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Ottawa, 1 September 1998
REGULATORY FRAMEWORK - ONTARIO NORTHLAND
TRANSPORTATION COMMISSION
Reference: 8085-RP0002/97
Paragraph Numbers
TABLE OF CONTENTS
I INTRODUCTION 1
II METHOD OF REGULATION 9
III INTEREXCHANGE COMPETITION 30
AND RELATED ISSUES
A. Interexchange Competition 30
B. Ownership of Customer Lists and 48
Use of O.N. Tel Logo
C. Equal Access 67
IV RATE ADJUSTMENTS 83
V CARRIER ACCESS TARIFF 88
A. Calculation of the Contribution 88
Rate
B. Recovery of Start-up Costs 101
C. Recovery of Switching and 109
Aggregation Costs
VI DEPRECIATION 114
VII LOCAL COMPETITION 118
VIII TARIFF FILING REQUIREMENTS 119
AND TERMINAL EQUIPMENT FORBEARANCE
A. Tariff Filing Requirements and Costing 119
B. Ex parte Process 123
C. Imputation Test 129
D. Terminal Equipment Forbearance 138
IX EXTENDED AREA SERVICE 145
A. Extended Area Service Criteria 145
B. Method for Recovering the Cost of 148
New Extended Area Service Links
X QUALITY OF SERVICE 149
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 Québec and Ontario (Except Ontario Northland Transportation Commission),
Telecom Public Notice CRTC 95-15, 23 March 1995 (PN 95-15), the
Commission initiated a proceeding to deal with a regulatory framework for the independent
telephone companies in Quebec and Ontario (the independents), except Ontario Northland
Transportation Commission (the telecommunications operating division of which is now known as
O.N. Tel) (O.N. Tel). In PN 95-15, the Commission determined that owing to the unique
circumstances of O.N. Tel, an appropriate regulatory framework for O.N. Tel could be better
established in a separate proceeding at a later date.
3.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 deal with the regulatory framework for
O.N. Tel.
4.In PN 97-7, the Commission noted that in Regulatory Framework
for Québec-Téléphone and Télébec ltée, Telecom Decision CRTC 96-5, 7
August 1996 (Decision 96-5), it had established a regulatory framework for Québec-Téléphone
and Télébec ltée (Télébec). The Commission also noted that Québec-Téléphone is a provider of
long distance services for local exchanges served by Le Téléphone de St-Éphrem Inc. and La
Compagnie de Téléphone de St-Victor, two small independent telephone companies adjoining
Québec-Téléphone's operating territory. Similarly, O.N. Tel is a toll provider for the local
exchanges served by Abitibi-Consolidated (formerly Abitibi-Price Inc.), Cochrane Public Utilities
Commission (Cochrane) and Northern Telephone Limited (Northern).
5.In PN 97-7, the Commission was of the preliminary view that the
regulatory framework established in Decision 96-5 for Québec-Téléphone could apply to O.N. Tel
as of 1 January 1998 (including a $2.00 increase in local rates effective 1 January 1998 and
1999).
6.In addition to O.N. Tel, Abitibi-Consolidated, Cochrane and Northern
were made parties to the proceeding.
7.On 21 May 1997, O.N. Tel filed its submission. Comments were filed by
Public Interest Advocacy Centre (PIAC) on 26 August 1997 and by AT&T Canada Long Distance
Services Company (AT&T Canada LDS) and Northern on 8 September 1997. O.N. Tel filed reply
comments on 6 October 1997.
8.In Telecom Order CRTC 97-1922,
23 December 1997, as corrected by Telecom Order CRTC 97-1922-1, 5 February 1998 (Order 97-1922), the Commission approved (1) a rate increase of $2.00 for
O.N. Tel's residence and business primary exchange services, effective 1 January 1998, unless a
particular rate was shown to be compensatory and (2) on an interim basis as of 1 January 1998,
O.N. Tel's settlement agreement with Bell Canada (Bell).
II METHOD OF REGULATION
9.O.N. Tel stated that it is a division of Ontario Northland Transportation
Commission (ONTC), a Crown agency of the provincial government and that, prior to coming
under the Commission's jurisdiction, O.N. Tel's rates were approved solely by the ONTC
commissioners. O.N. Tel noted that its accounting practices are not consistent with those of other
telephone companies because it has not previously been subject to rate base/rate of return
regulation.
10.O.N. Tel was of the view that, since it is a provincially-owned
undertaking and does not pay income tax, extra revenues are allowed to remain in its hands to be
utilized by the ONTC in the furtherance of its public mandate.
11.In this proceeding, O.N. Tel proposed a simplified split rate base
methodology in which its Competitive segment would be subject to a two-stage regulatory regime,
and its Utility segment would be regulated on a rate of return basis.
12.O.N. Tel was of the view that rate of return regulation is neither
necessary nor desirable for its proposed Competitive segment. The company stated that it
markets Bell and Stentor Resource Centre Inc. (Stentor) toll services and, in its view, this ensures
that residents in its serving territory have already benefited from toll competition, even in the
absence of such competition in its serving territory.
13.O.N. Tel also suggested that the toll rate reductions which have been
implemented by Bell, and matched by O.N. Tel, have been akin to price caps and that this has
served to provide O.N. Tel with efficiency improvements similar to those achieved by Bell. The
company concluded from this that its rates are just and reasonable.
14.During Stage I of its suggested regulatory framework, O.N. Tel
proposed that its Competitive segment would not be subject to rate of return regulation but would
be faced with toll competition on a set of short-term conditions. O.N. Tel also stated that it would
undertake not to raise its toll rates above existing levels during Stage I of the regulatory
framework.
15.Before it could provide a detailed proposal for Stage II of its regulatory
framework, O.N. Tel argued that it must complete the overhaul of its accounting systems, re-negotiate its traffic agreement with Bell and transfer its core telecommunications business to a structurally separate subsidiary of ONTC.
16.With respect to its Utility segment, O.N. Tel noted that, in Decision 96-5,
the Utility segments for Québec-Télephone and Télébec were regulated on a rate of return basis
with a price cap regime envisaged once rebalancing had taken place. O.N. Tel, however,
proposed that its Utility segment be regulated on the same rate of return basis as adopted by the
Commission in Regulatory Framework for the Independent Telephone Companies in
Québec and Ontario (Except Ontario Northland Transportation Commission, Québec-Téléphone
and Télébec ltée), Telecom Decision CRTC 96-6, 7 August 1996
(Decision 96-6), for the independent telephone companies. The company pointed out that, in
Decision 96-6, the Commission had stated that issues particular to municipal ownership, such as
the Public Utilities Commissions' (PUCs) income tax-exempt status and lack of capital structure,
did not represent an impediment to rate of return regulation. O.N. Tel noted that it faces similar
issues due to its provincial ownership and proposed that the Commission address these issues in
the same manner as it did for the Ontario PUCs in Decision 96-6.
