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Telecom Decision CRTC 99-20

Ottawa, 15 December 1999
Review of frozen contribution rate policy
File No.: 8692-C12-01/99
Table of contents Paragraph
Summary
The industry players 1
Acronyms and definitions used in this proceeding 2
Background 3
Level of contribution revenues 9
Ability to meet price cap obligations 25
Direct access lines (DALs) and wireless service provider (WSPs) surcharges 30
Participants in this frozen contribution proceeding 35
Appendix 1 - NBTel 1999 contribution calculation effective 1 June 1999
Appendix 2 - Calculation of contribution effective 1 January 2000
Appendix 3 - Reference documents
Appendix 4 - Parties filing submissions
Summary
The CRTC has concluded that long distance traffic increases resulting from flat-rate calling plans are not sufficient to "unfreeze" and reduce contribution charges that service providers must pay to defray the cost of basic local service.
Contribution charges were established by the CRTC in 1992 and have significantly decreased in subsequent years. Long distance service providers are currently required to pay a per-minute charge to a central fund administrator. The funds are divided among local service providers as a subsidy to ensure all consumers have access to local service at affordable rates. In 1998, the contribution rates were frozen for four years to sustain the local subsidy.
Call-Net Enterprises and AT&T Canada asked the CRTC to lower contribution rates because they believed significantly more contribution was being collected than required.
Contribution is paid to local service providers on most long distance minutes. The flat-rate calling plans first introduced by some alternate long distance companies a year ago resulted in a sudden increase in long distance minutes.
The CRTC's conclusions that contribution charges are not excessive are primarily based on the following:
1. Claims were overstated regarding significant growth in minutes immediately following the introduction of flat-rate calling.
2. The initial growth rates have not been sustained and will not likely be sustained in the future.
3. The increase in minutes does not result in a proportionate increase in revenues because most new minutes occurred during off-peak hours when contribution rates are lowest.
4. Changes to the international contribution regime result in reduced contribution revenues from international calls.
Meanwhile, the CRTC is reviewing the current per-minute contribution collection mechanism in a separate proceeding. It will also be looking at the amount of contribution required to support local service in the upcoming price cap review proceeding.
However, the CRTC has decided that the telephone companies may propose reductions in their contribution rates in special cases where they cannot otherwise adhere to their price cap obligations.
Effective January 1, 2000, this decision also revises the contribution surcharges for alternative long distance companies that use direct access lines to connect their customers directly to their own switches. In addition, the CRTC has adjusted the surcharges for wireless service providers, effective that same date.
The industry players
1. In this decision, the Commission uses the following terminology:
. Incumbent local exchange carriers (ILECs or incumbent local carriers) 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) are new competitors in a market for local telephone service.
. Alternate providers of long distance service (APLDS) are competitors in the market for long distance service.
. Bell et al includes Bell Canada (Bell), MTS Communications Inc. (MTS), NBTel Inc. (NBTel), NewTel Communications Inc. (NewTel), Island Telecom Inc. (Island Tel) and Maritime Tel &Tel Limited (MTT).
. Wireless service providers (WSPs) provide cellular telecommunications services.
. Former Stentor-member companies refers to Canada's major incumbent local exchange carriers which formed an alliance referred to as "Stentor" that was disbanded in late 1998. This alliance included the federally-regulated companies BC TEL, Bell, Island Tel, MTT, MTS, NBTel, NewTel and TELUS Communications Inc. (TCI). Saskatchewan Telecommunications is a former Stentor company but this decision does not apply to it as it is not federally regulated at this time.
. ARC et al refers to the consumer groups Action Réseau Consommateur, the Consumers' Association of Canada, and the National Anti-Poverty Organization.
Acronyms and definitions used in this proceeding
2. The following terms are used in this proceeding:
. Central Fund Administrator (CFA) refers to the third-party central fund administrator designated pursuant to the Telecommunications Act to administer contribution reported to the central funds.
