ARCHIVED -  Telecom Decision CRTC 98-13

I INTRODUCTION

1. On 26 April 1994, as a result of the Supreme Court of Canada’s decision in Attorney-General of Quebec et al. v. Téléphone Guèvremont Inc., the independent telephone companies in Canada were brought under the Commission’s jurisdiction.

2. 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 recognized the unique circumstances facing Abitibi-Consolidated (formerly Abitibi-Price Inc.) and Cochrane Public Utilities Commission (Cochrane), and accepted the continuation of the current method of regulation for Abitibi-Consolidated and Cochrane, i.e., the traditional settlement agreement between those companies and Ontario Northland Transportation Commission (the telecommunications operating division which is now known as O.N. Tel) (O.N. Tel).

3. On 19 February 1997, the Commission issued Regulatory Framework for Abitibi-Price Inc. and Cochrane Public Utilities Commission, Telecom Public Notice CRTC 97-6 (PN 97-6), initiating a proceeding to deal with the regulatory framework for Abitibi-Consolidated and Cochrane. The Commission was of the preliminary view that the regulatory framework established for the Ontario independent telephone companies in Decision 96-6 could apply to Abitibi-Consolidated and Cochrane as of 1 January 1998 (including a $2.00 increase in local rates effective 1 January 1998 and 1999).

4. Parties to the proceeding were Abitibi-Consolidated, Cochrane, O.N. Tel and Public Interest Advisory Centre (PIAC).

5. Cochrane filed its submission and its response to initial Commission interrogatories on 16 April 1997. On 16 June 1997 and on 11 August 1997, Cochrane filed responses to the second set of Commission interrogatories and O.N. Tel’s interrogatories, respectively. O.N. Tel filed comments on 25 September 1997. Cochrane filed reply comments on 14 October 1997.

6. Abitibi-Consolidated filed its submission and its response to initial Commission interrogatories on 20 June 1997. On 22 September 1997, Abitibi-Consolidated filed responses to the second set of Commission interrogatories and to O.N. Tel’s interrogatories. Comments were filed by Abitibi-Consolidated on 27 October 1997 and by O.N Tel on 28 October 1997. On 10 November 1997, Abitibi-Consolidated filed reply comments.

7. PIAC filed comments with respect to both Abitibi-Consolidated’s and Cochrane’s submissions on 28 October 1997.

8. In Telecom Order CRTC 97-1921, 23 December 1997, as corrected by Telecom Order CRTC 97-1921-1, 5 February 1998 (Order 97-1921), the Commission (1) approved Terms of Service for Cochrane (Terms of Service for Abitibi-Consolidated were approved in Telecom Order CRTC 95-1264, 21 November 1995), (2) approved a rate increase of $2.00, effective 1 January 1998, for Abitibi-Consolidated’s and Cochrane’s residence and business primary exchange services, unless a particular local rate was shown to be compensatory, and (3) made interim, as of 1 January 1998, the respective settlement agreements Abitibi-Consolidated and Cochrane currently have with O.N. Tel.

II INTERIM REGULATORY REGIME FOR ABITIBI-CONSOLIDATED AND COCHRANE

A. Application of Decision 96-6 Framework

9. In Decision 96-6, the Commission established a regulatory framework for the Ontario and small Quebec independent telephone companies except Abitibi-Consolidated, Cochrane and O.N. Tel. During the proceeding that led to Decision 96-6, both Abitibi-Consolidated and Cochrane submitted that they required time to separate their costing records for their telephone operations. These companies did not have separate telephone company records, but rather are operated as a Mill Business unit in the case of Abitibi-Consolidated and a separate division of a public utilities commission in the case of Cochrane. The Commission stated that it would accept the continuation of the method of regulation in place for Abitibi-Consolidated and Cochrane until it carried out a separate proceeding for O.N. Tel. Consequently, neither Abitibi-Consolidated nor Cochrane were required to file a forecast carrier access tariff (CAT) and associated financial information.

10. On 19 February 1997, the Commission issued Regulatory Framework - Ontario Northland Transportation Commission, Telecom Public Notice CRTC 97-7 (PN 97-7), initiating a proceeding to set a regulatory framework for O.N. Tel on the same day that the Commission issued PN 97-6 initiating a proceeding to set a regulatory framework for Abitibi-Consolidated and Cochrane.

11. In PN 97-6, the Commission was of the preliminary view that enough time had elapsed since the issuance of Decision 96-6 in order for Abitibi-Consolidated and Cochrane to have separated their telephone company accounting records from the records of their other operations. In addition, Abitibi-Consolidated and Cochrane were asked to show cause why the regulatory framework set out in Decision 96-6 should not apply to them.

12. In their submissions, Abitibi-Consolidated and Cochrane filed proposals/comments regarding the application of the regulatory framework set out in Decision 96-6. However, Abitibi-Consolidated and Cochrane did not file Phase III costing information.

13. The Commission considers that the public record is sufficient for it to make determinations on all issues necessary for setting a regulatory framework for Abitibi-Consolidated and Cochrane, with the exception of Phase III costing information, as discussed in Section B below.

14. Therefore, in this Decision, the Commission has set out a regulatory framework for Abitibi-Consolidated and Cochrane based on the framework in Decision 96-6 . Those elements of the regulatory framework set out in Parts III, VI and VIII of this Decision will apply subject to the conditions described in Section B below. Due to the absence of costing information, in Section B, the Commission has set out an interim regulatory regime for Abitibi-Consolidated and Cochrane that applies effective 1 January 1998. Under this interim regulatory framework, Abitibi-Consolidated and Cochrane will have an interim CAT that is based on the final 1997 Northern Telephone Limited (Northern) CAT. Each company’s Phase III costing information, when filed, can be dealt with in a CAT proceeding similar to those that currently take place for the other independent telephone companies.

