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Telecom Order
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Ottawa, 30 November 1998
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Telecom Order CRTC 98-1190
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On 16 June 1997, Stentor Resource Centre Inc. (Stentor), on behalf of and with the concurrence of the federally regulated Stentor telephone companies, and TELUS Communications Inc. (TCI) filed Tariff Notice (TN) 487 and TN 931 respectively, for approval of tariffs pertaining to: (a) the termination of intra-exchange traffic in case of significant traffic imbalance; and (b) the transport of traffic between exchanges linked through Extended Area Service (EAS).
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On 18 July 1997, Stentor and TCI filed revisions to TN 487 and TN 931 under TN 487A and TN 931A, respectively.
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File Nos.: Stentor TN 487 and TCI TN 931
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A. Mutual Compensation Tariff
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1.In Local Competition, Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8), the Commission determined that mandating bill and keep would be in the public interest for traffic that is exchanged between local exchange carriers (LECs) and terminated within the same exchange.
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2.The Commission also concluded that, in those instances where it is demonstrated that traffic between LECs is not balanced for a significant period of time, mutual compensation should be implemented and the rate should be capped at the incumbent local exchange carrier (ILEC) rate.
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3.Stentor, including TCI, proposed mutual compensation rates that would apply, on a per trunk basis, depending on the number of trunks and whether the imbalance, within a given trunk group, is greater than 20%, 40%, or 60%. Stentor stated that for a six-month "settling time" period at the start of interconnection with a Competitive Local Exchange Carrier (CLEC), it would not monitor the interconnecting circuits. After six months have passed, the ILEC would monitor the interconnecting circuits to detect any traffic imbalances. In the event that the ILEC detected an imbalance for three consecutive months in any trunk group, it would notify the CLEC of the imbalance after the third consecutive month and inform the CLEC of the magnitude of the imbalance. Stentor indicated that should an imbalance continue to exist in the following months, the imbalance tariff would apply on a monthly basis for as long as the imbalance is present.
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4.MetroNet Communications Inc. (MetroNet) submitted that the companies had arbitrarily set both the imbalance thresholds and the time period threshold for the application of a mutual compensation regime and have provided no substantive reasons as to why they are appropriate. MetroNet indicated that it might be appropriate at a later date for the industry to review the conditions and threshold under which mutual compensation will apply.
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5.Rogers Cantel Inc. (Cantel) submitted that the time threshold be set at one year instead of three months, as proposed by Stentor.
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6.Call-Net Enterprises Inc. (Call-Net) submitted that Stentor's suggested six-month "settling time" period was insufficient. Call-Net observed that the rate the CLECs will pay for traffic termination could fluctuate wildly from month to month.
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7.Call-Net argued that CLECs will not be able to control or predict these fluctuations since traffic imbalance depends on service use by customers of the interconnected LECs, and CLECs have no historical record to aid in forecasting these volumes. Call-Net submitted that uncertainty created by the proposed imbalance tariff would act as a barrier to entry.
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8.Call-Net proposed that a "temporal sliding scale" (TSS) methodology be used to determine when mutual compensation should apply. Call-Net proposed that, during the first year of a five-year initial competitive period, bill and keep should apply without exception. The start of the period would be measured from the time that local number portability (LNP) becomes available in a given area or the point at which a given CLEC begins to provide service in that area, whichever is later.
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9.During the remaining four years, the traffic imbalance threshold would decrease annually by 20% (i.e., a threshold of 80% in the second year, 60% in the third year, and so forth). Once the threshold for a given year has been passed, the mutual compensation arrangement would apply based on the criteria proposed by Stentor. Call-Net argued that the Commission should revisit the bill and keep threshold issue at the end of the fifth year, and set a reasonable threshold based on five years of historical data.
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10.Call-Net argued that the TSS methodology has a number of advantages over Stentor's proposal. Call-Net submitted that the TSS methodology is not arbitrary and that it recognizes the inherent reality that the CLECs' market share is likely to be quite modest in the early days of competition and will only grow progressively. Call-Net claimed that the TSS methodology would mitigate uncertainty over time by decreasing the mutual compensation threshold as CLECs develop experience in the local market and are better able to manage rate uncertainty thereby lowering barriers to entry.
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11.Call-Net submitted that a one-year market entry window would allow six months for a CLEC to prepare for competition and a further six months to gain enough market shares to become viable.
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12.Call-Net claimed that measuring traffic on a monthly basis as proposed by Stentor would be unduly costly and unnecessary. Call-Net proposed that LECs biannually analyze traffic data from the previous six months to determine whether mutual compensation should apply in the following six months.
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13.Stentor submitted that Call-Net's proposed TSS methodology would allow significant traffic imbalances to exist over an unreasonable period of time.
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14.Stentor submitted that the three levels for the imbalance threshold were established for ease of administration. The structure of the imbalance tariff is consistent with the principle that LEC A should be compensated for terminating that portion of LEC B's traffic that is in excess of the traffic originated by LEC A and terminated by LEC B. Stentor argued that this principle is consistent with the intent of Decision 97-8.
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15.Stentor noted that none of the interested parties objected to a "settling time". Stentor stated that the six-month "settling time" was chosen because the companies felt that it represented a reasonable time period for variations in demand to be settled and for the establishment of long term trends. Stentor observed that the six-month "settling time" commences after interconnection with a CLEC, not at the start of local competition, as Call-Net seems to have inferred.
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16.Stentor further submitted that any "settling time" longer than six months would amount to a significant period of time for which one party is not bearing its fair share of the costs associated with the exchange of local traffic. Stentor argued that this would be contrary to the Commission's intent in Decision 97-8.
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17.The Commission considers that Call-Net's proposal for a one-year market entry window, measured from the later of interconnection or LNP introduction, constitutes an excessive amount of time over which a LEC could be incurring costs for which it will not be compensated.
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18.The Commission notes that the cost of terminating traffic varies based on the amount of traffic to be terminated. The Commission considers that, under Call-Net's proposed TSS methodology, rates would not reflect costs for a too long a period of time.
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19.The Commission considers that a six-month "settling time", commencing upon interconnection with the CLEC, is a reasonable amount of time over which the CLEC may assess the amount of interconnection trunks that it will require based on the amount of traffic its customers generate. The Commission notes that one month is a typical trunk-servicing interval used to add capacity to trunk groups in order to maintain grade of service requirements.
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20.The Commission is of the view that the mutual compensation tariff proposed by Stentor is not unduly complex. Moreover, the Commission considers that Stentor's proposed rates, which are based on imbalance thresholds of 20%, 40% and 60%, better reflect the costs of providing traffic termination than Call-Net's proposed TSS methodology. The Commission further notes that seasonal differences in traffic will not trigger the implementation of mutual compensation under Stentor's proposal.
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21.The Commission considers that it would not be appropriate to set an imbalance threshold at less than 20% since, based on the information provided by Stentor, the costs of measuring and billing for such an imbalance would exceed the potential revenue.
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22.The Commission notes that Call-Net's proposal that traffic data from the previous six months be analyzed to determine whether mutual compensation should apply in the next six months would be less costly to implement than Stentor's proposal to measure traffic on a monthly basis. The Commission considers, however, that with the averaging proposed by Call-Net, imbalances in traffic could be sustained for a significant period of time without triggering mutual compensation.
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23.On balance, the Commission finds that a threshold of three months of traffic imbalance, before mutual compensation rates can apply, is reasonable.
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24.The Commission notes that it does not consider it appropriate to set a time for the industry to review the conditions and threshold under which mutual compensation will apply, as suggested by MetroNet. The Commission is nonetheless prepared to entertain applications from the LECs to change such thresholds based on evidence that a change is warranted.
