ARCHIVED -  Telecom Order CRTC 99-740

Telecom Order

Ottawa, 29 July 1999

Telecom Order CRTC 99-740

In the matter of Québec-Téléphone - 1997 Contribution, Telecom Public Notice CRTC 98-7, 23 March 1998 (PN 98-7).

File No.: 8695-Q1-01/98

Background

1.In PN 98-7, the Commission directed Québec-Téléphone to file, a final per-minute contribution rate for 1997 based on the company's forecast contribution requirement, reflecting its 1997 Phase III forecast results and taking into account the $2 local rate increase approved in Telecom Order CRTC 96-1611 dated 31 December 1996 and its forecast of 1997 minutes for contribution-eligible services as defined in Regulatory Framework for Québec-Téléphone and Télébec ltée, Telecom Decision CRTC 96-5, 7 August 1996 (Decision 96-5). The Commission also directed Québec-Téléphone to show cause as to why de-averaged per-minute contribution rates (peak and off-peak) applicable to (a) trunk-side connections and (b) line-side connections should not apply in its territory pursuant to Revisions to the Mechanism to Recover Contribution Charges, Telecom Decision CRTC 95-23, 4 December 1995 and Per-Minute Contribution Mechanism for Line-Side Connections, Telecom Decision CRTC 96-12, 12 December 1996, respectively.

2.The Commission made AT&T Canada Long Distance Services Company [now AT&T Canada Corp.] (AT&T Canada), fONOROLA Inc. (fONOROLA) and Sprint Canada Inc./Call-Net Enterprises Inc. (Call-Net) (which originate and terminate contribution-eligible traffic in Québec-Téléphone's territory) parties to the proceeding and directed them to file 1997 forecast originating and terminating contribution-eligible minutes as defined in Decision 96-5.

Contribution rate

3.Québec-Téléphone filed a final proposed 1997 per-minute contribution rate of $0.0778 based on an actual contribution requirement of $60.4 million which was calculated using the Phase III procedures approved in Decision 96-5.

4.The Commission notes that the proposed final contribution rate is lower than its approved final 1996 rate of $0.0834 per-minute and slightly higher than the 1997 interim rate of $0.0754 approved in Telecom Order CRTC 97-573 dated 29 April 1997.

Issues

a) Contribution requirement

i) Local Rate Increases

5.AT&T Canada and Call-Net submitted that the $2 local rate increase approved in 1997, resulted in approximately $7 million increase in revenues. AT&T Canada and Call-Net also submitted that this increase should be applied dollar for dollar to reduce the 1997 contribution requirement. AT&T Canada further submitted that the above adjustment would result in a total 1997 contribution requirement of $54 million.

6.Also, Call-Net, making reference to paragraph 461 of Implementation of Price Cap Regulation and Related Issues, Telecom Decision CRTC 98-2, 5 March 1998 (Decision 98-2), stated that Québec-Téléphone was to apply the $2 local rate increase to reduce its 1997 contribution requirement. In its reply, Québec-Téléphone simply stated that Decision 98-2 did not apply to the company.

7.Based on the methodology for calculating the company's contribution requirement, as set out in Decision 96-5, the Commission notes that the revenues raised as a result of the 1 January 1997 local service rate increase were in fact applied to Québec-Téléphone's 1997 contribution requirement.

ii) 1996 Base

8.AT&T Canada submitted that Québec-Téléphone should use its approved 1996 budget forecast of $60.8 million, less the amount of 1997 rate rebalancing revenues, as a basis of comparison with the 1997 contribution requirement.

9.In its reply, Québec-Téléphone indicated that the 1996 contribution requirement was based on its approved January 1996 budget forecast while actual results indicate a revenue shortfall of $6.2 million. One of the main reasons for this $6.2 million shortfall was that the $2 local rate increase which had been budgeted for the second half of 1996 was not implemented until 1 January 1997. Québec-Téléphone submitted that this $6.2 million shortfall in revenue brought the company's 1996 contribution requirement to $67 million; however, due to increases in productivity in the order of $2 million, relative to the 1996 budget forecast, the actual contribution requirement for 1996 was $65 million.

10.Québec-Téléphone noted that, based on the actual contribution requirement of $65 million, the 1996 contribution rate would be $0.0916 per-minute compared to the final rate of $0.0834 for 1996.