. Direct access lines (DALs) are lines, from an end-user directly connected to an APLDS' switch, on which contribution eligible minutes cannot be measured.
. Price Cap Index is an index which specifies the maximum allowable value of the aggregate price level of rates for all capped services.
Background
3. The Commission established toll contribution charges by ILEC territory in 1992 to ensure an adequate subsidy source for basic local service at affordable rates. Prior to the implementation of price caps in 1998, the Commission implemented a program of rate rebalancing to bring basic local rates closer to costs, among other things. Contribution charges have significantly decreased since 1992 and are currently in the range of $0.005 to $0.0212 per minute across the ILECs' territories. In 1992, the equivalent contribution rates ranged from $0.0671 to $0.1065.
4. As part of the overall price cap regime, the Commission froze the level of contribution rates for four years because it would: (a) provide an adequate subsidy source to maintain affordable basic service for all customers; (b) eliminate the requirement for annual proceedings to set contribution rates; and (c) provide more certainty to competitive suppliers concerning the cost of toll contribution.
5. The frozen contribution rate policy, along with certain pricing constraints and the productivity offset, forms the backbone of the price cap regime that was put into place for a four-year period beginning 1 January 1998. The industry-wide 4.5% productivity offset established in Telecom Decision 97-9 recognizes historical growth in toll minutes over the price cap period.
6. In November 1998, applications were filed with the Commission, from AT&T Canada Corp. (AT&T Canada) and from Call-Net Enterprises Inc. (Call-Net), requesting that the Commission unfreeze and reduce contribution rates because of an unprecedented growth in minutes resulting from the introduction of flat-rate calling plans. It was argued that the frozen contribution rates and the unprecedented growth would result in excessive toll contribution revenues being collected by the former Stentor-member companies. In their respective applications, the companies also requested that the contribution rates be made interim, effective 1 January 1999.
7. The Commission made contribution rates interim, effective 1 January 1999, and initiated two proceedings (Telecom Public Notice 99-5) to review the frozen contribution rate policy and (Telecom Public Notice 99-6) to determine whether the current contribution collection mechanism should be modified in the longer term.
8. A key issue in the present proceeding is whether, over the remaining price cap period from 1999 to 2001, contribution revenues resulting from growth in toll minutes have been or are expected to be significantly in excess of what could reasonably have been anticipated at the time of Telecom Decision 98-2 in light of determinations made in Telecom Decisions 97-8 and 97-9 and if so, what remedy or remedies would be appropriate. Another issue in the present proceeding is whether it would be appropriate to lift the freeze on contribution rates and/or adjust consumer rates in order to allow a company to meet its price cap obligations in situations where rate reductions for capped services are inappropriate.
Level of contribution revenues
9. APLDS claimed that the introduction of flat-rate calling plans in 1998 led to a dramatic jump in the level of contribution-eligible minutes over what could reasonably have been envisaged at the time of Telecom Decision 98-2. Call-Net, for example, submitted that total quarter-over-quarter growth for all ILECs collectively for the third quarter of 1998 was 21.9%. APLDS argued, among other things, that the incumbent telephone companies would be able to use the excess revenues resulting from flat-rate calling plans against their competitors, thereby effectively funding the incumbents' strategy to retain market share.
10. The ILECs submitted that the contribution revenues based on their current forecasts are not expected to materially exceed their estimates of the level of revenues that would have been expected at the time of implementing the frozen contribution policy in Telecom Decision 98-2.
11. In assessing whether or not there are, or will be, excess contribution revenues, the Commission has taken into consideration: (a) the level of contribution revenues that would have been expected at the time of Telecom Decision 98-2; and (b) actual/estimated contribution minutes and revenues for the period 1999 to 2001, taking into account the impacts of Telecom Decision 98-17, among other things.
