ARCHIVED -  Telecom Order CRTC 99-497

Telecom Order

Ottawa, 1 June 1999

Telecom Order CRTC 99-497

On 29 March 1999, NBTel Inc. (NBTel) filed an application pursuant to Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, 1 May 1997 (Decision 97-9).

File No.: 8678-C12-04/99

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

2.NBTel submitted that 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 had determined, on an interim basis, that it would not mandate price reductions for capped services in order for the company to meet its price cap obligations, if the revenues for the entire capped basket of services are below the price cap requirement floor.

3.NBTel indicated that its total capped services revenues were below its Phase II costs plus a 25% mark-up at the level of the total capped basket. NBTel submitted that pursuant to Decision 99-3, it was not required to make any rate reductions to meet its 1999 price cap requirement.

4.NBTel indicated that significant price reductions would markedly alter the cost of providing business multi-line access services (BMAS). The company stated that it would have to alter the costing it presented if significant price reductions were implemented.

5.On 14 April 1999, interrogatories were addressed to NBTel. On 26 April 1999, the company filed responses to these interrogatories. NBTel also filed revisions to its responses on 11 May 1999.

6.In Pricing Policy for Services Subject to Price Caps, Telecom Order 99-494, 1 June 1999 (Order 99-494), the Commission made 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. In that Order, the Commission found that Decision 99-3 could not be interpreted to apply at the level of the overall capped basket level, in the manner suggested by the company. Accordingly, the Commission finds that NBTel's 29 March 1999 proposal not to make any price reductions, on the basis of its submission that its total capped services revenues are below its Phase II costs plus a 25% mark-up at the level of the total capped basket, is unacceptable.

7.The Commission notes that in response to an interrogatory, NBTel provided details of its calculation for the exogenous adjustment noting that it had made a minor modification to the exogenous factor shown in its 29 March 1999 price cap filing.

8.The Commission considers that the revised exogenous adjustment is in compliance with Local Competition Start-up Costs Proceeding, Telecom Public Notice CRTC 98-10, Telecom Order CRTC 99-239, 12 March 1999.

9.In another interrogatory, NBTel was asked what its proposal to meet its 1999 price cap commitment would be if the Commission were not to accept the company's interpretation of Decision 99-3.

10.In its response, NBTel proposed rate reductions to business single line access service, BMAS, Digital Switched Service - Public Switched Telephone Network (PSTN) Connectivity, Direct Inward Dial (DID) service, Low Speed Digital Network Access (DNA) service, and DS-1 DNA service. NBTel also proposed to introduce a 128 kilobits per second (kbps) DNA service.

11.NBTel stated that the application of a floor price at the service level focuses on reducing only those prices that have a margin above the floor, without giving regard to services priced below the floor. NBTel noted that while the amount of margin on services priced above floor prices (Phase II cost plus a 25% mark-up) is in the $3 to $4 million range, the amount of shortfall in capped services (excluding basic residential service) is upwards of $14 million. The company noted that in view of the price cap constraints, it has no pricing flexibility to increase the rates for those services priced below cost to compensatory levels over the entire price cap period.

12.NBTel submitted that implementing further reductions to the rates of its capped services beyond those that it proposed would either not make business sense and/or have severe and unacceptable cross-impacts.

13.NBTel argued that although there is margin on its business single line access service, it does not make business sense for the company to reduce that rate beyond $30.00. NBTel submitted that at $30.00, the service would already be priced below the perceived market value.

14.NBTel noted that the revenue impact associated with its proposed price reductions is $ 2.3 million, or $1.0 million less than the $3.3 million revenue reduction required by the price cap regime.

15.NBTel proposed that the remaining amount of $1 million be applied against contribution, which is the subject of Proceeding to Review Frozen Contribution Rate Policy, Telecom Public Notice CRTC 99-5, 2 February 1999 (PN 99-5). NBTel noted that the Commission made contribution rates interim for 1999, based on its plan to review the frozen contribution rate policy, which would allow for putting the $1 million balance into abeyance until the Commission renders a decision in that proceeding.

16.The Commission has concerns with respect to two of the rate changes proposed by NBTel to meet its price cap requirement: the rate reduction proposed for DID service and the introduction of 128 kbps DNA service.

