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Letter

Our ref.: 8740-S1-0487/97
8740-T10-0931/97

Ottawa, 27 November 1998

TO: Interested Parties to Public Notices 95-36 and 96-28

Re: The Imputation Test Methodology for Local Services

1. This letter disposes of an application by Stentor Resource Centre Inc. (Stentor) regarding the methodology that all incumbent local exchange carriers (ILECs) propose to apply with respect to the imputation test for local services and the conditions under which this imputation test is to be applied.

2. In Local Competition, Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8), the Commission concluded that an imputation test was required to prevent anti-competitive pricing by carriers with market power in markets subject to entry by competitors and extended the applicability of the imputation test to local exchange services. As directed in paragraph 221 of Decision 97-8, Stentor, under Tariff Notice No. 487 dated 16 June 1997, submitted a description of its proposed imputation test methodology for local services and the conditions under which the imputation test would be applied. Comments relating to the imputation test proposal were submitted by Call-Net Enterprises Inc. (Call-Net), to which Stentor filed a reply.

3. This letter addresses the following issues: (1) the methodology of the local service imputation test, (2) the application of the test, (3) the services treated as essential for which the associated prices are to be included in the imputation test, (4) the service filing information requirements and (5) the imputation test for bundled services.

Local Service Imputation Test Methodology

4. Stentor proposed that the imputation test for local services performed by the ILECs will include the proposed service revenues and the aggregate of the following costs:

(a) the Phase II costs of the proposed service modified to exclude cross impacts; and
(b) the tariffed rates for the essential services used by the ILECs in the provision of the proposed service; less
(c) the Phase II costs included in item (a) above for those functionalities and facilities included in the essential services in item (b) above.

5. Stentor submitted that its proposed imputation test methodology and format adhere to the information requirements submitted in its "Proposal on the Information Requirements for Service Filings (Post Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994)" approved on an interim basis by the Commission on 16 January 1995 (the Information Requirements).

6. The Commission considers that Stentor's proposed local service imputation test methodology is generally consistent with the directives of Decision 97-8.

Application of the Local Service Imputation Test

7. As directed by the Commission in Decision 97-8, the local service imputation test is to be applied on a service-specific basis. In general, the definition of the service is to be consistent with the tariff definition. The imputation test is to be provided with all tariff applications for services in the local market which propose: (a) the introduction of a new service; or (b) implicit or explicit price decreases for an existing service. Consistent with Decision 97-8, imputation tests are not required for legitimate market trials or for promotions of limited duration.

8. The Commission considers that applications for existing service tariff revisions involving implicit or explicit price decreases should include either an imputation test or an estimate of the overall weighted average percentage price change. The price change should reflect the average customer impact of moving towards the tariff revisions under the proposed service. If the average price change is negative, an imputation test is to be filed. Consistent with the filing requirements of existing competitive service tariff revisions, the revenues, costs and demand provided in the imputation test are to reflect the base data adjusted for market share loss/gain, re-price and stimulation associated with the proposed service alternative.

9. Decision 97-8 directed that for local exchange service tariff applications involving the use of essential services, the imputation test be applied at the rate band level, thus setting an imputed floor price for each rate band for each service involving the use of essential services. The Commission therefore considers that applications for rate revisions of local exchange services involving implicit or explicit price decreases within a particular rate band should include either an imputation test or an estimate of the overall weighted average percentage price change within that rate band. If the average price change within a particular rate band is negative, an imputation test is to be filed. The imputation test is to include all mandatory (non-optional) local services such as EAS or a community calling plan. The Commission considers that mandatory local service features such as 9-1-1 service and Message Relay Service (MRS) can be excluded from the test since the rates for these services are generally set with a minimum mark-up and, in the Commission's view, are not expected to have a significant impact on the associated local service results.

10. In its comments on the imputation test, Call-Net submitted that the ILECs should be required to undertake a holistic review of their proposed rates for residential exchange services to determine which of these rates are above Phase II costs, and apply the imputation test for explicit and implicit price reductions on a going-forward basis for these services.

11. The Commission notes that in response to SRCI(AT&T)2Jul97-5 TN 487, Stentor stated that the ILECs would perform an imputation test for basic residential service in a band where the associated revenues, standing on their own, exceed Phase II costs. Stentor also submitted that the cost of most residential services will remain above or close to current rates for the next few years, and that, consequently, they would be the least likely candidates for rate decreases. Stentor submitted that a holistic review of all residential services is not warranted, and that a review of costs and revenues, if and when any price reductions for residential services are proposed, will conform to the requirements of Decision 97-8.