12. With respect to the amount of contribution revenues that could reasonably have been expected at the time of Telecom Decision 98-2, the Commission considered the ILEC-specific minute growth rates that were used to set the contribution rates in that decision. The Commission notes that the annual growth in minutes over the period 1993 to 1996 averaged 9% on a total ILEC basis. In the Commission's view, there would have been no reason to expect that annual growth in minutes would deviate significantly from that achieved in the past. Based on the historical growth patterns and the current contribution rate levels, the Commission would have expected contribution revenues over the remaining price cap period to be approximately $2.43 billion on a total ILEC basis.
13. With respect to the current estimate of contribution minutes for the period from 1999 to 2001, the Commission took into account the 1999 year-to-date actual conversation minutes reported by the CFA. The Commission also considered the reasonableness of the forecasts submitted by parties in this proceeding, among other things.
14. The Commission notes that some parties advocating unfreezing contribution rates suggested there was phenomenal growth in long distance minutes from flat-rate calling plans in the third quarter of 1998 and that this growth would be sustained in 1999 and beyond.
15. The Commission finds that the claims were overstated regarding significant growth in minutes following the introduction of flat-rate calling. For example, the total conversation minutes reported by the CFA for the third quarter of 1998 reflect a 7.4% growth over the second quarter of 1998, and not 21.9% as submitted by Call-Net.
16. Moreover, the Commission finds that initial growth rates have not been sustained and will not likely be sustained in the future. In this respect, the Commission notes that, based on CFA reports, the quarterly growth started to level off in 1999. The conversation minutes in the first quarter of 1999 were 4.0% higher than in the fourth quarter of 1998. The second quarter 1999 minutes declined by 2.4% compared to the first quarter. Recently-available CFA reports for the third quarter indicate that conversation minutes increased by 2.1%. The Commission notes that quarterly growth is returning to historical levels.
17. The Commission also notes that the increase in minutes from flat-rate calling plans has not resulted in a proportionate increase in contribution revenues. This is because most new minutes occurred during off-peak hours when the contribution rates payable are half of that payable on peak minutes.
18. Based on the above and on the international contribution regime that was in place prior to Decision 98-17, the Commission estimates that contribution revenues would be approximately $2.56 billion on a total ILEC basis over the period 1999 to 2001. This would be approximately 5% higher than the $2.43 billion level that could have been expected at the time of Decision 98-2.
19. However, this estimate does not factor in the impacts of the changes to the international contribution regime made after Decision 98-2. First of all, as a result of Decision 98-17, the contribution rate applicable to the international end of a call is now the rate in effect at the physical location of the cross-border facility or international gateway switch. Further, in a separate decision issued today, the Commission determined that, effective 1 January 2000, the contribution rates for each ILEC territory will be set at the Bell contribution rates for the international end of a call. The Commission notes that Bell's contribution rates are much lower than those applicable in other ILEC territories.
20. Accordingly, the Commission expects that contribution revenues from international traffic for the period 1999 to 2001 will be less than the levels expected at the time of Decision 98-2. Therefore, the Commission estimates that the contribution revenues over the remaining price cap period, adjusted to reflect the reduced contribution rates applicable to international minutes, would be approximately $2.45 billion. This is approximately 1% over the level that would have been expected at the time of Telecom Decision 98-2.
21. Based on the above, the Commission finds that, over the remaining price cap period, contribution revenues will not be significantly in excess of what could reasonably have been anticipated at the time of Telecom Decision 98-2. This finding takes into account the materiality of any differences in the level of contribution revenues now expected to be realized on both a total ILEC basis and by individual ILEC territory.
22. The Commission considers that deviations would have to be of a material nature and impact unfavourably on the competitive environment in order to substantiate changing any of the price cap parameters at this point in time. In light of the above, the Commission considers it important to maintain the fundamental principles of the price cap regime. Therefore, the Commission concludes that there is no need to adjust domestic contribution rates.
23. The Commission is reviewing the current contribution collection mechanism, including examining alternative collection mechanisms, as noted in Telecom Public Notice 99-6. It will allow the Commission to consider whether the current per-minute mechanism remains an appropriate contribution collection mechanism. The Commission also notes that the contribution requirement and the current price cap regime, will be re-examined at the end of the price cap period.