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25.Call-Net submitted that the rates charged for imbalance of traffic might be overstated since it appears that the companies have included a number of cost elements that should be excluded in their cost studies. In particular, Call-Net claimed that the rates should only be based on the costs of incremental capital, which should be similar in each company. Call-Net stated further that these costs should include only the costs attributable to terminating CLEC traffic that is in excess of that traffic originated by the ILEC and terminated by the CLEC. Similarly, MetroNet claimed that the only incremental capital required to handle the traffic imbalance is for switching functionality and software.
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26.Call-Net argued that expenses related to the measurement of imbalance are not causal to the service since the companies will be measuring traffic regardless of whether mutual compensation is implemented. MetroNet asserted that the process for measuring traffic only involves programming of the switch to measure traffic volumes of specific trunk groups, which does not require significant effort.
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27.Cantel argued that the costs for ongoing monitoring should not be recovered through the imbalance tariff and that each party, since it will monitor its own network, should bear its own costs.
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28.Stentor submitted that the capital and expenses that are included in the cost studies submitted in support of the proposed tariffs include only the incremental costs that are causal to these services. Stentor noted that each member company negotiates supplier contracts and labour contracts separately and, as such, each company has a different cost structure. These different costs are reflected in the tariffs provided in Stentor TN 487 and TCI TN 931. Stentor indicated that each company has a different network topology, which impacts the facilities required to provide traffic termination.
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29.Stentor noted that, in addition to the incremental capital cost related to switching, there is also additional incremental capital associated with inter-office transport that is required for calls from CLEC end customers which do not terminate in the gateway switch. If the companies did not have to switch or transport calls originated from CLEC end customers, then their facilities used to switch and transport these calls would be available to provide other services offered by the ILECs to their own end customers.
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30.The expenses related to monitoring are associated with the additional time required to measure the traffic on the trunks and with the personnel required to analyze the data retrieved from the measurement process to determine the level of imbalance. Stentor submitted that this monitoring activity is not necessary under bill and keep. Stentor submitted that MetroNet is incorrect, therefore, to assert that the measurement of traffic imbalance only requires programming of the switch.
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31.The Commission agrees with Stentor that inter-office facilities are required for intra-exchange calls that do not terminate at the gateway switch. The Commission thus considers that the associated costs are causal to the termination of such calls.
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32.The Commission notes that a measure of the traffic carried on shared trunks, going in each direction, is necessary before the mutual compensation tariff can be applied. Accordingly, the Commission considers that the monitoring activity is causal to traffic termination under mutual compensation rates.
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33.In light of the above, the Commission finds that inter-office transport costs and monitoring costs were appropriately included in the incremental costs for traffic termination under mutual compensation.
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34.MetroNet submitted that it was necessary to identify the types of traffic eligible for bill and keep, and therefore, mutual compensation before establishing final tariffs for traffic imbalance.
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35.The Commission notes that the costs used to develop the traffic imbalance tariff vary with the amount of traffic as do the proposed rates, and not with the type of traffic that is carried. Therefore, the Commission disagrees with MetroNet's assertion that it is necessary to identify the types of traffic eligible for bill and keep before establishing final tariffs for traffic imbalance.
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36.The Canadian Cable Television Association (CCTA) submitted that without knowledge of how the Stentor companies will identify the busy hour for assessing the tariff, parties are unable to predict how their interconnection costs might vary. CCTA submitted that the companies should clearly define the busy hour that will apply to each exchange and to each trunk group to all CLECs prior to receiving approval for applying the tariff.
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37.The Commission considers that since the proposed rates apply on the basis of the number of trunks between the LECs, as jointly determined by these LECs, there is no need for the mutual compensation tariff to include a definition of the busy hour as requested by CCTA.
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38.AT&T Canada Long Distance Services Company (AT&T Canada LDS) noted that CLECs will be able to send a range of different types of traffic to the ILEC. AT&T Canada LDS submitted that the rates for transiting and terminating such traffic should closely mirror those rates or arrangements available for the termination of interexchange traffic, given that the functionality necessary in the switch and network would be very similar. AT&T Canada LDS requested that the Commission take steps to harmonize the rates for traffic termination for both local and long distance traffic.