12. The Commission notes that when a basic residential service becomes compensatory in a given band, Stentor has confirmed that the ILEC will perform an imputation test. The Commission is of the view that this is acceptable.

13. Call-Net submitted that the following examples of implicit price decreases should require the filing of imputation test results: (a) the reclassification of an exchange into a higher cost rate band; and, (b) the expansion of an EAS that increases the volume of trunking and switching. Stentor noted that the imputation test is performed at a service level, whereas, in Stentor's submission, Call-Net's examples refer to network rather than service changes. Also, Stentor submitted that the initial imputation test provides costs averaged over a band, and that when EAS areas are expanded or when an exchange moves from one density band to another, the cost changes averaged over the band would be negligible. Given this, Stentor submitted that the re-filing of service imputation tests when an EAS is expanded or where an exchange is reclassified into a higher cost rate band is not material and not warranted.

14. The Commission concurs with Stentor's view, that the expansion of an individual EAS resulting in an increase in the volume of trunking and switching, or the reclassification of an exchange into a higher cost rate band, would likely have a minimal impact on the service costs when averaged over the entire rate band. The Commission therefore does not consider it necessary for ILECs to re-file service imputation tests following an EAS expansion or the reclassification of an exchange into a higher cost rate band.

Treatment of Essential Services

15. At paragraph 81 of Decision 97-8, the Commission concluded that central office codes (NXXs), subscriber listings and local loops in certain rate bands meet the definition of essential services. At paragraph 130 of Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, 1 May 1997, the Commission indicated that it would finalize the classification of wire centres and/or exchanges into rate bands in the Price Cap regulation follow-up proceeding and that the imputation test will be applied in accordance with any such classification changes. In Implementation of Price Cap Regulation and Related Issues, Telecom Decision CRTC 98-2, 5 March 1998, the Commission finalized the rate band classifications. As a result, loops in the following rate bands are to be treated as essential facilities for purposes of the imputation test:

- loops in Bands C and D in BC TEL, Bell Canada and TCI;
- loops in Bands C, D and E in MTS;
- loops in Bands B and C in Island Tel and MT&T; and
- loops in Band B in NBTel and NewTel;

16. Consistent with Decision 97-8, local loops in the above rate bands should be costed at tariffed rates for purposes of the imputation test.

17. Call-Net submitted that the ILECs should be required to impute at tariff prices any ancillary facility (e.g., connecting link, riser space) integral to the provisioning of the essential facility. In response, Stentor submitted that while it is not clear what Call-Net would consider to be an ancillary facility, its suggestion would result in the treatment of non-essential facilities, as, in effect, essential facilities, and that this would represent an attempt to circumvent one of the major principles of Decision 97-8 which holds that non-essential local facilities be costed using Phase II costs in the imputation test.

18. The Commission notes that in Decision 97-8, it directed that those services which do not meet the criteria for essential facilities, but are required to be unbundled for a period of five years, must be included in the imputation test at Phase II costs rather than at tariffed rates. These services include:

- the provision of non-essential loops;
- transport of traffic between EAS exchanges;
- transiting of traffic and signaling;
- 9-1-1 service; and
- MRS.

19. The Commission considers that the connecting link and riser space components are more in the nature of co-location components. Accordingly, the Commission does not consider that connecting links and riser space should be costed at tariffed rates in the imputation test.

20. Call-Net submitted that the service charges associated with essential facilities and their associated ancillary facilities should be included in the imputation test. In response, Stentor submitted that to the extent that Call-Net considers service charges comprise ancillary facilities, service charge costs are generally recovered in a separate service charge tariff. Stentor further submitted that if and when the service charge rates are reduced, the imputation test supporting the change would include any service charge costs, incurred as a consequence of use of essential facilities, at tariffed rates, and service charge costs, incurred as a consequence of use of non-essential facilities, such as those for ancillary facilities, at Phase II costs.

21. While service order charges associated with the provisioning of essential facilities are essential, the Commission notes that service charge costs are generally not recovered in the monthly rates for local exchange service but rather in a separate service charge tariff. If such service charges are reduced, the Commission considers that only service charge costs that are incurred as a consequence of use of essential facilities, are to be included in the imputation test at tariffed rates, with the remaining service charge costs included at Phase II costs.

22. The Commission notes that, in some cases, the service charge costs (i.e., associated with the service order of a local exchange service) may in part be recovered through the monthly recurring rate for the local exchange service. The Commission considers that wherever rate reductions of an ILEC's local exchange service are proposed, Stentor should report any changes to the re-assignment of costs between the monthly recurring and the service charge rate elements, and in the event of any such changes, Stentor should file imputation tests for both rate elements. In such instances, Stentor should further address why corresponding changes should not be made to the ILEC's unbundled loop monthly rates and associated service charge rates.

