ARCHIVED - Decision CRTC 2001-202

Decision CRTC 2001-202

Ottawa, 30 March 2001

MTS Communications Inc. - Final rate increase to recover income tax expense

Reference: 8661-C12-04/00

Table of contents

Paragraph

Terms and acronyms used in this decision

The decision in brief

Background

1

Regional consultation

6

MTS' proposal

11

Draw-down of the additional tax deductions

17

Calculation of income tax expense

25

35

38

43

57

     Allocation of income tax expense

58

Rates

76

79

Disposition of the deferral account

81

Establishing new constraints on rates

86

Other issues

91

Terms and acronyms used in this decision

Additional income tax deductions carry forward (Additional tax deductions or ATDs) - result from the process of privatization when the tax value of the assets exceeds their book value. The ATDs are supported by a tax ruling from Revenue Canada and eliminate income tax expense for several years.

Average net investment base (ANIB) - the average cost of the investment facilities used by a regulated telecommunication carrier to provide telecommunications services. The ANIB lists by major components the average cost of the telecommunication facilities and other assets that are normally reported in a company's financial statement.

Directory affiliate - a related company that produces white and yellow page telephone books and sells associated advertising.

Price cap index (PCI) - a constraint under price caps that specifies the maximum allowable price changes for total capped services. The PCI consists of an inflation factor, a productivity offset and in some cases, an exogenous factor.

Return on equity (ROE) - the rate of return on the average shareholder's investment, also known as average common equity. The ROE is calculated by dividing the net income after taxes by the average common equity.

Sub-basket limit (SBL) - a price cap constraint which limits the increase or decrease in the price level of a sub-basket of services.

Utility segment - services of a regulated telecommunications carrier that include local service, access, local transport and a share of certain common facilities.

The decision in brief

This decision sets out the Commission's determinations in setting the rate increases necessary to allow MTS Communications Inc. (MTS) to recover its income tax expense for the years 2000 and 2001.

In assessing MTS' income tax expense, the Commission has treated the company in the same manner as the other telecommunications companies regulated under price caps. The other companies were taxable at the beginning of price caps and their income tax expense was based on the approved ANIB, deemed capital structure and the allowed ROE used in setting rates at the start of the price cap regime.

In the Commission's view, using a similar approach will not claw back the additional earnings resulting from the efficiencies gained under price caps but will, in the same manner as the other price-capped companies, require MTS' shareholders to be responsible for the income tax expense on these additional earnings.

The Commission finds that MTS' Utility segment ATDs were fully used by July 2000 and the company's earnings would then attract income tax. MTS' regulatory income tax expense is calculated as $20.2 million for 2000 and $39.1 million for 2001, a portion of which will be recovered through rate increases.

The Commission gives final approval to the residential and business rate increases approved on an interim basis in Order 2000-677, as well as to an additional residential rate increase of $1.85 and various business rate increases effective 1 April 2001.

Background

MTS Communications Inc. was privatized in 1997, and thus became a taxable corporation. As a result of a Revenue Canada ruling, MTS received a tax deduction of approximately $359 million, arising from its contribution to a new employee pension trust fund. These tax deductions eliminated the company's income tax expense for 1997 and produced ATDs to offset future income tax expense for several years. In MTS Communications Inc. - Mechanism to recover future income tax expense, Telecom Decision CRTC 99-2, dated 4 March 1999, the methodology for allocating the ATDs was approved. As a result, $243.3 million of ATDs were allocated to MTS' Utility segment.

Unlike the other companies under price caps, MTS' going-in revenue requirement did not include any recovery of income tax expense because the company was non-taxable at the beginning of the price cap period.

In Decision 99-2 the Commission recognized that when MTS became taxable, its income tax expense would meet the criteria for an exogenous factor, as defined in Price cap regulation and related issues, Telecom Decision CRTC 97-9, dated 1 May 1997, and that the company would be given the opportunity to recover the income tax expense.

In MTS Communications Inc. - Interim rate increases to recover income tax expense, Order CRTC 2000-677, dated 21 July 2000, the Commission concluded on a prima facia basis that MTS would incur income tax expense in the year 2000 and therefore approved interim rate increases, effective 1 August 2000, for the recovery of the Utility segment income tax expense.

The Commission issued MTS Communications Inc. - Recovery of 2000 and 2001 income tax expense, Public Notice CRTC 2000-108, dated 21 July 2000, initiating a proceeding to determine the appropriate amount of MTS' Utility segment income tax expense and the rates necessary for its recovery.

Regional consultation

As part of the public process the Commission held an oral hearing in Winnipeg from 10 to 11 January 2001. See appendix 2 for further details.

A regional consultation was held on the first day of the hearing to allow members of the public to express their concerns regarding MTS' proposed rate increases.

A number of individuals and groups who participated in the consultation expressed specific complaints regarding the quality, reliability and affordability of MTS' telephone service.

The Commission notes MTS' submission that it has always taken the quality of its services seriously and that there have been no major outages during the past year. The Commission also notes MTS' submission that it provides bill management tools and affordability monitoring. However, the Commission notes that many of the presenters were not aware that these tools are available.

The Commission expects MTS to investigate the specific complaints raised by the consultation participants and to report its findings as to each complaint to the particular customer and to the Commission within 30 days of the date of this decision.

MTS' proposal

MTS submitted that its Utility segment ATDs were fully utilized by July 2000 and it became taxable at that time.

The company proposed that its income tax expense for 2000 and 2001 should be calculated on the basis of forecast income before income taxes. In order to fully recover its Utility segment income tax expense, MTS submitted that it would require additional revenues of $38 million in the year 2000 and $75.2 million in the year 2001.

Based on its forecast July 2000 to June 2001 income tax expense, the company requested an adjustment to its PCI of $75.6 million, as opposed to the forecast 2001 revenues of $75.2 million.

In order to minimize the impact on both consumers and itself, MTS proposed to recover only a portion of its 2000 and 2001 Utility segment income tax expense from additional Utility segment revenues.

MTS requested (a) final approval of the residential and business rate increases approved on an interim basis in Order 2000-677, (b) approval of additional rate increases (including a $3.00 per month local residential rate increase effective 1 January 2001) and (c) the draw-down of the amounts in a deferral account that had been established to accumulate revenues from certain business rate reductions that MTS had been permitted to forego.

The company expected the total interim and additional rate increases as well as the draw-down of the deferral account to generate revenues of $18.1 million in 2000 and $46.3 million in 2001.

Draw-down of the additional tax deductions

MTS' Utility segment becomes taxable when the $243.3 million of ATDs allocated to that segment are fully drawn-down. The company and the Consumers' Association of Canada (Manitoba Branch) and the Manitoba Society of Seniors (CAC/MSOS) proposed different methodologies for drawing-down the ATDs, and depending on the methodology used, MTS becomes taxable at different dates.

MTS submitted that its ATDs should be drawn-down on the basis of actual/forecast income before income taxes. Using this approach, the company stated that it became taxable in July 2000.

CAC/MSOS submitted that the ATDs should be drawn-down using a regulated income based on a 60% deemed common equity and the 11% ROE used for the determination of the revenue requirement at the start of the price cap method of regulation. In addition, CAC/MSOS submitted that before calculating a regulated income for the purpose of drawing-down the ATDs, MTS' ANIB should be reduced by the amount of working capital that is not needed for regulatory purposes.

Under CAC/MSOS' proposal, MTS would become taxable for regulatory purposes in 2001 with no adjustment to the ANIB and in 2002 if the ANIB were adjusted.

CAC/MSOS submitted that the above approach would ensure that the full benefit of the ATDs would flow to customers and that this was the Commission's intent in Implementation of price cap regulation and related issues, Telecom Decision CRTC 98-2, dated 5 March 1998, when it denied the shareholder entitlement.

The Commission disagrees with CAC/MSOS' submission on the link between the shareholder entitlement and the draw-down of the ATDs. The Commission is of the view that the ATDs and shareholder entitlements are different. For instance, ATDs are drawn-down based on actual income whereas any shareholder entitlement would be amortized over a reasonable period of time. The Commission also notes that when AGT Limited (now TELUS Communications Inc.) was privatized, its ATDs were drawn-down on the basis of actual income. Accordingly, the Commission considers that there is no link between the denial of the shareholder entitlement in Decision 98-2 and the draw-down of the ATDs.

