ARCHIVED - Order CRTC 2000-1159

Order CRTC 2000-1159

Ottawa, 19 December 2000

SATAT - Final 1999 Carrier Access Tariffs and network (¼ mile) tariffs

Reference: Tariff Notice 11

Consistent with the regulatory framework as prescribed in Decision 96-6 for SATAT members, the Commission approves:

• the final 1999 CATs (contribution requirement and direct toll component) with adjustments; and

• the final 1999 network tariffs (¼ mile) with adjustments.

The Commission does not accept SATAT's proposal to consider the three components of contribution, direct toll and network (¼ mile) as a total requirement.

The Commission directs the nine member companies represented by SATAT to:

• issue revised tariff pages reflecting the approved CATs and network (¼ mile) tariffs;

• proceed with billing adjustments as expeditiously as possible; and

• file their proposed 2000 and 2001 CATs and network (¼ mile) tariffs by 1 February 2001.

The Commission also directs that three companies, namely, Milot, CoopTel and Warwick, provide their proposals detailing how they intend to reduce their contribution requirement (subsidy) to no more than 25% of total revenue requirement effective 2002. These proposals are to be filed by 1 February 2001.

In Telecom Order CRTC 99-1111, the Commission directed, among other things, that SATAT file the proposed final 1999 CATs for its nine member companies by 7 January 2000. The company-specific proposals were to include Phase III results, contribution-eligible minutes (toll and direct access line (DAL) minutes) and CAT calculations in accordance with Telecom Decision CRTC 96-6. The Commission notes that the regulatory framework prescribed in Decision 96-6 is the result of a public process involving, among others, the small independent telephone companies in Québec and Ontario.

On 12 April 2000, SATAT filed proposed final 1999 company-specific CATs and network (¼ mile) tariffs on behalf of its members. Bell Canada filed comments. SATAT responded to the Commission's interrogatories. SATAT filed its final comments on 15 September 2000.

Contribution-eligible minutes

In its proposed final 1999 CAT filing, SATAT used actual 1999 contribution-eligible minutes resulting in decreases in minutes from the 1998-approved levels for Courcelles, La Baie, Milot, Nantes and Upton. Similarly, the DAL minutes submitted resulted in a decrease in minutes from the 1998-approved levels for Milot, Nantes, St-Liboire, Upton, CoopTel and Sogetel. Bell Canada did not comment on SATAT's proposed minutes for 1999.

The Commission finds SATAT's proposed toll and DAL minutes to be reasonable. The use of decreased minutes results in slightly higher CAT rates. The Commission used these minutes to calculate the final 1999 CAT rates for the nine SATAT member companies.

SATAT's general proposal

In its proposed final 1999 CAT filing, SATAT requested that the three components of contribution, direct toll and network (¼ mile) be considered as a total requirement rather than by the three individual components.

SATAT stated that the contribution requirement and the direct toll component are capped separately which causes a disadvantage to the companies when there are year-over-year fluctuations in traffic patterns between local and toll (long distance) calls.

SATAT also indicated that any direct or indirect expenditure increase imposed on its members must be considered as uncontrollable and therefore must be included in the calculation of the CATs.

SATAT submitted that the Commission should ensure that the member companies can earn a reasonable rate of return on common equity (ROE) and that the Commission has already specified, in Decision 96-6, that the approved ROE for the small independents is between 11% and 13%.

SATAT filed the proposed final 1999 CATs based on ROEs ranging from 9.2% to 12.9% for the various member companies.

Bell Canada's comments

Bell Canada stated, among other things, the following regarding SATAT's filing:

• toll providers have historically paid a subsidy to the independent telephone companies. However, the subsidy should not guarantee the companies' achievement of their ROE;

• the Commission has made it abundantly clear in Decision 96-6 that local rates need to be more reflective of underlying costs and that rate increases would be necessary to reduce the contribution requirements of the independents;

• increases in expenses imposed on the independents should be offset through cost reductions or rate increases and that SATAT cannot expect to pass these expenses on to the toll providers;

• the contribution requirement of SATAT member companies must be in line with the declining rates in the telecommunications industry in Canada; and

• Bell Canada might agree that shifts exist in traffic patterns. However, it would expect that an increase in one category should be offset with a reduction in another category. SATAT should demonstrate that it has achieved an overall reduction in the CAT received from the toll provider.

SATAT departs from the Commission's objectives and directives

For over four years, the Commission has been consistent with its message to the small independent telephone companies stating that it is committed to promote competition in telecommunications services throughout Canada. As indicated in Decision 96-6, one initiative has been to bring local rates closer to the cost of providing local services while reducing the high contribution rates paid by the long-distance providers.

In Decision 96-6, the Commission approved an ROE range of 11% to 13% for the small Québec independents. It directed these independents to ".use a rate of return 50 basis points less than the midpoint of the approved range [i.e., 11.5%] when preparing their revenue requirement forecasts and CAT calculations". The Commission also directed the independents to ".provide explanations and justification supporting their revenue requirement forecasts and CAT calculations if, after netting out the impact of local rate increases. the contribution requirement exceeds the previous year's approved contribution requirement."

Finally, in Order 99-1111, the Commission directed, among other things, that SATAT file ".detailed explanations for any increase in the direct toll component where the proposed final 1999 direct toll component exceeds the approved final 1998 direct toll component by more than 5%." The Commission notes that the direct toll component is not capped as indicated by SATAT.

This lighter form of regulation that the Commission has adopted does not impose an in-depth revenue requirement assessment for the purpose of finalizing the small independents' CATs.

The Commission considers that SATAT's filing for the proposed final 1999 CATs does not conform to the Commission's directives iterated above.

Commission's ruling on SATAT's general proposal

The Commission assessed SATAT's general proposal to have the three components approved as a total requirement.

The Commission also undertook a detailed analysis of the company-specific proposals for the final 1999 CAT and network (¼ mile) tariff applications and reviewed comments from Bell Canada and SATAT's responses to the Commission's interrogatories.

The Commission considers that SATAT's general proposal is a significant departure from the existing directives prescribed in Decision 96-6 and Order 99-1111 regarding the calculation of the contribution, direct toll and network rates.

The Commission is of the view that the existing method of calculating the CATs and network (¼ mile) tariffs for the small independents is consistent with its objective to reduce the required contribution payments of long-distance providers. The Commission considers that reducing the level of contribution payments is one of the crucial factors to foster competition among the long-distance providers in Canada.

In its 6 September 2000 letter, Bell Canada commented that SATAT ". failed to provide any substantive evidence in support of its position with respect to the impacts of a shift in cost allocation."

Having reviewed the evidence, the Commission is of the view that SATAT failed to support its claim that there were major shifts in traffic patterns causing significant shifts in expense distribution.

Moreover, the Commission notes that Courcelles, St-Liboire and Sogetel indicated a shift in expense distribution from local to the toll category. However, in response to the Commission's interrogatories, SATAT indicated that these companies in fact experienced shifts in calling patterns from toll to local. The Commission is of the view that, in the case of these three companies, SATAT provided evidence that contradicts its position that the reallocation of expenses between the categories resulted from shifts in traffic patterns.

The Commission considers that SATAT has not adequately justified its proposed departure from the directives set out in Decision 96-6 and Order 99-1111 for the purpose of setting the final 1999 CATs.

As a result, the Commission does not accept SATAT's proposal. The Commission has therefore assessed the companies' proposals for the final 1999 CATs and network (¼ mile) tariffs on the basis of the three distinct components of contribution, direct toll and network (¼ mile).

This approach is consistent with the previous determinations made in setting the final 1999 CATs for the other small independent telephone companies regulated by the Commission.

The Commission notes that, in the wake of an extensive public process that started on 1 March 1999, Decision CRTC 2000-745 has introduced changes to the contribution regime for the small independent telephone companies. The Commission is in the process of consulting with the small independent companies in Ontario and Québec to seek their input on the implementation of the new regime and the regulatory framework to be effective on 1 January 2002.

Required adjustments

i) Rate of return on common equity (ROE)

As noted above, the Commission directed SATAT to file the proposed final 1999 CATs using the ROE rate of 11.5% for the preparation of the revenue requirement forecasts and CAT calculations. For the preparation of the proposed final 1999 CATs, the Commission continues to consider that this is an appropriate level to use since it allows sufficient flexibility for the companies to have an opportunity to achieve a reasonable ROE.

