ARCHIVED - Order CRTC 2000-1097

Order CRTC 2000-1097

Ottawa, 4 December 2000

Reference: Tariff Notice 41

The Commission approves Amtelecom's service improvement plan (SIP) to provide basic service to the unserved and underserved customers in its territory. To fund the company's SIP, the Commission also approvesa rate increase of $5.25, effective 1 January 2001, to Amtelecom's residential and business individual line rates, with the exception of those residential rates currently at $26.75 in the Manitoulin exchange, Amtelecom's request for expanded local free calling areas is denied.

In Telephone service to high-cost serving areas, Telecom Decision CRTC 99-16, dated 19 October 1999, the Commission established a basic service objective for all telephone companies in Canada.

To ensure that telephone companies were able to provide service levels that meet the basic service objective, the Commission directed all incumbent local carriers to file SIPs for Commission approval, or demonstrate that the basic service objective has been and will continue to be achieved in their territory.

In Review of contribution regime of independent telephone companies in Ontario and Quebec, Telecom Decision CRTC 99-5, dated 21 April 1999, the Commission directed those independent telephone companies whose contribution requirement exceeded 25% of their total revenue requirement after 1 July 1999, to file a proposal detailing how they intended to meet this objective by 2002. In Decision 99-16, the Commission indicated that those independents filing a SIP were still required to meet the 25% threshold.

In its 1 March 2000 filing, Amtelecom proposed to complete the first four phases of its SIP by 2004. Amtelecom did not intend to proceed with Phase five of its SIP. The company submitted that the area comprised under Phase five only has 16 unserved seasonal customers and one permanent customer. Amtelecom also noted that cellular service is available in the area and indicated that it did not have the resources to proceed with service extension in the area at this time.

Amtelecom proposed funding its SIP through various means, such as directing a greater portion of its capital expenditure budget to the SIP, by increasing rates for local service and optional services, and by improving productivity. Amtelecom's proposed rate increases ranged between $2 and $11, over the years 2001 and 2002. Amtelecom also proposed applying the rate increase to individual line as well as party-line subscribers. Amtelecom also submitted that increasing party-line rates together with individual line rates would lessen party-line customers' rate shock and irritation when they get individual line service.

Amtelecom proposed to establish new extended area service (EAS) links together with its SIP. Amtelecom submitted that the new EAS links would provide a tangible benefit to all its customers, including those who already meet the basic service objective and whose rates will increase regardless. Amtelecom also submitted that its proposed links responded to its customers' expressed needs and concerns and also eliminated arbitrary and irrelevant boundaries.

Amtelecom issued billing inserts and placed newspaper advertisements informing its subscribers of its SIP and providing them with the opportunity to comment. Amtelecom also held informal consultations with its customers prior to filing its SIP.

All customers who provided comments opposed Amtelecom's proposed rate increase for the SIP. Customers noted that the proposed increases were substantial. They also pointed out that the increase would not bring about long-distance competition. Many subscribers noted that they would draw no benefit from the SIP and were of the view that unserved and underserved customers should bear the costs of the service upgrades and extensions.

Capital expenditures

The Commission has examined Amtelecom's SIP to ensure that it is reasonable, incorporates least-cost technology and meets the basic service objective, in accordance with the priorities and conditions set out in Decision 99-16. The Commission notes that a substantial portion of Amtelecom's capital expenditures is to replace switches in the Manitoulin and Taylor exchanges which have reached the end of their useful lives. The Commission is satisfied that Amtelecom's SIP capital expenditure of $10,567,500 is reasonable, employs least-cost technologies and meets the basic service objective.

Customer payments in unserved territory

Amtelecom treated customers' $1,000 contribution for service extension as credits to capital expenditures and spread the resulting depreciation credits over the life of the SIP. The Commission finds that this is the appropriate way to treat customers' $1,000 contribution for service extension.

