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Telecom Order CRTC 99-1068
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Ottawa, 16 November 1999
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On 21 June 1999, Northern Telephone Limited (Northern) filed an application under Tariff Notice (TN) 105, amended by TN 105A on 9 August 1999, requesting final approval of the 1999 Carrier Access Tariff (CAT). Further, on 11 December 1998, Northern filed an application seeking approval of proposed depreciation life characteristics to be implemented in 1999 for 22 accounts.
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File Nos.: Tariff Notice 105 and
8630-N3-03/98
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1. With respect to Northern's depreciation application, in a letter dated 31 May 1999, the parties were advised that the Commission intended to make a determination on the depreciation life characteristics, for implementation in 1999, as part of the application to finalize Northern's 1999 CAT.
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2. In its application dated 9 August 1999, Northern requested final approval of a 1999 CAT of $0.0561 per minute with a contribution rate of $0.0481 per minute, based on a contribution requirement of $13.1 million and a Direct Toll rate of $0.0081 per minute based on a Direct Toll requirement of $2.2 million.
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3. Northern estimated that the number of originating and terminating toll minutes for 1999 would be 273.4 million.
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4. On 21 July 1999 and 3 September 1999, O.N. Tel provided comments on the applications. On 10 September 1999, Northern provided reply comments.
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Depreciation
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5. The net impact of the proposed life changes increased Northern's depreciation expense by $2.1 million, with the impact on the 1999 contribution and Direct Toll requirement estimated to be $2.0 million.
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6. In response to a Commission interrogatory, Northern provided the financial impact of extending average service lives (ASLs) of three accounts from those lives proposed by Northern. The result of changing the proposed ASL of Digital DMS-10 from 11 years to 13 years, Digital DMS-100 from 12 years to 13 years, and Micro Computers from four years to five years, reduced the proposed increase in depreciation expense for those three accounts from $1.5 million to $0.6 million.
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7. The Commission considers that Northern has not provided sufficient justification for its proposed life changes for the three accounts indicated above.
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8. The Commission is of the view that the depreciation life characteristics for Digital DMS-10 at 13 years, Digital DMS-100 at 13 years, and Micro Computers at five years are more reasonable and are within industry norms.
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9. Accordingly, the Commission concludes that the depreciation life characteristics for the three accounts in paragraph 8, are appropriate.
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10. The Commission notes that Northern is proposing to recover the additional 1999 depreciation expense due to changes in depreciation lives through its 1999 contribution requirement.
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11. The Commission notes that this would result in Northern's contribution requirement being higher than the previous year's base.
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12. The Commission concludes that such expense increases resulting from the changes in depreciation life characteristics should not flow through to the contribution requirement if such increases would cause a contribution requirement to exceed the previous year's base.
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13. The Commission notes that Northern could choose to absorb the additional depreciation expense in 1999 or elect to delay the implementation of the approved life characteristics to commence in a future year.
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Re-assignment of embedded toll billing and collection costs
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14. Northern proposed to change the allocation of the embedded costs for its toll billing and collection service, in which it bills toll service on behalf of O.N. Tel, from the Direct Toll component of the CAT to the contribution requirement.
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15. The Commission notes that the impact to the contribution requirement would be an increase of $1.4 million with an offsetting decrease to Direct Toll of $1.7 million.
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16. The Commission notes that Northern's proposed treatment of the embedded billing and collection costs is not in accordance with its current approved Phase III methodology.
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17. The Commission also notes that in 1999, Northern is still performing the toll billing and collection function for O.N. Tel.
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18. The Commission notes that O.N. Tel indicated that it intended to continue using Northern's toll billing service until early 2000 and at that time it would use its own billing service.
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19. The Commission considers that it is not appropriate to address the assignment of embedded billing costs until Northern no longer provides toll billing service.
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20. Accordingly, the Commission is of the view that for the purposes of finalizing the 1999 CAT, the embedded billing and collection costs should continue to be assigned to the Direct Toll component of the CAT in accordance with approved Phase III procedures.
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1999 Expense issues
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21. The Commission notes that with the embedded toll billing and collection costs assigned to Direct Toll, as explained above and excluding the impact of depreciation changes, the 1999 contribution requirement is estimated to increase by $0.5 million over the adjusted contribution base for 1999.