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39.The Commission notes that the issue raised by AT&T Canada LDS has been most recently addressed in Telecom Order CRTC 98-489 dated 20 May 1998 (Order 98-489). In Order 98-489, the Commission denied AT&T Canada LDS' application to vary the rate for the Direct Connection service in a manner which is consistent with any interim or final rates approved for LEC traffic termination.
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B.EAS Termination Tariff
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40.In Decision 97-8, the Commission observed that CLECs would originate traffic in one exchange for delivery to ILEC subscribers in a second exchange that has EAS to the original exchange. The Commission directed the ILECs to provide for the delivery of CLEC originated traffic to other exchanges that have EAS to the originating exchange, priced as an essential facility, for a period of five years.
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41.Stentor, excluding TCI, proposed rates that would apply, on a per trunk basis, depending on the number of trunks, within a given trunk group. Stentor proposed rates which, in order to allow maximum flexibility between the CLEC and the ILEC, were based on the use of either one-way or two-way trunks, separate from the two-way bill and keep trunks.
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42.Call-Net observed that where two-way trunks are employed in Stentor's proposed EAS transport tariff, Stentor has already basically proposed a bill and keep regime. Call-Net indicated that Stentor's tariff is needlessly complicated. Call-Net submitted, that the conceptually correct way to view the EAS transport service is as a separate bill and keep trunk identical in every way to intra-exchange interconnecting trunks. Call-Net concluded that, as such, EAS trunks between an ILEC and a CLEC should be provisioned as shared-cost facilities and should follow the same bill and keep regime proposed above for intra-exchange trunks.
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43.MetroNet noted that if one-way trunks are provisioned, the costs are borne by the CLEC. If two-way trunks are provisioned, the CLEC and the ILEC share the costs. MetroNet argued that this is essentially a bill and keep regime, without the trigger for mutual compensation.
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44.The Commission agrees with Stentor that it did not direct that (1) EAS trunks be provided on shared cost basis, or that (2) traffic on these trunks be exchanged on a bill and keep basis. As stated above, the Commission, in Decision 97-8, directed the ILECs to provide for the delivery of CLEC originated traffic to other exchanges that have EAS to the originating exchange, priced as an essential facility.
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45.Cantel submitted that since two-way trunks are more efficient and cost effective, and since rates for EAS termination were set to recover the cost of terminating traffic over one-way trunks, the rates charged for two-way trunks that provide for EAS termination should be less than half the charge for one-way trunks.
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46.The Commission agrees with Stentor that any network efficiencies achieved through the use of two-way trunks will result in a requirement for fewer two-way trunks for the same traffic and not in a cost reduction per trunk. Accordingly, the Commission finds that there is no reason to reduce EAS termination rates for two-way trunks to less than half the rates for one-way trunks.
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47.The CCTA proposed that the wording of the EAS termination tariff be revised to incorporate local traffic which terminates in independent telephone company exchanges.
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48.The Commission notes that in Telecom Order CRTC 98-486, dated 19 May 1998, it found that transiting between CLECs and independent telephone companies within the EAS/EFRC (Extended Flat Rate Calling) area of an ILEC is to be treated in the same manner as transited traffic from or to a CLEC within the company's own EAS/EFRC area.
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49.Cantel submitted that the proposed EAS termination charges should be no higher than the finalized rates for Wireless Access Service Network Charges, proposed in Bell Canada TN 5903.
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50.The Commission agrees with Stentor that comparing the Wireless Access Service Network Charge to the EAS termination charge is not appropriate since the EAS termination charge encompasses functionality, which for the wireless carriers, is provided under additional tariff components.
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51.Call-Net noted that Maritime Tel & Tel's Limited (MT&T) Band A rate for EAS transport is much higher than the other companies' proposed rates and is also different from MT&T's proposed rates for Bands B and C. Call-Net claimed MT&T's rate differentiation by band is inconsistent with Decision 97-8 and MT&T should be directed to re-file its rates based on an average cost for all bands.
