ARCHIVED -  Telecom Order CRTC 99-494

Telecom Order

Ottawa, 1 June 1999

Telecom Order CRTC 99-494

PRICING POLICY FOR SERVICES SUBJECT TO PRICE CAPS

File No.: 8678-C12-05/99

I INTRODUCTION

1.In NBTel Inc. - Application to Review and Vary Telecom Order CRTC 98-468 and Telecom Decisions CRTC 97-9 and 98-2, Telecom Decision CRTC 99-3, 5 March 1999 (Decision 99-3), the Commission determined, on an interim basis, that it would not require NBTel Inc. (NBTel) to file rate reductions below Phase II costs plus a mark-up of 25% in order to meet price cap requirements. The Commission also stated that NBTel would still have the option of reducing rates to the imputation test price floor.

2.In Pricing Policy for Services Subject to Price Caps, Telecom Public Notice CRTC 99-9, 15 March 1999, the Commission sought comments on the appropriateness of making final and extending this pricing policy to all incumbent local exchange carriers subject to price caps.

3.On 6 April 1999, Bell Canada, on behalf of itself, Island Telecom Inc., Maritime Tel & Tel Limited, MTS Communications Inc., NBTel and NewTel Communications Inc. (the companies) and BC TEL and TELUS Communications Inc. (BCT'TELUS) filed comments in support of the Commission's proposal to extend this pricing policy. NBTel also filed separate comments. On 15 April 1999, London Telecom Network Inc. (London Telecom) filed reply comments.

4.In this Order, the Commission considers the question raised by NBTel in its comments as to the intent of Decision 99-3 in addition to the subject of PN 99-9, notably, the appropriateness of making final and extending the pricing policy found to be appropriate for NBTel to other local exchange carriers subject to price cap regulation.

II THE INTENT OF DECISION 99-3

5.NBTel submitted that in Decision 99-3 the Commission stated that it would not mandate price reductions for capped services in order to meet a company's price cap obligations, if the revenues for the entire capped basket of services are below the price cap requirement floor. NBTel noted that the price cap requirement floor was to be calculated as the Phase II cost plus a 25% mark-up associated with all capped services, with the 25% mark-up included in recognition of the need to recover fixed and common costs.

6.NB Tel also submitted that, although not explicitly stated in Decision 99-3, the Commission also made an implicit determination that once a company "bottoms out", there is no requirement to reach into other services to meet the price cap requirement.

7.NBTel asserted that Decision 99-3 is consistent with the relief sought in its application to review and vary Telecom Order CRTC 98-468, 12 May 1998 and Telecom Decisions CRTC 97-9 and 98-2 (Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, 1 May 1997 and Implementation of Price Cap Regulation and Related Issues, Telecom Decision CRTC 98-2, 5 March 1998). NBTel noted that the principles adopted by the Commission in Decision 99-3 modified the price cap requirement, with the result that the company can now meet its price cap requirements as evidenced by its 1999 annual price cap filing.

8.NBTel noted that it had encountered problems early in the price cap regime because of its unique situation. NBTel expected that similar issues would arise for other companies.

9.NBTel submitted that Decision 99-3 provides an additional framework to the price cap formula by defining a floor price at the basket level, thus enhancing the price cap regime. For reasons discussed above, NBTel was of the view that it would be appropriate to apply the pricing policy that the Commission adopted for NBTel, to all companies subject to price cap regulation.

10.The Commission notes that, in Decision 99-3, it made no statement about price reductions for capped services not being required if the revenues for the entire basket of capped services are below the price cap requirement floor as asserted by NBTel. Rather, Decision 99-3 only states that "in satisfying the price cap requirements for capped services, NBTel should not be required to reduce rates to the imputation test price floor, and that it is appropriate to not require reductions below Phase II costs plus 25%."

11.The Commission does not agree that Decision 99-3 can be interpreted in the manner suggested by NBTel. The Commission notes that the imputation test price floor is service-specific. Within the context of the proceeding that led to Decision 99-3, the Commission considers that only one interpretation is possible, notably, that it will not require NBTel to file, for a service, a rate reduction below its Phase II costs plus a mark-up of 25% in order for NBTel to meet its price cap requirements.

III THE APPROPRIATENESS OF MAKING FINAL AND EXTENDING THE PRICING POLICY ESTABLISHED IN DECISION 99-3

12. The companies requested that the Commission make final its interim ruling in Decision 99-3 that NBTel not be required to file rate reductions below Phase II costs plus a 25% mark up in order to meet price cap requirements, although NBTel would still have the option of reducing prices to the imputation test price floor. The Companies and BCT'TELUS requested that the Commission extend this pricing policy to the other companies subject to price caps.

