the operating territory of Northwestel.
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By letter dated 28 February 1997, the
Commission denied Call-Net's application for interim relief. On the same date, the
Commission issued Northwestel Inc. - Interconnection of Interexchange Carriers and
Related Resale and Sharing Issues, Telecom Public Notice CRTC 97-10, 18 February 1997 (PN 97-10), initiating a proceeding to consider the
issues of interconnection of interexchange carriers (IXCs) to Northwestels network
and the resale and sharing of Northwestels telecommunications services to provide
interexchange voice services that allow for access to the PSTN.
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In PN 97-10, the Commission sought comments associated
with long distance service competition in Northwestels territory, including (i) the
advantages and disadvantages of competition, (ii) the impact on service to high-cost
areas, (iii) the impact on service to underserved areas, (iv) the form of competition, (v)
the terms and conditions of interconnection, (vi) the appropriate contribution mechanism,
(vii) equal access and recovery of start-up costs, (viii) the implementation schedule
for competition and equal access, (ix) the recovery of switching and aggregation costs,
(x) the method of regulation (e.g., split rate base), (xi) the need to restructure rates,
(xii) the rationalizing of toll rates for the Eastern and Western regions of
Northwestels operating territory, and (xiii) any other issues that the
Commission should consider.
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The Commission received submissions from
individual subscribers, organizations, and from the following registered parties:
Call-Net, Government of the Northwest Territories (GNWT); Government of Yukon (Yukon);
Westel Communications Ltd. (Westel); Consumers Association of Canada [NWT] (CAC
[NWT]); TMI Communications Company, Limited Partnership (TMI); and Telesat Canada
(Telesat). The Commission held regional consultations at Yellowknife and Whitehorse, with
video links to Iqaluit and Fort Nelson, respectively.
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II Advantages and Disadvantages of Toll
Competition
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Northwestel, CAC [NWT], Yukon and Telesat
submitted that competition would provide the benefits of customer choice of long distance
service suppliers and the potential for lower long distance rates.
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Northwestel submitted that it is
financially dependent on toll revenues from a few high-volume business customers and with
the introduction of toll competition it would lose this revenue and incur a revenue
shortfall. Northwestel further submitted that its larger toll users would be highly
susceptible to switching to a new carrier, which would result in a faster rate of market
share erosion than that experienced by the Stentor owner companies (SOCs).
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GNWT submitted, among other things, that
competition would bring new services and pricing packages that would be more responsive to
customers needs, but noted that competition may affect employment and investment
levels.
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GNWT and CAC [NWT] submitted that
competition may impact the accessibility to affordable, high quality service and that it
may result in loss of traffic for Northwestel on which the company relies to generate
subsidies to support unprofitable service.
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The Commission notes that there was general
support for the introduction of competition, both in the written comments received and at
the regional consultations. The Commission considers that the advantages of competition
outweigh the disadvantages and that the disadvantages can be addressed through the
establishment of appropriate terms and conditions for toll competition. Among the
advantages, competition would reduce toll rates to the benefit of the majority of
Northwestel subscribers given the importance of toll calling in the North. Competition
would also increase the competitiveness of business in the North, as well as bring about
increased customer choice and responsiveness to the requirements of users.
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Based on the record of this proceeding, the
Commission finds that toll competition, subject to appropriate terms and conditions, is in
the public interest.
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III Impact of Toll Competition on
High-Cost Serving Areas and Underserved and Unserved Areas
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Northwestel submitted that, if toll
competition were to be introduced, it would have to be on different terms and conditions
than those established for other telephone companies in order to address the unique
circumstances of its operating environment.
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Northwestel submitted that, in comparison
to other telephone companies, its operating environment is unique in a number of ways: the
varied topography; the extreme climate; long distances between inhabited communities
making travel and shipping difficult and costly; a widely dispersed population in small
centres; a mix of languages, cultures and lifestyles; a small, fragile and very cyclical
economy with a gross domestic product highly dependent on the public sector; high cost of
living; a vast operating area; a high-cost serving area; its financial viability highly
dependent on toll service revenues from its high-volume customers; and toll rates
significantly higher than in southern Canada.
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Northwestel submitted that, absent
modifications to take into account the uniqueness of the North, the competition model
established by the Commission in the operating territories of other telephone companies
would have significant adverse effects, including the viability of Northwestel as a full
service provider.
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Northwestel submitted that, in order to
recover the revenue shortfall arising from toll competition, there would be a need for an
external subsidy, through a high-cost area fund.
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Westel, GNWT and Yukon agreed with
Northwestel that there is a need to establish a mechanism to fund the cost of service to
high-cost areas and submitted that this matter should be examined by the Commission in a
separate proceeding dealing with high-cost and underserved areas.
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Some parties expressed general concern
about the continuation of basic service throughout the North.
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The Commission notes that it has initiated
a proceeding to examine the issue of service to high-cost serving areas in Service to
High-Cost Serving Areas, Telecom Public Notice CRTC 97-42, 18 December 1997 (the High-Cost Areas
Proceeding), in which the Commission stated its intention to implement by 1 January 2000
any safeguards or mechanisms required to address the issue of service to high-cost serving
areas.
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The Commission agrees with Northwestel that
the companys provision of service to certain areas is uneconomic and requires
financial cross-subsidies from highly profitable toll routes. In the Commissions
view, this source of subsidy would likely be eroded significantly with the introduction of
competition, absent further rate rebalancing discussed below and the establishment of
appropriate terms and conditions. This would adversely impact on the companys
capability to continue to be a full service provider of last resort throughout its
operating territory, thereby further exacerbating the problem of service to underserved
and unserved areas in Northwestels territory.
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Given the above, the Commission finds that
the introduction of toll competition in Northwestel's territory, is not appropriate at
this time.
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In light of (a) the timing of the rate
rebalancing directives ordered in this Decision, and (b) the proposed timetable to address
the issues in the High-Cost Areas Proceeding, the Commission considers that competition
should not be implemented before 1 July 2000 in Northwestels territory. This timing
takes into consideration the expected implementation date of 1 January 2000 for any
mechanisms to address the question of high-cost serving areas. Given the unique
circumstances of Northwestels operating area, including the matter of uneconomic
toll routes, the Commission will initiate a proceeding to examine the specific terms and
conditions of competition in Northwestels territory (the Implementation Proceeding)
which will take into account the findings of the High-Cost Areas Proceeding. The
Commission expects to initiate the Implementation Proceeding in late 1999 with a decision
expected to be rendered by early 2000.
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IV Form of Competition and the
Appropriateness of an Interim Regime
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Call-Net and Westel submitted that the form
of competition established for the SOCs (the Southern-Canada model) should be applied
without change in Northwestels territory.
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Northwestel submitted that the
Southern-Canada model fails to respond to the unique needs of the North, including its
cost structure and the fact that long distance service is provided at a loss to the vast
majority of communities. In Northwestels view, competition should not undermine the
continued financial viability of the company as a service provider, employer and investor.
Northwestel also submitted that competition should not prevent the company from recovering
its high operating costs and should permit it to price its services at a competitive
margin above the prices of alternate service providers.
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A number of parties made submissions
concerning the appropriateness of an interim regime and the gradual implementation of
competition.
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GNWT submitted that, provided a new support
mechanism is implemented for high-cost areas, including underserved and unserved, there
should be as few restrictions as possible on competitive entry.
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Northwestel opposed the early introduction
of a competitive resale regime in its territory as this would cause significant and
immediate erosion of the companys toll revenues.
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Yukon submitted that competition and equal
access should be implemented as soon as possible.
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The Commission considers that, as far as
possible, the terms and conditions of competition should be the same throughout Canada. In
the case of Northwestel, the Commission is of the view that modifications may be required
to reflect the uniqueness of Northwestels operating environment. The Commission
considers that the need, if any, for such modifications will likely be affected by the
findings in the High-Cost Areas Proceeding. The Commission intends to examine the
appropriateness of modifications in the Implementation Proceeding.
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With respect to the matter of an interim
limited competitive regime prior to the introduction of equal access, the Commission
considers that any such regime, including simple resale and sharing of its interexchange
services, would not be appropriate. In the Commissions view, while an interim regime
may provide certain benefits to some subscribers in the largest communities, it would
likely have negative consequences for the general body of subscribers as a whole. These
consequences include the potential adverse impact on quality of service and undue upward
pressure on local service rates.
