ARCHIVED -  Telecom Decision CRTC 99-3

Telecom Decision

Ottawa, 5 March 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

File No.: 8662-N5-02/98

1.By letter dated 18 June 1998, The New Brunswick Telephone Company, Limited (now NBTel Inc.) (NBTel) filed an application to review and vary Telecom Order CRTC 98-468, 12 May 1998 (Order 98-468), and certain aspects of Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, 1 May 1997 and Implementation of Price Cap Regulation and Related Issues, Telecom Decision CRTC 98-2, 5 March 1998.

2.NBTel submitted that, among other things, substantial doubt exists as to the correctness of the foundation for the Commission's decision in Order 98-468. NBTel submitted that the Commission made incorrect use of the imputation test price floor to mandate the price reductions under the price cap mechanism (i.e., no company should be mandated to set rates for a service at a level that allows for minimal or no recovery of fixed common costs). NBTel was of the view that, at an absolute minimum, rates mandated by the Commission should include at least a 25% mark-up on Phase II costs. In addition, NBTel argued that implementation of Order 98-468 would have significant implications for services that are not subject to price cap constraints, and that these implications would have a negative impact on the company's financial health. If the company was forced to implement the rates set out in Order 98-468, NBTel stated that it is unlikely that competitors will choose to offer facilities-based local service in New Brunswick. Finally, NBTel submitted that, under the current price cap formula it is required to absorb a 4.5% productivity offset on services in the Basic Residential Local Service (Residence) sub-basket. NBTel submitted that the productivity on this sub-basket does not benefit residential services as long as the prices for these services are below their costs. It argued that the productivity gain, in fact, reduces the contribution shortfall, but because the contribution rate is frozen, these productivity gains must be absorbed through rate reductions in other capped services.

3.NBTel requested that the Commission: (1) lift the freeze on interexchange (IX) contribution rates to allow the company to reduce these rates by the amount necessary to meet the price cap requirements ("preferred" remedy) over and above the amounts that can be absorbed through reductions in rates for its capped services; or (2) as an alternative, allow the company to remove the Residence sub-basket from the overall capped basket, for the purpose of calculating the Price Cap Index (PCI) impact for 1998 and beyond, and to allow the company to disaggregate its Exchange Business Communication Service (BCS) rates into a basic service component and a Direct Inward Dial (DID) component, with the DID component included in the Other Capped Service sub-basket ("alternate" remedy); and (3) not require mandated rate reductions to the imputation test floor to meet the PCI.

4.On 10 July 1998, the Commission issued a letter to NBTel indicating its preliminary view that, consistent with the treatment of the other companies subject to price cap regulation, NBTel should meet its price cap requirements for 1998 under the current formula.

5.To achieve this, the Commission found reasonable, on a preliminary basis, NBTel's proposal to disaggregate its Exchange BCS rates into a basic service component and a DID component and to include the DID component in the Other Capped Services sub-basket. It also approved, effective 19 May 1998, monthly rates for Business Single Line Service, Business Multi-line Service and DID in place of those approved in Order 98-468. The Commission stated that it was satisfied that, on the basis of the imputation test required by Local Competition, Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8), these rates would not be anti-competitive.

6.In its 10 July 1998 letter, the Commission also stated that the company's Utility segment rates would remain interim pending completion of the proceeding initiated by NBTel's review and vary application.

7.The following parties filed submissions: Stentor Resource Centre Inc. on behalf of BC TEL, Bell Canada (Bell), Island Telecom Inc. (Island Tel), Maritime Tel & Tel Limited (MT&T), MTS Communications Inc. (MTS), NewTel Communications Inc. (NewTel) and TELUS Communications Inc. (TCI) (collectively, the "companies"); Call-Net Enterprises Inc. on behalf of AT&T Canada Long Distance Services Company and Sprint Canada Inc. (collectively, the "IXCs"); London Telecom Network Inc. (London Telecom); the Canadian Cable Television Association (CCTA) and SCL Atlantic Communications (SCL Atlantic). The Commission has carefully considered these submissions, as well as those submitted by NBTel.

8.In Decision 97-8, the Commission found it appropriate to maintain contribution at a sufficient level to ensure that residence rates continue to permit universality of access in high-cost areas, while minimizing distortion of the emerging competitive local exchange market.

9.In light of the foregoing, the Commission concluded that the IX contribution rates should be frozen during the price cap period for BC TEL, Bell, Island Tel, MT&T, MTS, NBTel, NewTel and TCI. The IX contribution rates were frozen, effective 1 January 1998, for all of the telephone companies, except TCI. With respect to TCI, IX contribution rates were to be frozen 1 January 1999, consequent on the particular treatment of its shareholder entitlement.