13. The companies and BCT'TELUS argued that the imputation test price floor is not the appropriate threshold for mandated price reductions to meet their price cap obligations. The companies and BCT'TELUS noted that competitive market forces might sometimes drive prices for services to incremental costs. They submitted that a company cannot price all or the majority of its services at this level if it is to remain viable in the long run. If a company is to survive, other services must generate sufficient revenues in order to compensate for services that are priced at incremental cost such that the company's total costs are recovered.

14. The companies and BCT'TELUS submitted that while price reductions mandated to Phase II costs may appear to benefit customers in the short run, the long-term impact on competition, and therefore on both competitors and consumers will be negative. BCT'TELUS further submitted that by requiring prices to be reduced to the imputation test price floor to meet their price cap commitment, the Commission would jeopardise the financial health of the incumbent local exchange carriers. BCT'TELUS noted that this would be contrary to one of the Commission's objectives stated at paragraph 10 of Decision 97-9, which is "to provide incumbents with ... a reasonable opportunity to earn a fair return for their Utility segment".

15. London Telecom noted that the companies and BCT'TELUS advocated that the Commission implement a policy across all federally regulated incumbent local exchange carriers subject to price cap regulation whereby prices for capped services would not be required to be reduced below Phase II costs plus 25% when meeting the yearly price cap requirement.

16.London Telecom submitted that such an option must not prevent these same companies from meeting their yearly Commission-mandated price reductions. London Telecom considered that the integrity of the price cap regime demands that these price reductions be attained on a yearly basis.

17.London Telecom submitted that, if an incumbent local exchange carrier finds itself in a position of not being able to meet its price cap obligations for a specific year, it would be able to make an alternate proposal and obtain the Commission's approval for the same. London Telecom noted that in Stentor's 23 June 1998 letter, sent to the Commission within the context of NBTel's application that led to Decision 99-3, and included as part of the companies' 6 April 1999 comments in this proceeding, the incumbent local exchange carriers appeared to agree with its position.

18.In that letter, Stentor stated at paragraph 14: "If the Commission finds that a particular company is unable to meet the price cap requirements, then that company should be permitted to make an alternate proposal which meets the intent of Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994, without having rates imposed to force-fit the price cap constraints in a manner which will ultimately both restrict competition and impede the company's ability to recover its costs."

19.London Telecom submitted that in the event that the Commission opts to review alternate proposals submitted by companies who cannot meet their price cap obligations on an ad hoc basis, the process must be public and interested parties must be afforded an opportunity to comment. London Telecom submitted that the Commission should issue general policy guidelines in this proceeding which would inform and direct future alternate proposals by incumbent local exchange carriers subject to price cap regulation. London Telecom maintained that the Commission should clarify which uncapped services are not available to be included in price capped sub-baskets.

20. The Commission notes that the imputation test price floor for a service is constructed so that it includes only the Phase II costs of providing the service (except where an essential service component is used in the provision of this service). Phase II costs are incremental costs, and specifically exclude fixed costs. It follows that a company pricing its services at the imputation test price floor would not recover all of its fixed costs. The Commission agrees with the companies and BCT'TELUS that requiring price reductions to Phase II costs would not sustain a company's financial viability over the long term.

21. The Commission notes that London Telecom did not raise any objections to the extension of the pricing police found to be appropriate for NBTel, rather its comments addressed the type of process that would be appropriate if a company found itself unable to meet its price cap requirements.

22. In Decision 97-9, the Commission established rules with respect to the disposition of tariff filings under the price cap regime. The Commission determined that it must be satisfied, where applicable, that the imputation test requirements are met and that there are no other concerns such as those relating to unjust discrimination, consumer safeguard or privacy issues, and finally that no issues relating to essential/bottleneck facilities are present. Subject to these considerations, the Commission expressed its intention to grant final approval to tariff filings, without waiting for comments from interveners, where it is satisfied that the corresponding price cap parameters are met.

23.The Commission notes that the alternate proposals referred to by London Telecom would not fall under the criteria set out in Decision 97-9 for final disposition of tariff applications without waiting for comments from interveners. As such, these applications would be subject to comments by interveners, and reply comments by the applicants. The Commission notes, for example, the current proceeding initiated by Telecom Public Notice CRTC 99-5 to review the frozen contribution rate policy.

24.The Commission does not consider it necessary or appropriate at this time to issue general policy guidelines that would inform and direct future alternate proposals by incumbent local exchange carriers subject to price cap regulation.

IV CONCLUSION

25.In light of the foregoing, the Commission finds it appropriate to make final its determination with respect to NBTel, that it will not require the company to file, for a service, a rate reduction below its Phase II costs plus a mark-up of 25% in order for NBTel to meet its price cap requirements, and to extend this pricing policy to other incumbent local exchange carriers subject to price cap regulation. The companies have the option to reduce rates to the imputation test price floor.

Secretary General

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