The Commission notes that from 1997 through June 2000, MTS' customers have received the benefit of the ATDs through lower rates. The Commission considers that to provide a balance between the interest of the residential subscribers and MTS' shareholders, the ATDs should be used to shelter from income tax expense all of the income realized by the Utility segment.

The Commission considers that the methodology proposed by MTS for drawing-down the ATDs is appropriate. Accordingly, the Commission finds that the ATDs were fully used in July 2000, and that MTS became taxable at that time.

Calculation of income tax expense

General methodology

Two broad methodologies for determining the income tax expense were identified in this proceeding:

MTS submitted that the income tax expense for 2000 and 2001 should be calculated on the basis of the total earnings methodology. Necessary revenues would then have to be increased so that the incurring of income tax expense would have no impact on the company's net income. Based on its proposed methodology, MTS submitted that it would require revenues of $38 million in the year 2000 and $75.2 million in the year 2001 to fully recover its Utility segment income tax expense.

MTS argued that under the price cap method of regulation, concepts that are based on rate of return/rate base method of regulation or financial performance are not relevant. The company submitted that any other methodology for calculating income tax expense would result in it being regulated differently from the other price-capped companies and place the company at a disadvantage relative to its peers, thus denying it the opportunity to recover the proper amount of income tax expense and confiscating efficiencies realized under price caps.

CAC/MSOS submitted that MTS' income tax expense should be calculated on the basis of the going-in methodology used to set income tax expense for the other price-capped companies. Notwithstanding price cap regulation, CAC/MSOS submitted that this methodology is appropriate because MTS' application to recover its post ATD income tax expense is itself a carryover from the pre-price cap era and involves passing through to customers income tax expense that was not included in the setting of rates at the start of the price cap regime.

CAC/MSOS also submitted that allowing MTS to recover income tax expense on earnings above an 11% ROE would give MTS an "enhanced" reward for having achieved an ROE above the target established in Decision 98-2, would penalize MTS' customers and result in inconsistency with the principles of price caps.

The Commission notes that MTS is forecasting an ROE that is greater than the 11% used to set rates in Decision 98-2. Under MTS' proposal, the company would have the opportunity to recover income tax expense on income above the 11% allowed ROE. This would result in MTS being regulated differently than the other price-capped companies whose revenue requirements at the start of the price cap period, reflected income tax expenses on the basis of an 11% ROE.

The Commission agrees with CAC/MSOS that the need to recover income tax expense flows from the pre-price cap era. In addition, the Commission considers that the amount of income taxes should not be dependent on the company's profitability during the price cap era, but should, similarly to the other priced-capped companies, be based on a reasonable amount of earnings.

The Commission is of the view that using the going-in methodology to determine MTS' income tax expense does not result in a different regulatory regime for the company, relative to other telecommunications carriers regulated under price caps.

The Commission is also of the view that determining MTS' income tax expense using the going-in methodology will not claw back the additional income that results from the efficiencies gained under price caps. Similar to the other price-capped companies, under the going-in methodology MTS' shareholders will be responsible for income tax expense on any additional income.

Based on the foregoing, the Commission finds the going-in methodology (i.e., a 55% maximum common equity and an 11% allowed ROE), using the applicable income tax rate and the ANIB calculation discussed below, to be the appropriate method for estimating MTS' income tax expense. In the Commission's view this approach respects the principles of price cap regulation and properly balances the interests of MTS' customers and shareholders.

Average net investment base

The Commission is of the view that using the going-in methodology requires a determination with respect to whether the 1997 forecast ANIB used in Decision 98-2, or the forecast ANIBs for 2000 and 2001 should be used. The Commission notes that the 1997 forecast Utility segment ANIB was about $755 million. In this proceeding, MTS forecasts that its 2000 and 2001 Utility segment ANIBs will be approximately $835 million and $855 million respectively. The increase is primarily due to increases in Working Capital and Investment in Subsidiaries and Affiliates.

The Commission notes that the 1997 forecast ANIB does not reflect the current investment and financing of the company, as it becomes taxable. In addition, the Commission considers that if the 1997 forecast ANIB were used to determine MTS' income tax expense, the income tax rates that were in effect at that time should also be used. However, the Commission notes that the federal corporate income tax rate has been reduced. Consequently, using the going-in income tax rate would not be in compliance with income tax rates applicable when MTS became taxable.

In order to reflect MTS' current financial circumstances, the Commission is of the view that the forecast ANIBs for 2000 and 2001, adjusted for the regulatory treatment of directory operations as discussed below, should be used for calculating MTS' income tax expense.

Working capital

CAC/MSOS stated that the amount of working capital included in the forecast ANIB is overstated and is disproportionate to the revenues and operating expenses. CAC/MSOS submitted that the working capital should be no more than 45 days operating expense, excluding depreciation.

MTS submitted that contributing factors to the increase in its working capital were the re-deployment of its engineering staff as a result of the 1998 flood and the 1999 strike by some of its employees. MTS noted that it expects that this short-term trend will reverse as the company undertakes capital projects.

MTS also submitted that it has calculated its working capital using the methodology approved in the company's Phase III manual. Any adjustment to the working capital would be a departure from the methodology used to calculate the ANIB at the start of the price cap regime.

The Commission notes that principles of finance would dictate that a company would only maintain sufficient working capital to finance its operation and to comply with any financial covenants that a company may have with respect to debt financing. The Commission also notes MTS' submission that it expects that the increase in working capital will reverse itself, as the company undertakes capital projects.

The Commission notes MTS' assertion that working capital has been calculated in accordance with the approved Phase III methodology. As a result, the Commission considers that under the current form of regulation a reduction to MTS' working capital for the purpose of calculating income tax expense, as proposed by CAC/MSOS, is not appropriate.

Directory services

In Implementation of the regulatory framework - Splitting of the rate base and related issues, Telecom Decision CRTC 95-21, dated 31 October 1995, the Commission was of the view that when directory services are provided by an affiliate, the affiliate's earnings, for regulatory purposes, should be treated as if they were earnings of the regulated company.

The Commission considers that if the directory services were provided by MTS, the company would require a certain amount of investment to provide that service. The amount of the investment would be limited to that required to provide the directory service and would be financed on the same basis as MTS' telecommunications investment.

In the case of MTS, directory services are provided by the affiliate MTS Advanced Inc.

For regulatory financial reporting purposes, MTS reported the income of the directory operations in its financial results. This has resulted in a higher regulated income and an annual increase to the investment in subsidiaries and affiliates.

CAC/MSOS submitted that under no circumstances should the amount in investment in subsidiaries and affiliates included in the ANIB exceed the common equity of the directory affiliate.

The Commission notes that MTS' deemed investment in the directory operations included in its ANIB is forecast to increase from $22 million in 1997 to $64 million in 2000 and $80 million in 2001.

The Commission notes that in BC TEL - Revenue requirements for 1993 and 1994, Telecom Decision CRTC 94-1, dated 25 January 1994, the issue of how deemed directory earnings should be recorded was addressed. In that decision, the Commission stated that it was mindful that the inclusion of the cumulative earnings as an adjustment to the regulated common equity would result in a continuing increase in regulated average common equity. As a result, the Commission was of the view that the benefit to subscribers of the earnings adjustment would be diminished over the years. Therefore the Commission determined that the equity adjustment for the directory affiliate should be discontinued.

The Commission considers that MTS has recorded directory earnings in its ANIB in a manner that results in continuing year-over-year increases to MTS regulated common equity and ANIB which is not in compliance with previous Commission determinations.

The Commission has determined that it is appropriate to calculate MTS' income tax expense on the basis of a 55% maximum common equity ratio applied to the Utility segment ANIB. Otherwise, the benefit to customers of treating directory earnings as integral would be diminished through higher financing costs under MTS' treatment of the regulatory adjustment for directory operations.

In the Commission's view the directory affiliate common equity included in MTS' common equity should be no higher than that required to support the affiliate's directory operations. The Commission, as in previous decisions, also considers that deemed directory income adjustments should not be carried forward to further increase MTS' common equity.

The Commission also notes that MTS Advanced Inc. carries out other functions in addition to directory operations. MTS Advanced Inc.'s segmented balance sheet for the directory operations includes an inter-division receivable that is not necessary for the directory operation.

The Commission is of the opinion that it would be appropriate to reflect in MTS' ANIB as a regulatory adjustment only the amount of equity that is necessary to support the directory operations.

Based on the foregoing, the Commission finds that MTS' ANIB should be reduced by $52 million for 2000 and $66 million for 2001 to reflect the above changes in accounting for the integrality of the directory affiliate.

