ARCHIVED - Public Notice CRTC 2001-36

Public Notice CRTC 2001-36

Ottawa, 13 March 2001

Implementation of price cap regulation for Québec-Téléphone and Télébec

Reference: 8678-C12-10/01

This public notice initiates a proceeding to develop and implement in 2002 an appropriate price cap methodology for Québec-Téléphone and Télébec ltée by setting the principles and components of price cap regulation. In addition, a financial review for both companies will be undertaken in order to set just and reasonable going-in rates coincident with the implementation of price cap regulation.

Introduction

In Regulatory framework for Québec-Téléphone and Télébec ltée, Telecom Decision CRTC 96-5, dated 7 August 1996, the Commission concluded that the same basic regulatory framework implemented for the ex-Stentor member companies should apply to Québec-Téléphone and Télébec. This framework would eventually include price cap regulation for the companies' Utility segments, following a transition period of earnings regulation.

In Implementation of regulatory framework for Québec-Téléphone and Télébec ltée, Telecom Decision CRTC 97-21, dated 18 December 1997, the Commission approved, effective 1 January 1998, a split rate base methodology and restricted earnings regulation to the companies' Utility segments. The Commission determined in Time-frame for the implementation of price cap regulation and rate rebalancing for Québec-Téléphone and Télébec ltée, Telecom Decision CRTC 99-19, dated 10 December 1999, that price cap regulation would commence on 1 January 2002. The Commission denied the companies' proposals to increase their monthly residential local service rates by $3 for each of the years 2000, 2001 and 2002, and indicated that in the price cap implementation proceeding, it would re-examine any requirement for further rate rebalancing.

In Telephone service to high-cost serving areas, Telecom Decision CRTC 99-16, dated 19 October 1999, the Commission directed Québec-Téléphone and Télébec to include their service improvement plans (SIPs) in the proceeding to implement price caps. The Commission expected service improvements to begin at the same time as the implementation of the price cap regime.

In Changes to the contribution regime, Decision CRTC 2000-745, dated 30 November 2000, the Commission directed Bell Canada, Island Telecom Inc., Maritime Tel & Tel Limited, MTS Communications Inc., NBTel Inc., NewTel Communications Inc., TELUS Communications (B.C.) Inc., TELUS Communications Inc., Télébec, Québec-Téléphone and Saskatchewan Telecommunications (SaskTel) to use a Phase II costing method to calculate their subsidy requirements as of 1 January 2002.

The Commission hereby initiates a proceeding to consider the issues associated with the implementation of an appropriate form of price cap regulation that would apply to both Québec-Téléphone and Télébec in 2002. The Commission directs Québec-Téléphone and Télébec to file evidence, and invites evidence and submissions from interested parties on this matter.

Public Notice CRTC 2001-37 is also being issued today to initiate a separate proceeding to review the price cap regime for the major incumbent telephone companies and to establish an appropriate regulatory regime that will go into effect in 2002.

Scope of proceeding

The scope of this proceeding is twofold: firstly to develop and implement in 2002 an appropriate price cap methodology for both Québec-Téléphone and Télébec by setting the principles and components of price cap regulation; and secondly to undertake a financial review for both companies in order to set just and reasonable going-in rates coincident with the implementation of price cap regulation. The Commission proposes that this financial review be undertaken by examining the sum of incremental revenue requirement impacts arising from material changes that the companies may propose to the financial assumptions to be used in finalizing their 2001 contribution requirements.

Price cap methodology

Under price cap regulation, the telephone companies' services that are subject to price caps are grouped into one or more service baskets, each of which is subject to a price cap index. As a general rule, the price cap index is adjusted annually by taking into account the annual change in inflation less the productivity offset and any exogenous factor adjustments that may be considered appropriate. The telephone company may change rates for individual services within the basket as long as the aggregate price for the services in the basket, taken as a whole, complies with the price cap index and any additional service basket pricing constraints.

The Commission seeks proposals on what determinations should be made with regard to setting the principles and components of price cap regulation for Québec-Téléphone and Télébec, including:

a) the components of a price cap formula, including the appropriate measure of inflation, the level and applicability of a productivity factor, and the treatment of any exogenous factor;

b) the definition and treatment of capped and uncapped services;

c) the service basket structure;

d) the length of the price cap period;

e) the appropriate treatment of any Utility segment competitive service rates that are excluded from the capped services basket as well as the appropriate treatment of Competitive segment service rates that are subject to tariff regulation;

f) the appropriate self-correcting mechanism, including an earnings-sharing overlay, as a measure of protection for consumers against possible errors in setting the price cap parameters;

g) the appropriate ancillary regulation and reporting requirements under the price cap proposals and how the effectiveness of price cap regulation should be monitored;

h) the appropriateness of including a quality of service component in the price cap regime, or of other methods such as targeted refunds to customers, to address inadequate service quality; and

i) the extent to which the companies' adherence to other benchmarks for consumer service, if any (e.g. billing policies, consumer bill of rights), should be linked to the price cap regime and what form any such benchmarks might take.