17.The Commission notes that DID service is provided at one rate, applicable to both Business Communications Service (BCS) and BMAS customers. NBTel proposed to introduce different rates, depending on whether the service was for a BCS or a BMAS customer. The Commission considers that NBTel did not discharge its onus to establish that the proposed rates would not unjustly discriminate between these two types of customers.

18.Moreover, the Commission notes that since the DID rate applies to all BCS lines, the proposed DID rate reduction amounts to, in effect, a rate reduction for BCS. At the current BCS rate levels, the Commission considers that an imputation test would be necessary to support what is, in effect, a rate reduction to BCS.

19.NBTel submitted that the introduction of 128 kbps DNA service would result in a reduction in the Actual Price Index (API).

20.In Decision 97-9, the Commission determined that information would need to be gathered prior to the inclusion of new services in the capped sub-baskets.

21.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 would include substantial additions and alterations to existing services.

22.The Commission notes that 128 kbps DNA service provides digital functionality at below DS-1 capacity, a function that was not previously made available to NBTel's customers. The Commission further considers that 128 kbps DNA would appeal to more customers than a subset of existing subscribers of DS-1 DNA service. Consequently, Commission considers that 128 kbps DNA is a new service and that pursuant to Decision 97-9, information would need to be gathered prior to the inclusion in the API.

23.In Local Competition, Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8), the Commission required that imputation test results be filed with all applications proposing the introduction of new services. The Commission notes that NBTel did not provide an imputation test in support of the rate that it proposed for 128 kbps DNA service. Accordingly, the Commission is not prepared to approve the rate proposed by NBTel for 128 kbps DNA service.

24.The Commission is satisfied that, on the basis of the imputation test information required by Decision 97-8, the proposed rates for business single line access service, BMAS, Digital Switched Service - PSTN connectivity, Low Speed DNA service, and DS-1 DNA service will not be anti-competitive.

25.The Commission however notes that the BMAS costs filed by NBTel indicate that the BMAS rate could be reduced to $40.00 per month without violating the imputation test constraint, or the price floor established in Decision 99-3 for either Band A or Band B.

26.In response to an interrogatory, NBTel indicated that it would incur substantial revenue losses if the monthly rate for BMAS was reduced to $40.00. The company noted that in view of the migration risks, it had performed an analysis of the cross-impacts.

27.The Commission notes the difficulty in estimating cross-elasticities of demand and thereby developing reliable estimates of cross-impacts.

28.The Commission further notes that to the extent that there are either negative or positive cross-effects arising from changes to rates for capped services, such cross-effects are not taken into account in estimating the changes in rates required by the price cap regime. To take the cross-effects into account would, in the Commission's view, amount to a fundamental change in the price cap regime. Further, if such information were to be taken into account, the information provided by NBTel is insufficient for the Commission to assess the reasonableness of the company's migration estimates. Accordingly, the Commission considers that the revenue loss and migration estimates provided by NBTel are unsubstantiated.

29.The Commission notes that BMAS is provided under measured rate as well as flat rate options. The Commission considers that a monthly rate of $40.00 for flat rated BMAS service and a maximum monthly rate of $40.00 for measured BMAS would be appropriate.

30.In light of the foregoing, the Commission orders that:

1. The following rates are approved effective 1 June 1999:

a) a flat rate of $30.00 per month for business single line access service;

b) a rate of $40.00 per month for BMAS:

i) flat rate
ii) flat rate >4 accesses,
iii) measured rate - low use - RG3,
iv) measured rate - high use - RG1,
v) measured rate - high use - RG2, and
vi) measured rate - high use - RG3;

c) a rate of $30.00 per month for Digital Switched Service - PSTN Connectivity;

d) a rate of $40.00 per month for low speed DNA service;

e) a rate of $290.00 per month for DS-1 DNA service customers with four or less accesses and a five-year contract; and

f) a rate of $390.00 per month for DS-1 DNA service customers with four or less accesses and no contract.

2. NBTel is directed to:

a) place $1.66 million in a deferral account until a decision is issued in the proceeding initiated by PN 99-5;

b) file forthwith revised price cap indices; and

c) issue forthwith revised tariff pages reflecting the rate changes approved in 1 above.

Secretary General

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