Telecom Decision
CRTC 98-23
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Ottawa, 30 November 1998
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TELUS COMMUNICATIONS (EDMONTON) INC. - DECISION REGARDING FORM OF REGULATION AND OTHER MATTERS
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File No.: 8085-RP0007/98
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SUMMARY
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In this Decision, the Commission approves a three-year price cap regime for TELUS Communications (Edmonton) Inc., effective 1 January 1999. This Decision also sets out a number of interim determinations which include, among other things, that no changes to rates for basic residential local service are required. A final decision will be issued in February 1999 in which the Commission will provide reasons for its determinations.
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I INTRODUCTION
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A. Background
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1. The regulatory framework of TELUS Communications (Edmonton) Inc. (TCEI) (formerly ED TEL Communications Inc.) is subject to the Directive to the Canadian Radio-television and Telecommunications Commission on the Regulation of Edmonton Telephones Corporation and ED TEL Communications Inc., P.C. 1994-1779, 25 October 1994 (the Directive). Among other things, the Directive specifies:
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(a) a form of incentive regulation with an allowed rate of return on average common equity (ROE) range of 11.5% to 13.5%;
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(b) the recovery of a shareholder entitlement as defined in the Directive; and
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(c) the treatment of directory operations as being partially integral to the operations of the company.
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2. Given that the Directive was set to expire on 25 October 1998, the Commission issued, on 23 February 1998, Form of Regulation for TELUS Communications (Edmonton) Inc., Telecom Public Notice CRTC 98-3 (PN 98-3), initiating a proceeding to determine the appropriate regulatory regime for TCEI to be implemented after the Directive expired.
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B. Scope of Proceeding
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1. Appropriate Regulatory Regime
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3. In Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994, the Commission determined, among other things, that earnings regulation, for certain of the Stentor Resource Centre Inc. (Stentor) member companies’ Utility segment (i.e., local and access services), would be replaced with price cap regulation effective 1 January 1998. Further, in Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, 1 May 1997 (Decision 97-9), the Commission set the principles and components of price cap regulation for BC TEL, Bell Canada, Island Telecom Inc. (formerly The Island Telephone Company Limited), Maritime Tel & Tel Limited, MTS Communications Inc. (formerly MTS NetCom Inc.), NBTel Inc. (formerly The New Brunswick Telephone Company, Limited), NewTel Communications Inc. and TELUS Communications Inc. (TCI) (the telephone companies).
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4. In PN 98-3, the Commission directed TCEI to show cause why some or all of the Commission’s determinations in Decision 97-9 should not apply to it.
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5. Further, in PN 98-3, the Commission expressed the preliminary view that it would be appropriate to extend the regulatory regime under the Directive to the end of 1998, and to align the start of a new regulatory regime with the beginning of the 1999 calendar year. As noted in PN 98-3, this would provide a consistent basis from which to calculate the rates going into the price cap period.
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6. By letter dated 27 May 1998, parties were requested to file comments on the Commission’s preliminary view that the regulatory regime under the Directive should be extended to the end of 1998. Comments were received from TCEI, Alberta Council on Aging (ACA) and the Consumers’ Association of Canada, Alberta Branch (CACAlta). By letter dated 30 June 1998, the Commission decided that it would extend the regulatory regime under the Directive for TCEI to the end of 1998.
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2. Going-in Rates and Related Issues
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7. The Commission stated that, in the proceeding initiated by PN 98-3, it would determine the 1998 contribution requirement for TCEI and the 1998 Blended Alberta rate.
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8. With respect to setting the level of rates for local services going into the new regime (i.e., the going-in rates), the Commission stated that it would examine in this proceeding the amount (if any) of rate rebalancing required, issues related to shareholder entitlement, integrality of directory operations and other issues, such as an appropriate ROE, the company’s going-in contribution requirement and the Blended Alberta rate, effective 1 January 1999.
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9. In an effort to streamline the process to determine an appropriate ROE, the Commission directed TCEI to show cause why the ROE applicable to TCI pursuant to Implementation of Price Cap Regulation and Related Issues, Telecom Decision CRTC 98-2, 5 March 1998 (Decision 98-2), should not apply to TCEI.
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C. Procedure
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10. TCEI was made a party to the proceeding. On 6 April 1998, TCEI filed evidence and responses to Commission interrogatories, including its financial forecasts for 1998.
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11. By letter dated 7 May 1998, it was noted that the determinations in TELUS Communications (Edmonton) Inc. - Local Competition and Related Issues, Telecom Decision CRTC 98-6, 7 May 1998 (Decision 98-6), may impact on the financial forecasts filed by TCEI and, ultimately, on the final determinations in this proceeding. TCEI updated its evidence and submissions, in light of Decision 98-6, on 20 May 1998.
