Telecom Decision CRTC 99-16

Ottawa, 19 October 1999

TELEPHONE SERVICE TO HIGH-COST SERVING AREAS

File No.: 8665-C12-04/97

Table of contents

Summary

The plan for high-cost areas

The Decision Paragraph

The industry players 1
Purpose of the proceeding 2

Basic service: how the market has evolved 3

Canadians enjoy a high level of telecommunications service 11
The exception: high-cost areas 14

The challenge: balancing priorities for high-cost areas 18

The basic  service objective 23

Achieving the basic service objective in southern Canada 30
Extending and upgrading service 31
Incumbent local exchange carriers retain their obligation to serve 31
Service improvement plans have proven effective in the past 37
Directing effort where effort is needed: requirements for filing service improvement plans 40
Service extension obligations 49
 Proposal for bidding to provide new services denied 54

Achieving the basic service objective in the far north 58

Maintaining established levels of high quality, basic service in southern Canada 71 Restructuring costing bands 71
Redistributing the explicit subsidy 79
Quality of service indicators
Long distance service
Proposal  to de-average switching and aggregation rates denied 82
Addressing  the quality of long distance service 84
 Long distance competition for O.N. Tel 87

Participants in this "high-cost areas" proceeding 88

Appendix 1 - Reference documents

Appendix 2 - Further details on the public process

Appendix 3 - Consideration of service improvement applications

Summary

The level of telecommunications service in Canada is generally very high. However, in some areas carriers face high operating costs to provide service. With some exceptions, the level of service in such high-cost serving areas, which generally occur in remote, rural regions and in the far north, is lower than the level of service generally available elsewhere in Canada.

This decision sets out the Commission's determinations and initiatives resulting from an extensive public process it conducted to determine how Canadians in all regions may have access to affordable, high quality telecommunications service. Among other things, this process included regional consultations held across the country in May and June 1998. Further details about the public process are set out in Appendix 2.

The Commission is setting three goals for high-cost areas, over time:
* To extend service to the few areas that are unserved.
* To upgrade service levels where customers do not currently have access to the basic services enjoyed by Canadians in other areas (i.e., in underserved areas).
* To maintain service levels, and ensure that existing levels do not erode under competition.

In addressing these goals, the Commission must balance competing priorities, such as improving service, keeping rates reasonable, and minimizing subsidies in order to foster fair competition.

The plan for high-cost areas

Although the Commission encourages competition for the provision of telecommunications service, high-cost serving areas may not benefit soon from such competition. To address this challenge, the Commission is implementing the following plan:

1. The Commission is establishing a basic service objective that reflects the level of service currently available to most Canadians.
2. The Commission is maintaining incumbent local exchange carriers' existing obligation to serve. This means that such carriers must provide service to subscribers in their service territory at a reasonable price without unjust discrimination. The obligation to serve helps ensure that Canadians have reasonable access to telecommunications service.
3. The Commission will address limits in the existing obligations that hinder customers from obtaining basic service. For example, in unserved areas, certain "unusual" construction expenses as part of an approved service improvement plan (see below) will not be charged to the subscriber requesting service.
4. All incumbent local exchange carriers not meeting the basic service objective must submit multi-year service improvement plans designed to achieve this objective in their entire service territory. The timing for submitting these plans will vary and the plans will generally be considered in previously announced proceedings.
5. The Commission will establish a monitoring program to track service improvement plans as they are implemented.
6. In a future proceeding, the Commission will provide an opportunity for incumbent local exchange carriers to redefine their costing bands. This should result in more narrowly defined bands that will better identify high-cost areas. The Commission anticipates two benefits:
   * Subsidies to achieve the basic service objective will eventually be targeted only to high-cost areas.
    *The price of local loops in less remote areas should decrease, thus providing cost reductions and incentives for competitive local exchange carriers to provide local telephone service.
7. The Commission will monitor complaints regarding the quality of long distance service to certain remote communities, and expects incumbent local exchange carriers to correct problems in service quality.
8. The territory of Northwestel Inc. (NWTel) presents unique and difficult challenges because it is large, sparsely populated and subject to severe climatic conditions. In light of its unique circumstances, NWTel may not have the means to achieve the basic service objective under similar terms and conditions as those for southern Canada. Accordingly, the Commission is beginning a public proceeding that will, among other things, assess NWTel's means to achieve the basic service objective, address the terms and conditions that may permit long distance competition in its territory and determine if any supplementary funding is required, and, if it is, the manner in which any such funding will be collected from the portable subsidy mechanism.

(Note : This summary is provided for the convenience of the reader and does not constitute part of the Decision).

Telephone service to high-cost serving areas

The industry players

1. In this decision, the Commission uses the following terminology:

*Incumbent local exchange carriers (ILECs or incumbent local carriers): These companies have had (and in some cases continue to have) a monopoly on local telephone service for a certain region or area.
*Competitive local exchange carriers (CLECs or competitive local carriers): These companies are new competitors in a market for local telephone service.
*Former Stentor companies: Canada's major incumbent local exchange carriers formed an alliance referred to as "Stentor" that was disbanded in late 1998. This alliance included the federally-regulated companies BC TEL, Bell Canada (Bell), Island Telecom Inc. (Island Tel), Maritime Tel & Tel Limited (MTT), MTS Communications Inc. (MTS), NBTel Inc. (NBTel), NewTel Communications Inc. (NewTel) and TELUS Communications Inc. (TCI). Saskatchewan Telecommunications (SaskTel) is a former Stentor company but this decision does not apply to it as it is not federally regulated at this time.
*Independent telephone companies: These incumbent local exchange carriers were not part of the Stentor alliance.

Purpose of the proceeding

2. The Commission has concluded a public process regarding the provision of telecommunications service to high-cost serving areas (high cost areas) throughout Canada. With the increasing presence of competition in the industry, the Commission has examined how best to continue to foster reliable, high quality, affordable service for Canadians in all regions.

