ARCHIVED -  Telecom Order CRTC 99-493

Telecom Order

Ottawa, 1 June 1999

Telecom Order CRTC 99-493

On 31 March 1999, MTS Communications Inc. (MTS) filed applications proposing tariff changes further to Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, 1 May 1997 (Decision 97-9).

File Nos.: Tariff Notices 359 and 360

1.MTS filed its Price Cap Index (PCI) and Service Band Limits (SBLs) for 1999, incorporating an exogenous adjustment related to the recovery of income tax expense and local competition start-up costs.

2.MTS submitted that both MTS Communications Inc. - Mechanism to Recover Future Income Tax Expense, Telecom Decision CRTC 99-2, 4 March 1999 (Decision 99-2), and Local Competition Start-up Costs Proceeding, Telecom Public Notice CRTC 98-10, Telecom Order CRTC 99-239, 12 March 1999 (Order 99-239), permitted the use of exogenous adjustments in 1999 to mitigate rate reductions required under the price cap formula.

3.MTS proposed to introduce an exogenous adjustment in the update of the PCI equivalent to the company's 1999 price cap obligation of 4.4%. The company noted that accordingly, it was not filing rate reductions in response to the price cap formula at this time.

4.The Commission considers that this exogenous adjustment is in compliance with Decision 99-2 and Order 99-239.

5.MTS updated its PCI and respective SBLs to incorporate the Gross Domestic Product - Price Index and the productivity offset of 4.5% stipulated in Decision 97-9.

6.MTS noted that the Commission had not rendered a final decision with respect to the magnitude of allowable local competition start-up and local number portability (LNP) costs for all the former Stentor companies and the exogenous factors to be implemented for the recovery of those costs. MTS also noted that in Order 99-239, the Commission indicated that following a decision in that proceeding, the telephone companies would be required to file any price changes required to meet the price cap commitments, taking into consideration any amount in the deferral account created pursuant to Order 99-239.

7.MTS noted that the Commission was also currently examining material issues affecting the current price cap regime in both Proceeding to Review Frozen Contribution Rate Policy, Telecom Public Notice CRTC 99-5, 2 February 1999, and in Pricing Policy for Services Subject to Price Caps, Telecom Public Notice CRTC 99-9, 15 March 1999.

8.MTS submitted that insufficient information exists to permit the company to decide whether the reductions offset by the exogenous adjustment, which it has included in its current filing on an interim basis, should be used by MTS for the recovery of income tax, or the start-up costs of local competition, or whether other options should be pursued. MTS proposed to provide further advice when the Commission's decisions in these other matters have been finalized.

9.In Decision 99-2, the Commission approved a pre-collection option whereby MTS would be permitted to forego some or all of the rate changes mandated under the price cap formula. The Commission noted that to the extent that MTS chose not to implement rate changes required under the price cap formula, the resulting additional revenues would accumulate in a deferral account. The Commission stated that funds in the deferral account would be used to mitigate future rate shock to basic residential local subscribers, when MTS incurs income tax expense.

10.Pursuant to Decision 99-2, MTS must identify the funds that it proposes to place in the deferral account for the recovery of income tax expense at the time of its annual price cap filings. Decision 99-2 further specifies that once funds accumulate in the deferral account, they are to remain there until the company incurs income tax.

11.The Commission considers that it is reasonable to grant MTS a delay with respect to the allocation of the funds in the deferral account between recovery of income tax, or the start-up costs of local competition and LNP. The Commission is of the view that a delay until a final decision is issued with respect to the recovery of the start-up costs of local competition would be appropriate.

12.The Commission therefore accepts MTS' proposal to meet its 1999 price cap obligation by introducing an exogenous adjustment in the update of the PCI equivalent to that obligation. The Commission further directs MTS to file its proposed allocation of funds accumulated in the deferral account, between the recovery of income tax or the start-up costs of local competition, at the same time as the company files its rate proposals pursuant to the final decision to be issued with respect to the recovery of the local competition start-up costs.

13.In Tariff Notice (TN) 359, MTS proposed to forego certain pre-approved Community Calling Service rate increases for residence and business customers scheduled for 1 July 1999. MTS stated that it had calculated and incorporated the resulting adjustments to the PCI and Residence SBL using the methodology directed by the Commission in a letter dated 19 May 1998 ruling on a similar application by MTS last year.

14.In TN 360, MTS proposed changes to Tariff Items 456 and 475, Multiline Business Service, Tariff Item 510, Service Charges, and Tariff Item 710, Exchange Service - Measurement Charges.

15.MTS proposed to provide lower rate options to multi-line business service customers in Bands A, B and C who commit to subscribing for pre-defined contract periods. MTS noted that it was not proposing to offer discounted rates under a contract option to multi-line service customers in Bands D and E as their current rates are not compensatory. MTS stated that it was proposing to introduce a contract pricing option for multi-line business service in response to customer interest.

16.In Inquiry into Telecommunications Carriers' Costing and Accounting Procedures - Phase II: Information Requirements for New Service Tariff Filings, Telecom Decision CRTC 79-16, 28 August 1979, the Commission noted that the definition of a new service includes substantial additions and alterations to existing services.

17.The Commission notes that contract pricing exhibits at least one characteristic of a new service in that, in order to determine the impact of a new contract pricing option on the actual price index, it is necessary to make use of demand forecasts. In Decision 97-9, the Commission agreed with Stentor that information would need to be gathered prior to the inclusion of new services in the capped sub-baskets.