In the proposed final 1999 CAT filing, SATAT calculated the revenue requirement forecasts and CAT rates for each of the nine member companies using the following ROE rates:

Company

Courcelles

La Baie

Milot

Nantes

St-Liboire

Upton

CoopTel

Warwick

Sogetel

La Compagnie de Téléphone de Warwick was the only company that filed its proposed final 1999 CAT at the directed rate of 11.5%. SATAT did not provide any reasons why the remaining eight companies filed their proposed final 1999 CATs using rates other than the directed 11.5% ROE.

The Commission has therefore recalculated the revenue requirement forecasts and CAT rates for eight of the nine SATAT member companies to reflect the appropriate use of an ROE rate of 11.5% and has adjusted SATAT's proposed 1999 filing accordingly.

This adjustment was applied to the calculation of the 1999:

• contribution requirements and rates;

• direct toll component and rates; and

• network (¼ mile) requirements and tariffs.

ii) Regulatory-related activities

Seven companies (Courcelles, La Baie, Milot, Nantes, Upton, CoopTel and Warwick) have provided explanations for increases in expenses due to regulatory activities relating to:

• applications for local rate increases;

• establishing Natural Calling Centres with Bell Canada;

• development of a billing and collection rate; and

• public notice on depreciation.

In its proposed final 1999 CAT filing, SATAT assigned 100% of the 1999 expenditure increases associated with regulatory activities to the direct toll component.

The Commission examined the explanations provided by SATAT and is of the view that the regulatory activities described above relate as much to the local side of the business as they do to the toll side and should therefore be allocated accordingly.

Therefore, the Commission adjusted the proposed final 1999 CATs by reallocating 50% of the regulatory activity expenditure increases from the direct toll component to the contribution requirement for the purpose of calculating the final 1999 CATs.

This reallocation is consistent with the treatment of similar expenses for the independent telephone companies of the Ontario Telecommunications Association (Order CRTC 2000-554).

1999 contribution requirements and rates

SATAT stated that some of the 1999 expenditure increases experienced by its member companies were "uncontrollable". The Commission is of the view that fluctuations in costs from external factors are experienced routinely in the business world and should be planned for through the development of contingency plans and effective risk management.

Except for the adjustments approved below, the Commission considers that cost increases should not result in increases in contribution payments by the toll providers and that the independent telephone companies should not rely on contribution payments as a guarantee to achieve a reasonable ROE.

The Commission approves the following permanent and one-time adjustments:

a) permanent adjustments:

• extraordinary revenue of $7,000 for Courcelles;

• extraordinary gain of $32,000 for Milot (pro-rated to reflect the impact of the 1998 gain on asset disposals); and

• correction of allocation error of $58,964 for Upton.

b) one-time adjustments for 1999:

• Y2K expenses of $2,888 for Courcelles; and

· Y2K expenses of $10,260 for La Baie.

After including the adjustments noted in paragraphs 29, 33 and 37, and consistent with the methodology enunciated in Decision 96-6, the Commission has determined the final 1999 contribution requirements and rates as set out in Appendix 1 as the lower of:

a) the previous year's approved contribution requirements after accounting for local rate increases; and

b) the current year's proposed contribution requirements.

1999 Direct toll component and rates

In Order 99-1111 and as indicated in paragraph 13 of this order, the Commission directed SATAT to provide ". detailed explanations for any increase in the direct toll component where the proposed final 1999 direct toll component exceeds the approved final 1998 direct toll component by more than 5%."

SATAT has explained some, but not all, of the 1999 direct toll component increases over the 1998 approved amount. The Commission accepts all the explanations for the increases in the direct toll component for the following four companies as filed:

Courcelles

• Y2K expenses of $2,032;

• depreciation expenses of $9,920;

• Hydro-Québec pole rental fees of $486; and

• 50% of regulatory expenses of $12,431 (adjustments as described in paragraphs 31 to 34)

Milot

• misallocation in depreciation of $32,550;

• extraordinary gain of $8,000 (pro-rated to reflect the impact of the 1998 gain on asset disposals);

• Hydro-Québec pole rental fees of $2,048; and

• 50% of regulatory expenses of $4,759 (adjustments as described in paragraphs 31 to 34).

CoopTel

• Hydro-Québec pole rental fees of $698; and

• 50% of regulatory expenses of $2,621 (adjustments as described in paragraphs 31 to 34).