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V Equal Access and Recovery of Start-up
Costs
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Northwestel proposed that
Feature Group D (FG-D) equal access be provided in the four switches located in
Yellowknife, Whitehorse, Iqaluit and Fort Nelson.
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Northwestel stated that it
had no firm plans to introduce FG-D equal access in other communities but assumed that
equal access would be rolled out to other locations as competition developed.
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Northwestel submitted that
toll competitors should be required to fully compensate Northwestel for all start-up costs
incurred for the provision of equal access. Northwestel proposed to estimate start-up
costs using a Phase II study and develop a per-minute rate and recover the costs over a
ten-year period.
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Northwestel also submitted
that start-up expenditures and the roll-out of equal access should not be incurred and
implemented until competitors had committed to enter its market. Northwestel submitted
that its finite resources do not permit it to undertake expenditures which require
speculation on the outcome of this proceeding and on the plans of potential competitors as
to whether, and if so, when and how, they might enter the market.
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Northwestel submitted that
it could not afford to subsidize the entry of large competitors because of its
vulnerability, competitive disadvantages and its inability to generate revenue from
lower-cost areas to cross-subsidize its higher-cost areas.
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GNWT, Yukon, Call-Net and
Westel disagreed with Northwestels position that expenditures related to the
start-up of equal access should only be undertaken once competitors had contractually
agreed to enter its territory.
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GNWT was of the view that
Northwestel should be required to immediately undertake these start-up activities
necessary to accommodate competitive entry, including the roll-out of equal access to the
four switches identified in the companys submission. GNWT was also of the view that
the company should be required to file a detailed plan outlining the further roll-out of
equal access to other communities.
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GNWT, Yukon, Call-Net and
Westel also disagreed with Northwestels proposal to recover all start-up costs from
new entrants and submitted that the recovery of those costs should be consistent with the
formula established for the SOCs.
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GNWT and Westel submitted
that because all customers will benefit from competition, start-up costs should be shared
between the company and new entrants based on long-run market share.
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Both Call-Net and Westel
expressed concern that Northwestel had overestimated start-up costs and submitted that
only costs causal to equal access should be recovered by Northwestel.
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The Commission notes that
no party opposed Northwestels proposal to begin the roll-out of equal access by
initially implementing FG-D equal access in Yellowknife, Whitehorse, Iqaluit and Fort
Nelson. The Commission also notes that most parties called for the continued roll-out of
equal access to all communities.
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Consistent with its view in Decision 92-12,
the Commission considers that equal ease of access through 1+ dialling is essential in a
competitive environment. Accordingly, the Commission disagrees with Northwestels
proposal that start-up expenditures be incurred only once competitors have contractually
agreed to enter the companys market. Moreover, the Commission is of the view that
equal access should be rolled out to as many communities as feasible.
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The Commission directs
Northwestel to implement FG-D equal access in its switches located in Yellowknife,
Whitehorse, Iqaluit and Fort Nelson by 1 July 2000 to coincide with the expected
introduction of competition in Northwestels territory. In conjunction with the
provision of FG-D interconnection, Northwestel shall also make arrangements necessary to
make available a pair of Common Channel Signalling #7 (CCS7) Signal Transfer Points with
which competitors can interconnect for the exchange of CCS7 signalling. The Commission
also intends to require Northwestel to file a roll-out plan outlining the type and
continued implementation of equal access for its remaining end offices in the course of
the Implementation Proceeding.
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With respect to the recovery of start-up
costs, the Commission is concerned that imposing all start-up costs on new entrants would
serve as a deterrent to workable competition.
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Consistent with Decision
92-12, the Commission considers that start-up costs should be shared between Northwestel
and new entrants. However, the Commission is of the view that a determination of the exact
proportion of costs to be recovered as between the company and new entrants should be made
in the Implementation Proceeding.
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The Commission is also of the view that
start-up costs should be based on Phase II incremental costing and recovered through a
per-minute mechanism over a ten-year period.
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VI Rate Rebalancing and Rationalizing
Toll Rates for the Eastern and Western Regions of Northwestels Operating Territory
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Northwestel submitted that
regardless of whether toll competition is introduced, the company should be permitted to
engage in further rebalancing of its local and long-distance rates and, accordingly,
proposed two different rate rebalancing scenarios.