24. Accordingly, the Commission makes the interim contribution rates final, effective 1 January 1999. ILECs and CLECs are to issue forthwith tariff pages to reflect final contribution rates effective on that date. NBTel's contribution rate is revised effective 1 June 1999, as discussed in paragraph 30. As noted earlier, as a result of a separate decision issued today, the contribution rate applicable to the international end of a call will be modified effective 1 January 2000.
Ability to meet price cap obligations
25. In this proceeding, the Commission also considered the appropriateness and applicability of: (a) lifting the freeze on contribution rates for telephone companies subject to price cap regulation, to allow reductions in those rates; or (b) adjusting consumer rates, or a combination of consumer and contribution rates, by the amounts necessary to meet price cap obligations over and above the amounts that can be absorbed through reductions in rates for capped services.
26. Both the ILECs and the APLDS generally agree it would be appropriate to lift the freeze on contribution rates for the telephone companies subject to price cap regulation, and to allow reductions in those rates by the amount necessary to meet price cap obligations over and above the amounts that can be absorbed through reductions in rates for capped services. Regarding the appropriateness and applicability of any adjustment to consumer rates for the purpose of meeting price cap obligations, the Commission notes that all parties who submitted comments on this matter, other than ARC et al, were opposed to such a solution. In Telecom Decision 97-9, the Commission determined that price changes for services that are currently priced below cost should generally not move rates further from costs. The Commission stated that this was consistent with its policies relating to anti-competitive pricing.
27. In Order 99-494, the Commission also determined that it would not require a company to file, for a service, a rate reduction below its Phase II (incremental) costs plus a mark-up of 25% in order to meet its price cap obligations. The Commission considers that it would be inconsistent with this order to require any reductions to consumer rates that are below their price floor. Further, based on the record of this proceeding, the Commission is not persuaded that it would be appropriate to reduce or adjust consumer rates or charges that are below Phase II cost plus 25% to meet price cap obligations.
28. Therefore, a telephone company should be permitted to meet its price cap obligations through reductions to the contribution rate, if no reductions to rates for its capped services are appropriate. In these circumstances, the Commission will require a telephone company to clearly demonstrate that rates for capped services should not be reduced as part of the price cap filing on 31 March each year.
29. With respect to the implementation of contribution rate reductions within the existing price cap structures, the Commission considers that contribution revenues should remain outside the basket of capped services. The Commission notes that an adjustment to the Price Cap Index is required to reflect the revenue impact associated with the amount of the price cap obligation that would be met through reductions to the contribution rate. To calculate the required contribution rate adjustment, the remainder of a telephone company's price cap obligation not achieved through reductions to its capped services in a year would be divided by the contribution revenues for the previous year, to yield the percentage by which the company's contribution rates would need to be reduced. The Commission notes that once contribution rates have been reduced, it expected that these rates would not later be increased, absent very special circumstances.
30. In Order 99-497, the Commission found that NBTel could not meet all of its price cap obligations for 1999 through reductions to its capped services. It ordered NBTel to place the remaining $1.66 million in a deferral account until a decision was issued in this proceeding. The Commission notes that the $1.66 million is an annualized amount and was determined based on the rate reductions required as of 1 May 1999. Since Order 99-497 came into effect on 1 June 1999, the Commission finds it appropriate that NBTel be permitted to apply $1.52 million (i.e., 11/12th of $1.66 million) of the deferral account to reduce its contribution rates. Accordingly, the Commission directs NBTel to eliminate the $1.66 million currently in the deferral account and to apply $1.52 million to reduce its contribution rates, effective 1 June 1999, as described previously in this decision.
31. NBTel is to issue forthwith final tariff pages to reflect the reduction in contribution rates and wireless service providers' surcharges as set out in Appendix 1. CLECs in NBTel territory are also to issue forthwith revised tariff pages, effective 1 June 1999, to reflect these changes. NBTel and CLECs operating in the province of New Brunswick are to: (a) make the necessary billing adjustments to amounts already billed as expeditiously as possible; and (b) report the corresponding billing adjustments to the CFA.
