ARCHIVED -  Telecom Order CRTC 99-239

Telecom Order

Ottawa, 12 March 1999

Telecom Order CRTC 99-239

LOCAL COMPETITION START-UP COSTS PROCEEDING, Telecom Public Notice CRTC 98-10

File No.: 8622-S1-03/98

I Introduction

1.In Local Competition, Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8) and in Responsibility for Carrier Specific Costs for the Provision of Local Number Portability, Telecom Order CRTC 97-591, 1 May 1997 (Order 97-591), the Commission determined that start-up costs to be incurred by the Stentor Resource Centre Inc. (Stentor) member companies to implement local competition should not be recovered from interconnecting carriers, but that each carrier should be responsible for recovering its own costs. In Order 97-591, the Commission also indicated that it would initiate a proceeding to address the appropriate approach for the Stentor member companies to recover their start-up costs.

2.In Implementation of Price Cap Regulation and Related Issues, Telecom Decision CRTC 98-2, 5 March 1998 (Decision 98-2), the Commission excluded local competition start-up and local number portability (LNP) costs incurred by some of the Stentor member companies from the expense forecasts used in establishing contribution and going-in rates. In so doing, the Commission referred to its intention to initiate a proceeding to determine the means to achieve recovery of these costs.

3.The Commission issued Local Competition Start-up Costs Proceeding, Telecom Public Notice CRTC 98-10, 12 May 1998 (PN 98-10). The focus of the proceeding established by PN 98-10 was to quantify the local competition start-up costs and costs specific to LNP and to determine the appropriate mechanism to address the recovery of these costs.

4.Submissions and/or comments were received from the following parties to the proceeding: Stentor, on behalf of BC TEL, Bell Canada (Bell), Island Telecom Inc. (Island Tel), Maritime Tel & Tel Limited (MT&T), MTS Communications Inc. (MTS), NBTel Inc. (formerly The New Brunswick Telephone Company, Limited) (NBTel), NewTel Communications Inc. (NewTel), TELUS Communications Inc. (TCI), and TELUS Communications (Edmonton) Inc. (TCEI) (collectively, the Companies); the Alberta Council on Aging, the Consumers' Association of Canada, the Fédération nationale des associations de Consommateurs du Québec and the National Anti-Poverty Organization (collectively ACA et al.); AT&T Canada Long Distance Services Company; Call-Net Enterprises Inc.; the Canadian Business Telecommunications Alliance; Rogers Cantel Inc.; Clearnet Communications Inc.; the Director of Investigation and Research; GT Group Telecom Networks Inc.; MetroNet Communications Group Inc.; and Microcell Telecommunications Inc.

5.In reaching its determinations set out herein, the Commission has reviewed and considered the submissions filed by all parties.

II Methodology for Recognition of Costs

6.During the proceeding, two costing methodologies were examined for the purposes of recognizing the local competition start-up and LNP costs:

i) a present worth of annual costs (PWAC) approach, which estimates the present value of costs incurred within the study period (1997-2002); and

ii) a revenue requirement costing methodology that recognizes the annual expenses based on accepted accounting principles and includes a return on equity.

7.The Companies proposed, using the PWAC approach, to recover all of the costs incurred over the six-year study period, except for the terminal value, over periods ranging from three to five years, depending on the company. Those companies that requested a three-year PWAC recovery period (BC TEL, Bell, Island Tel, MT&T and NBTel) proposed to recover their costs by the end of 2001.

8.The Companies argued that too long a recovery period would lessen their chances of ever recovering all of their costs given forecast market share losses to competitors.

9.Under the revenue requirement approach, the Commission notes that, among other things, the capital costs are recovered through an annual depreciation expense. Based on the approved depreciation life characteristics, this approach would defer the recovery of some of the local competition start-up and LNP costs beyond the proposed PWAC recovery periods.

10.The Commission notes that in Decision 98-2 and in TELUS Communications (Edmonton) Inc. - Implementation of Price Cap Regulation and Related Issues, Telecom Decision CRTC 99-1, 18 February 1999 (Decision 99-1), the depreciation life characteristics established for the Companies at the outset of their respective price cap regimes were determined based on a historical view of plant as well as a prospective view that included the impacts of future competition.

11.The Commission notes that based on the determinations made in Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, 1 May 1997 (Decision 97-9), and Decisions 98-2 and 99-1 which utilized a revenue requirement approach, rates were set at the start of the price cap regimes, based in part on these approved depreciation life characteristics, to provide the Companies with a reasonable opportunity to recover their capital costs.

12.The Commission is not persuaded that the recovery of capital assets at issue in this proceeding should be treated differently from the recovery of capital assets at issue in Decisions 98-2 and 99-1. The Commission is also of the view that the depreciation life characteristics approved in Decisions 98-2 and 99-1 remain appropriate estimates of the plant lives of local competition start-up and LNP assets.

13.In light of the above and consistent with the approach adopted for the recovery of Bell's Service Improvement Program costs in Decision 98-2, the Commission finds that a revenue requirement methodology is appropriate for recognizing the Companies' local competition start-up and LNP costs.

III Magnitude of the Costs

14.The Commission finds that there is insufficient information on the record to enable it to make a final determination as to the reasonableness of the local competition start-up costs and LNP costs identified by the Companies.

15.In order to examine further the level of the costs submitted, the Commission is addressing additional interrogatories to the Companies.

16.The Commission will render a final determination with respect to this matter, as well as other matters raised in this proceeding that are not expressly addressed in this Order, at a later date.

17.Notwithstanding the above, the Commission considers it appropriate to permit the Companies to include LNP and local competition start-up costs in the calculation of the revenue reductions they are required to implement at the Price Cap Index (PCI) level through filings to be made by the Companies by 31 March 1999 with respect to their 1999 price cap parameters.

18.For this purpose, the Commission accepts at this time, on an interim basis, the cash flows submitted by the Companies, modified to reflect the use of the revenue requirement methodology.

19.The capped and uncapped revenue requirement amounts for 1997 to 2001 provided in response to interrogatories SRCI(CRTC)5Aug98-43 PN 98-10 and TCEI(CRTC)31July98-43 PN 98-10, and based on the cash flows referred to in paragraph 18 are set out below:

BC TEL $ 57,806,000
Bell $ 249,779,000
Island Tel $ 1,256,000
MTS $ 16,742,000
MT&T $ 10,395,000
NBTel $ 6,178,000
NewTel $ 4,312,000
TCI/TCEI $ 65,316,000

20.Pending a final determination on the magnitude of the allowed cost recovery, the Companies are permitted to use, for their respective 31 March 1999 price cap filings, up to one-third of the amounts identified in paragraph 19, adjusted for the allocation factor for capped and non-capped services based on the determinations in section V of this Order, only to mitigate rate reductions otherwise required. With respect to TCI/TCEI, the amount identified in paragraph 19 is to be revised in the 31 March 1999 price cap filing to reflect the determinations in Decision 99-1.

21.The amounts that are determined in accordance with paragraph 20 and used to mitigate the required rate reductions are to be included in a deferral account.

IV Recovery Mechanism

22.The Companies submitted that the local competition start-up and LNP costs that are allocated to the companies' capped services should be recovered through the use of an exogenous factor and that the costs allocated to non-capped Utility services should be recovered through associated rates.

23.The Companies also submitted that an exogenous adjustment to the PCIs and the corresponding adjustments to the Service Band Limits (SBLs) for their Basic Residential Local Service and Other Capped Services Sub-Baskets will set a cap on the amount that can be passed on to residential customers. The Companies stated that this will give them the flexibility needed to price their services in accordance with, and subject to, market conditions.

24.Some parties suggested an end-user surcharge be imposed to recover local competition start-up and LNP costs. The Companies stated that such an approach would remove their discretion as to how local competition start-up and LNP costs would be recovered.

25.The Commission considers that the local competition start-up and LNP are initiatives that meet the criteria established in Decision 97-9, for an exogenous factor adjustment for inclusion in the PCI, namely:

a) they are legislative, judicial or administrative actions which are beyond the control of the company;

b) they are addressed specifically to the telecommunications industry; and

c) they have a material impact on the Utility segment of the company.

26.The Commission considers that the use of an exogenous factor is more appropriate than end-user surcharges, as it provides the Companies with greater pricing flexibility.

27.In light of the above, the Commission considers that the Companies' local competition start-up and LNP costs allocated to capped Utility services should be recovered through an exogenous factor.

V Allocation of Revenue Requirement Costs

28.The Companies proposed that costs be allocated between capped and uncapped services and among the separate capped services sub-baskets, in the same proportion as the number of Network Access Services (NAS) or equivalents.

29.Other approaches examined in this proceeding included the allocation of costs by:

a) 1998 forecast revenues;

b) NAS weighted by 1998 forecast revenues;

c) retail switched exchange service NAS;

d) retail switched exchange service NAS weighted by 1998 forecast revenues; and

e) retail switched exchange service NAS with business NAS weighted by a factor of 1.5.

30.In the Commission's view, a revenue-based allocation places a larger burden of cost recovery on those customers who already pay compensatory rates. In addition, a revenue allocator would result in costs being allocated to other services which are neither NAS-based nor associated with local telephone numbers and therefore are not linked to the costs to be recovered.

31.Accordingly, the Commission considers that a NAS-based allocator is more appropriate than a revenue-based allocator.

32.However, the Commission notes that the use of NAS as an allocator results in costs being allocated to Competitor services.

33.In Order 97-591, the Commission stated:

"... it is appropriate that each carrier be responsible for the recovery of its own costs associated with the implementation of LNP."

34.In addition, in Decision 97-8, the Commission stated:

"The Commission notes that in [Order 97-591] it has concluded that the carrier specific costs associated with the implementation of LNP should be borne by the carriers incurring the costs. Noting that the LNP start-up costs are likely to be the most significant portion of total start-up costs, the Commission considers that approach to be appropriate for the start-up costs referred to in this proceeding."

35.During the proceeding, the Companies confirmed that BC TEL, Bell, MTS, NBTel, NewTel and TCI had included NAS associated with certain Competitor services for purposes of allocating costs between Capped and Uncapped services, thus raising the prospect of potential increases in these Competitor services rates and understating the portion of costs allocated to capped services. The Commission considers that to recover these costs through higher rates for Competitor services would be contrary to its previous rulings.

36.In the Commission's view, the use of retail NAS as an allocator would avoid costs being allocated to Competitor services and local private line services, since these services are not retail switched exchange services.

37.The use of retail NAS as the basis for allocating revenue requirement costs raises the issue of whether residence and business retail NAS should be weighted equally, weighted by revenues or weighted by some other factor.

38.The Commission is of the view that in the present environment business and residence retail NAS should not be weighted equally.

39.In the Commission's view, business customers can be expected to benefit from the roll-out of LNP and local competition to a greater degree than residence customers during the current price cap period.

40.Accordingly, the Commission considers it appropriate to weight the retail NAS to recognize the current competitive market and to recognize the higher value of local competition and LNP to business customers.

41.The Commission concludes that a weighting factor of 1.5 applied to non-residence retail NAS is an appropriate weighting factor to reflect the greater benefit derived by business customers.

42.Accordingly, the Commission directs that the revenue requirement costs should be allocated between Capped and Uncapped services and among Capped services on the basis of retail switched exchange service NAS with non-residence NAS weighted by a factor of 1.5.

43.In response to an interrogatory, the Companies indicated that, for BC TEL, the NAS associated with Centrex service had been included in the Competitive segment.

44.In accordance with Decision 98-2, the Commission directs BC TEL to include the NAS associated with Centrex service in the Uncapped services category.

VI Issues Related to Final Determinations

45.Following the final determination on the magnitude of allowable local competition start-up and LNP costs, the exogenous factors to be implemented at the level of the total basket of capped services and at the level of the Basic Residential Local Service and Other Capped Service Sub-baskets will be based on the various findings in this Order. At that time, the Companies will be required to file any price changes required to meet the price cap commitments, taking into consideration any amount in the deferral account.

Secretary General

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