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Appendix 1 - Reference documents
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Appendix 2 - Additional details on the public proceeding
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Glossary
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Contribution rate. Charges applying to all long-distance service providers, including the Competitive segment of the incumbent company, for use of the local network to provide long-distance service. The contribution received by the company's Utility segment is used to subsidize basic local service rates.
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DRD (Depreciation reserve deficiency). A DRD occurs if the current estimated service life of a category of assets is less than that used to establish the previous years' depreciation expenses. As a result, the accumulated depreciation is lower than it would have been had the depreciation expenses been established on the basis of current estimated service life.
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Earnings regulation. The regulated telephone company is permitted to earn a reasonable return on its rate base. The Commission approves the rates that the telephone company must charge to achieve this rate of return.
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Going-in rates. Rates set by the Commission for residential or business services at the beginning of the price cap period.
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Local/access shortfall. Shortfall that occurs because the revenues for combined local and access services do not cover costs.
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Price cap regulation. Regulatory mechanism that caps the maximum price a telephone company can bill for a specific set of services. It focuses on prices rather than earnings. This type of regulation creates stronger incentives to improve productivity.
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Rate rebalancing. An increase in the price of local services in order to move service rates closer to their associated costs and to reduce the contribution rate by an equivalent amount.
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Rate restructuring. Change in the number of rate groups, accompanied by rate reductions or increases for some of these groups within the same category of services. The revenues generated after rate restructuring may not exceed those generated before rate restructuring.
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Split rate base. During the transition period, a company's rate base is split into two segments: the Utility segment and the Competitive segment. During this period, the Utility segment continues to be regulated on the basis of earnings while the Competitive segment ceases to be regulated on this basis.
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Transition period. Specific period marking the transition from one regulatory regime to another and during which some elements of earnings regulation are gradually replaced by others inherent in the implementation of price cap regulation. For the former Stentor member companies, this period began with the splitting of the rate base on 1 January 1995 and ended with the implementation of price cap regulation on 1 January 1998.
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Summary
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Both Québec-Téléphone and Télébec have proposed to increase their monthly residential local service rates by $3.00 for each of the years 2000, 2001 and 2002 in order to, among other things, bring these rates closer to costs and reduce their contribution rates. The Commission considers that a certain level of contribution must be maintained to ensure that local exchange rates in high-cost areas permit continuation of universality of access while minimizing distortion of the competitive market. The Commission notes that, to date, the evolution of long-distance competition in the territories served by the two companies demonstrates that a contribution rate higher than that of the former Stentor member companies have not prevented new competitors from entering the long-distance market. The Commission considers at this time that rate rebalancing will not be necessary in 2000 and 2001. However, in the price cap implementation proceeding, the Commission will re-examine these issues and will determine any requirement for rate rebalancing effective 1 January 2002.
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One of the Commission's specific objectives in this proceeding was to set the appropriate level of rate rebalancing required for 1 January 2000 and subsequent years. The Commission notes that, for purposes of rebalancing, all revenues generated by increases in local service rates should be directed towards reducing the contribution requirement by an equivalent amount. However, certain proposals are inconsistent with this principle: Québec-Téléphone's proposals to apply these rate increases to revenue losses associated with reductions in multiline business service rates and to the higher operating expenses associated with the DRD, and Télébec's proposal to apply these increases to rate restructuring. The Commission notes that Québec-Téléphone and Télébec are permitted to submit proposals concerning these initiatives.
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The Commission notes that it has already approved significant increases in local residential rates for Québec-Téléphone and Télébec in recent years. The Commission believes that certain initiatives could result in further rate increases for Québec-Téléphone and Télébec prior to the implementation of price cap regulation. In light of the above, the Commission considers it inappropriate to increase the local residential rates of Québec-Téléphone and Télébec at this time for the purpose of reducing the contribution requirement.
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The Commission considers that commencing price cap regulation on 1 January 2002 provides the flexibility required to introduce initiatives designed to smooth the transition of local services from the current earnings regulation to price cap regulation.
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This decision represents an equitable balance between the interests of consumers and those of the companies, and maintains a regulatory framework conducive to the entry of new competitors into the long-distance market.
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The Industry
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Interveners
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1. In this decision, the Commission uses the following terminology:
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. Independent telephone companies: These incumbent local exchange carriers were not part of the Stentor alliance (see former Stentor member companies). Some of these companies, including Québec-Téléphone and Télébec, provide long-distance service.
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Former Stentor member companies: Canada's major incumbent local exchange carriers formed an alliance referred to as "Stentor", which was disbanded in late 1998. This alliance included the federally regulated companies BC TEL, Bell Canada, Island Telecom Inc., Maritime Tel & Tel Limited, MTS Communications Inc., NBTel Inc., NewTel Communications Inc., and TELUS Communications Inc. Saskatchewan Telecommunications is also a former Stentor member company but is not currently subject to federal regulation.
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Québec-Téléphone and Télébec under federal regulation
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2. On 26 April 1994, pursuant to the decision of the Supreme Court of Canada in Attorney-General of Quebec et al. v. Téléphone Guèvremont inc., the independent telephone companies, including Québec-Téléphone and Télébec, were deemed subject to federal regulation. Until then they were under provincial jurisdiction, and the Commission essentially regulated only the major incumbent local telephone companies, i.e., those forming the Stentor alliance, with the exception of Saskatchewan Telecommunications.
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3. In the course of the transition from the provincial to the federal regime, the Commission held a proceeding in which it concluded in 1996 that the same basic regulatory framework applying to Stentor member companies, including price cap regulation, should apply to Québec-Téléphone and Télébec. This framework would eventually provide price cap regulation for the companies' Utility segments, but only after a transition period of earnings regulation.
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4. At that time, the Commission had already begun to apply a number of measures designed to move the Stentor member companies gradually from earnings regulation to price cap regulation. The Commission initially opened the long-distance market to competition in 1992, using a system of explicit subsidies known as contribution. Consumers in the territories of the Stentor member companies gradually began to benefit from the numerous advantages associated, in particular, with a greater choice of long-distance providers and a substantial decline in rates. On 1 January 1995, the Commission implemented a split rate base regime. The Commission considered that this transition period was necessary to establish the conditions conducive to the implementation of price cap regulation, and in particular to move local service rates closer to cost and reduce the contribution from long distance services to an appropriate level. The Commission also decided that, effective 1 January 1998, price cap regulation would replace earnings regulation for the Utility segment.
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5. As in the case of the former Stentor member companies, the Commission had to implement a number of initiatives before applying price cap regulation to Québec-Téléphone and Télébec. Thus, the long-distance market was first opened to competition in 1995. Next, the Commission approved implementation of a split rate base regime effective 1 January 1998 and the establishment of a transition period, prior to the implementation of price cap regulation. At that time, however, the duration of the transition period and consequently the time-frame for the implementation of price cap regulation was not determined due to a number of uncertainties relating to a review of the contribution regime of independent telephone companies in Ontario and Quebec. After the Commission published its decision relating to this proceeding in April 1999, the Commission initiated a public proceeding on the conditions under which Québec-Téléphone and Télébec would operate under the new regulatory regime.
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Purpose of the proceeding
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6. One of the primary purposes of the current proceeding was to establish the appropriate level of rate rebalancing required for 1 January 2000 and subsequent years. Another was to establish the time-frame for the implementation of price cap regulation for Québec-Téléphone and Télébec. In this proceeding, the Commission sought comments on a number of issues, including the target contribution rate required to establish the going-in rates for price cap regulation.