10.Given the importance of the rationale for the frozen contribution rate policy and the Commission's 21 December 1998 announcement that it would initiate a proceeding to review this policy for incumbent local exchange carriers (ILECs) subject to price caps, as indicated in Proceeding to Review Frozen Contribution Rate Policy, Telecom Public Notice CRTC 99-5, 2 February 1999, the Commission has included in that proceeding, that part of NBTel's application relating to its request to lift the freeze on IX contribution rates in order to meet its price cap obligations.

11.Several interveners objected to NBTel's request to allow the company to remove the Residence sub-basket from the overall capped basket, for the purpose of calculating the PCI for 1998 and beyond.

12.London Telecom was of the view that NBTel's proposal goes against the spirit and intent of the price cap decisions. Specifically, London Telecom submitted that NBTel's proposal would only address the problem on a short-term basis, would give NBTel the luxury of maintaining higher margins on other capped services within the constraints of the price cap regime than other companies, and would permit NBTel to deal with surplus contribution any way it wished.

13.CCTA submitted that in order to motivate NBTel to maintain and improve its productive capabilities and to continue to share the benefits of these efficiencies with customers, local residential services must be maintained within the cap. CCTA submitted that only in this way could the merits of price cap regulation be achieved.

14.While opposed to NBTel's "alternate" proposal, the IXCs suggested that should the Commission find that NBTel's proposal to remove the Residence sub-basket from the overall basket has merit, the Residence sub-basket should become a stand alone basket subject to the same productivity offset (4.5%) that exists in the overall basket. The IXCs submitted that this new sub-basket should also contain contribution and the various competitor services.

15.In the Commission's view, removing the Residence sub-basket from the overall capped basket would fundamentally change the price cap regime established for NBTel, as this would in essence be equivalent to reducing the productivity offset from 4.5% to a significantly lower percentage. This would provide NBTel with revenues greater than anticipated which it could use to support pricing in markets in which it is subject to the greatest degree of competition.

16.Given the above, the Commission denies NBTel's request to remove the Residence sub-basket from the overall capped basket.

17.SCL Atlantic opposed NBTel's request to allow the company to disaggregate its BCS rates into a basic service component and a DID component, with the DID component included in the Other Capped Services sub-basket. SCL Atlantic considered that the rates approved in Order 98-468 should stand.

18.As noted above, the Commission, by letter dated 10 July 1998, found reasonable, on a preliminary basis, NBTel's proposal to disaggregate its Exchange BCS rates into a basic service component and a DID component, and to include the DID component in the Other Capped Services sub-basket. Having further considered the matter, the Commission approves on a final basis NBTel's request to disaggregate its BCS rates and to include the DID component in the Other Capped Services sub-basket.

19.NBTel proposed, supported by the companies, that it should not be required, in order to meet the PCI, to reduce rates for capped services to the imputation test price floor. They argued that companies should be allowed to recover their total common costs, including fixed common costs, in a manner that reflects market conditions. They opposed a requirement to reduce prices for some services down to incremental costs if this is necessary to meet the requirements of the price cap regime. The companies submitted that this would also be detrimental to the development of competitive markets.

20.NBTel argued that, at an absolute minimum, rates mandated by the Commission should include at least a 25% mark-up on Phase II costs. In NB Tel's view there are circumstances where even the 25% margin does not represent an adequate price floor for mandated price reductions.

21.The Commission notes that it has on many occasions, with respect to the pricing of services, acknowledged the need to include a mark-up on Phase II costs to allow a contribution towards the recovery of fixed common costs.

22.The Commission is of the preliminary view that in satisfying the price cap requirements for capped services, NBTel should not be required to reduce rates to the imputation test price floor, and that it is appropriate to not require reductions below Phase II costs plus 25%. The Commission notes that wherever essential services are employed, the imputation test price floor includes the Phase II costs plus a 25% mark-up for these services. Thus the threshold for mandated rate reductions would be the same as the imputation test price floor for essential service components and would differ for other service components by the 25% mark-up.

23.Accordingly, on an interim basis, the Commission will not require NBTel to file rate reductions below Phase II costs plus a mark-up of 25% in order to meet price cap requirements. NBTel will still have the option of reducing rates to the imputation test price floor. Furthermore, the Commission is of the view that it is appropriate to consider whether this pricing policy should be extended to the other ILECs subject to price caps. The Commission will initiate a proceeding forthwith to review the appropriateness of implementing this policy, on a final basis, for all federally regulated ILECs subject to price cap regulation.

24.By letter dated 19 May 1998, the Commission made NBTel's Utility segment rates interim effective 19 May 1998 in order to allow any modifications to the determinations made in Order 98-468. The Commission approves on a final basis the modifications granted interim approval by letter dated 10 July 1998 and other Utility segment rates, except for NBTel's contribution rates, which shall remain interim.

Secretary General

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