Service Filing Information Requirements

23. Each report of imputation test results will include a statement as to whether or not the imputation test is met. The imputation test will be considered to be met when service revenues exceed the aggregate of

(a) the Phase II causal costs of the plan under study, excluding cross impacts; and
(b) tariffed rates for essential services used by the ILECs in the provision of the services under study; less
(c) Phase II costs included in item (a) for those functionalities and facilities included in the essential services in item (b).

24. For each service, the report will therefore include the service revenues and each of the cost items (a), (b) and (c) above. The above revenues and costs are to be provided on a total basis, and, where appropriate, on a per unit basis. The other parts of the ILECs' filings are to adhere to the Information Requirements.

25. Call-Net submitted that a requirement that ILECs separately identify Phase II costs for non-essential facilities required to be unbundled for 5 years under the directives of Decision 97-8, would impose a healthy level of discipline on ILEC costing exercises. Stentor submitted that no rationale or evidence was provided to support the view that such a requirement would, in fact, result in the production of more accurate costs. Stentor submitted that the requirement to cost some facilities separately would add further complexity and time to an already complex costing process.

26. The Commission notes that based on Stentor's current information requirements submitted in the Information Requirements, the proposed cost summary of a service provides costs for each of the following components:

(a) expenses causal to the service (further disaggregated into advertising and promotion, billing-related, and other);
(b) capital expenditures causal to the service (further disaggregated into hardware and software);
(c) expenses causal to demand (further disaggregated into maintenance, service provisioning, advertising, sales management, other);
(d) capital expenditures causal to demand (further disaggregated into outside plant, switching equipment, transmission equipment and land/building/other);
(e) settlement adjustments by settlement; and
(f) an end-of-study terminal value.

27. Although this cost summary is not broken down by non-essential facility component, the Commission considers that the proposed level of cost detail is consistent with current filing requirements and is sufficient to allow the Commission to assess the reasonableness of the service rate levels.

Imputation Test for Bundled Services

28. In Decision 97-8, the Commission established a framework for the bundling of tariffed and forborne services and ruled that where a forborne service is included in a new bundled service, the rates for the bundled service are to be filed for approval and that Phase II costs for the forborne service must be included in the imputation test. The Commission further stated that below-cost single line residence service included in the bundle should be costed at the applicable tariffed rates. At paragraph 131 of Forbearance - Regulation of Toll Services Provided by Incumbent Telephone Companies, Telecom Decision CRTC 97-19, 18 December 1997, the Commission stated that it would permit the bundling of forborne toll and toll free services with ILEC local exchange services, or with other tariffed telecom services, subject to bundling rules established in Decision 97-8. At paragraph 129 of Stentor Resource Centre Inc. - Forbearance from Regulation of Interexchange Private Line [IXPL] Services, Telecom Decision CRTC 97-20, 18 December 1997, the Commission further stated that, consistent with Decision 97-8, when a forborne service is included in a new bundled service, the Phase II costs of the forborne service elements are to be filed as part of the imputation test. The Commission further stated that tariffed rates are to be used to cost the tariffed IXPL service elements as well as any interconnection or contribution elements.

29. The Commission is of the view that the imputation test filing requirements discussed above for local services should apply to bundled services as follows. The imputation test is to:

(a) identify with supporting rationale, as appropriate, the assumed levels and types of revenue discounts;
(b) provide separate Phase II costs of major forborne services and non-forborne services;
(c) provide separate tariffed rates for essential services, below-cost single-line residence service, bottleneck services as identified in Decision 94-19, contribution charges and IXPL services; and
(d) include separately the associated revenue and cost summaries for each major forborne service and for each major non-forborne service which are determined based on Phase II costs, and which show the Phase II cost adjustments associated with any of the functionalities and services, the costs of which are included in both items (b) and (c) above.

30. The Commission considers that a major forborne or non-forborne service would be a service, the cost of which exceeds 10% of the total bundled cost.

31. If a bundled service uses the facilities of more than one ILEC, the Commission directs that, consistent with current filing requirements, a separate imputation test for each ILEC be filed.

32. Stentor's proposed imputation methodology and the conditions under which it is to be applied, as modified by this letter, are approved.

Yours sincerely,

Secretary General

cc: CRTC Regional Offices
Y. Davidson, CRTC

Date Modified: 1998-11-27