ARCHIVED -  Telecom Decision CRTC 99-5

Telecom Decision

Ottawa, 21 April 1999

Telecom Decision CRTC 99-5

REVIEW OF CONTRIBUTION REGIME OF INDEPENDENT TELEPHONE COMPANIES IN ONTARIO AND QUEBEC

File No.: 8695-C12-03/97

TABLE OF CONTENTS

Paragraph Numbers

OVERVIEW

I INTRODUCTION 1

A. Background 1
B. Scope of Proceeding 12
C. Procedure 15

II BARRIERS/DISINCENTIVES TO ENTRY 17

III CAT METHODOLOGY PROPOSALS 40

IV PRODUCTIVITY IMPROVEMENTS/COST REDUCTIONS 74

V RATE ADJUSTMENTS 110

VI OTHER MECHANISMS TO FOSTER TOLL COMPETITION 149

A. Expanding the Scope of Contribution Paying Services 149
B. Unbundling Direct Toll Costs 155

VII OTHER ISSUES 163
A. Revenue Requirement 163
B. Broadband and Preparation for Local Competition 172
C. Construction Program Reviews 189
D. Phase III Audits 198
E. Capital Structure and Costs of Equity and Debt 211
F. Method of Regulation 226

VIII CONTRIBUTION MATTERS RELATED TO O.N. TEL, 235
ABITIBI-CONSOLIDATED AND COCHRANE

IX FILING REQUIREMENTS 242

OVERVIEW

(Note: This overview is provided for the convenience of the reader and does not constitute part of the Decision. For details and reasons for the conclusions, the reader is referred to the various parts of the Decision.)

A. Introduction

In Review of the Contribution Regime of Independent Telephone Companies in Ontario and Quebec, Telecom Public Notice CRTC 97-41, 18 December 1997 (PN 97-41), the Commission initiated a proceeding to review the level of toll competition in the independents' territories. In PN 97-41, the Commission set out the scope of the proceeding and invited comments on the various issues outlined in paragraph 12 of this Decision.

Parties identified various barriers to providing choice of toll service providers in the independents' territories but, inevitably, all were linked to the high individual Carrier Access Tariff (CAT) rates.

B. CAT Methodology

Following a thorough review of the evidence submitted, the Commission notes that some of the independents presented variations on the CAT blending methodologies previously proposed and found inappropriate. The Commission is of the view that all of these proposals require toll carriers who do not offer their services in the independents' territories to contribute to the independents' revenue requirements. The Commission is of the view that a blended CAT approach remains inappropriate and determines that company-specific CATs, established on 7 August 1996 in Regulatory Framework for Québec-Téléphone and Télébec ltée, Telecom Decision CRTC 96-5 (Decision 96-5) and Regulatory Framework for the Independent Telephone Companies in Quebec and Ontario (Except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec ltée), Telecom Decision CRTC 96-6 (Decision 96-6), should be maintained.

C. Contribution Requirements

The relative contribution requirements of the independents expressed as a percentage of total revenue requirement varies widely and, for some independents, is much greater than the Commission considers reasonable. Based on 1997 data, the Commission estimates that the percentage of contribution requirement of each independent to its total revenue requirement ranged from 21% to 57%.

The Commission is of the view that a maximum contribution requirement of 25% of the total revenue requirement reflects an appropriate efficiency benchmark. Further, the Commission caps the contribution requirement at the 1999 level and sets out directives to be implemented by the independents by the year 2002 in order to achieve a maximum 25% contribution requirement to total revenue requirement.

D. Rate Adjustments

The Commission directs the independents whose residential and business rates are below $19.85 and $45.45, respectively, to increase their rates to those levels, effective 1 July 1999; however, to the extent that they achieve a 2 cent contribution rate, companies will not be required to increase their rates to those levels. The Commission estimates that, with the resulting increase in revenue, more than half of the independents will achieve their maximum 25% of total revenue requirement contribution objective.

Those independents whose total revenue requirement from contribution still exceeds 25% of total revenue requirement following the local rate increases of 1 July 1999, are to file with the Commission, by 1 January 2000, a proposal detailing how they intend to reduce their subsidy requirement to no more than 25% by the year 2002. Independents may choose to further increase residential, business, and/or optional services' rates, improve productivity, reduce costs or otherwise restructure their rates to achieve that contribution objective.

The Commission is of the view that independents who opt to increase their residential rates should not increase these by more than $5 per month, annually, in each of the years 2000 and 2001.

E. Other Mechanisms to Foster Toll Competition

The Commission concludes that the base of contribution paying services in the independents' territories should remain as determined in Decisions 96-5 and 96-6. As an added measure to foster toll competition, the Commission directs the independents to file tariffs to unbundle Billing and Collection services for toll providers, effective 1 January 2000.

F. Other Issues

·With regard to intercorporate transactions, the Commission considers that it would be useful to conduct a review of policies governing such transactions. The Commission directs those companies that have intercorporate transactions to file, within 90 days of this Decision, details of pricing policies and accounting procedures associated with these transactions.

·The Commission directs that on a going-forward basis, small independents file, as part of their annual CAT filings, detailed information on broadband applications including investment levels and planned use for any fibre investment.

·The Commission is of the view that, given the significant cost of a Phase III audit and the likelihood that any misallocation errors would not have a significant impact on the level of the CAT rate, the additional financial burden of a Phase III audit would likely outweigh any potential benefits.

·The Commission intends to initiate a proceeding to review the independents' capital structures and associated costs of equity and debt.

·The Commission finds that earnings regulation continues to be appropriate for the Ontario and small Quebec independents. However, the Commission would be prepared to consider an application should any of these independents consider that price cap regulation is appropriate for them.

I INTRODUCTION

A. Background

1.On 7 August 1996, the Commission issued Regulatory Framework for Québec-Téléphone and Télébec ltée, Telecom Decision CRTC 96-5 (Decision 96-5) and Regulatory Framework for the Independent Telephone Companies in Quebec and Ontario (Except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec ltée), Telecom Decision CRTC 96-6 (Decision 96-6), implementing regulatory frameworks for those telephone companies.

2.In the proceeding leading to Decisions 96-5 and 96-6, the Commission instituted the use of company-specific contribution rates, effective 1 January 1997. This company-specific Carrier Access Tariff (CAT) rate was determined to be more appropriate than the blended/integrated contribution rates proposed by the Association des compagnies de téléphone du Québec/Société d'administration des tarifs d'accès des télécommunicateurs (ACTQ/SATAT), Québec-Téléphone and the Ontario Telephone Association (OTA).

3.In Regulatory Framework - Prince Rupert City Telephones, Telecom Decision CRTC 98-5, 4 May 1998 (Decision 98-5), Regulatory Framework for Abitibi-Consolidated and Cochrane Public Utilities Commission, Telecom Decision CRTC 98-13, 1 September 1998 (Decision 98-13), and Regulatory Framework - Ontario Northland Transportation Commission, Telecom Decision CRTC 98-14, 1 September 1998 (Decision 98-14), the Commission established the regulatory framework for the following independents: Prince Rupert City Telephones (City Tel); Abitibi-Price Telephone Inc. (now Abitibi-Consolidated); Cochrane Public Utilities Commission (Cochrane) and O.N. Tel.

4.In Decisions 98-5, 98-13 and 98-14, the Commission reaffirmed for these companies its earlier conclusion that company-specific contribution rates should be adopted together with regulatory frameworks similar to those established in Decisions 96-5 and 96-6.

5.Since the issuance of Decisions 96-5 and 96-6, the principle of a company-specific contribution rate has been questioned on a number of occasions, most notably by Québec-Téléphone. In an application pursuant to section 62 of the Telecommunications Act, dated 20 December 1996, Québec-Téléphone requested that the Commission review and vary Decision 96-5 as it relates to the applicable contribution mechanism. Québec-Téléphone proposed a form of blended CAT rate as a way of lowering its CAT rate as well as that of other independents, including Télébec ltée (Télébec) and itself.

6.Following a thorough review, the Commission, in a letter dated 12 September 1997, denied Québec-Téléphone's application to review and vary Decision 96-5, concluding that the proposed contribution mechanism and province-wide blended CAT rate were examined in depth during the proceeding leading to Decisions 96-5 and 96-6.

7.However, the Commission noted in its letter that the CAT rate of many independents had been increasing, unlike the Commission's expectation that the CAT rate would decrease over time to foster toll competition in respective independent telephone companies' territories. Further, industry participants cited the high CAT rates as the main barrier/disincentive preventing Alternate Providers of Long Distance Services (APLDS) from offering services in the territories of the independents, thus denying choice of toll providers to subscribers in these independents' territories.

8.Coincident with the Commission's letter denying Québec-Téléphone's review and vary application, the Commission, on 12 September 1997, issued an invitation to a Round Table Consultation Related to the Contribution Regime in Independent Telephone Companies' Operating Territories (the consultation). An important aspect of the consultation was to seek clarification and industry input on the extent of the problems associated with the contribution mechanism established in Decisions 96-5 and 96-6 and identifying alternative solutions, if required, that would foster competition and, at the same time, maintain both affordable basic local service and the financial health of the independents.

9.During the consultation held on 21 and 22 October 1997, it became evident that, because their toll rates are tied to those applicable in Bell Canada's (Bell) territory, independent subscribers have indeed benefited from the introduction of toll competition. Since 1992, their toll rates have been reduced significantly (in certain cases, by as much as 75%), while their local rates have only risen marginally, beginning on 1 January 1997. The independents concurred that competition had brought lower toll rates; however, due to the high CAT rates, their subscribers have not had the benefit of choice of toll service providers.

10.AT&T Canada Long Distance Services Company (AT&T Canada LDS) and Sprint Canada Inc. (Sprint Canada) stated during the consultation that they would be more inclined to offer their services in the territories of the independents if they could see evidence of a reduction in the CAT rates.

11.On 18 December 1997, the Commission issued Review of the Contribution Regime of Independent Telephone Companies in Ontario and Quebec, Telecom Public Notice CRTC 97-41 (PN 97-41), to initiate a proceeding to review the contribution mechanism in the independents' territories.

B. Scope of Proceeding

12.In PN 97-41, the Commission invited comments on, but not limited to, the following issues:

(i) what barriers or disincentives have discouraged the entry of APLDS in the independents' territories and how can such barriers or disincentives be addressed; (ii) what measures could be implemented by the independents to reduce their costs such as further productivity improvements, cost controls and cost sharing initiatives; (iii) to what extent, if any, should the CAT go toward subsidizing expenditures related to broadband facilities and expenditures associated with the preparation for local competition; (iv) should there be further audits of the independents (other than for Québec-Téléphone and Télébec) and if so, what should be the scope and form of such audits; (v) is there a need for further rate rebalancing in the territories of the independents (other than for Québec-Téléphone and Télébec) and what should be the criteria for such rate rebalancing; (vi) what should be the level and implementation timeframe of such rate rebalancing (other than for Québec-Téléphone and Télébec); (vii) to what level of detail should the Commission scrutinize the revenue requirements of the independents (other than for Québec-Téléphone and Télébec); and (viii) what mechanisms could be used to reduce the CAT rates in order to foster toll competition while continuing to implement the other objectives of the Canadian telecommunications policy.

13.A detailed discussion of these issues is set out in subsequent Parts of this Decision.

14.Not all the issues outlined in PN 97-41 and the recommendations that follow, pertain to Québec-Téléphone and Télébec.

C. Procedure

15.The transcripts of the consultation held on 21 and 22 October 1997 were made part of the record of this proceeding.

16.The following parties participated in the proceeding: ACTQ/SATAT; Association of Municipalities of Ontario; AT&T Canada LDS; Bell; Bruce County Federation of Agriculture; Call-Net Enterprises Inc. (Call-Net); Canadian Alliance of Publicly-Owned Telecommunications Systems (CAPTS); Dairy Farmers of Ontario; London Telecom Network; Norfolk Federation of Agriculture; Northern Telephone Limited (Northern); Ontario Beekeepers' Association; Ontario Cattlemen's Association; Ontario Corn Producers' Association; Ontario Federation of Agriculture; O.N. Tel; OTA; Perth County Federation of Agriculture; Rogers Cantel Inc. (Cantel); Sprint Canada; Québec-Téléphone; Télébec; Téléphone Guèvremont Inc. (Guèvremont); Temiskaming Federation of Agriculture; The Ontario Wheat Producers' Marketing Board. A number of individuals also filed comments.

II BARRIERS/DISINCENTIVES TO ENTRY

17.As noted earlier, the Commission requested submissions on what barriers or disincentives have discouraged the entry of APLDS in the independents' territories and how such barriers or disincentives can be addressed.

18.To varying degrees, Call-Net, AT&T Canada LDS, Québec-Téléphone, Télébec, OTA, Cantel, ACTQ/SATAT, Bell, O.N. Tel and Northern identified the high CAT rates as the primary barrier/disincentive to entry by the APLDS into the territories of the independents. Both Call-Net and AT&T Canada LDS pointed out that, in many cases, the CAT rate exceeds the per-minute rate generally charged by them for their long distance service.

19.Call-Net also submitted that the requirement to establish interconnection and individual Primary Interexchange Carrier/Customer Account Record Exchange (PIC/CARE) arrangements with each independent is an additional barrier to entry. AT&T Canada LDS submitted other factors such as interconnection agreements, its cost of capital and the low potential demand for its services as additional disincentives.

20.Bell indicated that a competitive environment is incompatible with the subsidy support provided in the past. Bell also contended that the lack of uniformity in PIC/CARE rates among the independents is a further deterrent.

21.CAPTS, supported by Northern, Guèvremont and Télébec, maintained that the perception of the CAT rates being too high is unreasonable and pointed to the size and location of its members as the obvious barrier.

22.Télébec argued that APLDS' reluctance to adjust their toll rates take into account the level of a company's CAT rate is one of the barriers to entry in the independents' territories.

23.OTA stated that the impediment is the different methodology of calculating contribution rates in Bell territory versus the territories of the independents which results in high CAT rates for the independents. OTA noted that, in addition, in the independents' territories, resellers are required to pay contribution on resold Extended Area Service (EAS) whereas single-hop EAS in Bell's territory is contribution exempt.

24.The Commission notes that the vast majority of parties considered that the level of the CAT rates is the most significant disincentive to competitive entry into the territories served by the independents.

25.The Commission also notes that, as of 1998, equal access has been widely available in the independents' territories and is therefore no longer a barrier to entry. The Commission agrees, however, with Call-Net and Bell, that a lack of uniformity in the administration of a PIC/CARE system across the individual companies is an additional deterrent to entry. The Commission encourages the small independents' associations to establish common administrative PIC/CARE systems.

26.The Commission further concurs with CAPTS, Télébec, Northern and Guèvremont that the type of territory served by the independents is a disincentive to competitive entry.

27.With respect to Télébec's submission concerning the reluctance of APLDS to adjust toll rates to reflect particular CAT rates, the Commission considers that it would be impractical for APLDS to adjust their rates in this manner.

28.Call-Net, AT&T Canada LDS, Bell, O.N. Tel and Cantel all submitted that the level of the CAT rate must be reduced to a more sustainable level if the barriers/disincentives that have discouraged the entry of APLDS in the independents' territories are to be addressed. This level was described by Bell as one that should show a definite downward trend over time; by Call-Net and Cantel as being in the range of 2 cents per minute; by O.N. Tel as being equivalent to Bell's rate; and by AT&T Canada LDS as having a contribution component of half a cent per minute.

29.All parties, except Québec-Téléphone, Télébec and Guèvremont, suggested, among other measures, local rate increases as being appropriate to reduce the independents' CAT rates. CAPTS proposed a level of 75% of Bell's rates over a two-year to three-year period, taking into account its members' unique tax status relative to the other independents. APLDS proposed that rates be increased to a level of affordability, which AT&T Canada LDS indicated could be up to $30 per month for residential service. OTA, ACTQ/SATAT and O.N. Tel suggested bringing local rates to Bell's level in comparable territories over a period of two to three years.

30.Parties proposed other measures to reduce the independents' CAT rates. Call-Net proposed cost reductions through improvements in productivity, the pursuit of additional revenues through new markets and broadening the base of contribution paying services. AT&T Canada LDS proposed increased revenues from optional services, productivity improvements, cost reductions and unbundling of Direct Toll charges. For some independents, it proposed a Commission review of revenue requirements, rates of return, Phase III, construction programs and capital structures. Bell proposed annual rate rebalancing with increased revenue flowing directly to the CAT, maximizing revenues from new and existing services, efficiency benchmarking, Commission review of revenue requirements, broadening the base of contribution paying services and introducing price cap regulation as soon as possible.

31.Québec-Téléphone argued that the major centres outside its serving territory should contribute towards the maintenance of affordable local service in the smaller centres. Québec-Téléphone also proposed a blended CAT.

32.OTA submitted a proposal for an integrated CAT whereby long distance providers in a given territory would have to pay a CAT rate based on all minutes within that same territory. ACTQ/SATAT also proposed a blended CAT rate along with a subsidy derived from a possible high-cost fund.

33.CAPTS put forward a proposal that the CAT should be derived based on a system of cost allocation including toll traffic studies of switch use. CAPTS' approach is to base the CAT on cost rather than revenue requirement.

34.Northern argued that local rates must be brought closer to cost and also argued that the scope of services required to pay contribution should be expanded.

35.Both Northern and CAPTS argued that the lack of profit incentives for APLDS, under any CAT rate level, would make competitive entry in the independents' territories unlikely. Northern and CAPTS concluded that APLDS have focused marketing efforts in major market areas.

36.The Commission considers that the level of the CAT rate is the most significant barrier to entry by APLDS in the territories of the independents thus denying subscribers of the independents choice of toll service providers.

37.The Commission notes that those parties who would be responsible to pay the CAT rate of the independents argued that increasing local rates closer to costs coupled with a series of other financial and operational measures are required to remove this most significant barrier to competition in the independents' territories. The Commission further notes that the independents, with the exception of CAPTS and Northern, strongly advocated the implementation of a blended type mechanism as the solution to the high CAT level.

38.The Commission further notes that, despite the high CAT rates, independents' subscribers have benefited from the introduction of toll competition in 1992. The Commission also notes that their toll rates have been reduced significantly while their local rates have only risen marginally.

39.The Commission considers that lowering the CAT rates along with the other measures identified in this Decision, will establish a more favorable framework for the entry of APLDS in the independents' territories. However, consistent with the Commission's increasing reliance on market forces, the decision to enter a particular independent's territory will be ultimately one for APLDS to make.

III CAT METHODOLOGY PROPOSALS

40.Québec-Téléphone, ACTQ/SATAT, Guèvremont and OTA each proposed alternative methods of calculating CAT rates which would reduce the rates to encourage competitive choice for their subscribers. Each of these proposals, which are described below, are different versions of blending the shortfalls of each company with that of Bell and dividing those shortfalls by the total toll minutes to arrive at a lower rate. CAPTS proposed an alternative method for determining the contribution requirement.

41.These proposals were opposed by Bell, Call-Net, AT&T Canada LDS, Northern and Cantel.

42.Québec-Téléphone submitted that a blended CAT would have the advantage of imposing the same rules on all carriers in a given territory. It noted that this method is a proven one which the Commission implemented in 1995 in Alberta. The company proposed that the blended CAT rate be calculated in a manner similar to that established for Alberta, so that the contribution requirements of all service providers in a specified region are added and then divided by the total toll minutes generated by all subscribers in that same region. The company argued that the blended CAT would only be a short-term solution since the CAT will soon disappear due to pressures of competition.

43.Québec-Téléphone also submitted that a standardized contribution mechanism would eliminate bypass of contribution charges and could become a substitute for current traffic settlement agreements, replacing them with a single method of cross-subsidization. It would enable Québec-Téléphone and Télébec to compete on an equal basis with APLDS who now have a considerable size advantage. In its view, some form of urban to rural cross-subsidization to encourage service universality, the level of rate rebalancing required would be too high and the consequences could be the unfortunate creation of a two-tiered society.

44.ACTQ/SATAT proposed a unified CAT that would (1) include contribution requirements spread over the two-way toll traffic generated by the entire Quebec network; and (2) use a common financial fund set up to return the money collected to companies based on their individual contribution requirements.

45.ACTQ/SATAT submitted that toll service providers should only have to pay the Direct Toll charges, not the contribution rate. The unified CAT, ACTQ/SATAT version, would only contain the Direct Toll portion and would result in a 69% drop in its members' CAT rates. ACTQ/SATAT claimed that unifying the Direct Toll component from all local exchange carriers in Ontario and Quebec would give the independents access to cross-subsidization from the large urban centres. This unification would standardize the contribution payable by toll service providers, thereby eliminating any discrimination resulting from individual company characteristics. ACTQ/SATAT submitted that the local service shortfall, which is the contribution portion of the CAT, could be addressed by a possible high-cost serving area subsidy.

46.OTA proposed to establish an integrated contribution methodology that would require all long distance service providers in a telephone region to contribute to the shortfall in the independents' territories. OTA proposed the establishment of two toll contribution rates to be paid on all minutes carried within the region; a Bell rate, as currently calculated, and an independent rate based on the independents' contribution requirements divided by the total toll minutes in the region. The contribution payable each month by a long distance carrier would be paid separately to a third party administrator and distributed accordingly.

47.Under OTA's proposal, the independent contribution rate would be determined annually by aggregating the contribution requirements, which would be based on the forecast Phase III results of the individual independents. The aggregated contribution requirements would then be divided by the total long distance minutes in the region. Amounts collected with respect to the independent contribution rate would then be pro-rated amongst the independents according to each one's requirements. With this approach, OTA submitted that the current OTA CAT rates would drop dramatically, thus removing the single largest impediment to meaningful toll competition.

48.CAPTS submitted that it would be counter-productive to cost-recovery efforts to establish a blended or combined CAT mechanism.

49.CAPTS proposed that the revenue requirement for local and toll services be calculated separately, based on the underlying costs, thereby making the revenue requirements a form of cost allocation/recovery. Direct Toll costs would continue to be assigned to the Toll Broad Service Category (BSC). Based on Toll Traffic studies, a factor would be determined representing that portion of total traffic served by a company's switches that is directly related to toll. This factor would then be used to determine (1) the toll contribution to the company's revenue requirement and (2) the minimum level of contribution required from toll service providers for their use of the local telephone facilities. All other categories should recover their related costs through rates.

50.CAPTS submitted that this method would eliminate the need for a ceiling on contribution rates because the rate would be based on costs, not revenue shortfall. Costs and their assignment would remain subject to Commission scrutiny. CAPTS argued that the main thrust of this proceeding has been to review ways and means that the toll contribution derived from the CAT can be reduced, with the possibility of stimulating long distance competition. It argued that with the current revenue shortfall subsidy, there is no incentive for local rate increases. Under the cost-based proposal, CAPTS members would be compensated only for the use of their facilities for the delivery of toll messaging services. CAPTS also proposed that the costs of customer Billing and Collection be removed from the Direct Toll component of the CAT and billed directly to the appropriate toll service carriers.

51.Guèvremont suggested an alternative to contribution rate calculations whereby the total long distance minutes in Ontario and Quebec would be divided by total Network Access Services (NAS) to derive average minutes per NAS. The minutes for each independent would then be increased or decreased based on a comparative formula which the company claimed would bring the benefits of urban subsidies to the rural areas.

52.Bell remained strongly opposed to any suggestion of reducing the contribution rates by means of "blending the CAT". Bell submitted that any such mechanism would provide a disincentive for individual companies to reduce their own costs. Bell further submitted that although blending might eliminate some of the bypass that is used to avoid the higher contribution charges of the independents, it would not provide any additional revenue for the independents, and thus would not reduce their contribution requirements.

53.Bell submitted that in Decision 96-6, the Commission concluded that the concept of a blended CAT was contrary to the principles of moving rates closer to costs and relying to a greater extent on market forces. Bell argued that, while a reasonable short-term target contribution level for the independents would be 2 cents per minute, it should not be achieved through blending. Bell submitted that it would prefer to pay an independent company-specific CAT rate greater than 2 cents per minute, rather than paying a blended CAT rate.

54.Bell, in final comments, again stated that company-specific CAT rates are essential in order to provide individual companies with an incentive to reduce costs. Bell argued that no type of mandated subsidy, including contribution, should be used to insulate companies from competition, technological change and market evolution. Bell further submitted that the competitive market in Bell territory should not be distorted as a result of any determination in this proceeding.

55.Bell stated that CAPTS' proposal was not based on either Phase II or Phase III accepted costing methodologies and was unnecessarily complicated and theoretically flawed.

56.AT&T Canada LDS urged the Commission to reject all blended or two-tiered CAT proposals for independents that rely exclusively upon APLDS to contribute to the Local/Access shortfall in the independents' territories, based on the minutes of toll traffic carried throughout a province, region or nation-wide.

57.AT&T Canada LDS submitted that OTA's proposal would not alleviate the underlying concerns with regard to blended and two-tier CAT regimes. According to AT&T Canada LDS, while the proposal would lower the independents' CAT rates, it would also remove much of the incentive to address the underlying concerns.

58.AT&T Canada LDS submitted that the various blended CAT proposals are highly inequitable because they would require long distance providers to render a subsidy for residential services in independents' territories, regardless of whether these carriers are operating in those territories. It would also have a significant impact on the effective CAT rate paid in Ontario and Quebec and could increase AT&T Canada LDS' contribution payments by more than 20%. AT&T Canada LDS submitted that if the Commission determined that an OTA-type proposal should be pursued, its implementation should be preceded by rate rebalancing and significant cost reduction efforts.

59.AT&T Canada LDS stated that measures to lower independents' contribution rates were necessary, not only to encourage long distance competition, but also to support other initiatives, including incentive-based regulation, local competition and affordability of service in high-cost service areas.

60.Call-Net submitted that a blended CAT approach should not be adopted since it would only serve to entrench the underlying causes of the higher independent contribution requirement. Call-Net also stated that a blended approach would create additional negative effects, primarily with regard to market distortions and competitive and consumer equity.

61.Cantel also objected to any blending of contribution rates because it would insulate the independents from the results of their decisions and there would be no incentive to minimize contribution requirements. Cantel submitted that any such blending would be contrary to the Commission's stated policy objectives of lowering and minimizing contribution rates and would involve the transfer of money from one region of the country to another.

62.The Commission notes that it rejected a form of blended CAT in Decisions 96-5 and 96-6. Specifically, in Decision 96-6, the Commission noted that:

"...industry-wide contribution rates... would average the net local/access shortfalls across all independents, even though the revenues and cost structures of these companies vary widely. Consequently, any form of an industry-wide contribution rate would be an average which would not be representative of the operational performance of any of the independents. Hence, the link between an independent's cost of providing local service and its contribution rate would be broken, resulting in low-cost areas subsidizing high-cost areas. This would be contrary to the Commission's principles of making rates more reflective of costs and of fostering an environment in which local and long distance service providers can compete.

Further, the Commission considers that any management decision made by an independent regarding revenues or costs would be directly reflected in a company-specific contribution rate (as opposed to being lost in a blended contribution rate). Consequently, the company-specific contribution rate would serve as a "barometer" of company performance vis-à-vis revenues and costs, as well as reflect the real economic conditions within which prospective alternative toll providers would compete.

In light of the above, the Commission concludes that the most appropriate method of settling contribution payments between the independents and their toll providers is through company-specific contribution rates. This will ensure cost-based rates, eliminate the possibility of cross-subsidization, make the contribution rates "barometers" of the real operational performance of the independents and ensure that prospective toll competitors are given realistic economic signals regarding the competitive environment in the independents' territories."

63.The Commission further notes that, in this proceeding, the independents have, for the most part, presented variations on the blending methodologies proposed in the proceeding leading to Decisions 96-5 and 96-6. In particular, the premise of requiring a higher contribution rate on all minutes in Bell's territory in order to reduce the CAT rates in the independents' territories, continues to be the primary focus of all these proposals.

64.The Commission notes that a blended CAT would impose an obligation on toll service providers that are not offering originating toll service in the independents' territories to subsidize independents' local rates. Currently, the contribution payment requirement is directly linked to toll calls which are originated from and terminated to independent subscribers.

65.With respect to Québec-Téléphone's submission that a blended CAT is already a proven method approved by the Commission for use in Alberta, the Commission notes that it dealt with this specific point in its letter dated 12 September 1999. The Commission found that the blended mechanism for Alberta, set out in Contribution Regime in Alberta, Telecom Decision CRTC 95-22, 27 November 1995, was based on significantly different circumstances than exist in the case of Québec-Téléphone. The Commission is of the view that the main difference is that Québec-Téléphone is proposing blending of the contribution requirements of two or more toll service providers whereas the blended contribution mechanism for Alberta only involved one toll service provider. The Commission notes that Québec-Téléphone would have the advantage of imputing the lower blended CAT rates for the purpose of setting its own toll rates whereas Bell's imputation of the higher blended rate could put upward pressure on the toll rates of its subscribers.

66.The Commission further notes that Québec-Téléphone has not submitted any additional information or data in this proceeding to support the need for a blended CAT. Moreover, the Commission notes that Québec-Téléphone's CAT rate has been significantly reduced in recent years. The Commission notes that its final CAT rate for 1995 was 9.69 cents and its interim 1999 CAT rate is 3.98 cents. The Commission is of the view that a blended CAT between toll providers is neither practical nor equitable.

67.The Commission notes that ACTQ/SATAT's unified CAT assumes that the territory of its members would be designated as high-cost areas and that there would be funding available from another source, such as a high-cost fund, to provide the same level of contribution currently required. The Commission is of the view that this is not a viable solution within the context of this proceeding.

68.Although OTA argues that, under its proposal, the individual company's contribution requirements would still be subject to Commission scrutiny and control, the Commission is of the view that the impact of the contribution rate would be buried in the blending and that any significant reduction in contribution requirement would be meaningless as it impacts on the CAT rate. With company-specific CATs, any change in a company's rates or relative efficiency would immediately be apparent to the toll service providers. The Commission is of the view that OTA's proposal effectively rewards the companies with the highest existing CAT rates and, in fact, could penalize independent companies with lower CAT rates who would likely experience competition sooner.

69.The Commission notes that all the proposals described above require toll service providers not offering their services in the independents' territories to contribute to the independent's Local/Access shortfall.

70.The Commission is of the view that under CAPTS' proposal, the subsidy from toll to basic local service rates appears to be eliminated. The toll providers would only be paying for the use of the company's switches. The Commission agrees with Bell that this proposal is not based on accepted costing principles and does not appropriately replace the current contribution regime.

71.The Commission is of the view that the integrated CAT approach could remove any incentive for the independents to engage in bringing rates closer to costs and cost reductions in order to reduce their CAT rates. The Commission considers that there are many other more effective ways to reduce the contribution requirements of the independents.

72.In summary, the Commission is of the view that the blended CAT approach should be denied based on the following:

·the degree of variation in the level of contribution requirements per NAS and the overall costs per NAS among the independents for the different independents;

·the need to increase rates and implement other changes to reduce CAT rates; and

·the need to encourage competition that is based on competitive and consumer equity (same rules for all).

73.Consistent with Decisions 96-5 and 96-6, the Commission continues to be of the view that company-specific CATs are appropriate.

IV PRODUCTIVITY IMPROVEMENTS/
COST REDUCTIONS

74.As noted earlier, the Commission requested submissions on what measures could be implemented by the independents to reduce their costs, such as further productivity improvements, cost controls and cost sharing initiatives.

75.ACTQ/SATAT agreed that the small independents' CAT rates are high and must be lowered. ACTQ/SATAT submitted that it is the distinctive characteristics of its members' operating territories and their impacts, rather than any inefficiencies of the independents, that causes the CAT rates to be high. OTA also submitted that its member companies are currently operating on a very efficient basis.

76.Québec-Téléphone submitted that, for many years, the Quebec independents deployed their network over a huge territory in accordance with the directives of the Régie des télécommunications du Québec (Régie) with respect to, among other things, universal telephone service. The Quebec independents must continue to assume additional costs, both to amortize these networks and to maintain them in acceptable condition.

77.AT&T Canada LDS proposed a modified price cap index, as an interim regime, whereby the independents would be required to reduce operating expenses by a certain percentage each year. These reductions would be flowed through to the contribution requirement, thereby lowering contribution rates.

78.OTA argued that AT&T Canada LDS' proposal would not reflect the real costs of serving the independents' territories and would be an unfair regulatory mechanism. It further argued that pre-set expense reductions would not allow OTA members to recover their costs of providing service, and would effectively subject the independents to reduced rates of return.

79.CAPTS and OTA also submitted that the capping of expenses per NAS would not be appropriate, as there would be no allowance for other cost increases, such as negotiated labour settlements, and that many of the expenses could be beyond the companies' control, resulting in annual expenses being pushed above previous years' levels.

80.CAPTS, supported by O.N. Tel, favoured the replacement of the 50 basis point reduction in the rate of return used for CAT calculations, approved in Decision 96-6, by an average 3% total implied productivity (TIP).

81.O.N. Tel submitted that a system based on the use of TIP targets may strike an appropriate balance between productivity incentives and the desirability of keeping a price cap mechanism relatively simple. O.N. Tel proposed that annual productivity targets could be set for multi-year periods, instead of having them set on an annual basis.

82.ACTQ/SATAT and OTA generally did not support using TIP targets.

83.CAPTS, O.N. Tel and OTA argued that some operating expenses incurred by the independents tend to be lumpy, and that this problem could only be addressed by averaging or amortizing expenses over a period of years.

84.Bell submitted that the most effective incentive for the independents to reduce their costs would be the introduction of price cap regulation. Bell argued that, before entering into a price cap regime, the Commission should benchmark the efficiency of the independents and introduce productivity targets and incentives. Bell advocated the use of a financial template that would be used to gather equivalent information from each of the independents for purposes of comparison.

85.Bell further argued that, following an initial broad benchmarking review of all the independents, the Commission would be better positioned to examine the revenue requirements of certain individual companies in a more detailed way.

86.AT&T Canada LDS proposed grouping the independents into three groups, based on the level of contribution that would be required after residential rates were raised to a maximum of $30 per month. AT&T Canada LDS submitted that its groupings would be based on several relevant characteristics of the independents that are significant contributory factors to higher contribution rates.

87.The independents generally did not support either Bell's or AT&T Canada LDS' benchmarking proposals.

88.Call-Net submitted that the most effective and administratively efficient means to generate productivity improvements would be to cap contribution rates and set targets for the timely reduction of the contribution requirement by aggressive, yet reasonable, steps.

89.The Commission considers that mechanisms such as the use of TIP or the capping of expenses/NAS, with expenses averaged over several years, would require each independent to keep track of past expense data and NAS growth as well as to carry out the necessary calculations.

90.In the Commission's view, the effort required to administer such mechanisms would outweigh the likely reductions in the contribution requirements of the independents. Moreover, the Commission is not persuaded that either of these approaches would lead to a significant reduction in the contribution requirements of the independents.

91.Despite the fact that the contribution requirements for the majority of the independents have not been reduced as expected through cost controls and greater efficiency, the Commission is of the view that it should continue its policy of light-handed regulation established in Decision 96-6 in order to minimize filing requirements and regulatory expenses for the independents.

92.The Commission notes that, in comparing the relative contribution requirements of the independents, the contribution requirement expressed as a percentage of the total revenue requirement varies widely, and that, for some independents, is much greater than the Commission considers appropriate.

93.Based on 1997 data, the Commission estimates that the percentage of contribution requirement to the total revenue requirement for the independents ranged from 21% to 57%.

94.The Commission is of the view that the most appropriate measure to promote efficiency and to reduce the amount of subsidy flowing to the independents is the implementation of a plan for a timely reduction to the contribution portion of the independents' revenue requirements through increases in local service rates.

95.The Commission is also of the view that this approach will treat each independent on a fair and equitable basis. The Commission notes that those independents that currently have a lower percentage contribution requirement to total revenue requirement would need to reduce their contribution requirement by a lesser amount.

ColSpan=2>96.The Commission further notes that this approach will allow the independents' management flexibility in controlling their operations and will eliminate the burden of productivity calculations over multi-year periods as well as the additional record keeping associated with TIP and the capping of expenses per NAS. Moreover, the independents' management would be able to determine in advance what managerial efforts are required to ensure adequate profitability.

97.As outlined in Part V of this Decision, the Commission considers it appropriate to bring local rates closer to cost, over the period 1 July 1999 to 31 December 2001. Further, each independent will be required to cap its contribution requirement at the interim 1999 contribution level and to systematically reduce the contribution requirement, annually, by bringing rates closer to costs and through other initiatives.

98.The Commission estimates that after taking into account the initial local rate increases effective 1 July 1999 as directed in Part V of this Decision, the percentage of contribution requirement to the total revenue requirements for the independents will average 21% for the SATAT members and 30% for the OTA members.

99.The Commission further notes that with the 1 July 1999 local rate increases, approximately one-half of the independents will likely have reached a contribution level coverage of total revenue requirement of 25% or less.

100.The Commission is of the view that a maximum 25% of contribution requirement to the total revenue requirement threshold reflects an appropriate benchmark of efficiency and thus a more reasonable benchmark of subsidy to be recovered by each of the independents. The Commission expects, as outlined in Part V of this Decision, that this will be achieved by all independents no later than the year 2002.

101.The Commission's determination are detailed below:

a) Any rate adjustment required in the year 1999 to bring the independents' rates to the levels described in Part V of this Decision, will reduce the contribution requirement for the year 1999;

b) For the year 2000, the contribution requirement will be capped at the contribution level reached in a) above, minus any year 2000 rate adjustment revenues following the company's proposal referred to in paragraph 145 and minus an adjustment to reflect the annualized impact of the rate adjustments described in Part V of this Decision;

c) For the year 2001, the contribution requirement will be capped at the contribution level reached in b) above, minus any 2001 rate adjustment revenues and minus an adjustment to reflect the annualized impact of any rate adjustments implemented part way through 2000 following the company's proposal referred to in paragraph 145; and

d) For the year 2002, the contribution requirement will be capped at the contribution level reached in c) above, minus an adjustment to reflect the annualized impact of any rate adjustments implemented part way through 2001, following the company's proposal referred to in paragraph 145, or 25% of the company's total revenue requirement, whichever is lower.

102.The Commission is of the view that this approach should encourage the independents to control operating expenses as the maximum amount of contribution that would be available to the companies would be capped at the previous year's level and would be reduced as a result of rate adjustments and other initiatives.

103.The Commission also notes that capping the contribution requirement provides an indirect incentive to control increases to the rate base since the recovery of capital investment driven expenses would be limited to 25% from contribution, with the remaining 75% to be recovered from revenue streams, cost efficiencies, rate increases, or shareholders absorbing recovery.

104.The Commission notes that the 1999 contribution will be calculated based on a 50 basis point reduction to the midpoint of the independents' current rate of return ranges, as outlined in Decision 96-6.

105.The Commission notes that with the capping of the contribution requirements at the 1999 levels (indicated above) and the associated reduction in contribution requirements for subsequent years, the 50 basis point reduction to the rate of return will no longer be required after 1999.

106.Further, given the reduction of the contribution requirement for the independents outlined above, and given that a benchmarking program would add significantly to the regulatory burden of the independents, the Commission does not consider that the Bell and AT&T Canada LDS benchmarking proposals are appropriate.

107.The Commission notes that even after rate adjustments, there may be several small independents that could have their contribution requirements higher than 25% of their respective total revenue requirement. Should this be the case, the Commission is of the view that those independents would have the option of reducing expenses further, increasing revenues, lowering earnings expectations, or applying to the Commission for a revenue requirement review.

108.The Commission expects that these options would be addressed in the independents' proposals to be submitted to the Commission by 1 January 2000, as described in Part V of this Decision.

109.The Commission is of the view that beyond the year 2002, the 25% maximum contribution requirement to the total revenue requirement for the Ontario and small Quebec independents may no longer continue to be appropriate. The Commission may therefore initiate a process to further review the contribution levels for the independents at that time.

V RATE ADJUSTMENTS

110.Generally, the independents submitted that their rates for local access service should move towards parity with Bell's neighbouring or similar exchanges, i.e., moving their monthly single-line, including TouchTone, local rates towards $19.85 for residential service and $45.45 for business service. In support, the independents relied on Local Competition, Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8), in which, they argued, the Commission found that rural rates should generally not be higher than urban rates. The independents also maintained that increasing their rates above those of Bell would discriminate against their subscribers.

111.The independents further stated that any attempt to increase their rates to bring the contribution component of their CAT to sustainable levels (such as 2 cents) would require substantial increases to rates, resulting in such rates not being affordable. Some independents also submitted that penetration/demand for secondary lines and optional services would drop if local rates were increased, especially if those rates were set above Bell's rates.

112.While it did not object to its members' rates being at parity with those of Bell in similar or neighbouring exchanges, OTA submitted that, in return, its members' subscribers should also receive an equivalent grade of service and local calling area equivalent to that available to Bell's subscribers. Specifically, OTA supported rate parity with Bell no later than 2002, or earlier, as long as the rate increases were coupled with the elimination of mileage charges, the expansion of local calling areas and the introduction of individual line service on demand.

113.ACTQ/SATAT submitted that its members should match Bell's local rates in similar exchanges over a two-year period. It also favoured maximizing revenues from optional services.

114.CAPTS submitted that its members' rates should reflect the fact that its members do not incur income taxes and should therefore be lower than Bell's. Consequently, CAPTS indicated that it would not be appropriate that its members' rates be equal to those of Bell as this would produce contribution rates below that of Bell. As noted earlier, CAPTS proposed that its members calculate the revenue requirement for local services and toll services separately, based on the costs incurred in providing these services. In CAPTS' view, this approach would more accurately recognize the sharing of the telephone infrastructure by both local telephone services and toll services. Furthermore, local rates would increase only if they did not recover the costs incurred to provide local service. CAPTS submitted that the more appropriate venue to examine whether local rates should increase would be in the proceeding to consider local competition for the independents.

115.CAPTS further maintained that the Commission should not order increases to optional service rates, submitting that these services are more elastic and that, therefore, increased revenues from higher rates would be offset by a reduction in demand. It also argued that increasing rates for local access service would further reduce demand, pushing the take-rate for optional services even lower and thus reducing the revenues that independents would draw from these services. Finally, CAPTS submitted that the implementation of rates equal to Bell's rates would not be affordable for rural customers.

116.AT&T Canada LDS, Bell, Call-Net, Cantel, Northern and O.N. Tel favoured more aggressive rate adjustments. All these parties, except Northern, submitted that revenues from local rate increases should be used to reduce the independents' contribution component of the CAT. Northern considered that the benefits of rate increases should be passed on to its subscribers, either through lower long distance rates or improved local services, such as expanded local calling areas.

117.Bell submitted that it should not be required to subsidize the local access rates of independents' subscribers, where those rates remain lower than the highest rate paid by Bell's subscribers within its Band D. Bell further submitted that those independents with the highest contribution rates should be required to increase their rates above those of Bell in order to reduce their contribution rates to reasonable levels, subject to affordability. Bell also submitted that local rate increases should be allowed to exceed rate rebalancing increases previously mandated by the Commission for other telephone companies. In support, Bell noted that the Commission had approved Northwestel Inc.'s application for a $10 local rate increase over two years. Bell submitted that local access rates for its residential customers in lower rate groups had increased by more than $7 over one year and up to $11 over three years following Bell's rate rebalancing and restructuring plans.

118.Bell further submitted that the independents should increase their rates for optional services to at least the same level as Bell and even higher, if necessary. Bell argued that the demand for optional services was inelastic and that there was no significant difference in elasticity estimates between rural and urban subscribers. Bell also submitted that other factors, such as promotional activities, bundling of services and availability of new services, are important factors in determining the penetration rates of optional services. In support, Bell submitted that the demand for optional services in its territory is higher than in the independents' territories, despite the rates being generally higher in its territory.

120. 119.Cantel submitted that as long as rates for services, especially basic residential services, are priced below Phase II costs plus 25%, further rate adjustment is required, subject only to affordability considerations.

120.Call-Net submitted that the independents should be required to adjust their rates as quickly and as aggressively as possible to move them closer to cost and reduce their CATs. In response to affordability concerns, Call-Net proposed to use the highest residential local access rate currently charged in Canada as a proxy to determine the highest rates that the independents should be required to charge. Like Bell, Call-Net was of the view that the independents could derive greater revenues from other sources, such as optional services.

121.AT&T Canada LDS submitted that, by 1 January 2000, the independents should increase their residential local access rates to $25 per month and their business local access rates to $45, to achieve parity with Bell's Band D rate. Independents whose contribution rates remained above 2 cents following such increases should, AT&T Canada LDS argued, be required to further increase their residential local access rates up to $30 to lower their contribution rate as soon as possible.

122.The Commission notes that the financial support for the independents was traditionally derived from toll revenue settlement agreements between the independents and their monopoly toll carriers. Under these agreements, toll carriers contributed to the recovery of the Local/Access shortfall of the independents, thereby enabling them to maintain their local rates below cost and to earn a reasonable rate of return.

123.With the advent of competition in the toll market, the mechanism for the recovery of the Local/Access shortfall in the independents' operating territories in Ontario and Quebec gradually evolved from toll settlement agreements to company-specific CATs. The CAT rates are levied on toll minutes and are paid by all toll service providers who originate and terminate traffic in an independent's territory.

124.In Decision 96-6, the Commission established company-specific CATs, effective 1 January 1997, that include a contribution component recovering the Local/Access shortfall. The CAT also provided a rate for the recovery of the costs related to Direct Toll and the start-up costs associated with the implementation of Equal Access.

125.The Commission notes that toll contribution revenues derived from the contribution component of the CAT provide an explicit subsidy to maintain affordable basic local rates.

126.Based on the record of this proceeding, the Commission notes that some companies currently obtain upwards of 50% of their revenue requirement from contribution. The Commission is of the view that this level of explicit subsidy is not appropriate in an increasingly competitive market.

127.The Commission notes that the high level of toll contribution is generally due to local access rates that do not recover a reasonable share of their costs. The Commission therefore concludes that the independents should be directed to bring their rates closer to cost.

128.The Commission disagrees with those parties who argued that local access rate increases in independents' territories should not exceed the level of rates in Bell's territory. The Commission considers that limiting rate increases in this manner would be inconsistent with the Commission's policy of bringing rates closer to costs.

129.In Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, 1 May 1997, the Commission found that it was appropriate to maintain rural rates at levels which are not greater than the rates paid by urban customers, unless it could be demonstrated that circumstances warranted higher rates in rural areas. The Commission notes that many independents have comparatively high contribution requirements as well as high contribution rates; in some cases, the contribution rate exceeds 10 cents per minute per end. These independents may need to increase their residential and business local access rates above Bell's to bring their contribution requirement to targets set out in this Decision.

130.Accordingly, the Commission finds that local rates for independent telephone companies should not be bound by the rates charged by Bell in similar or neighbouring exchanges. The independents will be required, where necessary, to increase their local rates above such levels in order to achieve the targets set out herein.

131.The Commission notes that many parties argued that the independents should be directed to increase local rates in order to move them towards cost, subject only to affordability concerns. Others argued that the independents should increase local rates with a view to achieving sustainable contribution rates. Several parties suggested that a sustainable contribution rate would be 2 cents, i.e., the level of contribution used by the Commission to set the going-in rates in Implementation of Price Cap Regulation and Related Issues, Telecom Decision CRTC 98-2, 5 March 1998.

132.While the Commission is of the view that independents should bring their rates closer to cost and reduce their reliance on contribution revenues, the Commission also recognizes that some independents will not be able to reduce their contribution rates to sustainable levels in the short term. Furthermore, the Commission considers that the independents do not have the same ability as larger integrated telephone companies to reduce their costs and generate additional revenues to reduce their CAT rates. In the circumstances, the Commission considers that a more flexible approach is appropriate to reduce the independents' reliance on contribution revenues.

133.Accordingly, the Commission finds that it would not be appropriate to require all independents to reduce the contribution component of their CAT down to 2 cents per minute per end at this time.

134.The Commission notes that some parties submitted that it could set different target contribution rates. Specifically, AT&T Canada LDS submitted that some independents would have to reduce their contribution rates down to 2 cents per minute per end, others to 6 cents per minute per end, and a third group of independents to 10 cents per minute per end. In the Commission's view, this approach is inappropriate. The Commission considers that the choice of particular target contribution rates would be arbitrary. This approach would also require greater Commission intervention than the Commission finds appropriate.

135.The Commission considers that some independents will be able to reduce their contribution rates down to at least 2 cents. In Decision 97-8, the Commission stated that a certain level of contribution must be maintained to ensure that local exchange rates in high-cost areas permit the continuation of universality of access while minimizing distortion of the competitive market. Furthermore, the Commission required those companies whose contribution rate was above 2 cents per minute per end to reduce their contribution rate to no less than 2 cents per minute per end. Accordingly, while the Commission does not find it appropriate that all independents be required to reduce their contribution rates down to 2 cents per minute per end, the Commission finds that, where feasible within the parameters set out in this Decision, the independents should be required to reduce their contribution rates down to, but not lower than, 2 cents per minute per end through rate rebalancing.

136.In Part IV of this Decision, the Commission determined that the independents must reduce the contribution portion of their total revenue requirement to no more than 25% by the year 2002. The Commission is of the view that the independents should adjust their local rates as well as implement other measures such as productivity improvements to achieve this maximum level of subsidy.

137.In order to ensure timely reduction of the independents' total revenue requirement while providing the independents with sufficient flexibility, the Commission considers that it must impose some level of rate adjustments but provide the independents at the same time with flexibility to reduce their reliance on contribution revenues.

138.The Commission notes that most parties agreed that, at a minimum, increases in local rates to Bell parity would be appropriate for the independents. The Commission directs those independents that have not already done so, except where they can demonstrate that a particular rate is compensatory, to file an application by 1 June 1999 to increase their monthly single-line, including TouchTone residential local rates up to $19.85 and their monthly single-line, including TouchTone business local rates, including multi-line trunks where applicable, up to $45.45, effective 1 July 1999.

139.The Commission finds that the revenues generated from rate increases must be used to reduce the contribution component of the independents' CAT.

140.Furthermore, those independents who can reduce their contribution rate to 2 cents per minute per end, without having to increase their residential and business local rates to $19.85 and $45.45, respectively, have the flexibility, subject to Commission approval, to choose how to rebalance their rates to reduce their contribution rate to 2 cents per minute per end in their 1 June 1999 application. The Commission notes that, for the purpose of moving rates closer to cost, the independents whose contribution requirements are at, or less than 25%, of their total revenue requirement on 1 July 1999 but whose contribution rate is above 2 cents, must also increase their residential and business local rates up to $19.85 and $45.45, respectively, subject to the 2 cent contribution rate floor.

141.The Commission notes that, in Telecom Order CRTC 98-1168 dated 24 November 1998 (Order 98-1168), it ordered Westport Telephone Company Limited (Westport) to implement the second phase of the proposed local residential and business rate increase on 1 January 2000. The Commission also notes that in Telecom Order CRTC 98-1203 dated 1 December 1998 (Order 98-1203), it directed Hurontario Telephones Limited (Hurontario) to further increase its residential rates to $19.85 and to implement an individual line business rate of $45.45 across all of its exchanges, effective 1 August 1999. Given the determination in this proceeding that the increases to residential and business rates are to be effective 1 July 1999, Westport and Hurontario are also directed to implement their increases mandated in Orders 98-1168 and 98-1203 effective 1 July 1999.

142.The Commission notes that, in Implementation of Price Cap Regulation - Decision Regarding Interim Local Rate Increases and Other Matters, Telecom Decision CRTC 97-18, 18 December 1997, it approved Bell's Service Improvement Program (SIP) to increase its residence primary exchange service rates to, among other things, eliminate mileage charges and establish expanded local calling based on Natural Calling Centres (NCCs). The Commission found that the SIP would provide rural customers with Internet access without mileage or toll charges. The Commission was also of the view that, while the extension of local calling might be an exception to the EAS criteria, the proposal would be in the interest of subscribers, and these outweighed competitive concerns. The Commission also considered that approval of the SIP would be consistent with the Canadian telecommunications policy objectives.

143.The Commission also notes that it has recently approved applications by Westport, Durham Telephones Limited (now Nexicom Telecommunications Inc.), Hurontario and Otonabee Telephones Ltd. (now Nexicom Telephones Inc.) to increase their local rates for basic access service improvements (expanded local calling areas, the elimination of mileage charges and community rates) and has received similar applications from other independents.

144.The Commission considers that, together with their residential and business local rate increases, independents should also be allowed to immediately file tariffs to eliminate mileage charges and to the extent that their customers can have access to the Internet without mileage or toll charges and to the extent the relevant criteria are met, expand local calling areas based on NCCs.

145.The Commission directs those independents whose contribution requirement will still exceed 25% of the total revenue requirement following the local rate increases of 1 July 1999, to file with the Commission, by 1 January 2000, a proposal detailing how they intend to reduce their subsidy requirement to no more than 25% by no later than the year 2002. As mentioned in Part IV of this Decision, independents may choose to further increase residential, business and/or optional local rates and/or penetration rates, improve their productivity, reduce costs, or otherwise restructure their rates.

146.To encourage the independents to increase their revenues from sources other than residential local rates, the Commission directs that the independents limit their residential basic local rate increases up to a maximum of $5 per month, annually, for each of the years 2000 and 2001.

147.The Commission considers that the independents can generate additional revenues from optional services. The Commission notes that many of the independents' rates for those services are below those of Bell. At the same time, penetration/demand for those services in the independents' territories is lower than in Bell's territory, and in some cases, significantly lower. The Commission notes that evidence filed by Bell in this proceeding showed that demand for optional services was relatively inelastic. Bell also submitted that there were no significant differences in elasticity estimates between rural and urban areas. The Commission also notes that Bell's take rates for optional services are higher than those of the independents, despite higher rates.

148.The Commission further notes that some independents may not need to match Bell's rates for optional services to meet the contribution objectives established in this Decision. The Commission is of the view that the independents should be given the flexibility to increase rates for their optional services and/or penetration/demand for those services to levels they deem sufficient and appropriate to meet the contribution objectives established in this Decision. The Commission further notes that this approach may cushion the increases faced by customers as the independents will have the flexibility to spread rate increases for optional services, if required, over the duration of their plan.

VI OTHER MECHANISMS TO FOSTER TOLL COMPETITION

A. Expanding the Scope of Contribution Paying Services

149.As another way of reducing the contribution rates for the independents, Bell, Télébec and Northern proposed that the base of interexchange contribution-paying services in the independents' territories be expanded in much the same manner as that currently in effect in the territories of incumbent carriers subject to price cap regulation.

150.Cantel was concerned that if the base of contribution paying services were expanded to include Wireless Service Providers (WSPs) in the manner that is currently applied in the territories of incumbent carriers subject to price cap regulation, it would amount to an over-contribution by the WSPs to the Local/Access shortfalls of the independents. Cantel noted that the rates for Wireless Access Services that WSPs currently pay are well in excess of Phase II costs plus 25% and therefore provide a significant contribution to the independents' shortfalls. It argued that, as long as these rates continue to be priced well in excess of the costs to provide service, the WSPs should not be required to make explicit long distance contribution payments since this could cause significant curtailment in the expansion of wireless networks into the territories of the independents.

151.In Decisions 96-5 and 96-6, the Commission determined that the scope of contribution paying minutes established for independents should be wider than that which applied to the then Stentor Resource Centre Inc. (Stentor) companies. The Commission was of the view that there was merit in recovering the Local/Access shortfall from as much traffic as possible in order to reduce the per-minute contribution rate. The Commission therefore determined that, in independent territories, contribution should be paid on all switched voice and data traffic that interconnected with the Public Switched Telephone Network (PSTN).

152.The Commission notes that the impact of the additional revenue from the WSPs' surcharges on the contribution requirements of the former Stentor-member companies was not very significant. Based on 1997 estimates of WSP traffic, the WSP contribution revenue was $10 million on a base of $700 million total contribution revenue. Following a similar determination for the independents' territories, WSPs would be required to pay contribution only on their traffic which interconnected to the PSTN in the independents' territories. In order to estimate the wireless toll traffic terminating and originating in the independents' territories, an extensive wireless traffic study would be required. The Commission is of the view that this additional requirement would not likely result in a material reduction of the independents' CAT rates at this time.

153.The Commission further notes that consideration of expanding the base of contribution paying services for the former Stentor-member companies was only undertaken after significant rate rebalancing and cost reduction. The Commission is of the view that further expansion of the contribution payment requirements in independent territories, prior to the reduction of the contribution rates, could limit the provision of competitive services, such as wireless, that are currently being offered in their territories.

154.In light of the above, the Commission determines that the base of contribution paying services for the independent territories should not be expanded.

B. Unbundling Direct Toll Costs

155.The Direct Toll portion of the CAT is derived from the costs allocated to the Toll BSC of the company's Phase III results for those independents that are not toll service providers. These companies do not have any toll revenue but do have costs that are directly related to the support of toll traffic. This is somewhat analogous to the Switching and Aggregation expenses of the former Stentor-member companies but in fact it does include some toll services such as Billing and Collection as well. Since Bell is currently the toll service provider for most of these independents, these services are provided on behalf of Bell. APLDS have submitted that if they were to offer originating toll service in these territories, they would provide their own Billing and Collection function and do not want to pay for a service that they would not use.

156.AT&T Canada LDS submitted that Direct Toll charges are another part of the CAT that cannot be ignored in the effort to reduce CAT rates. AT&T Canada LDS argued that the independents' Direct Toll charges should be unbundled to the extent possible along the same elements as those established in Unbundled Rates to Provide Equal Access, Telecom Decision CRTC 97-6, 10 April 1997. AT&T Canada LDS submitted that estimates of the Billing and Collection costs provided by some independents indicate that this is a significant portion of the costs. AT&T Canada LDS argued that separate tariffed rates should be established for recovery of the costs of Billing and Collection services, effective no later than 1 January 2000.

157.Both ACTQ/SATAT and OTA stated that they are working on unbundling proposals. OTA submitted that it is currently working on a Billing and Collection Tariff that could be charged for Billing and Collection services and that, subsequently, the costs associated with Billing and Collection services would be removed from the Toll BSC.

158.CAPTS submitted that the CAT should be reviewed to determine what level of "unbundling" can be applied. Billing and Collection are examples of elements that are still included in the current CAT. The Direct Toll component should be unbundled to the degree that customer Billing and Collection costs will be removed and billed directly to the applicable toll carrier. CAPTS stated that it was unable to quantify the exact costs at this time but that its members have undertaken a study to do so.

159.The Commission considers that unbundling the Direct Toll component, to the extent of removing those services which can be provided by APLDS themselves, such as Billing and Collection, would reduce the independent CAT rates and help to reduce the barriers to competitive entry.

160.The Commission agrees with parties who have proposed the unbundling of Direct Toll costs. The Commission is of the view that there would be no direct impact on the toll service providers if the unbundled billing charges were the same as the company is now paying through the Direct Toll rate. The Commission notes that OTA and ACTQ/SATAT submitted that they have already started working on developing the costs required to set unbundled rates. CAPTS have already reported the Direct Toll cost components and are preparing procedures to support the filing of separate tariffs.

161.In Decision 98-5 for City Tel, the Commission directed the company to file a proposed rate and methodology for the recovery of the toll Billing and Collection costs. The Commission considers that a similar approach would allow the independents, who are in the process of developing the procedures, flexibility in submitting their proposals. The Commission is of the view that the methodology could then be commented on by interested parties either through a separate process or as part of the annual contribution proceedings.

162.Accordingly, the Commission directs the independents to file tariffs, within 60 days of this Decision, to be effective 1 January 2000, for unbundled Billing and Collection services for toll service providers, along with the detailed methodology used to develop the rates, and to reduce the Direct Toll component of the CAT accordingly.

VII OTHER ISSUES

A. Revenue Requirement

1. Revenue Requirement Scrutiny

163.Generally, the independents were of the view that the regulatory framework developed in Decision 96-6 continued to strike an appropriate balance between the regulatory burden placed on them and the interests of the contribution payers and the wider public interest, while encouraging the development of a cost-effective telecommunications industry. Some parties, primarily the long distance carriers, recommended measures to modify this regulatory approach by having detailed revenue requirement reviews for the independents. These parties noted that, with few exceptions, the independents have never been subject to a thorough revenue requirement review since coming under Commission jurisdiction in 1994.

164.The Commission recognizes the significant resources in terms of time, effort and expense that revenue requirement proceedings entail, particularly for the smaller independents. The Commission considers that the measures set out in this Decision mitigate the need at this time for further scrutiny of each independent's revenue requirement with a view to CAT rate reduction. However, the Commission notes that an application to initiate a revenue requirement proceeding, encompassing a full examination of a company's financial and operational forecasts, is an option always available to an independent in the event that the company's earnings are projected to be below the bottom of its allowed rate of return range.

2. Deferral Account

165.OTA submitted that, since the independents are local exchange carriers only, and unable to influence long distance minutes, their earnings should not be put at risk due to variations in actual minutes from the forecast minutes used to establish the CAT. OTA proposed that, if actual minutes underrunning forecast were to result in the company earning below the bottom of its rate of return range, the shortfall to reach the bottom of the range be put in a deferral account and charged after year-end to all long distance carriers, pro-rated by share of total minutes carried in the year. OTA submitted that this mechanism should be in place prior to actual minutes being used for billing and collecting CAT revenues, stating that, without such a deferral account, the independents could experience serious financial impact.

166.Bell noted that the use of such a deferral account would be dependent on the independents' CAT charges being billed on the basis of actual minutes, rather than proxy minutes. Consistent with the Commission's direction in Decision 96-6 that the collection of contribution should be based on actual toll minutes, Bell submitted that the Commission should mandate a requirement for the independents to report actual minutes.

167.The Commission is not persuaded that the risk arising from variations between forecast and actual minutes would be significant enough to outweigh the disadvantages inherent in OTA's proposed mechanism. These disadvantages include increased operational uncertainties for APLDS seeking to enter the independents' territories, as well as additional administrative burden and increased regulatory lag. The Commission also notes that the measures established in this Decision will serve to reduce the independents' reliance on CAT revenues as a primary source of income, thus reducing the impact that fluctuations in minutes will have on a particular company's earnings.

168.The Commission is of the view that implementation of OTA's proposed deferral account should not be a prerequisite to moving away from proxy minutes to a system of forecast/actual minutes as envisaged in Decision 96-6. Accordingly, the Commission directs those independents/associations that are not already doing so, to use forecast minutes in the preparation of their financial forecasts and CAT filings for the year 2000 and onwards, and to use actual minutes for the billing and collection of their CAT revenues, commencing in the year 2000. The Commission notes that the deferral account implemented in Decision 96-6, dealing with any independent's earnings in excess of its maximum approved rate of return, remains in place.

3. Intercorporate Transactions

169.Bell, AT&T Canada LDS and O.N. Tel were of the view that the Commission should scrutinize and approve intercorporate transactions by the independents to ensure that the transactions are conducted at market-based rates such that subscribers and competitors do not subsidize competitive initiatives. To that end, they submitted that the independents should be directed to file regular reports on intercorporate transactions. Bell expressed the view that the Commission should be guided by the principles set out in the intercorporate transaction pricing policy established by the Commission for Bell and other former Stentor-member companies, in assessing whether the independents' intercorporate transactions are taking place at fair and reasonable rates. O.N. Tel expressed concern about administrative burden, and submitted that any reporting process should be as simple as possible.

170.OTA and ACTQ/SATAT were of the view that sufficient information on these types of transactions is already available through the notes to the financial statements filed with the Commission each year. OTA suggested that additional information could be provided to the Commission on a case-by-case basis, when particular issues or questions arise. Call-Net did not believe it was necessary for the independents to file intercorporate transaction reports, but submitted that the companies should be required to file their intercorporate transaction policies along with confirmation, at regular intervals, that they were adhering to their policies. CAPTS questioned whether reviews of intercorporate transactions would be cost beneficial.

171.The Commission is of the view that increasing the filing requirements for the Ontario and small Quebec independents to include separate reporting of all intercorporate transactions would run counter to the Commission's objective of streamlining, as much as possible, ongoing regulatory requirements. However, the Commission considers that it would be useful to conduct an initial review of policies governing intercorporate transactions for applicable companies. Accordingly, those companies that have intercorporate transactions are directed to file details of the pricing policies and accounting procedures associated with their intercorporate transactions, with the Commission within 90 days of this Decision. The Commission notes that it may also request information updates pertaining to intercorporate transaction amounts through the annual contribution proceedings.

B. Broadband and Preparation for Local Competition

172.In PN 97-41, the Commission requested submissions regarding the extent, if any, to which the CAT should subsidize expenditures related to broadband facilities and expenditures associated with the preparation for local competition.

173.Call-Net submitted that any costs related to broadband facilities and/or related to the preparation for local competition should be isolated and excluded from the CAT calculation so that the Interexchange Carriers (IXCs) are not required to finance those costs. Call-Net referred to Implementation of Regulatory Framework for Québec-Téléphone and Télébec ltée, Telecom Decision CRTC 97-21, 18 December 1997 (Decision 97-21), which directed Québec-Téléphone and Télébec to assign all new broadband costs to the Competitive segment in order to protect utility customers and IXCs from the risk of subsidizing broadband investments.

174.AT&T Canada LDS argued that it would be inappropriate for the independents to recover these costs from the IXCs. AT&T Canada LDS argued that all expenses associated with broadband and the preparation for local competition should be excluded from the independents' contribution requirement. AT&T Canada LDS further argued that some scrutiny of the capital expenditures and five-year capital plans of the independents could prevent unwarranted expenses from being recovered through contribution rates.

175.Bell submitted that, in the absence of a split rate base, the Phase III costing procedures could be used to ensure that inappropriate broadband investments and expenses are not included in the independents' rate bases, revenue requirements or contribution requirements. Bell also submitted that broadband expenditures should not be considered appropriate for the small independents, unless specifically incurred for the provision of utility-type services, and should therefore not be subsidized by the CAT.

176.Bell further argued that any expenditure undertaken by the independents for the preparation for local competition should be borne entirely by the independents and not be passed through to toll carriers via the CAT.

177.Québec-Téléphone argued that as long as broadband facilities are deployed in the Utility segment, the contribution rate should subsidize these costs. Québec-Téléphone acknowledged, however, that broadband investments for any non-utility services should be excluded from the CAT.

178.Télébec and Cantel argued that the CAT should not be used to subsidize costs associated with broadband facilities or in preparation for local competition.

179.CAPTS submitted that the Commission should recognize that there are acceptable instances where the deployment of fibre is more efficient and cost effective for the provision of utility services. CAPTS also proposed that, if and when there are investments in broadband facilities for providing current or future competitive services, the cost of these services should be paid entirely by the users. CAPTS noted that, since the local competition proceeding has yet to commence, it would be inappropriate to incur costs before the rules have been established.

180.O.N. Tel and Northern argued that the costs associated with broadband facilities and the start-up of local competition should be treated in the same way, for the independents, as it is for the former Stentor-member companies. Northern also pointed to Phase III allocation procedures and to the directives from Decision 96-6 as appropriate direction for the treatment of these costs. ACTQ/SATAT submitted that broadband investments should continue to be allocated according to the rules set out in its members' Phase III Manuals.

181.OTA stated that its members have made no expenditures to prepare for local competition and that any broadband investments that have been made, have been done to offer utility services. OTA argued that, whenever broadband facilities are used to offer utility services, the costs should be included in the Local and Access BSCs and therefore covered by the CAT.

182.The Commission notes that all parties agree that (1) capital expenditures and expenses made for the provision of broadband facilities used to provide competitive-type services should be excluded from the CAT calculation; and (2) the rules currently in place for the former Stentor-member companies can, and should be, made applicable to the independents.

183.The Commission considers that there are instances where the deployment of broadband facilities offers the most cost-effective way of providing transmission facilities for the provisioning of primary exchange services. The Commission is of the view, however, that the deployment of fibre facilities beyond the location of electronic remotes or in the distribution portion of the plant, is not justified for the provision of primary exchange services.

184.The Commission considers that, for the Ontario and small Quebec independents, the annual Phase III and contribution filings provide appropriate safeguards to ensure that inappropriate broadband investments and expenses are not included in the independents' contribution requirement calculations.

185.The Commission directs that, on a going-forward basis, the Ontario and small Quebec independents are to file, as part of their annual CAT filings, detailed information on broadband applications including investment levels and planned use for any fibre investments.

186.The Commission notes that those parties who commented on the issue of the costs associated with the preparation for local competition generally interpreted these costs as being those which are related to local competition start-up and to local number portability.

187.The Commission also notes that the parties agreed that such expenditures, when required, should not be recovered through the CAT and should be treated in the same manner as they are currently treated for the former Stentor-member companies.

188.The Commission is of the view that the recovery of expenditures associated with local competition start-up and local number portability should be addressed in a future proceeding to determine the timing and conditions for the introduction of local competition in the territories of the independents.

C. Construction Program Reviews

189.During the proceeding, a number of parties addressed the appropriateness of annual reviews by the Commission of capital investment plans of the small independents.

190.AT&T Canada LDS submitted that some scrutiny of the capital expenditures and five-year capital plans of the independents could prevent unwarranted expenses from being recovered through contribution rates. AT&T Canada LDS also added that the onus should be on the independents to demonstrate why any accelerated depreciation and depreciation reserve deficiencies should be derived from contribution.

191.Bell argued that, in order to ensure that depreciation expense, which is a component of both revenue and contribution requirements, is reasonable, it is essential that the Commission review the capital expenditures of the small independents on a regular basis. Bell noted that, prior to coming under the Commission's jurisdiction in 1994, Quebec independents were required to file five-year development plans, which included capital expenditure budgets. These plans were reviewed and approved by the Régie on an annual basis.

192.CAPTS submitted that the Commission retains the ability to review the construction programs of the independents annually when it reviews related contribution requirements. CAPTS submitted that the regulatory review process is sufficient for providing information on capital expenditures and satisfying concerns about the costs of certain capital initiatives being recovered from the IXCs.

193.O.N. Tel submitted that, pending the implementation of price caps, the small independents should include a three-year capital plan in their annual filings. O.N. Tel was also of the view that future revenue requirement proceedings should include a review of the five-year capital plan of each independent. Such a review would focus on capital expenditures relating to competitive initiatives that are not recovered through rates paid by customers of services provided by the independents on a monopoly or utility basis.

194.OTA suggested that, if it is determined that reviews of the capital plans of the independents are in the public interest, three-year plans provided every two years or one-year plans provided annually would be more appropriate than annual three-year plans.

195.The Commission agrees that it would be appropriate to scrutinize the small independents' capital expenditures in order to ensure that CAT rates are no higher than absolutely necessary. However, in the interest of keeping the regulatory burden for the small independents as light as possible, the Commission is of the view that detailed construction program reviews on a regular basis are not appropriate at this time.

196.The Commission notes that capital expenditure information can be obtained through the annual Phase III and CAT filings. The Commission is satisfied that through these annual filings and, through regular depreciation life characteristics filings, it will be in a position to adequately scrutinize the costs that may be legitimately recovered through the CAT.

197.The Commission concludes therefore that the Ontario and small Quebec independents are not, at this time, required to file specific detailed annual construction plans for Commission approval.

D. Phase III Audits

198.In PN 97-41, the Commission asked for parties' comments on whether there should be further audits of the independents (other than for Québec-Téléphone and Télébec) and if so, what should be the scope and form of such audits.

199.Bell proposed that Phase III audits be carried out as long as the independents are under rate of return regulation. Bell and O.N. Tel proposed that the Phase III audit reports, including a copy of the audit plan, a summary of substantive findings and any plans for corrective action, be placed on the public record, with interested parties given the opportunity to ask questions.

200.Cantel argued that Phase III audits be made a requirement as long as the independents' CATs are higher than those of the former Stentor-member companies.

201.AT&T Canada LDS and O.N. Tel proposed that Phase III audits be conducted annually by a reputable and impartial third party with sufficient expertise. AT&T Canada LDS was of the view that once price caps are implemented, the necessity for further audits would be alleviated.

202.Further, AT&T Canada LDS and Cantel were of the view that the cost of Phase III audits should be borne entirely by the independents and not be classified as an allowable expense for purposes of calculating the CAT.

203.OTA argued that Phase III audits would be costly and burdensome for the independents. OTA and Northern were of the view that the direction in Decision 96-6 continues to strike a balance between the Commission's need to ensure that the independents' rates are just and reasonable and the cost and burden imposed on the independents.

204.ACTQ/SATAT stated that it did not object to having independent audits conducted but proposed that they take place every second year rather than annually. ACTQ/SATAT stated that it was willing to furnish an audit report but strongly objected to the publication of any information pertaining to the audit program, procedures or working papers.

205.CAPTS' view was that audited Phase III results would be a needless expense but indicated a willingness to have Phase III audits performed so long as they had no impact on the resources of the companies. CAPTS proposed that only truly affected parties be allowed to participate if the Commission decided that the Phase III audit process should be a public one.

206.OTA and CAPTS argued that the costs of Phase III audits are legitimate costs of doing business and should be incorporated in the CAT calculation through the Phase III allocation procedures.