Direct access lines (DALs) and wireless service provider (WSPs) surcharges
32. In Telecom Decision 99-9, the Commission stated that it would establish, in this proceeding, ILEC-territory specific contribution surcharges to come into effect 1 January 2000 based on final 1998 traffic data filed in this proceeding and that the base contribution rates would be adjusted accordingly as of the same date. Appendix 2 reflects the 1 January 2000 contribution rates. The contribution surcharges applicable to APLDS as compensation for traffic carried over DALs are reflected in Appendix 2.
33. The Commission notes that changes to the per-minute base contribution rates also necessitates changes to the WSP surcharges. The following surcharges by ILEC territory become effective 1 January 2000.
BC TEL
Bell
Island Tel
MTS
MTT
NBTel
NewTel
TCI 		$23.23
$ 6.35
$ 6.60
$ 9.27
$11.27
$17.14
$19.56
$35.39
34. All carriers providing local exchange service are directed to issue forthwith amended tariffs, effective 1 January 2000, reflecting changes to contribution rates and WSP surcharges resulting from changes in the DAL loading factors.
Participants in this frozen contribution proceeding
35. AT&T Canada Long Distance Services Company (now AT&T Canada Corp.), ACC TelEnterprises, (now AT&T Canada Corp.) Call-Net Enterprises Inc., London Telecom Network Inc., Westel Telecommunications Inc. (now RSL COM Canada Inc.) BC TEL (now TELUS Communications (B.C.) Inc.), Bell Canada, Island Telecom Inc., Maritime Tel & Tel Limited, MTS Communications Inc., NBTel Inc., NewTel Communications Inc. Telus Communications Inc., Metronet Communications Group Inc. (now AT&T Canada Corp.) and Vidéotron Télécom ltée were made parties to this proceeding.
The Commission received written submissions that were subject to interrogatories by interested parties and the Commission. The Commission also received written final and reply arguments. (Further details of the public process are included in Appendix 4).
In arriving at its determinations set out in this decision, the Commission has considered all submissions as part of this proceeding. The Commission wishes to thank the parties and all those who participated in the proceeding.
Secretary General
This document is available in alternative format upon request and may also be viewed at the following Internet site: www.crtc.gc.ca

Appendix 1
NBTel 1999 contribution calculation
effective 1 June 1999

Contribution requirement ($M)
1. a) Going-in contribution requirement 25.5
b) Adjustment to meet price cap commitment 1.5
c) WSP surcharge 0.3
d) Revised contribution requirement (L1a - L1b - L1c) 23.7
Toll minutes calculation (millions)
2. a) Telco orig. & term. minutes peak 838
b) Telco orig. & term. minutes off-peak 917
3. a) Entrant minutes peak 94
b) Entrant minutes off-peak 126
4. a) Market orig. & term. minutes peak (L2a + L3a) 933
b) Market orig. & term. minutes off-peak (L2b + L3b) 1,043
c) Total market orig. & term. minutes (L4a + L4b) 1,975
Contribution rates (without DAL surcharge)
5. a) Average contribution per-minute per end ($) (L1d / L4c) 0.0120
b) Peak contribution per min. per end ($) (2 x L5c) 0.0163
c) Off-peak contribution per min. per en d($) (L5a / (2 - (L4b / L4c))) 0.0081
Contribution rates (including DAL surcharge)
6. DAL surcharge 1.02
7. a) Average contribution per minute per end ($) (L5a x L6) 0.0122
b) Peak contribution per min. per end ($) (L5b x L6) 0.0166
c) Off-peak contribution per min. per end ($) (L5c x L6) 0.0083
8. WSP per-circuit surcharge $17.35
(Some figures may not calculate due to rounding)
Going-in contribution requirement and contribution-eligible minutes as determined in Decision 98-2.