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Under its non-competitive
scenario, Northwestel proposed to increase its local rates for both residence and business
customers by $4 in 1998, $4 in 1999 and $3 in 2000, with offsetting long distance rate
reductions causing its basic toll rates to move towards levels similar to the existing
basic schedules of the SOCs.
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Under its competitive
scenario, Northwestel proposed to accelerate rebalancing with a $4 increase in 1998 and a
$6 increase in 1999. Under this scenario, Northwestel proposed to first move its rates
towards those of the SOCs, then seek to price its toll services at levels similar to those
offered to consumers in the South. Northwestel also submitted that an additional revenue
requirement increase would likely be required within this timeframe.
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GNWT, noting the increased
bypass activity, the pending introduction of competition and the benefits of rate
rebalancing identified by the Commission in Review of Regulatory Framework, Telecom
Decision CRTC 94-19, 16 September 1994 (Decision 94-19), agreed with Northwestel that its
rates needed to be rebalanced prior to the projected introduction of competition on an
equal access basis.
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A number of parties to the proceeding
acknowledged that the high level of toll prices in Northwestels serving area
constitutes a strong incentive to bypass the companys toll services.
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GNWT submitted that, in
order to avoid undue negative impacts on certain customers, any rate rebalancing should be
limited in magnitude and should not involve more than one local rate increase over any
twelve-month period.
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GNWT further submitted that
Northwestels competitive rate rebalancing proposal would generally allow for a
reduction in the average residential subscriber bill and would yield substantial
reductions to the average bills of heavy toll users.
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GNWT agreed with
Northwestels proposal to continue to seek to equalize the rates for the Eastern and
Western areas.
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Yukon submitted that rate rebalancing would
produce a welcomed reduction in long distance rates. However, rate rebalancing must not
jeopardize quality of service or the affordability of local access. Yukons
submissions also addressed the Eastern and Western area toll schedule disparities, and
included a call for the re-examination of the Commissions determinations in Bell
Canada and Northwestel Inc. - Sale of Facilities in the Northwest Territories, Telecom
Decision CRTC 92-6, 1 May 1992 (Decision 92-6).
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Call-Net and Westel noted
that Northwestels rates for local services are far below costs and supported the
companys proposals to rebalance rates.
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Northwestel acknowledged
Yukons dissatisfaction with the present rate structure but submitted that a
re-investigation of Decision 92-6 was not warranted.
Northwestel submitted that the record of this proceeding showed that substantial
cross-subsidies flow throughout Northwestels operating territory and that these
benefit many Yukon communities.
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The Commission notes that while Northwestel
has already begun a process of rate rebalancing, its local access rates remain among the
lowest in the country. At the same time, its toll rates, particularly those in the Western
operating area, are very high.
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The Commission agrees with
parties that current bypass activities are causing a significant erosion of
Northwestels revenue. In the Commissions view, this revenue erosion could
ultimately undermine the companys ability to maintain existing subsidy flows to
local service. The Commission notes that rate rebalancing would also reduce the incentive
for bypass.
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The Commission also agrees
with parties that rate rebalancing is a necessary precondition for workable toll
competition and considers that Northwestels specific proposal to rebalance rates in
two steps by $4 and $6 local rate increases with offsetting toll rate reductions over a
two-year period, as supported by GNWT, is appropriate.
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The Commission shares the concerns of both
CAC [NWT] and GNWT with regard to the accuracy of elasticity assumptions concerning rate
rebalancing. However, the Commission is of the view that the elasticity factor approved in
Telecom Order CRTC 97-1034, 25 July 1997
(Order 97-1034), continues to be the best
estimate of elasticity at this time.
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The Commission is of the
view that the local rate increases directed in this Decision, using the elasticity factor
approved by the Commission in Order 97-1034,
will permit Northwestel to price its basic toll services at levels similar to the
SOCs existing basic toll schedules.
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Given the uncertainty
associated with elasticity, and given that the impacts of the High-Cost Areas Proceeding,
and a possible Northwestel initiated revenue requirement proceeding are not known at this
stage, the Commission considers that it would be inappropriate to make any determination
at this time regarding the need, if any, for additional rebalancing beyond that directed
in this Decision.