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Rate rebalancing
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7. Québec-Téléphone proposed to increase its monthly residential local service rates by $3.00 for each of the years 2000, 2001 and 2002. The company indicated that these increases would, among other things, enable it to bring local rates closer to costs and to achieve a contribution rate of $0.007 per minute per end, comparable to that of Bell Canada. Québec-Téléphone has also indicated that it would use part of these revenues to offset the losses associated with two of its proposals. The first involves the reductions applicable to its multiline business service beginning in 2000 and the second, the increase in its operating expenses to accelerate the depreciation of certain assets.
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8. Télébec also proposed to increase its monthly residential local service rates by $3.00 effective 1 January 2000. This increase combined with funds from the national fund would be used to reduce its contribution rate to $0.02 per minute per end. Should the Commission fail to establish a national fund, it would be forced to increase its monthly residential local rates by $3.00 for each of the years 2001 and 2002. Finally, Télébec has noted that it also intends to use part of these revenues for rate restructuring.
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9. The Commission notes that the proposed rate increases of Québec-Téléphone and Télébec were to be applied not only to rate rebalancing, but also to financing other initiatives, such as reductions for multiline business service rates, rate restructuring and accelerated depreciation of certain assets. The Commission notes that any rate rebalancing must be revenue-neutral for the telephone company and must be applied solely to reducing the contribution requirement by an equivalent amount. Consequently, the amounts required to subsidize the other initiatives proposed by Québec-Téléphone and Télébec should not be drawn from the revenues generated by rate rebalancing, but should be subject to a separate examination, as indicated in the subsequent sections of the decision.
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10. The Commission finds that it is not appropriate at this time to introduce rate rebalancing in 2000 and 2001. The Commission considers that a certain level of contribution must be maintained to ensure that local exchange rates in high-cost areas permit continuation of universality of access while minimizing distortion of the competitive market. However, in the price cap implementation proceeding, the Commission will re-examine the situation of the two companies and their market and determine any requirement for rate rebalancing effective 1 January 2002.
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11. The Commission notes that it has already approved substantial increases in local residential rates for Québec-Téléphone and Télébec in recent years. The Commission considers that the subscribers of Québec-Téléphone and Télébec have already contributed significantly to the reduction of the companies' contribution requirements.
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12. However, the Commission considers that a number of factors could result in further rate increases for Québec-Téléphone and Télébec. For example, the Commission notes that Québec-Téléphone has indicated that it will require additional revenues to recover its depreciation reserve deficiency (DRD), as indicated later in this decision. In addition, both companies may require additional revenues to extend or improve their service and to achieve the basic service objectives established by the Commission in Decision 99-16. In light of the above, the Commission considers it inappropriate to increase the local residential rates of Québec-Téléphone and Télébec at this time for rate rebalancing purposes.
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13. The Commission notes that its decision not to approve rate increases for Québec-Téléphone and Télébec for the purpose of reducing their contribution rates does not preclude the companies from proposing rate increases over the remainder of the transition period. Québec-Téléphone and Télébec are permitted to apply to increase their rates if the companies consider that they will not have the opportunity to achieve a reasonable rate of return on the Utility segment. If the companies do apply, the Commission will review their applications in a revenue requirement proceeding, including a full examination of their financial projections.
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Rate restructuring
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14. Québec-Téléphone proposed to offset the shortfall resulting from the planned reductions for its multiline business service rates by increasing its basic residential local service rates. Télébec has not ruled out a similar approach. In addition, Télébec announced that it intends to carry out a restructuring of its basic local service rates in 2000.
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15. The Commission notes that the rate restructurings it approved for other telephone companies in the past did not permit them to offset revenue shortfalls resulting from rate reductions for business services by increases for other services, such as the basic residential service. The Commission has always ensured that rate restructuring proposals are revenue neutral, i.e., that they result in no increase or reduction in revenues for one service at the expense of another. It should be noted that some companies have compensated for revenue shortfalls associated with rate restructuring through the gains generated by improved efficiency.
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16. The Commission determines that the revenue shortfalls associated with rate reductions for business services and rate restructuring are to be excluded in determining the level of rate rebalancing required prior to implementation of price cap regulation. The Commission notes that during the remainder of the transition period, Québec-Téléphone and Télébec are permitted to submit rate restructuring applications in accordance with the Commission practices noted above.
