ARCHIVED -  Telecom Order CRTC 99-148

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Telecom Order

  Ottawa, 23 February 1999
  Telecom Order CRTC 99-148
  An application filed on 22 August 1997 by the Ontario Telephone Association (OTA) requesting final approval of the 1996 OTA Carrier Access Tariff (CAT).
  File No.: Tariff Notice 28
  1. On 27 March 1997, OTA filed an application, under Tariff Notice (TN) 28, on behalf of the twenty-seven Ontario independent telephone companies (OTA member companies) (listed in Appendix A to this Order) which are participants in the OTA CAT. OTA requested approval of a proposed final 1996 CAT rate of $0.1210 per minute ($0.0294 for Direct Toll charges including equal access and $0.0916 for Toll Contribution). At that time, the Commission was deliberating on the merits of OTA's application to finalize its 1995 CAT, which was likely to affect the finalization of the 1996 CAT.
  2. On 30 June 1997, the Commission issued Telecom Order CRTC 97-927 (Order 97-927) denying the proposed final 1995 OTA CAT of $0.1205 per minute, on the basis that, among other things, certain operating expenses and capital expenditures should not be recovered from the CAT. As well, the Commission directed OTA to file for approval, a revised proposed final 1996 OTA CAT taking into account the Commission's determinations in Order 97-927.
  3. On 21 August 1997, OTA filed an application pursuant to section 62 of the Telecommunications Act requesting that the Commission review and vary Order 97-927.
  4. On 22 August 1997, OTA, on behalf of its members, filed a revised application under TN 28, requesting approval of a proposed final 1996 CAT rate of $0.1206 per minute ($0.0296 for Direct Toll charges including equal access and $0.0910 for Toll Contribution).
  5. In a letter decision, dated 27 April 1998, the Commission denied OTA's application to review and vary Order 97-927.
  6. On 3 July 1998, OTA submitted revisions to the contribution requirement calculation of Brooke Telecom Co-operative Ltd. and North Renfrew Telephone Company Limited. These changes had no impact on the overall proposed CAT of $0.1206 filed on 22 August 1997.
  7. 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 found that a streamlined incentive form of earnings regulation, with minimal filing requirements, was appropriate for the companies. As part of this light handed regulatory approach, the Commission stated that, for the Ontario independents, the same internal guidelines used to finalize the 1994 and 1995 CAT should be used for 1996, with the exception of a reduction of the Average Net Investment Base (ANIB) guideline.
  8. In its 22 August 1997 submission, OTA indicated that, in calculating its 1996 CAT, 15 of the 27 OTA member companies exceeded their 1996 ANIB guidelines while 24 companies exceeded the lowest of the three expense measures. Each company provided explanations for the excess amounts claimed.
  9. OTA submitted that it is difficult for all companies to come within the ANIB guidelines every year due to the lumpiness of capital expenditures, i.e., small telcos typically have one main digital switch, several remotes and one main toll connect facility and, therefore, the replacement or upgrade of any particular piece of equipment or software results in a large increase in capital expenditures over the previous year.
  10. With respect to expenses, OTA noted that some actions that contribute to excess expenses in one year could result in cost savings in future years. Further, OTA submitted that the Commission's scrutiny of excess operating expenses should focus on the excess expenses that are not offset by excess revenues, otherwise toll carriers benefit from OTA member companies' excess revenues but would not have to compensate the companies for the excess expenses incurred to generate that revenue.
  11. Both AT&T Canada Long Distance Services Company (AT&T Canada LDS) and Bell Canada (Bell) objected to the fact that, contrary to the Commission's directive in Order 97-927, OTA, in calculating the contribution requirement of its members, exceeded the 1996 ANIB guidelines and did not use the lowest of the three operating expenses measures.
  12. AT&T Canada LDS submitted that many of the increases in ANIB and operating expenses included in OTA's 1996 proposed final CAT are discretionary or are the type of expenditures that were denied for CAT calculation purposes by the Commission in finalizing the 1995 CAT, and therefore they should be disallowed for the purposes of calculating the 1996 final CAT. AT&T Canada LDS added that if OTA calculated its CAT using the ANIB guideline and the lowest of the three expense measures as directed in Order 97-927, the resultant CAT would be lower than the proposed $0.1206 per minute.
  13. Bell expressed concern regarding OTA's year-over-year increase in its CAT and attributed this trend to the fact that the guidelines were not being followed. Specifically, Bell cited for the years 1994 to 1996, the increasing number of OTA member companies whose ANIB costs and expenses exceeded the guidelines in the calculation of the OTA CAT. Bell noted that the rising CAT was contrary to the trend throughout the telephone industry in Canada where contribution rates are decreasing annually.
  14. Bell submitted that the companies appeared to be selective with regard to the items they chose to identify where overspending occurred, identifying as reasons for over-expenditure only those items which they felt would most likely be approved by the Commission. In Bell's view, many of the over-expenditures were controllable through a proper budgeting system and accrual process.
  15. Regarding OTA's view that its members' over-spending should be netted against their excess revenues, Bell submitted that this was never the intent of the OTA guidelines; rather, the guidelines were established to control costs and encourage operational efficiency. Without enforcement of these guidelines, Bell stated that there are no incentives to encourage operational efficiency as excess costs would be borne entirely by toll service providers through higher CAT rates.
  16. Bell submitted that, prior to becoming tax-paying companies, the newly incorporated co-operative companies proposed to recover co-operative conversion costs through higher contribution rates while maintaining lower local rates for their subscribers. Further, Bell submitted that the companies' argument for not raising local rates was that the companies were non-tax paying and that part of this benefit should be passed on to their subscribers. Bell noted that the co-operatives have not raised local rates after becoming tax-paying entities in 1995. In Bell's view, some of the additional costs should be borne by the co-operatives' subscribers through higher local rates.
  17. Bell noted that Dryden Municipal Telephone System (Dryden) and Thunder Bay Telephone (Thunder Bay) did not bill customers for $5,000 and $32,000 respectively, for the recovery of Relay Service costs originally billed to the companies by Bell. Bell submitted that these revenues should be deemed to have been collected in calculating the 1996 CAT, otherwise, the toll carriers would be required to pay a higher CAT as a result of the companies' decisions to not bill their customers.
  18. In reply, OTA maintained that in Order 97-927, the Commission merely noted that the lowest of the three expense measures was used to determine the allowable level of operating expenses in setting the 1994 final CAT but gave no such direction to use the lowest of the three expense measures in its CAT calculation as contended by AT&T Canada LDS and Bell.
  19. OTA submitted that its members' expenses were not discretionary but rather were made in an effort to reduce costs or to increase revenues in the future, citing, as an example, a joint purchase of a new billing system that is expected to service 15 or more of the companies. OTA argued that, if such initiatives were denied, the companies would never be able to achieve productivity gains.
  20. OTA also submitted that, if excess spending is not netted against excess revenues, the companies would not have the incentive to develop new services that would eventually contribute to the reduction of the contribution rate through increased revenues.
  21. With respect to the recovery of Bell's Relay Service costs, OTA pointed out that Thunder Bay did not pay Bell in 1996, nor did it accrue an expense for the service in the year and therefore no adjustment is required. In the case of Dryden, OTA submitted that the company set up the cost of the service as a balance sheet item and based on this accounting treatment, an adjustment as suggested by Bell is unwarranted.
  22. OTA also submitted that the Commission did not intend for the co-operative companies to increase local rates to recover the costs of their new tax paying status. OTA cited Decision 96-6 in which the Commission recognized that the 1995 final CAT could be higher than the 1995 interim CAT after taking into account the income tax paying status of the co-operatives. Further, OTA stated that, in Order 97-927, the Commission allowed expenses related to the co-operative conversions to be recovered from the CAT.
  23. Since the inception of toll competition in 1992, the Commission has called for decreases in contribution levels in order to encourage toll competition. One of the Commission's approaches to achieve this objective involves various rate rebalancing initiatives. For instance, in Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994, the Commission established a local rate rebalancing initiative to speed the decline in the Stentor companies' contribution levels. Subsequently, in Implementation of Regulatory Framework - Splitting of the Rate Base and Related Issues, Telecom Decision CRTC 95-21, 31 October 1995, the Commission upheld its decision to increase local rates which would have the effect of reducing the required contribution levels and ultimately reduce CAT rates. Similarly, the Commission has approved some rate rebalancing in the territories served by the independent telephone companies in Quebec and Ontario. For example, with respect to OTA operating territories, in a series of Orders issued in December of 1996, the Commission approved annual increases of $2.00 per month per local access line, effective 1 January 1997 and 1998.
  24. In those orders, in Order 97-927 and in the Commission's 27 April 1998 letter decision, the Commission recognized the importance of reducing the CAT rate to achieve effective toll competition.
  25. Another approach to achieve lower CAT rates has been through the control of costs. As part of all annual contribution proceedings held to set CAT rates, the Commission has scrutinized forecasted budgets, including costs, in order to ensure the lowest CAT rate possible. For OTA, the Commission directed the use of the expense and ANIB guidelines that were independently developed by OTA in 1994 for the same purpose.
  26. However, the Commission finds that, contrary to its expectations, the anticipated reduction in OTA's contribution rate has not materialized. In this regard, the Commission notes the year-over-year increase in OTA CAT for the years 1994 to 1996, i.e., $0.1139 per minute for 1994, $0.1180 for 1995 and $0.1206 proposed for 1996. The Commission considers that the upward trend of OTA CAT is inconsistent with the CAT decreases achieved elsewhere in Canada.
  27. In Decision 96-6, the Commission, as part of its light handed regulatory approach, exempted OTA from having to file detailed information normally required of other regulated companies such as construction programs and expense budgets. Instead, OTA member companies were to observe cost guidelines that OTA itself had proposed and developed in order to control costs and encourage efficiency. Only in instances in which the companies' expenditures exceeded the guidelines would detailed supporting explanations be required.
  28. Specifically, the Commission stated in that Decision that the 1996 CAT should be calculated using the internal guidelines used to finalize the 1994 and 1995 CAT, with the exception of a reduction of the ANIB guideline from 8% to 5%.
  29. Under OTA guidelines for 1994 and 1995, the increase in each company's approved ANIB was limited to 8% of the previous year's ANIB projection. Increases in operating expenses were to be limited to the lowest of three expense measures, i.e., (i) an updated operating expense guideline based on the previous year's approved operating expenses increased by the percent growth in actual Network Access Service (NAS) plus 2%, (ii) the company's annual operating expense budget, and (iii) the actual annual operating expenses of the company. The approved expenses and ANIB serve as a basis for determining the following year's CAT.
  30. OTA's 1996 CAT filing included the following: (1) $81.3 million in expenses of which $2.7 million exceeded the lowest of the three expenses measures, and (2) $5.8 million in capital expenditures of which $2.4 million exceeded the ANIB guidelines.
  31. The Commission notes that, not only has there been an upward spending trend for the years 1994 to 1996, but the number of OTA member companies that have exceeded the OTA's own spending guidelines has also continued to increase year-over-year, resulting in the continual increase of the OTA CAT.
  32. In particular, the Commission notes that, for 1994, OTA requested approval, on behalf of only one company, of $37,000 in excess expenses, while no companies filed for approval of capital expenditures above the ANIB guideline. For its 1995 final CAT, OTA requested approval, on behalf of 15 companies, of excess expenses of $1.9 million and for two companies, excess capital expenditures of $80,000. For 1996, the number of companies has increased even further to 24 (of the 27) companies with excess expenses of $2.7 million and 15 companies with excess capital expenditures of $2.4 million.
  33. As noted above, the OTA guidelines were intended to control total allowable spending. However, the Commission finds that OTA's guidelines are not being followed by OTA members themselves and that attempts to recover excess expenditures from toll providers through the CAT seem to have become the rule rather than the exception.
  34. As the Commission stated in Order 97-927, those OTA members that are continually experiencing excess increased expenses should seek rate relief in the future rather than relying on the toll carriers to meet budget deficits or to fund new services.
  35. With regard to OTA's submission that certain excess expenses should be allowed because they are offset by excess revenues, the Commission has determined on previous occasions, that the Ontario independents have not demonstrated a direct causal link between the two. In this regard, see Telecom Order CRTC 97-571, 29 April 1997, finalizing the 1995 Northern Telephone Limited CAT, and Order 97-927, 30 June 1997, dealing with OTA's final 1995 CAT.
  36. The Commission is of the view that, although the OTA stated that initiatives taken to achieve these additional revenues resulted in increased expenses, in the context of a light handed regulatory framework, no direct relationship can be established between the two. Further, as the Commission stated in its letter decision of 27 April 1998, the intent of the guidelines was not to net these expenses against excess revenues, but rather to control costs. Therefore, the Commission is not persuaded by OTA's submission that the methodology should be revised to allow the netting of revenues against expenses for CAT calculation purposes.
  37. The Commission notes that the issue of the appropriate method for the calculation of OTA's 1995 CAT (and by extension its 1996 CAT) was extensively discussed and confirmed in the Commission's 27 April 1998 determination, denying OTA's application to review and vary Order 97-927.
  38. In Order 97-927, the Commission considered that, where the companies' expenditures exceed the guidelines, the excess expenditures should be fully supported with detailed explanations, and that the excess expenditures should, generally, not be allowed unless they are justified.
  39. The Commission has reviewed the explanations provided by each OTA company for its excess expenditures. The Commission finds that not only are some of the excess expenses unsupported or subject to management's discretion, but many are similar to those disallowed in Order 97-927, e.g., Internet and optional local services. In the Commission's view, costs associated with services such as Internet and optional local services should be recovered through company rates. In view of the above, the Commission considers that it would be inappropriate to allow OTA member companies to recover from the 1996 CAT any costs that were unsupported, discretionary or similar to those disallowed in Order 97-927.
  40. In addition, the Commission recognizes that some expenses, such as depreciation and co-operative conversion expenses that are identified as excess expenses, are similar to those claimed and approved in Order 97-927 dealing with the 1995 OTA CAT.
  41. As submitted by OTA, the Commission considered, in Order 97-927, that co-operative conversion expenses should be recoverable from the 1995 CAT. As stated in Decision 96-6, the Commission recognized that, as submitted by OTA in that proceeding, the 1995 CAT would likely be higher than the interim 1995 CAT due to the change in the tax-paying status of newly formed co-operatives in 1995.
  42. However, the Commission is not persuaded that, for 1996, these expenses should be recovered as excess expenses through the CAT. The Commission is of the view that these expenses could have been planned for and/or funded within the allowable annual increases in expenditures.
  43. Similarly, for depreciation, the Commission notes that increases in depreciation expenses are the result of the companies' capital expenditures or new asset life characteristics which are approved by the Commission following the companies' applications. In either case, the depreciation increases result from company initiated actions which were planned and therefore could have been funded within the allowable annual expense levels.
  44. The Commission is of the view that many of the over-expenditures claimed were controllable through a proper budgeting system or accrual process.
  45. In view of the above, the Commission finds it appropriate to deny all expenses which exceed the lowest of the three expense measures.
  46. With respect to capital expenditures, the Commission notes that the same upward spending trend prevails as for expenses.
  47. In reviewing the excess capital expenditure explanations, the Commission notes that many of the excess expenditures for purchases, such as Internet hardware, switch upgrades to provide Call Management services, and the purchase of a house for a senior employee, are within management's discretion. However, others, such as replacement of failed equipment and installation of equipment to solve slow dial tone and all trunks busy problems, are not discretionary. In addition, the Commission considers that joint initiatives, such as the purchase of a new billing system, which will serve several companies, should ultimately reduce costs.
  48. Further, the Commission notes that the OTA itself recommended that the annual increase to the ANIB guideline be lowered from 8% to 5% in the proceeding leading to Decision 96-6.
  49. In view of the above, the Commission finds that it is appropriate to allow the recovery of $366,690 of the $2.4 million excess capital expenditures claimed by OTA, as indicated in Appendix B to this Order.
  50. In addition, the Commission notes that the companies' CAT calculations, provided in Section 2 of OTA's submission, do not reflect the income tax expense impact of adjustments to the toll revenue requirement needed to attain the mid-point of each company's rate of return.
  51. With respect to Bell's proposal that revenues be deemed in the calculation of the CAT for Dryden's and Thunder Bay's unbilled portion of Relay Service costs, the Commission notes that Bell and OTA agree that Thunder Bay did not bill its customers for these costs in 1996. The Commission also notes that in Telecom Order CRTC 96-600, dated 18 June 1996, that approved the company's tariff revisions for its Relay Service, the Commission approved the past charging of rates for the period in question.
  52. On 7 January 1997, Thunder Bay requested that the Commission provide clarification as to whether the company was liable to Bell for Relay Service costs for the period 1 April to 1 July 1996. On 11 March 1997, the Commission confirmed that the company was responsible for payment to Bell for these costs effective 1 April 1996.
  53. In view of the above, the Commission considers it appropriate that Thunder Bay deem revenues for the period 1 April to July 1996 in the calculation of the 1997 CAT since the aforementioned expenses would not have been recognized by the company until 1997.
  54. In the case of Dryden, the Commission notes that Telecom Order CRTC 96-1361, dated 26 November 1996, approving the company's tariff revisions for Relay Service, with an effective date of 1 December 1996, did not ratify the past charging of rates. As Dryden did not have the right to bill its customers prior to 1 December 1996, the Commission is of the view that no adjustment to the revenue component of Dryden's 1996 contribution requirement is required for the calculation of the 1996 OTA CAT.
  55. In light of the foregoing, the Commission orders that:
  (1) the proposed 1996 final OTA CAT of $0.1206 per minute ($0.0296 for Direct Toll charges and $0.0910 for Contribution) under TN 28 be denied;
  (2) Thunder Bay deem Relay Service revenues for the period 1 April to 1 July 1996 in the calculation of its 1997 CAT;
  (3) OTA file for approval by 25 March 1999, a 1996 final OTA CAT calculated to reflect the income tax expense impact of the additional toll revenue requirement needed to attain the mid-point of each company's rate of return and to exclude:
  (a) all excess operating expenses that exceed the lowest of each OTA CAT participant's:
  (i) 1995 approved operating expenses increased by 2% plus actual 1996 percent NAS growth guideline, and
  (ii) forecasted 1996 operating expenses, and
  (iii) actual 1996 operating expenses, and
  (b) all excess investment over the 5% capital expenditures guideline (except for those capital expenditures specifically identified in Appendix B).
  56. The Commission intends to issue a letter shortly in order to commence a process to finalize the 1997 individual company CATs for the members of OTA, Bruce Municipal Telephone System, Dryden, Keewatin Municipal Telephone System, Kenora Municipal Telephone System and Thunder Bay.
  Secretary General
  This document is available in alternative format upon request and may also be viewed at the following Internet site:
  Appendix A
  Amtelecom Inc.
Brooke Telecom Co-operative Ltd.
Bruce Municipal Telephone System
Coldwater Communications Inc.
Durham Telephones Limited
Dryden Municipal Telephone System
Gosfield North Communications Co-Operative Limited
Hay Communications Co-operative Limited
Huron Telecommunications Co-operative Limited
Hurontario Telephones Limited
Keewatin Municipal Telephone System
Kenora Municipal Telephone System
Lansdowne Rural Telephone Co. Ltd.
Manitoulin Tel Inc.
Mornington Communications Co-operative Limited
North Frontenac Telephone Co.
North Norwich Telephones Ltd.
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
The Corporation of the City of Thunder Bay - Telephone Division
Tuckersmith Communications Co-operative Limited
Westport Telephone Company Limited
Wightman Telephone Limited
  Appendix B
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