Warwick

• Hydro-Québec pole rental fees of $341; and

• 50% of regulatory expenses of $15,408 (adjustments as described in paragraphs 31 to 34)

Where the 1999 direct toll component expenditure increase was only partially or not explained, the Commission was only able to consider the explained portion of the increases being requested.

For La Baie, Nantes and Upton, the Commission adjusted the direct toll component to reflect the approved ROE rate of 11.5% minus the adjustment of 50% for regulatory expenditure increases (adjustments as described in paragraphs 31 to 34).

For St-Liboire and Sogetel, SATAT provided no explanations for the increases in the direct toll component. The Commission was thus unable to approve any increase requested for these two companies.

After incorporating the adjustments noted in paragraphs 40 and 42, the Commission approves the direct toll rates for the nine member companies as set out in Appendix 1.

1999 Network (¼ mile) requirements and tariffs

As previously stated, only one company (Warwick) used the approved ROE rate of 11.5% in preparing the revenue requirement forecasts and CAT calculations. The Commission has recalculated the network (¼ mile) tariff for the remaining eight companies at the approved ROE rate of 11.5% in accordance with Decision 96-6.

This recalculation results in increases to the network tariffs for six companies (Courcelles, La Baie, Milot, Nantes, Upton and CoopTel) since their ROE calculations were filed based on rates lower than the directed rate of 11.5%. This recalculation results in decreases to the network tariffs for two companies (St-Liboire and Sogetel) since their ROE calculations were filed based on rates higher than the directed rate of 11.5%.

After incorporating the adjustment noted in the above paragraph, the Commission approves the network (¼ mile) tariffs for the nine member companies, as set out in Appendix 1.

Contribution requirement (subsidy) target of 25%

In Telecom Decision CRTC 99-5, the Commission directed ".those independents whose contribution requirement will still exceed 25% of the total revenue requirement following the local rate increases of 1 July 1999, to file with the Commission, by 1 January 2000, a proposal detailing how they intend to reduce their subsidy requirement to no more than 25% by no later than the year 2002."

Based on the Commission's determinations for the final 1999 contribution requirements set out in Appendix 1 and the examination of the Phase III results filed for the proposed final 1999 CATs, four companies still have a contribution requirement exceeding 25% of the total revenue requirement.

The Commission notes that one of the four companies, Nantes, is being addressed in a separate proceeding (Public Notice CRTC 2000-54).

The Commission directs that the three remaining companies, Milot, CoopTel and Warwick, file their individual company proposals by 1 February 2001 detailing how they intend to reduce their subsidy requirement to no more than 25% by no later than the year 2002.

Achieving the approved ROE

As noted in paragraph 8, SATAT indicated that the Commission should ensure that the member companies earn a reasonable ROE. In Decision 96-6, the Commission set an approved ROE level for the small Québec independent telephone companies at 50 basis points less than the midpoint of the approved range (i.e., 11% to 13%) when preparing their revenue requirement forecasts and CAT calculations. The Commission continues to consider this ROE range to be reasonable.

The Commission encourages all independents to conduct their businesses in a manner that maximises their ROE within the approved range. However, the Commission wishes to reiterate that the contribution requirement is not a vehicle to guarantee a certain ROE level.

The small independent telephone companies continue to have the following options available to them to achieve their approved ROE:

• applying for rate increases (on a going-forward basis);

• decreasing expenditures;

• increasing revenues from optional services; and

• combining a mix of the above.

Implementation

In light of the foregoing, the Commission orders that the nine member companies represented by SATAT:

a) issue revised tariff pages, within 30 days of this order, reflecting the approved CATs and network (¼ mile) tariffs set out in Appendix 1;

b) proceed with billing adjustments as expeditiously as possible;

c) file the proposed 2000 and 2001 CATs and network (¼ mile) tariffs by 1 February 2001 in accordance with Decision 99-5, including the projected:

• Phase III results;

• contribution-eligible minutes (toll and DAL);

• CAT calculations;

• impact of local rate increases implemented in 2000;

• impact of proposed local rate increases to be implemented in 2001; and

• number of network access services (NAS) identifying residential and business separately; and

d) with the CAT proposals to be filed in c):

• provide detailed explanations for any increase in the 2000 direct toll component where the proposed amount exceeds the 1999 direct toll component set out in Appendix 1 by more than 5%; and

• provide detailed explanations for any increase in the 2001 direct toll component where the proposed amount exceeds the proposed 2000 direct toll component by more than 5%.