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ARCHIVED - Order CRTC 2000-677

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Order CRTC 2000-677

Ottawa, 21 July 2000

MTS Communications Inc. - Interim rate increases to recover income tax expense

Reference: 8661-M3-01/00 and Tariff Notices 403, 404, 405, 406, 407, 408, 409, 410, 411 and 412 
The Commission approves, on an interim basis, MTS Communications Inc.'s proposed $3 increase to basic local residential service rates as well as various increases to other service rates. These interim increases are effective 1 August 2000 and will be reviewed in a follow-up proceeding initiated today.

Recovery of income tax

1.

MTS Communications Inc. filed an application on 1 May 2000 claiming that its utility segment additional tax deductions (ATDs) that resulted from a Revenue Canada tax ruling will expire on 1 July 2000. MTS proposed various rate increases, including a $3 increase for basic local residential service, to recover some of its estimated utility segment income tax expense for year 2000.

2.

MTS had not incurred any Utility segment income tax expense since it was privatized in 1997. This was due to the ATDs that have been available to offset any income tax liability.

3.

The Commission received comments from subscribers, the Consumers Association of Canada and the Manitoba Society of Seniors (CAC/MSOS) and the Manitoba Minister of Consumer and Corporate Affairs, which all opposed MTS's application.

Interim rate increases

4.

The Commission has considered the merits of this application in the context of interim rate increases.

5.

CAC/MSOS submitted that this application does not meet the Commission's established criteria for interim rate increases.

6.

The Commission notes that those criteria were established in the context of rate of return regulation. It considers that they do not apply to MTS's application since the company is under price cap regulation.

7.

In MTS Communications Inc. - Mechanism to recover future income tax expense , Telecom Decision CRTC 99-2, dated 4 March 1999, the Commission concluded that incurring income tax by MTS would meet the criteria of an exogenous event as defined in Price cap regulation and related issues , Telecom Decision CRTC 97-9, dated 1 May 1997.

8.

Based on the evidence filed in this proceeding, the Commission concludes that, on a prima facie basis, MTS will incur utility segment income tax expense in the year 2000. Accordingly, the Commission considers it appropriate to approve MTS's proposed rate increases on an interim basis.

9.

However, given the complexity of the issues, the exact amount of utility segment income tax expense to be recovered in the years 2000 and 2001 will need to be reviewed in a more detailed process. The Commission has today initiated such a proceeding by issuing MTS Communications Inc. - Recovery of 2000 and 2001 income tax expense , Public Notice CRTC 2000-108 (PN 2000-108) dated 21 July 2000.

Price cap constraint

10.

CAC/MSOS submitted that the rate increases associated with MTS's application render the 10 percent annual rate increase constraint on local residential and single line business service in essential bands under the price cap regime absolutely meaningless.

11.

The Commission is of the view that the 10 percent constraint would not allow MTS to recover its utility segment income tax expense in a timely manner.

Deferral account

12.

In Decision 99-2, the Commission approved a pre-collection mechanism whereby MTS would be permitted to not make some or all of the future rate reductions, primarily to business rates, mandated under the price cap formula. The resulting additional revenues were to accumulate in a deferral account to be used to mitigate future rate shock to basic local residential subscribers, when MTS incurred income tax expense.

13.

MTS requested that the accumulated amount from its deferral account be used to mitigate the associated rate increases in the year 2000.

14.

The Commission will finalize the use of this deferral account as part of the process initiated by PN 2000-108.

Exogenous factor

15.

Although MTS is not requesting to fully recover its utility segment income tax expense for the year 2000, it has requested an exogenous factor at the overall basket level, as well as the residential sub-basket level, to fully recover its annual income tax expense.

16.

The Commission considers it appropriate to limit the exogenous factors to the annualized amount of revenues generated from the rate increases approved in this order.

Conclusion

17.

In light of the foregoing:
a) MTS is allowed to increase rates in local residential and single-line business sub-baskets in essential bands by more than the 10 percent constraint for the purpose of recovering some of its utility segment income tax expense in the year 2000.
b) The Commission approves, on an interim basis, rate increases effective 1 August 2000 to:

i) residence primary exchange service of $3 in each band. The monthly rate in bands A, B, C, D and E2 will be $22.02, the monthly rate in band E1 will be $20.97, and the monthly rate in band EA will be $18.45;

ii) individual line business service in bands D and E of up to $3.45. The monthly rate in bands D and E2 will be $38.55, the monthly rate in band E1 will be $35.80 and the monthly rate in band EA will be $30.50;

iii) individual semi-public line service in bands C, D and E of up to $5. The following are the revised monthly rates:

         Band C                   $39.25
         Bands D and E2   $40.90
         Band E1                  $37.95
         Band EA                  $32.40

iv) multi-line business service rates in bands D and E of $1. The monthly rate in each band will be $51.65;

v) exchange service - measurement charges. Circuits between the serving central office and the customer's telephone will increase to $14.60 per circuit, and rates for each additional connection will increase to $5.50 in each of bands A, B and C and to $2.75 in each of band D, E2, E1 and EA;

vi) various components of channels for occasional radio program service;

vii) the access charges for interexchange voice grade channels;

viii) local channel access charges;

ix) mobile telephone service; and

x) marine radio-telephone service.

c) The Commission also approves exogenous factors of $18.8 million at the overall basket level and $16.8 million at the residential sub-basket level to recover some of MTS's 2000 utility segment income tax expense, effective 1 August 2000.
d) MTS will not be allowed any more local residential rate increases until a determination is made in the proceeding initiated by PN 2000-108.
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

Date Modified: 2000-07-21

Date modified: