Decision CRTC 2000-746

Ottawa, 30 November 2000

Long-distance competition and improved service for Northwestel customers

Reference: Tariff Notice TN 737 and 8622-N1-04/99

Table of contents

Terms and acronyms used in this decision

The decision in brief

Background – Paragraph 1

Northwestel's proposal – Paragraph 8

Service improvement plan and construction program – Paragraph 13

Overview – Paragraph 13

Service improvement plan – Paragraph 14

Provisioning criteria for toll-free access to the Internet – Paragraph 17

Provisioning criteria for enhanced calling features – Paragraph 23

Application of construction charges – Paragraph 26

Fixed manual mobile – Paragraph 27

Unserved customers – Paragraph 30

Tracking the service improvement plan – Paragraph 34

Construction program – Paragraph 38

Quality of service – Paragraph 43

Reporting categories – Paragraph 43

Measuring network operation – Paragraph 49

Competition – Paragraph 50

Carrier Access Tariff rates – Paragraph 51

Terms of access for competitors – Paragraph 55

Imputation test required – Paragraph 59

Pricing of interconnection services – Paragraph 60

Estimate of market share – Paragraph 61

Local competition a future consideration – Paragraph 62

Regulatory framework – Paragraph 63

Form of regulation – Paragraph 64

Review the regulatory framework in two years – Paragraph 71

Phase III issues – Paragraph 73

Return on equity/Capital structure – Paragraph 75

Cost of equity – Paragraph 79

Excess earning sharing mechanism – Paragraph 89

Accounting matters – Paragraph 90

Employee benefit transitional asset – Paragraph 90

Investments in affiliates – Paragraph 94

Integral directory operations – Paragraph 98

Rate changes effective 1 January 2001 – Paragraph 101

Local rates – Paragraph 102

Long-distance rates – Paragraph 105

Revenue requirement – Paragraph 111

Market share loss – Paragraph 111

Toll, settlement and Carrier Access Tariff revenues – Paragraph 114

Expense and efficiency – Paragraph 116

Depreciation – Paragraph 121

Financing adjustment – Paragraph 123

Supplemental funding – Paragraph 125

The initial review – Paragraph 129

Operating territory of Northwestel – Paragraph 132

Filing requirements – Paragraph 136

Appendix 1 – Reference documents

Appendix 2 – Further details on the public process

Appendix 3 – Tracking the service improvement plan

Appendix 4 – Community designations for quality of service

Appendix 5 – Depreciation life characteristics

Appendix 6 – The initial review

Appendix 7 – Northwestel supplemental funding for 2001

Appendix 8 – Northwestel's operating territory in northern British Columbia

Terms and acronyms used in this decision

Carrier Access Tariff (CAT) is a per-minute rate paid by competitive long-distance providers to originate and terminate traffic in Northwestel's territory.

Construction program refers to the company's forecast of its capital expenditures.

Direct access line (DAL) is a network facility used to transmit traffic between an alternative long-distance service provider's network and a subscriber's premises.

Equal access includes the telephone company facilities, services and agreements that allow a competitive provider of long-distance service to connect with the telephone network and offer long-distance service features equal to the telephone company.

Fixed manual mobile subscribers are customers who use radio service from a fixed installation to connect with the switched telephone network through an operator.

Return on equity (ROE) is the rate of return on the average shareholder's investment, also known as average common equity. The ROE is calculated by dividing the net income after taxes by the average common equity.

Switching and aggregation (S&A) is a per-minute charge paid by competitive long-distance service providers for use of the telephone company's switch.

Service improvement plans (SIPs) are proposals made by incumbent local carriers to upgrade their networks.

Total implied productivity (TIP) is a measure of efficiency that results from factoring out the year-over-year impact of changes in price and growth in operating expenses.

The decision in brief

This decision sets out the Commission's determinations to improve telecommunications services in Canada's far north, the territory served by Northwestel Inc. The decision approves a plan to extend and improve the telecommunications network and the associated funding implications, implements long distance competition and approves a regulatory framework appropriate to Northwestel's operating and competitive circumstances.

To extend and improve the existing telecommunications network in the north, the Commission approves Northwestel's proposed four-year service improvement plan (SIP) with certain modifications. As well, the application of the subscriber-paid construction charges for work associated with the SIP is modified to encourage potential customers to take advantage of this unique program.

Effective 1 January 2001, the terms and conditions to permit long distance competition in Northwestel's territory go into effect. Potential competitors will be required to pay a Carrier Access Tariff (CAT) of $0.07 per minute on all toll traffic that they originate or terminate in Northwestel's territory. Northwestel will be able to offer competitively-priced toll services for its business and residential customers. In the case of residential customers, the Commission approves an off-peak toll plan of $0.10 per minute capped at $25 for the first 600 minutes.

The Commission will continue to regulate the telephone company on a total company rate of return basis, but it will require an imputation test of Northwestel to be applied for future rate changes to its toll services. A rate of return on equity (ROE) of 10.5 percent is approved for Northwestel. The rates set in this decision are designed to achieve an ROE of 10.5 percent.

There will be a requirement for additional revenue to implement the SIP and competition, including Northwestel's new lower toll rates. Sources of additional revenue for 2001 include increases in the monthly local rates of $3 for residential subscribers and $5 for business subscribers, plus a subsidy from certain telecommunications service providers in southern Canada of $15.1 million. It is expected that the majority of customers' monthly long distance and local telephone bills combined should decrease with the changes approved in this decision.

To ensure the orderly introduction and roll-out of long-distance competition, as well as to monitor the implementation of Northwestel's approved SIP, the Commission intends to conduct a limited annual review of the impact of this decision.

The Commission is very grateful to all parties who shared their time and knowledge during the public hearings in June. This decision benefits from the intervenors' clear presentations and the comprehensive evidence offered by Northwestel.

Background

1. The two recent Commission decisions that have had a significant impact on Northwestel and its customers are Northwestel Inc. – Interconnection of interexchange carriers and related resale and sharing issues, Telecom Decision CRTC 98-1, dated 11 February 1998, and Telephone service to high-cost serving areas, Telecom Decision CRTC 99-16, dated 19 October 1999.

2. The Commission first examined the issue of toll competition in the telephone company's territory in the proceeding initiated by Northwestel Inc. – Interconnection of interexchange carriers and related resale and sharing issues, Telecom Public Notice CRTC 97-10, dated 28 February 1997. This proceeding resulted in Decision 98-1 which approved toll competition in Northwestel's operating territory, but delayed its implementation until after the Commission examined the broader issue of service in high-cost serving areas (Decision 99-16).

3. In delaying the introduction of competition, the Commission noted that the provision of service to certain areas in Northwestel's territory is uneconomic and requires financial cross-subsidies from high-profit toll routes. The Commission found that this source of subsidy would likely be eroded significantly with the introduction of competition in the absence of further rate rebalancing and the establishment of appropriate terms and conditions. This would adversely impact the company's capability to continue to be a full service provider of last resort throughout its operating territory, thereby further exacerbating the problem of service to underserved and unserved areas in Northwestel's territory.