B. Phase III Methodology

15. During the proceeding that led to Decision 96-6, both Abitibi-Consolidated and Cochrane submitted that they required time to separate their costing records for their telephone operations.

16. As noted above, in PN 97-6, Abitibi-Consolidated and Cochrane were asked to show cause why the regulatory framework set out in Decision 96-6 should not apply to them, which includes the requirement to develop a Phase III methodology, without which a cost-based CAT cannot be developed.

17. Abitibi-Consolidated stated that its telephone operations have not been segregated from the books of the Iroquois Falls mill. Abitibi-Consolidated preferred to maintain the status quo, i.e., the toll settlement agreement with O.N. Tel. In the event that the status quo was not an optimum solution, Abitibi-Consolidated proposed an alternate regulatory scenario. Rather than develop Phase III costing, Abitibi-Consolidated proposed a proxy CAT of $0.1293 per minute based on the averages of seven similarly-sized Ontario independent telephone companies. Abitibi-Consolidated argued that the determination of a return on investment, the performance of Phase III costing and the calculation of a CAT would be exercises in futility.

18. Cochrane proposed, among other things, that the present method of regulation continue until a regulatory framework has been established for its long distance carrier, O.N. Tel.

19. In response to Commission interrogatories, Cochrane stated that its telephone department is following the Ontario Telephone Association’s (OTA’s) Phase III costing methodology but has not completed its Phase III costing process. Cochrane stated that unaudited results using 1995 data would be completed by the end of 1997.

20. PIAC expressed the view that Abitibi-Consolidated and Cochrane should be directed to propose a cost-based methodology effective 1 January 1999. PIAC further stated that only a regulatory framework that is rooted in a reasonable assessment of annual costs is capable of capturing the impact of the rapidly changing telecommunications marketplace on the cost structure of the companies.

22. O.N. Tel viewed Abitibi-Consolidated’s alternate regulatory scenario as being neither justifiable nor reasonable, noting that Abitibi-Consolidated’s proposal to use a proxy-based CAT arrangement would result in Abitibi-Consolidated collecting about $268,000 and $289,000 more in 1996 and 1997, respectively, when compared to the existing toll settlement arrangement. O.N. Tel submitted that the companies chosen by Abitibi-Consolidated for the purpose of benchmarking its revenue requirement forecasts and CAT calculations are clearly inappropriate.

23. O.N. Tel stated that it has no objection to the implementation of a regulatory framework for Cochrane’s operating territory that makes reasonable accommodations for special aspects of its operations. O.N. Tel also noted that Cochrane has ignored the fact that the implementation of a competitive toll environment within O.N. Tel’s territory requires a rebalancing of rates and a closer examination of access costs to ensure their reasonableness.

24. In reply, Abitibi-Consolidated stated that it is not clear how the maintenance of the status quo would inhibit O.N. Tel’s ability to control its costs. Further, Abitibi-Consolidated indicated that in selecting the seven Ontario independents for its benchmarking proposal, it chose those that most closely represented it in terms of network access service (NAS); Abitibi-Consolidated would have no objection to using another group of companies should the Commission "find a better representation of companies".

25. The Commission notes that the regulatory framework set out in Decision 96-6 includes the requirement to develop a Phase III methodology, without which a cost-based CAT cannot be developed. The Commission also notes that, to date, neither Abitibi-Consolidated nor Cochrane have filed proposed Phase III Manuals or forecast Phase III results.

26. The Commission agrees with Abitibi-Consolidated with respect to the use of a proxy for a CAT. However, the Commission disagrees with Abitibi-Consolidated with respect to the proposed benchmark upon which a CAT would be based. The Commission notes that Abitibi-Consolidated had the lowest average settled toll revenue per NAS, compared to the seven benchmark Ontario independents, at $347 (the highest being $609). The Commission also notes that in response to interrogatory Abitibi-Consolidated(CRTC)21Jul97-106, the loop lengths for the seven Ontario independent companies selected by Abitibi-Consolidated ranged from 2.0 to 9.0 kilometres while the average loop length for Abitibi-Consolidated is 0.4 kilometres. Since the costs of providing the local loops are an important part of the local/access shortfall that is used in calculating the CAT, the Commission considers that, based on the above, use of the seven selected Ontario independents as a benchmark would overstate the local/access shortfall.

27. The Commission notes that O.N. Tel is the toll carrier for the local exchanges served by Abitibi-Consolidated, Cochrane and Northern. The Commission also notes that Abitibi-Consolidated is the LEC for part of the Iroquois Falls serving area while Northern serves the remainder of Iroquois Falls. Based on the above, in the Commission’s view, Northern’s CAT is an appropriate benchmark to use as a proxy interim CAT for both Abitibi-Consolidated and Cochrane.

28. In Telecom Order CRTC 98-317, 3 April 1998, the Commission approved for Northern, a final 1997 CAT of $0.0697 per minute, with a Contribution rate of $0.0519 per minute and a Direct Toll rate of $0.0178 per minute (no equal access charge). The Commission notes that Northern’s 1997 CAT already includes the effect of its first $2.00 local rate increase (as ordered in Decision 96-6) effective 1 January 1997 and that in Order 97-1921, Abitibi-Consolidated and Cochrane were directed to implement their first $2.00 rate increase effective 1 January 1998. The Commission considers that the use of Northern’s 1997 CAT for Abitibi-Consolidated’s and Cochrane’s 1998 interim CAT is more appropriate than the use of Northern’s 1998 interim CAT. Therefore, the Commission concludes that Northern’s final 1997 CAT will be used as the interim 1998 CAT for Abitibi-Consolidated and Cochrane.