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Depreciation reserve deficiency
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17. In its rate rebalancing proposal, Québec-Téléphone estimated its DRD at approximately $59 million as of 31 December 1999. The company indicated that recovery of this deficiency over the remaining average service life of the assets and the accelerated depreciation rates resulting from shorter service lives would increase its operating expenses by approximately $8.5 million, beginning in 2000.
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18. Télébec indicated that it anticipated a depreciation reserve deficiency during the transition period but that it could not, at the present time, estimate the deficiency as of 1 January 2000.
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19. The Commission notes that one of the objectives of this proceeding is to set the level of rate rebalancing required to move rates closer to costs and to reduce the contribution rate by an equivalent amount to bring it to an appropriate level prior to the implementation of price cap regulation. The Commission notes that a review of the revenues required to make up for any other increases in expenditures or reduction in revenues is not part of this proceeding.
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20. The Commission therefore considers that Québec-Téléphone's expenses associated with the DRD should be excluded when determining the appropriate level of rate rebalancing prior to the implementation of price cap regulation.
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21. The Commission considers, however, that during the period of the split rate base regime, Québec-Téléphone and Télébec may, in accordance with the Phase I directives, apply to change their depreciation life characteristics. However, any application to significantly accelerate depreciation expenses should entail a full review of the impact on rates including contribution rates, as stipulated in Decision 97-21. The Commission also considers that this review should include a full examination of the companies' financial projections.
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Target contribution rate
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22. The Commission notes that the target contribution rates proposed by Québec-Téléphone and Télébec for the implementation of price cap regulation essentially reflect the contribution level established for the former Stentor member companies.
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23. The Commission notes that there is a close relationship between the contribution rate and rate rebalancing. All revenues generated by increasing local residential service rates should be directed toward reducing the contribution rate. However, the two companies proposed to use some of these increases to offset the revenue losses associated with the reductions in their multiline business rates, the DRD and rate restructuring, over the remainder of the transition period.
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24. The Commission considers that the companies could mitigate the cost of their proposals by being more efficient and increasing revenues from other sources. The Commission notes that, to date, the evolution of long-distance competition in the territories served by the two companies demonstrates that a contribution rate higher than that of the former Stentor member companies have not prevented new competitors from entering the long-distance market.
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25. In light of the foregoing, the Commission finds that it is not appropriate at this time to introduce rate rebalancing in 2000 and 2001. The Commission considers that a certain level of contribution must be maintained to ensure that local exchange rates in high-cost areas permit continuation of universal access while minimizing distortion of the competitive market. However, in the price cap implementation proceeding, the Commission will examine any rate rebalancing that may be necessary effective 1 January 2002. The Commission will also review a number of issues which, after 1 January 2002, could have a considerable impact on the rates applicable to the Utility segment, including accelerated depreciation expenses, plans for improved services and an adequate contribution rate.
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Transition period prior to implementation of price cap regulation
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26. Québec-Téléphone and Télébec both proposed the commencement of price cap regulation on 1 January 2002. Both companies consider this time-frame necessary to achieve the objectives described in greater detail in other sections of this decision. These objectives include rate rebalancing, rate restructuring, and rate reduction programs, as well as other initiatives.
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27. In the Commission's view, a transition period extending for another two years and an effective date of 1 January 2002 for price cap regulation are appropriate for Québec-Téléphone and Télébec. This provides the flexibility required to introduce initiatives designed to smooth the transition of local services from the current earnings regulation to price cap regulation.
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28. The Commission will hold a proceeding to consider the conditions necessary for the implementation of price cap regulation. This will be the last stage in the rebalancing of local rates to bring the rates for residential services closer to cost and to reduce contribution rates proportionally to an appropriate level effective 1 January 2002.