207.The Commission notes that a Phase III audit would test expenditures and revenues of a company assigned to the proper BSCs in accordance with the established principles and guidelines; it would not, however, test the reasonableness of the expenditures and revenues of a company.

208.The Commission notes that, under rate of return regulation, the two components of the independents' CAT (contribution requirement plus Direct Toll costs) provide each independent with an allowed rate of return on its total regulated operations. If an expense were incorrectly allocated to a BSC, the ultimate effect on the company's CAT would, in any event, not likely be significant.

209.The Commission is of the view that, given the significant cost of a Phase III audit and the likelihood that any misallocation errors would not have a significant impact on the level of a company's CAT, the additional financial burden of a Phase III audit would likely outweigh any potential benefits.

210.The Commission concludes that generally the independents (with the exception of Québec-Téléphone and Télébec) are not required to file audited Phase III results at this time. However, the Commission considers that Phase III reviews may be conducted on an exception basis or as deemed necessary by the Commission.

E. Capital Structure and Costs of Equity and Debt

211.As part of the record of this proceeding, CAPTS argued that the Commission should continue to use its members' actual capital structures in determining their CAT rates and revenue requirements. CAPTS further submitted that, due to the uncertainty of the degree of toll competition and of the conditions of local competition in the territories served by the independent telephone companies, it would be reasonable to defer any review of the allowed cost of equity until these matters have been clarified.

212.OTA also argued that the Commission should continue to use the actual capital structures in determining the CAT rates and revenue requirements of the independents, since the actual capital structure reflects the actual financing decisions taken. In support of its argument, OTA submitted that no evidence has been put forward in this proceeding which would lead to the conclusion that an equity component of 55% to 65% is the norm for independent local exchange carriers the size of its members.

213.OTA was of the view that it would be premature, at this time, to hold a cost of capital review. It argued the situation of the independents vis-à-vis many aspects of regulation, which will impact the risk they are under, is unknown at this time and will remain unknown until decisions are issued in this proceeding, the Service to High-Cost Serving Areas, Telecom Public Notice CRTC 97-42, 18 December 1997 (PN 97-42) proceeding, and the proceeding on local competition in the territories of the independents.

214.ACTQ/SATAT proposed that the Commission use, in the calculation of the CAT rate and revenue requirements, a capital structure with a higher equity component than those of former Stentor-member companies. It recommended a 55% minimum common equity component, with a maximum of 75%.

215.Call-Net was of the view that, where the use of the actual capital structure does not materially affect the CAT rate when compared to the CAT rate resulting from a normalized capital structure, the actual capital structure of the independent should be employed.

216.O.N. Tel was of the view that the industry norm for capital structures of telephone companies in Canada includes an equity component of approximately 55%.

217.AT&T Canada LDS proposed that the independents' CAT rates and revenue requirements be calculated using a capital structure reflecting the prevailing industry norm, which it assumes to be 55% equity. AT&T Canada LDS argued that this is consistent, not only with the structure mandated for most of the former Stentor-member companies, but also with that applied to Québec-Téléphone and Télébec.

218.Bell submitted that, for the purpose of determining the independents' contribution and revenue requirements, the independents should also be subject to a maximum imputed equity component of 55% where the actual equity component exceeds 55%. Bell also proposed that, for rate-making purposes, the Commission deem a maximum equity component of 60% for CAPTS members, given their tax-exempt status. Bell argued that this would be consistent with the Commission's approach to capital structure for the former Stentor-member companies. Bell submitted that such a deemed capital structure should be put in place as soon as reasonably possible.

219.Bell further submitted that, given that the regulatory regime has rewarded companies with a high equity component in their capital structure, it is unlikely that a more balanced capital structure will emerge without some regulatory incentive, such as that provided by a deemed capital structure.

220.In addition to capital structure considerations, given that the Commission has not examined the allowed rates of return for the independents since 1995, Bell submitted that an overall review of the allowed cost of equity for the independents, is appropriate at this time.

221.Finally, Bell noted that many of the independents have an actual capital structure comprising 100% equity. Bell submitted that, if the Commission decides that a deemed capital structure is appropriate for the calculation of the independents' revenue requirements, it clearly will not be in a position to adopt the actual cost of debt for those independents in calculating their imputed cost of debt. In Bell's view, the Commission should not necessarily adopt the independent's actual cost of debt, even if it does have one, but rather should determine whether such cost is reasonable.

222.The Commission notes that, in Decision 96-6, it agreed in principle that the independents' capital structures are not in line with the prevailing industry norms and that these differences can be translated into rate of return on equity differentials.

223.The Commission agrees with Bell that the current regulatory regime has rewarded the independents with a high equity component in their capital structure and that a more balanced capital structure will not likely emerge without some regulatory incentive. However, the Commission is of the view that there is not enough evidence in this proceeding to consider the issues associated with determining reasonable capital structures and the associated costs of equity and debt.

224.The Commission notes CAPTS' and OTA's submissions that it would be premature, at this time, to hold a cost of capital review for the independents. However, in view of the fact that it has not examined the allowed rates of return for the independents in Ontario and for the small independents in Quebec since 1995, the Commission considers that an overall review of the allowed cost of capital is appropriate.

225.The Commission will initiate a proceeding, by way of Public Notice, to review the independents' capital structures and associated costs of equity and debt. In setting out the milestones for the upcoming proceeding, the Commission will provide parties and interveners with sufficient time to take into consideration the outcome of the PN 97-42 proceeding. The Commission intends to implement any change to the capital structures and associated costs of equity and debt by 1 January 2001.

F. Method of Regulation

1. Québec-Téléphone and Télébec

226.In Decision 97-21, the Commission approved rate rebalancing initiatives for 1997 and 1998 and was of the view that rates should be moved closer to costs prior to implementing price cap regulation for Québec-Téléphone and Télébec. The Commission also recognized the need to implement price cap regulation as soon as practically possible and announced that it would initiate a process shortly following a decision in this proceeding to examine the parameters of the price cap regime that would apply to Québec-Téléphone and Télébec.

227.The Commission continues to be of the view that rates should be moved closer to their underlying costs and that price cap regulation should be implemented as soon as possible. However, the Commission notes that there would be insufficient time following the release of this Decision to properly consider the parameters of a price cap regime that would apply to Québec-Téléphone and Télébec for 1 January 2000. The Commission also notes that it has not approved any rate rebalancing for 1 January 2000 for Québec-Téléphone and Télébec.

228.Given the above, the Commission intends to initiate a proceeding following the release of this Decision to consider rate rebalancing for 1 January 2000 as well as the appropriate time-frame for the implementation of price cap regulation for Québec-Téléphone and Télébec.

2. Ontario and the Small Quebec Independents

229.In Decision 96-6, the Commission recognized that the benefits of price cap regulation are best achieved when rates are closer to their underlying costs and that some type of earnings regulation is required until that time. Furthermore, the Commission found that earnings regulation was appropriate for the Ontario and small Quebec independents and that this method of regulation would continue for the foreseeable future.

230.The Commission notes that those interested parties that advocated implementing price cap regulation generally submitted that rates should reflect their underlying costs prior to adopting this form of regulation.

231.The Commission notes that OTA favoured the continuation of earnings regulation for the Ontario and small Quebec independents. While OTA recognized the importance of an incentive-based form of regulation, it was concerned that price cap regulation would create unwarranted risks for the smaller independents.

232.The Commission also notes that ACTQ/SATAT considered that price cap regulation was not appropriate for the independents.

233.The Commission continues to be of the view that the benefits of price cap regulation are best achieved when rates are closer to their underlying costs and that price cap regulation should be implemented as soon as practically possible. Accordingly, the Commission is of the view that it is premature to consider adopting price cap regulation for the Ontario and small Quebec independents until after the rate rebalancing initiatives outlined in Part V of this Decision have been implemented.

234.The Commission finds that earnings regulation generally continues to be appropriate for the Ontario and small Quebec independents. However, the Commission notes that it would be open to any independent that considers that price cap regulation is appropriate for its circumstances, to file an application detailing its proposal.

VIII CONTRIBUTION MATTERS RELATED TO O.N. TEL, ABITIBI-CONSOLIDATED AND COCHRANE

235.The Commission notes that O.N. Tel, Abitibi-Consolidated and Cochrane do not have approved Phase III processes in place at this time.

236.With respect to O.N. Tel, the Commission anticipates that the company will be in a position to produce its first Phase III forecast for the year 2000. The Commission is of the view that, once O.N. Tel has a Phase III process in place, the same measures that are applicable to the other Ontario and small Quebec independents should also apply to O.N. Tel's Utility segment.

237.The Commission concludes that, for O.N. Tel, given the timing of available Phase III results and the fact that O.N. Tel's local subscribers were subject to a $2 per month rate increase on 1 January 1999, it is appropriate that O.N. Tel delay the implementation of these measures until 1 January 2000.

238.With respect to Abitibi-Consolidated and Cochrane, the Commission notes that both companies advised the Commission, during the proceeding which led to this Decision, of their intention to cease participation in the proceeding. The companies were advised that the determinations made as a result of the proceeding would be applicable to them, notwithstanding their decision to no longer participate in this proceeding.

239.The Commission notes that, for the years 1998 and 1999, Abitibi-Consolidated and Cochrane have chosen an option, provided to them by the Commission, of applying Northern's final CAT rates of 1997 and 1998 respectively as a proxy for their own individual company rates. The Commission is of the view that Abitibi-Consolidated and Cochrane should have company-specific CAT rates by 1 January 2000.

240.The Commission also notes that the subscribers of Abitibi-Consolidated and Cochrane were subject to a $2 per month rate increase effective 1 January 1999.

241.In view of the above, the Commission will initiate a public process, by way of Public Notice, to consider the appropriateness of applying the following measures to Abitibi-Consolidated and Cochrane until company-specific Phase III processes are in place:

·effective 1 January 2000, the contribution rate for Abitibi-Consolidated and Cochrane be set at 2 cents per originating and terminating minute;

·Northern's Direct Toll rate be applied as a proxy for their own individual company Direct Toll rates; and

·Abitibi-Consolidated and Cochrane may apply to the Commission, providing supporting evidence, for any local rate increases which would be required by each company.

IX FILING REQUIREMENTS

242.The Ontario and small Quebec independents are directed to file, within 60 days of this Decision, revised 1999 interim CATs taking into account the increases in local residential and business rates effective 1 July 1999 directed in this Decision.

243.The Commission notes that ongoing filing requirements for the Ontario and small Quebec independents, as established in Decision 96-6, remain in place.

This document is available in alternative format upon request.

Secretary General