 

Calculation of contribution effective 1 January 2000
BC TEL Bell Island
Tel 		MTS MTT NBTel NewTel TCI
Contribution requirement ($M)
1. a) Contribution requirement 179.9 191.0 5.6 24.9 35.0 24.0 19.9 152.1
b) WSP surcharge 2.4 2.2 0.0 0.3 0.3 0.3 0.1 3.1
c) Revised contribution requirement (L1a - L1b) 177.4 188.8 5.6 24.6 34.7 23.7 19.8 148.9
Toll minutes calculation (millions of minutes except L3c)
2. a) Telco orig. & term. minutes peak 2,616 11,589 99 804 622 838 309 2,079
b) Telco orig. & term. minutes off-peak 3,901 13,813 139 988 836 917 510 2,877
3. a) Entrant minutes peak 1,496 6,111 21 221 146 94 94 1,060
b) Entrant minutes off-peak / Minutes des nouveaux venus en période hors pointe 1,250 5,657 25 219 180 126 101 1,009
c) DAL loading factor 1.1253 1.1422 1.0866 1.1132 1.1173 1.1154 1.1179 1.1279
d) Entrant contribution-eligible minutes peak (L3a x L3c) 1,684 6,980 23 246 163 105 105 1,195
e) Entrant contribution-eligible minutes off-peak (L3b x L3c) 1,407 6,462 27 244 202 140 113 1,138
4. a) Market orig. & term. minutes peak (L2a + L3d) 4,300 18,569 122 1,050 785 944 414 3,274
b) Market orig. & term. minutes off-peak (L2b + L3e) 5,308 20,275 166 1,232 1,038 1,057 623 4,015
c) Total market orig. & term. minutes (L4a + L4b) 9,607 38,844 288 2,282 1,823 2,001 1,037 7,289
Contribution rates (without DAL surcharge)
5. a) Average contribution per minute per end ($) (L1c / L4c) 0.0185 0.0049 0.0193 0.0108 0.0191 0.0118 0.0191 0.0204
b) Peak contribution per min. per end ($) (2 x L5c) 0.0255 0.0066 0.0272 0.0148 0.0266 0.0161 0.0273 0.0282
c) Off-peak contribution per min. per end ($) (L5a / (2 - (L4b / L4c))) 0.0128 0.0033 0.0136 0.0074 0.0133 0.0080 0.0136 0.0141
Contribution rates (including DAL surcharge)
6. DAL surcharge 1.1253 1.1422 1.0866 1.1132 1.1173 1.1154 1.1179 1.1279
7. a) Average contribution per minute per end ($) (L5a x L6) 0.0208 0.0056 0.0210 0.0120 0.0213 0.0132 0.0213 0.0230
b) Peak contribution per min. per end ($) (L5b x L6) 0.0287 0.0075 0.0295 0.0165 0.0298 0.0179 0.0305 0.0318
c) Off-peak contribution per min. per end ($) (L5c x L6) 0.0144 0.0038 0.0148 0.0082 0.0149 0.0090 0.0153 0.0159

Some figures may not calculate due to rounding

Appendix 3
Reference documents

Public notices
Telecom Public Notice CRTC 99-5, Proceeding to Review Frozen Contribution Rate Policy, 2 February 1999 and Erratum 99-5-1, 11 February 1999.
Telecom Public Notice CRTC 99-6, Review of Contribution Collection Mechanism and Related Issues, 1 March 1999.
Decisions
Telecom Decision CRTC 97-8, Local Competition, 1 May 1997.
Telecom Decision CRTC 97-9, Price Cap Regulation and Related Issues, 1 May 1997.
Telecom Decision CRTC 98-2, Implementation of Price Cap Regulation and Related Issues, 5 March 1998.
Telecom Decision CRTC 98-17, Regulatory Regime for the Provision of International Telecommunications Services, 1 October 1998.
Telecom Decision CRTC 99-1, TELUS Communications (Edmonton) Inc. - Implementation of Price Cap Regulation And Related Issues, 18 February 1999.