17.O.N. Tel requested a rate of return (ROR) range for its Utility segment
based on the allowed ranges for the PUCs. However, the company proposed that the size and
composition of its Utility segment warranted an approved ROR range identical to that of the
smaller PUCs, rather than the average which includes the approved ROR range for Thunder Bay
Telephone. In view of this, O.N. Tel proposed a midpoint ROR of 11.375% for its Utility segment
with a range of 10.375% to 12.375%.
18.O.N. Tel proposed to follow the Decision 96-6 methodology of deducting 50 basis points from the midpoint of its ROR range in its Carrier Access Tariff (CAT) calculations.
19.Further, O.N. Tel agreed with the provisions of Decision 96-6 to
establish a deferral account to record any earnings in excess of its maximum approved ROR.
O.N. Tel also agreed that the amounts in the deferral account should be refunded to the various
long distance carriers, on a pro-rata basis, within three months after year-end.
20.O.N. Tel did not comment on the Decision 96-6 finding that companies should file audited financial statements by 31 March of each year.
21.PIAC submitted that the subsidy implicit in O.N. Tel being an income tax
free entity should be used to maintain lower costs for providing services to remote and unserved
communities.
22.The Commission agrees with O.N. Tel that the toll rate reductions which
Bell has implemented, and which O.N. Tel has provided to its customers, have benefited its
customers.
23.The Commission also notes that O.N. Tel has undertaken not to raise
its toll rates above the existing levels during Stage I of its proposed regulatory framework. The
Commission accepts O.N. Tel's undertaking that for the period up to the proposed beginning of
toll competition in O.N. Tel's territory on 1 July 2000, O.N. Tel will not seek to raise its toll rates
above those existing at 31 December 1997.
24.The Commission agrees in principle with O.N. Tel's proposal for splitting
the rate base into the Competitive and Utility segments. However, the Commission notes that,
prior to splitting the rate base, it is necessary for O.N. Tel to have a costing methodology
approved by the Commission.
25.The Commission notes that, after the close of this proceeding, O.N. Tel
filed for approval, on 25 November 1997, its proposed Phase III Costing, CAT and Split Rate Base
Procedures Manual (Phase III/SRB Manual). However, O.N. Tel did not provide copies to
interested parties. The Commission will initiate a proceeding shortly to consider, among other
things, O.N. Tel's proposed Phase III/SRB Manual.
26.The Commission also notes, as discussed in Part III of this Decision,
that toll competition will be allowed to commence in O.N. Tel's serving area on 1 July 2000.
27.In light of the above, the Commission concludes that O.N Tel's rate
base will be split effective 1 January 2000 which will allow a cost-based CAT to be developed prior
to the commencement of competition on 1 July 2000.
28.The Commission determines that O.N. Tel's Utility segment is to be
regulated on a rate base/rate of return basis. This will ensure that O.N. Tel's local network access
service (NAS) subscribers face the same regulatory regime as the local customers of Abitibi-
Consolidated, Cochrane and Northern who receive toll service from O.N. Tel.
29.Concurrent with splitting O.N. Tel's rate base effective 1 January 2000,
the Commission considers it appropriate that the following financial measures be implemented for
O.N. Tel:
(a) the Utility segment ROR range be 10.375% to 12.375%, with a
midpoint of 11.375%;
(b) O.N. Tel establish a deferral account to record any Utility segment
earnings in excess of its maximum approved ROR. The Commission will determine, at a later
date, how to deal with the deferral account;
(c) O.N. Tel deduct 50 basis points from the midpoint of the ROR range
for the Utility segment in calculating its CAT; and
(d) O.N. Tel file audited financial statements by 31 March of the following
year.
III INTEREXCHANGE COMPETITION AND RELATED ISSUES
A. Interexchange Competition
30.In Decision 96-5, the Commission was of the view that resellers and
interexchange carriers (IXCs) should be allowed to compete in the territories of Québec-
Téléphone and Télébec. Accordingly, the Commission approved interexchange competition in the
territories of Québec-Téléphone and Télébec, 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 (Decision 94-19), subject to the modifications detailed
in Decision 96-5.
31.O.N. Tel stated that it is the local exchange carrier (LEC) for several
communities with a total NAS count of 3,383 as of 31 December 1996, from which it derives
revenues representing less than 2% of its total telecommunications related revenues. O.N. Tel
stated that it is also the toll carrier for local exchanges served by Abitibi-Consolidated, Cochrane
and Northern and that the exchanges to which it provides toll service are situated in northeastern
Ontario and Temiscaming, Quebec. O.N. Tel stated that it provides toll services to a vast and
sparsely populated territory, similar to that served by Northwestel Inc.
32.O.N. Tel submitted that, given their remoteness and small population,
the provision of toll service at current rates to most communities in O.N. Tel's operating territory is
dependent on the toll revenues, and associated implicit contribution, generated by traffic flowing in
and out of Timmins, which is the largest urban centre in O.N. Tel's serving territory. O.N. Tel
submitted that, as its toll revenues in less remote centres, particularly Timmins, are eroded
through competition, it will have fewer means of recovering the costs associated with providing toll
service to remote communities that are unlikely to attract competitive entry. For example, given
the minimal NAS count in those exchanges where it provides local exchange service, O.N. Tel
would not be in a position to implement revenue neutral rate rebalancing (i.e., generate sufficient
revenues from local rate increases to compensate for lost toll revenues).
33.O.N. Tel noted that a significant portion of its toll revenues is generated
by traffic which originates and/or terminates outside its operating territory (i.e., toll traffic
exchanged between O.N. Tel and Bell). Timmins is near the trans-Canada facilities of other
national toll carriers (including Bell) and significant market share losses in the lowest-cost and
most densely populated portion of O.N. Tel's territory, would threaten its ability to continue serving
high-cost remote areas within its serving territory at current rates, while remaining financially
viable.
34.O.N. Tel submitted that, while it is in the public interest for toll
competition to be introduced into its operating territory as soon as reasonably possible, given its
unique circumstances described above, toll competition should not be introduced until the
following conditions have been met:
(a) the negotiation of a new traffic agreement with Bell;
(b) an overhaul of O.N. Tel's accounting systems and procedures;
(c) the implementation of a split rate base regime; and
(d) the transfer of O.N. Tel's core telecommunications business, cellular
and single-line, key system and private branch exchange equipment business to a structurally
separate subsidiary of ONTC.
35.O.N. Tel submitted that, once the above pre-conditions are met, toll
competition should be introduced in a two-stage approach. O.N. Tel submitted that, under Stage
I, equal access toll competition would not be permitted so that its ability to serve high-cost remote
areas within its operating territory would not be compromised. Instead, O.N. Tel submitted that
toll competition should be permitted on the following terms:
(a) IXCs and resellers would be provided with the facilities required to
originate and terminate their switched interexchange voice and data services in the operating
territory of O.N. Tel based on the terms and conditions negotiated with O.N. Tel and O.N. Tel's toll
interconnection tariff;
(b) for purposes of originating and terminating traffic, IXCs and resellers
could establish a point of presence in North Bay, in order to interconnect with O.N. Tel's facilities,
using O.N. Tel's toll interconnection tariff;
(c) IXCs and resellers would be required to use O.N. Tel's facilities to
access locations served by O.N. Tel;
(d) resale of switched interexchange voice and data services within O.N.