Based on the above, MTS is directed to re-file in confidence with the Commission its regulated split rate-base financial reports for the period 1997 to 2000 within 30 days of the date of this decision, to reflect this determination on recording the regulatory adjustment for directory operations.

Income tax expense

Based on the going-in methodology and the adjustments to ANIB, as identified in paragraph 55, the Commission estimates the amounts of Utility segment income tax expense that MTS should be allowed, for regulatory purposes, are $20.2 million for 2000 and $39.1 million for 2001, as shown in Appendix 3.

Allocation of income tax expense

MTS stated that it considered various recovery methods in order to determine whether the income tax expense could be allocated on a cost causality basis. The company submitted that the allocation of income tax expense to profitable services, that is the majority of business services and optional services, or on the basis of service basket revenues would exacerbate the inefficiencies that currently exist in the pricing within the Utility segment.

In addition, MTS was of the view that to allocate income tax expense back to the rates of services, for which there is competition and for which rates cannot be increased, denies the company the opportunity to recover its income tax expense.

MTS noted that a retail network access services (NAS) allocator would require the residential sub-basket to absorb about two-thirds of the income tax expense which would be greater than the increases proposed by the company. MTS submitted that the use of the weighted NAS allocator used in Local competition start-up costs proceeding, Telecom public notice CRTC 98-10, Telecom Order CRTC 99-239, dated 12 March 1999, would be inappropriate because such an allocator would continue to increase inefficiencies.

As a result, MTS proposed to recover the majority of the income tax expense from capped services with a maximum of $33.9 million allocated to the residential services sub-basket. MTS noted that this would provide the company with PCI headroom such that it would not be required to make any rate reductions required by the annual price cap plan adjustments.

In arriving at its allocation methodology, MTS submitted that it has mostly looked to increasing rates for services currently priced below cost, the majority of which are residential services, and considered what the market would bear in determining the manner in which to allocate its income tax expense.

MTS stated that its average cost of providing service in Manitoba is $34 and that it was of the view that the current residential rates are not making a substantial enough contribution towards the cost of providing service. MTS submitted that if its residential rate application were accepted, the average residential rate would be about $25. The company was of the view that $25 is a reasonable amount for consumers to pay, recovers approximately 74% of costs (about the same as other telephone companies) and is about mid-range for similar services provided across Canada.

In addition to the increases proposed to residential and business services, MTS proposed that the incremental revenues from foregone business service rate reductions under the price cap plan be utilized to recover a portion of the Utility segment income tax expense in 2001.

CAC/MSOS was of the view that MTS' proposal allocates the income tax expense in accordance with the company's desire to rebalance rates and that MTS' approach increases rates for basic residential service by more than any reasonable estimate of the increase in causal costs. CAC/MSOS stated that reliance on a reasonable allocator is necessary and if costs are not allocated appropriately there is a danger that rate increases could result in an inappropriate cross-subsidy.

CAC/MSOS stated that the ideal basis for allocating income tax expense between capped and uncapped services would be on the basis of the rate base associated with each basket of services. Assuming the same ROE and capital structure apply to both service baskets, this would be a very direct measure of the tax expense "caused" by services in each basket. CAC/MSOS stated that it recognizes that a breakdown of the rate base in this way may not be readily available.

CAC/MSOS further submitted that if the company is unable to provide a better proxy for allocating income tax expense, such as suggested above, it should be required to use the total revenue of each basket and sub-basket as the basis of allocating Utility segment income tax expense. The implicit assumption of this approach is that the rate base and the taxes associated with each service basket, are roughly proportional to revenue.

In Decision 99-2, the Commission noted that a significant portion of the Utility segment income tax expense would likely have to be recovered from basic local residential subscribers since most residential local services are priced below cost. The Commission also noted that the extent of this impact will be dictated by MTS' response to the competitive environment at that time.

The Commission notes that generally business and optional services are priced above Phase II costs, including income tax expense. Prior to MTS becoming taxable, the revenue for income taxes included in these rates was used to subsidize residential services. Now that the company is taxable this revenue is required to pay income taxes. In light of the above, the Commission considers that it would be inappropriate to allocate additional income tax expenses to business and optional services beyond that proposed by MTS, as these rates already fully recover their share of income tax expenses.