Normal capital expenditures in SIP territory

Amtelecom would need to incur incidental capital expenditures to maintain its network in areas covered by the SIP, even if it were not implementing a SIP. The Commission considers that it would be unnecessary and too costly to require Amtelecom to track separately its SIP-related capital expenditures from its ongoing capital expenditures in those areas covered by the SIP. The Commission finds that the amounts involved are not material in terms of the overall revenue requirement and directs that they not be differentiated from SIP expenditures for the purpose of calculating Amtelecom's SIP revenue requirement.

Limits to financial obligation to extend service

Amtelecom submitted that it should not have to extend service where its costs, after customers' $1,000 contribution, exceed $2,000 per permanent customers or $1,500 per seasonal customer. It also proposed not extending service to seasonal trailer parks. Also, as noted above, Amtelecom proposed not proceeding with Phase five of its SIP.

The Commission finds that Amtelecom's proposed financial limits to extend service are unreasonable and overly restrict the attainment of the Commission's directives in Decision 99-16. Furthermore, the Commission agrees with Action Réseau Consommateur, the Consumers' Association of Canada, Fédération des associations coopératives d'économie familiale, and the National Anti-Poverty Organization (ARC et al.) that the independents' financial obligation for extending service pursuant to their SIP should generally be uniform. However, Amtelecom does not have access to supplementary funding as was granted to Northwestel Inc. in Long-distance competition and improved service for Northwestel customers, Decision CRTC 2000-746, dated 30 November 2000. Rates in Amtelecom's territory are also increasing significantly to fund the company's SIP. The Commission finds that imposing the same financial obligations on Amtelecom as the $25,000 limit approved for Northwestel would be unreasonable. Accordingly, the Commission directs Amtelecom to extend service where costs per customer taking service do not exceed $15,000, including customers' $1,000 contribution for service extension.

Notwithstanding the above, the Commission considers that Amtelecom should not be required to proceed with Phase five of its plan at this time. The Commission is satisfied that Amtelecom does not have the resources to proceed with service extension in this area. The Commission also notes that most unserved customers are seasonal, that there is only one permanent customer with substantial service extension costs and that cellular service is available in the area. Accordingly, the Commission has not included the forecasted capital expenditures required to serve this area to determine Amtelecom's local rate increase to fund its SIP.

Furthermore, the Commission agrees with Amtelecom that the temporary nature of seasonal trailer parks does not warrant additional rate increases to its subscribers. Accordingly, Amtelecom is not required to extend service to those areas at this time.

Revenue requirement

SIP recovery period

In order to recover the cost of its SIP, Amtelecom proposed different rate increases, which varied depending on the exchange. When asked about the appropriateness of basing its rate increases on SIP costs to be incurred over 11 years, Amtelecom favoured a shorter time period to recover costs associated with its SIP because it considered that longer cost and revenue forecasts were too inaccurate and unpredictable.

Generally, the Commission sets rates so that total revenues equal total revenue requirement for a given year. However, Amtelecom will have to invest large sums of capital over a period of years to complete its SIP, which will cause its revenue requirement to fluctuate from year to year. To avoid a situation whereby Amtelecom would need to adjust its local rates on an annual basis to reflect its annual SIP revenue requirement, the Commission has set rates so that, by the end of a pre-determined SIP recovery period, total cumulative revenues should equal the total cumulative revenue requirement for that period.

The Commission finds that longer term forecasts are not as reliable as shorter term forecasts. At the same time, the Commission must find an appropriate balance between Amtelecom's need to recover SIP costs within a reasonable time and the need to minimize rate fluctuations. The 2000 to 2005 period provides this appropriate balance. The Commission directs that the period from 2000 to 2005 be used as the SIP recovery period on which Amtelecom's rate increases are based.

Special reserve account

Amtelecom did not consider that it was necessary to set up a special reserve account. Amtelecom stated that a special reserve account would add to its regulatory and accounting burden, as it would need to track costs and revenues separately. Amtelecom also submitted that, since its contribution requirement is capped at the previous year's level, it did not need to insulate its Carrier Access Tariff (CAT) from its SIP-related revenues, since it could not increase its CAT to fund SIP expenditures.

