ARCHIVED -  Telecom Order CRTC 98-317

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Telecom Order

Ottawa, 3 April 1998
Telecom Order CRTC 98-317
On 27 March 1997, Northern Telephone Limited (Northern) filed an application under Tariff Notice (TN) 71, amended by TN 71A dated 1 April 1997, requesting final approval of the 1997 Carrier Access Tariff (CAT).
File No.: Tariff Notice 71
1. In its application, Northern requested final approval of a 1997 CAT of $0.0725 per minute with a Contribution rate of $0.0545 per minute and a Direct Toll rate of $0.0180 per minute.
2. Northern estimated that the number of originating and terminating toll minutes for 1997 would be 226,940,500.
3. In Regulatory Framework for the Independent Telephone Companies in Quebec and Ontario (except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec ltée), Telecom Decision CRTC 96-6, 7 August 1996 (Decision 96-6), the Commission stated that it would require an independent telephone company to provide explanations and justification supporting its revenue requirement forecasts and contribution calculations if, after accounting for local rate increases, its contribution requirement exceeds the previous year's approved contribution requirement.
4. Northern calculated its Toll Settlement/CAT Revenue Requirement to be $16,455,000, made up of Contribution of $12,375,000 and Direct Toll of $4,080,000. Northern reported that its 1997 contribution requirement of $12,375,000 increased over the 1996 contribution requirement, after netting out local rate increases, by $977,000.
5. Northern submitted that the increased contribution requirement was due to two extraordinary expenditure increases in 1997, namely: (1) increased depreciation expense due to changes in the life characteristics of certain assets; and (2) additional costs incurred with respect to Northern's business transformation program.
6. O.N. Tel, a division of Ontario Northland Transportation Commission, filed comments on 28 April, 2 May, 20 June, 7 July, 11 July, 24 September, 1 November and 26 November 1997.
7. In Telecom Order CRTC 97-1330, 15 September 1997 (Order 97-1330), the Commission approved Northern's application to change depreciation life characteristics of certain assets to be implemented in 1996 and 1997.
8. In the proceeding leading to Order 97-1330, O.N. Tel objected to the proposed changes in life characteristics on the basis that Northern was seeking to recover, through its 1997 CAT, an increase of $927,300 in depreciation expense.
9. In Decision 96-6, the Commission stated that the revenues and expenses associated with Northern's Competitive Terminal Broad Service Category would be excluded from the determination of its 1997 Toll Settlement/CAT Revenue Requirement. In Order 97-1330, the Commission noted that, as a result of Decision 96-6, not all changes in depreciation expense would be included in calculating Northern's 1997 CAT.
10. The Commission notes that the allocation of depreciation expense for Northern is in accordance with Phase III methodology approved for the independent telephone companies in Decision 96-6. The Commission also notes that, of the increase of $927,300 in depreciation expense for 1997, not all, but rather approximately 70% was included in the calculation of Northern's 1997 CAT.
11. Northern filed further materials (including submissions, responses to interrogatories and reply comments) on 3 June, 4 July, 10 July, 14 July, 17 September, 1 October, 31 October, and 21 November 1997.
12. In response to a Commission interrogatory, Northern filed an actuarial valuation as at 31 December 1996. As a result of the actuarial valuation, pension expense for 1997 decreased by $719,000.
13. On 31 October 1997, Northern recalculated its 1997 CAT to incorporate the revised 1997 pension expense identified by the actuarial valuation as well as the estimated curtailment credit. The revised 1997 Toll Settlement/CAT Revenue Requirement is $15,812,000 comprised of Contribution of $11,769,000 and Direct Toll of $4,043,000. Northern's application to finalize its 1997 CAT was therefore revised to $0.0697 per minute (Contribution of $0.0519 per minute and Direct Toll of $0.0178 per minute). Northern calculated that its 1997 contribution requirement increased over the 1996 contribution requirement, after netting out local rate increases, by $371,000.
14. In Telecom Order CRTC 98-119, 6 February 1998 (Order 98-119), the Commission approved Northern's 1996 CAT. In paragraph 23 of Order 98-119, the Commission was of the view that, even though the business transformation costs caused Northern to exceed the Ontario Telephone Association operating expense guideline for 1996, there was no basis to deny Northern's downsizing costs for purposes of calculating its 1996 CAT, given that the Commission has approved similar downsizing initiatives for other telephone companies. Moreover, Northern had demonstrated that the savings would offset the corresponding costs by the third year of the five-year amortization period. The Commission notes that O.N. Tel, as a payer of Northern's CAT, will ultimately benefit from those savings that will flow through to lower Northern's CAT in future years.
15. Accordingly, the Commission finds that the Toll Settlement/CAT Revenue Requirement for Northern for 1997 is estimated to be $15,812,000. This amount includes the impact of the revised pension expense identified by the actuarial valuation as at 31 December 1996 as well as the impact of amortizing the curtailment credit over five years, in accordance with paragraph 26 of Order 98-119.
16. In light of the foregoing, the Commission orders that:
(a) The final 1997 Northern CAT is approved at $0.0697 per minute, with a Contribution rate of $0.0519 per minute and a Direct Toll rate of $0.0178 per minute, effective 1 January 1997;
(b) Northern is to issue, forthwith, revised tariff pages to reflect the final 1997 Northern CAT, and to make any necessary billing adjustments to amounts already billed to O.N. Tel as expeditiously as possible; and
(c) Northern is to file its proposed 1998 CAT within 45 days of this Order, in accordance with the Commission's letter addressed to Northern on 22 December 1997.
Laura M. Talbot-Allan
Secretary General
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