29. The Commission notes that the respective settlement agreements that Abitibi-Consolidated and Cochrane currently have with O.N. Tel were made interim, effective 1 January 1998, in Order 97-1921. Therefore, the companies’ interim settlement agreements will be replaced by their interim 1998 CATs, effective 1 January 1998.

30. In view of the above, Abitibi-Consolidated and Cochrane are directed to issue forthwith tariff pages to reflect an interim 1998 CAT rate, effective 1 January 1998. The tariffs are to state that the 1998 interim CAT of $0.0697 per minute consists of a Contribution rate of $0.0519 per minute and a Direct Toll rate of $0.0178 per minute.

31. In order to develop an appropriate cost-based final 1998 CAT, the Commission will require proposed Phase III Manuals and 1998 Phase III forecasts. Therefore, Abitibi-Consolidated and Cochrane are directed to notify the Commission by letter, no later than 1 December 1998, whether or not they intend to file proposed Phase III Manuals and 1998 Phase III forecasts by 31 December 1998.

32. The Commission notes that, given the time required to initiate a proceeding to finalize the CAT, the Commission expects to finalize the 1998 CATs for Abitibi-Consolidated and Cochrane in early 1999. Should the companies file proposed Phase III Manuals and 1998 Phase III forecasts by 31 December 1998, a forecast of their 1998 total originating and terminating switched toll conversation minutes will be required so that a 1998 company-specific CAT can be set. Therefore, Abitibi-Consolidated and Cochrane are directed to file a forecast of their 1998 total originating and terminating switched toll conversation minutes at the same time that they file their proposed Phase III Manuals and 1998 Phase III forecasts.

33. If Abitibi-Consolidated or Cochrane do not intend to file Phase III Manuals and 1998 Phase III forecasts by 31 December 1998, the Commission intends to make final for that company the interim 1998 CAT set in this Decision for the entire year.

34. Given that the companies’ 1999 CATs will not be finalized until after the finalization of the 1998 CATs, the Commission intends to use the final Northern 1998 CAT, when available, as the companies’ interim 1999 CATs.

III METHOD OF REGULATION

A. Rate of Return Regulation

35. In Decision 96-6, the Commission found that earnings regulation continues to be appropriate for the Ontario independents and small Quebec independents and that this method of regulation would be continued for the foreseeable future.

36. The Commission also concluded that the regulatory framework to be applied to the Public Utilities Commissions (PUCs) (except Cochrane) should be identical to that specified for all Ontario independents, giving all subscribers equivalent safeguards under the Telecommunications Act (the Act) and equivalent access to competitive telecommunications services. The Commission stated that applying the identical regulatory regime to the PUCs would create a single framework for all independents in Ontario and would make that regulatory framework consistent with the policy objectives of the Act.

37. Consistent with Decision 96-6, the Commission concludes that rate of return regulation will apply to Abitibi-Consolidated and Cochrane. The Commission notes, however, that this form of regulation will only apply when Abitibi-Consolidated and Cochrane have filed and received approval of a Phase III methodology. Should either company opt not to file a Phase III methodology, the interim regime outlined in Part II, above, would continue to apply to that company.

B. Financial Issues

38. Prior to coming under the Commission’s jurisdiction, the Ontario independents were regulated by the Ontario Telephone Service Commission (OTSC) which had set a return on equity (ROE) for the investor-owned independents and a return on average capital (ROR) employed for the PUCs.

39. In Decision 96-6, the Commission assessed the reasonableness of the existing ROEs and RORs for the Ontario and small Quebec independents with a view to making any appropriate adjustments. The Commission widened the ROE/ROR range to 200 basis points for all the Ontario independents, the same as that for the small Quebec independents. The Commission went on to state that in its view, a 200 basis point range, with the regulatory method established in Decision 96-6, should provide the independents with a reasonable opportunity to be rewarded if they are efficient, while minimizing regulatory burden.

40. The Commission was also of the view in Decision 96-6 that issues particular to municipal ownership, such as the PUCs’ income tax-exempt status, did not represent an impediment to rate of return regulation.

41. In Order No. 6007 dated 26 February 1993, the OTSC approved an ROE range of 11.00% to 11.75% for Abitibi-Consolidated and an ROR range of 11.00% to 11.75% for Cochrane. These returns were effective 1 July 1993 and produced a midpoint ROE and ROR of 11.375%.

42. In this proceeding, Abitibi-Consolidated requested a midpoint ROR of 12.235% which it had imputed by averaging the ROR of two of the Ontario co-operative telephone companies and the ROE of five of the Ontario investor-owned telephone companies. The criterion selected by Abitibi-Consolidated for choosing these companies was that they had a similar number of NAS to Abitibi-Consolidated. Abitibi-Consolidated accepted a 200 basis point range for its proposed ROR.

43. Abitibi-Consolidated stated that the imputation of debt for its telephone operations would not be fair since the telephone operations’ revenues minus expenses have been sufficient to pay for investments without incurring debt since the 1920s. In response to a Commission interrogatory, the company also provided figures at the corporate level for its deferred tax balance, effective corporate income tax rate, interest rate on its debt and corporate debt/equity ratio.

44. Cochrane suggested that, if a regulatory framework that included an ROR and a CAT is imposed on the company, then the present ROR of 11.375% should be used to calculate the terminal equipment and service rates but that this ROR rate should be doubled for the CAT calculation. Cochrane stated that this doubling of the ROR for CAT purposes would allow it to continue to assist the municipality at a level close to that allowed by the current settlement agreement with O.N. Tel. Cochrane also stated that it currently has no debt and that it is income tax exempt. Cochrane did not comment on an appropriate ROR range.