In Order CRTC 2000-162, dated 29 February 2000, the Commission directed Northern Telephone Limited to set up a special reserve account to track the revenues, expenses and investments associated with its SIP. The Commission found that the special reserve account would insulate the CAT rate against the effects of the SIP. With the special reserve account, regular operations would not be affected by the swings in net revenue caused by the SIP over the SIP period. The Commission finds that Amtelecom's CAT also needs to be insulated from the effects of year-to-year fluctuations between the revenues generated by the SIP-related rate increases and Amtelecom's annual SIP revenue requirement. The Commission therefore directs Amtelecom to set up a special reserve account to track the revenues, expenses and investments associated with its SIP and to accumulate any shortfalls or surpluses.

As a result of Changes to the contribution regime, Decision CRTC 2000-745, dated 30 November 2000, Phase II incremental costs will be used in 2002 to estimate the contribution required by the independents to subsidize local service. Consequently, the Commission may need to re-examine the status of Amtelecom's special reserve account at that time.

Total operating expenses

The Commission has examined Amtelecom's proposed total operating expense estimates related to its SIP and is satisfied that they are appropriate.

Depreciation expense

Amtelecom used depreciation methodology and life characteristics previously approved by the Commission to develop its SIP depreciation expense estimates. Accordingly, the Commission approves Amtelecom's SIP-related depreciation expense estimates adjusted to reflect increases related to normal capital expenditures in SIP areas.

Interest expense and return on equity

Amtelecom proposed financing its SIP through 100% debt financing, at a pre-tax interest rate of 8%. The Commission accepts Amtelecom's proposed method for financing its SIP and its interest rate used.

Rate increase

Amtelecom proposed different rate increases, depending on the exchange. Amtelecom proposed recuperating a larger portion of the costs from customers benefiting more directly from the SIP. The Commission considers it more equitable to spread the SIP rate increases to as many customers as is reasonable. This is consistent with the Commission's approach for the other independents' SIPs. Accordingly, the Commission rejects Amtelecom's proposal for varying rate increases.

Amtelecom has two sets of tariffed individual line service residential rates in its territory. While a majority of its residential individual line customers pay $19.85 monthly for local service, a number of residential customers in the Manitoulin exchange pay monthly rates of $26.75. To alleviate the service rate differences within Amtelecom's territory, the Commission directs Amtelecom not to increase its individual line residential rates currently at $26.75 in the Manitoulin exchange.

Amtelecom proposed to increase both its individual line and party-line service rates to fund its SIP. In Order 2000-162, the Commission denied Northern's application to increase party-line service rates to fund its SIP. The Commission stated that it would be inappropriate to increase party-line customers' rates until they have access to individual line service. The Commission also directed Northern to eliminate party-line service where individual line service becomes available and to make individual line service the basic grade of service in its territory. The Commission finds that Amtelecom should be subject to the same obligations. Accordingly, the Commission directs Amtelecom to eliminate party-line service where individual line service becomes available and to make individual line service the basic grade of service in its territory.

After reviewing Amtelecom's capital expenditures and its revenue requirement, the Commission finds that a single $5.25 individual line residential and business local rate increase, excluding individual line residential rates in the Manitoulin exchange currently at $26.75, will allow Amtelecom to recover its SIP-related expenses over the period 2000 to 2005. Accordingly, the Commission directs Amtelecom to increase its monthly individual line residential and business local rates, excluding individual line residential rates in its Manitoulin exchange currently at $26.75, by $5.25, on 1 January 2001.

Other issues

Expanded local free-calling areas

Although the Commission finds some merit in Amtelecom's contention that its new EAS links would provide a tangible benefit to its customers not directly benefiting from its SIP, Amtelecom has not provided evidence that any of the new links meet the criteria for EAS or provide toll-free access the Internet or to a major social and economic centre. In Orders CRTC 2000-1088, 2000-1089 and 2000-1092, the Commission has denied similar requests by Hurontario Telephones Limited, Nexicom Telecommunications Inc. and People's Telephone Company of Forest Inc. for EAS because they do not meet the criteria for EAS or for natural calling centres (NCC). Also, Amtelecom's EAS links are not essential to its SIP. Accordingly, the Commission denies Amtelecom's request for expanded local free calling areas.