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12. ACA, the City of Calgary (Calgary) and CACAlta filed evidence in this proceeding.
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13. ACA, AT&T Canada Long Distance Services Company (AT&T Canada LDS), Calgary, CACAlta and TCEI filed argument and reply comments.
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II DETERMINATIONS
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A. General
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14. This Decision sets out, among other things, the form of regulation, as well as local rates and contribution rates, effective 1 January 1999. In reaching these determinations, the Commission has considered issues such as depreciation, integrality of directory operations, shareholder entitlement, treatment of terminal operations, as well as other issues related to the financial forecasts. All determinations made in this Decision are final unless otherwise stated. A final decision on all other issues raised in the PN 98-3 proceeding will be issued in February 1999.
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B. Form of Regulation
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1. Price Cap Regulation
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15. TCEI submitted that, with two exceptions, all of the determinations contained in Decision 97-9 should apply to the company. TCEI submitted that adopting a price cap plan which is similar to that applicable in the rest of Alberta would permit seamless interoperability with TCI’s price cap plan. Consequently, TCEI accepted the price cap parameters, as well as the capped service basket, the three sub-baskets, and the pricing constraints applicable to the sub-baskets, as enunciated in Decision 97-9. TCEI also noted that aligning TCEI’s capped service basket and sub-baskets with TCI’s basket and sub-baskets would facilitate the possible merger of the two price cap plans at some point during the price cap period, anticipating that it may amalgamate with TCI on or after 1 January 1999.
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16. However, TCEI sought two modifications to the determinations made in Decision 97-9. These modifications related to the application of a three-year, as opposed to a four-year, price cap period and the Commission’s acceptance that TCEI would not file Phase III/Split Rate Base (SRB) results.
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17. ACA stated that it is most appropriate to treat TCEI in the same manner as a Stentor-member company. Similarly, AT&T Canada LDS submitted that the determinations made by the Commission in Decision 97-9 should be equally applicable to TCEI.
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18. CACAlta stated that TCEI appears too "ill prepared to compete and the ‘Directive’ may need to be extended beyond the end of the year to allow the deficiencies in its operations to be corrected". CACAlta maintained that it is important for price cap regulation that the capped prices be based on proper and provable costs, otherwise, the transition to competition will be uneconomic in nature.
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19. The Commission notes that, while CACAlta suggested that the Directive may need to be extended beyond 31 December 1998, CACAlta did not specifically oppose price cap regulation for TCEI. The Commission further notes that no other party has taken issue with the Commission’s preliminary determination that the price cap plan determined in Decision 97-9 would be appropriate for the regulation of TCEI, effective 1 January 1999.
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20. The Commission finds that, subject to the exceptions noted below, the price cap regime, as set out for the telephone companies in Decision 97-9, is the appropriate form of regulation for TCEI, effective 1 January 1999, and fairly balances the interests of subscribers, shareholders and competitors. Moreover, the Commission is of the view that the record of this proceeding contains sufficient information to set appropriate going-in rates for TCEI.
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2. Price Cap Period
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21. In order to facilitate a possible amalgamation of the companies, TCEI proposed that the four-year price cap plan set out in Decision 97-9 be modified to a three-year period to allow TCEI’s and TCI’s price cap plans to be reviewed at the same time.
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22. ACA stated that it agrees with TCEI’s proposal for a three-year term for the initial price cap period, thereby treating TCEI in the same manner as a Stentor-member company.
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23. The Commission notes that no party raised any objection to TCEI’s proposal for a three-year price cap plan.
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24. In determining the length of the price cap plan in the proceeding leading to Decision 97-9, the Commission considered that the period must balance the need to allow the telephone companies the opportunity for the benefits of price cap regulation to materialize against the cummulative effects of any errors in setting the price cap parameters. The Commission considers that a price cap period of three years for TCEI would not jeopardize this balance.
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25. Adoption of a three-year plan will also permit the review of TCEI’s price cap plan to be undertaken concurrently with that of TCI (and the other telephone companies), as well as facilitate any possible amalgamation. In light of the above, the Commission approves for TCEI a price cap period of three years, commencing 1 January 1999.
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26. In the event of an amalgamation of TCEI and TCI, the Commission will require certain financial information to determine what process, if any, will be required to address any consequential impacts on, among other things, rates and the price cap parameters for the amalgamated company.
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3. Filing of Phase III/SRB Results
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27. TCEI requested an exemption from the requirement to file historical Phase III/SRB results. TCEI stated that it is unable to produce these results and is of the view that a split rate base is not necessary in order to establish a price cap plan for an urban Local Exchange Carrier or to establish its going-in rates.
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28. The Commission notes that no party raised any objection to TCEI’s request to be exempted from filing Phase III/SRB results and considers that it need not be a prerequisite for implementing a price cap regime for TCEI. The Commission also notes that, if TCEI and TCI were to amalgamate, the Phase III filing requirements applicable to the Stentor-member companies would likely apply to the amalgamated company in due course.
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29. The Commission finds that it is appropriate to exempt TCEI from the requirement to file historical Phase III/SRB results. The Commission nevertheless considers that there is a requirement to monitor the financial performance of the company and, consequently, directs TCEI to file with the Commission actual company-wide financial results on a semi-annual year-to-date basis. This information is to be filed 45 days after the end of each period, consistent with the reporting requirements and filing dates set out in Decision 97-9 for the Stentor-member companies.
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C. Rates
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1. Local Rate Increase
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30. TCEI requested approval for an increase of $3.00 to the monthly rate for its basic residential local service, effective 1 January 1999, in order to reduce its going-in contribution requirement. TCEI also proposed that its going-in contribution rate be virtually eliminated, such that the Blended Alberta rate for TCI and TCEI would not exceed the target 2-cent ceiling established for the Stentor-member companies in Decision 97-9. TCEI proposed to recover the amount of revenues required to achieve this target through an adjustment to the price cap constraints (Factor-A).
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31. AT&T Canada LDS supported TCEI’s proposal with respect to a zero contribution rate for TCEI and a 2-cent ceiling for the Blended Alberta rate. AT&T Canada LDS stated that, with its proposed adjustments to the TCEI contribution requirement, this can be achieved with minimal rate rebalancing and without Factor-A adjustments to the price cap index (PCI).
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32. ACA submitted that TCEI’s proposed Factor-A adjustment to the PCI and the Basic Residential Local Service Sub-Basket Service Band Limit (SBL), to allow TCEI to generate sufficient revenue to reduce the Blended Alberta contribution rate to 2 cents per minute, would result in rate shock for TCEI’s subscribers. ACA strongly urged the Commission not to accept this proposal.
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33. The Commission considers that TCEI’s proposed Factor-A would result in an inappropriate shift of the burden from competitors to subscribers. The Commission considers that the Factor-A was intended to recover any revenue requirement shortfall that could not be recovered from going-in rates. It was not the Commission’s intention in Decision 97-9 to use the Factor-A to bring contribution rates down to the 2-cent level. Furthermore, the Commission did not intend, in Decision 97-9, that rate rebalancing revenues be used to reduce contribution rates to a 2-cent level for the Blended Alberta rate.
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34. Accordingly, the Commission does not consider that TCEI’s contribution requirement and rate should be constrained by a targeted 2-cent Blended Alberta rate.
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35. After reviewing the evidence filed in this proceeding, the Commission concludes that, on a prima facie basis, no change to basic residential local service rates is warranted, effective 1 January 1999.
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36. The Commission also considers that, on a prima facie basis, the implementation of a mechanism to recover any remaining revenue requirement shortfall is not required. The Commission notes that there may be some minor adjustments to the interim rates approved in this Decision. The Commission will further address these issues in its final decision to be issued in February 1999.
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2. Contribution
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37. The Blended Alberta contribution mechanism was established for TCEI and TCI in Contribution Regime in Alberta, Telecom Decision CRTC 95-22, 27 November 1995.
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38. The Commission established interim 1998 contribution rates for TCEI (and Blended Alberta) and interim wireless service provider (WSP) surcharges for Blended Alberta in Decision 98-2, and stated that these would be finalized in the proceeding initiated by PN 98-3. The Commission will finalize the 1998 contribution rates and WSP surcharges in the decision to be issued in February 1999.
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39. The Commission approves, on an interim basis, effective 1 January 1999, the contribution rates set out in Decision 98-2 for TCEI and Blended Alberta including the WSP surcharges. TCEI and TCI are directed to issue forthwith tariff pages setting out the interim 1999 Blended Alberta contribution rates and WSP surcharges, reflecting TCI’s final rates to come into effect 1 January 1999 and TCEI’s interim rates set out in Decision 98-2.
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D. Local Subsidy Allocation
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1. Rate Band Structure
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a. General
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40. In Tariff Notice 84, dated 8 June 1998, TCEI proposed, among other things, that loops in the downtown core of Edmonton be assigned to Band A, and loops in the remainder of Edmonton to Band B. In Telecom Order CRTC 98-772, 7 August 1998 (Order 98-772), the Commission granted interim approval to TCEI’s proposed banding structure.
