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Order CRTC 2000-143
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Ottawa, 23 February 2000
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Local competition start-up and LNP costs established
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Reference: 8622-S1-03/98; BC TEL Tariff Notice 3865; TCEI Tariff Notice 99 and TCI Tariff Notice 1072
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The Commission has determined local competition start-up costs and local number portability (LNP) costs for ex-Stentor telephone companies.
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1.
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In Telecom Order CRTC 99-239, dated 12 March 1999, the Commission rendered its decision with respect to the issues examined in the proceeding conducted pursuant to Local competition start-up costs proceeding, Telecom Public Notice CRTC 98-10, dated 12 May 1998. In this order, the Commission found that there was insufficient information on the record to enable it to make a final determination as to the reasonableness of the local competition start-up and local number portability costs submitted by the companies. This order includes the Commission's final determination with respect to the costs submitted, as well as other matters raised in the proceeding that were not expressly addressed in Order 99-239.
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2.
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In Local competition, Telecom Decision CRTC 97-8, dated 1 May 1997 and in Responsibility for carrier specific costs for the provision of local number portability, Telecom Order CRTC 97-591, dated 1 May 1997, the Commission determined that local competition start-up costs incurred by the then-Stentor Resource Centre Inc. (Stentor) member companies should not be recovered from interconnecting carriers. Instead, each carrier should be responsible for recovering its own costs. In Order 97-591, the Commission also indicated that it would initiate a proceeding to address the appropriate approach for the Stentor-member companies to recover their start-up costs.
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3.
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In Implementation of price cap regulation and related issues, Telecom Decision CRTC 98-2, dated 5 March 1998, the Commission excluded local competition start-up and LNP costs incurred by some of the Stentor-member companies from the expense forecasts used in establishing rates to be effective at the outset of the price cap regime. In so doing, the Commission referred to its intention to initiate a proceeding to determine the means to recover these costs.
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4.
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The Commission subsequently issued PN 98-10. The focus of that proceeding was to quantify the local competition start-up and LNP costs and to determine the appropriate mechanism to address the recovery of these costs.
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5.
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Submissions were received from the following parties: Stentor on behalf of BC TEL, Bell Canada (Bell), Island Telecom Inc. (Island Tel), Maritime Tel & Tel Limited (MTT), MTS Communications Inc. (MTS), NBTel Inc. (NBTel – formerly The New Brunswick Telephone Company, Limited), NewTel Communications Inc. (NewTel), TELUS Communications Inc. (TCI) and TELUS Communications (Edmonton) Inc. (TCEI) (collectively, the companies), the Alberta Council on Aging, the Consumers' Association of Canada, the Fédération nationale des associations de consommateurs du Québec and the National Anti-Poverty Organization, AT&T Canada Long Distance Services Company (now AT&T Canada Corp.), Call-Net Enterprises Inc., the Canadian Business Telecommunications Alliance, Rogers Cantel Inc., Clearnet Communications Inc., the Director of Investigation and Research, GT Group Telecom Networks Inc., MetroNet Communications Group Inc., and Microcell Telecommunications Inc.
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6.
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Order 99-239 was the Commission's response to the issues examined in the PN 98-10 proceeding.
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7.
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In Order 99-239, the Commission found that there was insufficient information on the record to enable it to make a final determination regarding local competition start-up and LNP costs identified by the companies.
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8.
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The Commission addressed two rounds of interrogatories to the companies to examine the costs submitted. This order deals with this and other matters which were not addressed in Order 99-239.
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Price cap impacts
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9.
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In Order 99-239, the Commission considered it appropriate to permit the companies to include LNP and local competition start-up costs in the calculation of the revenue reductions they were required to implement at the Price Cap Index (PCI) level through the 31 March 1999 filings made by the companies with respect to their 1999 price cap parameters.
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10.
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The combined capped and uncapped revenue requirement amounts for 1997 to 2001, set out in Order 99-239 and accepted on an interim basis by the Commission, are set out below:
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BC TEL $ 57,806,000
Bell $249,779,000
Island Tel $ 1,256,000
MTS $ 16,742,000
MTT $ 10,395,000
NBTel $ 6,178,000
NewTel $ 4,312,000
TCI/TCEI $ 65,316,000
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11.