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22. The Commission notes that Northern's claim that the total CAT rate is declining is a result of the 12.1% increase in minutes, not the result of a lower contribution requirement.
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23. In 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, 7 August 1996, the Commission required an independent to provide explanations and justification supporting its revenue requirement forecasts and contribution calculations if, after accounting for local rate increases, its contribution requirement exceeds the previous year's approved contribution requirement.
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24. O.N. Tel submitted that it expected to see significant savings as a result of Northern's business transformation program that was initiated in 1996.
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25. Northern argued that the final payouts under its business transformation program were made late in 1998 and early 1999; consequently, a significant portion of the cost savings would not be realized until three to five years after this timeframe.
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26. The Commission accepts Northern's explanations with respect to its business transformation program for 1999; however, the Commission will expect to see the realization of future savings, because of the business transformation program, in subsequent contribution filings.
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32. The Commission reviewed Northern's explanations, based on total company excess expense claims, and finds that most of the expenses were subject to management's discretion and, as such, should have been taken into account in the company's budget.
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33. The Commission is of the view that the explanations provided by Northern with respect to its excess expense claims do not justify increasing the 1999 contribution requirement base.
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Adjustments to the 1999 contribution requirement
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34. In its submission, Northern indicated that the 1999 contribution requirement base was approximately $9.7 million and was based on the 1998 contribution requirement of $9.9 million, less the impact of the 1 July 1999 rate increase revenues of $289,000.
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30. The Commission notes that Northern's 1999 CAT calculation reflects the impact of revenues generated by the rate restructuring approved by the Commission in Telecom Order CRTC 98-780 dated 11 August 1998 (Order 98-780) for the purpose of funding the company's Switching Equipment Modernization (SEM) program.
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31. In Order 98-780, the Commission recognized that there would be some revenues generated which would be in excess of those required to fund the SEM expenditures, and directed that those incremental revenues be used to reduce Northern's contribution requirement.
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32. Accordingly, Northern's contribution requirement in 1998 was reduced by $294,000 which represented the partial year impact of the excess revenues associated with the rate increases implemented 1 September 1998, subsequent to the approval of the SEM program in Order 98-780. Telecom Order CRTC 98-1157 dated 20 November 1998, approving Northern's 1998 CAT, reflected this $294,000 reduction.
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33. The Commission considers that there should also be an adjustment to the contribution base for 1999 to reflect the annualized impact of the excess revenues referred to in paragraph 32.
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34. The Commission estimates that the contribution base for 1999 should be reduced by approximately $220,000 to reflect this annualized impact.
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35. Based on the above, the Commission is of the view that the final 1999 contribution requirement should be an estimated $9.4 million, based on the final 1998 contribution requirement after taking into consideration the impact of the 1 July 1999 local rate increases and the excess revenue from the SEM program.
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36. In light of the foregoing, the Commission orders that:
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a) The depreciation life characteristics, listed in the attached table are approved;
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b) Northern is to advise the Commission when it has implemented or plans to implement the approved depreciation life characteristics at the same time it files its proposed final 2000 CAT;
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c) Northern's request to re-assign its toll billing and collection services embedded costs, for 1999, from the Direct Toll component of the CAT to the contribution requirement is denied;
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d) Northern's excess expenses over the 1999 contribution requirement base are denied;
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e) Northern's proposed CAT rate of $0.0561, comprised of a contribution rate of $0.0481 and Direct Toll rate of $0.0081, is denied;
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f) Northern is to refile its proposed final 1999 CAT and proposed tariff pages within 30 days, with the 1999 contribution requirement based on the final 1998 contribution requirement, less the revenue impact of the 1 July 1999 business and residence rate increases, and less the annualized impact for rate increases in excess of SEM funding; and
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g) Northern is to file its proposed interim 2000 CAT within 30 days, having regard to the final contribution requirement to be filed pursuant to the determination in this Order which will become the cap identified in Review of contribution regime of independent telephone companies in Ontario and Quebec, Telecom Decision CRTC 99-5, 21 April 1999, paragraph 97.
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Secretary General
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This document is available in alternative format upon request and may also be viewed at the following Internet site: www.crtc.gc.ca
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