Instalment payment plan

In Decision 99-16, the Commission directed carriers to provide unserved customers the option to pay their $1,000 contribution for service extension on a reasonable instalment basis. Amtelecom proposed to give its unserved customers 12 months to pay. Amtelecom did not request a deposit but proposed to charge up to $3.50 as a monthly administration fee.

The Commission considers that all independents with a SIP should provide the same instalment payment plan to their unserved customers. Both Northern and O.N.Telcom, in their respective SIP filings, proposed not to charge interest on outstanding instalment amounts. O.N.Telcom did propose to charge an interest penalty for late payments of instalment payments due each month. In Decision 2000-746, the Commission did not allow Northwestel to charge interest for customers' outstanding $1,000 instalment payments. The Commission remains of the view that there should not be interest charges on outstanding instalment amounts. However, the Commission finds that Amtelecom should be allowed to charge its tariffed late payment interest rate for late payments of instalments due each month.

The Commission also finds reasonable that Amtelecom be allowed to request a non-refundable deposit no greater than $200, payable in the first month of the instalment payment plan. The Commission is of the view that a non-refundable deposit will secure customers' commitment to, and agreement with, service extension.

Most of the independents proposed giving new customers 12 months to pay their $1,000 contribution. In Decision 2000-746, the Commission allowed Northwestel's new customers 36 months to pay their $1,000 contribution. However, by providing an instalment payment plan, Amtelecom is effectively extending interest free credit to its customers. Amtelecom, unlike Northwestel, does not receive supplementary funding and the entirety of those costs are assumed by its general body of subscribers. Moreover, unserved customers' monthly instalment payments, after the $200 deposit, will be less than $75. In the Commission's view, this monthly payment is reasonable. Accordingly, the Commission finds that allowing Amtelecom's customers to pay the instalment payments over 12 months is reasonable.

Tracking SIP implementation

In Decision 99-16, the Commission directed telephone companies to file a plan to track and monitor the progress of their SIP and ensure it is carried out. The Commission directs Amtelecom to file a tracking report on 31 March of each year, throughout the life of its SIP, and provide the following information:

a) a list of exchanges scheduled for completion in the previous year and those actually completed;

b) the forecasted and actual number of subscribers whose service was upgraded or to whom service was extended in the previous year;

c) the total capital investment for the previous year;

d) the projected service upgrades and extensions for the upcoming year; and

e) any changes to the yearly program with supporting reasons.

Since Amtelecom may not need to maintain a special reserve account in 2002, the Commission directs Amtelecom to file with its tracking report, for the years 2000 and 2001, an accounting of the special reserve account to include:

a) depreciation, operating costs, taxes and financing costs associated with the SIP, based on the generally accepted revenue requirement methodology prescribed by the Commission for Phase III costs; and

b) revenues generated from rate increases to fund Amtelecom's SIP.

For the years 2002 onwards, the Commission will decide whether Amtelecom needs to continue reporting expenses and revenues associated with its SIP when it implements the new contribution collection regime for the independents.

Reducing the contribution requirement to 25% of the total revenue requirement

Notwithstanding that it receives more than 25% of its total revenue requirement from contribution, Amtelecom forecasted that, in view of its increased revenue requirement because of the SIP, its contribution requirement as a percentage of its total revenue requirement would be at 25% by 31 December 2001, without further rate increases for this purpose.

The Commission has reviewed Amtelecom's forecasts and is satisfied that it will be able to reduce its contribution requirement to no more than 25% of its total revenue requirement by the year 2002.

The Commission directs Amtelecom to file forthwith revised tariff pages that reflect the determinations made above.

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