Basic service: how the market has evolved

3. For many years the telecommunications industry consisted of companies that were regionally-based regulated monopolies. Regulators ensured that rates were just and reasonable while providing the companies with the opportunity to earn a reasonable rate of return (profit). This regulatory approach, coupled with price averaging and value of service pricing, were used to set affordable rates while, at the same time, allowing incumbent local carriers to extend, improve and maintain service.

4. Profitable areas (usually urban) and profitable services (long distance, optional services) subsidized local service and areas with high operating costs (usually rural or remote). The industry was thus able to provide affordable, high quality service in a relatively consistent manner across most regions, including those areas with high operating costs.

5. Under this regime, regulators established "quality of service indicators" which enabled both regulators and the industry to monitor the level of service being provided. Companies also submitted plans to extend and improve service over time, within their territories.

6. The Commission first began to foster competition in long distance. More recently, it has done so with respect to local service. As well, the Commission no longer regulates certain rates. As a result, subsidies are being driven out of the system. This creates a concern that the level of service to some areas may suffer as profits in competitive markets decline, as well as a concern that some areas could remain unserved.

7. For this reason, when it permitted competition for toll (long distance) service markets, the Commission created a system of explicit subsidies. Competing long distance companies were required to pay a set amount (contribution) to the incumbent local carrier which continues to provide local service at subsidized rates.

8. Where it subsequently permitted competition for local markets, the Commission made the contribution portable. Any local exchange carrier (ILEC or CLEC) could therefore use it to subsidize local rates.

9. The territories of major incumbent local carriers are subdivided into exchanges (the geographic area associated with one or more switching centres). Where local competition is permitted, these exchanges are classified into bands based primarily on the cost to provide telephone service in these exchanges. Residential service in certain bands is eligible for a subsidy. Local exchange carriers receive a subsidy based on the number of residential lines they serve in those bands. Bands in higher cost areas generally receive more subsidy on a per subscriber line basis.

10. Although the Commission has permitted competition in most regions of Canada, long distance competition is still not permitted in the operating territories of NWTel and O.N. Tel. As well, local service competition is not yet permitted in the operating territories of the independent telephone companies.

Canadians enjoy a high level of telecommunications service

11. The level of telecommunications service in Canada is very high. During this proceeding, the Commission heard evidence that Canada is one of the best-served countries in the world with respect to telecommunications.

12. Based on the record of this proceeding, it is estimated that over 18 million telephone lines are connected to the public switched telephone network. Over 99 per cent of these lines represent "single line" service. More than 97 per cent are connected to a digital switch, provide touch-tone telephone service, and can connect, via low speed data transmission, to the Internet without incurring long distance charges. Some telephone companies offer this level of service in 100 per cent of their lines. These figures indicate the success of Canadian telecommunications, which has grown steadily over the last century, in providing millions of Canadian residences and businesses with high quality service.

13. Existing service improvement programs will enhance the level of basic telephone service to about 90,000 more Canadians. The Commission notes that when these existing programs are complete, it is estimated that only 7,700 currently served customers will not have access to single line service. As well, incumbent local carriers have identified, in total, approximately 13,000 residences and/or businesses, in over 700 locations, that will still not have any access to telephone service.

The exception: high-cost areas

14. High-cost areas occur primarily in remote, rural regions and in the far north.

15. In the territories of the incumbent local carriers other than NWTel, there remain small pockets of unserved or underserved areas. Unserved areas have no telecommunications service while those in underserved areas receive service that is more limited than that enjoyed by most other Canadians. Telephone service to these areas generally costs more to provide and is often of lower quality than service in other regions.

16. Parties suggested various definitions of a high-cost area:
*Some defined a high-cost area as one where costs of providing service are above those in an urban area.
*Others defined it as an area where costs are a certain percentage higher than the company's average costs of providing service.
 *Still others defined it as an area where it would be difficult for customers to afford residential rates high enough to cover the costs of delivering service.

17. After considering all comments, the Commission is adopting the following definition of a high-cost area:

a clearly  defined geographical area where the incumbent local exchange carrier's monthly costs to provide basic service are greater than the associated revenues generated by an affordable rate as approved by the Commission. Costs are estimated using Phase II or Phase II-like costs, plus an appropriate mark-up. (Phase II costs are long-run, incremental costs calculated in accordance with directives established by the Commission.)

The challenge: balancing priorities for high-cost areas

18. The Commission has set three goals for high-cost areas, over time:
*To extend service to the few areas that are unserved.
*To upgrade service levels where customers do not currently have access to the basic services enjoyed by Canadians in other areas (i.e., in underserved areas).
*To maintain service levels, and ensure that existing levels do not erode under competition.

19. In assessing the options available to achieve these goals, the Commission must consider the sometimes competing policy objectives that are set out in section 7 of the Telecommunications Act (the Act), such as:

a) to facilitate the orderly development throughout Canada of a telecommunications system that serves to safeguard, enrich and strengthen the social and economic fabric of Canada and its regions;

b) to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada;

c) to enhance the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications;

f) to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective; and

h) to respond to the economic and social requirements of users of telecommunications services.

20. As the industry moves towards increased competition, the Commission wants to ensure, to the extent possible, that all Canadians benefit from competition. Nevertheless, competition may not soon reach Canadians in remote or rural areas. As well, incumbent local carriers currently serving high-cost areas may find that subsidy erosion in more competitive markets, within or outside their serving territories, reduces their ability to provide quality services at affordable rates.

21. For example, competitors may choose to operate only in lower cost areas. Incumbent local carriers might then concentrate their efforts in lower cost areas as well, to better compete with new providers. To remain competitive, incumbent local carriers would perhaps reduce their rates in lower cost areas or cut their costs over all. Either of these strategies would reduce the funds available to subsidize their services to high-cost areas.

22. The Commission's challenge is to establish a reasonable level of service and to determine how, in a competitive era, all Canadians may gain access to that service. To fulfil the requirements of the Act, the Commission must balance social policy objectives (for example, high quality, affordable service) with competitive ones (for example, minimizing subsidies). It must weigh the cost of any programs to improve service against the financial burden placed on those paying for these programs. This is especially important given the Commission's goal of ensuring affordable basic service.

The basic service objective

23. Incumbent local carriers continue to improve service to their customers. These improvements, in turn, raise Canadians' expectations of what should constitute basic service. However, the Commission found evidence that some companies provide lower levels of service in high-cost areas.

24. The Commission considers that the level of service now available to the vast majority of Canadians should be extended to as many Canadians as feasible in all regions of the country. Accordingly, the Commission is hereby establishing the following basic service objective for local exchange carriers:

*Individual line local service with touch-tone dialling, provided by a digital switch with capability to connect via low speed data transmission to the Internet at local rates;
*Enhanced calling features, including access to emergency services, Voice Message Relay service, and privacy protection features;
*Access to operator and directory assistance services;
 *Access to the long distance network; and
 *A copy of a current local telephone directory.

25. The basic service objective is independent of the technology used to provide service, and may change over time as service expectations evolve.

26. During the proceeding, several groups representing consumer interests suggested that basic service should include a telephone line capable of local and interexchange data transmission at a modem speed of 28.8 kb/s or higher. Several carriers noted that it would be difficult to provide any guarantee of data transmission rates. They added that such network changes are prohibitively expensive and provide almost no additional revenue to offset the costs.

27. The Commission considers that the benefits of upgrading the local network must be balanced against the subscribers' ability to pay for these upgrades. For a higher level of basic service, subscribers would have to pay more and costs to provide the service in remote areas would increase. These costs could, in turn, affect subsidy rates levied on profitable markets, which would distort the competitive nature of those markets.

28. The Commission expects that, over time, competitive pressures and improvements in network technology will permit basic service to include faster transmission speeds.

29. In light of these considerations, the Commission will not include line speed as part of the basic service objective.

Achieving the basic service objective in southern Canada

30. In this Decision, when the Commission refers to southern Canada it means all areas other than the territory served by NWTel. NWTel provides service in the Yukon, Nunavut, the Northwest Territories and the northern portion of British Columbia. The Commission considers that NWTel's territory presents unique challenges and more complex problems than territories in the rest of Canada. This Decision will address NWTel's concerns separately in a later section.

Extending and upgrading service

Incumbent local carriers retain their obligation to serve

31. Currently, incumbent local carriers have an obligation to serve in their territories. This means that an incumbent local carrier must provide service to subscribers in its service territory at a reasonable price without unjust discrimination. The Commission requested comments on whether this obligation should change, in view of the advent of competition among carriers providing basic local services.

32. The concept of an "obligation to serve" developed within the context of a traditional, regulated monopoly in telecommunications services. Where customers in unserved areas have applied for basic service, the carrier's tariffs, including the Terms of Service, define its obligations to extend service beyond the limits of its existing facilities and the prices it can charge to customers for such extensions.

33. Presently, incumbent local carriers extend or upgrade their existing plant as part of normal provisioning, at the request of individuals or groups, and through specific service improvement plans, either in response to the Commission's decisions or as initiated by the carriers themselves.

34. Generally, parties considered that where one carrier (typically the incumbent local carrier) provides basic service to an area, the obligation to serve should be retained. Some parties submitted that this obligation should remain until local competition ensures service on demand. Other parties maintained that competition will not ensure that providers will offer service in all locations to all customers now served. Conversely, some parties argued that this obligation to serve should be eliminated or compensation provided.

35. In determining this matter, the Commission must weigh, among other things, the objective of fair competition against the need for an efficient, effective means to achieve the basic service objective in high-cost areas.

36. Effective local service competition will not likely occur in the short term. The Commission therefore determines that, at this time, incumbent local carriers must retain their obligation to serve.

Service improvement plans have proven effective in the past

37. Encouraging incumbent local carriers to develop service improvement plans proved very successful through the monopoly era. The Commission is of the view that, despite the arrival of competition, such programs can continue to provide effective means to extend and improve service to high-cost areas. The Commission does not, however, expect the industry to extend and improve service to all areas immediately.

38. According to the former Stentor companies and the independent telephone companies, just over 11,000 premises in southern Canada will not have access to any telephone service once existing service improvement plans have been completed. As a result, the Commission anticipates that incumbent local carriers in southern Canada have the ability to fund service improvement programs through the existing regulatory framework. This could be accomplished in various ways, such as reducing costs, raising rates, using existing explicit subsidies from long distance services, and generating additional profits from the sale of special calling features.

39. Multi-year plans to improve service, developed by incumbent local carriers and filed for approval with the Commission, provide other benefits as well. They are administratively simple to implement and they allow for comment by the public. Such programs can also allow communities or regions to participate in proposed service upgrades. For instance, if a telephone company begins construction in an area, it may be able to offer inexpensive service improvements beyond the basic service objective to other nearby homes or communities. Knowing in advance the timetable for construction projects near their area, individuals, communities or regions may choose to take advantage of any cost-saving opportunities. They may be able to budget their own resources or obtain government grants to enhance services.

Directing effort where effort is needed: requirements for filing service improvement plans

40. In some areas where service is not at an acceptable standard, work is already underway to improve service. The Commission notes, however, that several telephone companies stated that they currently have no plans to extend or upgrade service to those unserved or underserved within their territories.

41. The Commission directs all incumbent local carriers to file service improvement plans for Commission approval, or to demonstrate that the basic service objective has been and will continue to be achieved in their territory (Appendix 3 sets out the filing and implementation schedule). Plans filed should indicate how incumbent local carriers will reinforce their existing networks where necessary to improve service or to extend service to unserved areas. Subject to network design and cost limitations, these plans should:

*Incorporate least-cost technology.
*Target larger communities or areas first.
*Serve unserved areas prior to providing upgrades.
*Serve permanent dwellings before seasonal ones.

42. Plans must also include proposals to fund such improvements. When funding proposals include rate increases, a reasonable balance should be achieved between the speed and cost of implementation and the need to maintain affordable rates. With their service improvement plans, incumbent local carriers must file a proposed tracking plan that will monitor the progress of all service extension and upgrade programs and will ensure that these programs are carried out. As a consequence, the Commission will no longer require Bell to file its existing annual "Access to Service Report," which contains the same kind of information, once Bell has approval for its first tracking plan pursuant to this Decision.

43. Incumbent local carriers should consult stakeholders prior to preparing their service improvement plans. In addition, communities and other organizations will have an opportunity to comment on the reasonableness of the carriers' proposals before the Commission rules on them.

44. Many former Stentor companies have significant programs underway to improve service during their current price cap period. In the proceeding to review price caps, the Commission will consider these companies' proposals for additional upgrades and improvements. These improvements should be set to begin no later than 1 January 2002.

45. Québec-Téléphone and Télébec ltée (Télébec) are not currently regulated by price caps. The Commission is conducting a public proceeding, announced in Time-Frame for the Implementation of Price Cap Regulation And Any Further Required Rate Rebalancing For Québec-Téléphone And Télébec ltée, Telecom Public Notice CRTC 99-15, 27 May 1999 to determine the timeframe for implementing price caps. After the Commission makes its determinations in that matter, it will initiate a process to implement price caps. The Commission directs Québec-Téléphone and Télébec to include their service improvement plans in the proceeding to implement price caps. The Commission expects service improvements to begin at the same time as the implementation of the price cap regime.

46. In Review of Contribution Regime of Independent Telephone Companies in Ontario and Quebec, Telecom Decision CRTC 99-5, 21 April 1999 (Decision 99-5), the Commission directed certain small independent telephone companies to increase local rates in stages before the end of 2001. The Commission directed these companies to file, by 1 January 2000, productivity improvement plans reducing the subsidy they require to less than 25 per cent of their total revenue requirement. This must take effect no later than the year 2002.

47. The Commission notes that any service improvements would create additional costs for the independent telephone companies and that additional costs will not be allowed to increase the contribution requirement (subsidy) above the 25 per cent target set by the Commission in Decision 99-5. In the Commission's view, the costs of service improvements can be incurred over a period of years so as not to increase the contribution requirement beyond this maximum amount or the capped contribution requirement established in Decision 99-5. In addition, the Commission expects that rates will remain affordable.

48. To meet the determinations of Decision 99-5, in addition to those in this Decision, the small independent telephone companies, including O.N. Tel, Abitibi-Consolidated, Cochrane Public Utilities Commission, and Prince Rupert City Telephone, must file these plans by 1 March 2000. Each service improvement program proposed by the independents should be set to begin no later than 1 January 2001.

Service extension obligations

49. The incumbent local carriers' obligation to serve and the terms for extension of service are set out in their approved tariffs. The terms include the portion of the cost for extending service to be paid by the company and the portion to be paid by the customer.

50. In the current tariffs, including the Terms of Service, provisions for service extensions vary from one incumbent local carrier's territory to another with respect to the dollar or distance construction allowances the carrier pays on behalf of a customer, the amount a customer must pay beyond these allowances, and the maximum costs the carrier will assume. Many tariffs state that a carrier is not required to extend service if, by doing so, it would incur unusual expenses that customers are unwilling or are unable to pay.

51. Given the unique circumstances of each company, the Commission considers it reasonable that these terms vary from one telephone company territory to another. The Commission finds that no change is warranted to the tariffs or the Terms of Service with regard to the handling of ongoing service extension requests.

52. The Commission further finds that where construction is taking place in a specific area pursuant to an approved service improvement plan, and construction to extend facilities is undertaken to meet the basic service objective, the customer's contribution shall not exceed $1,000 per customer premises. This modification is to be reflected in the incumbent local carriers' tariffs.

53. The Commission notes that, in their tariffs, a number of incumbent local carriers permit customers to pay in instalments for service extensions. Where such plans are not available in the tariffs, the Commission directs carriers to file, with their service improvement plans, proposed tariffs giving customers the option to pay for extensions on a reasonable instalment basis.

Proposal for bidding to provide new services denied

54. Some parties proposed that incumbent local carriers and other service providers be permitted to bid on providing new service to a high-cost area. The successful bidder would then receive funding to recover capital costs and operational costs for providing service.

55. The Commission sees some merit to a bidding process to implement service to high-cost areas. Such a process could provide opportunities and incentives for interested providers to establish a presence in a particular area, and encourage companies to operate more efficiently, using more cost-effective technologies. In addition, a subsidy to the successful bidder would limit service providers' risk to acceptable levels and provide for competitive equity among incumbent and competitive local carriers.

56. The Commission considers, however, that a bidding process would make administration more complex, and would unduly slow the implementation of basic service in certain high-cost areas. Given the small number of Canadians without access to telephone service, the Commission is of the view that establishing a new bidding mechanism to provide basic service is not warranted. In the Commission's view, incumbent local carriers, with their widespread infrastructures, will likely be the only providers of service to these areas in the foreseeable future.

57. Given the relatively small number of Canadians in scattered locations who do not have access to service that meets the basic service objective, the Commission finds that the most appropriate approach in high-cost areas is for incumbent local carriers to provide service over a reasonable time period. The Commission is of the view that extending service to those now unserved is generally the responsibility of the incumbent local carrier providing service in that territory.

Achieving the basic service objective in the far north

58. The incumbent local carrier, NWTel, serves the Yukon, Nunavut, the Northwest Territories and part of northern British Columbia. As such, it has the largest operating territory in Canada, but the territory's population is only about 110,000, representing less than one half of one per cent of the country's total population.

59. NWTel delivers service to as many as 96 communities, providing them with about 68,000 telephone lines. More than 80 per cent of these communities scattered over NWTel's operating territory have fewer than 500 telephone lines. Many communities are accessible only by air. As a result, NWTel has the lowest telephone line density in the country. This low density, combined with the size and severe climatic conditions of its territory, requires NWTel to operate and maintain a network without the efficiencies available to companies in southern Canada.

