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Order CRTC 2000-1099
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Ottawa, 4 December 2000
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North Frontenac Telephone Co. - Service improvement plan
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Reference:Tariff Notice 17
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The Commission approves North Frontenac'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 approves a rate increase of $3.90 to North Frontenac's business and residential individual line rates, effective 1 January 2001.
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1.
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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.
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2.
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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.
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3.
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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.
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4.
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In its 1 March 2000 filing, North Frontenac proposed to increase all its individual line and party-line residential and business local rates by $5 on each of 1 January 2001 and 1 January 2002, to fund its SIP. North Frontenac submitted that party-line subscribers should bear their share of the cost, particularly since they draw the most benefit from the SIP. North Frontenac estimated that it would complete its SIP by the end of 2005.
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5.
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North Frontenac inadvertently omitted to send billing inserts when it filed its SIP with the Commission. North Frontenac recently issued billing inserts informing its subscribers of its SIP and providing them with the opportunity to comment by 10 November 2000.
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6.
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All customers who provided comments opposed North Frontenac'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 low income customers and customers on fixed income could not afford North Frontenac's proposed rate increases.
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Capital expenditures
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7.
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The Commission has examined North Frontenac'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. North Frontenac included $388,000 in capital expenditures to provide high-speed Internet access by extending fibre cable to areas already meeting the basic service objective. The Commission notes that this level of service exceeds what should properly be funded under the SIP. TheCommission has reduced North Frontenac's SIP capital expenditures by $388,000 to reflect this adjustment. Subject to this reduction, the Commission is satisfied that North Frontenac's SIP capital expenditures are reasonable, employ least-cost technologies and meet the basic service objective.
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8.
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The Commission points out, however, that North Frontenac may identify its capital expenditure for high-speed Internet access as part of its normal construction program. The Commission would assess whether these expenses are justified in that context.
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Customer payments in unserved territory
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9.
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North Frontenac treated customers' $1,000 contribution for service extension as revenues. It considered that this revenue would offset the capital expenditures required for customer service connections and therefore excluded both amounts from its SIP. The Commission finds that customers' $1,000 contributions should be treated as credits to capital expenditures and the resulting depreciation credits should be spread over the life of the SIP. However, since North Frontenac has not included the capital costs for customer service connections in its SIP, the Commission accepts North Frontenac's treatment of these costs in its SIP. However, the Commission directs that any difference between the actual customer service connection costs and the actual customer contribution payments be documented in the special reserve account outlined in this order.
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Normal capital expenditures in SIP territory
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10.
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North Frontenac 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 North Frontenac 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 North Frontenac's SIP revenue requirement.
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Limits to financial obligation to extend service
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11.
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The Commission considers that the independents' financial obligation for extending service pursuant to their SIP should generally be uniform. North Frontenac submitted that it should not be required to extend service where costs per customer exceed $10,000, including the customer's $1,000 contribution for service extension. The Commission finds that this financial limit unduly restricts North Frontenac's obligation to extend service to unserved areas. However, North Frontenac does not have access to supplementary funding as was granted to Northwestel in Long-distance competition and improved service for Northwestel customers, Decision CRTC 2000-746, dated 30 November 2000. The Commission finds that imposing the same financial obligations on North Frontenac as the $25,000 limit approved for Northwestel would be unreasonable. Accordingly, the Commission directs North Frontenac to extend service where costs per customer taking service do not exceed $15,000, including the customer's $1,000 contribution for service extension.
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Revenue requirement
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SIP recovery period
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12.
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In order to recover the cost of its SIP, North Frontenac proposed to increase its monthly local rates by $5 on each of 1 January 2001 and 1 January 2002. When asked about the appropriateness of basing its rate increases on SIP costs to be incurred over 11 years, North Frontenac 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.
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13.
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Generally, the Commission sets rates so that total revenues equal total revenue requirement for a given year. However, the Commission notes that North Frontenac 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 North Frontenac 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.
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14.
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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 North Frontenac'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 North Frontenac's rate increases are based.
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Special reserve account
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15.
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North Frontenac did not consider that it was necessary to set up a special reserve account. North Frontenac submitted that a special reserve account would add to its regulatory and accounting burden, as it would need to track costs and revenues separately. North Frontenac 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.
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16.
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In Order CRTC 2000-162, dated 29 February 2000, the Commission directed Northern to set up a special reserve account to track the revenues, expenses and investments associated with the 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 North Frontenac'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 North Frontenac's annual SIP revenue requirement. The Commission therefore directs North Frontenac 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.
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17.
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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 North Frontenac's special reserve account at that time.
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Total operating expenses
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18.
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The Commission has examined North Frontenac's proposed total operating expense estimates related to its SIP and is satisfied that they are appropriate.
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Depreciation expense
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19.
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North Frontenac used depreciation methodology and life characteristics previously approved by the Commission to develop its SIP depreciation expense estimates. Accordingly, the Commission approves North Frontenac's SIP-related depreciation expense estimates.
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Interest expense and return on equity
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20.
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North Frontenac proposed financing its SIP through 100% debt financing, at a pre-tax interest rate of 12%. The Commission accepts North Frontenac's proposed method for financing its SIP and its interest rate used.
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Rate increase
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21.
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North Frontenac proposed to increase both its individual line and party-line service rates to fund its SIP. North Frontenac submitted that customers benefiting the most from the SIP should also bear their share of the costs. 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 North Frontenac should be subject to the same obligations. Accordingly, the Commission directs North Frontenac 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.
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22.
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After reviewing North Frontenac's capital expenditures and its revenue requirement, the Commission finds that a single $3.90 individual line residential and business local rate increase will allow the company to recover its SIP-related expenses over the period 2000 to 2005. The Commission therefore directs North Frontenac to increase its monthly individual line residential and business local rates by $3.90, on 1 January 2001.
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Other issues
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Instalment payment plan
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23.
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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. North Frontenac proposed to give its unserved customers six months to pay, at a monthly interest rate of 1.25%, in accordance with the Ontario Independent Services Tariff.
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24.
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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 North Frontenac should be allowed to charge its tariffed late payment interest rate for late payments of instalments due each month
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25.
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The Commission also finds reasonable that North Frontenac be allowed to request a non-refundable deposit no greater than $200, payable in the first month of the instalment payment plan. The Commission finds that a non-refundable deposit will secure customers' commitment to, and agreement with, service extension.
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26.
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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, North Frontenac is effectively extending interest free credit to its customers. North Frontenac, 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 North Frontenac's customers to pay the contribution over 12 months is reasonable.
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Tracking SIP implementation
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27.
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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 North Frontenac to file its tracking report on 31 March of each year, throughout the life of its SIP, and provide the following information:
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a) a list of exchanges scheduled for completion in the previous year and those actually completed;
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b) the forecasted and actual number of subscribers whose service was upgraded or to whom service was extended in the previous year;
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c) the total capital investment for the previous year;
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d) the projected service upgrades and extensions for the upcoming year; and
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e) any changes to the yearly program with supporting reasons.
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28.
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Since North Frontenac may not need to maintain a special reserve account in 2002, the Commission directs North Frontenac to file with its tracking report, for the years 2000 and 2001, an accounting of the special reserve account to include:
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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
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b) revenues generated from rate increases to fund North Frontenac's SIP.
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29.
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For the years 2002 onwards, the Commission will decide whether North Frontenac needs to continue reporting expenses and revenues associated with its SIP when it implements the new contribution collection regime for the independents.
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Reducing the contribution requirement to 25% of the total revenue requirement
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30.
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Although it receives more than 25% of its total revenue requirement from contribution, North Frontenac 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.
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31.
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The Commission has reviewed North Frontenac'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.
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32.
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The Commission directs North Frontenac to file forthwith revised tariff pages that reflect the determinations made above.
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Secretary General
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This document is available in alternative format upon request and may also be examined at the following Internet site: http://www.crtc.gc.ca
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