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Pending a final determination on the magnitude of the allowed cost recovery, the Commission permitted the companies to use, for their respective 31 March 1999 price cap filings, up to one-third of the amounts identified in paragraph 10, adjusted for the allocation factor for capped and non-capped services approved in Order 99-239, to mitigate rate reductions otherwise required. The Commission also directed that these amounts were to be included in a deferral account.
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12.
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Based on the determinations in this order regarding 1997 to 2001 LNP and local competition start-up cost cash flows, as discussed in paragraphs 17 to 43 below, the Commission finds that the combined capped and uncapped revenue requirement amounts for 1997 to 2001 should be modified to the following levels:
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BC TEL $ 57,836,000
Bell $219,699,000
Island Tel $ 1,128,000
MTS $ 15,764,000
MTT $ 9,348,000
NBTel $ 5,583,000
NewTel $ 3,816,000
TCI/TCEI $ 48,966,000
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13.
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The Commission notes that in accordance with Order 99-239, the companies set aside in deferral accounts capped revenues which would have otherwise been eliminated through required rate reductions. Closing the deferral accounts would allow the companies to recover a portion of their LNP and local competition start-up costs. Accordingly, the Commission finds it appropriate for the companies to close the deferral accounts.
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14.
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For the purposes of the 31 March 2000 price cap filings, it will generally be necessary for each company to reflect an exogenous variable at the PCI level that is different from that previously approved. The companies will also have to establish exogenous factors to be incorporated in the service band limits (SBLs).
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15.
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The companies are directed, when establishing the PCI and SBLs for their respective 31 March 2000 price cap filings, to use one half of the following: (1) the revenue requirement amounts identified in paragraph 12 allocated in accordance with the determinations in section V of Order 99-239, less (2) the amounts in the deferral accounts closed in paragraph 13.
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16.
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The Commission's determinations with respect to the reasonableness of the local competition start-up and LNP costs identified by the companies and with respect to related issues are set out in the paragraphs following.
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Magnitude of costs
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17.
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In the proceeding leading to Order 99-239, some parties submitted that costs for numerous cost categories were overstated particularly in the ongoing LNP network cost category. Their analyses relied primarily on the observed divergence of item-by-item cost comparisons among companies.
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18.
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In reply, Stentor submitted that the differences in the different cost categories are not a reflection of overspending in any area by any company, but reflect the different network architectures and methodologies employed by these companies. Stentor further submitted that the choices made by the companies were driven by each company's assumptions regarding, among other things, the rate of LNP roll-out in its respective serving areas and changing industry requirements, as understood at the time of the associated network decisions. With respect to the magnitude of the ongoing LNP costs, Stentor noted that from the outset of industry discussions in the course of Implementation of regulatory framework - Local number portability and related issues, Telecom Public Notice CRTC 95-37, dated 26 July 1995, it had emphasized that the database solution favoured by the companies' competitors would be, by far, the most expensive solution.
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19.
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The Commission generally considers that item-by-item comparisons of the companies' local competition start-up costs and LNP costs do not provide a valid basis to reach conclusions regarding the appropriateness of these costs. Differences in the companies' cost estimates by category may vary due to numerous factors, such as differences in the companies' business operations and practices and differences in cost category definitions and inclusions.
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20.
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Based on the record of the PN 98-10 proceeding and the responses to the interrogatories subsequently filed by the companies, except as otherwise determined in this Decision, the Commission finds the costs submitted by the companies to be appropriate.
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Local competition start-up cost cash flows
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21.
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Local competition start-up costs are the incremental start-up capital and expenses associated with the companies' changes to their systems and operations to provide local competition functionality to accommodate local network interconnection as directed by the Commission.
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22.
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The Commission's changes to the companies' proposed local competition start-up cost cash flow estimates primarily reflect:
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(1) the actual cost information received for the years 1998 and 1999 year-to-date;
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(2) reductions to certain start-up costs for the years 1999 and beyond; and
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(3) miscellaneous changes to modify certain costing assumptions.
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23.
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The Commission notes that BC TEL, TCI, Island Tel, MTS and MTT included certain recurring local competition start-up cost estimates for 1999 and beyond (e.g., ongoing methods and procedures and systems modifications of existing ordering and billing systems).
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24.
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By contrast, Bell, NBTel, NewTel and TCEI did not include activities and costs that are recurring in nature within this category.
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25.