Telecom Decision CRTC 99-3, NBTel Inc. - Application to Review and Vary Telecom Order CRTC 98-468 and Telecom Decisions CRTC 97-9 and 98-2, 5 March 1999.
Telecom Decision CRTC 99-9, Contribution on Traffic Carried by Alternate Providers of Long Distance Services Over Direct Lines, 20 July 1999.
Orders
Telecom Order CRTC 99-494, Pricing Policy for Services Subject to Price Caps, 1 June 1999.
Telecom Order CRTC 99-497, On 29 March 1999, NBTel Inc. (NBTel) filed an application pursuant to Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, 1 May 1997 (Decision 97-9), 1 June 1999.
Others
Commission letter dated 5 March 1998 with respect to: Application to Review and Vary Parts of Telecom Decisions CRTC 97-8 and 97-9 Related to the Freezing of the Contribution Rates Over the Price Cap Period.
Commission letters dated 21 December 1998 with respect to:
(a) AT&T Canada Long Distance Services Company (AT&T Canada LDS) Application, dated 27 November 1998, to Review and Vary Local Competition, Telecom Decision 97-8, 1 May 1997 (Decision 97-8), Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, 1 May 1997 (Decision 97-9) and the Commission's Decision in its letter of 5 March 1998 Relating to the Freezing of Contribution Rates over the Initial Price Cap Period; and
(b) Call-Net Enterprises Inc., on behalf of itself and Sprint Canada Inc. (Call-Net), Part VII Application, dated 30 November 1998, to Modify the Current Contribution Regime.
Commission letter dated 15 December 1999 with respect to TELUS Communications (B.C.) Inc. and TELUS Communications Inc. Part VII Application to modify the international contribution regime to introduce a single blended contribution rate for Canada.

Appendix 4

Interested parties
The following parties filed submissions, interrogatories, comments, and/or reply comments: Bell Canada, Island Telecom Inc., Maritime Tel & Tel Limited, MTS Communications Inc., NBTel Inc., and NewTel Communications Inc., TELUS Communications (B.C.) Inc., AT&T Canada Corp., Call-Net Enterprises Inc., Cogeco Cable Inc., London Telecom Network Inc., Rogers Cantel Inc., RSL COM Canada Inc., Teleglobe Canada, Vidéotron Télécom ltée., Fundy Cable Ltd., Action Réseau Consommateur, the Consumers' Association of Canada, and the National Anti-Poverty Organization. In addition, Metronet Communications and ACC TelEnterprises participated individually in the proceeding before being amalgamated in AT&T Canada Corp.
Dissenting opinion of Commissioners Barbara Cram and David McKendry
We dissent from the majority of Commissioners' (the majority) decision that telephone companies can reduce their contribution rates under certain circumstances in order to implement the annual productivity offset required by price cap regulation.
We dissent because the majority is altering the allocation of price cap benefits between customers and long distance providers prior to the completion of the four year price cap period that began on January 1, 1998. Revenue reductions from the application of the productivity offset, including the consumer productivity dividend, were intended to benefit customers through lower rates. The reductions are now going to long distance providers through lower contribution rates.
Show customers the money
Rather than reduce contribution rates, we would require the telephone companies to provide annual credits to their residential and business customers. A customer would receive a credit for each exchange line subscribed to by the customer. As discussed below, this approach was implemented earlier this year by another regulator. The Commission has also used this approach to refund excess revenues to customers.
Productivity, inflation and exogenous factors
In 1997 the Commission put in place a four year price cap plan commencing January 1, 1998. (Telecom Decision CRTC 97-9.) The rates for certain utility services, including basic residential local service, were capped except for increases due to inflation and exogenous factors that arise from events beyond the companies' control. The Commission also decided that revenues from capped services would be reduced annually by the application of a 4.5 per cent productivity offset to reflect the telephone companies' productivity improvements. Productivity improvements in excess of 4.5 per cent accrue to the companies' shareholders. The revenue reduction from the productivity offset would be implemented by reducing the rates for capped services, taking into account increases due to inflation and exogenous factors. The inflation index, productivity offset and exogenous factors are applied together annually in a price cap formula to determine the net impact of these components on the companies' revenues.