Tel's operating territory would not be permitted;
(e) if an interconnecting LEC did not have a CAT established by the
commencement of Stage I, the prevailing Northern CAT would be used as a proxy; and
(f) the rate employed by O.N. Tel for transport of competitor traffic would
be based on the average settlement rate that O.N. Tel receives pursuant to its existing traffic
agreement with Bell.
36.O.N. Tel submitted that, prior to implementing Stage II, LECs operating
within O.N. Tel's territory would be required to transfer customer-specific information in machine-
readable form to O.N. Tel in order for O.N. Tel to assume billing, collection and business office
functions historically performed by LECs, as agents of O.N. Tel (This issue is discussed in more
detail below in Section B, Ownership of Customer Lists and Use of O.N. Tel Logo). O.N. Tel also
submitted that the Commission must resolve issues regarding a competitively neutral high-cost
area subsidy in time for Stage II to be implemented.
37.Once the above conditions have been met, O.N. Tel proposed to
implement Stage II in two steps:
(a) all toll carriers, except LECs serving the same territory as O.N. Tel,
would be allowed to compete with O.N. Tel on an equal access basis, using the Local Access and
Transport Equal Access System (LEAS) software provided through O.N. Tel's toll switch, rather
than in each individual end-office switch; and
(b) LECs serving the same territory as
O.N. Tel would only be allowed to enter the toll market once O.N. Tel is in a reasonable position to
enter the local markets served by the LECs (i.e., LECs should not have a head start on O.N. Tel).
38.O.N. Tel submitted that the proposed two-stage approach is not an
attempt to obtain a competitive advantage but rather reflects the Commission's own approach of
introducing competition gradually to ensure fairness between all players in view of the evolution of
competition in the telecommunications industry.
39.Northern submitted that the introduction of toll voice and data
competition in northeastern Ontario should not be delayed any further, nor should residential and
business customers in these communities be required to accommodate a schedule for the roll-out
of competition which is designed solely with the incumbent service provider's interests in mind.
40.Northern was opposed to O.N. Tel's two-stage approach to introduce toll
competition in O.N. Tel's territory, submitting that it is an attempt to limit long distance competition
in the northern Ontario toll market. More specifically, Northern submitted that
O.N. Tel's proposal to deny LECs operating in its territory the right to compete with
O.N. Tel in the toll market until O.N. Tel has had "a reasonable opportunity to identify itself to its
customers, develop the required business office, billing and collection procedures, and establish a
presence in the competitive local market" was fundamentally anti-competitive and at odds with the
principle adopted by the Commission in Decision 92-12, AGT Limited - Interconnection of
Interexchange Carriers and Related Resale and Sharing Issues, Telecom Decision CRTC 93-17, 29 October 1993 (Decision 93-17), and Decisions 96-5 and 96-6 to
permit unrestricted entry into the toll market.
41.Northern further submitted that O.N. Tel's two-stage approach, if
adopted, would result in a fundamental change in the Commission's policy to permit unrestricted
entry and exit in the Canadian long distance market.
42.PIAC did not support O.N. Tel's staged approach because it would
remove the pressure to complete the transition to equal access, which should be completed as
quickly as possible. PIAC further submitted that O.N. Tel's staged approach appears to be a
strategy to establish itself as the incumbent toll carrier in the mind of customers, which would, in
itself, be of no benefit to consumers. Cognizant of the concern that toll competitors may "cherry
pick" the more profitable communities within O.N. Tel's operating territory, PIAC submitted that
IXCs entering O.N. Tel's operating territory should be required to extend service to all consumers
in O.N. Tel's operating territory on equitable terms.
43.The Commission considers that the type of two-stage approach
proposed by O.N. Tel is inconsistent with the Commission's approach for introducing toll
competition in the territories of other telephone companies. Therefore, the Commission denies
O.N. Tel's two-stage approach to toll competition.
44.The Commission agrees 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, with the introduction of toll competition, the
subsidy from toll services would likely be eroded significantly, absent further rate rebalancing and
the establishment of appropriate terms and conditions for competition.
45.The Commission notes that in the proceeding initiated by Service
to High-Cost Serving Areas, Telecom Public Notice CRTC 97-42, 18
December 1997 (the High-Cost Areas Proceeding), the Commission will examine the issue of
service to high-cost serving areas and that any safeguards or mechanisms required to address
the issue of service to high-cost serving areas will be implemented by 1 January 2000.
46.The Commission considers that, as much as possible, the terms and
conditions of competition should be the same throughout Canada. In the case of O.N. Tel, the
Commission is of the view that modifications may be required to reflect the uniqueness of O.N.
Tel's 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.
Consequently, the Commission is of the view that, while toll competition is in the public interest,
toll competition, even an interim limited competitive regime, should not be implemented in O.N.
Tel's territory before 1 July 2000.
47.The Commission will initiate a proceeding to examine the specific terms
and conditions of implementing interexchange competition in O.N. Tel's territory which will take
into account the findings of the High-Cost Areas Proceeding. The Commission expects to initiate
that proceeding in late 1999 with a decision to be rendered by early 2000.
B. Ownership of Customer Lists and Use of O.N. Tel Logo
Ownership of Customer Lists
48.As noted above, O.N. Tel submitted that, prior to implementing Stage II,
LECs operating within O.N. Tel's territory would be required to transfer customer-specific
information in machine-readable form to O.N. Tel in order for O.N. Tel to assume billing, collection
and business office functions historically performed by LECs, as agents of O.N. Tel. O.N. Tel
maintained that it has compensated the LECs through settlement and CAT payments for the
development and maintenance of the systems/offices required to perform toll billing, collection
and customer-related functions on its behalf and it should not have to incur further costs to obtain
this information.
49.O.N. Tel requested that the Commission require the LECs to delete
customer-specific toll related information from their records, given that the LECs would no longer
be involved in providing the customer with support services related to toll services.
50.Abitibi-Consolidated stated that O.N. Tel should not be entitled to any
information to which other long distance providers would not be entitled.
51.Cochrane submitted that O.N. Tel already has all the information
required to perform business office functions for customers in Cochrane's territory.
52.Northern submitted that it is the provider of toll services and that toll
customers and the toll related information belong to Northern. Moreover, Northern added that the
issue in this regard is not one of subscriber "ownership" but of the appropriate limits on the
disclosure of confidential customer information. Northern submitted that to provide O.N. Tel with
strategically-sensitive and confidential customer information would confer an undue preference on
O.N. Tel relative to other toll competitors who enter the market. Northern also submitted that such
information cannot be disclosed without subscribers' informed consent.
53.In response, O.N. Tel rejected Northern's submission. In O.N. Tel's
view, the central issue relates to whether Northern or O.N. Tel is the historic provider of toll
services. Entitlement to access and use of toll customer related information rest with the provider
of the service.