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The Commission considers that only minimal amounts of start-up costs associated with recurring activities will be incurred. Accordingly, the recurring cost estimates that have been forecast for this category are reduced by 20% for 1999 and by 50% beyond 1999.
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LNP start-up cost cash flows
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26.
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LNP start-up costs are the incremental start-up capital and expenses associated with the companies' changes to their network, systems and operations to implement the LNP functionality as directed by the Commission.
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27.
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The Commission's changes to the companies' proposed LNP start-up cost cash flow estimates primarily reflect:
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(1) the actual cost information received for the years 1998 and 1999 year-to-date;
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(2) revised LNP software upgrade costs based on the updated contract price information;
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(3) additional annual productivity improvements of 3.5% applicable to most expense forecasts from 1999 onwards; and
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(4) miscellaneous changes to correct for errors reported or to modify certain costing assumptions.
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28.
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The Commission considers that the majority of the incremental LNP expenses relate to changes to internal operations and practices which have been estimated on the basis of a time estimate multiplied by the associated labour unit cost by activity.
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29.
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The Commission is of the view that efficiency improvements can be expected over time for most of these activities. The Commission notes that in the unbundled local loop rates proceeding leading to Final rates for unbundled local network components, Telecom Decision CRTC 98-22, dated 30 November 1998, the companies included explicit productivity improvement factors in developing the incremental expenses associated with the provisioning of unbundled loops to competitors. In that proceeding, most companies proposed an explicit productivity factor estimate of 3.5% or more.
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30.
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With respect to the LNP software upgrade component, the Commission has incorporated Stentor's proposed cost estimates based on the updated contracted price information received in response to the Commission interrogatories, except for the following changes:
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(1) the removal of the Goods and Services Tax charges for MTS;
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(2) reductions to BC TEL's 1998 cost estimate and NewTel's 1999 cost estimate that are in line with their proposed costing methodology and contracted prices; and
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(3) a reduction to Bell's 2001 cost estimate with respect to the supply of LNP software patches beyond Bell's three-year contract.
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31.
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With respect to the non-TCI Service Management System/Service Control Points (SMS/SCP) cost estimates, the Commission has included a reduction in the 1999 interest payments to reflect the reported one-year delay of certain 1999 expenditures.
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Ongoing LNP cost cash flows
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32.
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Ongoing LNP costs include additional capital and expenses required to provide LNP on an ongoing basis, such as the additional central processing unit (CPU) and CCS7 capacity necessary to process calls to ported numbers.
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33.
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Following a detailed examination of the companies' Phase II cost estimates and associated costing methodologies and assumptions, the Commission considers that the companies' proposed ongoing LNP cost cash flows should primarily be modified to reflect:
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(1) miscellaneous changes to correct for errors or inadvertent omissions reported or to modify certain costing assumptions;
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(2) reductions to the CPU network cost estimates for each company;
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(3) reductions to certain A-link cost estimates for TCI and BC TEL;
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(4) additional annual productivity improvements of 3.5% applicable to most ongoing expense forecasts from 1999 onwards; and
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(5) the inclusion of the incremental processing costs associated with the porting of a number from one carrier to another for BC TEL, TCI and TCEI (see paragraphs 43 and 57).
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34.
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The approved reductions to the CPU network costs are primarily due to the use of a lower CPU unit cost, stemming primarily from the use of a higher average working fill factor (AWFF) associated with the CPU and from the removal of the start-up cost factor included in the companies' CPU upgrade cost estimates.
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35.
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In light of the fact that a percentage of the CPU capacity is already assumed to be reserved for overhead purposes, the Commission considers that MTS's higher proposed AWFF value represents an appropriate measure for all companies.
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36.
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The Commission notes that the companies proposed to include CPU start-up costs on the basis that DMS switches would eventually need to be replaced, rather than the CPU simply being upgraded.
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37.
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The Commission notes that no evidence was provided to support the companies' claim that existing switches would be replaced as a result of LNP. The Commission considers it inappropriate to include such start-up costs in the CPU upgrade cost estimate.
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38.
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In the case of TCI, the approved CPU cost estimates further reflect a lower view of the associated CPU busy hour demand forecast (i.e., the incremental number of LNP queries in the busy hour) that is in line with TCEI's CPU busy hour demand forecast taking into account the number of ported NXXs.
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39.
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In addition, the Commission has adjusted downwards BC TEL's revised CPU 2001 cost estimate, reflecting a lower view of the associated CPU busy hour demand forecast that is more in line with BC TEL's 2001 growth for calls to ported numbers.