60. Providing reasonably priced access to high-quality long distance service is a further challenge for NWTel. The Commission has received complaints regarding the quality of long distance service in NWTel's territory. As well, NWTel's rates for long distance are much higher than those elsewhere in Canada to generate the revenues necessary to provide local service throughout its territory. While the Commission has permitted competition and refrained from regulating long distance services in most telephone companies' operating territories, it has not yet set terms and conditions allowing for long distance competition in NWTel's territory.

61. Because of the high rates charged by NWTel, some northern customers have engaged in "toll bypass" by conducting long distance telephone calls in a manner that avoids high charges from NWTel. Revenue from long distance calls contributes a significant amount in subsidy towards its cost of providing local service throughout its territory. Toll bypass erodes this important source of revenue. The Commission, therefore, has an immediate concern about the financial impact of toll bypass on NWTel's ability to maintain and improve telecommunications service in northern Canada.

62. In light of the unique circumstances listed above, NWTel may not have the means to achieve the basic service objective under similar terms and conditions as those for southern Canada. Accordingly, the Commission has begun a public proceeding (NWTel proceeding) Northwestel Inc. Implementation of Toll Competition and Review of Regulatory Framework, Quality of Service and Related Matters, Telecom Public Notice CRTC 99-21, 1 October 1999, that will, among other things, assess NWTel's level of revenue and contribution required to achieve the basic service objective, address the terms and conditions that may permit long distance competition in its territory, and determine if any supplementary funding is required.

63. The Commission directs NWTel, as part of the NWTel proceeding, to file for Commission approval a service improvement plan by which it will achieve the basic service objective over time, including upgrading the quality of long distance service. This plan must address the same priorities as the plans that the Commission requires from the other incumbent local carriers. The Commission will consider the merits of NWTel's plan in relation to its service benefits, costs and impact on rates. In addition, the Commission determines that NWTel should retain its obligation to serve, as do incumbent local carriers elsewhere in Canada. It also considers that the factors regarding obligation to serve addressed earlier in this Decision should also apply to NWTel.

64. Further, as part of the NWTel proceeding, and in order to permit long distance competition, the Commission will have to establish sustainable rates for the switching and aggregation component, as well as the toll contribution (subsidy) component, of the Carrier Access Tariff (CAT). To achieve this, NWTel is to propose, with supporting rationale, a sustainable CAT that would encourage long distance competition.

65. As well, NWTel is to propose the amount, if any, of supplementary funding it may require to meet the basic service objective, recover its contribution requirement and provide the company with a reasonable opportunity to earn a fair rate of return. NWTel's proposal for a sustainable CAT and supplementary funding should reflect the Commission's findings set out below.

66. Switching and aggregation facilities include the trunks connecting NWTel's toll switches (Access Tandem switches) to its local switches, as well as a portion of the switches themselves. The Commission notes that the costs of these toll connecting trunks are distance and usage sensitive.

67. NWTel faces unique circumstances in that it has unusually long toll connecting trunks throughout its territory, and its ability to maintain and upgrade these facilities affects whether customers will have access to quality toll service. The Commission considers that NWTel may not be able to propose a cost-based switching and aggregation rate that is sustainable and thus may not be able to recover the associated costs in a competitive long distance environment.

68. The Commission finds it appropriate in these circumstances that the company's switching and aggregation facilities be considered an extension of the local network. Accordingly, the associated costs are to be assigned to the Monopoly Access category as opposed to the competitive toll category as is the case with other telephone companies. The Commission is satisfied that this change is appropriate in order to facilitate the provision of competitive long distance service to subscribers throughout NWTel's territory. Notwithstanding this change, the Commission notes that the portion of NWTel's toll switches used to provide the inter-toll portion of long distance service, along with the trunks used to connect those switches, would remain in the Competitive Toll category.

69. To be eligible for any supplementary funding, NWTel will have to demonstrate that it cannot meet the basic service objective using the traditional funding mechanisms relied upon by companies in southern Canada. If NWTel is able to demonstrate that it needs supplementary funding, any such funding will come from the existing portable subsidy mechanism within the former Stentor companies' operating territories. The Commission considers that the existing portable subsidy collection mechanism is appropriate for any such funding as a short-term measure since the existing mechanism is currently under review in a separate proceeding.

70. In the NWTel proceeding, the Commission will also determine the manner in which any supplementary funding will be collected from the portable subsidy mechanism.

Maintaining established levels of high quality, basic service in southern Canada

Restructuring costing bands

71. In Final Rates for Unbundled Local Network Components, Telecom Decision 98-22, 30 November 1998, the Commission established rates for unbundled local loops, based on the existing definition of bands. Local loops are used to connect the subscriber's telephone to the serving switch. "Unbundling" separates the cost for this item from the whole cost for local service. The cost of providing local service varies with the loop length and densities within each band. The portable subsidy made available partially offsets the cost of providing residential local service within each band. Former Stentor companies suggested revising the costing band structures to better isolate the high cost portions of their serving territories.

72. The Commission shares the view of most parties that refining the current banding structure based on switching centres would better focus subsidies to higher cost regions.

73. The Commission considers that it may be helpful to develop costs by smaller geographical areas such as enumeration areas. However, the Commission is concerned about determining average costs using boundaries of enumeration areas since these boundaries change for various reasons with every census undertaken by Statistics Canada. As well, if companies develop new bands, local loop rates for each band will have to be adjusted at the same time as any change to bands.

74. Independent telephone companies, including NWTel, do not currently have costing bands within their territories. However, when local competition is permitted in the territories of independent telephone companies, the Commission will have to establish a mechanism for distributing portable subsidies. Because costs vary within each territory, it may be necessary to identify costing bands to accurately direct the portable subsidy to high-cost areas.

75. Early in the year 2000, the Commission will begin a proceeding to examine the former Stentor companies' proposals for new bands. Proposals may base new bands on costs to provide residential service within switching centre boundaries, enumeration area boundaries, and/or some reasonable alternative. The Commission considers that any proposal to refine bands must be based on costs, be unambiguous and readily identify the band(s), and be administratively simple.