54.O.N. Tel submitted that toll services in its territory are provided pursuant to its General Tariff, which has been approved by the Commission, and that there is no support for Northern's submission that toll customers in the territory are Northern's. On this basis, O.N. Tel submitted that Northern has no grounds upon which to deny O.N. Tel access to information about its customers. O.N. Tel submitted that it would not be appropriate for the LECs, as potential new entrants in the toll market, to be allowed to retain toll customer information they have as a result of their historic role as the incumbent's billing agents, thereby granting themselves an undue advantage over other new entrants.
55.The Commission agrees with O.N. Tel that the issue is one of
subscriber "ownership". The Commission notes that in Definition of Customer, Telecom
Decision CRTC 97-4, 26 February 1997 (Decision 97-4), the Commission
determined the common definition of customer appropriate for the Stentor-member companies.
However, in Decision 97-4, the Commission did not consider that it was necessary to extend the
definition of customer to the independent telephone companies.
56.The Commission notes that, prior to the implementation of toll competition in O.N. Tel's operating territory by 1 July 2000, it is important to have a definition of a customer in
place. The Commission considers, however, that because of the unique historic structure of and
relationship between telecommunications providers in the independents' territories, the definition
of customer involves a resolution of questions relating to subscriber data ownership and end-
customer service provider. Further, the Commission considers that a determination on these
matters may have broad implications for other independent telephone companies that are not
party to this proceeding.
57.Therefore, the Commission plans to initiate a proceeding to seek
comments from the independent telephone companies and other interested parties on several
issues including:
(a) the appropriateness of setting a uniform definition of what constitutes
a customer for the independent companies;
(b) the appropriateness of extending the common definition of customer
set out in Decision 97-4 to the independents;
(c) the ownership of customer information given the historic relationship
between the telecommunications providers in the independents' territories; and
(d) the appropriateness of applying a fee for the provision of toll customer
related information, given the historical relationship between the telecommunications providers in
the independents' territories.
58.The Commission intends to issue a public notice shortly initiating a
proceeding to deal with these issues with a decision to be issued by the end of 1999, to provide a
period of time for the transition to toll competition in the independents' operating territories.
2. Use of O.N. Tel Logo
59.O.N. Tel submitted that LECs should immediately identify O.N. Tel by
name and logo on their billing statements, until such time as O.N. Tel can bill its customers
directly. O.N. Tel maintained that this was required because its toll customers erroneously believe
that the LECs operating in O.N. Tel's territory are their toll provider. O.N. Tel argued that it would
be fundamentally unfair and contrary to the public interest to allow LECs to mislead O.N. Tel's
customers by claiming to be their toll provider and by taking credit for O.N. Tel's work and efforts
just as those LECs are to enter the toll market.
60.Abitibi-Consolidated was of the view that there was no benefit to its
customers to add O.N. Tel's logo to its monthly invoice and that such a measure would lead to
customer confusion.
61.Cochrane submitted that the question of whether O.N. Tel can have its logo on
Cochrane's billing statements should be resolved through negotiation between the parties and that
O.N. Tel should be ordered to work with the LECs to achieve a solution that is satisfactory to the
companies involved.
62.Northern submitted that it does not have to include O.N. Tel's name and
logo on its billing statements or to disclose customer specific billing information to O.N. Tel on the
following grounds:
(a) there is no precedent for such a request and the Commission has even concluded,
in previous proceedings, that LECs should not be required to make their monthly billing
capabilities available to third party IXCs for the purpose of promoting the services of their
competitors;
(b) it would confer an undue preference on O.N. Tel vis-à-vis other IXCs, contrary to
subsection 27(2) of the Telecommunications Act (the Act); and
(c) it would undermine the value of Northern's trademarks and trade names and would
hurt its competitiveness vis-à-vis
O.N. Tel.
63.PIAC stated that LECs should identify to their customers that O.N. Tel is
their current supplier of toll services, to balance the "incumbency advantage" between the LEC
billing for toll services and O.N. Tel, which is providing the toll services.
64.The Commission is of the view that, since O.N. Tel is the long distance
provider and does not bill for toll use separately from the LECs, local consumers that use O.N.
Tel's toll services could erroneously believe that the LECs operating in O.N. Tel's territory are their
toll provider. Further, the Commission considers that it would be unfair and contrary to the public
interest not to inform toll consumers who is providing long distance service to them.
65.In light of the above, the Commission considers 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.
66.Therefore, Abitibi-Consolidated, Cochrane and Northern are directed to
submit, with a copy to O.N. Tel, within 30 days of this Decision, for Commission approval, wording
that is to be included on their monthly billing that identifies O.N. Tel as the long distance carrier for
their local customers. This wording is to be included in the next billing cycle following Commission
approval of the wording and in subsequent monthly billings until toll competition is introduced.
Abitibi-Consolidated, Cochrane, Northern and O.N. Tel should negotiate a compensation arrangement for the inclusion of the approved wording on the LECs' monthly billings.
C. Equal Access
67.In Decision 96-5, 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, Québec-Téléphone and Télébec
were directed to implement equal access, defined as Feature Group D (FG-D) with Common
Channel Signalling #7 (CCS7 signalling), where technologically feasible.
68.O.N. Tel proposed to provide equal access through its toll switch, using
LEAS software, which it stated would provide universal equal access to all of the NAS lines served
by all of the LECs with which O.N. Tel interconnects, irrespective of the end-office switching
technology employed by a LEC, and whether a customer was served by a single-party or multi-
party line. O.N. Tel noted that the LECs would incur some costs associated with the roll-out of
equal access, even under the LEAS implementation, but that the overall costs of implementation
of LEAS would be less expensive and would provide better coverage than end-office-based equal
access implementation.
69.O.N. Tel submitted that, while it has not yet conducted testing of LEAS,
the technology is in use in the United States and as such is a tested technology.
70.O.N. Tel submitted that LEAS allows for the evolution to CCS7 when
required for the purpose of offering local CCS7 based services, while maintaining centralized toll
Automated Message Accounting and equal access administration.
71.AT&T Canada LDS submitted that, if
O.N. Tel's proposed framework is adopted, it would be unable to serve residential and business
customers in O.N. Tel's serving area using its own facilities, with the result that the opportunity for
northern Ontario residents to obtain alternative toll and Internet services would be reduced.
72.Northern was opposed to O.N. Tel's LEAS proposal. In Northern's view,
the untested nature of LEAS software in Canada creates unwarranted business and operational
risks. Northern stated that O.N. Tel's plans for the implementation of equal access cannot and
should not be viewed with solely O.N. Tel's interests in mind but must also take into account the
plans of LECs operating within O.N. Tel's territory. In Northern's view, O.N. Tel's proposed LEAS approach to provide equal access would effectively discourage facilities-based entry into the northeastern Ontario toll market.
73.Northern stated that it intends to implement equal access by upgrading
its digital end-office switches with FG-D software augmented by CCS7. Northern noted that this
approach, adopted by the Commission in Decisions 92-12, 93-17, 96-5 and 96-6, is fundamentally
at odds with the LEAS software approach advocated by O.N. Tel whereby all toll calls in
northeastern Ontario would continue to be carried on O.N. Tel's interexchange network because
the only point of equal access connection would be at a toll switch in Timmins. Northern
submitted that, under O.N. Tel's LEAS software proposal, IXCs and resellers would be denied the
ability to interconnect at the local end-office of their choice and LECs would be denied the ability to
provide equal access services at their end-office switches.
74.Northern noted that, given that O.N. Tel only intends to upgrade for
equal access its toll switch in Timmins, all carriers and resellers who wish to provide long distance
services in northeastern Ontario on an equal access basis would have to rely on O.N. Tel to route
their traffic from the toll switch in Timmins to or from the end-office switches of the LECs that
originate or terminate their traffic. Northern submitted that, because O.N. Tel's toll switch would
stand directly in the path of all incoming and outgoing toll calls in northern Ontario, there would be
no opportunity for facilities-based carriers to enter the interexchange transport market to carry
traffic between O.N. Tel's toll switch and the various end-office switches that are interconnected to
that switch.
75.In response, O.N. Tel stated that, in proposing the LEAS software for
equal access, it was influenced by the overall lower costs associated with this form of
implementation for its territory and the fact that LEAS software was already required in its toll
switch in order to capture the data required to bill its toll customers, thus making equal access
available to all customers very rapidly. O.N. Tel submitted that providing equal access using
LEAS is not contrary to Decision 96-6 because it allows LECs operating in its territory to provide
equal access through O.N. Tel's toll switch at reduced costs. Further, O.N. Tel submitted that this
way of providing equal access was what the Commission had in mind in Decision 96-6 where it
stated that equal access could be achieved in certain cases through the Bell toll switch serving the
independent territory, with a probable reduction in the independent's cost of implementing equal
access. O.N. Tel submitted that it was not opposed to end-office implementation of equal access
in addition to LEAS implementation, and that the implementation of LEAS did not act as a barrier
to end-office implementation.
76.The Commission notes that O.N. Tel favoured providing equal access
through its toll switch in Timmins, using LEAS because of the overall lower costs associated with
this form of implementation for its territory and the fact that O.N. Tel stated that LEAS software is
required in O.N. Tel's toll switch for future billing purposes. O.N. Tel also submitted that this
approach would make equal access available to customers very rapidly.
77.However, the Commission agrees with AT&T Canada LDS and
Northern that O.N. Tel's proposal could impede facilities-based carriers from entering the
interexchange transport market to carry traffic between O.N. Tel's toll switch and the various end-
offices that are interconnected to that switch.
78.Consistent with the Commission's view in Decision 92-12, the
Commission considers that equal ease of access through 1+ dialling is essential in a competitive
environment. The Commission notes that, in both Decisions 96-5 and 96-6, it was left to the
telephone companies in question to decide whether they would provide equal access at their end-
office switches or through Bell's toll switch.
79.The Commission considers that Northern and O.N. Tel 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 at the LEC's end-
office switch or through the incumbent toll provider's toll switch serving the independent's territory.
Therefore, the Commission directs Northern and O.N. Tel 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 with CCS7 signalling capability. For those exchanges in which O.N. Tel is the LEC, O.N. Tel
may implement equal access through its switches at its end-offices or through its toll switch, using
LEAS.
80.In Regulatory Framework for Abitibi-Consolidated and Cochrane
Public Utilities Commission, Telecom Decision CRTC 98-13, 1
September 1998 (Decision 98-13), the Commission directed Abitibi-Consolidated and Cochrane
to implement equal access in their territories by 1 July 2000 through their own switches or through
O.N. Tel's toll switch. In either case, the interconnection must provide features equivalent or
superior to FG-D and must also provide CCS7 signalling capability.
81.The Commission encourages Northern and O.N. Tel to negotiate with
each other 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 O.N. Tel and Northern to
advise the Commission within 60 days of this Decision, and periodically thereafter, as to the
progress of the negotiations.
82.The issue as to the recovery of start-up costs is discussed below in Part
V, Section B.
IV RATE ADJUSTMENTS
83.In PN 97-7, the Commission was of the preliminary view that the
regulatory framework established for Québec-Téléphone in Decision 96-5 could apply to O.N. Tel,
including a $2.00 increase in local rates effective 1 January 1998 and 1999.
84.O.N. Tel stated that it does not object to rate rebalancing, provided that
rate increases are not required where a particular local rate can be shown to be compensatory.
Furthermore, O.N. Tel submitted that local rate increases should be used to decrease O.N. Tel's
proposed CAT as much as possible.
85.In Order 97-1922, the Commission was of the view that local services
provided by O.N. Tel were priced below cost and that prices should move towards cost as part of the regulatory framework to be established for O.N. Tel. The Commission noted that, with the
introduction of toll competition in Bell's operating territory, whose toll rates are matched by O.N.
Tel, the latter's subscribers have benefited from lower rates for long distance services. In order to
bring rates closer to cost, the Commission ordered that O.N. Tel increase rates for residence and
business primary exchange services by $2.00 effective 1 January 1998 unless a particular rate
can be shown to be compensatory.
86.Although O.N. Tel has advised the Commission that it was not in a
position to provide its incremental costs for local service, the Commission considers that O.N. Tel
should increase its rates for residence and business primary exchange services by $2.00 effective
1 January 1999, unless a particular local rate can be shown to be compensatory. O.N. Tel is
directed to file, for approval, tariff revisions by 1 October 1998 providing for the above-noted rate
increases.
87.In Order 97-1922, in approving the local rate increases for residence
and business primary exchange services for 1 January 1998, the Commission made interim the
settlement agreement between O.N. Tel and Bell in order to allow the additional revenues from
these local rate increases to be reflected in a lower negotiated revenue settlement agreement.
Consistent with Order 97-1922 and failing the approval of a new settlement agreement, the
Commission directs that the settlement agreement as per
Order 97-1922 remain interim in 1999 to allow the additional revenues from the
1 January 1999 local rate increase to be reflected in a lower negotiated revenue settlement
agreement.
V CARRIER ACCESS TARIFF
A. Calculation of the Contribution Rate
88.In Decision 96-5, the Commission considered that, as toll carriers,
Québec-Téléphone and Télébec should calculate their contribution requirement for purposes of
calculating the contribution component of the CAT in a manner that is consistent with that used by
other toll carriers. Accordingly, Québec-Téléphone and Télébec were directed to calculate their
contribution requirements starting from their respective forecast Phase III results in a manner set out in the Decision.
89.As noted above, O.N. Tel proposed a two-staged approach for the
introduction of toll competition in its territory. O.N. Tel noted that, at the present level, Northern's
CAT is significantly higher than the CAT in place in Bell's operating territory. O.N. Tel submitted
that it is extremely unlikely that national carriers will actively promote and market services for
traffic originating in O.N. Tel's territory until such time as the Northern CAT is generally within the
range of the CATs applicable throughout other regions in Canada.
