ARCHIVED -  Telecom Order CRTC 99-941

Telecom Order

Ottawa, 30 September 1999

Telecom Order CRTC 99-941

In the matter of applications filed by the Canadian Alliance of Publicly-Owned Telecommunications Systems (CAPTS), 1 June 1999, and the Ontario Telephone Association (OTA), 4 June 1999, concerning their members' 1997 and 1998 Carrier Access Tariffs (CATs). CAPTS and OTA members are listed in Appendix A to this Order.

File Nos.: 8740-B7-0044/97; 8740-D3-0013/97; 8740-K1-0008/97;
8740-K2-0006/97; 8740-O2-0029/97; 8740-O2-0043/99; and 8740-T8-0039/97

Background

1.In Regulatory Framework for the Independent Telephone Companies in Quebec and Ontario (Except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec ltée), Telecom Decision CRTC 96-6, 7 August 1996 (Decision 96-6), the Commission directed that company-specific contribution rates be developed annually, based on each company's forecast Phase III results and their respective toll minutes, effective 1 January 1997.

2.Decision 96-6 stated that an independent would be required to provide explanations and justification supporting its revenue requirement forecasts and contribution calculations if, after accounting for local rate increases, its contribution requirement exceeds the previous year's approved contribution requirement. For 1997, Decision 96-6 stated the need to establish a 1996 base contribution requirement for comparison with the 1997 contribution requirement and directed that this base should be calculated using 10 months of actual results and two months of budget amounts. In this Order, the previous year's contribution requirement, after accounting for local rate increases, is referred to as the "base contribution requirement".

3.On 27 March 1997 and 4 April 1997, respectively, CAPTS and OTA filed, on behalf of their respective members, proposed 1997 company-specific CATs, which took into account the local rate increases that came into effect on 1 January 1997.

4.Telecom Order CRTC 97-767, 6 June 1997, granted interim approval to the above tariffs, effective 1 January 1997.

5.On 8 January and 3 February 1998, respectively, pursuant to a Commission letter, OTA and CAPTS filed interim 1998 company-specific CATs, which took into account the local rate increases that came into effect on 1 January 1998.

6.On 1 June 1999, pursuant to a Commission staff letter, CAPTS filed, on behalf of its members, 1997 and 1998 company-specific CATs. With the exception of one company, the 1997 company-specific CATs were the same as those filed on 27 March 1997.

7.CAPTS claimed excess expenses on behalf of four of its members in 1997 and did not claim any excess expenses in 1998. Excess expenses represent the amount by which the current year's contribution requirement exceeds the previous year's base contribution requirement.

8.On 4 June 1999, pursuant to a Commission staff letter, OTA filed, on behalf of its members, 1997 and 1998 company-specific CATs. Except for two companies, the 1997 company-specific CATs were lower than those filed on 4 April 1997.

9.OTA did not claim any excess expenses in 1997 using the original forecast 1996 contribution requirements as the base for comparison. OTA, did, however, claim excess expenses relating to the ice storm on behalf of four of its members in 1998.

Phase III Assignment Methodologies

10.CAPTS proposed Phase III methodology changes for the assignment of excess working capital and the reallocation of the various items in the Common Broad Service Category (BSC), to be effective with its 1997 Phase III results.

11.The change to the assignment of excess working capital was to correct an error in the calculation of the Phase III results, whereby net plant investment had been used, instead of working capital already assigned. With regard to the reallocation of the Common BSC items, CAPTS wanted to ensure it had complied with the directives in Decision 96-6.

12.OTA corrected its assignment of excess working capital and reallocated its Common BSC items, but did not consider either of these changes to be changes to the current Phase III assignment methodology.

13.No comments were received from interested parties on the proposed updates.

14.The Commission finds the proposed Phase III methodology changes reasonable. Even though the proposed Phase III methodology changes were submitted by CAPTS, the Commission is of the view that OTA should also ensure that its Phase III Manual properly reflects these two items.

15.Based on a review of the Phase III results submitted in this proceeding, the Commission notes that some members of CAPTS and OTA have allocated revenues to the Common BSC.

16.In the Phase III Manuals approved for CAPTS and OTA, there is no definition of what constitutes Common revenue and no procedures to assign any revenues to the Common BSC. The current Phase III costing guidelines do not contemplate the existence of Common revenue.

17.Given that the amounts assigned to the Common BSC are small, the Commission accepts the treatment of the Common revenues for the purpose of calculating the 1997 and 1998 CATs. However, the Commission is of the view that revenues should not be assigned to the Common BSC in the future.

18.Prior to 1997, the OTA Fund Administration Fee was added to the total, CAPTS and OTA combined, contribution requirement just prior to the calculation of the contribution rate. For 1997 and 1998, the OTA Fund Administration Fee was identified for each OTA member and then added to each company's contribution requirement, again just prior to the calculation of the contribution rate.

19.Given that the OTA Fund Administration Fee is included in the contribution rate, the Commission is of the view that the OTA Fund Administration Fee should be included in each company's Phase III results for regulatory purposes for 1999 and beyond and not just added to each company's contribution requirement just prior to the calculation of the contribution rate. The Commission notes that this change in methodology may cause a company's contribution requirement to change for the first year that the OTA Fund Administration Fee is included in the Phase III results. In order to have a proper basis of comparison, OTA may increase its 1998 base contribution requirements by the amount of the 1998 OTA Fund Administration Fee that is allocated to the BSCs that form part of the contribution requirement for the purpose of calculating its proposed final 1999 CATs.

20.With respect to Phase III assignment methodologies, the Commission orders that:

(a) CAPTS' proposed Phase III assignment methodology changes regarding excess working capital and the reallocation of items in the Common BSC are approved, effective with the 1997 Phase III results;

(b) CAPTS and OTA file amended Phase III Manual pages, as applicable, to ensure the assignment of excess working capital and the reallocation of the Common BSC items are clearly identified in their respective Phase III Manuals, within 30 days of the date of this Order;

(c) CAPTS and OTA include, at the time of filing their proposed final 1999 CATs, a proposal to eliminate the assignment of revenues from the Common BSC and to include the revised assignment methodology in the Phase III results filed in support of their proposed final 1999 CATs; and

(d) OTA include, at the time of filing its proposed final 1999 CATs, a proposal to include the OTA Fund Administration Fee in its member's Phase III results and to include the revised assignment methodology in the Phase III results filed in support of their proposed final 1999 CATs.

1996 Base Contribution Requirements

21.In order to expedite finalization of the 1997 and 1998 CATs, OTA submitted a proposal whereby its members' CATs would be equal to or less than the previous year, except in the case of unavoidable direct causal costs, such as the 1998 ice storm. OTA stated its proposal was consistent with Decision 96-6 except for the inclusion of the income tax adjustment identified in Telecom Order CRTC 99-148, 23 February 1999 (Order 99-148).

22.OTA also submitted that its members have recognized the need and made the effort necessary to reduce the CAT and there is nothing the companies can do (for example, by way of local rate increases) to offset the impact of the decision of the 1997 and 1998 CATs at this time.

23.Bell Canada (Bell) submitted the approved 1996 contribution requirements, which take into account Order 99-148, in which the Commission disallowed approximately $2.7 million of operating expenses and $2.0 million of capital expenditures, should be used for comparison with the 1997 contribution requirements.

24.Bell suggested that the Commission should follow the same principle for the 1996 base as it did for the 1995 base for the 1996 CAT. In Bell's view, the Commission intended, in Decision 96-6, to make a decision based on a 1996 forecast, however this did not mean that the 1996 CAT could not have been made final prior to or at the same time as the 1997 CATs.

25.With respect to using the approved 1996 contribution requirements as the base, OTA replied that any proposal to change the 1996 base would in effect be a request to the Commission to review and vary Decision 96-6.

26.OTA also submitted that Decision 96-6 changed the methodology used to finalize the CATs and that the OTA guidelines were no longer relevant, as they were for the 1995 base for the 1996 CAT.

27.Further to a review of the parties' submissions, the Commission has determined that using the approved 1996 contribution requirements as the base for comparison to the 1997 forecast contribution requirements would constitute a review and vary of Decision 96-6. The issue of how to calculate the 1996 base contribution requirement was specifically addressed in, and was an important element of Decision 96-6. To change it now would operate retrospectively.

28.The Commission considers that there is no substantial doubt as to the correctness of this element of Decision 96-6. Therefore, the Commission considers the original forecast 1996 contribution requirements to be the appropriate base for comparison with the 1997 contribution requirements.

29.In its 4 June 1999 submission, OTA suggested that members who had a surplus in the Competitive Terminal category in 1996 would see their 1996 base contribution requirements reduced by the amount of the surplus and that this would result in those members not realizing the incentives provided for in Decision 96-6.

30.Given that the Commission regulated all of the telecommunications services provided by the companies until terminal equipment forbearance was conditionally granted in Decision 96-6, the Commission is of the view that the 1996 base contribution requirements should be calculated using the formula that was in place for 1996 (the 1996 formula). The 1997 contribution requirements are to be calculated using the formula set out in Appendix II in Decision 96-6.

31.With respect to the 1996 base contribution requirements, the Commission determines that:

(a) the original forecast 1996 contribution requirements, including the income tax adjustment identified in Order 99-148, should be used as the 1996 base for comparison with the 1997 contribution requirements;

(b) the 1996 base contribution requirements be calculated using the 1996 formula; and

(c) in order to have a proper basis for comparison, CAPTS may increase its 1996 base contribution requirements by its estimated 1996 OTA Fund Administration Fee for the purpose of calculating its final 1997 CATs.

1997 and 1998 CATs

32.Except for excess expenses in 1997, CAPTS calculated its contribution requirements by using the lower of (a) the previous year's contribution requirement, after accounting for local rate increases, and (b) the current year's contribution requirement. The direct toll components were based on the current year's Phase III results.

33.In its proposal, OTA calculated its CATs by using the lower of:

(a) the sum of the previous year's contribution requirement, after accounting for local rate increases, and the previous year's direct toll component; and

(b) the sum of the current year's contribution requirement and the current year's direct toll component.

34.Bell suggested that direct toll rates should be declining in order to entice toll competition. Further, direct toll cost increases, without any reference to future cost reductions, provide no assurances that the proposed direct toll rates are warranted.

35.As stated in Decision 96-6, the Commission considers, generally, that the contribution requirements should be calculated by using the lower of (a) the previous year's contribution requirement, after accounting for local rate increases, and (b) the current year's contribution requirement. For 1997, the 1996 base contribution requirements are the original forecast 1996 contribution requirements, as adjusted by paragraph 31 above. For 1998, the 1997 base contribution requirements are the 1997 contribution requirements filed pursuant to this Order.

36.The Commission notes that the direct toll component is designed to allow the local exchange carriers to recover the costs they incur to originate and terminate toll traffic on behalf of toll providers.

37.As set out in Decision 96-6, the Commission considers that the direct toll component should be based on the current year's forecast Toll BSC.

38.The Commission shares Bell's concerns about possible increases in the direct toll component. The Commission intends to monitor the direct toll component and expects the companies to provide explanations of increases, as appropriate, as part of the process to finalize future years' CATs.

39.In its 1 June 1999 submission, CAPTS provided explanations for excess expenses for four of its members for 1997 and submitted that any capping of the contribution requirement at the previous year's level effectively ignores the fact that costs can and do rise. Further, CAPTS argued that it does not recognize the lumpiness of certain expenditures, particularly for the smaller companies.

40.Bell submitted that while four CAPTS members were providing explanations for excess expenses, very little justification was given. For example, over half of the excess expenses being claimed by The Corporation of the City of Thunder Bay - Telephone Division (Thunder Bay Telephone) was attributed to initial costs for the department's share for a new financial and human resource system.

41.The Commission notes that the excess expenses being claimed by the CAPTS' members in 1997 range between $41,000 and almost $1.0 million. For Dryden Municipal Telephone System and Keewatin Municipal Telephone System, the excess expenses requested exceed their 1997 local rate increases; for Thunder Bay Telephone, the excess expenses are just over half of its 1997 local rate increase.

42.The Commission has previously identified the importance of reducing the CAT to achieve effective toll competition and the fact that one method to achieve lower CAT rates is through control of costs.

43.In past orders and again in Review of Contribution Regime of Independent Telephone Companies in Ontario and Quebec, Telecom Decision CRTC 99-5, 21 April 1999 (Decision 99-5), the Commission stated that companies that are continually experiencing increased expenses should seek rate relief rather than relying on the toll carriers to meet budget deficits or to fund new services. Also, excess expenses should be supported with detailed explanations and will not be allowed unless they are fully justified.

44.The Commission has reviewed the excess expense explanations provided and finds them insufficient since most of the expenses were subject to management's discretion and, as such, should have been taken into account in the companies' budgets. The Commission also notes that the purpose of the local rate increases was to reduce the contribution requirement and this will not fully occur if the excess expenses were to be allowed.

45.In view of the above, the Commission denies the excess expenses claimed by four of the CAPTS' members in 1997.

46.In Order 99-148, the Commission ordered Thunder Bay Telephone to deem Relay Service revenues for the period 1 April to 1 July 1996 in the calculation of its 1997 CAT.

47.Given that the Phase III results and CAT calculations submitted by Thunder Bay Telephone in June 1999 were basically the same as those submitted in April 1997, the Commission is of the view that Thunder Bay Telephone did not comply with Order 99-148, with regard to the deeming of the Relay Service revenues.

48.In its June 1999 submission, OTA claimed ice storm related excess expenses for four of its members, ranging between $66,000 and $151,000. OTA stated that the ice storm related excess expenses were one time in nature and would not impact the 1998 base for comparison with the 1999 CATs.

49.Given the unusual circumstances surrounding the ice storm, the Commission is of the view that the ice storm related excess expenses should be allowed for the purpose of calculating the final 1998 CATs. However, these excess expenses are not to be included in the 1998 base for the purpose of calculating the proposed final 1999 CATs.

50.With respect to calculating the final 1997 and 1998 CATs, the Commission orders that:

(a) CAPTS' proposed 1997 and 1998 CATs are denied;

(b) OTA Tariff Notices 29A and 43 are denied;

(c) the contribution requirements are to be calculated by using the lower of (a) the previous year's contribution requirement, after accounting for local rate increases, and (b) the current year's contribution requirement;

(d) the direct toll component is to be based on the current year's forecast Toll BSC;

(e) OTA's treatment of the 1997 and 1998 OTA Fund Administration Fee is approved;

(f) CAPTS members' excess expenses in 1997 are denied;

(g) Thunder Bay Telephone deem Relay Service revenues in its 1997 Phase III results for the purpose of calculating its 1997 contribution requirement, in compliance with Order 99-148; and

(h) OTA members' ice storm related excess expenses in 1998 are approved, but are to be excluded from the 1998 base for the purpose of calculating the proposed final 1999 CATs.

51.With respect to filing CAT information and Phase III results:

(a) CAPTS and OTA are directed to file, for each company, by 29 October 1999:

(i) revised final 1997 and 1998 CATs in accordance with the determinations above;

(ii) revised interim 1999 CATs based on the revised final 1998 CATs, filed pursuant to (i) above, after accounting for the impact of the 1999 local rate increases. The revised interim 1999 contribution requirements filed here will become the cap identified in paragraph 97 of Decision 99-5;

(iii) actual 1997 and 1998 Phase III results which include the revised CAT revenues calculated pursuant to (i) above; and

(iv) actual rates of return for 1997 and 1998 for the regulated portion of the company and in the event that a company has over-earned in a particular year, the amount that will be refunded to toll providers; and

(b) CAPTS and OTA are directed to file, for each company, by 30 November 1999:

(i) proposed final 1999 CATs including Phase III results, toll minutes and CAT calculations, in accordance with Decision 96-6;

(ii) the impact of any local rate increases implemented during 1999;

(iii) explanations for any increases in the direct toll component where the proposed final 1999 direct toll component exceeds the revised final 1998 direct toll component by more than 5%; and

(iv) proposed interim 2000 CATs based on the revised interim 1999 CATs, filed pursuant to (a) (ii) above. As identified in paragraph 101 of Decision 99-5, the contribution requirements are capped at the interim 1999 contribution requirement levels, after accounting for the annualized impact of the 1999 local rate increases and any planned or pending local rate increases in 2000 filed in accordance Decision 99-5.

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

The Canadian Alliance of Publicly-Owned Telecommunications Systems (CAPTS) represents the following companies :

Bruce Municipal Telephone System
Dryden Municipal Telephone System
Keewatin Municipal Telephone System
Kenora Municipal Telephone System
The Corporation of the City of Thunder Bay - Telephone Division

The Ontario Telephone Association (OTA) represents the following companies :

Amtelecom Inc.
Brooke Telecom Co-operative Ltd.
Durham Telephones Limited *
Gosfield North Communications Co-Operative Limited
Hay Communications Co-operative Limited
Huron Telecommunications Co-Operative Limited
Hurontario Telephones Limited **
The Lansdowne Rural Telephone Company Limited
Mornington Communications Co-operative Limited
North Frontenac Telephone Corporation Limited
North Norwich Telephones Limited **
North Renfrew Telephone Company Limited
Otonabee Telephones Ltd. ***
People's Telephone Company of Forest Inc.
Quadro Communications Co-operative Inc.
Roxborough Telephone Company Limited
The South Bruce Rural Telephone Company Limited
Tuckersmith Communications Co-operative Limited
Westport Telephone Company Limited
Wightman Telephone Limited

* Renamed Nexicom Telecommunications Inc. in 1999.
** Hurontario Telephones Limited includes North Norwich Telephones Limited, effective in 1998.
*** Renamed Nexicom Telephones Inc. in 1999.