ARCHIVED -  Telecom Order CRTC 98-780

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Telecom Order

Ottawa, 11 August 1998

Telecom Order CRTC 98-780

On 27 October 1997, under Tariff Notice (TN) 78, Northern Telephone Limited (Northern) filed an application for approval of tariff revisions reflecting a restructuring of itslocal rate schedules for primary exchange service. Northern proposed that the revenuesgenerated from this application would be used to fund a significant service enhancement initiativeto the benefit of its more rural communities. On 30 October 1997 and 25 March 1998, thecompany amended its application under TNs 78A and 78B, respectively.

File No.: Tariff Notice 78

1. Northern's proposed enhancement initiative consists of an accelerated Switching Equipment Modernization (SEM) program removing eight of the remaining ten analog switches from its network by the end of 1999 at a cost of $7.4 million.

2. Under the rate restructuring component of the application, Northern proposed to bring the primary exchange service rates in its lower, more rural, rate groups closer to the levels in its upper, urban rate groups. Northern proposed to establish a common monthly rate for its residence and business customers, and a partial equalization of multi-line service rates.

3. As a result, the proposed common residential and business individual line rates would be $17.45 and $38.65 respectively. In addition, a common multi-line business rate of $38.65 was proposed for its five rural rate groups. This increase once fully implemented would generate approximately $1.7 million annually in additional local revenues.

4. The proposed increases to individual line residential rates range from $0.90 for existing rate group 8 customers to $5.25 for existing rate group 3 customers. Northern proposed to exempt all two and four-party line customers from the rate restructuring proposal. Accordingly, all two and four-party customers would remain at current rates.

5. Northern submitted, in support of its application, that its current rate structure will not support the development of sustainable competition in the local market and represents a barrier to local competition.

6. Northern proposed to transfer the eight exchanges targeted for modernization to a temporary rate group at current rates whereby each exchange would migrate towards the proposed common rates when the modernization of the exchange is completed.

7. Northern proposed that the two remaining exchanges served by analog switches, Detour Lake and Abitibi Canyon, would be exempt from the rate restructuring proposal.

8. Northern submitted that with its SEM program it is taking the first step towards providing urban quality service to rural communities. The proposed SEM will provide the benefit of digital switching to approximately 5,200 customers currently served by analog switches by the end of 1999.

9. According to Northern the benefits of digital switching include: improved service reliability; access to network features such as Call Management Services; fast and reliable access to the Internet; expanded free calling areas; direct access to any long distance carrier offering service in the customers' area; and reliable 9-1-1 service in the municipalities that choose to implement it.

10. Northern submitted that without the Commission's endorsement and approval of the rate restructuring it would be unable to implement the SEM program.

11. On 18 February 1998, the Commission issued Telecom Public Notice CRTC 98-2, Northern Telephone Limited - Local Rate Restructuring and Switching Equipment Modernization Proposal, inviting comments on Northern's application.

12. Northern advised its subscribers of its proposal through a bill insert.

13. Comments were received from the Consumers' Association of Canada and the National Anti-Poverty Organization (CAC/NAPO) and the Ontario Northland Transportation Commission (O.N. Tel). A number of interventions were also filed by subscribers and local organizations.

14. CAC/NAPO argued that the proposed SEM program will provide significant service enhancements and should therefore be implemented. However, it argued that Northern had failed to adequately justify the associated rate increases.

15. CAC/NAPO noted that in the absence of a revenue requirement review it was unclear whether Northern in fact needs the requested rate increase in order to fund the proposed SEM. CAC/NAPO stated that increases should not be approved without proof by Northern of financial need.

16. In support of its position, CAC/NAPO noted that Northern failed to take into account any cost savings or increased revenues from new services being offered. CAC/NAPO also questioned whether some of the costs of these new facilities should not be attributed to equal access start-up costs.

17. CAC/NAPO also compared Northern's rates with those of other companies such as Bell Canada (Bell) and Québec-Téléphone, suggesting that with the new rates, subscribers will be paying similar rates to those paid by other Canadians who receive superior service.

18. O.N. Tel submitted that TN 78 is in fact two separate initiatives, rate restructuring and the SEM, and that Northern was attempting to link together for the purpose of obtaining Commission approval of both proposals at the same time.

19. O.N. Tel submitted that both initiatives should be treated separately and argued that implementation of the rate restructuring may be justified but that the implementation of the SEM program is not.

20. In support of its position, O.N. Tel argued, among other things, that the implementation of the SEM is not justifiable on an economic basis, there is no evidence of significant demand for its implementation among subscribers, subscribers would be treated inequitably, the high Carrier Access Tariff (CAT) rates in the independent telephone company territories must be reduced, and the Commission's examination of how high-cost serving areas (HCSAs) should be served should not be circumvented by the SEM.

21. O.N. Tel also argued that if the Commission was inclined to approve the SEM in some form, that O.N. Tel and Northern should engage in a joint build of facilities since both local and toll traffic would be carried on such facilities.

22. A number of comments were received from the general public, various local interest organizations and municipal governments. Concern was expressed about the proposed rate increases and the continued affordability of telephone service. However, much of the comment focused on the grade of service afforded to Northern's more rural subscribers.

23. Subscribers called for the expansion of individual line service to Northern's rural areas. Some subscribers submitted that Northern should make urban grade service available if it wanted to charge urban type rates.

24. Some subscribers did recognize that the SEM proposal was one of the steps necessary to the full urbanization of service and urged the Commission to make funds available for the continued urbanization of outlying areas.

25. In its reply, Northern noted CAC/NAPO's apparent general support for the company's proposal to modernize its analog switches.

26. Northern noted that pursuant to Telecom Decision CRTC 96-6, Regulatory Framework for the Independent Telephone Companies in Quebec and Ontario (Except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec ltée), 7 August 1996 (Decision 96-6), the Commission normally examines the revenue requirements of independent telephone companies in the context of their annual CAT filings. Northern also noted that it has filed proposed CAT rates for 1998 under TN 85.

27. Northern submitted that TN 85 provides a comprehensive explanation of its revenue requirement and demonstrates that Northern's SEM proposal, when viewed in the context of TN 85, will not result in over-earnings.

28. On the issue of cost savings and revenue enhancements, Northern noted that CAC/NAPO was relying on statements made by Bell in connection with a 1992 SEM program, making reference to its stated claims that cost savings alone justified that particular project. Northern noted that there are significant differences between Bell's 1992 SEM program and Northern's current proposal. Northern also noted that unlike its 1992 SEM initiative, Bell was unable to justify its 1996 SEM program on the basis of costs or revenue enhancements alone.

29. Northern also submitted that its SEM program does not include any costs associated with the implementation of equal access and reiterated that the SEM is required regardless of whether toll competition is introduced in Northern's serving territory.

30. Northern also argued that its proposed local rates would be on par with those of Bell and noted that Québec-Téléphone's CAT rate remains higher than its own. Northern indicated that Télébec ltée (Télébec), Northern's neighbour to the east, charges residential rates which are $6.00 per month higher than Northern's proposed rates in TN 78.

31. Northern argued that it would not be able to finance its SEM program out of cost savings or incremental revenues associated with the program. Northern submitted that the inability of the SEM program to be self-financing should not be a basis for rejecting the proposal.

32. Northern submitted that its approach treated all subscribers in an equitable manner. Northern added that the primary intent of TN 78 was to provide for local service improvements and not rate rebalancing as advocated by O.N. Tel.

33. Northern also dismissed O.N. Tel's alternate proposal whereby the two companies would share new facilities.

34. In responding to the concerns of the general public and municipal governments, Northern noted that some subscribers opposed the application but noted that a number of writers acknowledged the important benefits which would come from the SEM program and even suggested that Northern should speed up its modernization efforts.

35. With regard to the continued affordability of telephone service, Northern noted that the proposed rates remain below rate levels which could reasonably raise affordability concerns and would still remain considerably below those charged by Télébec.


36. The Commission recognizes that Northern's subscribers are demanding that individual line service (ILS) be provided as soon as possible. The Commission notes that Northern's proposed SEM project will not provide ILS to subscribers. The Commission is nevertheless of the view that the SEM program will provide benefits to the affected subscribers and that Northern should be encouraged to continue with its modernization efforts.

37. The Commission notes that, pursuant to the regulatory framework set out in Decision 96-6, Northern is not subject to any construction review requirement or annual review program. Northern is free to carry out its SEM program without Commission approval. Northern has, however, submitted that it cannot justify the SEM program expenditures without additional revenue, and requires a Commission determination on its rate change proposal.

38. The Commission notes that Northern's proposed rate restructuring and establishment of common residential and business single line rates is similar to proposals made by and approved for other telephone companies under the Commission's jurisdiction.

39. The Commission also notes that Northern's rates for primary exchange service have been maintained at levels below the cost of providing the service.

40. The Commission notes that Northern's rate restructuring proposal concurs with the Commission's stated objective of bringing rates for local service closer to the cost to provide service. Common rates also serve to simplify billing procedures and customer care issues and, therefore, provide for efficiencies in this regard.

41. However, the Commission is concerned that Northern has not fully justified the need for the $1.7 million annualized revenue increase resulting from the full implementation of its proposed rate restructuring.

42. The Commission notes that Northern's economic evaluation of TN 78 indicates a pay-back period of seven years, while the accounting lives of the various investments range from 12 to 21 years.

43. The Commission is of the view that cost recovery for the SEM investments should be reflective of Northern's current depreciation rates. Accordingly, the Commission is of the view that there is no need to accelerate the recovery of the investments related to the SEM as proposed by Northern.

44. The Commission notes that the annualized revenue requirement necessary to recover the investments over their normal accounting lives will not amount to the full $1.7 million annualized increase requested by the company.

45. The Commission is of the view that the appropriate level of funds directed to the SEM program should be that amount necessary to recover SEM investments according to their standard accounting lives as approved for the equipment in question.

46. The Commission is also of the view that the portion of the rate increase not necessary to recover the costs of the SEM, according to their standard accounting lives, should flow towards reducing Northern's contribution requirement.

47. Accordingly, the Commission approves TNs 78, 78A and 78B effective 1 September 1998, with the changes set out above.

48. Northern is ordered to revise forthwith its 1998 CAT filing to reflect the approval of TN 78 as indicated above. In its revised 1998 CAT filing Northern is directed to identify the incremental revenues and expenses associated with the approval of TN 78.

49. Northern is also directed to identify the incremental SEM revenues and expenditures in its 1999 CAT filing and reduce its contribution requirement by the portion of the increase not necessary for the recovery of SEM expenditures using standard accounting lives.

50. Northern is further directed to file annual SEM program progress reports concurrent with the company's annual CAT filings until the SEM program has been fully implemented. The annual reports are to outline the SEM related investment incurred during the previous year and the progress made towards service upgrades for each of the exchanges that are to be modernized as a result of the SEM program.

Laura M. Talbot-Allan
Secretary General

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