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The Commission notes
Northwestels proposal to rationalize Eastern and Western toll schedules and the
agreement of GNWT and Yukon with this principle.
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Since the Eastern area toll
rates are significantly lower than those of the Western area schedules and are already
similar to the SOCs basic toll schedules, the Commission is of the view that the
rebalancing should be applied to eliminate the rate disparity between the Western and
Eastern area toll schedules, and should also address the bypass issue.
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The Commission considers that as a result
of the rebalancing initiatives approved herein, including the required toll rate
reductions, the average bill for the majority of Northwestel residential customers will
likely decrease, as will the average bill for the majority of its business customers.
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The Commission hereby
orders Northwestel to increase its local access rates by $4 effective 1 August 1998 and by
$6 on 1 August 1999, and to offset such increases with toll rate reductions on a
revenue neutral basis. Northwestel is directed to file, by 15 June 1997 and 15 June
1998, proposed tariffs reflecting the above.
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Given that, among other things, the toll
restructuring ordered in this Decision addresses the issue of the rationalization of the
Eastern and Western area toll schedules, the Commission is not persuaded by Yukons
arguments that a review of Decision 92-6 is warranted.
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VII Contribution and Recovery of
Switching and Aggregation Costs
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Northwestel submitted that it was essential
that it fully recover the Carrier Access Tariff (CAT) charge. The company estimated its
current level of the CAT to be 17 cents per minute which includes switching and
aggregation costs, contribution requirement and recovery of start-up costs. At such a
level, and if the company were required to satisfy an imputation test for purposes of
competitive safeguards, Northwestel submitted that it would be prevented from setting its
toll rates at levels reasonably competitive with those of its toll competitors.
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Northwestel noted that the costs of
providing long distance service are much higher than those in Southern Canada, whether
calculated based on Phase III costs or on Phase II incremental costs. Northwestel proposed
that switching and aggregation rates be based on Phase III costs.
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Northwestel submitted that the contribution
mechanism best suited to its territory includes differing peak and off-peak rates, a
doubling of minutes for Canada-U.S. and Canada-Overseas calls, no discounts for toll
competitors and Direct Access Line (DAL) compensation which fully reflects conversation
minutes.
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Northwestel proposed that its contribution
requirement be calculated to include the shortfall in its "Competitive Terminal -
Other" Phase III Broad Service Category because the company remains the only
immediate, local provider of single-line telephone sets and inside wire in most of the
communities that it provides service to.
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GNWT supported a per-minute contribution
mechanism but proposed further de-averaging of contribution rates by rate groups. GNWT
further submitted that new competitors should not be entitled to any discounts and
proposed that contribution on DALs be based on an estimated number of minutes of traffic
carried on such lines. GNWT was of the view that a proxy of 8,000 minutes per DAL per
month would be reasonable, subject to periodic audits.
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GNWT proposed that, consistent with the
treatment afforded to the Ontario and Quebec independent telephone companies, any new
traffic arising solely as a result of market entry should not be exempt from contribution
charges.
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GNWT proposed that Northwestel be required
to use Phase II costing principles to establish switching and aggregation charges but that
it be permitted to make any necessary adjustments to ensure that the study results more
accurately reflect the long-run incremental costs of providing switching and aggregation
service to competitors.
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Westel submitted that the issue of service
to high-cost areas should be treated separately from the regulatory framework applicable
to Northwestel and that the contribution regime currently applicable to the SOCs should
also apply to Northwestel.
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Call-Net submitted that, if an explicit
fund or other such mechanism is established as a result of the High-Cost Areas Proceeding,
sustainable CAT rates could be achieved. In this regard, Call-Net proposed that the
contribution mechanism presently in place for the SOCs should also apply to Northwestel,
including the use of Phase II costing to determine switching and aggregation charges, and
that any CAT established should be applied to all carriers.
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Yukon submitted that large toll competitors
should be required to pay slightly higher contribution because of the higher costs to
serve the North.
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With respect to the contribution mechanism,
a number of parties recognized the need for some form of competitive safeguards to apply
to Northwestel.