The Commission considers that, except for a minor adjustment to reflect the interim increases of $0.2 million to uncapped services, $38.9 million of the $39.1 million income tax expense for 2001 should be allocated to capped services. Accordingly, the PCI for the capped services should reflect an exogenous factor adjustment of $38.9 million.

The Commission notes that Decision 99-2 allowed MTS to forego certain business rate reductions and to accumulate these revenues in a deferral account for the benefit of residential subscribers. The Commission considers that MTS' estimated foregone business rate reductions of $8.9 million in the year 2001 should be treated as a portion of business services' contribution to the recovery of income tax expense.

The Commission also considers that the increases to capped business services approved on an interim basis in Order 2000-677 as well as those that MTS applied for in this proceeding will contribute $1.9 million and $1.3 million respectively on an annualized basis to the recovery of income tax expense. As a result of these business rate increases and the $8.9 million mentioned above, business services will contribute $12.1 million to the recovery of MTS' income tax expense.

The Commission considers that the residual income tax expense of $26.8 million not recovered from business customers should be allocated to the residential services sub-basket.

The following is a summary of the allocation of the approved 2001 Utility segment regulated income tax expense of $39.1 million:

Business sub-basket             12.1

Residential sub-basket          26.8

Capped services                    38.9

Uncapped services                  0.2

Total                                         39.1

In order to appropriately reflect the above allocation for the purposes of the 2001 price cap mechanism, MTS is to include the following in its 2001 price cap filingfor the purpose of calculating the exogenous factors:

Rates

Residential services

Order 2000-677 approved on an interim basis a residential exchange service increase of $3.00. This rate increase is expected to generate $16.6 million of additional revenues in 2001. Given the determination above to allocate $26.8 million of income tax expense to the residence service sub-basket, the Commission is of the view that an additional residential rate increase of $1.85 will be required to fund the difference of $10.2 million.

In light of the foregoing, the Commission approves on a final basis:

The resulting residential exchange service rates will be as follows:

Band A - Winnipeg core                                 $23.87

Band B - Winnipeg non-core                          $23.87

Band C - Brandon                                          $23.87

Band D                                                           $23.87

Band E2                                                         $23.87

Band E1                                                         $22.82

Band EA                                                         $20.30

Business services

Order 2000-677 approved on an interim basis capped and uncapped business service increases expected to generate $2.1 million of additional revenues in 2001. As noted in paragraph 71, the Commission considers the foregone business rate reductions of $8.9 million should be treated as a portion of business services' contribution to the recovery of income tax expense. In addition to the above, MTS proposed further rate increases, which are expected to generate $1.3 million on an annualized basis.

In light of the foregoing, the Commission approves on a final basis:

b) the business rate increases proposed under MTS' current application, effective 1 April 2001.

Disposition of the deferral account

In Decision 99-2, the Commission approved a pre-collection mechanism whereby MTS was not required to make some or all of the rate reductions mandated under the price cap formula. The Commission required that the additional revenues resulting from not making these rate reductions be accumulated in a deferral account and accrue interest. The purpose of the funds in the deferral account was to mitigate the initial rate increases that would be required of residential customers when MTS incurred income tax expense.

MTS stated that in its efforts to protect the residential customer from the impact of higher rate increases, it has made maximum use of the foregone business rate reductions to pre-collect income tax expense from business service rates. As a result, the deferral account balance at the end of 2000 was $10.3 million.

MTS proposed that the benefit of the deferral account flow to residential consumers through the calculation of the residential sub-basket exogenous factor for the 2000 price cap year.

The Commission notes that as stated in paragraph 24, MTS became taxable in July 2000. As a result, the funds in the deferral account have been applied directly to reduce the residential income tax expense for the year 2000.

As stated in paragraph 79, the foregone business rate reductions, which correspond to $8.9 million in 2001, will be treated as a portion of business services' contributions to the recovery of income tax expense. As of 1 January 2001, these business rate reductions should no longer accumulate in the deferral account which should be closed at that time.

Establishing new constraints on rates

Under the current price cap plan, there is an overall constraint of inflation on the residential sub-basket and a further constraint which specifies that any single rate element in essential bands cannot increase by more than 10%.

MTS stated that it does not believe that, once the rates requested have been implemented, it would be appropriate or necessary for the Commission to establish any new constraint on residential rates specifically to enable the recovery of its income tax expense. CAC/MSOS agreed.

The Commission notes that the level of increases to residence exchange service rates in 2001 for the purpose of allowing MTS to recover its Utility segment income tax expense do not violate the 10% constraint. As a result no adjustment to the existing constraint for residential services is necessary.

The Commission notes that none of the parties addressed the issue of the 10% constraint in relation to business service rates.

In paragraph 80 the Commission approved increases to single line business rates in Bands E1 and E2 of 13.3% and 16.4% respectively. In the circumstances, the Commission considers it appropriate to modify the 10% constraint on single-line business rates in bands E1 and E2 such that they are capped for the year 2001 at 13.3% and 16.4% respectively.

Other issues

By letter dated 5 March 2001, MTS was informed that the Commission would give the company further instructions as to when to file its 2001 annual price cap filing. The company is hereby directed to submit its 2001 annual price cap filing by 17 April 2001.

Secretary General

This document is available in alternative format upon request and may also be examined at the following Internet site: www.crtc.gc.ca

Appendix 1

Reference documents

Legislation

Telecommunications Act, S.C. 1993, c.38, as amended

Public notice

MTS Communications Inc. - Recovery of 2000 and 2001 income tax expense, Public Notice CRTC 2000-108, dated 21 July 2000

Decisions

BC TEL - Revenue requirements for 1993 and 1994, Telecom Decision CRTC 94-1, dated 25 January 1994

Implementation of the regulatory framework - Splitting of the rate base and related issues, Telecom Decision CRTC 95-21, dated 31 October 1995

Price cap regulation and related issues, Telecom Decision CRTC 97-9, dated 1 May 1997

Implementation of price cap regulation and related issues, Telecom Decision CRTC 98-2, dated 5 March 1998

MTS Communications Inc. - Mechanism to recover future income tax expense, Telecom Decision CRTC 99-2, dated 4 March 1999

Orders

MTS Communications Inc. - Interim rate increases to recover income tax expense, Order CRTC 2000-677, dated 21 July 2000

Local competition start-up costs proceeding, Telecom public notice CRTC 98-10, Telecom Order CRTC 99-239, dated 12 March 1999

Appendix 2

Further details on the public process

A public hearing took place before Commissioners David Colville (chairman of the hearing), Barbara Cram (regional commissioner for Manitoba/Saskatchewan), Jean-Marc Demers, David McKendry and Andrée Noël.

Regional consultation

Winnipeg, Manitoba on 10 January 2001

Oral hearing

Winnipeg, Manitoba on 11 January 2001

Interested parties

The following registered as interested parties or were made parties to the oral hearing. Some of these parties filed written submissions.

· Aliant Telecom Inc.

· Angus Telemanagement Group Inc.

· AT&T Canada Corp.

· Bell Canada

· Eapen Cherian

· Consumers' Association of Canada (Manitoba Branch) and the Manitoba Society of Seniors (CAC/MSOS)

· Forward Finance Inc.

· MTS Communications Inc.

· Manitoba Keewatinowi Okimakanak Inc.

· SaskTel

Appendix 3

MTS Utility segment
Calculation of 2000 and 2001 income tax expense

$ million

ANIB as filed by MTS

833.2

Adjustment for directory operations

52.3

Adjusted ANIB

780.9

Common equity (55%)

429.5

ROE (11%)

47.2

Income tax expense*

20.2

Appendix 4

Approved rates effective 1 April 2001

Approved
monthly rates

Tariff item/Description/Band

Tariff CRTC 24001

Item 475.1

Individual line residential

Primary exchange service

A - Winnipeg core

$23.87

B - Winnipeg non-core

$23.87

C - Brandon

$23.87

D

$23.87

E2

$23.87

E1

$22.82

EA

$20.30

Item 475.2

Individual line business

Primary exchange service

D, E2, E1

$40.55

EA

$35.50

Individual semi-public line

C

$39.65

D, E2, E1

$43.20

EA

$38.15

Item 510

Residential line connection

$12.00

Item 710.3.A

Exchange measurement

Circuit between serving CO and customer telephone

A, B , C, D, E2, E1, EA

$16.05

Item 710.3.C

Each additional connection

A, B, C

$6.00

D, E2, E1, EA

$3.00