Proposals may also address whether there should be any departure from the use of uniform parameters for both telephone companies, to recognize company-specific circumstances.

In Decision 2000-745, the Commission concluded that a pre-determined productivity offset would be used to annually re-evaluate the total subsidy requirement, based on a Phase II methodology. This productivity offset would reflect cost reductions in providing residential services in high-cost serving areas that could reasonably be expected by carriers operating in such territories. Parties should provide evidence on the appropriate methodology to arrive at that productivity offset, in addition to addressing the possible need to apply a productivity offset to capped services.

Financial review (setting going-in rates)

In this proceeding, the Commission will undertake a financial review to assess the companies 2002 going-in rates. In separate proceedings, the Commission will be finalizing, before the end of 2001, the companies 2001 contribution requirements. The companies going-in rates will be assessed by examining the sum of any incremental revenue requirement impacts arising from material changes that the companies may propose to the financial assumptions to be used to finalize the 2001 contribution requirements. These changes could include, but not be limited to:

i) any SIP proposals as outlined in paragraphs 13 to 15;

ii) any additional depreciation expense from proposed changes to asset service lives over those reflected in the determination of the 2001 contribution requirement;

iii) any changes to the allowed Utility segment rate of return on common equity (ROE). In this regard, the Commission seeks comments as to why the companies' going-in rates should not reflect the same ROE and capital structure that were used in setting the ex-Stentor member companies' initial going-in rates (i.e., 11% ROE and/or maximum capital structure of 55%);

iv) net annualized revenue impacts of pending and planned tariff items;

v) adjustments for the amortization of any deferral accounts; and

vi) any proposed recovery of Phase III/Phase II contribution shortfalls that may be warranted.

Service improvement plans

In Decision 99-16, the Commission established a basic service objective for all telephone companies in Canada. To ensure that telephone companies meet the basic service objective, the Commission directed all incumbent local carriers to file SIPs for Commission approval, or to demonstrate that the basic service objective has been and will continue to be achieved in their territory.

The Commission directs Québec-Téléphone and Télébec to file their SIP proposals including SIP roll-out plans, as well as forecasts of capital expenditures for each year of the SIP, any related operating costs and the associated revenue requirement impacts. The companies should also include any SIP cost recovery proposals.

As part of this proceeding, the Commission will review the various SIPs to ensure that the telephone companies meet the basic service objectives and other key elements of Decision 99-16, including the use of least-cost technology.

Basic toll constraints

In Forbearance - Regulation of toll services provided by incumbent telephone companies, Telecom Decision CRTC 97-19, dated 18 December 1997, the Commission considered that the competitive market would generally be sufficient to ensure that the incumbent telephone companies' toll rates were just and reasonable. Consequently, the Commission forbore from regulating toll services, while retaining upward pricing constraints on North American basic toll schedules.

In this proceeding, the Commission intends to review the continued need to maintain the five conditions set out in Decision 97-19, including upward pricing constraints on North American basic toll schedules.

Total subsidy requirement

In Decision 2000-745, the Commission outlined the components of the total subsidy requirement (TSR) for high-cost serving areas. For the ex-Stentor member companies, these areas will be categorized into costing bands and identified in the proceeding initiated by Restructured bands, revised local loop rates and related issues, Public Notice CRTC 2000-27, dated 18 February 2000. Various costing parameters used to determine loop rates in that proceeding will also be used to determine the TSR. The Commission intends to outline the process to follow in establishing the costing bands and loop rates for Québec-Téléphone and Télébec at the time of releasing the decision relating to PN 2000-27.

The Commission determined, in Decision 2000-745, that the TSR calculation for high-cost serving areas would be updated annually. The Commission further determined that the specific timing of the annual TSR updates would depend on the nature of the regulatory mechanism after 1 January 2002, and would be established during the price cap review proceeding. The specific timing of the annual TSR updates for Québec-Téléphone and Télébec will also be determined in the present proceeding.

For 2001, the distribution of the subsidy will be based on allocation factors. Any remaining implementation issues for 2002, such as changes to the basis for distributing the subsidy, will be determined in the present proceeding.

Rates in high-cost serving areas

With the subsidy mechanism established by Decision 2000-745, incumbents and competitors will be compensated for providing residential local service, and possibly business service, in high-cost areas. The Commission invites proposals on the appropriate treatment of rates in high-cost serving areas.

Other issues

While the Commission has outlined above a number of specific issues on which it seeks comments, parties may submit comments on other issues or alternative proposals which are relevant to this proceeding.

Procedure

Québec-Téléphone and Télébec are made parties to this proceeding.