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Telesat and TMI raised a number of concerns
relating to the treatment of contribution on private lines.
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Consistent with the view that the terms and
conditions of competition in Northwestels territory should be as similar as possible
with those in the rest of the country, the Commission considers that the contribution
mechanism will contain the following elements: (1) contribution will be applied on a
per-minute basis; (2) there will be no discounts for toll competitors; (3) the
contribution requirement will be calculated using Phase III costs and will be based on the
Local/Access shortfall; (4) rates will be de-averaged by peak and off-peak traffic;
(5) traffic on DALs will be subject to contribution; and (6) switching and
aggregation charges will be based on Phase II incremental costing principles.
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In the Commissions view, a
sustainable CAT is necessary to ensure workable toll competition. However, given, among
other things, the uncertainty concerning the impact of the High-Cost Areas Proceeding on
the CAT, the Commission is not in a position at this time to determine the specific terms
and conditions of a contribution mechanism. Such terms and conditions will be established
in the Implementation Proceeding, together with other matters, including the need for, and
form of, both competitive safeguards and the explicit treatment for contribution on
private lines.
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VIII Method of Regulation
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In Decision 94-19, the Commission
determined that a different form of regulation from that applicable to the SOCs should
apply to Northwestel as there would be little benefit gained from splitting
Northwestels rate base due to (1) no major competitor existing in the companys
long-distance service markets and (2) the limited competition that currently exists in
private line services and terminal equipment markets.
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In Decision 94-19, the Commission adopted
an incentive earnings regime for Northwestel by widening the company's return on average
common equity to a range of 11.25% to 13.25%, with any returns between 13.25% and 14.25%
to be shared between shareholders and subscribers. Earnings in excess of 14.25% are to be
returned to the subscribers.
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Northwestel submitted that given the
presence of shortfalls in its local market and substantial parts of its toll market, the
split rate base and the price cap method of regulation applicable to the SOCs would not be
appropriate for Northwestel at this time. The company submitted that a premature change to
its method of regulation would place its financial viability at risk.
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In Northwestels view, the earnings
method of regulation, supplemented by the incentive scheme established in Decision 94-19,
continues to provide the best balance between the interests of customers, competitors and
investors for the time being.
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Northwestel proposed that after having had
the opportunity to observe the introduction and progress of toll competition in the North,
and once a number of market/regulatory conditions have been met, the Commission could then
consider the appropriateness of other regulatory models developed for the South.
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A number of parties submitted that a split
rate base regime is the appropriate method of regulation for Northwestel but that price
cap regulation would be inappropriate in the short term as it is dependent on
Northwestels rates for local service being closer to costs.
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Westel submitted, among other things, that
it would be highly inappropriate for Northwestel to be regulated by way of earnings
regulation after toll competition is introduced in its operating territory as this would
provide Northwestel with anti-competitive incentives and opportunities.
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Given that toll competition is not being
introduced immediately, and recognizing the need for a more rational pricing structure
prior to considering a move to a different method of regulation, the Commission is of the
view that the existing incentive earnings regime established in Decision 94-19 remains
appropriate at this time. The Commission will examine this issue further in the
Implementation Proceeding.
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IX Quality of Service
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Northwestel submitted that its role must
continue to be that of the primary provider of end-to-end telecommunications services to
all communities in the North. With the appropriate funding mechanism in place to maintain
its viability as a full service provider in a competitive market, Northwestel stated that
it remains committed to fulfilling this vision.
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GNWT submitted that the Commission will
need to be increasingly vigilant in guarding against any deterioration in quality of
service standards and that it will be particularly important for the Commission to
consider the rapid introduction of the sanctions described in paragraph 73 of Quality
of Service Indicators for Use in Telephone Company Regulation, Telecom Decision CRTC 97-16, 24 July 1997 (Decision 97-16).
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Yukon submitted that, among other things,
Northwestels proposal does not adequately address quality of service issues.
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The Commission notes that, depending on the
severity of service quality deterioration, Decision 97-16
provides for progressively severe regulatory responses. This, together with the reporting
format for service indicators established in Decision 97-16,
should, in the Commissions view, provide for adequate monitoring and enforcement of
Northwestels service quality after the introduction of toll competition.
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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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