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52.Stentor indicated that the costs for EAS termination service differ significantly in MT&T's territory by band, due to the significant difference in the EAS complexes in Halifax versus those in other parts of MT&T's territory. Stentor submitted that MT&T's proposed rate structure is consistent with the Commission's directives.
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53.The Commission notes that large EAS complexes in urban bands are not unique to MT&T. The Commission also notes that none of the other Stentor companies have filed EAS termination rates that vary across bands.
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54.The Commission considers that a consistent rate structure should apply across the companies. The Commission is of the view that MT&T should file revised EAS termination rates based on an average cost for all rate bands.
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55.Clearnet Communications Inc. (Clearnet) questioned the revisions to the EAS termination rates filed by Stentor in TN 487A. Clearnet stated that the proposed rate increases were not supported by any qualitative or quantitative evidence and, thus, should not be approved.
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56.The Commission notes that the revised rates in TN 487A reflect the 25% mark-up permitted by Decision 97-8 that was omitted in TN 487.
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57.TCI proposed that the existing EFRC rates should apply per activated telephone number.
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58.CCTA, Clearnet, Call-Net and MetroNet were opposed to paying the tariff rates for EFRC per activated telephone number. Clearnet and CCTA submitted that TCI should use other telephone companies' costs, until it is able to file a cost study. Call-Net argued that TCI should provide the service free of charge. MetroNet submitted that the rates provided by TCI in the interrogatory response TCI(CRTC)21Aug97-1 could be used, on an interim basis.
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59.TCI explained that EFRC is deployed ubiquitously in Alberta and is used extensively by rural subscribers. TCI argued that its territory was demographically distinct from any other telephone company in that the distribution of the EFRC network in the rural areas covers a far greater distance. TCI asserted that no other company has the same rural call volumes or patterns used in the development of EFRC costs. The company noted that its EFRC rates also recover a portion of the lost toll revenue from broadening the local calling area.
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60.TCI noted that the rates in the interrogatory response referred to by MetroNet were provided for consideration only in the event that the Commission ruled that EFRC is substantially the same as EAS and that the same rate structure for delivery of CLEC traffic within a Stentor owner company's EAS areas should apply to all Stentor companies. TCI submitted that if the Commission were to choose this option, absent recognition of the costs associated with foregone toll, the competitive necessity for TCI to restructure rates for EFRC would have a significant impact on the company's local revenue shortfall.
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61.The Commission notes that although they are rated differently, EFRC and EAS provide the same functionality to subscribers.
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62.The Commission further notes that in requiring that EAS termination service for CLECs be priced as an essential facility, Decision 97-8 directed that the price be based on Phase II costs plus a 25% mark-up. The price is therefore not to include a component addressing the recovery of foregone toll revenues. The Commission finds that TCI's proposal to apply to CLECs the existing EFRC rates per activated telephone number is contrary to Decision 97-8.
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63.The Commission considers that the same rate structure should apply across all Stentor companies for EAS/EFRC termination.
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64.Accordingly, the Commission denies TCI's proposal to apply to CLECs the existing EFRC rates.
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C.Other Related Issues
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65.CCTA submitted that the cost studies underlying the proposed tariffs for traffic imbalance and EAS termination are based on unreasonably high returns on equity (ROE).
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66.CCTA also indicated that the cost studies might incorporate unrealistically short life estimates for major capital items. CCTA argued that the capital costs should be developed using approved depreciation life characteristics rather than economic life estimates.
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67.Stentor stated that, consistent with the costing methodology which has been generally adopted by the Commission for the performance of Phase II costing studies, the life estimates used in the economic studies reflect the life expectations for the additional plant required for a given service. Stentor submitted that using depreciation lives that reflect the average lifetime of all plant in service would distort the prospective incremental costs associated with the additional plant required for a given service, and thus, would provide an incorrect economic signal to the market place.
