ARCHIVED - Order CRTC 2000-1080

Order CRTC 2000-1080

Ottawa, 1 December 2000

Reference: 8661-S22-01/00

The Commission approves for SaskTel a direct connect rate of 0.5¢ per-minute per-end, effective the date of this order.

In the proceeding leading to SaskTel - Transition to federal regulation, Decision CRTC 2000-150, dated 9 May 2000, Saskatchewan Telecommunications proposed to unbundle its switching and aggregation rate and offer a 0.7¢ per-minute per-end rate for direct connect service by 30 June 2000. The Commission approved, by letter dated 9 March 2000, a 0.3¢ per-minute per-end rate for service for the other major incumbent telephone companies.

Decision 2000-150 directed SaskTel to file unbundled tariffs for the provision of switching and aggregation services. It also directed SaskTel to show cause, by 30 June 2000, as to why SaskTel should not adopt the 0.3¢ per-minute per-end direct connect rate approved for the other major incumbent telephone companies. On 29 June 2000, SaskTel filed its response to the show cause directive. On 5 September 2000, Call-Net Enterprises Inc. filed comments.

SaskTel's response

SaskTel stated that it has completed a number of studies, using various costing techniques, to obtain a better understanding of the costs associated with providing direct connect service in Saskatchewan. SaskTel submitted that these cost studies have confirmed that the nature of SaskTel's network, driven by the structure of its serving territory and location of its customers, results in high switching and aggregation costs:

• the Phase II study performed to support this submission (filed);

• an embedded cost study performed to separate the 1998 Utility segment cost between local and switching and aggregation services (not filed); and

• a 1999 study which used a Phase III like approach to determine the current, rather than embedded, network costs associated with switching and aggregation service (not filed).

SaskTel stated that the calculated average Phase II cost for direct connect service is 0.382¢ per-minute per-end. Even at this level, SaskTel submitted that these costs may be underestimated because it has been unable, in the time available, to develop a fibre cost factor which it considered would appropriately reflect the cost of fibre investment needed to support service delivery in rural areas.

According to SaskTel, with respect to the 1998 embedded cost study, because the costs assigned to switching and aggregation include direct connect services provided to all long-distance providers and access tandem service provided to the alternate providers of long-distance service (APLDS), it is difficult to develop costs that are comparable to the direct connect study. To approximate costs per minute, SaskTel stated that APLDS traffic volumes were doubled and combined with SaskTel's volume to arrive at a cost per minute of 1.118¢.

SaskTel stated that the 1999 study, which used a Phase III like approach applied to current costs, indicated that the cost of switching and aggregation service, excluding a mark-up, was approximately 0.72¢ per-minute per-end.

SaskTel submitted that it would be inappropriate to reduce the direct connect rate from 0.7¢ per minute to 0.3¢ per minute as this rate is clearly below the Phase II costs of the service. SaskTel was also of the opinion that this rate should not be reduced to the Phase II costs plus a 25% mark-up for two reasons.

Firstly, the difference between the embedded cost and the Phase II cost of the service exceeds 25% of the Phase II costs. In the Commission's 9 March 2000 letter approving the submission of the other major incumbent telephone companies, only one company MTS Communications Inc. was restricted to a mark-up of 25%.

Secondly, in Decision 2000-150, the Commission removed any opportunity for SaskTel to recover the foregone revenues that would result from the suggested rate reduction. SaskTel's current Utility segment rates were established prior to SaskTel's entry into federal regulation, under the assumption that the direct connect rate would be 0.7¢ per minute.

In SaskTel's view, therefore, it would not be equitable to reduce one source of Utility segment revenues in isolation of the other Utility service rates and without providing SaskTel with an opportunity to replace these revenues through other Utility services. SaskTel noted that having a direct connect rate significantly higher than other parts of Canada is problematic within the existing competitive long-distance environment where prices are established nationally while there are significant differences in regional costs. SaskTel submitted that this situation is not sustainable in the long-term, but there is no short-term alternative to charging a higher direct connect rate.

Call-Net's comments

Call-Net submitted that SaskTel has not demonstrated any substantial reason for maintaining the current 0.7¢ per-minute per-end direct connect rate and should be ordered to reduce its direct connect rate to 0.3¢ retroactive to 9 March 2000. Call-Net stated that it would be in the public interest to require SaskTel to adopt the 0.3¢ per-minute per-end rate as it would help to promote competition in a province that is over 90% served by SaskTel.

Call-Net submitted that, since it is not in a position to scrutinize the inputs used in SaskTel's Phase II costing study to determine their appropriateness, it could not comment on the appropriateness of the 0.382¢ per-minute per-end estimate.

With respect to the other studies relied upon by SaskTel, Call-Net submitted that, while it is not clear, it appears that the 1998 embedded cost study indicating a switching and aggregation cost of 1.18¢ per-minute per-end would relate to the access tandem rate including the direct connect component. Similarly, the 1999 study indicating a switching and aggregation cost of 0.72¢ per-minute per-end also appears to relate to the access tandem rate including the direct connect component.

Call-Net noted that, by SaskTel's own 1998 and 1999 cost studies, there has been a 64% reduction in switching and aggregation costs due to decreasing prices of technology. If this trend continues in 2000, one would expect that the switching and aggregation costs would further drop by 64% to 0.439¢ per-minute per-end. If this is marked-up by 25% as per the essential services pricing policy, the switching and aggregation costs would be 0.549¢ per-minute per-end. Call-Net noted that if the access tandem connection rate were subtracted to calculate the direct connect portion of the switching and aggregation rate (using Bell Canada's 0.5223¢ per-minute per-end as a proxy), the remaining rate is 0.036¢ per-minute per-end. Call-Net further stated that this rate is substantially lower than the 0.3¢ per-minute per-end for which the Commission asked SaskTel to show cause as to its appropriateness.

SaskTel's reply

In reply, SaskTel reiterated that its costing information clearly indicates its cost of providing direct connect service exceeds the 0.3¢ per-minute per-end rate that has been adopted by the other major incumbent telephone companies. SaskTel stated that there is substantial information available on the public record and from independent industry sources to support SaskTel's statement that the structure of its serving territory and location of its customers result in high switching and aggregation costs.

With respect to the 1998 embedded cost study, SaskTel stated that, although the methodology is imperfect, mechanisms to separate the direct connect service cost from the access tandem costs were not available when the study was performed. To compensate for the added costs associated with providing access tandem connections to alternate provider of long-distance services (APLDS), SaskTel stated that it doubled the APLDS's traffic volume to arrive at a reasonable estimate of the average cost of providing direct connect service. In SaskTel's view, the 1.18¢ represents a reasonable estimate of the embedded costs of direct connect service.

With respect to the 1999 study, SaskTel stated that the use of current costs was intended to provide an estimate of the impact of technology price changes and to determine the cost differential between current costs and historical costs by maintaining consistency in the deployed network capacity, network technologies and costing methodologies. Therefore, in SaskTel's view, Call-Net's assertion that the result of these cost studies show a 64% reduction in costs over a one-year period is clearly inaccurate.

Commission determination

The Commission notes that the 1999 study was not filed by SaskTel. On the basis of the information submitted in this proceeding, the Commission is not persuaded that it is appropriate to rely on such a study for the purpose of rate-making.

In a recent submission regarding the review and vary of the Commission's 9 March 2000 letter, the major incumbent telephone companies (excluding SaskTel) recognized the inherent unreliability of any Phase III cost estimate for a specific service. The reason provided was that the Phase III methodology is only designed to estimate costs at the level of broad service categories that include many different services.

Based on the Phase II cost study filed in support of its submission, SaskTel's costs to provide direct connect service (at 0.382¢ per-minute per-end) are higher than those of the other major incumbent telephone companies. Direct connect service Phase II costs, for the other major incumbent telephone companies, range from 0.11¢ for Bell Canada to 0.24¢ per-minute per-end for MTS.

In its letter of 9 March 2000 lowering the direct connect rate to 0.3¢ for the other major telephone companies, the Commission concluded that the 0.3¢ direct connect rate would recover the associated Phase II costs and would provide sufficient contribution to recover fixed and common costs.

The Commission concludes that a direct connect rate of 0.5¢ is appropriate for SaskTel to recover the Phase II incremental costs and provide sufficient contribution for the recovery of fixed and common costs.

SaskTel is directed to issue forthwith tariff pages that reflect the Commission's determinations in this order.

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