45. PIAC expressed the view that the Commission should only accept a proxy method, as proposed by Abitibi-Consolidated, as an interim regulatory framework.

46. The Commission notes that Abitibi-Consolidated has not explained why it requested an ROR to replace its current ROE. The Commission also notes that Abitibi-Consolidated’s benchmarking exercise assumes that independent telephone companies with similar NAS count have a similar risk profile. The Commission is of the view that, when the OTSC set different ROEs and RORs for different companies, it implicitly rejected this argument and that Abitibi-Consolidated has not presented any evidence to show that the OTSC was incorrect.

47. Consequently, the Commission is of the view that Abitibi-Consolidated has not submitted any evidence to justify a change in its ROE and concludes that the company’s midpoint ROE should remain at its current level of 11.375%.

48. The Commission notes Abitibi-Consolidated’s submission that the telephone operations have not incurred any debt since the 1920s. However, the Commission is of the view that, unless Abitibi-Consolidated re-organizes its telephone department as a separate company, the corporate debt/equity ratio and interest rate should be imputed for the telephone company.

49. The Commission notes that Cochrane has not argued for a change in the midpoint of its existing ROR but only in how the ROR is used in a CAT calculation. This latter point is addressed in Section D, below. The Commission therefore concludes that Cochrane’s present ROR of 11.375% should remain unchanged.

50. In light of the above, the Commission will follow the same process as it did in Decision 96-6 for the independents and maintain Abitibi-Consolidated’s and Cochrane’s current midpoint rates of return. Therefore, Abitibi-Consolidated’s midpoint ROE and Cochrane’s midpoint ROR will remain at 11.375%.

51. The Commission is also of the view that, consistent with Decision 96-6, the ROE range for Abitibi-Consolidated and the ROR range for Cochrane should be widened from the current 75 basis points to 200 basis points.

52. In light of the above, the Commission concludes that Abitibi-Consolidated’s ROE range will be set at 10.375% to 12.375% and Cochrane’s ROR range will also be set at 10.375% to 12.375%.

C. Deferral Account

53. In Decision 96-6, the Commission directed the Ontario and small Quebec independents to record any earnings in excess of their respective maximum approved RORs/ROEs in a deferral account. The Commission further directed that, because local rates were below cost and revenues from the contribution rate recover this shortfall, any amount recorded in these accounts should be refunded to the various long distance carriers on a pro-rata basis within three months after year-end.

54. Neither Abitibi-Consolidated nor Cochrane wished to establish deferral accounts associated with any future surplus earnings in accordance with the requirements of Decision 96-6.

55. The Commission notes that the issues involved in establishing a surplus earnings deferral account are (1) to segregate earnings in excess of the upper limit of the ROR/ROE range, and (2) to decide how to dispose of any such earnings. In the Commission’s view, the proposal put forward by Abitibi-Consolidated and Cochrane would allow excess earnings to be retained by the companies, without any Commission review. The Commission notes that no justification has been given as to why Abitibi-Consolidated and Cochrane should be allowed to retain any such earnings rather than the payers of the CAT, as was determined in Decision 96-6.

56. The Commission is of the view that the rationale established in Decision 96-6 regarding deferral accounts is still valid. In light of the above, the Commission concludes that Abitibi-Consolidated and Cochrane are directed to establish a deferral account to record any earnings in excess of their maximum approved ROR/ROE. Any amount allocated to these deferral accounts is to be refunded to the long distance carriers, on a pro-rata basis, within three months after year-end.

D. Carrier Access Tariff Calculations

57. In Decision 96-6, the Ontario and small Quebec independents were directed to use a rate of return 50 basis points less than the midpoint of the approved range when preparing their revenue requirement forecasts and CAT calculations. The Ontario and small Quebec independents were also directed to provide explanations and justification supporting their revenue requirement forecasts and CAT calculations if, after netting out the impact of local rate increases, the contribution requirement exceeds the previous year’s approved contribution requirement.

58. Abitibi-Consolidated stated that it would be appropriate to use the midpoint of its approved rate of return in determining CAT calculations.

59. Cochrane suggested that, if an ROR and a CAT are implemented for regulatory purposes, then the present ROR (i.e., a midpoint 11.375%) should be doubled for the long distance settlement CAT solution.

60. The Commission notes that neither Abitibi-Consolidated nor Cochrane have adequately justified why the Decision 96-6 formula of using the midpoint ROE/ROR less 50 basis points in determining CAT calculations is not appropriate. In particular, the Commission is of the view that Cochrane’s proposal of using twice the existing ROR for calculating the CAT would guarantee that Cochrane would earn above the upper range of its ROR.

61. In view of the above, Abitibi-Consolidated and Cochrane are directed to deduct 50 basis points from their approved midpoint ROE/ROR in calculating their CAT.

E. Financial Filing Requirements

62. In Decision 96-6, the Commission found that the independents should file audited financial statements by 31 March of each year, consistent with Telecommunications Fees Regulations, 1995, Telecom Public Notice CRTC 95-20, 25 April 1995.

63. Abitibi-Consolidated did not comment on this issue.

64. Cochrane planned to submit its financial statements after the external municipal auditor has completed them. Cochrane indicated that the statements cannot be submitted by 31 March but will be submitted as soon as they are available.

65. The Commission recognizes, that although the independent telephone companies are expected to file their audited financial statements by 31 March, many of them come before the Commission to request extensions if they are unable to meet the deadline. The Commission directs Abitibi-Consolidated and Cochrane to make every effort to file their financial statements as soon as reasonably possible in order to enable the Commission to finalize the telecommunications fees in a timely fashion.