76. Several parties to the proceeding raised their concern that it costs more to provide single line business service in high-cost areas than it does in other regions. Most proposed that a "high-cost subsidy" be provided for those businesses to support the local rural economy. However, information regarding the number of business lines in each band and the associated costs and revenues was not available in this proceeding. As part of the re-banding proceeding, the Commission will consider whether to make subsidies available for single line business service in high-cost areas.

77. The Commission will therefore require the former Stentor companies, in their submissions as part of the re-banding proceeding, to:

*comment on the provision of subsidies to business lines in high-cost areas;
*comment on the implementation of expanded indicators for quality of service specific to high-cost areas; and
*propose revised rates for local loops for each band. The Commission expects that the associated loop cost estimates should be developed based on the costing methodologies relied upon in the determination of the rates approved in Decision 98-22.

78. The Commission expects to render its decision in the proceeding on re-banding prior to the review of price caps, with changes to bands and loop rates to take effect 1 January 2002.

Redistributing the explicit subsidy

79. Once companies refine their costing bands, the Commission anticipates that the existing explicit subsidy will be used specifically to maintain the basic service objective in high-cost areas. Accordingly, the Commission makes the following rulings regarding the distribution of explicit subsidies for ongoing operational shortfalls:

a) Prior to 1 January 2002 (the timeframe of the current price cap period), the existing explicit subsidy mechanism will continue.

b) After 1 January 2002, given that the obligation to serve is maintained for incumbent local carriers in this Decision, the explicit subsidy will be available to incumbent local carriers that file an approved service improvement plan indicating how they will achieve the basic service objective. Competitive local carriers will be eligible to receive the subsidy for those customers receiving a level of service that meets the basic service objective. In addition, if a service provider other than an incumbent local carrier offers service in an otherwise unserved area, that service provider must offer service at an affordable rate to be eligible to receive the subsidy.

Quality of service indicators

80. This proceeding addressed whether the Commission should regulate the quality of service in high-cost areas, and if so, how it should implement that regulation. Some parties proposed adding "high-cost area" categories to some of the quality of service indicators in Appendix A of Quality of Service Indicators for Use in Telephone Company Regulation, Telecom Decision 97-16, 24 July 1997. Other parties proposed relying on the complaints process. Still others proposed that the Commission hold a separate proceeding to address quality of service for high-cost areas.

81. The Commission considers that, in the context of the re-banding proceeding, it would be appropriate for former Stentor companies to identify those quality of service indicators where the standards should vary in high-cost serving areas, and to propose what standards would be appropriate for those areas. The Commission considers that existing quality of service indicators are adequate for the independent telephone companies. However, the Commission may re-examine this issue at some future point.

Long distance  service

Proposal to de-average switching and aggregation rates denied

82. Some parties proposed de-averaging switching and aggregation rates as an alternative to subsidies for long distance routes that do not cover their costs. Switching and aggregation typically refers to the carrying and connecting of calls between the local exchange and the long distance networks. Carriers pay a fee based on the average cost to the incumbent local carrier for the provision of this service. "De-averaging" would allow the incumbent local carrier to charge different rates in different local exchanges based on costs.

83. The Commission notes that sustainable long distance competition exists in the former Stentor companies' operating territories and that its own policy is to refrain from regulating rates for long distance service. It considers that the parties addressing this matter did not demonstrate a need for de-averaging or that de-averaging would address the problems associated with access to toll services in high-cost areas. Accordingly, the Commission concludes that de-averaging of switching and aggregation rates is not appropriate at this time.

Addressing the quality of long distance service

84. Throughout this proceeding, the Commission received numerous complaints from subscribers about the quality of long distance service in certain northern communities. Some complained that they did not have reasonable access to long distance service. Others indicated that the network frequently dropped their long distance calls, or that they were unable to get a dial tone to place calls.

85. In Forbearance - Regulation of Toll Services Provided by Incumbent Telephone Companies, Telecom Decision CRTC 97-19, 18 December 1997, the Commission refrained from regulating long distance services in the territories of former Stentor companies, as well as those of Télébec and Québec-Téléphone, subject to certain conditions established to protect the interests of users. Although these conditions are not specifically geared towards ensuring high quality toll services, the Commission's view in refraining from regulating was that competition and choice of providers would ensure acceptable quality of long distance service in all areas.

86. The Commission therefore expects that, in areas where limited competition has not ensured a high quality of long distance services, incumbent local carriers will continue to work to remedy the situation. The Commission will monitor complaints on the poor quality of long distance service, as well as the incumbent local carriers' actions in addressing this matter.

Long distance competition for O.N. Tel

87.In Regulatory Framework-Ontario Northland Transportation Commission,Telecom Decision CRTC 98-14, 1 September 1998, the Commission determined that it would consider terms and conditions for toll competition in O.N. Tel's territory in light of the findings in this Decision. The Commission considers that O.N. Tel's current customers already pay long distance rates comparable to those in areas where competition takes place. In view of this, and the determinations made in this Decision, the Commission will initiate a public proceeding in the year 2000 that will establish the terms and conditions under which long distance competition can be introduced in O.N. Tel's territory.

Participants in this "high-cost areas" proceeding

88. To consider the issues associated with service to high-cost areas, the Commission issued Service to High-Cost Serving Areas, Telecom Public Notice CRTC 97-42, 18 December 1997. It received written submissions which were subject to queries by interested parties and the Commission. The Commission also heard oral final argument and received written final and reply arguments. At regional consultations conducted across the country, the Commission heard over 250 presentations. The Commission also received over 300 written comments. (Further details on the public process are included in Appendix 2.)

89. The Commission made all federally-regulated, incumbent local carriers parties to the proceeding. SaskTel, the only non-federally regulated incumbent local carrier, also participated fully in this proceeding. In a future proceeding, the Commission will consider how this Decision applies to SaskTel once it comes under CRTC jurisdiction.

90. In arriving at its determinations set out in this Decision, the Commission has carefully considered all of the submissions received throughout this proceeding.