Keep in mind
Two key elements of the price cap plan must be kept in mind with respect to the majority's decision and our dissenting opinion. First, the productivity offset was intended to benefit customers. Second, the Commission said in its price cap decision that contribution rates were not subject to change during the price cap period (Telecom Decision CRTC 97-9, paragraph 154).
The nature and source of contribution must also be kept in mind. The cost of basic local telephone service is subsidized by contribution charges paid by long distance providers to local service providers. Contribution charges are an expense that the long distance providers recover from their customers. The charges are mandated by the Commission because the cost of basic local service must be subsidized "to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada." [Telecommunications Act, section 7(b).]
Productivity offset overwhelms
As discussed above, the productivity offset component of the price cap index requires the companies to annually reduce the revenues from capped services by 4.5 per cent. The index has two other components which may also require revenue adjustments: (1) inflation and (2) exogenous factors.
We are in a period of inflation that is significantly less than the productivity offset of 4.5 per cent; exogenous factors generally do not occur. As a result, the productivity offset overwhelms the other price cap index components, requiring the companies to reduce their revenues.
What happens when price floors are reached?
The question arises: how should the companies shed the excess revenues generated by the price cap formula? Until this decision, the companies were required to reduce the rates for capped services to a price floor of the cost of the services plus a mark-up of 25 per cent. If all the services were at their price floors, the companies were required to place the excess revenues in a deferral account pending this decision. NBTel Inc. was the only company with excess revenues in a deferral account although other companies may reach their price floors before the end of the current price cap plan.
Rates should not be reduced below costs
Once rates are at the services' price floors, we agree with the majority that the excess revenues from the productivity offset should not be used to reduce rates below costs. In this connection, we note the Commission's statement in its price cap decision: "The Commission has also determined that price changes for services that are currently priced below cost should generally not move rates further from costs." (Telecom Decision CRTC 97-9, paragraph 158).
We do not, however, agree with the majority that the excess revenues should be shed by transferring the revenues to long distance providers through lower contribution rates. Annual one-time credits to the telephone companies' customers would not change the companies' rates, eliminating the majority's primary concern (majority decision, paragraphs 27 and 28). In addition, the credits, unlike contribution rate reductions, are consistent with the allocation of price cap benefits between customers and long distance providers in the Commission's price cap plan.
Sharing of benefits altered
The majority's approach violates the regulatory bargain struck between customers and the companies in the Commission's 1997 price cap decision. Money from the productivity offset that was supposed to benefit customers through lower rates is now going to long distance providers through lower contribution rates. This development is particularly frustrating from a customer's perspective because the price cap decision said that "toll contribution should be treated as a special category, with rates not subject to change during the price cap period." (Telecom Decision CRTC 97-9, paragraph 154, emphasis added). This decision changes toll contribution rates during the price cap period.
The Commission's 1997 price cap decision included an explicit consumer productivity dividend in the productivity offset. The dividend was "intended to provide a dividend to consumers resulting from the streamlining of regulation and increased incentives for efficiency of the telephone companies." (Telecom Decision CRTC 97-9, paragraph 80, emphasis added.) The majority's decision means that the consumer productivity dividend will flow in the situations described above to long distance providers - not to consumers as intended by the Commission in 1997.
A viable solution
The provision of annual credits to customers is a viable solution to the problem created by the existence of excess revenues when capped rates are at their price floors. For example, in 1986 the Commission ordered one-time credits to each Bell Canada subscriber in order to eliminate excess revenues of $206 million. (Telecom Decision CRTC 86-17.) In October of this year the Massachusetts Department of Telecommunications and Energy approved Bell Atlantic-Massachusetts's one-time credit to all exchange lines. The credit refunded about $21.2 million under price cap regulation. (D.T.E. 98-67.)

Date Modified: 1999-12-15

Date modified: