ARCHIVED -  Telecom Decision CRTC 99-9

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Telecom Decision

Ottawa, 20 July 1999
Telecom Decision CRTC 99-9
File No.: 8695-C12-04/98
1.In Telecom Order CRTC 97-590, 1 May 1997, the Commission noted that declining contribution rates had not provided the necessary incentive to reduce contribution avoidance on traffic carried by alternate providers of long distance services (APLDS) on direct access lines (DALs), and that the 2% contribution surcharge (which was intended to provide a reasonable level of compensation to the telephone companies for traffic carried over DALs) did not adequately account for such traffic. In Contribution on Traffic Carried by Alternate Providers of Long Distance Services Over Direct Access Lines, Telecom Public Notice CRTC 98-4, 27 February 1998, the Commission initiated a proceeding to determine how best to recover contribution on traffic carried by APLDS over DALs.
2.The following parties submitted comments in this proceeding: BC TEL, Bell Canada, Island Telecom Inc., Maritime Tel & Tel Limited, MTS Communications Inc., NBTel Inc., NewTel Communications Inc., TELUS Communications Inc. and TELUS Communications (Edmonton) Inc., (collectively, the Companies), ACC Long Distance Inc. (ACC), AT&T Canada Long Distance Services Company (AT&T Canada LDS), Call-Net Enterprises Inc. (Call-Net), London Telecom Network, (London Telecom), MetroNet Communications Group Inc. (MetroNet), Shaw FiberLink Ltd., Vidéotron Télécom ltée and Fundy Cable Ltd./ltée (Shaw et al.), Canadian Business Telecommunications Alliance (CBTA) and Canadian Bankers Association (CBA).
3.The Companies favoured a self-reported per-minute mechanism for APLDS' DAL traffic, but stated that, in the event that the Commission determined that it was inappropriate to require APLDS to track DAL minutes, the Commission should increase the DAL surcharge to levels commensurate with APLDS' DAL usage. They considered that, based on APLDS' own reported DAL minutes, a surcharge of 8.3% would be appropriate, and proposed that the DAL surcharge be increased to that level, effective 1 January 1999.
4.ACC, AT&T Canada LDS, Call-Net, MetroNet, Shaw et al., CBA and CBTA supported retention of the existing surcharge mechanism.
5.AT&T Canada LDS, supported by Call-Net, stated that a change to a per-minute or per-circuit mechanism for the collection of contribution on APLDS' DALs would be costly and administratively complex. AT&T Canada LDS estimated that it would cost some $13.7 million and require a two-year lead-time to implement the required tracking systems.
6.CBA did not support any major change to the way in which the DAL contribution is calculated and collected where such change may be expensive to implement and administer. CBA recommended that any contribution shortfall from traffic carried over DALs should be recovered through simple and straightforward means, such as through an increase in the current 2% surcharge.
7.London Telecom supported a per-circuit mechanism for DALs. Although the company acknowledged that there were significant issues with respect to setting the actual rates, including circuit loadings, it considered a per-circuit charge to be equitable in that APLDS that do not use DALs could be exempted from any and all contribution charges associated with APLDS' use of DALs. London Telecom also noted that it does not use DALs.
8.The Companies and London Telecom requested that the Commission explicitly rule on the contribution-eligibility of traffic on circuits that directly link long distance service providers' networks. The Companies submitted that, should the Commission determine that such traffic is not contribution-eligible, the Companies should be permitted to exclude these minutes from their monthly reports to the Central Fund Administrator (CFA), effective 1 January 1999. London Telecom considered that a distinction between a DAL and an interconnecting circuit (i.e., a DAL connected to another APLDS) must be clearly identified. Call-Net agreed with London Telecom that the mechanism should treat DAL traffic that connects to end users differently than DALs that connect to other carriers.
9.The options put forward by parties for recovery of contribution on APLDS' DALs are: (1) maintain the status quo; (2) implement a per-minute mechanism; (3) implement a per-circuit mechanism; and (4) increase the level of the surcharge. Each of these options is discussed below.
10.The Commission considers that the regime adopted for APLDS' DALs should, to the extent possible, be relatively easy and inexpensive to implement, be competitively equitable (i.e., APLDS and the Companies would be treated in a similar manner), be simple to administer and yield the appropriate contribution amounts for traffic carried on DALs.
A. Maintain the status quo
11.Most parties advocated maintaining the status quo. In support of this position, parties stated that (1) in Review of Contribution Collection Mechanism and Related Issues, Telecom Public Notice CRTC 99-6, 1 March 1999 (PN 99-6), the Commission will be reviewing the current contribution collection mechanism which could lead to modifications to the overall mechanism; (2) under the current frozen contribution rate policy and with increased traffic due to flat rate calling plans, the telephone companies are recovering a growing amount of contribution revenues from the APLDS; (3) the Companies have provided no evidence that the existing contribution mechanism results in under-recovery of the contribution revenues required to subsidize local rates; and (4) dramatic changes in the competitive industry have rendered the Commission's concerns moot.
12.The Commission is of the view that it would be inappropriate at this time to require companies to invest significant time and resources to implement major changes to the current collection mechanism for DALs, given that the overall contribution collection mechanism may be modified. With respect to the possibility that there may be more contribution being collected than was originally anticipated at the start of the price cap regime, the Commission is of the view that this will be determined and remedied, if necessary, in the proceeding initiated by Proceeding to Review Frozen Contribution Rate Policy, Telecom Public Notice CRTC 99-5, 2 February 1999 (PN 99-5). The Commission considers that the issue in this proceeding is not so much whether the Companies are collecting too much contribution, but rather whether there is competitive equity between the APLDS and the Companies. The Commission notes that DAL usage has been growing significantly. In light of the above, the Commission does not consider that maintaining the status quo is an appropriate option.
13.The Commission remains of the view that the present 2% DAL surcharge does not adequately account for APLDS' traffic carried over DALs, and considers that some remedial action is required at this time.
B. Per-minute mechanism
14.Under a per-minute mechanism, APLDS would pay the per-minute contribution rate on their DAL traffic, as do the Companies. This would require the APLDS to track their DAL minutes by Incumbent Local Exchange Carrier (ILEC) territory. APLDS would need to ensure that their switches are capable of measuring this traffic and audit procedures would be required to verify the DAL minutes reported by the APLDS.
15.AT&T Canada LDS indicated that it will cost some $13.7 million and take approximately two years to develop the necessary tracking systems and system modifications needed to implement a per-minute mechanism. Other APLDS' estimates were in the $50,000 to $100,000 range.
16.AT&T Canada LDS and other APLDS stated that they would be unable to initiate any systems changes required to implement a per-minute mechanism until the year 2000 because of Year 2000 compliance priorities.
17.The Commission considers that a per-minute mechanism would, in theory, be the most equitable option and would yield appropriate contribution amounts. The Commission also considers that AT&T Canada LDS' estimated implementation costs may be overstated. However, the Commission notes that the current contribution collection mechanism may be revised or replaced as a result of determinations to be made in the PN 99-6 proceeding. That being the case, the costs of implementing a per-minute mechanism for APLDS' DAL traffic, even at a level substantially lower than that estimated by AT&T Canada LDS, could be an inappropriate expenditure for a potentially short-term solution. In these circumstances, the Commission does not consider that the per-minute mechanism is a viable option at this time.
C. Per-circuit mechanism
18.A per-circuit mechanism would require APLDS to pay contribution on each DAL circuit. APLDS would need to track and self-report the number of DALs employed in each ILEC territory. Audit procedures would be required to verify the number of DALs reported.
19.Parties noted that in order to calculate an appropriate per-circuit rate, assumptions regarding the average number of minutes and peak/off-peak splits of traffic carried on a DAL circuit are required. Most parties considered these assumptions to be inherently arbitrary and likely to introduce distortions in the marketplace. The Companies noted that the determination of these factors has been very contentious in the past and is, by its nature, competitively inequitable. AT&T Canada LDS stated that the many assumptions that are required in order to estimate a per-circuit charge would likely render the setting of an appropriate charge virtually impossible.
20.The Commission considers that the per-circuit option does not meet the criteria set out above in that it may not be simple to implement, nor would it be equitable to all parties. In addition, it is uncertain whether or not it would yield the appropriate contribution amounts for traffic carried on DALs.
D. Increase the level of surcharge
21.As noted above, the Companies stated that, in the event that the Commission deemed it inappropriate to require APLDS to track DAL minutes, the Commission should increase the DAL surcharge to 8.3%, effective 1 January 1999, on the basis that this level would generate revenues commensurate with APLDS' DAL usage.
22.AT&T Canada LDS was of the view that increasing the surcharge would create perverse incentives to use DALs. It stated that an increase in the surcharge, and commensurate increases in the contribution savings from using DALs, could be expected to encourage even greater usage of DALs. The Companies argued that AT&T Canada LDS' claims with respect to these incentives are inconsistent with AT&T Canada LDS' comments that DALs are not used to avoid contribution and pointed out that APLDS' DAL traffic continues to grow, even though contribution rates have declined.
23.The Commission considers an increase to the surcharge commensurate with APLDS' DAL usage to be the best option at this time in that it would be simple to implement, more competitively equitable and would not require APLDS to incur inordinate system modification costs.
24.The Commission notes that the Companies' proposed 8.3% surcharge was based on forecast 1997 data filed in the proceeding initiated by Implementation of Price Cap Regulation, 1997 Contribution Charges and Related Issues, Telecom Public Notice CRTC 97-11, 25 March 1997. The Commission further notes that parties recently provided actual 1998 contribution-eligible and DAL minutes in the PN 99-5 proceeding.