90.In its 21 May 1997 submission, O.N. Tel proposed to calculate its
contribution requirement based on the method approved by the Commission for Québec-
Téléphone and Télébec in Decision 96-5 as follows:
(a) Allocate the Common Broadcast Service Category (BSC) expenses
across all other BSCs in proportion to the operating expenses previously assigned to the other
BSCs and allocate the Common BSC investment in proportion to the Average Net Investment
Base previously assigned to the other BSCs;
(b) Remove all revenues, investment and expenses associated with
cellular and terminal operations from the appropriate BSCs as directed above and calculate the
revised surplus/shortfall for the applicable BSC; and
(c) Add the surplus/shortfall of the Access and Local BSCs.
91.O.N. Tel also proposed to deduct 50 basis points from the midpoint of
its ROR range in order to calculate the CAT.
92.O.N. Tel noted that, in its case, the contribution requirement is based on
the Utility segment shortfall. Further, the company noted that its existing terminal operations will
be conducted outside of the corporate entity that is expected to assume responsibility for
providing the core telecommunications business of O.N. Tel. Therefore, investments, revenues
and expenses associated with terminal operations will not appear in O.N. Tel's Phase III costing
results. Moreover, the company stated that the investment, expenses and revenues from O.N.
Tel's future cellular operations will be removed from O.N. Tel's Utility segment results before the
contribution requirement is calculated.
93.O.N. Tel concurred with the approach adopted by the Commission in
Decision 96-6 in which no true-up of a contribution rate would be required. O.N. Tel stated that it
was prepared to comply with the requirement to develop annual forecasts of originating and
terminating toll minutes in O.N. Tel's own local exchanges. O.N. Tel also agreed that the
collection of contribution should be based on actual toll minutes, whenever possible.
94.Parties did not comment specifically on O.N. Tel's proposed methodology to calculate the contribution requirement. However, they agreed generally that the regulatory framework established in Decision 96-5 should also apply to O.N. Tel.
95.AT&T Canada LDS noted that O.N. Tel's Stage I framework proposes
that all switched toll traffic originating and terminating in a local exchange to which the carrier
provides local service would require the payment of contribution. AT&T Canada LDS was of the
view that competitive service providers should be required to pay contribution to O.N. Tel only
where it provides local service and in no case should a competitive service provider be required to
pay contribution to both O.N. Tel and another LEC.
96.AT&T Canada LDS noted that, in addition to the payment of
contribution, O.N. Tel's proposed framework would require the payment on an unknown transport
rate negotiated between Bell and the incumbent carrier. AT&T Canada LDS stated that the
cumulative effect of these charges may discourage market entry by competitive providers due to
prohibitive costs.
97.In AT&T Canada LDS' view, the Commission must ensure that, while
competitors should be permitted to interconnect with O.N. Tel for origination and termination of
traffic in its serving territory, it is imperative that the new regulatory framework also allow toll
competitors the option to directly interconnect with Abitibi-Consolidated, Cochrane and Northern
without the payment of compensation to O.N. Tel.
98.With respect to O.N. Tel's concern about the CAT applicable in some of
the territories it serves, PIAC noted that there is a need to integrate the independent telephone
companies into the portable subsidy scheme contemplated by the Commission's decision on local
competition, both to encourage competition in these jurisdictions and to assist in the problem of
addressing the current level of their CATs. PIAC noted that this issue is outside of the scope of
this proceeding, but emphasized that the decision in this proceeding should be consistent with
expected future developments in the regulation of LECs in the operating territory of O.N. Tel.
99.As noted earlier, O.N. Tel proposed to calculate its contribution
requirement based on the methodology approved by the Commission for Québec-Téléphone and
Télébec in Decision 96-5, with the exception that O.N. Tel proposed to deduct 50 basis points
from the midpoint of its ROR range in order to calculate the CAT. However, in its Phase III/SRB
Manual, filed on 25 November 1997, O.N. Tel proposed a slightly different methodology for
calculating its contribution requirement. In addition to the three steps set out in Decision 96-5 for
calculating Québec-Téléphone's and Télébec's contribution requirement, O.N. Tel added a fourth
step: 4. If there is a surplus in the Other BSC, add it to the result of the previous step. In light of
this, the Commission intends to determine the specific methodology to calculate the company's
contribution requirement in the proceeding to be initiated to deal with O.N. Tel's Phase III/SRB
Manual. In its determination regarding the methodology to calculate the company's contribution
requirement, the Commission will take into account its determination that the Utility segment ROR
to be used to calculate O.N. Tel's CAT be 50 basis points below the midpoint of its ROR range.
100.Given that toll competition will not be introduced in O.N. Tel's territory
until July 2000, the Commission considers that there is no need to set a proxy CAT for 1998 and
1999. The Commission intends to establish the level of the CAT for O.N. Tel in the proceeding
that will be initiated to implement toll competition in the company's operating territory.
B. Recovery of Start-up Costs
101.In order to provide interconnection to toll carriers, O.N. Tel will have to
modify its network, 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.
102.In Decision 96-5, the Commission directed Québec-Téléphone and
Télébec to develop cost-based rates to recover equal access start-up costs over a 10-year period
and to base the proposed rates on Phase II causal costs. The Commission also determined that
start-up costs should be recovered from all participants in the toll market, including the
incumbents, in accordance with their estimated share of that market. The Commission further
noted that only trunk-side originating and terminating minutes should be used in the calculation of
the equal access charge, since equal access functionality is not used by resellers who access the
switch from the line side.
103.O.N. Tel submitted that it generally agreed with the principles set out in
Decision 96-5 with regard to the recovery of equal access start-up costs. However, O.N. Tel
stated that adjustments to the cost inclusion and recovery principles might be necessary owing to
the non-vertically integrated nature of its operations. O.N. Tel suggested that this issue should be
further examined in the proceeding leading to the implementation of its Stage II proposal.
104.O.N. Tel accordingly expressed the view that where an IXC is obtaining
equal access through O.N. Tel's toll office, such IXC should contribute towards the associated
causal costs. However, where an IXC exercises the option to interconnect at an end-office, O.N.
Tel was of the view that the IXC should make arrangements with the LEC. O.N. Tel added that,
when the IXC interconnects directly with the LEC, cost recovery issues should be resolved
between the LEC and the IXC whereby O.N. Tel should not be required to contribute towards the
causal costs of end-office equal access.
105.AT&T Canada LDS was generally supportive of the Commission's
initiative to apply the regulatory framework established in Decision 96-5 to O.N. Tel. AT&T Canada LDS also stated that it was in the public interest to apply the basic framework developed in Decisions 92-12 and 94-19 to all incumbent toll carriers. The establishment of such a framework in O.N. Tel's operating territory would serve to foster the rapid introduction of toll competition.
106.AT&T Canada LDS was of the view that the Commission must ensure
that the regulatory framework provides for both toll office and end-office interconnection. AT&T
Canada LDS added that where a competitor opts for end-office interconnection, no additional
compensation should be due to O.N. Tel.
107.The Commission notes that, in Decision 92-12, it was of the view that
the public interest would be best served if the start-up costs, were shared among entrants and
incumbents, as all subscribers would benefit from the introduction of competition. As noted
above, this was the view taken by the Commission in Decision 96-5. Consistent with that view,
the Commission considers that equal access start-up costs, regardless of whether they be
incurred at the toll office, end-office or otherwise, should be shared between the incumbent toll
carrier and new entrants. However, the Commission considers that a determination on the exact
proportion of costs to be recovered from each party should be deferred until after a decision has
been issued on the High-Cost Areas Proceeding. The proportion of costs to be recovered will be
addressed in the proceeding to examine the specific terms and conditions of toll competition in
O.N. Tel's territory.
.108.The Commission is of the view that O.N. Tel's own start-up costs should be based on Phase II incremental costing and recovered over a 10-year period.
C. Recovery of Switching and Aggregation Costs
109.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.
110.In Decision 96-5, the Commission determined that Québec-Téléphone
and Télébec were to file unbundled rates for the recovery of switching and aggregation costs
(direct connection and access tandem) based on Phase II causal costs.
111.O.N. Tel agreed with the methodology set out in Decision 96-5 and
noted that it would be prepared to file switching and aggregation rates accordingly.
112.No party opposed O.N. Tel's proposal.
113.The Commission concludes that the Phase II methodology for the
recovery of switching and aggregation costs set out in Decision 96-5 will apply to O.N. Tel.
VI DEPRECIATION
114.O.N. Tel stated that it is currently depreciating its capital assets using a
straight-line depreciation method with an overall life of 15 years, and that this method was found
to be acceptable by the Provincial Auditor. The company also stated that it has not conducted
depreciation studies in the past and intends to continue using straight-line depreciation in the
future. However, in order to simplify its regulatory reporting requirements, the company proposed
to use average service lives (ASLs) approved for Bell for equivalent asset classes.
115.No comments were filed by interveners.
116.The Commission is of the view that the use of Bell's approved ASLs by
the company is not appropriate since the operating environment of both companies is too different
(e.g., in respect of toll and local competition for Bell but not for O.N. Tel). The Commission is also
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.
117.Accordingly, the Commission directs O.N. Tel to continue using its current straight-line depreciation method with an overall asset life of 15 years.
VII LOCAL COMPETITION
118.The terms and conditions of local competition in the territories of certain
of the 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 O.N. Tel will
be included in that proceeding.
VIII TARIFF FILING REQUIRMENTS AND TERMINAL EQUIPMENT
FORBEARANCE
A. Tariff Filing Requirements and Costing
119.In Decision 96-5, for telecommunications services other than those
which the Commission determined met the conditions for forbearance, Québec-Téléphone and
Télébec were required to continue to file tariffs for approval, but only required to file economic
studies (1) in support of filings for new services; (2) when proposing rates for a service that are
not similar 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.
120.In Decision 96-5, to ensure that the content of economic studies was
well-defined, Québec-Téléphone and Télébec were ordered to file resource cost study manuals
similar to those provided by Stentor-member companies. These filings were to be received by the
Commission within six months of the date of the Decision. The Commission also noted that, while
tariffs will continue to be required for market trials and promotions, economic studies will not be
required.
121.O.N. Tel agreed to the tariff filing requirements and costing principles as
enumerated in Decision 96-5.
122.The Commission has set out, in Section D below, the terms and
conditions for forbearance from the regulation of the provision 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 96-5 with regard to tariff filing requirements apply to O.N. Tel. The Commission directs
that the tariff filing requirements and costing principles set out in Decision 96-5 apply to O.N. Tel.
B. Ex parte Process
123.In Decision 96-5, the Commission found ex parte filings to be
appropriate for discount toll and 800 service filings where the applicant demonstrates that
competitive and non-discrimination safeguards are met and that no bottleneck service, consumer
safeguard or privacy issue is raised.
124.O.N. Tel submitted that the ex parte process set out in Decision 96-
5 should apply with respect to its discount toll and 800 service filings. In addition, O.N. Tel stated
that the modifications brought to the ex parte process in Tariff Filings Relating to
Promotions, Telecom Decision CRTC 96-7, 18 September 1996 (Decision
96-7), should also apply. Decision 96-7 provided for additional flexibility and clarification with
regard to the publication requirements and expanded the ex parte regime to promotional filings for
competitive network and basic toll services.
125.The Commission recognizes that, in the case of O.N. Tel, a competitive
framework for the services that normally qualify for ex parte process will not exist until mid-
year 2000. However, the Commission notes that the fulfilment of a clause in O.N. Tel's current
settlement agreement with Bell, requiring O.N. Tel to price its toll services at the same rates as
Bell, could be hampered if the ex parte process is not applied to O.N. Tel.
126.In this regard, the Commission notes that pursuant to Forbearance
- Regulation of Toll Services Provided by Incumbent Telephone Companies, Telecom Decision
CRTC 97-19, 18 December 1997 (Decision 97-19),
O.N. Tel was directed to file its own tariffs for toll and toll free services. Prior to Decision 97-19,
O.N. Tel's tariffs for toll and toll free services made reference, where applicable, to the rates for
similar services set out in the Stentor National Services Tariff.
127.The Commission notes that, in seeking to respect its agreement with
Bell and Commission tariff requirements, O.N. Tel, when placing its proposed rates on the public
record, would effectively be placing rates for Bell's forborne services on the public record and
announcing them to Bell's competitors prior to them becoming effective. Therefore, the
Commission considers it appropriate that the ex parte procedure apply to O.N. Tel,
particularly as it provides O.N. Tel with the flexibility in the interim period leading up to competition
to respect its current settlement agreement with Bell.
128.Accordingly, the Commission directs that the ex parte process set
out in Decision 96-5 and modified by Decision 96-7 apply to O.N. Tel with respect to the toll and
toll free services it provides.
C. Imputation Test
129.In Review of Regulatory Framework - Targeted Pricing, Anti-
Competitive Pricing and Imputation Test for Telephone Company Toll Filings, Telecom Decision
CRTC 94-13, 13 July 1994, and Decision 94-19, the Commission
established for the Stentor-member companies an imputation test. In order to prevent anti-
competitive pricing in the long distance market, the Commission determined that the telephone
companies' long distance services must be priced to recover all underlying costs and charges for
contribution, start-up cost recovery and bottleneck services (price imputation test). Consistent
with the development of a competitive market for toll services in the territories of Québec-
Téléphone and Télébec, the Commission, in Decision 96-5, required that these companies
provide an imputation test calculation.
130.O.N. Tel submitted that, unlike other telephone companies, O.N. Tel is
largely a non-vertically-integrated telephone company, in that O.N. Tel's local operations only
contribute a fraction of its annual revenues. Therefore, O.N. Tel considered, that unlike other
vertically-integrated telephone companies, it does not have significant opportunities to price
competitive services (including toll services) in an anti-competitive manner, by cross-subsidizing
toll rate reductions with revenues from monopoly operations. Accordingly, O.N Tel was of the
view that it should not be subject to an imputation test requirement.