18.The Commission notes that Centrex and Digital Network Access services have long included both a contract and a non-contract option under a single tariff item. The Commission considers that it would be difficult to conclude that the addition of a contract pricing option to the tariff for an existing service constitutes a new service.

19.The Commission considers that the introduction of contract pricing to the tariff for an existing service is best characterized as a rate restructure and notes that it has found other types of rate restructuring to be acceptable rate reductions for the purposes of the price cap regime in the past.

20.The Commission is of the view that the introduction of the proposed contract pricing option for multi-line business service proposed by MTS is acceptable as a price reduction under the price cap regime.

21.MTS proposed to lower the existing rate for the work unit (premise connection) element service charge applicable to new multi-line installations where no telephone lines to a premise exist. MTS submitted that the proposed rate meets the imputation test. MTS also proposed to extend this charge to residence and single line business exchange service customers who request installation where no telephone lines to a premise exist.

22.On 28 April 1999, Call-Net Enterprises Inc. (Call-Net) filed comments on behalf of itself, Sprint Canada Inc. and Call-Net Communications Inc.

23.Call-Net considered that a rate-element-specific imputation test was inappropriate for service charges applying to a primary exchange service. Call-Net submitted that the Commission's determinations to date would require that such an imputation test apply at the service-specific level, rather than at the rate-element-specific level. Call-Net noted that applying the imputation test to service charges at the rate-element-specific level would permit the incumbent local exchange carriers (ILECs) to reduce selected service charges that exceed the imputation test floor price on an individual basis even though the service charge tariff as a whole may not meet the imputation test.

24.Call-Net requested that the Commission deny MTS' proposal and mandate that, in general, ILEC imputation tests filed in support of revisions to service charge tariffs be applied to business service charges combined. Call-Net submitted that in the event that an ILEC de-averages its basic business service charges between business multi-line and single line, it should be required to apply the imputation test to each of the business single line service charges combined and the business multi-line service charges combined.

25.Call-Net also stated that the Commission should require residence service charge revenues and costs to be aggregated for purposes of ensuring that residence service charges do not move further from costs, and for the purpose of applying the imputation test to residence service charges.

26.Call-Net stated that, provided that neither the loop service charges nor retail service charges vary across bands, the Commission should not require the ILECs to apply the service-specific service charge imputation test at the band level.

27.MTS noted that the Commission's letter ruling entitled The Imputation Test Methodology for Local Services, dated 27 November 1998, specified how imputation tests are to be applied and when they are required for local services.

28.MTS noted that at paragraph 7, the Commission stated that the definition of the service is to be consistent with the tariff definition, and that a service-specific imputation test is only required where (1) a new service is introduced, or (2) there is a price decrease for an existing service.

29.MTS stated that at paragraph 8, the Commission prescribed that an application for tariff revisions for an existing service should include either (1) an imputation test or (2) an estimate of the overall weighted average percentage price change of the service. MTS noted that, in addition, the Commission prescribed an imputation test only if the weighted average price change is negative. MTS noted that multi-element service charges by component have been previously cost justified and accepted by the Commission on an individual element basis. MTS submitted that the information it filed clearly demonstrates that the rate for work unit (premise connection) is fully cost justified.

30.MTS submitted that the work unit (premise connection) charge recovers the costs associated with undertaking the physical connection at a customer's premise to MTS' network where no telephone lines to a premise exist.

31.MTS noted that the proposed revisions to Tariff Item 500 would result in an increase to its service charge revenues. MTS submitted that there is no basis for Call-Net's suggestion that there is an imputation test issue or that the proposed revision is anti-competitive.

32.The Commission notes that its 27 November ruling would require that local loop service charges be imputed in essential bands when reductions to service charges applicable to new installations of primary exchange services are proposed. Moreover, all the applicable elements of multi-element service charges associated with a new installation of a primary exchange service would have to be considered in this imputation test.

33.The Commission notes that the proposed work unit (premise connection) element would apply in the case of some new installations of primary exchange services. The imputation test provided by MTS is not band specific and does not reflect the local loop service charges as a cost for essential bands. The Commission considers that the imputation test provided by MTS is not satisfactory, as it is specific to the work unit (premise connection) element. Moreover, the Commission has concerns about the wording in the proposed tariff being unclear.

34.The Commission hereby denies MTS' proposal to lower the existing rate for the work unit (premise connection) element service charge and to apply that charge consistently across all basic exchange service customers.

35.MTS also proposed to simplify the rate structure for Exchange Service - Measurement Charges by establishing one rate for all bands. MTS noted that the proposed rate would result in an increase for all bands. MTS submitted that the existing rates are below cost in most bands.

36.MTS filed the calculation of its Actual Price Index and the Service Band Indices demonstrating that, under its proposal for rate changes, it will not exceed the PCI and SBLs for 1999.

37.The Commission is satisfied that, on the basis of the imputation test information required by Local Competition, Telecom Decision CRTC 97-8, 1 May 1997, the proposed rates for Multiline Business service are not anti-competitive.

38.In light of the foregoing, the Commission approves the tariff revisions proposed under Tariff Notices 359 and 360 with the exception of the revisions proposed to Tariff Item 510, Service Charges.

Secretary General

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