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68.The Commission notes that the cost studies for a number of Stentor companies are based on ROEs in excess of the 11% approved in Implementation of Price Cap Regulation and Related Issues, Telecom Decision CRTC 98-2, dated 5 March 1998 (Decision 98-2). The Commission considers that the approved rates should not reflect a ROE greater than 11%. Accordingly, the Commission has made adjustments to the rates proposed by the Stentor companies to account for the fact that the cost studies reflected ROEs in excess of 11%.
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69.The Commission notes that five of the eight Stentor companies used life estimates that were either higher or the same as those approved in Decision 98-2. The Commission considers that the use of the life estimates approved in Decision 98-2 by the remaining three companies, namely, BC TEL, NBTel Inc. and TCI, would have a negligible impact on the costs provided. Accordingly, the Commission has not made adjustments to the costs or rates provided by the companies to account for the use of life estimates other than those approved in Decision 98-2.
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70.CCTA questioned what it alleged to be very large and poorly explained cost differences across some of the Stentor companies.
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71.Stentor indicated that there are three main factors that account for these differences, notably, network topology, supplier prices and the labour costs for installation and engineering of the plant. The network topology differences associated with the different EAS areas would have a significant impact on the utilisation of the facilities and the switching and trunking required to carry a call. This would also have an impact on the estimate of the capital costs, as would the use of different types of equipment by each of the companies. In addition, Stentor noted that each company negotiates supplier contracts and labour contracts separately and, as such, each company has a different cost structure.
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72.Stentor submitted that as these factors result in unit costs that are specific to each company, it would be inappropriate to substitute an average cost for the company-specific costs used in the studies filed under TN 487.
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73.The Commission considers that most of the differences in costs between the companies can be explained by differences in network topology, supplier prices and the labour costs for installation and engineering of the plant. Accordingly, the Commission is of the view that no adjustment needs to be made to the proposed rates on account of cost differences between the telephone companies.
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74.MetroNet noted that it is appropriate to allow 800/888 traffic to route over either one-way or bill and keep two-way trunks. MetroNet submitted that, regardless of directionality, there should not be a trunk termination charge applied to these facilities.
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75.Stentor, not including TCI, submitted that it concurred with MetroNet's opinion concerning CLEC 800/888 traffic.
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76.TCI argued that where the originating CLEC 800/888 traffic is in fact only one-way in nature, the CLEC should bear the costs for trunk terminations in their entirety. TCI submitted that if CLEC 800/888 traffic is carried over one-way trunks, these trunks are not bill and keep and do not provide the ILEC with a reciprocal arrangement for termination of their traffic. Therefore, TCI should not be expected to share the costs of these trunks with the CLEC and all the costs associated with one-way trunks, including termination charges, should be borne entirely by the CLEC.
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77.The Commission notes that although TCI's argument only addresses one-way trunks, its proposed tariff indicates that trunk termination charges apply regardless of whether one-way or two-way trunks are used.
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78.The Commission notes that the LECs collect switching and aggregation charges on 800/888 calls routed to interexchange carriers. As switching and aggregation rates are set to recover costs, including the cost of trunk terminations, the Commission concludes that there would be double recovery of the costs.
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79.Accordingly, the Commission denies TCI's proposal to apply trunk termination charges regardless of whether the CLECs use one-way or two-way trunks to route 800/888 calls.
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80.In light of the foregoing, the Commission orders that:
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(a) With the exception of MT&T's current rates for the transport of traffic linked through EAS which will remain interim, Stentor TN 487 and TN 487A and TCI TN 931 and TN 931A are approved on a final basis with the following modifications:
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(i) the approved rates, not including rates for termination of EAS traffic for MT&T, are shown in the Appendix to this Order; and
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(ii) the wording "TCI's trunk termination charges are assessed on a per trunk basis" in TCI's Tariff Item 400.4 d shall be replaced with "trunk termination charges do not apply".
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(b) MT&T is directed to file revised EAS termination rates based on an average cost for all rate bands within 30 days of this Order.
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Secretary General
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This document is available in alternative format upon request.
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