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Conduct of the proceeding and its participants
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29. To examine the questions relating to the time-frame for the implementation of price cap regulation and any further required rate rebalancing for Québec-Téléphone and Télébec, the Commission issued Public Notice 99-15 on 27 May 1999. The proposals submitted by the two companies drew a number of comments that were made part of the public record and to which Québec-Téléphone and Télébec were able to respond. Further details on the public consultation are included in appendix 2.
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30. Before reaching its conclusions in this decision, the Commission carefully considered all the submissions filed in this proceeding.
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The Commission thanks all those who participated in the proceeding.
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Secretary General
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This document is available in alternate format upon request and may also be viewed at the following Internet site: www.crtc.gc.ca
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Appendix 1
Reference documents
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Public Notices
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Telecom Public Notice CRTC 97-41, 18 December 1997, Review of the Contribution Regime of Independent Telephone Companies in Ontario and Quebec
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Telecom Public Notice CRTC 97-42, 18 December 1997, Service to High-Cost Serving Areas
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Telecom Public Notice CRTC 98-5, 6 March 1998, Service to High-Cost Serving Areas - Amendment to PN 97-42
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Telecom Public Notice CRTC 98-18, 30 July 1998, Service to High-Cost Serving Areas - Amendment to the Procedures in PN 97-42
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Telecom Public Notice CRTC 99-6, 1 March 1999, Review of Contribution Collection Mechanism and Related Issues
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Telecom Public Notice CRTC 99-15, 27 May 1999, Time-Frame for the Implementation of Price Cap Regulation and Any Further Required Rate Rebalancing for Québec-Téléphone and Télébec ltée
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Decisions
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Telecom Decision CRTC 94-19, 16 September 1994, Review of Regulatory Framework
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Telecom Decision CRTC 95-21, 31 October 1995, Implementation of Regulatory Framework - Splitting of the Rate Base and Related Issues
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Telecom Decision CRTC 96-5, 7 August 1996, Regulatory Framework for Québec-Téléphone and Télébec ltée
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Telecom Decision CRTC 96-6, 7 August 1996, Regulatory Framework for the Independent Telephone Companies in Quebec and Ontario (except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec ltée)
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Telecom Decision CRTC 97-8, 1 May 1997, Local Competition
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Telecom Decision CRTC 97-9, 1 May 1997, Price Cap Regulation and Related Issues
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Telecom Decision CRTC 97-21, 18 December 1997, Implementation of Regulatory Framework for Québec-Téléphone and Télébec ltée
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Telecom Decision CRTC 98-2, 5 March 1998, Implementation of Price Cap Regulation and Related Issues
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Telecom Decision CRTC 99-5, 21 April 1999, Review of Contribution Regime of Independent Telephone Companies in Ontario and Quebec
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Telecom Decision CRTC 99-16, 19 October 1999, Telephone Service to High-Cost Serving Areas
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Order
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Telecom Order CRTC 95-558 - 11 May 1995
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Appendix 2
Additional details on the public proceeding
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Subscribers
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A number of observations were received from subscribers. In the case of Québec-Téléphone, 116 written observations were made part of the public record, including petitions bearing a total of 28,688 signatures. In the case of Télébec, 584 written observations were made part of the public record, including petitions bearing a total of 41 signatures.
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Interested Parties
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The following parties registered as interested parties or were designated as parties to the proceeding: Action Réseau Consommateur; Association des Compagnies de Téléphone du Québec inc. (ACTQ); AT&T Canada Corp.; BC TEL, Bell Canada; Call-Net Enterprises Inc.; Christian S. Tacit c/o Nelligan Power; Cogeco Cable Canada Inc.; Government of Quebec; Industry Canada; NewTel Communications Inc.; Northern Telephone Limited; Québec-Téléphone; Ontario Telephone Association; SaskTel; Société d'administration des tarifs d'accès des télécommunicateurs (SATAT); Télébec ltée; and The Corporation of The City of Thunder Bay. Some filed observations and arguments.
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