ARCHIVED -  Telecom Order CRTC 99-607

Telecom Order CRTC 99-607

Ottawa, 30 June 1999

On 9 April 1999, Northwestel Inc. (Northwestel) filed an application to increase local access rates by $6.00 and to offset this increase with long distance rate reductions on a revenue neutral basis effective 1 August 1999.

File No.: Tariff Notice 701

1. The application is filed pursuant to Northwestel Inc. - Interconnection of Interexchange Carriers and Related Resale and Sharing Issues, Telecom Decision CRTC 98-1, 11 February 1998 (Decision 98-1).

2. In Decision 98-1, the Commission ordered Northwestel to implement a $4.00 per month local rate rebalancing increase on 1 August 1998, with a second rebalancing increase of $6.00 per month to occur on 1 August 1999. Both increases were to be offset, on a revenue neutral basis, with lower long distance rates.

3. With this application, Northwestel proposed to utilize a price elasticity of zero instead of the -0.4 previously set out by the Commission in Telecom Order CRTC 97-1034, 25 July 1997.

4. In support of the proposed change in elasticity, Northwestel argued that the use of the -0.4 price elasticity factor led to an overestimation of the toll traffic stimulation, which resulted in a negative financial impact on the company.

5. Northwestel argued that the negative impact is inconsistent with the intent of rate rebalancing, a process adopted to move both local and toll rates towards costs while maintaining net revenues at existing levels.

6. Northwestel noted that it did not develop any detailed elasticity studies to support the use of its proposed figure.

7. Northwestel instead based its argument on recent experience with regard to rate rebalancing. Northwestel submitted that since 1997, despite an aggregate toll price reduction of approximately 20%, average residential long distance minutes per customer account declined by 23%. For business long distance, the aggregate toll rate reduction was 16%, while minutes declined by 3%.

8. This experience has suggested to Northwestel that it had experienced significantly less stimulation than the -0.4 elasticity implied. Northwestel submitted that the various opportunities for bypass are causing the drop in toll minutes.

9. The company asserted that the intent of proposing a price elasticity of zero was not to generate any revenue gain to the company. Instead, the intent was to minimize the negative impact of rate rebalancing on the company’s financial integrity.

10. Comments were received from The Government of Yukon (Yukon), the Government of the Northwest Territories (GNWT), the Public Interest Advocacy Centre and the Utilities Consumers’ Group.

11. Parties argued that Northwestel’s request to deviate from previous direction given by the Commission on the appropriate level of toll elasticity was not adequately substantiated. A consideration of a change of this magnitude required a Public Notice and at least one opportunity for interrogatories by interested parties.

12. Parties also argued that the introduction of a lower elasticity factor at this point would be counter-productive to the rate rebalancing process. It would minimize the effect on critically needed toll reductions.

13. Some parties noted that the change could also potentially produce a revenue windfall to Northwestel.

14. Both Yukon and GNWT noted that if Northwestel is concerned about its financial position, then it should address the requirement through a separate proceeding.

15. GNWT noted that other factors, unrelated to elasticity, were influencing toll demand. GNWT noted that Northwestel itself suggested that bypass was the likely cause of the decline in toll demand. GNWT argued that the reduction in demand was occurring in spite of Northwestel’s toll price reductions.

16. In reply, Northwestel reiterated its position and noted that, in rate rebalancing, price elasticity is used to estimate any anticipated revenue from toll traffic stimulated by basic toll rate reductions. In the absence of any such revenues in the past, the company proposed not to account for any toll stimulation in its current application. This is equivalent to setting the price elasticity at zero.

17. Northwestel stated that it was not trying to undermine economic theories. Northwestel recognized that many customers have responded to price changes in the South and that they are thus insensitive to price changes to Northwestel basic toll schedules.

18. On the claim of the lack of evidence to diverge from the previously approved Commission figure, Northwestel submitted that the -0.4 elasticity factor was based on studies conducted over ten years ago in Bell Canada operating territory. At that time Bell Canada was operating in a monopoly environment devoid of any competition, any large-scale price differential between regions or any bypass. Northwestel questions the relevancy of such studies to its own situation more than a decade later, in a geographical area with entirely different demographic, population density and economic activity characteristics, and under a market where significant bypass is occurring.

19. The Commission notes Northwestel’s submission that it is experiencing a decline in toll demand as a result of the lower rates for toll services in Southern Canada. However, in this proceeding, no alternative estimate of price elasticity was supported by appropriate evidence. Accordingly, the Commission considers it appropriate to continue to rely upon the estimate of -0.4.

20. The Commission notes that basing toll reductions on an elasticity estimate of -0.4 rather than zero results in lower toll rates and thus provides greater reduction to the incentive for bypass.

21. Consistent with the view expressed by Yukon and GNWT, the Commission considers that Northwestel’s financial concerns should be addressed in the proper context with proper supporting evidence.

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

(1) Tariff Notice 701 is approved, as modified by paragraph (2) below.

(2) The columns of rates identified as proposed rates in Attachment 6 to the company’s letter of 9 April 1999 are approved.

(3) Northwestel is to issue, forthwith, tariff pages reflecting the above revisions.

Secretary General

This document is available in alternative format upon request and may also be viewed at the following Internet site: www.crtc.gc.ca