ARCHIVED - Order CRTC 2000-1096

Order CRTC 2000-1096

Ottawa, 4 December 2000

Reference: Tariff Notice 126

The Commission approves Northern'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 $3.50 to Northern's residential and business individual line rates, effective 1 January 2001. Northern's rate rebalancing proposal 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 Order CRTC 2000-162, dated 29 February 2000, the Commission approved Phase I of Northern's SIP and a $4 local rate increase to Northern's individual line residential and business subscribers, effective 1 March 2000. This increase was used to fund a portion of Northern's SIP and eliminate mileage charges in Northern's territory. Northern was also directed to file Phase II of its SIP by 15 March 2000.

In Phase II, Northern proposes to provide service to its remaining eligible unserved and underserved customers by the end of 2002. Northern sent out a survey to prospective unserved customers to find out whether they wanted telephone service and to assess how much it would cost to extend service in its territory. In its survey, Northern advised potential customers that they would be required to contribute up to $1,000 for service.

Northern estimated that Phase II of its SIP would cost $13.7 million. It proposed to increase its monthly residential and business individual line rates by $5 on 1 January 2001. A portion of this increase would fund Phase II of Northern's SIP, while the remainder would be used to reduce Northern's reliance on subsidies from long-distance service providers.

Northern issued billing inserts informing its subscribers of its SIP and providing them with the opportunity to comment. Northern also placed newspaper advertisements and held townhall meetings to consult with its customers prior to filing its SIP.

All customers who provided comments opposed Northern'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 Northern's SIP and is satisfied that Northern's capital expenditures, as modified below, are reasonable, employ least-cost technologies and meets the basic service objective.

Limits to financial obligation to extend service

Northern submitted that it should not have to extend service where costs per subscriber actually taking service exceed $10,000, unless customers pay for the additional costs. Northern stated that the $10,000 cut-off point provided a reasonable balance between local rate increases to the body of subscribers and the benefits of extending service to unserved areas.

In Long-distance competition and improved service for Northwestel customers, Decision CRTC 2000-746, dated 30 November 2000, the Commission directed Northwestel Inc. to apply up to $25,000 as a construction allowance to existing and future households when extending service. Action Réseau Consommateur, the Consumers' Association of Canada, Fédération des associations coopératives d'économie familiale, and the National Anti-Poverty Organization (ARC et al.) submitted that independents' financial obligation for extending service should generally be uniform across the country and should more appropriately fall between Northern's proposed $10,000 limit and Northwestel's $25,000 limit. With Northern's proposed limits, many of its unserved customers will likely remain without telephone service.

The Commission agrees that all independents requiring a SIP should have the same financial obligation when extending service. The Commission also finds that Northern's proposed financial limit unduly restricts its obligation to extend service to unserved areas. The Commission notes however, that Northern does not have access to supplementary funding as was granted to Northwestel. Rates in Northern's territory have increased significantly to fund the company's SIP and other related service improvements. The Commission finds that imposing the same financial obligations on Northern as those approved for Northwestel would be unreasonable. Accordingly, the Commission directs Northern to extend service where costs per customer do not exceed $15,000, including the customer's $1,000 contribution for service extension.

Similarly, the Commission is satisfied that Northern should rely on those customers actually taking service to determine where to extend service and estimate their extension cost.

Based on the estimated number of new customers actually taking service and Northern's increased financial obligation when extending service, the Commission determines that Northern will require an additional $1,525,000 in capital expenditures to extend service to unserved areas in its territory.

Customer payments in unserved territory

Northern proposed to treat 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.

Revenue requirement

Normal capital expenditures in SIP-territory

Northern 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 Northern 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 Northern's SIP revenue requirement.

SIP recovery period

Northern proposed rate increases sufficient to recover its SIP costs to be incurred over the years 2000 to 2002. Northern submitted that longer term 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, the Commission notes that Northern 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 Northern 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 agrees with Northern that longer term forecasts are not as reliable as shorter term forecasts. At the same time, the Commission must find an appropriate balance between Northern'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 Northern's rate increases are based.

Special reserve account

In Order 2000-162, 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 Carrier Access Tariff (CAT) rate against the effects of the SIP. The Commission directs Northern to maintain the special reserve account.

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 subsidise local service. Consequently, the Commission may need to re-examine the status of Northern's special reserve account at that time.

Total operating expenses

As noted above, the Commission estimates that Northern will require an additional $1,525,000 in capital expenditures to extend service in its territory. Accordingly, the Commission has proportionately increased Northern's operating expenses related to its SIP.

Northern estimated its Gross Receipt Tax requirements based on a constant tax rate. The Commission notes, however, that the Government of Ontario has revised those rates. The Commission has thus reduced Northern's operating expenses related to its SIP to reflect those changes.

Depreciation expense

Northern used the depreciation life characteristics approved in Telecom Order CRTC 99-1068, dated 16 November 1999, to develop its SIP depreciation estimate. The Commission notes, however, that using those depreciation life characteristics is not consistent with the depreciation life characteristics approved in Telecom Order 98-1157, dated 20 November 1998, that Northern used to calculate its 2000 CAT. The Commission directs Northern to use the depreciation life characteristics approved in Order 98-1157 to calculate its SIP depreciation, in order to maintain consistency between its SIP and its regulatory financial statements. The Commission has reduced Northern's SIP depreciation expenses proportionately to reflect the longer service lives. The Commission has also recognized the depreciation expenses associated with the additional $1,525,000 SIP capital expenditure required to extend service to unserved areas.

Interest expense and return on equity

Northern proposed to finance its SIP through equal amounts of debt and equity financing, at a pre-tax interest rate of 8.5% and after tax return on investment rate of 12.625%. The Commission is satisfied that Northern's proposed financing method and rates are appropriate.

Income tax expense

The Commission has adjusted Northern's income tax expense for its SIP commensurate with the adjustments made to Northern's capital expenditures, operating expenses and depreciation expense.

Rate increase

After reviewing Northern's capital expenditures and its revenue requirement, the Commission finds that a $3.50 residential and business local rate increase, together with the increase approved in Order 2000-162, will allow Northern to recover its SIP-related expenses over the period 2000 to 2005. The Commission directs Northern to increase its monthly individual line residential and business service lines by $3.50, effective 1 January 2001.

Other issues

Rate rebalancing

Northern proposed to rebalance its rates to reduce its contribution requirement with the expectation that O.N.Telcom would lower its long-distance rates. The Commission notes, however, that there is no guarantee that reducing Northern's contribution rates will provide lower long-distance rates for Northern's subscribers. The Commission will also consider what further local rate increases, if any, are needed to reduce Northern's subsidy requirement in the context of the proceeding to implement the new contribution collection regime for independents. The Commission accordingly denies Northern's rate rebalancing proposal.

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. Northern proposed that unserved customers requesting service pay a $200 deposit and pay the remaining balance over the next 11 months, at no interest.

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 contribution amounts. O.N.Telcom did propose to charge an interest penalty for late payments of contribution payments due each month. In Decision 2000-746, the Commission did not allow Northwestel to charge interest on 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 Northern should be allowed to charge its tariffed late payment interest rate for late payments of instalments due each month.

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, Northern is effectively extending interest free credit to its customers. Northern, unlike Northwestel, does not receive supplementary funding and the entirety of those costs are assumed by the 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 Northern'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 Northern to file its 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 Northern may not need to maintain a special reserve account in 2002, the Commission directs Northern 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 Northern's SIP.

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

The Commission directs Northern 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