11.Given that a major reason for the discrepancy between the 1996 budget versus the 1996 actual contribution requirement was the fact that the $2 local rate increase was not implemented until 1 January 1997, the Commission agrees with Québec-Téléphone that the appropriate base for comparison to the 1997 contribution requirement should be the actual 1996 contribution requirement of $65 million.

iii) Operating Expenses

12.AT&T Canada expressed the view that the year-over-year increase of $20.9 million (12%) in operating expenses is inappropriate and excessive since it is not reflective of the relatively modest Network Access Services (NAS) growth experienced by the company.

13.Québec-Téléphone provided explanations for the apparent large year-over-year increase in operating expenses. Following a company reorganization, a number of integral divisions of Québec-Téléphone were converted to affiliate companies. Service contracts were then established for activities performed on behalf of Québec-Téléphone by their affiliates. Revenues for services provided to the affiliates by Québec-Téléphone were also recorded as intercorporate transactions. After recasting the 1997 expenses to be consistent with the 1996 organization structure, Québec-Téléphone showed that expenses increased by less than 4%. In addition, Québec-Téléphone stated that its 1997 expenses increased relative to 1996 as a result of: a 2.5% growth in NAS, inflation, expenses associated with year 2000 compliance, increased depreciation expense resulting from a higher capital asset base, additions to marketing staff, re-engineering of the company's billing system, and impact of a one-time revenue settlement received in 1996 as a result of a previous dispute with Hydro-Québec.

14.Accordingly, the net impact of expenses for services received and revenues for services provided had minimal effect on the company's total contribution requirement.

15.The Commission is of the view that the company's reduction of $4.6 million in contribution requirement for 1997 compared to 1996 represents a reasonable effort to become more efficient and to develop productivity improvements to offset cost increases.

16.The Commission concludes that Québec-Téléphone's contribution requirement calculation is reasonable and acceptable for purpose of determining the company's final 1997 contribution rate.

17.The Commission also finds appropriate the accounting method used by Québec-Téléphone, with its new organization structure, for recording intercorporate transactions. The Commission notes that accounting procedures require that such transactions be recorded at fair market value.

b) Contribution-eligible minute forecast

18.Québec-Téléphone, AT&T Canada and Call-Net, on behalf of itself and fONOROLA, provided their estimates of the total originating and terminating minutes for 1997 in Québec-Téléphone's territory. In addition, Québec-Téléphone provided an estimate of the competitors' total originating and terminating minutes for 1997.

19.Neither AT&T Canada nor Call-Net questioned the accuracy of Québec-Téléphone's own minute forecast or its estimate of entrants' minutes. Indeed, the minutes provided by both entrants were approximately the same as those provided by Québec-Téléphone.

20.Therefore, for purposes of finalizing Québec-Téléphone's 1997 contribution rate, the Commission is of the view that Québec-Téléphone's estimate of 1997 contribution-eligible minutes is reasonable.

c) Other matters

i) De-averaged Contribution Mechanism

21.In its submission, Québec-Téléphone indicated that it was not opposed to the application of a de-averaged contribution mechanism. However, it added that, it could only identify, for trunk-side and line-side connections, peak and off-peak traffic starting on 1 January 1998.

22.The Commission accepts Québec-Téléphone's proposal and expects the company to adopt a de-averaged mechanism for both trunk side and line-side connections on a peak/off-peak basis applicable to its 1998 final contribution rates.

ii) Market Share Criterion

23.Parties were requested to provide their views on whether or not companies that have at least 0.5% share of total contribution-eligible minutes in Québec-Téléphone's territory should, in future years, be made parties to proceedings to set Québec-Téléphone's contribution rate. All parties, including Québec-Téléphone, agreed with the 0.5% market share criterion.

24.The Commission considers that a 0.5% share of contribution-eligible minutes is an appropriate threshold for Québec-Téléphone's territory and is consistent with that approved for the former Stentor-member companies.

Implementation

25.In light of the above, the Commission approves a final per-minute contribution rate for Québec-Téléphone of $0.0778, effective 1 January 1997.

26.Québec-Téléphone is directed to issue forthwith revised tariff pages and to make any necessary adjustments to amounts already billed to interexchange carriers as expeditiously as possible.

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