131.AT&T Canada LDS, noting O.N. Tel's statement that the billing of its
services through LECs renders the carrier "invisible" to its toll customers, submitted that, even if
O.N. Tel's assertion with respect to market visibility is correct, this can only be to the incumbent
carrier's advantage. In AT&T Canada LDS' view, if customers in northeastern Ontario believe that
the LECs provide both local and long distance service, they may be highly reluctant to switch to an
alternate toll carrier, conferring on O.N. Tel the power to dominate the toll market and to pass on
toll rate increases to its customers transparently via the LECs. Therefore, AT&T Canada LDS
urged the Commission to reject O.N. Tel's arguments and ensure that an imputation test is
applied to O.N. Tel as the only current provider of toll services in northeastern Ontario.
132.Northern noted that the purpose of the imputation test is not to detect
cross-subsidies between the telephone companies' Utility segments and their competitive services
but to ensure that they do not unfairly take advantage of their dominant market position by pricing
their services in an anti-competitive manner. In Northern's view, O.N. Tel is already dominant in
the toll market of northeastern Ontario by virtue of the fact that it is presently the only carrier with
operational interexchange transmission facilities, and that such dominance underscores the need
for a carefully designed set of competitive safeguards including the establishment of an imputation
test.
133.In reply, O.N. Tel reiterated its opposition to an imputation test. O.N. Tel
submitted that it had limited control over bottleneck services and relative lack of incumbency
advantages and/or market power. O.N. Tel stated that it does not have the financial resources to
discipline competitors or to drive them out of its territory by sustaining anti-competitive prices, or
by any other means. Further, the requirement to maintain average rates on high cost routes and
its commitment to route-averaging limit its financial ability to sustain low rates on vulnerable routes
and provide limited or no opportunity for O.N. Tel to recoup losses that might be incurred under a
strategy of low pricing on vulnerable routes. O.N. Tel also argued that, given that toll rates will be
determined by national market forces in a competitive environment, it has no ability to raise prices
given the much lower average CAT rates in the national markets enjoyed by national toll providers
such as Sprint Canada Inc. or AT&T Canada LDS. O.N. Tel noted that the record of this
proceeding indicates that at least one facilities-based alternate provider of long distances services
(APLDS) is poised and waiting to extend its facilities into the territory. O.N. Tel further submitted
that it need not be subject to the imputation test because many customers do not recognize O.N.
Tel as their toll carrier and because customers are already aware of the existence of competing
long distance carriers through their national campaigns.
134.In Decision 97-19, the Commission made a determination to partially
forbear under section 34 of the Act with respect to toll services provided by the Stentor-member
companies. The Commission also considered that the imputation test was no longer required for
these forborne services given that circumstances have changed since the implementation of the
imputation test in 1994, that the toll and toll free markets have generally become more competitive
and that there are presently fewer sources and amounts of revenues available to subsidize below
cost pricing.
135.In Decision 97-19, the Commission considered that the circumstances
of Québec-Téléphone and Télébec warranted a less rigorous application of the forbearance pre-
conditions than was determined appropriate for the Stentor-member companies. The
Commission noted that Québec-Téléphone and Télébec were not as well positioned for toll and
toll free competition in their territories as the members of the Stentor alliance, given that the
APLDS, who market their services nationally, generally averaged their prices over the national
market, whereas Québec-Téléphone and Télébec had a significantly more limited geographical
coverage and subscriber base. The Commission also noted that both Québec-Téléphone and
Télébec have CATs that are significantly higher than that of Bell. Accordingly, in respect of the toll
services and toll free services provided by Québec-Téléphone and Télébec, the Commission
made a decision to forbear and to discontinue the imputation test as described above for the
Stentor-member companies in Decision 97-19.
136.The Commission notes that the characteristics of the markets of
Québec-Téléphone and Télébec that warranted the discontinuance of the imputation test are
present in the case of O.N. Tel. The Commission considers that, with the continued filing of tariffs
for toll services by O.N. Tel, the provisions of section 27 of the Act require that the rates for these
services be just and reasonable and that the terms under which these services are made
available are not unjustly discriminatory or unduly preferential.
137.Therefore, the Commission concludes that the imputation test will not
apply with respect to O.N. Tel's toll and toll free services.
D. Terminal Equipment Forbearance
138.On 16 October 1996, O.N. Tel filed an application, pursuant to section
34 of the Act, requesting the Commission to forbear from regulating the sale, lease and
maintenance of its competitive terminal equipment other than equipment supplied on a monopoly
basis and single-line residence and business inside wire, in the same fashion as ordered with
respect to other independent telephone companies in Decision 96-6. O.N. Tel noted that it
provided terminal equipment in largely the same geographical markets as Northern, which is
subject to Decision 96-6. O.N. Tel stated that the terminal equipment market in its operating territory was highly competitive as it is throughout Ontario.
139.By letter dated 28 April 1997, the Commission noted that in the
proceeding initiated by PN 97-7, it requested comment, among other things, on why any part of
the regulatory framework in Decision 96-5 should not apply to O.N. Tel. Decision 96-5 prescribed
the necessary conditions in respect of the Commission's determination to forbear from the
regulation of the sale, lease and maintenance of terminal equipment by Québec-Téléphone and
Télébec. The Commission stated that, in view of the fact that O.N. Tel's forbearance request
raises issues to be considered in the context of PN 97-7, it would be more appropriate to deal with
this matter in the context of the PN 97-7 proceeding.
140.In Decision 96-5, 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, 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.
141.Consistent with Decision 96-5, with the confirmation that O.N. Tel has
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.
142.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.
143.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.
144.O.N. Tel is 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 the 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.
IX EXTENDED AREA SERVICE
A. Extended Area Service Criteria
145.In Decision 96-5, the Commission approved the continuation of the two
Extended Area Service (EAS) standards within the territories of Québec-Téléphone and Télébec,
i.e., depending on whether the company is linking to a Bell exchange or to another independent's
exchange.
146.O.N. Tel submitted that Bell's EAS criteria, as modified by Decision 96-6, should apply to O.N. Tel. In Decision 96-6, the Commission required that a vote be held in the
exchanges where the associated individual line residential local rate increase would be greater
than $1 per month. Furthermore, the Commission ordered that subscribers pay for the cost of
EAS directly through higher local rates, rather than recovering the cost through the CAT.
147.The Commission agrees with O.N. Tel that the EAS criteria established
in Decision 96-6 are more appropriate to O.N. Tel's particular situation. Therefore, the
Commission approves for O.N. Tel the use of the EAS criteria approved in Decision 96-6.
B. Method for Recovering the Cost of New Extended Area Service Links
148.Consistent with approval of the Decision 96-6 EAS criteria, the
Commission approves for O.N. Tel the Decision 96-6 requirement that subscribers pay for the
cost of EAS directly through higher local rates and that the CAT not be used for this purpose.
X QUALITY OF SERVICE
149.In Decision 96-6, the Commission determined that issues pertaining to
quality of service for those independents with less than 25,000 NAS lines be addressed via a complaints procedure.
150.The Commission considers it appropriate that the method to deal with
quality of service issues outlined in Decision 96-6 apply with respect to O.N. Tel's provision of
local service.
Laura M. Talbot-Allan
Secretary General
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