4. Decision 99-16 established a basic service objective (BSO) for telephone service in Canada that includes:

• individual line service with Touch-Tone dialling, provided by a digital switch with capability to connect via low-speed data transmission to the Internet at local rates;
• access to the long distance network;
• enhanced calling features including access to emergency services, voice message relay service, and privacy protection features;
• access to operator and directory assistance services; and
• a copy of a current local telephone directory.

5. To meet the BSO, the Commission directed Northwestel to file a SIP to extend and upgrade service as well as improve the quality of long-distance service.

6. Decision 99-16 also provided a mechanism to provide supplemental funding to Northwestel should the company demonstrate that it did not have the financial capacity to meet the BSO for its customers.

7. The decision released today is the result of Northwestel Inc. – Implementation of toll competition and review of regulatory framework, quality of service and related matters, Telecom Public Notice CRTC 99-21, dated 1 October 1999. Details of the public process can be found in Appendix 2.

Northwestel's proposal

8. The key components of Northwestel's proposal are a SIP, a framework to introduce sustainable long-distance competition, a regulatory framework by which the Commission will regulate Northwestel, and funding requirements.

9. Northwestel proposed a four-year $75.2 million SIP designed to provide its customers with a level of service consistent with the Commission's BSO for all Canadians and to improve the quality of its long-distance service. Unserved customers in areas benefiting from the SIP would be charged $1,000 to obtain service. However, in certain cases, additional construction charges may apply. Customers whose service was being upgraded to meet the BSO would not be charged.

10. The telephone company proposed introducing long-distance competition on 1 January 2001 and competitors would have equal access in major communities starting 31 March 2001. Competitors would pay a Carrier Access Tariff (CAT) of $0.05 per minute. Northwestel's residential toll customers would have access to an off-peak calling plan for Canadian calls of $20 per month capped at 600 minutes with additional calls being charged at $0.10 per minute. There would be reduced toll rates for business customers as well.

11. Northwestel proposed a regulatory framework that would continue to see it regulated on a total company rate of return basis as opposed to the regulatory framework used in the rest of Canada for similar companies. This method would reflect the uniqueness of Northwestel's operating environment.

12. Northwestel proposed that it be allowed to earn profits on its operations that would yield a rate of return of 12.25 percent. To achieve this return, as well as introduce competition and pay for the SIP, the company proposed increasing local rates by $5 per month and requiring supplemental funding from carriers in southern Canada of $30.6 million for 2001, increasing gradually to $40.2 million in 2003. Northwestel also proposed to eliminate its exchange line mileage charges which are paid, in addition to regular rates for local service, by certain customers situated in outlying areas.

Service improvement plan and construction program

Overview

13. Northwestel proposed a four-year construction program totalling $110.1 million for the years 2000-2003 inclusive. Northwestel also proposed a four-year SIP totalling $75.2 million for the years 2001-2004 inclusive. The SIP incorporated capital expenditures on top of those in the construction program, comprising four categories:

a) provision of service to unserved and underserved territories;

b) provision of local dial Internet access;

c) upgrade of transport technology; and

d) upgrade of switching technology

Northwestel stated that the construction program and SIP incorporate the most cost-efficient technology.

Service improvement plan

14. Northwestel's proposed four-year SIP, beginning in 2001, would extend individual line service to both unserved and underserved customers. The vast majority of the unserved and underserved areas would be serviced within the first two years of the SIP. Existing analog microwave toll connect systems would be upgraded with digital systems over the four-year SIP and all switches in the communities would either be upgraded or replaced, and provide enhanced calling features and toll-free access to the Internet.

15. Most parties supported the four-year SIP and no one provided specific comments on the telephone company's toll improvement program.

16. The Commission finds that the company's proposal to upgrade its toll network and extend individual line service to both unserved and underserved customers over the four-year SIP is reasonable. The Commission expects the company to be guided by the goals and priorities set out in Decision 99-16 in developing its detailed annual plans to extend service to unserved customers and upgrade underserved customers. Therefore, Northwestel is directed to proceed with a four-year SIP as proposed, subject to the modifications set out below.

Provisioning criteria for toll-free access to the Internet

17. Northwestel's proposal, which was modified over the course of the proceeding, was to install modems and routers in each community with fewer than 2,000 network access services (NAS) and provide wide area networking to back-haul the dial-up Internet service providers' (ISPs) traffic in each community to Northwestel's central office facilities in Yellowknife, Whitehorse, or Iqaluit using the existing frame relay network. Northwestel would charge to the ISPs providing service in those communities for this service. The Commission notes that in Northwestel's proposal, 54 of the smaller communities would not receive toll-free access to the Internet until 2003 and 2004.

18. The Commission considers that providing Internet access should be an important priority. There is concern, however, about the extent of the costs and potential anti-competitive effects of Northwestel's plan. One ISP raised the issue of stranded investment while another felt that Northwestel's proposal would provide opportunities for competitive marketplace distortions. Concern was expressed that the proposal would give Northwestel an advantage in its own provision of Internet service through its affiliate Sympatico.

19. The Commission heard from ISPs that are prepared to provide Internet service to communities in the north. They argued that Northwestel's proposal could restrict their ability to extend service. Given the success of the existing ISPs, the planned roll-out of Internet access in numerous communities, the level of expenditures for modems contained in Northwestel's SIP proposal and the fact that modems and routers are typically the ISPs' costs and not the local carrier's access costs in other territories, the Commission denies Northwestel's proposal for Internet access at this time.

20. The Commission recognizes that in some very small communities, it may never be economic to provide access to the Internet without some form of subsidy, and as a result, it may have to examine the feasibility of establishing an ISP of last resort to address this problem. The Commission will monitor the roll-out of Internet access to communities in Northwestel's operating territory. During the initial review in 2002, which is discussed later in this decision, the Commission will assess the success of this approach and review the issue of making Northwestel the ISP of last resort.

21. Some ISPs indicated at the public hearings that co-location would assist them in providing service to smaller communities. Co-location tariffs exist for larger communities and the Commission believes that they would benefit smaller communities. Therefore, the Commission directs the company to file co-location tariffs for service in communities with fewer than 2,000 NAS within 90 days of this decision.

22. During the public hearings, concern was expressed about Northwestel's relationship with ISPs vis-à-vis Sympatico. To minimize any potential conflict, the Commission directs the company to assign responsibility for all of the company's dealings with any ISP to the Carrier Services Group (CSG).

Provisioning criteria for enhanced calling features

23. Northwestel proposed that the following enhanced calling features be made available in each community and that they would function only within the exchange:

• call management services: calling number delivery, calling number delivery blocking, automatic recall, automatic call-back, central office trace; and
• custom calling features: call waiting, call forwarding, three-way calling, speed calling, selective ringing.

24. Northwestel currently offers these call management services and privacy protection features in 29 locations, with only four locations providing them on an interexchange basis. The company currently provides access to emergency services and voice message relay service to all of its 96 exchanges. The company estimated it would cost $4.7 million to provide enhanced calling features with intra-exchange capabilities to the remaining 67 communities. Northwestel stated that those features are designed for larger markets and are not cost effective in switches with low line sizes. The company has 77 switches with fewer than 500 working lines and 42 with fewer than 200 working lines

25. The Commission notes the relatively high cost of equipping smaller exchanges and the expected low penetration rate for these features. In light of the size of the supplemental funding requirement which is discussed later in this decision, the Commission believes that the costs do not warrant the extension of enhanced calling features to smaller communities as part of the initial four-year SIP. The Commission concludes that the company may continue to roll out these features as part of its normal provisioning criteria.

Application of construction charges

26. The Commission noted in Decision 99-16 that where construction is taking place in a specific area pursuant to an approved SIP, and construction to extend facilities is undertaken to meet the BSO, the customer's contribution shall not exceed $1,000 per customer premises.

Fixed manual mobile

27. Northwestel proposed that a $1,000 customer contribution be applied per service applicant to all unserved potential customers, including fixed manual mobile subscribers.

28. During the hearing, Northwestel indicated that the applicability of the $1,000 charge for fixed manual mobile customers might be something that the company could reconsider.

29. Fixed manual mobile customers are provided with a telecommunications service from the company and are being served now. The Commission disagrees that those customers should be charged the $1,000 applicable to unserved customers. Therefore, Northwestel's fixed manual mobile customers will not be subject to the $1,000 customer charge when their service is being upgraded pursuant to the SIP program. The Commission directs the company to file revisions to its tariffs to reflect this determination.

Unserved customers

30. Northwestel proposed to provide a construction allowance of up to $25,000 per application for service. Northwestel submitted that for its operating area, $25,000 is an appropriate threshold, which balances reasonable cost with the mandate to ensure that as many Canadians as possible have access to service according to the BSO defined in Decision 99-16. Any costs incurred in excess of $25,000 per customer would result in a construction charge to the applicant. Northwestel expected there would be few instances where additional construction charges would apply, as the average cost of providing service to unserved and underserved customers in its territory is in the range of $12,000 to $15,000.

31. Northwestel pointed out that facilities are designed not only for current potential subscribers, but also to accommodate reasonable growth over time. This is the standard design criterion for outside plant extensions. The Commission believes that when calculating a customer's construction charges under the SIP, the $25,000 limit should be applied, not only to those who request service at the time, but to those who may request service in the near future as determined by standard design criteria. The $25,000 construction allowance is per existing and future household, and not per applicant, when extending facilities to more than one household.

32. The Commission notes Northwestel's proposal that the customer could pay the $1,000 customer contribution as well as any additional construction charges over time. Based on comments concerning the affordability of these charges during the public hearings, the Commission believes that the payment schedule should be extended to three years to enhance affordability. The Commission directs the company to file tariff pages that modify the payment schedule to add a three-year payment option.

33. The Commission notes that after the SIP-related construction in a specific area is completed, the company's existing tariffs for the extension of service will apply.

Tracking the service improvement plan

34. Decision 99-16directed that incumbent local exchange carriers (ILECs) must file a proposed tracking plan to monitor the progress of all service extension and upgrade programs and ensure these programs are carried out.

35. Northwestel's proposed tracking plan would provide reports to the Commission at the end of the first quarter of each year throughout the life of the SIP from 2002 to 2005.

36. The Commission notes that Northwestel has committed to further surveys prior to the start of construction each year in order to gather detailed information and develop more accurate cost estimates. The company has also committed to provide stakeholders with ongoing updates on the progress of the SIP.

37. Northwestel is directed to provide updates on the progress of the four-year SIP and actual results to date and updated estimates in the format illustrated in Appendix 3.

Construction program

38. In response to interrogatories addressing the issue of network congestion, Northwestel stated that there was sufficient capacity in the long-distance network to carry the forecasted traffic increase without causing congestion that would block emergency services. Northwestel also indicated that the Internet network was separate from the long-distance voice network. In the Commission's view, Northwestel has adequately addressed concerns about possible network congestion.

39. The Yukon government submitted that the telecommunications management network (TMN) should be re-evaluated. In light of the company's accomplishment in reducing its projected expenditures in 2000, the Commission is satisfied that there is no requirement for the company to re-evaluate its 2001 plan for the TMN.

40. The Commission agrees with Northwestel that it should be given the flexibility to manage its construction program to reflect varying circumstances. However, the Commission is of the view that Northwestel should provide an additional item to its 2001 View of the construction program entitled, "Projects prerequisite to the fulfilment of the SIP." In this item, Northwestel should list all projects that are prerequisite to the fulfilment of the SIP, provide a fully-detailed explanation for any delays, and in the event of any delay, describe its plan to get back on track.

41. Northwestel should also provide an additional item to the 2001 View of the construction program entitled, "Technology evolution", which will keep the Commission apprised of any evolution in technology that would affect Northwestel's construction program and SIP. In particular, Northwestel is to report annually whether it could provide uplink and downlink Internet services via direct satellite.

42. Northwestel filed a detailed and comprehensive construction program and responded adequately to all Commission interrogatories. All significant expenditure variances have been satisfactorily explained. Business cases to verify project economic justification have been undertaken when applicable. Therefore, the Commission finds Northwestel's 2000 construction program reasonable.

Quality of service

Reporting categories

43. Northwestel submitted that it could not meet the current "rural" standards for quality of service indicator 2.1 Out-of-service trouble reports cleared within 24 hours due to the vast geographic region, the relatively small workforce, and the remoteness of the communities.

44. To address this situation, the company proposed to reclassify some of its exchanges from "rural" to "remote" on the basis of the following definition of "remote community". A remote community would be one where:

• there are fewer than two full-time technicians normally based there; and
• the community is accessible only by air, or a technician travelling to the community by road would normally take three hours or more for the round trip from where the technician is normally based.

45. The Commission recognizes the difficult operating environment in some of the company's exchanges and approves Northwestel's definition of "remote community". Any changes to a community's current designation will be subject to approval by the Commission (see Appendix 4 for a listing of community designations).

46. Northwestel also proposed a standard of clearing 80 percent of the troubles in five working days for remote communities. The Commission agrees with some parties that an 80 percent standard is too low considering the extra time being granted to repair the troubles, and concludes that a 90 percent standard is appropriate.

47. Therefore, the Commission directs Northwestel to report on a new quality of service indicator 2.1C Out-of-service trouble reports cleared "remote" with a standard of 90 percent or higher within five working days.

48. The Commission also directs the company to continue community level reporting for all quality of service indicators.

Measuring network operation

49. The Commission directs Northwestel to report on the status of the company's program to deploy data collection devices and additional ports at each satellite end-office to ensure reliable data capture. The company should also provide the Commission with the impact of the more reliable data in its quality of service tracking reports in 2001.

Competition

50. The Commission establishes the following terms and conditions for the introduction of competition in long-distance services for Northwestel's customers effective 1 January 2001.

Carrier Access Tariff rates

51. Northwestel proposed a sustainable CAT rate of $0.05 per minute per end. The total of $0.05 consists of a rate of $0.02 for contribution, plus $0.028 for switching and aggregation (S&A), plus the company's current estimate for recovery of equal access start-up costs ($0.002). Northwestel emphasized that the level of the total CAT rate is the most important issue in establishing a "sustainable" CAT.

52. Both the S&A and contribution rates will be subsidized for Northwestel. With the movement of the S&A costs to the Access category, the differentiation between the non-cost-based component rates becomes arbitrary.

53. Some parties proposed a higher sustainable CAT rate, in the range of $0.065 to $0.07, stating that the benefits of this approach would be to shift more of the burden of revenue loss to the long distance sector and allow competition to grow slowly and perhaps more rationally. This would also provide another means of buffering the local ratepayers from immediate rate shock. The Commission agrees with the objective of maximizing all revenue sources before depending on supplemental funding.

54. The Commission approves a bundled CAT rate of $0.07. This single rate includes S&A, contribution and equal access start-up rates, without any designation of individual rates. Since the CAT rate is bundled, there is no requirement to de-average the contribution component for peak and off-peak periods. The total CAT rate applies to all minutes originating and terminating in Northwestel's territory. For direct access lines (DALs) leased to entrants, the Commission approves a loading of 8,000 minutes per month per DAL to recover CAT revenue. Revising the CAT rate from $0.05 to $0.07 results in $2.8 million of additional settlement revenues and $1.1 million of additional CAT revenues for a total revenue requirement reduction of $3.9 million.

Terms of access for competitors

55. Northwestel proposed to install equal access facilities to enable competitors to provide the same long-distance service options as Northwestel. Initially, equal access facilities will be installed in Yellowknife, Whitehorse, Iqaluit and Fort Nelson by 1 January 2001. Four other locations are planned for 2002 and 2003, depending upon competitor demand. The Commission approves this plan subject to an annual review of equal access progress and expenditures. Competitors should generally be able to conclude agreements within 30 days of a request to connect to Northwestel's network where equal access facilities are available.

56. Northwestel indicated that it will file tariffs to enable customers to select alternate long-distance carriers as their primary interexchange carrier and to enable customer account record exchange by 1 January 2001. Northwestel will also make billing system changes over the first year of competition to enable billing and collection agreements with alternate carriers. The company is establishing a CSG to separately handle service requests from competitive service providers and its own competitive operations. The Commission approves Northwestel's plans for the implementation of long-distance competitor access, subject to the company filing copies of CSG confidentiality agreements for approval. Competitors who have difficulty obtaining access to provide long-distance service can raise their concerns with the Commission.

57. Northwestel proposed that long-distance competition should be permitted through resale of its services. The Commission approves the resale of Northwestel's interexchange facilities and long- distance services on the same terms as now apply to resale in the territories of other major telephone companies, including the restriction to prohibit resale by Northwestel through an affiliate. The telephone company is to file proposed tariffs to implement this determination.

58. Northwestel indicated that it will file tariffs to accommodate co-location of long-distance competitor equipment in central offices by 1 January 2001. The Commission considers that co-location should be available to all competitive service providers under the same terms established for other major telephone companies and that tariffs are to be filed. Where a competitor cannot obtain co-location, a dispute resolution process is available as described in Practices and procedures for resolving competitive and access disputes, Public Notice CRTC 2000-65, dated 12 May 2000.

Imputation test required

59. Northwestel contended that it will be a price-follower in its territory as competitors enter with national long-distance discount plans. The company argued that it should not be required to provide an imputation test calculation for its long-distance rates to demonstrate that they are not anti-competitive. Some parties disagreed and submitted that a control to prevent anti-competitive pricing was needed. The Commission requires Northwestel to provide an imputation test calculation with proposed toll rate applications that will enable it to evaluate whether proposed rates cover costs and, if not, to indicate the level of the CAT rate that would satisfy the imputation test.

Pricing of interconnection services

60. Consistent with the approach employed for other companies, the Commission considers it generally appropriate to price interconnection services based on the associated Phase II (progressive incremental) costs, plus a 25 percent mark-up.

Estimate of market share

61. The company provided a forecast of its long-distance market share based on historical trends, customer response to its proposed rate reductions (including repatriation of long-distance bypass), and the impact of competitor entry. The Commission concurs with Northwestel's evidence that any forecast of the market response in these volatile conditions is very uncertain. The Commission also agrees with parties who conclude that Northwestel's estimate of market share loss is overstated and has used a lower market loss forecast in this decision. In recognition of the uncertainty of long-distance revenue forecasts during the initial two-year period for competition, the Commission will review the actual level of long-distance revenues at year-end. It will also adjust supplemental funding for variances from the forecast revenue level as described in the "Revenue requirement" section of this decision.

Local competition a future consideration

62. Local competition was not considered for Northwestel at this time, although some parties raised the issue. Competition in local access services remains a matter for future consideration.

Regulatory framework

63. The Commission concludes that Northwestel will continue to be subject to earnings regulation on a total company basis for an additional two-year period ending 31 December 2002. The Commission directs Northwestel to continue to file its Phase III results, including a methodology to assign S&A costs to the Access category. The Commission will scrutinize Northwestel's audited Phase III results to ensure that the appropriate accounting separation is in place and that there is no cross-subsidization of the company's Internet service provision.

Form of regulation

64. Northwestel proposed to continue to be regulated on a total company basis for at least the next three years. At that point, a substantial portion of the SIP would have been implemented and the method of regulation could then be reviewed.

65. Northwestel believes that toll revenues are an important element in sustaining the entire network, and that the SIP encompasses both local and toll networks which both require funding. Northwestel said that a sustainable CAT is required, ensuring that alternate carriers extend service to the whole of Northwestel's territory, thus enabling the benefits of long-distance competition to flow to the majority of customers.

66. Northwestel views split rate base (SRB) as an interim step toward a fundamentally different form of regulation (i.e., price cap) and realizes that SRB is a tool to safeguard against cross-subsidization. The company also stated that there is a clear need to manage the overall transition from a monopoly company.

67. The Consumers' Association of Canada and the National Anti-Poverty Organization (CAC/NAPO) submitted that there is no justification for funding competitive services other than toll. The Commission is concerned that other competitive services are included in the revenue requirement of Northwestel and is of the view that further scrutiny of the competitive categories is required before determining whether or not to adjust the company's revenue requirement. The Commission will consider the issue during the initial review in 2002.

68. Whether or not the company should be compensated for the toll revenue losses resulting from the implementation of toll competition is an important consideration. In Decision 99-16, the Commission directed Northwestel to assign the costs of S&A to the Monopoly Access category to facilitate the provision of competitive long-distance service to subscribers throughout Northwestel's territory. The Commission believes it may be premature to split the rate base if the loss in toll revenues is to be taken into account in Northwestel's total earnings.

69. The uncertainty associated with estimating the level of toll market share loss is another reason for maintaining earnings regulation on a total company basis. Northwestel has requested a significant reduction in its toll rates, which would reduce the overall level of revenue from toll. This reduction would be offset partially by a decrease in toll bypass while the remainder would come from supplemental funding. The Commission has concerns as to the level of toll market share loss and is aware of the large degree of possible estimation error. The Commission therefore considers it appropriate to capture the effect of any over- or under-estimation of toll revenue by use of a deferral account.

70. With the implementation of many significant changes in the year 2001, including the introduction of toll competition, the SIP, and an increase in local rates, the Commission is of the view that SRB is not appropriate at this time and finds that Northwestel should continue to be subject to earnings regulation on a total company basis.

Review the regulatory framework in two years

71. Northwestel proposed that the Commission conduct a review of the regulatory framework after a minimum three-year period. It argued that the Commission would then be able to evaluate the SIP, assess the state of toll competition and market share loss, and determine if the BSO of Decision 99-16 was being achieved. Northwestel also noted that as the contribution collection mechanism proceeding and the price cap review would both be completed, the Commission would be in a better position to consider any new form of regulation for Northwestel.

72. Even though the Commission sees some merit in reviewing Northwestel's regulatory framework in three years, changes to the contribution mechanism released today in Changes to the contribution regime, Decision CRTC 2000-745, accelerate the need to review the regulatory framework of Northwestel and, therefore, it finds a two-year timeframe more appropriate.

Phase III issues

73. Decision 99-16 directed that the associated costs of the company's S&A be considered an extension of the local network and be assigned to the Monopoly Access category. The Commission accepts Northwestel's proposal to file a Phase III methodology update for this by the third quarter of 2001 for implementation beginning with the actual 2001 results.

74. During the regional hearings, parties expressed concerns about the provision of Sympatico service by Northwestel. Parties were concerned that the funding to be provided for telephone service not be used to subsidize competitive Internet service. The Commission has established rules under which it has forborne from regulating ISP service provided by Northwestel and, as a condition of forbearance, requires the company to establish an accounting separation for the Internet-related investments, expenses and revenues. The company will be filing its first results based on approved methodology by 30 November 2000. The Commission will scrutinize Northwestel's audited Phase III results to ensure that there is no cross-subsidization of the company's Internet service.

Return on equity/Capital structure

75. Northwestel Inc. – Revenue requirement for 1993, Telecom Decision CRTC 93-20, dated 21 December 1993, established an ROE midpoint for Northwestel of 12.25 percent with a range of 100 basis points. The Commission also stated that the company should move towards a more conservative capital structure (i.e., a common equity ratio of 55 percent) to mitigate any potential increase in business risk over the long term.

76. Review of regulatory framework, Telecom Decision CRTC 94-19, dated 16 September 1994, reaffirmed the same midpoint of 12.25 percent but expanded the ROE range to 200 basis points (11.25 percent to 13.25 percent). It established a sharing mechanism for excess earnings above the top of the approved ROE range to incorporate an increased incentive for the company to be more productive. All excess earnings between 13.25 percent and 14.25 percent were to be shared equally between the shareholders and the subscribers while excess earnings above 14.25 percent were to be returned to the subscribers.

77. Northwestel proposed:

78. CAC/NAPO, the only other party that filed technical evidence on this topic, proposed an ROE range of 8.25 percent to 10.25 percent with a midpoint of 9.25 percent. It also proposed retaining the existing excess earning sharing mechanism. The party also stated that it should be symmetric in order to ensure fairness to all participants. In addition, CAC/NAPO proposed that the company move to a common equity ratio of 55 percent.

Cost of equity

79. In establishing the cost of common equity, the Commission has considered both quantitative technical evidence and the qualitative risk analysis. In the past, the Commission has considered the use of three techniques in assessing the cost of equity:

80. In light of the weight given the equity risk premium by both the company and CAC/NAPO in this proceeding, the Commission is satisfied that the equity risk premium test, together with the underlying qualitative risk analysis, will be sufficient to establish a reasonable estimate of the cost of equity.

81. The equity risk premium test consists of both the risk-free rate and the equity risk premium. The latter has two elements – the market risk premium (MRP) and the beta. This "bare-bones" cost of equity is then subjected to a flotation cost adjustment.

82. The risk-free rate was measured as the yield on a 30-year, long-term Canada bond (LTC). The Commission finds that an LTC yield of approximately 6.2 percent based on the supporting evidence is reasonable.

83. Northwestel and CAC/NAPO filed MRP estimates in this proceeding. The main differences between the estimates of their respective experts relate to the time period over which the risk premium is measured, the differences in the holding periods, and whether or not an adjustment for U.S. influence in the markets is included. The Commission finds that an MRP of 5 percent to 5.5 percent is appropriate based on a geometric holding period, a timeframe of post-World War II, and an adjustment for the integration of capital markets.

84. The beta serves to adjust the MRP to reflect the risk of a benchmark telephone company relative to the market. Consistent with past decisions, the Commission finds that the use of the data from the TSE 300 Telco index is appropriate and concludes that a beta of between 0.7 and 0.79 is reasonable.

85. The Commission reinforces the fact that regulated firms are entitled to recover legitimate flotation costs that are a necessary cost of doing business and concludes an adjustment of 15 to 25 basis points for this factor is appropriate.

86. The level of risk is a major consideration in determining the cost of equity. The Commission considers that any increase in Northwestel's overall risk is offset by both the use of a deferral account to capture any over- or under-estimation of toll revenue and by supplemental funding.

87. Decision 93-20 allowed Northwestel "to move towards a more conservative capital structure (i.e., a common equity of 55 percent) in order to mitigate any potential increase in its business risk over the long term." Northwestel expects that it will get to the 55 percent level of common equity by the year 2001, although this is contingent on the extent of supplemental funding and the level of toll competition. The Commission finds that the company should be allowed to move to a common equity ratio of 55 percent, primarily to mitigate any increases in business risk.

88. Taking into consideration all of the determinations made above, the Commission finds that a lower estimate of 10.5 percent for the cost of equity is more appropriate for Northwestel. This ROE reduction results in a revenue requirement reduction of $4.1 million.

Excess earning sharing mechanism

89. The Commission considers the continuation of both the ROE range of 200 basis points and the excess earning sharing mechanism to be inappropriate, given the benefits associated with the supplemental funding and the implementation of the deferral account associated with forecasting the variance of toll revenue. The Commission directs that the ROE range be reduced to 100 basis points, 50 basis points on either side of the midpoint of 10.5 percent, and finds that the sharing mechanism for excess earnings over the top of the approved ROE range be eliminated. It also considers that the company's earnings should be monitored and any need for such a sharing mechanism should be reviewed at a later date.

Accounting matters

Employee benefit transitional asset

90. Effective 1 January 2000, Canadian companies are required to comply with a new accounting standard and recognize gains and losses resulting from the difference between the market value of the employees' benefit plan assets and the actuarial present value of the employee benefit obligation. That difference is either a transitional asset or obligation and may be accounted for on a retroactive or prospective basis.

91. Compliance with the new accounting standard resulted in a transitional asset, which Northwestel proposed to account for on a retroactive basis. The result would be an increase to its average common equity of $6.3 million.

92. Under Northwestel's proposal, its shareholders would receive the benefit of the transitional asset. Although the company submitted that the pension plan surplus results from the performance of the employee benefit plan assets, the Commission is of the view that the employee benefit plan surplus may also be a result of past contributions being higher than necessary. The Commission considers that the employee benefits are necessary costs for the provision of service that are normally included in the determination of a company's revenue requirement.

93. The Commission concludes that subscribers should receive the benefit of the transitional asset resulting from the pension surplus. It directs Northwestel to account for the employee benefit transitional asset on a prospective basis. The Commission has reduced Northwestel's regulated common equity by $6.3 million. This reduction, combined with the amortization of the surplus over the expected average remaining service life of the employees covered by the employee benefit plan, results in a $2.4 million reduction to the company's revenue requirement for the year 2001.

Investments in affiliates

94. The Commission believes that the regulatory adjustments proposed by Northwestel for investments in affiliates are not appropriate because they do not reflect the current financing for investing in affiliates. In addition, the Commission considers that the telephone company's proposal may distort Northwestel's regulated capital structure because the regulated common equity is calculated on the basis of regulated income that may not reflect financial reality, such as the write-down of the investments in affiliates.

95. The Commission is of the view that where the current financing of a particular investment cannot be established with reasonable certainty, it is more appropriate to exclude the impact of non-regulated investments from the determination of a company's regulated revenue requirement. Even when the financing source for the initial investment can be established with reasonable certainty, with the passage of time, the financing may change due to earnings, dividends, and debt repayment, among other things, resulting in a different financing than at the time of the initial investment. Consequently, the Commission believes that the company's capital structure should be used to determine the financing of the investment in affiliates when the financing cannot be directly identified.

96. The Commission notes that the retractable preferred shares were issued specifically to finance the cable investments and were issued to the vendor of the cable assets. Consequently, the outstanding average preferred share balance should be considered to be financing only the investments in affiliates. The balance of the investments in affiliates should be deemed financed on the basis of Northwestel's current capital structure, excluding the preferred shares.

97. The Commission has determined that the $22.7 million investment in affiliates less the $6 million outstanding retractable preferred shares, issued specifically to finance investing in affiliates, is financed on the basis of the company's capital structure for 2001, exclusive of the preferred shares. This determination results in a reduction to the common equity of $6.1 million and to the revenue requirement of $0.9 million, when compared with Northwestel's proposal.

Integral directory operations

98. Generally, the Commission's policy has been that the directory-related activities of telephone company affiliates are integral to the telephone company's business.

99. Northwestel agreed that directory activities undertaken by others on Northwestel's behalf are integral to the provision of telecommunications services. However, it submitted that if the directory operations are deemed integral, it is necessary to develop a proxy to allocate the earnings of the affiliate on Northwestel's directory operations as well as the common equity of the affiliate that supports the directory operations to Northwestel. It proposed to allocate the affiliate's earnings on the basis of the operating profit ratio and the common equity on the basis of the revenue ratio.

100. Based on the information filed in Northwestel's exhibit 29, the Commission has adjusted the deemed directory earnings to account for the affiliate's cost of equity.

Rate changes effective 1 January 2001

101. Northwestel is to issue tariff pages to reflect the local and long-distance rates approved below.

Local rates

102. Over the past five years, Northwestel has progressively lowered its long-distance rates and raised local rates to better reflect the costs of providing service. In this proceeding, Northwestel proposed a further $5 local rate increase for both residence and business customers. The company also proposed to eliminate mileage charges and rural serving area charges for customers in outlying areas.

103. The Commission heard from individual customers, consumer associations and governments that the local rate increases make phone service difficult to afford for low income subscribers. Parties emphasized the necessity of telephone service in harsh northern conditions to connect with essential services.

104. Local rates must be viewed in conjunction with affordability concerns, long-distance rate discounts, service improvements and supplemental funding. The Commission considers that a monthly local residence rate increase of $3 and a monthly business rate increase of $5 represent an appropriate balance of these factors and approves these rate increases effective 1 January 2001. The Commission also approves the elimination of mileage charges and rural serving area charges. The resulting individual line rates are $29.33 for residence local service and $49.70 for business service. The majority of subscribers will see a reduction in their total telephone bill when long-distance discounts are also considered. This determination results in a revenue requirement increase of $0.8 million, since residential local rates are increasing less than what was proposed by the company.

Long-distance rates

105. Northwestel proposed a residence off-peak discount plan of $0.10 per minute, capped at $20 for the first 600 minutes each month, and also $0.10 per minute above 600 minutes. The rates would be provided throughout its territory. The company argued that its long-distance rates need to be comparable to southern rates to combat the bypass of its service through the use of calling cards and call-back schemes. Several parties contended that long-distance rates do not need to be reduced to equal southern rates to attract and retain customers in the higher cost northern market.

106. The Commission concurs that long-distance competition and lower rates should benefit all Northwestel subscribers. The Commission also agrees that long-distance rates do not need to exactly match southern rates in order to provide a viable alternative to long-distance bypass schemes and to also support the progressive introduction of competition in the north. Northwestel's residence discount plan is approved with a cap of $25 rather than $20 for up to 600 minutes per month. The higher long-distance revenues will support the objective of reducing the need for supplemental funding.

107. Northwestel proposed business long-distance rates that ranged from $0.12 to $0.19 per minute. The company also indicated that it would offer volume and long-term contract discounts that would foster long-distance resale competition.

108. Several parties contended that these rates would not cover the costs of providing long-distance service in the north, including the CAT rate. The Commission concurs that rates higher than those proposed are appropriate, particularly for the high-cost intra-territory service. The following rates are approved effective 1 January 2001:

109. The volume and contract term discounts proposed by the company appear reasonable. Northwestel indicated that it will file final discount rates for approval at a later date. The Commission will also consider other long-distance rate filings as a competitive response, and consider them on a confidential ex parte basis, similar to the treatment for other carriers in competitive markets.

110. Northwestel proposed increases to service charge rates in Tariff Notice 737, which were discussed in this proceeding. The proposal moves service charge rates closer to costs. Tariff Notice 737 is approved effective 1 January 2001. The combined financial impact of the off-peak discount calling plan, business and Centrex rates approved by the Commission results in a revenue requirement reduction of $3.2 million.

Revenue requirement

Market share loss

111. With its proposed rate plans, Northwestel forecasted 115 million originating minutes and 145.6 million terminating minutes for itself and 14.6 million originating minutes and 40.6 million terminating minutes for the entrants for a total market of 315.8 million minutes for 2001.

112. The Commission believes that with the adjustments to the CAT and toll rates, Northwestel's market share loss forecast is likely over-estimated. During the first year of toll competition, the toll market share loss is more likely to be in the range of 5 percent. Consequently, the Commission has reduced Northwestel's estimate of market share loss to 5 percent of the total market minutes for originating minutes and reduced the entrants' share of the market from 14.6 million to 6.5 million for originating minutes and from 40.6 million to 9.3 million for terminating minutes. As a result, the CAT revenues have been reduced by $2.9 million, and toll and settlement revenues have been increased by $1.2 million and $2.3 million, respectively, resulting in a reduction to the revenue requirement of approximately $0.6 million.

113. In the determination of the revenue requirement for 2001, the Commission has determined that the toll revenue forecast should be $27.7 million, with settlement at $14.6 million and CAT at $1.1 million.

Toll, settlement and CAT revenues

114. Due to the substantial reduction in toll rates and the introduction of toll competition in 2001, there is uncertainty with respect to Northwestel's long-distance market share and revenues. This could result in large deviations between the actual and forecast toll and settlement and CAT revenues, and consequently affect the required amount of any supplemental funding.

115. As a result of potential significant differences between forecast and actual toll and settlement and CAT revenues, the Commission directs the company to accumulate the difference between the forecast of $43.4 million and the actual revenues in a deferral account. Any amount accumulated in the deferral account, in any given year, will be disposed of in conjunction with the determination of any supplemental funding requirement for the following year.

Expense and efficiency

116. Northwestel forecasted operating expenses (less depreciation and taxes) of $66.4 million and $70.3 million for 2000 and 2001, respectively.

117. The company proposed an "objective productivity gain" of 2 percent total implied productivity (TIP) for the initial three-year period of supplemental funding, calculated on the aggregate of four expense categories: corporate, customer services, finance and network. The company indicated that the calculation would exclude the impact of the SIP. Based on its submission, the company's TIP for 2000 and 2001 was estimated to be 4.3 percent and 0 percent, respectively.

118. The Commission finds that Northwestel has provided sufficient evidence in support of its estimated total company operating expenses for 2000, including explanations for any significant variances in expense categories that have occurred in the past few years.

119. The Commission is of the view that a 2 percent TIP should be applied to the base operating expenses for 2001, as an incentive to reduce costs. Accordingly, the Commission has adjusted downwards the base operating expenses for 2001, used for revenue requirement purposes, by $1.4 million to reflect a 2 percent TIP.

120. The Commission expects the company to achieve a minimum 2 percent TIP in 2002, excluding the impact of the SIP. Further, the Commission will monitor the company's forecasted productivity level during the initial review.

Depreciation

121. On 14 January 2000, the Commission determined that Northwestel's application dated 31 December 1999 concerning proposed depreciation life characteristics for the year 2000 should be disposed of in this proceeding. The Commission finds Northwestel's proposal reasonable and approves the depreciation life characteristics contained in Appendix 5.

122. The Commission also finds that any proposal to change depreciation life characteristics in the year 2001, and thus increase depreciation expense, cannot be funded by an increase in rates or supplemental funding for that year. The Commission notes that on 29 September 2000 (subsequent to the closing of the record in this proceeding), the company filed several depreciation studies for approval effective 1 January 2001. In a letter of today's date, Northwestel has been asked whether it wishes to proceed further with this depreciation application. Further, the Commission will assess the financial impact of any proposed changes to depreciation life characteristics for implementation in 2002 as part of the initial review.

Financing adjustment

123. In the determination of the revenue requirement, the Commission considered Northwestel's concerns that the deeming of earnings on investment in affiliates and the accounting for the pension surplus place inappropriate pressure on the cash flows of the company. The Commission also considered the telephone company's concern that deemed earnings cannot be used to pay the bills and could have the potential of standing in the way of the delivery of modern, advanced telecommunications service in the north with prices and quality comparable to those in southern Canada.

124. The Commission has determined that the financing adjustment should compensate Northwestel for the cost of any additional financing that it may require as a result of cash flow reductions. These reductions result from the lower ROE and the non-cash earnings resulting from the accounting for the employee benefit surplus and the regulatory adjustment for investment in affiliates. The financing adjustment results in a $0.2 million increase to the revenue requirement.

Supplemental funding

125. With the proposed local rate increases and long distance rate reductions, Northwestel proposed a supplemental funding requirement of $30.6 million. Northwestel's proposal reflects its forecast revenues, operating expenses, depreciation, required ROE and capital structure. With the financial adjustments discussed in this decision, the Commission has determined that the supplemental funding requirement for 2001 should be $15.1 million (see Appendix 7).

126. Decision 99-16 determined that the supplemental funding, if required, would be drawn from the portable subsidy revenues collected in each of the existing central funds. For 2001, the total requirement of $15.1 million will be distributed equally each month and allocated to each fund based on the proportion of total contribution revenue collected in 1999, as follows:

127. Each month, prior to distribution to the local exchange carriers (LECs), the central funds administrator (CFA) will subtract the above amounts from the billable contribution reported and remit $1,258,333 to Northwestel. The CFA will amend the quarterly reports provided to the Commission to reflect the remittance.

128. For 2002, specific determinations concerning supplemental funding will be set as part of the initial review.

The initial review

129. Northwestel proposed that the Commission assess the success of the SIP and whether it is achieving the BSO on an annual basis. The supplemental funding requirement would also be re-assessed annually as a residual or consequence of the revenue requirement calculation. The Commission agrees with the necessity for an annual review.

130. A Commission public notice will initiate the first review in 2002. This public notice will provide for the filing requirements as set out in Appendix 6. It may also consider other issues, such as the impact on the framework established in this decision of the new contribution mechanism decision released today.

131. The supplemental funding level for 2001 will continue to be made available on an interim basis effective 1 January 2002, pending review and approval of the final 2002 supplemental funding requirement.

Operating territory of Northwestel

132. The Commission considers that a clearly defined boundary will serve to ensure the provision of telecommunications services in urban, rural and remote areas in Northwestel's operating territory. This boundary will mark the area where it is Northwestel's responsibility to extend and upgrade service to customers under the approved SIP.

133. Northwestel and TELUS have agreed that service to Atlin, British Columbia and vicinity is provided by TELUS and that Fraser, British Columbia and vicinity is within Northwestel's operating territory.

134. In response to Commission interrogatories, both companies proposed boundaries in northern British Columbia. The Commission notes that Northwestel filed clarifications and further exhibits during the public hearing in an effort to clarify any boundary issues in the area of Montney and Prespatou and that TELUS did not comment on these proposed boundaries.

135. The Commission finds that the establishment of a boundary for Northwestel's operating territory in northern British Columbia, as described in Appendix 8, would more clearly define the area for which Northwestel is responsible for the provision of the company's BSO. The Commission concludes that Northwestel is the incumbent LEC north of the boundary, subject to two exceptions:

Filing requirements

136. Except where otherwise indicated, the Commission directs Northwestel to file forthwith proposed tariffs to implement the determinations in this decision.

Secretary General

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

Appendix 1

Reference documents

Legislation

Telecommunications Act, S.C. 1993, c.38, as amended

Public notices

Northwestel Inc. – Interconnection of interexchange carriers and related resale and sharing issues, Telecom Public Notice CRTC 97-10, dated 28 February 1997

Review of contribution collection mechanism and related issues, Telecom Public Notice CRTC 99-6, dated 1 March 1999

Northwestel Inc. – Implementation of toll competition and review of regulatory framework, quality of service and related matters, Telecom Public Notice CRTC 99-21, dated 1 October 1999

Northwestel Inc. – Implementation of toll competition and review of regulatory framework, quality of service and related matters - Amendment to PN 99-21, Public Notice CRTC 2000-29, dated 22 February 2000

Northwestel Inc. – Implementation of toll competition and review of regulatory framework, quality of service and related matters - Amendment to PN 99-21, Public Notice CRTC 2000-29-1, dated 25 February 2000

Practices and procedures for resolving competitive and access disputes, Public Notice CRTC 2000-65, dated 12 May 2000

Decisions

Resale and sharing of private line services, Telecom Decision CRTC 90-3, dated 1 March 1990

AGT Limited – Revenue requirements for 1993 and 1994, Telecom Decision CRTC 93-18, dated 29 October 1993

Northwestel Inc. – Revenue requirement for 1993, Telecom Decision CRTC 93-20,
dated 21 December 1993

Review of regulatory framework, Telecom Decision CRTC 94-19, dated 16 September 1994

Implementation of regulatory framework – Splitting of the rate base and related issues, Telecom Decision CRTC 95-21, dated 31 October 1995

Revisions to the mechanism to recover contribution charges, Telecom Decision CRTC 95-23,
dated 4 December 1995

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, dated 7 August 1996

Local service pricing options, Telecom Decision CRTC 96-10, dated 15 November 1996

Quality of service indicators for use in telephone company regulation, Telecom Decision CRTC 97-16, dated 24 July 1997

Northwestel Inc. – Interconnection of interexchange carriers and related resale and sharing issues, Telecom Decision CRTC 98-1, dated 11 February 1998

Implementation of price cap regulation and related issues, Telecom Decision CRTC 98-2,
dated 5 March 1998

Telephone service to high-cost serving areas, Telecom Decision CRTC 99-16, dated 19 October 1999

Final standards for quality of service indicators for use in telephone company regulation and other related matters, Decision CRTC 2000-24, dated 20 January 2000

Changes to the contribution regime, Decision CRTC 2000-745,dated 30 November 2000

Orders

Telecom Order CRTC 98-619, dated 23 June 1998

(pertains to the Commission's forbearance from regulating Northwestel's Internet service subject to the requirement that the company separate its competitive Internet service assets, revenues and expenses from its rate base and shortfall calculations)

Telecom Order CRTC 99-625, dated 9 July 1999

(pertains to the Commission's approval of required accounting separation procedures for Northwestel's Internet service)

Appendix 2

Further details on the public process

Regional consultations held in June 2000

One in Yellowknife, Northwest Territories on 12 June 2000

Two in Whitehorse, Yukon on 13 June 2000 with video links to Fort Nelson, Yellowknife, Iqaluit and Pond Inlet

Oral hearing

Whitehorse, Yukon on 14 - 21 June 2000

Interested parties

The following registered as interested parties or were made parties to this proceeding. Some of these parties filed submissions:

• 6517 153 PI SE
• Angus TeleManagement Group Inc.
• AT&T Canada Telecom Services Company
• The British Columbia Public Interest Advocacy Center representing BC Old Age Pensioners' Organization, Consumers' Association of Canada (BC Branch), Council of Senior Citizens' Organizations of BC, Federated anti-poverty groups of BC, Senior Citizens' Association of BC, West End Seniors' Network, End Legislated Poverty, and BC Coalition for Information Access and Tenants Rights Action Coalition (collectively BCOAPO et al.)
• Bell Canada
• BRULYN Consulting
• Call-Net Enterprises Inc.
• Corporation of the City of Thunder Bay
• Council of Yukon First Nations
• Fort Nelson Farmers Institute
• Government of British Columbia
• Government of Nunavut
• Government of the Northwest Territories
• Government of Yukon
• Gowling, Strathy & Henderson
• Industry Canada
• Internet Yukon Inc.
• Kaska Tribal Council
• KVM Consulting
• Microcell Telecommunications Inc.
• MTS Communications Inc.
• Nelligan Power
• New North Networks Ltd.
• NewTel Communications Inc.
• Northern Rockies Regional District Town of Fort Nelson
• Northern Telephone Limited
• Northwestel Inc.
• O.N. Tel (now O.N.Telcom)
• Angus Oliver
• Primus Telecommunications Canada Inc.
• Public Interest Advocacy Centre representing the Consumers' Association of Canada and the National Anti-Poverty Organization
• Québec-Téléphone
• RSL COM Canada Inc.
• Saskatchewan Telecommunications
• Société d'administration des tarifs d'accès des télécommunicateurs
• David Stinson
• Telesat Canada
• TELUS Communications (B.C.) Inc. and TELUS Communications Inc.
• Utilities Consumers' Group
• Vidéotron Communications inc.

Appendix 3

Tracking the service improvement plan

The Commission believes that the level of detail provided in the response to interrogatory Northwestel(CRTC)07Feb00-1111, Attachment 1, Supplementary, is reasonable for tracking estimates and should be provided. Actual expenditures should also be included as part of the information filed annually. The information to be provided should include:

Appendix 4

Appendix 5

Depreciation life characteristics

Appendix 6

The initial review

The Commission intends to issue a public notice in January 2002, initiating a funding review for Northwestel and outlining the scope and the specific issues to be considered.

At a minimum, Northwestel will be required to file on 31 March 2002 the following:

• actual financial statements including balance sheet and income statements for 2001 with explanations of variance from the current forecast;
• budget financial statements including balance sheet and income statements for 2002;
• SIP tracking results (as detailed in Appendix 3);
• SIP capital expenditures compared to planned investments and any funding adjustments;
• equal access roll-out progress, including competitor requests, in 2001;
• actual minutes of toll traffic for both the company and the entrants;
• actual toll revenues, settlement revenues and entrant CAT revenues for 2001; and
• worksheets showing the calculation of the supplemental funding requirement for 2001 based on the actual toll, settlement and CAT revenues in 2001, any additional or deferred requirement for 2001, the supplemental funding required for 2002 and an explanation of the variance from the forecast provided in this proceeding.

In addition, on 31 March 2002, the Commission will require sufficient information to monitor the following for possible action:

• the level of competitive entry;
• Internet service availability by community;
• variance in the construction program;
• level of productivity improvement;
• quality of service results;
• impact of any depreciation life changes; and
• Phase III results for the competitive categories, including accounting separation for Internet service.

Appendix 7

Appendix 8

Northwestel's operating territory in northern British Columbia

The area of Northwestel's operating territory in northern British Columbia is generally north of the boundary described below:

The two exceptions to the above boundary are:

Date modified:

2000-11-30