25.The Commission considers that the level of the surcharge should be set commensurate with the most current data available on APLDS' DAL usage. The Commission notes that the traffic data filed in the PN 99-5 proceeding is the most current information available. The Commission considers it appropriate to set the surcharges based on the 1998 data filed in the PN 99-5 proceeding.
26.With respect to whether the surcharge should be disaggregated by ILEC territory, most parties did not favour such an approach. The Companies stated that, in the short term, disaggregated surcharges would better reflect appropriate contribution recovery than an average surcharge, but that over the longer term there would be greater variance at disaggregated levels than at more aggregated levels.
27.The Commission notes that, based on the information filed in this proceeding, as well as the data filed in the PN 99-5 proceeding, there are significant differences in the proportion of DAL traffic to contribution-eligible traffic amongst the various ILEC territories.
28.The Commission considers that ILEC-territory specific surcharges would most closely approximate the contribution amounts that would be generated under a per-minute mechanism and would provide for greater competitive equity. Based on the above, the Commission intends to set out ILEC-territory specific surcharges in the decision pursuant to PN 99-5.
29.Several parties (Call-Net, London Telecom and MetroNet), submitted that any increase to the contribution surcharge should be accompanied by a revision to the base contribution rate to ensure that the Companies do not have access to additional excess revenues.
30.The Commission agrees that offsetting adjustments to the base contribution rates are required. Without offsetting adjustments, the contribution rates would be overstated. Any required adjustments will be made in the decision pursuant to PN 99-5.
31.London Telecom submitted that increasing the surcharge would further penalize the companies, such as themselves, that do not use DALs. Most APLDS supported a simple exemption mechanism to exempt those APLDS that do not use any DALs from paying the surcharge.
32.The Commission considers that a simple exemption mechanism is appropriate for those APLDS that do not use any DALs. Such a mechanism would require an affidavit, sworn by a senior officer of the company, attesting to the fact that the company does not use any DALs. The affidavit would need to be resubmitted on an annual basis and include a statement to the effect that if, during the year, the company uses any DALs, it would notify the Commission immediately, serving copies on the relevant Companies, and the surcharge would immediately apply.
33.The Companies proposed that, since contribution rates were made interim effective 1 January 1999 and since the Commission determined more than a year and a half ago that the 2% surcharge is inadequate, the increase should take effect from 1 January 1999.
34.AT&T Canada LDS argued that the Companies' proposed effective date was inappropriate. AT&T Canada LDS submitted that the Commission made current rates interim only for the purpose of allowing adjustments to be made retroactively in the event that changes to the frozen contribution rate policy were required. AT&T Canada LDS noted the Commission's comments in a 18 December 1997 letter that the 2% surcharge would be maintained until such time as a proceeding could be completed to review the mechanism for collecting contribution on APLDS' DAL.
35.The Commission is of the view that it would be inappropriate to make any change to the surcharge, effective 1 January 1999. The Commission is also of the view that the increased contribution payments may impact on the APLDS' current year's business plans. Given the Commission's statement in its 18 December 1997 letter that the 2% surcharge would be retained pending the disposition of this proceeding, the Commission considers it inappropriate to make any change, effective 1 January 1999.
36.With respect to an effective date for a change to the level of the surcharge, the Commission considers 1 January 2000 to be an appropriate effective date.
37.As noted above, the level of the ILEC-territory specific surcharges will be established in the decision to be issued pursuant to PN 99-5. The surcharges will be commensurate with APLDS' 1998 DAL usage and will exclude any APLDS, such as London Telecom, that declare under affidavit that they do not use any DALs. In order to establish the appropriate surcharge levels to come into effect 1 January 2000, APLDS that do not use any DALs are directed to submit by 3 August 1999, an affidavit, as described in paragraph 32 above, to that effect.
38.The Companies noted situations in which their traffic over circuits that interconnect with another service provider's interexchange voice network is assessed the per-minute contribution rate. Under similar circumstances where two APLDS' networks are interconnected, the APLDS do not pay the per-minute contribution rate. The Companies submitted that, should the Commission determine that such traffic is not contribution-eligible (for the APLDS), then the Companies should be permitted to exclude these minutes from their monthly reports to the CFA, effective 1 January 1999.
39.The Commission notes that, in such circumstances, contribution is already assessed in the conventional way, for example, at the originating end of the call (i.e., where the traffic goes from the Local Exchange Carrier (LEC)'s network to an interexchange carrier's switch) and at the terminating end of the call (i.e., where the traffic goes from the interexchange carrier's switch to the LEC's network). Accordingly, the Commission is of the view that contribution should not be assessed elsewhere.
40.The Commission considers that the Companies should be permitted to exclude these minutes from their monthly reports to the CFA, effective 1 January 2000, coincident with the modification to the contribution surcharge for APLDS' DAL traffic.
Secretary General
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