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40.
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The approved cost cash flows also reflect reductions to TCI's and BC TEL's A-link cost forecasts consistent with the above reductions to the busy hour demand estimate associated with the CPU cost component.
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41.
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As discussed in paragraphs 56 to 58 below, the Commission notes BC TEL, TCI and TCEI proposed that incremental transaction costs associated with the porting of a number from one carrier to another should be recovered through an LNP number export service charge.
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42.
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By contrast, the companies other than BC TEL, TCI and TCEI did not propose a separate tariff to recover the incremental transaction costs associated with the porting of numbers, but included these incremental costs in the Business Operations – Order Processing function of the Ongoing LNP cost category.
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43.
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The Commission considers it appropriate to include the incremental costs associated with the porting of numbers for recovery through the exogenous factor mechanism in this proceeding. Therefore, the incremental transaction costs associated with the porting of numbers for BC TEL, TCI and TCEI should be added to the Business Operations – Order Processing costs.
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LNP roll-out
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44.
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The Commission considers that no changes to the proposed costs should be made to reflect LNP roll-out changes resulting from a CRTC Interconnection Steering Committee (CISC) consensus report dated 6 November 1998 or from other factors.
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45.
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However, the Commission notes that to the extent that some of the reported LNP start-up cost actuals have been the result of changes to the LNP roll-out schedule, some of the approved cost changes will be related to changes to the LNP roll-out schedule.
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Location portability
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46.
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GT Group Telecom stated that Stentor has indicated that the advanced intelligent network (AIN) software being purchased by some companies to support service provider portability also supports location number portability within an exchange. GT Group Telecom submitted that the cost of such software should be prorated between LNP and other competitive services that the AIN software supports, rather than merely allocating all the costs to LNP.
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47.
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Stentor submitted that only LNP costs used for the provision of service provider portability were submitted for recovery.
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48.
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The Commission examined whether a portion of the LNP costs should more appropriately be attributed to location portability, rather than service provider portability, and be excluded from recovery in this proceeding.
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49.
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In the Commission's view, the costs to be recovered through this proceeding should include those costs which are caused by its decision to mandate service provider portability and by the companies' efforts to comply with that mandate.
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50.
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The Commission is of the view that any allocation of LNP costs to location portability would be arbitrary. It is not certain that the companies, in the absence of mandated service provider portability, would have incurred costs to implement location portability or what the magnitude of such costs would be.
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51.
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In the Commission's view, any attempt to recover LNP costs through location portability usage charges would probably be unsuccessful since the resulting price increases would probably have a negative impact on the demand for location portability.
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52.
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In view of the foregoing, the Commission finds that there should not be any allocation of costs to location portability and that the recovery mechanism approved by the Commission in this proceeding be designed to recover all costs which were incurred in the provision of mandated service provider portability.
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Spill-over benefits
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53.
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Parties submitted that the companies may be providing themselves spill-over benefits for other revenue generating services or ongoing operations in the guise of local and LNP start-up costs.
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54.
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Stentor submitted that the companies' costs associated with spill-over benefits such as other revenue generating services were specifically excluded from the costs submitted for recovery.
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55.
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The Commission is satisfied that costs associated with potential spill-over benefits have not been included in the companies' local competition start-up and LNP cost estimates to be recovered in this proceeding.
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Number export charge
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56.
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BC TEL through Tariff Notice 3865, TCI through Tariff Notice 1072, and TCEI through Tariff Notice 99, requested approval for "LNP Number Export Service", a new service which provides for the porting out of the ILECs' customers' telephone numbers to CLECs upon payment by the CLECs of a one-time processing charge to recover the incremental cost of LNP associated with the actual transaction of porting a number from one carrier to another.
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57.
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Stentor described the ongoing costs associated with LNP as including additional costs for the incremental customer contact time and the additional time to process orders. In the Commission's view, the processing costs associated with the porting of numbers fall within this description and therefore should be included in this proceeding. This would ensure consistent treatment among the companies for the processing costs associated with the porting of numbers.
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58.
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Accordingly, the Commission denies the above LNP Number Export Service tariff notices for BC TEL, TCI and TCEI.
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Secretary General
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This document is available in alternative format upon request and may also be viewed at the following Internet site: http://www.crtc.gc.ca
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