IV INTEREXCHANGE COMPETITION AND RELATED ISSUES

A. Interexchange Competition

66. In Decision 96-6, the Commission was of the view that resellers and interexchange carriers (IXCs) should be allowed to compete in the territories of the independents that were subject to the Decision. The Commission approved, effective 1 January 1997, a competitive interexchange regime in the territories of all the independents in Ontario and Quebec, except Abitibi-Consolidated, Cochrane and Northern. The regime was based on the terms and conditions 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), and Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994, subject to the modifications detailed in Decision 96-6 which were necessitated by the uniqueness of the independents with respect to serving areas, services offered, size and/or ownership arrangements.

67. In Regulatory Framework - Ontario Northland Transportation Commission, Telecom Decision CRTC 98-14, 1 September 1998 (Decision 98-14), the Commission agreed with O.N. Tel that the provision of service to certain areas is uneconomic and requires cross-subsidization of revenues generated from highly profitable toll routes. In the Commission’s view, this source of subsidy would likely be eroded significantly with the introduction of competition, absent further rate rebalancing and the establishment of appropriate terms and conditions.

68. In Service to High-Cost Serving Areas, Telecom Public Notice CRTC 97-42, 18 December 1997 (the High-Cost Areas Proceeding), the Commission stated its intention to implement by 1 January 2000 any safeguard or mechanism required to address the issue of service to high-cost serving areas. In view of the above, the Commission concluded in Decision 98-14 that, while toll competition is in the public interest, it should not be implemented in O.N. Tel’s territory before 1 July 2000.

69. In Decision 98-14, the Commission stated that it would initiate an implementation proceeding to examine the specific terms and conditions of competition in O.N. Tel’s territory which would take into account the findings of the High-Cost Areas Proceeding. Further, the Commission plans to initiate that proceeding in late 1999 with a decision to be issued by early 2000.

70. Given that O.N. Tel is presently the sole toll provider for Abitibi-Consolidated and Cochrane, the Commission notes that alternate providers of long distance service (APLDS) will not be able to offer competitive toll services in the territories of Abitibi-Consolidated and Cochrane until 1 July 2000 at the earliest, after the Commission determines the specific terms and conditions of competition in O.N. Tel’s territory.

71. In Decision 98-14, the Commission also determined that it is contrary to the public interest not to inform toll consumers who is providing long distance service. Accordingly, the LECs that interconnect with O.N. Tel were directed in Decision 98-14 to identify the latter as their toll carrier on each LEC’s billing. In light of the above, the Commission, in Decision 98-14, considered that, in the circumstances, it would be appropriate that the LECs place on their monthly billings an indication that O.N. Tel is the long distance provider.

B. Equal Access

72. In Decision 96-6, the Commission was of the view that equal access is important to encourage the spread of competition and that it should be implemented where technologically feasible (as per Decision 92-12). Accordingly, the independents were directed to implement equal access, defined as Feature Group D (FG-D) with Common Channel Signalling #7 (CCS7 signalling), where technologically feasible.

73. Abitibi-Consolidated and Cochrane did not file submissions on how equal access should be implemented in their respective territories.

74. Consistent with Decision 92-12, the Commission considers that equal ease of access through 1 + dialing is essential in a competitive environment and should be rolled out to as many communities as possible. The Commission notes that, in the proceeding initiated by PN 97-7, O.N. Tel proposed to implement equal access, using the Local Access and Transport Area Equal Access System (LEAS) software. O.N. Tel submitted that LEAS allows for the evolution to CCS7 when required for the purpose of offering local CCS7-based services. Under this approach, according to O.N. Tel equal access would not need to be implemented at each of Abitibi-Consolidated’s and Cochrane’s end-office switches but only at O.N. Tel’s toll switch in Timmins. In the PN 97-7 proceeding, O.N. Tel submitted that this approach is not contrary to Decision 96-6 because it allows providers of local service operating in O.N. Tel’s territory to provide equal access through its toll switch at reduced costs.

75. The Commission considers that O.N. Tel, Abitibi-Consolidated and Cochrane should adopt the approach to the implementation of equal access that most appropriately responds to their needs and requirements. As noted in Decision 96-6, equal access can be achieved in certain cases through the incumbent toll provider’s toll switch serving the independent’s territory. Therefore, the Commission directs Abitibi-Consolidated and Cochrane to implement equal access in their territories by 1 July 2000 to coincide with the expected introduction of toll competition in their territories. In either case, the interconnection must provide features equivalent or superior to FG-D and must also provide CCS7 signalling capability.

76. The Commission encourages Abitibi-Consolidated and Cochrane to negotiate with O.N. Tel to interconnect where it is most economical, in order to keep the CAT lower and thus reduce the cost of implementing equal access. The Commission directs Abitibi-Consolidated and Cochrane to advise the Commission within 60 days of this Decision, and periodically thereafter, as to the progress of the negotiations.

77. The issue as to the recovery of start-up costs is discussed below in Part VI, Section B.

V RATE ADJUSTMENTS

78. In Decision 96-6, the Commission noted that, with the introduction of competition in Bell Canada’s (Bell) territory, subscribers of all the independent telephone companies have benefited from lower rates for long distance services. The Commission agreed with parties that local rates would need to be more reflective of underlying costs, particularly if there is to be effective local competition. Further, the Commission considered that rate increases were necessary to reduce the individual contribution requirements of the independents. The Commission was of the preliminary view that the independents, including the PUCs, should be required, like the Stentor-member companies, to increase their monthly local rates by a total of $4.00 in two stages.