Other parties wishing to participate in this proceeding must notify the Commission of their intention to do so, by 23 April 2001. These parties should contact the Secretary General by mail at CRTC, Ottawa, Ontario, K1A 0N2, by fax at (819) 953-0795; or by email at procedure@crtc.gc.ca. They are to indicate in the notice their email address, where available. If parties do not have access to the Internet, they are to indicate in their notice whether they wish to receive disk versions of hard copy filings. The Commission will issue, as soon as possible after the registration date, a complete list of interested parties and their mailing address (including their email address, if available), identifying those parties who wish to receive disk versions.

The assessment of whether to hold a public hearing will be made after examining the companies' submissions. Should Québec-Téléphone or Télébec propose rate increases as part of their price cap submissions, then those companies would need to provide the Commission with a proposal on how they intend to notify subscribers (billing insert, newspaper ads, etc.).

Any person who wishes merely to file written comments in this proceeding, without receiving copies of the evidence filed, may do so by writing to the Commission, at the address noted in paragraph 24by 29 October 2001.

By 23 March 2001, the Commission will address interrogatories to Québec-Téléphone and Télébec regarding the issues set out in this public notice. The telephone companies are directed to file responses to the interrogatories with the Commission and serve copies on all parties by 14 June 2001.

Québec-Téléphone and Télébec are to file with the Commission, serving copies on all parties, their evidence on all matters within the scope of this proceeding. All such material is to be filed with the Commission and served on all parties by 14 June 2001.

Parties may address interrogatories to Québec-Téléphone and Télébec. Any such interrogatories must be filed with the Commission and served on the telephone company in question by 10 July 2001.

Responses to interrogatories addressed pursuant to paragraph 29 are to be filed with the Commission and served on all parties by 30 July 2001.

Requests by parties for further responses to their interrogatories, specifying in each case why a further response is both relevant and necessary, and requests for public disclosure of information for which confidentiality has been claimed, setting out in each case the reasons for disclosure, must be filed with the Commission and served on all the parties by 7 August 2001.

Written responses to requests for further responses to interrogatories and for public disclosure must be filed with the Commission and served on all parties by 14 August 2001.

A determination will be issued with respect to requests for further information and public disclosure as soon as possible, and it is expected that any information to be provided pursuant to that determination will be filed with the Commission and served on all parties by 23 August 2001.

Parties other than Québec-Téléphone and Télébec may, by 30 August 2001, file evidence with the Commission, serving all other parties.

Parties may address interrogatories to any party who files evidence pursuant to paragraph 34. Any such interrogatories must be filed with the Commission and served on all parties by 14 September 2001.

Responses to interrogatories addressed pursuant to paragraph 35 are to be filed with the Commission and served on all parties by 24 September 2001.

Requests by parties for further responses to their interrogatories, specifying in each case why a further response is both relevant and necessary, and requests for public disclosure of information for which confidentiality has been claimed, setting out in each case the reasons for disclosure, must be filed with the Commission and served on all parties by 28 September 2001.

Written responses to requests for further responses to interrogatories and for public disclosure must be filed with the Commission and served on all parties by 3 October 2001.

A determination will be issued with respect to requests for further responses and public disclosure as soon as possible, and it is expected that any information to be provided pursuant to that determination will be filed with the Commission and served on all parties by 12 October 2001.

All parties may file arguments with the Commission on any matters within the scope of this proceeding, serving copies on all other parties by 29 October 2001.

All parties may file reply argument with the Commission serving a copy on all other parties by 9 November 2001.

Where a document is to be filed or served by a specific date, the document must be actually received, not merely sent, by that date.

Parties wishing to file electronic versions of their comments can do so by email at the address shown above, or on diskette.

The electronic version should be in the HTML format. As an alternative, those making submissions may use "Microsoft Word" for text and "Microsoft Excel" for spreadsheets.

Please number each paragraph of your submission. In addition, please enter the line ***End of document*** following the last paragraph. This will help the Commission verify that the document has not been damaged during transmission.

The Commission will make submissions filed in electronic form available on its web site at www.crtc.gc.ca in the official language and format in which they are submitted. This will make it easier for members of the public to consult the documents.

The Commission also encourages interested parties to monitor the public examination file (and/or the Commission's web site) for additional information that they may find useful when preparing their submissions.

Submissions may be examined or will be made available promptly upon request at the following Commission offices during normal business hours:

Central Building
Les Terrasses de la Chaudière
1 Promenade du Portage
Room G-5
Hull, Québec K1A ON2
Tel: (819) 997-2429 - TDD: 994-0423
Fax: (819) 994-0218

405 de Maisonneuve Blvd. East
2^nd floor, Suite B2300
Montréal, Québec H2L 4J5
Tel: (514) 283-6607 - TDD: 283-8316
Fax: (514) 283-3689

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