The Commission wishes to thank the parties and all those who participated in the proceeding. The Commission also thanks those telephone companies who provided video and audio links used to support the regional consultations held in their operating territories.

Secretary General

This document is available in alternative format upon request, and may also be viewed at the following Internet site: http://www.crtc.gc.ca

Reference documents

Legislation

Telecommunications Act, S.C. 1993, c. 38, as amended CRTC Telecommunications Rules of Procedure, SOR/79-554, as amended by SOR/86-832

Public Notices

Service to High-Cost Serving Areas, Telecom Public Notice CRTC 97-42, 18 December 1997

Service to High-Cost Serving Areas - Amendment to PN 97-42, Telecom Public Notice CRTC 98-5, 6 March 1998

Service to High-Cost Serving Areas - Amendment to the Procedures in PN 97-42, Telecom Public Notice CRTC 98-18, 30 July 1998

Time-Frame For The Implementation of Price Cap Regulation and Any Further Required Rate Rebalancing for Québec-Téléphone and Télébec, Telecom Public Notice 99-15, 27 May 1999

Review of Contribution Collection Mechanism and Related Issues, Telecom Public Notice 99-6, 1 March 1999

Decisions

Regulatory Framework for the Independent Telephone Companies in Québec and Ontario (Except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec Limitée), Telecom Decision CRTC 96-6, 7 August 1996

Local Service Pricing Options, Telecom Decision CRTC 96-10, 15 November 1996

Local Competition, Telecom Decision CRTC 97-8, 1 May 1997

Quality of Service Indicators for Use in Telephone Company Regulation, Telecom Decision CRTC 97-16, 24 July 1997

Implementation of Price Cap Regulation - Decision Regarding Interim Local Rate Increases and Other Matters, Telecom Decision CRTC 97-18, 18 December 1997

Forbearance - Regulation of Toll Services Provided by Incumbent Telephone Companies, Telecom Decision CRTC 97-19, 18 December 1997

Northwestel Inc.- Interconnection Of Interexchange Carriers And Related Resale And Sharing Issue, Telecom Decision CRTC 98-1, 11 February 1998

Regulatory Framework - Ontario Northland Transportation Commission, Telecom Decision CRTC 98-14, 1 September 1998

Final Rates for Unbundled Local Network Components, Telecom Decision CRTC 98-22, 30 November 1998

Review of Contribution Regime of Independent Telephone Companies in Ontario and Quebec, Telecom Decision CRTC 99-5, 21 April 1999

Orders

Telecom Order CRTC 99-357 - 19 April 1999

Other Documents

Preparing Canada for a Digital World, Final Report of the Information Highway Advisory Council, 1997 10 08

Telecom CRTC Letter Decision, 26 March 1998, regarding an application, dated 6 February 1998, from AT&T Canada Long Distance Services Company, ACC TelEnterprises Ltd., Call-Net Enterprises Inc. and Fonorola Inc.

Appendix 2

Further details on the public process

Regional consultations held during May and June 1998

Whitehorse, Yukon with video or audio links to sites at (i) Dawson City, Yukon, (ii) Fort Nelson, British Columbia, (iii) Haines Junction, Yukon, (iv) Old Crow, Yukon and (v) Watson Lake, Yukon;

Prince George, British Columbia with video links to sites at Prince Rupert and Vancouver;

Prince Albert, Saskatchewan with video links to sites at Regina, Saskatoon, Swift Current and Yorkton;

Grande Prairie, Alberta with video links to sites at Calgary and Edmonton;

Timmins, Ontario with video links to sites at Haileybury, Hearst, Kapuskasing, Kirkland Lake, Moosonee, Ottawa, Temagami and Toronto;

Thompson, Manitoba with video links to a site at Winnipeg;

Val d'Or, Quebec with video links to sites at Baie-Comeau, Ville de Bécancour, Chicoutimi, Chisasibi, Gaspé, Montréal, Québec, Rimouski, Saint-Georges, Sainte-Marie and Sept-Îles;

Deer Lake, Newfoundland with video links to sites at (i) Moncton, New Brunswick and (ii) St. John's, Newfoundland; and,

Iqaluit, Northwest Territories with audio or video links to sites at Cambridge Bay, Hay River, Inuvik, Rankin Inlet and Yellowknife.

Oral argument:

Hull, Quebec on 25 and 26 January 1999

Interested Parties

The following persons registered as interested parties or were made parties to this proceeding. Some of these parties filed submissions, comments, and/or argument: Abitibi-Consolidated (formerly Abitibi-Price Telephone Inc.) ACA/CAC/ARC/NAPO/RDC, ACC TelEnterprises, Action-Réseau Consommateur, Amtelecom Inc., Angus Oliver, Angus TeleManagement Group Inc., Association des Compagnies de Téléphone du Québec inc., AT&T Canada Corp., B.C. Old Age Pensioners' Organization, BC TEL, Bell Canada (Bell), Brooke Telecom Co-operative Limited, Bruce Municipal Telephone System, BRULYN Management Consulting, Call-Net Enterprises Inc., Campbell Ryder Consulting Group Ltd., Canadian Business Telecommunications Alliance, Canadian Cable Television Association, Canadian Wireless Telecommunications, Chisasibi Telecommunications Association, Christopher A. Taylor, Clearnet Communications Inc., Cochrane Public Utilities Commission (Cochrane), Cogeco Câble Inc., Consumers Association of Canada (Manitoba) & Manitoba Society of Seniors Inc., CoopTel, Dan Hammond & Associates, David Stinson Consulting Inc., Dryden Municipal Telephone System, Ecoanalysis Consulting Services Inc., Fundy Cable Ltd./Ltée., Globalstar Canada Co., Gosfield North Communications Co-operative Limited, Gouvernement du Québec, Government of British Columbia, Government of Manitoba, Government of the Northwest Territories, Government of Saskatchewan (Saskatchewan), Hay Communications Co-operative Limited, Huron Telecommunications Co-operative Limited, Hurontario Telephones Limited, Industry Canada, Island Telecom Inc. (Island Tel), Johnston & Buchan, Keewatin Municipal Telephone System, Keewaytinook Okimakanak, Kenora Municipal Telephone System, KVM Consulting, La Cie de Téléphone de Courcelles Inc., La Compagnie de Téléphone de Lambton Inc., La Compagnie de Téléphone de St. Victor, La Compagnie de Téléphone de Warwick, La Compagnie de Téléphone Nantes Inc., La Compagnie de Téléphone Upton Inc., La Corporation de Téléphone de La Baie (1993), Lansdowne Rural Telephone Co. Ltd., Le Téléphone de St-Éphrem Inc., Le Téléphone de St-Liboire de Bagot Inc., London Telecom Network, Inc., Manitoba Keewatinowi Okimakanak Inc., Maritime Tel & Tel Limited (MTT), MetroNet Communications Group Inc., Microcell Telecommunications Inc., Mobility Canada, Mornington Communications Co-operative Limited, MTS Communications Inc. (MTS), NBI/Michael Sone Associates, NBTel Inc. (NBTel), Nelligan Power, NewTel Communications Inc. (NewTel), Nexicom Telecommunications Inc., Nexicom Telephones Inc., North Frontenac Telephone Company Limited, North Renfrew Telephone Co. Ltd., Northern Ontario Infrastructure Working Group/Wawatay Native Communications Society, Northern Telephone Limited (Northern), Northwestel Inc. (NWTel), O.N. Tel, Ontario Telephone Association, People's Telephone Company of Forest Ltd., Prince Rupert City Telephone (Prince Rupert), Quadro Communications Co-operative Inc., Québec-Téléphone, Rogers Cantel Inc., Roxborough Telephone Company Limited, RSL COM Canada Inc., SaskTel, Société d'administration des tarifs d'accès des télécommunicateurs, Sogetel inc., South Bruce Rural Telephone Company Limited, Tatlayoko Think Tank, Télébec Itée. (Télébec), Téléphone Guèvremont Inc., Téléphone Milot Inc., Telesat Canada, TELUS Communications Inc. (TCI), TELUS Communications (Edmonton) Inc., The Corporation of The City of Thunder Bay (Thunder Bay), The Federation of Alberta Gas Co-ops Ltd., Timiskaming-Cochrane Telecommunications Infrastructure Improvement Committee, Total North Communications Ltd., Tuckersmith Communications Co-operative Limited, Utilities Consumers' Group, Vidéotron Télécom Itée., Wall Communications Inc., Westport Telephone Company Limited, Wightman Telephone Limited, and Yukon Government.

Notes:

In final argument, Northern Ontario Infrastructure Working Group represented Wawatay Native Communications Society, originally an interested party, and Keewaytinook Okimakanak.

Keewatin Municipal Telephone System gave notice that it was represented by The Corporation of The City of Thunder Bay.

Appendix 3

Consideration of service improvement applications

Dissent by Commissioner Andrew Cardozo

While I am in accord with the majority in most parts of the decision, i.e. as it relates to telecommunications service to the far north, I dissent on how the Commission proposes to remedy the situation for those living in the rest of Canada.

General outlook

On a broad level, I look at this proceeding as being about "the last spikes in the telecommunications railroad". It is about how to get telecommunications services to the outlying areas which are served at a high cost. The completion of the railroad was about completing a national dream a little over a hundred years ago when the railroad across the country was considered a basic service which linked Canadians from east coast to west coast. Getting telecommunications services to all Canadians, or at least as many as reasonably possible in this day and age, is about providing this basic service.

Specific concerns

Consider the number of Canadians who are not adequately served. The number of under-served households in Northwestel territory (Nunavut, Northwest Territories, Yukon and the northern region of British Columbia) is 300 and unserved is 1,300. Once existing service improvement programs are complete, the number of underserved households in the rest of the country is expected to be approximately 7,400 (primarily in the area served by the Ontario independent companies) and the unserved number will be just over 11,000 (served by Ontario and Quebec independents and former Stentor member companies).

This decision sets a "basic service objective" (paragraph 24), with which I am in full agreement. It is both timely and realistic. Further, it notes that this objective is for companies serving the far north as well as those in southern Canada, and again I agree with this.

Where I depart from the majority is with regards to the means that we put in place, such that all Canadians can have access to this basic service objective in a reasonable amount of time. I am in agreement with the means that we set for the far north (paragraph 62), but would have preferred that the same means explicitly exist for southern Canadians, as a back-up to the mechanisms that we will have for southern companies (paragraph 38). In fact, I am in partial agreement with part of the decision that deals with southern Canada. While I agree with the direction to all incumbent local carriers to file service improvement plans as set out in paragraph 41, my concern is that the direction does not go the next step and clearly provide them access to supplementary funding if needed.

For the far north we are setting a reasonably high expectation for companies to fund improvements through means within their practices, and failing that they may have access to supplementary funding (the details to be addressed in a subsequent proceeding). We should have set a similar process in place for other companies making clear that a reasonably high burden of proof would have to be demonstrated by such companies. The Commission has a history of dealing with such funding mechanisms in a responsible and fair manner, and I would be confident that this would continue for assisting high-cost areas beyond the far north.

It is the lack of this clear back-up for southern companies that I am in disagreement with. In short, I am concerned that without the explicit availability of supplementary funding, where necessary, Canadians living in the south, sometimes in remote or northern regions of the provinces, may not have access to the same benefits.

Essence of national public policy

Since the basic service objective is a national objective, the mechanisms for its implementation should be accessible to all Canadians, regardless of which part of the country they reside in. That is what a national objective is. For me it is central to the meaning of national Canadian public policy. I believe that different mechanisms may be applicable for different regions, so long as it is reasonably certain that the end result for citizens will be the same. The lack of specified access to supplementary funding (or an alternate but equally effective mechanism) for the south leaves me unconvinced that the end result will be the same.

For these reasons I respectfully dissent from my colleagues on the panel.

Date modified:

1999-10-19