79. In PN 97-6, the Commission was of the preliminary view that the regulatory framework established in Decision 96-6 for the independent telephone companies could apply to Abitibi-Consolidated and Cochrane including a $2.00 increase in local rates effective 1 January 1998 and 1999.

80. Abitibi-Consolidated submitted that the Commission should maintain the status quo i.e., the toll settlement agreement with O.N. Tel.

81. Cochrane was opposed to the Commission’s rate rebalancing proposal. Cochrane noted that the aim of rate rebalancing is to reduce the subsidy flowing from long distance service to local service, which has historically been provided below cost. Cochrane submitted that, because of Cochrane’s remoteness, location and size, APLDS are not interested in extending service to the community. Cochrane submitted that the proposed local rate increases would only increase its customers’ local rates for the same service without providing them with any benefit. Cochrane submitted that the Commission should allow the continuation of the present method of regulation (settlement agreement) and should leave decisions concerning local rate increases to the locally elected PUC.

82. O.N. Tel supported the Commission’s proposal of increasing local rates for Abitibi-Consolidated and Cochrane stating that the status quo, as proposed by Abitibi-Consolidated and Cochrane, is unacceptable. O.N. Tel submitted that it does not have the ability of absorbing ongoing excess expenses and facing the challenges of continuing to provide toll service while competing with new entrants.

83. In Order 97-1921, the Commission was of the view that local services are currently priced below cost and that prices should move towards cost as part of the regulatory framework to be established for Abitibi-Consolidated and Cochrane. The Commission noted that there has been no pressure to increase the local rates of Abitibi-Consolidated and Cochrane because their local service revenue shortfalls have been compensated through a negotiated revenue settlement with their toll carrier O.N. Tel. The Commission also noted that with the introduction of toll competition in Bell’s operating territory, whose toll rates are matched by O.N. Tel as part of its settlement agreement with Bell, subscribers of Abitibi-Consolidated and Cochrane have benefited from lower rates for long distance services. Accordingly, the Commission directed Abitibi-Consolidated and Cochrane to increase rates for residence and business primary exchange services by $2.00 effective 1 January 1998, unless a particular local rate was shown to be compensatory.

84. With these considerations in mind, Abitibi-Consolidated and Cochrane are directed to file tariff revisions, by 1 October 1998, providing for rate increases of $2.00, effective 1 January 1999, for residence and business primary exchange services, unless a particular local rate can be shown to be compensatory.

VI CARRIER ACCESS TARIFF

A. Calculation of the Contribution Requirement

85. In Decision 96-6, the Commission, as a result of its decision to forbear from the regulation of terminal equipment, determined that the surplus/shortfall in the Competitive Terminal Broad Service Category (BSC) should be excluded from the contribution requirement calculation.

86. The Commission notes that in Part X, Section B of this Decision, it has made a decision to forbear from the regulation of terminal equipment for Abitibi-Consolidated and Cochrane. The Commission is satisfied that, as the Northern CAT excludes terminal equipment operations from its contribution requirement calculation, the use of the Northern CAT for Abitibi-Consolidated and Cochrane as a proxy is appropriate in this regard as it does not compensate Abitibi-Consolidated and Cochrane for any potential shortfall arising from terminal equipment operations.

87. The Commission notes that Cochrane provides cellular services and Abitibi-Consolidated does not. In Regulation of Mobile Wireless Services Provided by Municipally Owned Telephone Companies, Telecom Public Notice CRTC 97-15, 29 April 1997 (PN 97-15), the Commission initiated a proceeding to consider issues relating to the forbearance from regulation of cellular and mobile wireless telecommunications services provided by the municipally owned telephone companies, including Cochrane.

88. In Decision 96-6, the Commission determined that all revenues, investment and expenses associated with cellular operations would be removed from the appropriate BSC and the revised surplus/shortfall for the applicable BSCs would be used to determine the contribution requirement.

89. The Commission notes that, in the case of Northern, cellular operations are conducted within a separate subsidiary and therefore are not taken into account in the calculation of Northern’s CAT. The Commission is of the view that the use of the Northern CAT for Abitibi-Consolidated and Cochrane on a proxy basis is appropriate, regardless of the outcome of the proceeding initiated by PN 97-15, as cellular operations are excluded from the calculation of the Northern CAT.

90. Should Abitibi-Consolidated and Cochrane provide Phase III costing methodologies, all revenues, investment and expenses associated with terminal and cellular operations are to be removed from the appropriate BSC and the revised surplus/shortfall for the applicable BSCs are to be used to determine the contribution requirement. This treatment is consistent with the calculation of the contribution requirement outlined in Appendix II in Decision 96-6.

B. Recovery of Start-up Costs

91. In order to provide interconnection to the toll carriers, Abitibi-Consolidated and Cochrane will have to modify their networks, systems and procedures which will cause additional costs to be incurred. These costs referred to collectively as start-up costs will occur once, generally near the outset of competitive entry.

92. In Decision 96-6, the Commission directed the independents to assign the start-up costs of equal access to the Toll BSC and to provide for the recovery of those costs over a 10-year period.

93. As discussed in Part II above, the Commission has established an interim 1998 CAT for both Abitibi-Consolidated and Cochrane based on the final 1997 Northern CAT. The Commission notes that the Northern CAT does not have an equal access charge component. Further, the Commission notes that, while Abitibi-Consolidated and Cochrane have been directed to implement equal access by 1 July 2000, equal access charges will not arise in 1998. Therefore, the Commission considers that the use of the Northern CAT is appropriate in this regard as it will not compensate Abitibi-Consolidated and Cochrane for equal access charges that have not been incurred.

94. Should Abitibi-Consolidated or Cochrane file proposed Phase III costing information to determine cost-based CATs, then the methodology for the recovery of start-up costs set out in Decision 96-6 will apply to Abitibi-Consolidated and Cochrane.

C. Recovery of Switching and Aggregation Costs (Direct Toll Charge)

95. Switching and aggregation costs are ongoing costs primarily associated with aggregating and terminating competitors’ traffic for delivery to and from the toll carriers’ networks. Other ongoing costs are usually associated with customer and operator services and carrier billing functions.

96. In Decision 96-6, the Commission supported the independents’ practice of equating switching and aggregation costs to the costs currently assigned to the Toll BSC (direct toll costs) and ordered that a single company-specific rate for the recovery of switching and aggregation be developed to recover such costs.

97. The Commission notes that the Northern CAT has a direct toll component which is similar to a switching and aggregation charge. Therefore, the Commission considers that Abitibi-Consolidated and Cochrane will be compensated for the costs associated with switching and aggregation through the use of the Northern CAT as the interim 1998 CAT.

98. In Decision 96-6, the Commission determined that the costs assigned to the Phase III Toll BSC for the independent companies are a reasonable estimate of switching and aggregation costs and that this approach serves to reduce the regulatory burden for small independents relative to the methodology set out in Decision 92-12 for the Stentor-member companies. Therefore, if Abitibi-Consolidated and Cochrane file proposed Phase III costing information to determine cost-based CATs, the methodology set out in Decision 96-6 whereby small independents equate switching and aggregation costs with those included in the Phase III Toll BSC (or equivalent expense category) will apply to Abitibi-Consolidated and Cochrane.

VII DEPRECIATION

A. Abitibi-Consolidated

99. Abitibi-Consolidated noted that its capitalization and depreciation policies for the telecommunication assets are integrated with that of the mill, resulting in a lower Average Net Investment Base than would have been the case had telephone company policies been followed. Abitibi-Consolidated submitted that it would be virtually impossible to re-construct its books to capitalize what should have been capitalized under normal telephone company situations. Abitibi-Consolidated currently depreciates its capital assets using a straight-line method over 10 to 20 years depending on the nature of the assets. The company has never conducted depreciation studies.

100. Interveners did not file comments.

101. Considering Abitibi-Consolidated’s unusual circumstances, the Commission concludes that the company will be allowed to continue using its current method of depreciating integrated telephone and mill assets until such time as the Commission, following a public process to be initiated, develops and puts into place a more appropriate method to be used for depreciation filings by the company.

B. Cochrane

102. Cochrane indicated that it has not undertaken depreciation studies in the past, but has used the straight-line analysis method to depreciate its assets using depreciation rates comparable to other independent telephone companies and the OTA. Cochrane agreed to undertake regular depreciation studies at a maximum interval of five years and to file annually any change in depreciation life characteristics, as specified in Decision 96-6. Cochrane further indicated that a detailed depreciation study, which was initially contemplated for completion in 1997, has been put on hold until the Commission’s decision is issued.

103. Interveners did not file comments.

104. The Commission is of the view that the straight-line method of depreciation is acceptable until such time as the Commission, following a public process to be initiated, develops and puts into place a more appropriate method to be used for depreciation filings by the small independent telephone companies. The Commission notes, however, that Cochrane has not identified the rates over which the assets are currently depreciated on a straight-line basis. The Commission concludes that Cochrane will be allowed to continue its current method of depreciation and directs Cochrane to file the depreciation rates for its assets within 90 days of the decision being issued.

105. The Commission approves the company’s proposal to undertake regular depreciation studies at a maximum interval of five years and to file annually any change in depreciation characteristics and notes that this is consistent with Decision 96-6.

VIII PHASE III METHODOLOGY

A. Use of Phase III Manuals and Procedures

106. As noted above, in Decision 96-6, the Commission determined that a Phase III type costing methodology should be used by all independents as the basis for calculating a CAT for each company on a consistent basis.

107. In Part II of this Decision, the Commission has set the dates for the filing of the 1998 Phase III Manuals and forecasts by Abitibi-Consolidated and Cochrane.

B. Other Filing Requirements

108. With respect to the filing of Phase III Manual updates by the independents, in Decision 96-6, the Commission considered that one annual submission, filed on or before 31 March of the following calendar year, was appropriate.

109. Consistent with Decision 96-6 and Regulatory Framework - Prince Rupert City Telephones, Telecom Decision CRTC 98-5, 4 May 1998, the Commission considers it appropriate that Abitibi-Consolidated and Cochrane file their Phase III Manual updates on or before 31 March of the following calendar year, should they file proposed Phase III Manuals as set out in Part II of this Decision.

IX LOCAL COMPETITION

110. The Commission notes that the terms and conditions of local competition for certain Stentor-member companies were set in Local Competition, Telecom Decision CRTC 97-8, 1 May 1997. Further, as noted in Review of the Contribution Regime of Independent Telephone Companies in Ontario and Quebec, Telecom Public Notice CRTC 97-41, 18 December 1997, the Commission intends to issue a public notice in the winter of 1998-1999 to determine, if appropriate, the terms and conditions for local competition in the territories of the independents. The Commission notes that Abitibi-Consolidated and Cochrane will be included in that proceeding.

X TARIFF FILING REQUIREMENTS AND TERMINAL EQUIPMENT FORBEARANCE

A. Tariff Filing Requirements

111. In Decision 96-6, the Commission determined that for telecommunications services other than those which the Commission has determined meet the conditions for forbearance, the independents were required to continue to file tariffs, for approval, but will only be required to file economic studies (1) in support of filings for new services; (2) when proposing rates for a service that are not comparable to rates approved by the Commission for other telephone companies offering the same service; (3) for rate reductions, where there are concerns that rates may not make an appropriate contribution to the local/access shortfall; and (4) where there is a potential for anti-competitive pricing. The Commission also determined that, while it would continue to require tariffs for promotions and market trials, it would not require economic studies and it would endeavour to provide flexibility and deal with such applications on an expedited basis.