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41. In Decision 98-2, the Commission approved for TCI the assignment of loops in the downtown core of the city of Calgary to Band A and loops in the remainder of Calgary to Band B, based on the rate band structure criteria set out in Implementation of Price Cap Regulation - Decision Regarding Interim Local Rate Increases and Other Matters, Telecom Decision CRTC 97-18, 18 December 1997. The Commission notes that the city of Edmonton is comparable in size to the city of Calgary.
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42. The Commission notes that no comments were received with respect to TCEI’s proposed banding structure in this proceeding. The Commission considers that TCEI’s rate band proposal is reasonable in that it is consistent with the rate band structures of TCI and of the other Stentor-member companies with large metropolitan areas approved in Decision 98-2. Therefore, the Commission gives final approval to TCEI’s banding structure.
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b. Loops as Essential Facilities
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43. In Local Competition, Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8), the Commission concluded that to be essential, a facility, function, or service must meet all three of the following criteria: (1) it is monopoly controlled, (2) a competitive local exchange carrier (CLEC) requires it as an input to provide services, and (3) a CLEC cannot duplicate it economically or technically. The Commission determined that facilities that meet this definition should be subject to mandatory unbundling and mandated pricing, and that tariffed rates for these facilities are to be treated as costs in the imputation test.
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44. In response to interrogatory TCEI(CRTC) 8 May 98-1707, TCEI submitted that loops in Bands A and B should be considered non-essential. TCEI noted that its serving territory, classified as Band A or Band B, will be subject to the same rapidly evolving competition which will be experienced in the urban exchanges of the Stentor-member companies.
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45. In Decision 97-8, the Commission found that local loops situated in small urban and rural areas meet the criteria set out in the Commission’s definition of an essential facility. As stated in Decision 97-9, the 10% limit on annual increases will not apply to individual rate elements for residence and single-line business primary exchange services within the bands for which local loops are considered non-essential.
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46. The Commission considers that loops in the territory served by TCEI do not meet the criteria for essential facilities set out in Decision 97-8. Therefore, the 10% constraint will not apply to individual rate elements for residence and single-line business primary exchange services in the territory served by TCEI.
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2. Percent Subsidy Requirement by Band
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47. The Commission approves, on a prima facie basis, an interim subsidy requirement of 100% for Band B.
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E. Service Baskets and Price Indices
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48. In response to interrogatory TCEI(CRTC) 23 Feb 98-710, TCEI filed a proposed service basket assignment that is generally consistent with the Utility segment service assignment set out in Decision 98-2. The Commission approves, on an interim basis, TCEI’s proposed service basket assignment. TCEI is directed to file with the Commission, by 18 December 1998, the classification of each of its services by sub-basket and by tariff item.
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49. In Decision 97-9, the Commission indicated that compliance with the PCI and SBLs would involve a demonstration of the impact of individual rates on the relevant price indices.
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50. The Commission directs TCEI to file, by 31 March 1999, its first price cap submission as well as any proposed rate changes that may be necessary to ensure that TCEI’s rates will be in compliance with the PCI and SBL constraints. Further, TCEI is directed to file, by 31 March 1999, the proposed classification of any service not yet classified.
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51. TCEI is directed to file forthwith the calculation of its actual price indices and service band indices, based on rates for capped services as at 1 January 1999, at the rate element level of detail (where possible). The associated PCI and SBLs are set at an initial level of 100, effective 1 January 1999, on an interim basis.
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F. Other Matters
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52. In TELUS Communications (Edmonton) Inc. - Provision of Primary Telephone Set and Forbearance from the Regulation of Terminal Equipment, Telecom Public Notice CRTC 98-21, 18 August 1998 (PN 98-21), the Commission initiated a proceeding to review, among other things, TCEI’s proposed tariff revisions to eliminate the provision of one standard telephone set for each residential and business individual line service. The Commission notes that the decision in the PN 98-21 proceeding may have an impact on TCEI’s going-in revenue requirement. Since the decision in the PN 98-21 proceeding is not expected by the end of the year, the Commission hereby makes rates for basic residential and business individual line service and the rental of standard extension sets interim, effective 1 January 1999, at existing levels.
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III FINAL DECISION
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53. As stated earlier, the Commission intends to issue its final decision in February 1999, based on the record of this proceeding as well as the decision to be made pursuant to PN 98-21. The final decision will provide the reasons for the Commission’s determinations and will also make final determinations on a variety of matters, including those made on an interim basis in this Decision.
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Secretary General
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This document is available in alternative format upon request.
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