112. Cochrane concurred with the Commission’s determinations in this regard in  Decision 96-6.

113. No other party to the proceeding opposed making these determinations apply to Abitibi-Consolidated and Cochrane.

114. The Commission has set out, in Section B below, the terms and conditions for forbearance from the regulation of terminal equipment. The Commission considers it appropriate that, for telecommunications services other than those which the Commission has determined meet the conditions for forbearance, the determinations made in Decision 96-6 with regard to tariff filing requirements will apply to Abitibi-Consolidated and Cochrane.

B. Terminal Equipment Forbearance

115. In Decision 96-6, the Commission recognized that a competitive environment exists with respect to terminal equipment and that regulatory oversight of the activities of the independents in this market is neither warranted nor desirable. With the establishment of an accounting separation for terminal equipment, the Commission decided pursuant to section 34 of the Act, to refrain with respect to the sale, lease and maintenance of Competitive Terminal - Other (CT-O) and Competitive Terminal - Multiline & Data (CT-MD) equipment, from the exercise of powers and the performance of duties with respect to sections 24, 25 and 31, and subsections 27(1), (2), (4), (5) and (6) of the Act.

116. Cochrane concurred with the Commission’s determinations in this regard in Decision 96-6. Cochrane stated that as it develops its Phase III methodology, the competitive terminal equipment assets, revenues and expenses will be separated from the rate base as other independents have done.

117. No other party addressed applying these determinations to Abitibi-Consolidated and Cochrane.

118. The Commission notes that its determinations in Decision 96-6, with regard to terminal equipment forbearance, applied to all of Northern’s serving areas including its Iroquois Falls operations that border on Abitibi-Consolidated operations.

119. Consistent with Decision 96-6, with confirmation that Abitibi-Consolidated and Cochrane have established accounting separations in order to address the Commission’s concern about possible cross-subsidies from monopoly services to terminal equipment services and anti-competitive pricing, the Commission finds, pursuant to subsection 34(1) of the Act, that to forbear from regulating, as specified below, with respect to the sale, lease and maintenance of CT-O and CT-MD equipment is consistent with the Canadian telecommunications policy objectives. Further, pursuant to subsection 34(2) of the Act, the Commission finds that these services are subject to sufficient competition to protect the interest of users, so that forbearance is appropriate. Finally, with respect to subsection 34(3) of the Act, the Commission finds that to forbear is unlikely to impair unduly the continuation of a competitive market for these services.

120. Accordingly, pursuant to section 34 of the Act, the Commission hereby refrains, with respect to the sale, lease and maintenance of CT-O and CT-MD equipment, from the exercise of powers and the performance of duties with respect to sections 24, 25, 31, and subsections 27(1), (2), (4), (5) and (6) of the Act.

121. The Commission’s decision to forbear does not apply to (1) terminal equipment supplied on a monopoly basis, more specifically to equipment required by tariff to be supplied by the telephone companies in conjunction with the provision of two-party, four-party or multi-party primary exchange services, and (2) single-line residence and business inside wiring.

122. Abitibi-Consolidated and Cochrane are directed to file tariffs deleting reference to the sale, lease or maintenance of terminal equipment, as described above, upon approval by the Commission of a filing by each company indicating that it has complied with the requirement to separate competitive terminal equipment assets, revenues and expenses from its rate base and shortfall determination.

XI EXTENDED AREA SERVICE

A. Extended Area Service Criteria

123. In Decision 96-6, the Commission approved, for the Ontario independents, the Bell extended area service (EAS) criteria modified to require a vote in the exchanges where the associated individual-line residential rate increase would be greater than one dollar per month.

124. Abitibi-Consolidated did not comment on whether or not the EAS criteria established in Decision 96-6 should apply.

125. Cochrane considered that there was no need for EAS in its territory because of the large distances between itself and surrounding communities, the low density of population around the town of Cochrane and the lack of customer interest. Cochrane submitted that, if the Commission found EAS criteria should apply, it preferred the EAS criteria approved in Decision 96-6.

126. The Commission recognizes that Cochrane may not need EAS criteria because there is no foreseen extension of service with surrounding communities at this time. The Commission considers, however, that the lack of EAS criteria prevents customers from knowing whether or not they can request extension of local service. The Commission also considers that, although Abitibi-Consolidated and Cochrane currently may not be able to extend their local service because the EAS criteria approved in Decision 96-6 would not be met, customers for both companies would benefit from knowing the conditions under which local service may be extended.

127. Accordingly, the EAS criteria approved in Decision 96-6 for the Ontario independents will apply to Abitibi-Consolidated and Cochrane.

B. Method for Recovering the Cost of New Extended Area Service Links

128. In Decision 96-6, the Commission required that subscribers pay for the cost of EAS directly through higher local rates and the CAT not be used for this purpose.

129. The Commission concludes that the method for recovering the cost of new EAS links set out in Decision 96-6 will apply to Abitibi-Consolidated and Cochrane.

XII QUALITY OF SERVICE

130. In Decision 96-6, the Commission determined that issues pertaining to quality of service for those independents with less than 25,000 NAS lines are to be addressed via a complaints procedure.

131. The Commission considers it appropriate that the method to deal with quality of service issues outlined in Decision 96-6 apply to Abitibi-Consolidated and Cochrane.

Laura M. Talbot-Allan
Secretary General

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