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Decision CRTC 2001-238

See also: 2001-238-1, 2001-238-2

Ottawa, 27 April 2001

Restructured bands, revised loop rates and related issues

Reference: 8661-C12-02/00

Table of contents

The decision in brief

In this decision, the Commission approves revised unbundled loop rates that competitive local exchange carriers will pay for the use of the incumbent local exchange carriers' (ILECs) unbundled loops. It also addresses the costs to be used as the basis for establishing the subsidy requirement under the recently-approved national subsidy mechanism. This includes the adoption of a uniform approach to identify high-cost serving areas (HCSAs) in the ex-Stentor ILEC territories and a more consistent set of costing methodologies by which ex-Stentor ILECs are to determine the costs for the loop and residential primary exchange services. The percentage revenue charge to be imposed on telecommunications service providers for the year 2002 is expected to be reduced to approximately one-third of its current level of 4.5%. The Commission finds that subsidies should not be extended to single-line business service provided in HCSAs.

Background

1. On 18 February 2000, the Commission issued Public Notice CRTC 2000-27, entitled Restructured bands, revised local loop rates and related iIssuesissues, which initiated a proceeding to, among other things, establish revised banding structures, determine revised loop costs and rates under these revised bands, and consider extending subsidies to single-line business service provided in HCSAs.

2. Comments were filed on 25 January 2001 by TELUS Communications Inc., (the amalgamation of the former TELUS Communications Inc. (TCI) operating in Alberta and TELUS Communications (B.C.) Inc. (TCBC) operating in British Columbia), Bell Canada on behalf of itself, MTS Communications Inc., and Aliant Telecom Inc. (formerly Island Telecom Inc., Maritime Tel & Tel Limited (MTT), NBTel Inc., and NewTel Communications Inc.) (collectively, Bell Canada et al.), Saskatchewan Telecommunications, AT&T Canada Corp. on behalf of itself, AT&T Canada Telecom Services Company, Call-Net Enterprises Inc., and C1.com Inc. (collectively, AT&T et al.), Microcell Telecommunications Inc., Rogers Wireless Inc. (RWI), and Action Réseau Consommateur, the Consumers' Association of Canada, Fédération des associations coopératives d'économie familiale du Québec, and the National Anti-Poverty Organization (collectively, ARC et al.). Reply comments were submitted by most of the above parties on 7 February 2001. In addition, reply comments were submitted by GT Group Telecom Services Corp.

Banding structure

3. In PN 2000-27, the Commission stated that two benefits are expected from restructured ILEC rate bands: subsidies to achieve the basic service objective will eventually be targeted only to high-cost areas, and the rates for local loops in less-remote areas should decrease. Pursuant to these objectives, the Commission received three different rebanding proposals from

  1. Aliant, MTS and SaskTel,
  2. Bell Canada, and
  3. TELUS.

The Aliant companies, MTS and SaskTel exchange/switching centre approach

4. The Aliant companies proposed to re-define their existing bands based on the following exchange-based banding structure:

5. The Aliant companies submitted that in the smaller exchanges, the companies are unable to take advantage of economies of scale in the provisioning of service to customers, and the average cost of serving exchanges having lower NAS counts is markedly higher than the cost of serving other areas.

6. MTS proposed to use its existing exchange/switching centre-based rate band structure. MTS' current Band E contains exchanges with less than 1,500 NAS. MTS selected the threshold of 1,500 NAS for high-cost exchanges based on its analysis of costing information for exchanges of various sizes. Exchanges with less than 1,500 NAS are generally higher-cost exchanges because of the higher proportion of longer rural loops in the exchange.

7. SaskTel proposed the use of its existing band structure defined by exchange and base rate area (BRA) boundaries, but modified to include two additional bands, resulting in seven bands.

8. SaskTel submitted that its proposed banding structure would isolate high-cost areas into unique bands, would be cost-effective and easy to administer and would result in reduced loop rates in more densely-populated areas, thus encouraging competitive local exchange carriers (CLECs) to provide local telephone service.

9. Microcell noted that SaskTel has proposed a banding methodology that has already been expressly rejected by the Commission (i.e., an earlier TELUS banding proposal using BRA boundaries), and submitted that there are no compelling reasons for considering it again.

Bell Canada's enumeration area approach

10. Bell Canada took the position that its existing exchange/switching centre-based rate band structure (Bands A to D) reflects the broad cost characteristics of providing basic local access service, and that the identification of high-cost areas within its territory requires analysis below the switching centre level. Bell Canada determined that two selection parameters best enabled it to achieve this objective:

  1. low population density, and
  2. remoteness.

11. With respect to the first criterion, Bell Canada extracted pockets of low-density high-cost areas from its switching centre serving areas, based on Statistics Canada enumeration areas (EAs) having 35 or less persons per square kilometre. The extraction process involved the use of overlay software and digital mapping capability.

12. Under the selection parameter of remoteness, Bell Canada classified all switching centres in Rate Group 3A as being high-cost. These switching centres serve remote communities in the far north, which are generally inaccessible by road. Maintenance expenses per NAS in these communities are generally very high as technicians and supplies must be flown into these locations.

13. Bell Canada's proposed high-cost bands contain approximately 11% of Bell Canada's residence NAS.

14. Aliant and SaskTel noted the cost and complexity of the EA method of sub-exchange definition. Aliant and MTS further noted that they do not have EA-level data. SaskTel further submitted that the EA approach would not produce significantly different results, and is not warranted.

15. Microcell submitted that other than Bell Canada, all ILECs seemingly reject the use of an EA-based approach, largely because of its cost of implementation and administration, among other concerns.

16. TELUS submitted that TCBC earlier dismissed EAs for banding purposes due to the very poor correlation between switching centres and EAs. TELUS further submitted that even if it were able to devote the resources required to update the costing information for EAs in the territory of TCI, it would not support a band structure based on EAs in TCI and a band structure based on an alternative banding methodology in TCBC.

TELUS' allocation area approach

17. TELUS proposed a common band structure for TCI and TCBC based on allocation areas (AAs). TELUS submitted that AAs are a standard outside-plant engineering concept used to engineer and maintain outside-plant facilities. TELUS further submitted that AAs contain a high degree of internal homogeneity, are a very stable component of telephone company infrastructure, and have clearly-defined boundaries.

18. TELUS used cluster analysis in the development of its band proposal. Cluster analysis is a statistical technique that was used to determine natural groupings of AAs with similar costs. Cluster analysis was also used to determine the optimum number of AA bands, which resulted in eight bands. Under this proposal, more than half of the residence NAS would be designated as high-cost.

19. When asked about the feasibility and validity of a facilities provisioning approach to banding such as that proposed by TELUS, Bell Canada et al. provided a number of reasons why this would not be feasible. These include the view that the AA concept is generally not used today, Bell Canada et al. companies do not maintain or track information at this level, and disaggregated input data for cost estimates at this level are not available and would be very costly to develop. AT&T et al., among other concerns, raised doubts concerning the reliability of TELUS' AA-level cost estimates, due to problems arising from data availability affecting such critical elements as loop length and make-up.

Uniform banding structure

20. In this proceeding, through the interrogatory process, the Commission identified and sought comments on an alternative method for refining bands.

21. The approach consists of a uniform definition of three HCSA bands that are extracted from the ILECs' existing bands. The three HCSA bands are based on the following wire centre and/or exchange classifications:

  1. wire centres or exchanges with less than or equal to 1,500 total NAS;
  2. wire centres or exchanges with greater than 1,500 and less than 8,000 total NAS, and where the average loop length is greater than four kilometers; and
  3. remote wire centres or exchanges (e.g., without year-round road access or found in remote parts of a company's serving territory).

22. The uniform definition of HCSA bands relies on cost-proxying criteria to capture elements of remoteness, low exchange density and long loops which have been identified by the ILECs as relevant indicators of high-cost service provision, and would apply uniformly across ILECs.

Banding structure considerations

23. The ILECs generally submitted that:

  1. their proposed banding reclassifications segregate areas into separate high-cost bands to ensure that subsidies are better directed to high-cost areas;
  2. each of the ILECs' proposed banding classification meets the criteria specified by the Commission in PN 2000-27;
  3. the parameters that each ILEC has selected enable it to identify the high-cost portions of its territory based on an assessment of the unique nature of that territory, the data availability, and the ease and cost-effectiveness of administering subsidies on the basis of the proposed bands; and
  4. while there is a need for a common calculation of the total subsidy requirement (TSR) based on the Phase II costs for each high-cost band, this does not necessitate adoption of a common methodology for determining band structures across ILECs; on the contrary, providing for a common banding methodology that would result in a less accurate identification of Phase II costs for high-cost areas of some ILECs would defeat the very purpose of the new TSR calculation.

24. Bell Canada submitted that it has demonstrated that its proposed banding classification is much more effective at isolating high-cost areas and thus reducing the cost heterogeneity that exists within its current Bands C and D than the alternative uniform banding structure. TELUS submitted that it has demonstrated that its proposed AA banding classification leads to significantly less cost-averaging within bands than does the current banding approach or the alternative uniform approach, noting that AAs are much smaller than exchanges, resulting in service provisioning characteristics and cost information that are much more precise than similar information for exchanges. SaskTel also submitted that its proposed banding structure effectively separates the high cost serving areas from the areas that are less costly to serve while the uniform banding structure creates bands that contain a mixture of low and high cost serving areas.

25. AT&T et al. submitted that the new band structures should be based on the use of publicly explained and relatively systematic and objective criteria. Confidence in the regulatory regime requires that interveners have some degree of confidence in, and understand the basis for, any new band structures implemented.

26. AT&T et al. submitted that the alternative uniform band structure identified by the Commission is the only scenario on the record conforming to these requirements, as it provides a reasonable basis for the segregation of potential high-cost areas, and captures the elements which have been identified by the ILECs as likely indicators/drivers of high-cost service provision. It also takes account of the constraints on data availability that exist in some companies and which could only be overcome at significant cost.

27. ARC et al. submitted that a national HCSA contribution system, which is based on at least three distinct sets of criteria and methodologies as proposed by the ILECs, not only poses administrative challenges for the regulator, but also creates risks of inequities among companies with different internal methodologies. Moreover, the benefits of a common methodology for regulatory purposes are significant, and do not appear to be appreciated by the ILECs.

28. RWI submitted that there should be a uniform approach to banding across the country, as this would facilitate the appropriate level of checks and balances throughout the system. RWI futher submitted that any means to minimize the contribution requirement to the greatest extent possible should be explored and used. RWI recommended that the Commission adopt a methodology that uses the number of NAS per exchange to determine band boundaries.

29. The Commission notes that the uniform banding structure relies on cost-proxying criteria that take account of data availability constraints, and has the following advantages:

  1. it does not require an identification of technology or costs;
  2. it is a banding system with universal definition and uniform criteria across all ILECs;
  3. it is simple to understand, easy to implement and administer;
  4. it has easily identifiable boundaries; and
  5. it provides a reasonable degree of cost homogeneity.

30. The Commission further notes that the uniform band structure would provide a segregation of each ILEC's territory into HCSA and non-HCSA bands such that there is no residence subsidy requirement (under the subsidy requirement formula) over the aggregate of the remaining non-HCSA bands.

31. In light of the foregoing, the Commission approves the use of the uniform banding structure for each ILEC participating in this proceeding. The Commission finds that the bands approved in this decision will ensure that the loop rates in both HCSA and non-HCSA bands are just and reasonable, and consistent with the Telecommunications Act (the Act), and will also ensure that the national subsidy fund established in Changes to the contribution regime, Decision CRTC 2000-745, dated 30 November 2000, will operate in a manner consistent with the objectives of the Act. For purposes of the TSR calculation, the Commission directs that the HCSA bands (i.e., Bands E, F and G identified as items (a), (b) and (c), respectively, in paragraph 21) are to be used effective 1 January 2002, pursuant to its determinations in Decision 2000-745. For the year 2001, the distribution of subsidies will continue to be based on the allocation factors and the existing bands as determined in Implementation of price cap regulation and related issues, Telecom Decision CRTC 98-2, dated 5 March 1998. 

32. The Commission notes that, overall, by comparison with the ILECs' proposals, this uniform banding structure would reduce the number of NAS considered to be high cost from 23% to 15%.

Low-cost bands

33. In their comments, AT&T et al. argued that the companies have not addressed the issue of cost homogeneity in the lower-cost bands and that these bands should be further disaggregated in order for the loop costs to be de-averaged between the downtown cores and non-downtown cores of major urban centres.

34. AT&T et al. submitted that, in practical terms, the most pressing need for a revised low-cost band structure would be in Bell Canada's and MTT's territories. In the case of Bell Canada, AT&T et al. submitted that it is reasonable to expect that the downtown cores of the larger Band B exchanges, such as Ottawa-Hull, would have cost characteristics similar to Band A, and that, similarly, it would be reasonable to expect that the most dense business districts of Band C exchanges would exhibit lower costs than other Band C areas or most Band B residential areas.

35. With respect to MTT, AT&T et al. recommended that the Commission split Band A into Bands A1 (Bishop wire centre) and A2 (remaining wire centres in the Halifax exchange) consistent with the scenario contained in the response to interrogatory The Companies(CRTC)30Oct00-13. 

36. With respect to Bell Canada, AT&T et al. submitted that they are perplexed as to why the scenarios in which Bands B and C are split into sub-bands do not demonstrate greater differences in loop costs across these bands. AT&T et al. noted the lower rates filed for the enhanced exchange-wide dial (EEWD) service filing and the statements made by Bell Canada in that proceeding that

  1. it is not unreasonable to expect that the provision of a large number of lines to a single customer, which are concentrated in a limited number of service locations, in combination with the use of technologies most suitable for the serving of customers located in large single-customer high density commercial premises would result in lower than average costs, and
  2. further economies may be expected where such buildings are located in high density areas, where, generally, much shorter loops are required than the average loop serving the band as a whole.

37. MTT submitted that disaggregating Band A (into Bands A1 and A2) is not warranted. Under that scenario, MTT determined the cost of Type A loops in Band A1 to be 15% lower than the average cost of Type A loops in the overall Band A. MTT submitted that it would expect that competitors offering service in Halifax would not restrict their coverage to the Bishop area alone but would offer service in at least the entire Halifax market, and that, therefore, de-averaging of prices in such narrow geographic areas is not warranted.

38. Bell Canada submitted that the split of Band B into Bands B1 and B2 areas produces two new sub-bands whose average Type A loop cost is within 3% to 4% of the Band B average, while the disaggregation of Band C into Bands C1 and C2 areas produces two new sub-bands whose average cost is within 2% to 3% of the Band C average. Bell Canada noted that these differences are very small and do not support the disaggregation of the company's proposed Bands B and C. Bell Canada further submitted that any further disaggregation of its proposed bands would require it to undertake a comprehensive study of the cost characteristics below the level at which its current costs are derived, and since the disaggregate input data needed to undertake such a study is not readily available and would be extremely time consuming and costly to develop, it has chosen not to pursue the disaggregation of its current bands below the level that is being proposed.

39. Under their proposals, most ILECs except TELUS chose not to modify their existing band structures in the lower-cost bands. In the case of TELUS, the proposed monthly per NAS loop cost for its lowest-cost Band A under the disaggregated AA approach (which relies on a banding structure at the sub-exchange level) is in fact higher than either of TCI's or TCBC's current Band A monthly per NAS loop cost (implied by the current loop rates).

40. With respect to MTT, the Commission finds the cost differential resulting from the Band A1/A2 split to be sufficient to warrant the proposed change. The Commission, however, finds the cost differential that has been reported between Bands A1 and A to be small given the differences in loop length and population density between the Bishop wire centre and the average for the Halifax exchange. The Commission therefore directs MTT to provide detailed explanations for the differences in the capital costs between Bands A1 and A, and serve a copy of its submission on all interested parties to this proceeding by 8 June 2001. This analysis should include a comparison between Bands A1 and A of the cost per NAS, the capital cost breakdowns, and the average copper loop characteristics, as per Attachments 2, 3 and 5, respectively, of the response to interrogatory The Companies(CRTC)30Oct00-3. Interested parties, may, by 9 July 2001, file comments, serving a copy thereof on MTT. MTT may by 24 July 2001, file a reply thereto, serving a copy on those interested parties who filed submissions.

41. With respect to Bell Canada, the Commission disagrees with the company's claim that further disaggregation of Bands B and C is not warranted. However, given the cost and administrative complexities of further disaggregating these bands, the Commission considers it more appropriate to address this issue by re-classifying the following wire centres as set out below. These changes re-classify wire centres in Bands B and C that are expected to have cost characteristics similar to Bands A and B, respectively.

42. Upon review of Bell Canada's NAS and average loop length information, the Commission directs that:

  1. the Ottawa-O'Connor, Toronto-Eglington and Montreal-St-Dominique Band B wire centres be re-classified into Band A; and
  2. the following Band C wire centres be re-classified into Band B: Oshawa, Windsor-Goyeau, Sherbrooke, Barrie, St. Catharines-King, Brampton-John, Guelph, Kingston-Princess, Streetsville-Pearl, Burlington-Brant, Peterborough, Brantford, Brampton-Walker, Sault Ste. Marie-Queen, Oakville-Balsam, Sudbury-Minto, Chicoutimi, North Bay, Newmarket, and Sarnia-Lochiel.

43. In addition, upon review of TCBC's NAS and average loop length information, the Commission directs that the following Band C wire centres be re-classified into Band B: Kelowna, Prince George, Abbotsford, South Kamloops, and Nanaimo.

44. In light of the above, Bell Canada and TELUS are directed to file with the Commission and serve a copy thereof on all interested parties to this proceeding by 14 May 2001, a letter indicating whether they intend to propose modifications to the loop rates adopted in this decision for Bands A, B, or C in order to reflect the above wire-centre classification changes. If so, Bell Canada and TELUS may file and serve a copy thereof on all interested parties to this proceeding, proposed revised loop costs for Bell Canada and TCBC, respectively, for these bands based on the above wire-centre changes, the cost parameters and assumptions used in the response to interrogatory (CRTC)30Oct00-3 issued to Bell Canada et al. and TELUS, and this decision's costing determinations, by 8 June 2001. The costing information furnished is to be consistent with the information provided in response to parts (b) to (g) of the interrogatory (CRTC)30Oct00-3. Interested parties may, by 9 July 2001, comment on any such proposed revisions, serving a copy thereof on the ILEC in question. Bell Canada and/or TELUS may, by 24 July 2001, file a reply thereto, serving a copy thereof on those interested parties who filed submissions.

The proposed TELUS amalgamation

45. In this proceeding, TELUS filed its restructured band proposal on an amalgamated basis, reflecting the amalgamation of TCI and TCBC.

46. TCBC's loop costs are in general significantly higher than TCI, especially for the HCSA bands where TCBC costs are typically double those of TCI's.

47. TELUS submitted that it would not be appropriate to combine the cost per NAS for TCI and TCBC under the uniform band structure proposal.

48. In light of the foregoing, the Commission considers it inappropriate to combine and approve loop rates on a combined TCI and TCBC basis at this time. The Commission further considers that the TSR should not be calculated on an amalgamated basis. TELUS is therefore directed to calculate its subsidy requirement by calculating the TSRs separately for TCI and TCBC (based on costs and rates specific to each of TCI and TCBC), and by then combining these separate TSRs.

The proposed Aliant amalgamation

49. Earlier this year, Aliant announced the amalgamation of the former Island Tel, MTT, NBTel and NewTel. In this proceeding, the Aliant companies have not proposed to restructure their bands on an amalgamated basis. Instead, each Aliant company proposed to restructure its existing rate bands for purposes of identifying high-cost areas using a consistent set of selection parameters.

50. The Commission accepts this proposal. However, the manner in which the unbundled loop service is currently provisioned to a CLEC in NBTel territory differs from that of the other Aliant companies.

51. Pursuant to Final rates for unbundled local network components, Telecom Decision CRTC 98-22, dated 30 November 1998, and contrary to all other ILECs, NBTel was relieved of the obligation to provide unbundled loops to CLECs at the wire centre if the loop is served off an integrated digital loop carrier (IDLC) system within a wire centre serving area. At paragraph 95 of that decision, noting that NBTel's solution would involve a much larger cost due to the extensive IDLC system overlay network builds required in its territory, the Commission stated that it "accepts NBTel's proposal at this time to allow the provision of CLEC access to IDLC loops at the remote site within its serving territory."

52. The Commission considers that, in light of the following developments since that decision, a review of NBTel's loop service provisioning approach is warranted.

  1. Under the Aliant amalgamation, there may be a need for the loop rate structure to be consistent across the Aliant companies. Also, there may be a need for the rates to be amalgamated in the future. Currently, there is a different service definition and rate structure for NBTel compared to the other Aliant companies.
  2. The general ILEC view in this proceeding is that there are numerous uncertainties and impracticalities associated with the provisioning of loops at IDLCs located within a wire centre serving area. For example, TELUS stated that the cabinets that house IDLC systems are relatively small and are not designed to accommodate co-location of CLEC equipment.
  3. It would be highly desirable to have consistent and uniform banding, loop and residential primary exchange service (PES) definitions across ILECs in light of the adoption of a national subsidy mechanism in Decision 2000-745. Under the national subsidy mechanism, the per NAS subsidy amount provides compensation for the entire retail residential service in each HCSA band. Currently, the loop service which would be provided to a CLEC in NBTel territory does not include the provision of the portion of the loop between IDLC systems and the host switch.
  4. To date, there is no evidence of local competition in NBTel territory via the provision of unbundled CLEC loops.

53. In light of the above, the Commission directs Aliant, on behalf of NBTel, to file and serve a copy thereof on all interested parties to this proceeding by 29 May 2001, justification as to why NBTel should not be required to modify its provision of loops to CLECs such that loops served off IDLC systems within a wire centre serving area be provided at the host switch consistent with the other Aliant companies and other ILECs. Interested parties may file comments in response, serving a copy on Aliant, by 28 June 2001. NBTel may, by 13 July 2001, file a reply, serving a copy thereof on those interested parties.

54. If Aliant considers this change to be appropriate, it should indicate in its 29 May 2001 response that loops will be offered on this basis, and should file, serving a copy on all interested parties to this proceeding, a revised loop cost study for NBTel by 30 July 2001. The revised cost study is to reflect the cost parameters and assumptions used in the response to interrogatory The Companies(CRTC)30Oct00-3, the uniform banding structure and the costing determinations of this decision. The costing information furnished is to be consistent with that provided in response to parts (b) to (g) of the interrogatory The Companies(CRTC)30Oct00-3 and is to show separate estimates of maintenance and capital. Interested parties may, by 29 August 2001, file comments on the revised loop cost study, serving a copy thereof on NBTel. NBTel may, by 13 September 2001, file a reply, serving a copy thereof on those interested parties who filed submissions. The Commission will then determine appropriate loop rates based on the Commission's review of the loop cost study.

Provision of maps

55. RWI submitted that under Bell Canada's and SaskTel's banding proposals, maps will have to be purchased from the ILECs in order to ascertain the band boundaries.

56. AT&T et al. submitted that, regardless of the criteria or methodology used to define bands under the revised band structure, mapping information for all bands and all exchanges should be made available in digital MapInfo format 120 days prior to the effective date of the new band structure.

57. Bell Canada et al. submitted that irrespective of the definition used to create high-cost bands, maps that delineate the boundaries of such bands will be required. Bell Canada et al. further submitted that such maps will be made available to CLECs.

58. The Commission considers that the ILECs should be prepared to furnish mapping information for all bands and all exchanges/wire centres in electronic format, upon request.

Loop pricing issues

Mark-up

59. AT&T et al. submitted that a 25% mark-up is no longer appropriate for the purposes of establishing prices for unbundled loops due to the following:

  1. No reliable cost justification for the 25% mark-up has been provided by the ILECs despite ample opportunity and the many years of debate surrounding this issue. Given the significant competitive impact of the mark-up, the approach that has been used in the past to justify the 25% mark-up is no longer sufficient to demonstrate that a mark-up at that level is appropriate;
  2. The available quantitative evidence suggests that no additional mark-up beyond the 15% level is required for the recovery of embedded costs; and
  3. Achievement of the Commission's objectives with respect to residential market entry in high-cost areas necessarily requires that loop prices embody a mark-up no higher than 15%. In supporting this assertion, AT&T et al. cited Decision 2000-745, which found that, in calculating the TSR, Phase II costs should be subject to a mark-up of 15%, rather than 25%.

60. TELUS submitted that this issue is outside the scope of this proceeding. Bell Canada et al. submitted that the 25% level should be retained. In reply to AT&T et al.'s request to employ a mark-up of no more than 15% to determine loop prices based on conclusions drawn from Decision 2000-745, Bell Canada et al. submitted that:

  1. the 15% explicitly excludes the difference between embedded and current costs for purposes of the subsidy calculation;
  2. the Commission has not found that this cost difference does not exist, nor has it found that its recovery is not appropriate;
  3. it has merely found that explicit subsidies are not to be one of the sources of recovery; and
  4. the cost difference still has to be recovered, and this necessarily means that it must be recovered from telecommunications services sold to end-users and to competitors.

61. The Commission notes that, in light of the following developments since the issuance of PN 2000-27, a review of this rating approach is warranted.

  1. In Decision 2000-745, the Commission indicated that
    1. it is not persuaded that a level of 25% is required to provide an appropriate recovery of the ILECs' fixed and common costs,
    2. it expects the ILECs' fixed and common costs to decline in a competitive local environment, and
    3. the 15% level explicitly excludes the difference between embedded and current Utility segment costs for purposes of the subsidy calculation.
  2. Evidence filed by Bell Canada in the proceeding leading to Decision 98-22 (response to interrogatory SRCI(CRTC)18Aug97-24 TN 516) showed that, for this company, there are no significant differences between embedded and current costs for the local loop outside plant.

62. Accordingly, in approving loop rates in this decision, the Commission has adopted the use of the current mark-up of 25% only on an interim basis.

63. Each ILEC may, by 8 June 2001, file comments, serving a copy on all interested parties to this proceeding, as to why a mark-up of 15% should not be used in place of 25% to determine loop rates. Interested parties may, by 9 July 2001, file comments serving a copy on each ILEC. ILECs may by, 24 July 2001, file a reply, serving a copy on those interested parties who filed comments. Justification to support the continued use of 25% should include evidence that demonstrates the differences between embedded and current costs for local loop outside plant.

64. At a minimum, each ILEC's analysis is to include a comparison of the estimated loop plant value between the embedded plant investment (i.e., 1 January 2000 net book value) and current capital expenditures included in the 30 June 2000 submission restated as at 1 January 2000 (with supporting calculations to explain how these capital cash flows are restated to 1 January 2000) associated with the local loop outside plant for copper and fibre, consistent with the type of information provided in the response to interrogatory SRCI(CRTC)18Aug97-24 TN 516. The analysis should further provide the annual capital additions and deductions for these outside plant accounts over the previous three years (each of 1997, 1998 and 1999), along with the percentage estimates of the plant additions associated with the deployment of higher-speed networks, with supporting rationale.

65. In the absence of a response by an ILEC or should there be insufficient quantitative evidence to justify the 25% mark-up, or some lower mark-up, within the process provided herein, the Commission will use a mark-up of 15% to determine final loop rates. In the event that the current mark-up of 25%, or some lower mark-up above 15%, is shown to be justified (to compensate for the differences between embedded and current costs), the issue of whether that mark-up level will remain after the price cap review proceeding will be dependent on the pricing policy established for competitor services in that proceeding.

Pricing of Type B loops

66. The ILECs proposed that where a Type B loop rate is less than the Type A loop rate, the Type B loop rate be set using the corresponding Type A rate as a lower limit. The ILECs submitted that this is necessary to ensure that there are no uneconomic incentives for carriers to order Type B loops to provide services that could be accommodated with Type A loops.

67. AT&T et al. noted that in bands subject to the proposed treatment, the ILECs' proposal will result in Type B prices that embody a mark-up exceeding the mandated level, which is inconsistent with cost-based pricing. Furthermore, this proposal is asymmetrical and unfair since the ILECs support Type B prices based on Type B costs when those costs exceed Type A costs.

68. AT&T et al. submitted that if the Commission agrees with the ILECs that setting Type B prices below Type A prices in a given band is inappropriate, the solution could be to aggregate the costs of Type A and B loops to establish prices common to both types of loops, and that this would ensure that the level of mark-up embodied in loop rates would, overall, be no higher than the mandated level of mark-up.

69. The Commission agrees with the objective of the ILECs' proposal. The Commission further considers that AT&T et al.'s proposed modification, as discussed in paragraph 68, is appropriate to achieve that objective. The Commission therefore has determined the loop costs and rates for each ILEC based on the per-band weighted average unit cost of the combined Type A and B loops where Type B loop costs are less than Type A loop costs.

Loop costing issues

Plant service lives

70. In PN 2000-27, the Commission stated that it expected the ILECs to develop revised loop costs for each proposed band in accordance with the costing methodologies used to determine the rates approved in Decision 98-22.

71. This was further emphasized in a Commission letter dated 12 May 2000 which stated: "Bell Canada et al. is directed to revise and re-file its 31 March 2000 submission with the Commission by 30 June 2000, to reflect all costing related determinations in Decision 98-22, applied to proposed bands, including the use of economic lives equal to the accounting service lives approved in Decision 98-2. TELUS is directed to apply the same approach in developing its 30 June 2000 submission. The Commission considers that its direction to parties in PN 2000-27 included the use of accounting service lives of the length approved in Decision 98-2."

72. Bell Canada et al. observed that the Commission noted that the present proceeding would determine costing parameters, including life estimates, that will be used to establish both loop rates and residential PES costs for purposes of estimating the subsidy requirement, and that this implies that the lives that will be used to determine loop rates, and residential PES costs for purposes of subsidy calculations need not be those determined in Decision 98-2. Bell Canada et al.further submitted that since revised loop rates based on the new banding structures will only come into effect after the price cap period, as will subsidy requirements based on the new bands, the life estimates that should be used to determine the underlying costs should reflect the ILECs' updated asset lives, and it is only in this way that they will reflect the true costs going forward.

73. AT&T et al.submitted that, in compliance with Decisions 98-22 and 2000-745 and PN 2000-27, the ILECs are required to use equipment lives equal to accounting lives, and, in particular, the accounting lives approved in Decision 98-2. ARC et al. also submitted that the depreciation lives set out in Decision 98-2 are appropriate and that a review of those lives was not an issue in this proceeding.

74. AT&T et al. noted that while TELUS has complied with the requirement to use the Decision 98-2 lives in the loop costing studies, Bell Canada et al., to varying degrees, have not complied. AT&T et al. submitted that one of the attractions of using the Decision 98-2 lives is that, in addition to their proper conceptual basis, the lives had been subject to extensive scrutiny and approved by the Commission.

75. AT&T et al. further submitted that even if the Commission were to entertain the possibility of approving changes in average service lives (ASLs) from the approved levels in this proceeding, which it should not, Bell Canada et al. have not provided the justification for the use of lives other than the Decision 98-2 lives. AT&T et al. noted, among other things, that:

  1. there have been no changes in competitive market conditions in the relatively short time since Decision 98-22 that would warrant a change in ASLs (as facilities-based local competition has not progressed as originally expected),
  2. the ILECs' forecast of a dramatic increase in the substitution of copper outside plant facilities has not materialized; and
  3. in many cases, the driver for the forecast technology substitution in the loop, and the resulting claimed shorter lives for existing technology, is the satisfaction of demand for high-bandwidth services.

76. The Commission has clearly stipulated in PN 2000-27 and subsequent correspondence in this proceeding that the revised loop cost studies are to rely on the approved accounting service lives. The Commission notes that TELUS and SaskTel filed revised loop cost studies based on the approved accounting service lives while Bell Canada et al. filed proposed loop cost studies based on proposed economic lives. These economic lives take a more aggressive view of obsolescence and are considerably shorter than the accounting lives. Further, Bell Canada proposed updates to its accounting lives for several accounts.

77. In light of the foregoing, the Commission is of the view that, in the context of this proceeding, the accounting lives approved in Decision 98-2 are appropriate for purposes of determining the ILECs' revised loop costs and subsidy requirements.

Expense productivity

78. AT&T et al. submitted that it is obvious that there are productivity improvements in the provision of telecommunications services, and that excluding the impact of such improvements on causal expense cash flows would thus overstate those cash flows and the overall costs of providing the service in question. AT&T et al. further submitted that the ILECs have provided no persuasive evidence that productivity increase factors of less than 3.5% should be used, and recommended that loop rates set as a result of this decision reflect productivity increase factors of at least 3.5%, consistent with Decision 98-22.

79. Bell Canada et al. submitted that it estimates the impact of future productivity improvements on costs by explicit application of ILEC-specific total implied productivity (TIP) factors to all expenses incurred in the provision of the service. In the absence of any other information, on a company-wide or service-specific basis, each of the ILECs used its corporate average TIP to estimate the productivity improvement associated with the provision of unbundled loops. The value of the TIP factors reflect company-specific expectations of year-over-year changes in operating expenses, adjusted for the rate of inflation and NAS growth.

80. TELUS submitted that if the Commission determines that productivity is to be explicitly recognized in Phase II cost studies, there are implications for the price cap regime that must be considered.

81. The Commission notes that the method of including expense productivity factors in determining the loop expense forecasts was established in Decision 98-22.

82. In this decision, the Commission has set limits on expenses as set out in paragraphs 120 to 129. The Commission notes that expense productivity improvements are implicitly recognized in these expense limits. The method of incorporating productivity in the residential PES cost studies for purposes of the TSR calculation is different, and is discussed in paragraphs 156 and 157. 

Average working fill factors and the inclusion of capital productivity

83. AT&T et al. recommended that, based on the evidence filed in this and other proceedings, the loop capital cost and capital-related costs should be reduced by 15% to properly reflect capital productivity. AT&T et al. submitted that the studies appear to reflect no change in current growth technologies or provisioning practices, or improvements in the capacity or functionality of capital equipment, and that the problem is further exacerbated by the fact that, even though the study period runs from 2002 to 2006, capital costs have not been adjusted for productivity for year 2001 over year 2000 or year 2002 over year 2001. 

84. Bell Canada et al. submitted that the ILECs' Phase II capital costs consider only high-capacity, cost-efficient growth technologies (i.e., they capture the improvement in productivity which is achieved through the replacement of older, less-efficient technology by new technology of a more efficient and effective kind), the resultant capital cash flows include expectations of future productivity changes, and thus cash flows for capital and capital-related items are not adjusted by a productivity factor. In addition, the application by the ILECs of prospective values of cost parameters such as structure factors, fibre factors and fills throughout the study period at long-term values also reflect productivity gains.

85. TELUS submitted that AT&T et al.'s proposal on this matter is different from the current approved methodology, and is outside the scope of this proceeding.

86. The Commission continues to be of the view that the use of cost-efficient growth technologies provide adequate consideration of the increase in productivity for these investments, and that the capital costing methodologies approved in Decision 98-22 continue to be appropriate.

87. However, by contrast with the methodology used to restate expenses, the ILECs proposed to restate their 2000 capital costs to the year 2002 without recognition of explicit productivity improvements. The Commission notes that, for example, while Bell Canada has indicated that the material price of cable has dropped since its cost study filed in the proceeding leading to Decision 98-22 (hereinafter referred to as the 1997 cost study), it has assumed that its 2000 cable costs will increase over the 2000 to 2002 period. The Commission has reduced the forecast capital costs in an amount equal to each ILEC's assumed capital cost increase factors, to take account of likely efficiency improvements and outside plant price reductions over this two-year period.

88. The loop capital costs are in general determined using the capacity costing approach. Through the use of the average working fill factor (AWFF), the capacity costing approach builds in spare capacity (which can include network inefficiencies) by apportioning the average non-service producing capacity to the per unit cost of the service producing capacity.

89. AT&T et al. submitted that fill factors should reflect the most efficient provisioning practices among the ILECs, rather than company-specific practices. AT&T et al. recommended that loop prices flowing from this proceeding reflect the higher of

  1. Bell Canada's fill factors and
  2. each ILEC's company-specific fill factors.

In the case of Island Tel, MTT and NBTel, whose costing data apparently makes no distinction between feeder and distribution cables, AT&T et al. recommended that their costs reflect the higher of

  1. the company-specific fill factor applying to the combined distribution and feeder, and
  2. a blended fill factor based on Bell Canada's fill factors and Bell Canada's proportions of feeder and distribution capital.

90. Aliant submitted that while it is not surprising that AT&T et al. would suggest the use of the highest possible fill factors because this lowers the rates they would have to pay for unbundled loops, this is not an acceptable reason for the Commission to abandon its long-standing approach to fill factors. Aliant stated that the approach should be entirely consistent with the Commission's determination in Inquiry into Telecommunications carriers' costing and accounting procedures - Phase II: Information requirements for new service tariff filings, Telecom Decision CRTC 79-16, dated 28 August 1979 (Phase II costing directives) and subsequent approval of costing studies submitted by the ILECs with respect to the capacity cost method, and that the appropriate fill factor must be based on the actual average working fill.

91. Aliant also submitted that a "fill at relief" fill factor (as initially proposed by Bell Canada) is inappropriate since it only applies to a relatively small subset of the total installed base of units, i.e., those assets that are just about to have additional plant installed for relief purposes. Aliant further submitted that the types of plant under discussion, such as outside plant cables, require additional capacity to be added in unit sizes that are many times larger than an individual demand unit (cable pair) basis.

92. Bell Canada et al. submitted that the adoption of a more explicit definition of fill values for capacity costing and the mandated use of this definition across all ILECs will ensure that differences in the values of fill factors across ILECs reflect only differences in their respective provisioning practices and operating conditions.

93. While initially proposing "fill at relief" estimates based on long-run provisioning practices, Bell Canada submitted that, should the Commission determine that measured actual AWFFs are the appropriate measures of long-term fill for Phase II costing purposes, then Bell Canada's loop and residence PES costs should be estimated on the same basis as other ILECs. Bell Canada further provided updated estimates of measured Bell Canada's AWFFs. These AWFF updates were lower than the "fill at relief" estimates. Bell Canada's AWFF results also revealed that the fill measures for HCSA bands were lower than non-HCSA bands.

94. TELUS submitted that, contrary to AT&T et al.'s proposal, no one set of fill factors represents the most efficient provisioning practice, and each ILEC adopts the most efficient provisioning practices for its circumstances. TELUS further submitted that if the Commission were to require TELUS to retain the current quality of service standards and still raise the fill factors used for costing purposes, it would, in effect, be ordering the provision of service at a specific quality standard without providing any reasonable opportunity for TELUS to recover its costs through the rates produced by the wrong costing information.

95. With respect to the ILECs' proposed use of average working fills, the Commission notes that this is the common methodology that has been used over the years to develop Phase II capacity costs as prescribed by the Commission's Phase II costing directives. Since the outside plant under discussion requires additional capacity to be added in unit sizes that are many times larger than an individual demand unit (cable pair) basis, the determination of the average long-run fill factor based on the theoretical "fill at relief" limit would not be appropriate.

96. For purposes of developing the loop and PES cost studies, the Commission therefore considers that the ILECs' capacity costs should continue to use measures of average working fills, consistent with most ILECs' proposals. However, the Commission is concerned about the wide range of AWFFs across ILECs proposed in this proceeding.

97. Several discrepancies in the definitions of AWFFs were reported across ILECs. For example, TCBC proposed a distribution AWFF based on a measure at the cross-connect box in the distribution plant while that of the feeder based on a percentage of the in-service pairs at the central office's (CO's) main distribution frame (MDF). Bell Canada proposed the use of a single measure based on the percentage of working copper pairs at the CO's MDF, applicable to both feeder and distribution plant.

98. Various other discrepancies exist regarding measures taken and the timing of the data. For example, TCI's proposed feeder fill was assumed to be constant across bands and based on updated 1999 measured data, while TCI's distribution AWFF was based on a proxy for its long-term expected fill based on provisioning guidelines rather than measured data. NBTel and NewTel indicated that their proposed AWFFs represent long-term averages over several years, i.e., they were initially developed in 1993 or 1994, and were subsequently reviewed and determined to be still relevant for the year in question.

99. The Commission notes that the AWFF for distribution plant is typically lower than for feeder plant. By contrast with feeder plant, distribution plant is generally designed with a higher level of spare capacity. Evidence of such differences in the ILECs' provisioning practices were observed in the lower AWFF values filed for distribution plant.

100. The Commission is further concerned with the revised AWFF proposals of Bell Canada, NBTel and NewTel, which do not distinguish between feeder and distribution plant. The use of a common AWFF measure for feeder and distribution plant, by comparison with a method that relies on separate measures, could result in some loss in the accuracy of the corresponding capital cost estimates.

101. In light of the foregoing, to determine the loop costs, the Commission adopts national long-run average estimates of 60% and 77%, respectively, for distribution and feeder AWFFs, for each ILEC's non-HCSA bands, and 56% and 72%, respectively, for each ILEC's HCSA bands.

102. The use of these uniform national AWFF measures, although higher than most AWFFs proposed by the ILECs, recognize, among other things:

  1. the apparent lack of consistency in the AWFF definitions;
  2. the differences in the measures filed by most ILECs compared to 1997 cost studies;
  3. Bell Canada et al.'s request for consistent AWFF definitions across ILECs;
  4. the need to revise the ILECs' proposed average historic AWFF values to reflect longer-run measures of AWFFs, i.e., those expected over the 2002-2006 study period; and
  5. the Commission's prior determination in Decision 98-22 to increase TCBC's proposed AWFF value for distribution plant for purposes of determining its loop costs, in order to be more consistent with the distribution AWFFs of other ILECs.

103. In some cases, the approved changes could result in some of the spare capacity in the network (implicit to the use of the AWFF) being disallowed for causal costing purposes under the view that it is in excess to that which should be reflected in the Phase II costs. This excess may be reflected in the company's embedded costs. The issue of compensation related to the difference between embedded and current costs for competitor services will be examined through the mark-up policy, as discussed in paragraph 65. 

Integrated digital loop carrier system overlay solution costs

104. The ILECs proposed two types of solutions to provide CLEC loops within a wire centre serving area for customers served by an IDLC/remote system, namely hairpin and facility overlay solutions. Both arrangements require the addition of digital channel banks via DS-1 cabling and DX-1 cross-connections at the remote and/or at the host switch location, along with the use of a fibre umbilical link between the host and the remote.

105. AT&T et al.submittedthat the loop costs should be limited to those necessary to make a physical connection between the customer and the host, that traffic on a loop arises from the use of that loop for retail services, not from the mere connection of the customer to the host, and, therefore, the costs included in the loop study for remotes and umbilical links in respect of both CLEC and ILEC demand should be limited to line-driven costs.

106. Bell Canada et al. submitted that the approach proposed by AT&T et al. is correct only in situations where the facilities for which costs are being estimated are dedicated to the end-customer. This is not the case for loops served by remotes where the size and cost of shared umbilical links are driven by a combination of access demand and usage demand. Most of the remote equipment costs are access demand driven but after the placement of the minimum number of DS-1 connections required to connect the remote to the switch, additional connections are driven by the amount of usage that the remote carries.

107. The umbilical link is shared by both CLEC and ILEC loops. The size of the umbilical link is driven by the total amount of traffic placed on it by both CLECs and ILECs. The loop rate must therefore recover both the cost of the physical connection and the usage expected to be generated on the loop.

108. For certain ILECs, the forecasts of the IDLC overlay capital costs and capital-related costs were many times greater than those forecast in the 1997 cost study. The ILECs submitted that the increases were primarily due to the increased CLEC demand forecast over the 2002-2006 time period and to increases in the assumed proportions of CLEC loops to be carried on overlays (as a consequence of the recent increases in the roll-out of remote technology).

109. The Commission considers that an ILEC's increase in its roll-out of remote technology does not mean that the proportions of CLEC loops carried on overlays should necessarily increase. This phenomenon was explained by Bell Canada in response to a Commission interrogatory, where it stated that the overlay CLEC demand in Band A is down significantly as Bell Canada expects to be able to accommodate most of the CLEC loop demand in this band by re-assigning Bell Canada's retail customers to the IDLC systems and freeing up copper loops to meet CLEC requirements.

110. The Commission also notes that for many ILECs, the CLEC loop demand forecast for the first year of the proposed cost studies (i.e., year 2002) was several times more than the corresponding current CLEC loop demand.

111. The Commission also notes that the IDLC overlay costs per NAS forecast by SaskTel were considerably higher compared to any other ILEC.

112. In light of the foregoing, the Commission has reduced by 30% the IDLC overlay system costs forecast for TCBC, TCI, MTT, Bell Canada and SaskTel.

Loop length estimation

113. In responding to interrogatory TELUS(CRTC)11Aug00-118, TELUS stated that, for TCI, the average loop lengths by proposed band are "calculated from the average loop length for each AA" but, "as the average length for each AA is not available for TCBC, the calculations for TCBC are similar except that the length is based on the longest loop lengths for each AA."

114. The Commission considers this assumption to be clearly inappropriate as it does not reflect the average loop length. The Commission has therefore included a downward cost adjustment to both TCBC's loop and PES cost studies, equivalent to a 10% reduction to the average loop length, for all bands.

115. In light of this, the Commission has reviewed the wire centre classifications using the revised average wire centre loop lengths, and requires that the Castlegar, Cedar, Kitimat and Revelstoke wire centres be removed from TCBC's HCSA band of between 1,500 and 8,000 total NAS and be re-classified into TCBC's non-HCSA bands.

Loop maintenance and functional operating expenses

116. AT&T et al. submitted that it is obvious that the Commission's intention was that the revised loop rates proposed in the current proceeding would reflect the determinations of Decision 98-22. In this manner, the PN 2000-27 proceeding could build upon, rather than duplicate, the exhaustive 15-month proceeding that culminated in Decision 98-22. Accordingly, AT&T et al. submitted that, for cost elements that were the subject of modification in Decision 98-22 (i.e., billing and collection, maintenance expenses, and product management and advertising), the present worth amounts per NAS used to set rates in this proceeding should be no higher than those dictated by Decision 98-22.

117. Bell Canada et al. submitted that this claim is unfounded, that the ILECs' cost estimates precisely adhere to the costing methodologies applied in Decision 98-22, and that the quantification of costs for these elements is not identical to the findings of Decision 98-22, which is to be expected given the need to reflect more current information.

118. At paragraph 71 of Decision 98-22, the Commission stated: "[w]ith respect to the proposed maintenance expenses, the Commission finds MTS' and TCI's maintenance expense forecasts to be too high compared to those of other ILECs. The Commission is of the view that MTS' and TCI's maintenance expense forecast, expressed as a percentage of the total capital loop plant, should not exceed 10%. Accordingly, where MTS' and TCI's proposed maintenance expense forecast exceeds 10% of the total capital loop plant, the Commission finds it appropriate to reduce this maintenance expense estimate to a level of 10% of the total loop plant capital."

119. The Commission notes that the ILECs' proposed maintenance expense and functional operating expense (FOE) forecasts are generally higher than those proposed in the 1997 cost studies. The Commission finds this result to be counter to that which is expected, especially in light of the ILECs' past productivity performance improvements and given the incentives provided under the price cap regime to reduce costs.

120. Furthermore, under the proposals in this proceeding, most ILECs have forecast per NAS maintenance expense levels that exceed the threshold set in Decision 98-22 (i.e., 10% of the capital loop costs). In this particular proceeding, the ILECs were requested to revise their loop cost studies and to incorporate the costing determinations made in Decision 98-22.

121. For certain ILECs such as Bell Canada and TCBC, the expense changes stem from changes in the sources of data (e.g., activity-based costing data or company maintenance expense actuals with adjustments). For TCI and MTS, the proposed maintenance expenses are similar to those proposed in the 1997 cost studies, which were rejected in Decision 98-22.

122. With the exceptions set out below, the Commission finds no persuasive evidence to support a departure from the maintenance expense threshold determined in Decision 98-22.

123. In light of the foregoing, the Commission considers that, with the exception of the remote bands, the per NAS maintenance expense for each ILEC and in each band is not to exceed 10% of the per NAS total loop capital cost. Bell Canada's and NewTel's per NAS maintenance expenses for the remote band are limited to $18 per NAS, while those for the other ILECs' remote band are limited to 20% of the per NAS total loop capital cost. While the ILECs' remote band captures the more remote areas, which have limited access and are more costly to serve, those proposed by Bell Canada and NewTel show higher maintenance costs by comparison with other ILECs and which were reported to be limited to areas that are generally served by air or boat.

124. Under its new loop cost study, NBTel indicated that:

  1. its maintenance expense is embedded in the capital cost and is no longer identified separately, and
  2. its outside plant capital has decreased (due to reduced average loop lengths), while its maintenance expense has increased (due to the use of NBTel's own maintenance factors rather than Bell Canada's unit costs).

Yet, despite the reductions in the outside plant capital, the combined capital plus maintenance loop costs per NAS proposed by NBTel show a significant increase compared to the cost levels approved in Decision 98-22. The Commission has therefore included a 10% reduction to NBTel's proposed combined capital and maintenance cost estimates in order to bring the cost levels for these cost categories more in line with Decision 98-22 cost levels.

125. AT&T et al. submitted that the ILECs have not complied with the Commission's directives and that their loop expenses do not reflect the determinations of Decision 98-22. In particular, AT&T et al. submitted that the ILECs' estimation of costs associated with billing and collection, product management and advertising expenses do not reflect the determinations of Decision 98-22. AT&T et al. further submitted several comments regarding the use of retail versus wholesale costs and suggested that the ILECs' loop cost studies have overestimated these expenses and should be rejected.

126. AT&T et al. argued that:

  1. the costs included in the loop costing study in respect of ILEC demand should exclude any costs of retail-related activities that may be embodied in cost estimates based on or derived from retail proxies;
  2. there are a variety of expense inclusions for which the use of retail proxies could result in an overstatement of costs;
  3. since the loop is only a portion of the retail exchange service, only a portion of the FOEs are applicable to unbundled loops; and
  4. therefore the expense levels in the 2000 studies are based on a methodological approach that is inconsistent with the approach adopted by the Commission in Decision 98-22.

127. Bell Canada et al. submitted that this claim is unfounded, that the ILECs' cost estimates precisely adhere to the costing methodologies applied in Decision 98-22, and that the fact that the quantification of costs for these elements is not identical to the findings of Decision 98-22 is to be expected given the need to reflect more current information. Bell Canada et al. further submitted that the update of unit costs is essential to derive accurate updated estimates of unbundled local loop costs, and consequently, the ILECs have included the best information available within the loop cost studies filed in this proceeding, including updated expense unit costs.

128. FOEs included in the loop cost studies primarily consist of service provisioning, and other FOEs such as sales management, billing and collection, product management and advertising.

129. The Commission finds the proposed ILECs' total FOE levels to be consistently higher than the Decision 98-22 levels. Consistent with the objectives enunciated in PN 2000-27 and in the light of the Commission's findings above in paragraph 119 regarding the anticipated expense levels, the Commission accordingly caps the total FOE loop expenses for each ILEC and in each band to an amount equal to the national FOE average of $1.65 determined in Decision 98-22, except for Bell Canada. The expense ceiling for Bell Canada is set higher at $1.95 to recognize a change in the reporting of certain service provisioning expenses that were previously captured in the capital category. These expense limits are set to include the costs of in-building wire associated with the multi unit dwellings where in-building wire continues to be controlled by an ILEC.

Revenue charge costs

130. In Decision 2000-745, the Commission directed that a national revenue-based subsidy mechanism be implemented effective 1 January 2001. Under the new mechanism, carriers are required to contribute to a national subsidy fund based on a percent charge on contribution-eligible telecommunications service revenues. The cost of contributing to the national subsidy fund has not been included in any of the costs filed in this proceeding but should be included in the costs of the unbundled loop service used to set the loop rates. Because the loop revenues are included in the calculation of contribution-eligible revenues, the additional Phase II costs resulting from the implementation of the new subsidy regime should be estimated.

131. The ILECs proposed that the impact of the revenue charge should be reflected in both the loop and PES cost studies. The ILECs proposed that these costs be included by multiplying each of the band-level cost estimates filed in this proceeding by 1/(1-RC), where RC is the revenue percentage charge used to compute the contribution payable.

132. The Commission considers it appropriate to include the above proposed adjustment to account for the revenue charge in respect of the loop service. While the current RC is 4.5%, the RC to be used in the loop study should be that which is reflective of the 2002 to 2006 period. Based on preliminary calculations, the RC for the year 2002 using the Phase II cost methodologies is estimated at approximately 1.5%. The Commission has accordingly made adjustments to reflect the RC costs based on this updated value. By contrast with the loop cost methodology, the RC costs to be included in the residential PES costs for purposes of the TSR calculation are to be determined separately each year based on the expected average residential revenue per NAS per band for that year, and added explicitly to the Phase II costs (within the TSR formula).

SaskTel return on equity

133. By contrast with other ILECs, SaskTel proposed the use of a rate of return on equity (ROE) of 12.87% in this proceeding. SaskTel noted that prior to coming under federal regulation, it utilized an ROE of 12.87% in calculating its rates that were established based on costs, which reflected the use of 11% adjusted upwards to reflect a 17% provincial income tax cost.

134. Recognizing that it is not required to explicitly pay the 17% provincial tax at this time, SaskTel indicated that it was prepared to eliminate this adjustment from its ROE calculation. For the purpose of calculating Phase II cost-based rates and the subsidy requirement, SaskTel further indicated that the use of an 11% ROE would be appropriate. SaskTel further noted that, should its tax status change in the future, the company would file an application with the Commission to have the cost of such taxes incorporated into its cost-based rates and subsidy requirement.

135. The Commission considers it appropriate for SaskTel, like all other ILECs, to use an ROE of 11% to determine loop and PES Phase II cost estimates. Should SaskTel's tax status change in the future, the Commission would be prepared to review the changes in loop costs and residential PES costs due to this tax change.

Adjustments to SaskTel's and MTS' proposed loop costs

136. By comparison with other ILECs, the Commission notes that it has examined SaskTel's detailed cost assumptions and methods for the first time.

137. With respect to SaskTel's proposed loop and PES cost studies, the Commission notes that contrary to other ILECs, SaskTel's cost studies exclude income tax costs since the company is provincially-owned. However, SaskTel's proposed loop and residence PES cost estimates per NAS were significantly higher than all other ILECs. Based on the alternative uniform banding structure, SaskTel's per NAS non-IDLC feeder capital costs showed significant cost variations across the bands, and are several times greater than those reported by other ILECs. The Commission finds that these differences are primarily caused by the per-metre unit cost estimates of buried copper cable assumed in each band.

138. In setting the rates for SaskTel in this decision, the Commission has made significant reductions to SaskTel's per-band per-metre unit cost estimates of buried copper cable to levels which are more in line with the per-metre unit costs proposed by other ILECs, and which are also more uniform across bands.

139. The Commission also finds that the cost levels for the IDLC feeder capital costs are significantly higher than those of other ILECs having comparable roll-out levels of remote technologies. The Commission expects the utilization of this shared facility to improve over time. Accordingly, the Commission has reduced by 30% SaskTel's IDLC feeder capital costs which bring the per NAS costs to levels that are more consistent with those of other ILECs, and which recognize future potential efficiency improvements.

140. For most bands, SaskTel's proposed loop capital costs are not significantly less than the levels proposed for its residence PES cost study. The Commission finds that SaskTel has not justified its loop capital costs, by comparison with its residence PES capital costs. As demonstrated by the other ILECs' submissions, the capital costs for the loop service are generally significantly lower than those for the PES service. This result is explained by the additional switching, inter-office trunking, and possible back-haul transport investments (between the wire centre and the host switch if the host switch is located outside the wire centre serving area) which are required to provision PES but are not part of the loop service. In light of the above, the Commission has adjusted SaskTel's per-band loop capital costs such that they do not exceed 80% of this decision's corresponding residence PES capital costs.

141. The Commission has also made a cost adjustment to MTS' proposed loop costs in Band E. MTS' costs for this band are more than double the costs for any other MTS band and even exceed the loop costs for its remote band. While the company indicated that the loop costs in Band E are higher because of disproportionately longer loops consistent with the low NAS density in rural areas, the Commission considers that only part of the proposed cost differences between this band and other bands are justified. The adjustment to the costs brings the per-metre capital cost for Band E in line with that of MTS' Band D.

Subsidies to business service

142. AT&T et al. and Microcell submitted that there is no need to subsidize single-line business service and that it would be completely inappropriate for other users of telecommunications services to finance, through a mandated subsidy, one of the costs of doing business for enterprises geared to making a profit. Microcell strongly opposed any explicit subsidy mechanism extended to business services, noting that there is simply no public policy justification for the Commission to implement an explicit subsidy for the provision of business local access service in an increasingly competitive marketplace.

143. Bell Canada et al. submitted that, as a matter of public policy, the rates for single-line business access services should be expected to recover the costs of providing the service. Where rates for single-line business access services are not already compensatory, the ILECs should be provided with the flexibility to increase such rates to compensatory levels. If not, the providers of non-compensatory single-line business service NAS should also be eligible to collect subsidies on those NAS.

144. TELUS maintained its position that subsidies should not be provided to single-line business customers in high-cost areas.

145. By contrast with other ILECs, SaskTel urged the Commission to include business single-line service in bands that meet the definition of a high-cost area into the portable subsidy allocation calculations. SaskTel submitted that it continues to believe that it is unrealistic, in the short to medium term, to expect single-line business customers operating in high-cost areas to pay rates that would be required to totally eliminate the subsidy requirement in these bands.

146. SaskTel also submitted that it is inappropriate to expect it to internally fund the significant annual revenue shortfalls associated with providing single-line business service in high-cost bands, and for these reasons, subsidy eligibility should be extended to single-line business service provided in high-cost areas.

147. The Commission is of the view that the cost of telephone service is not a major driver in the viability of businesses, even in remote areas. In most cases, the costs of telephone service for a business accounts for only a small percentage of operating costs. Businesses recoup the costs of doing business, including the cost for telephone service, in the prices they charge for the goods and services they provide. Moreover, unlike residential subscribers, business subscribers can deduct telephone service costs as an income tax deduction.

148. In view of the foregoing, the Commission finds that subsidies should not be extended to single-line business service provided in high-cost service areas.

Residence service costing issues

General costing assumptions

149. In Decision 2000-745, the Commission stated that local loop rates and high-cost serving area bands for the ILECs will be determined in this proceeding based on the ILECs' Phase II costs and that, to the extent applicable, various costing parameters (for example, study period, productivity factors, life estimates) used to determine the loop rates in this proceeding should also be used to determine the residential PES costs for purposes of calculating the subsidy requirement.

150. ARC et al. submitted that consistency and fairness in the administration of the portable subsidy regime call for a uniform set of criteria and methodology, to the extent possible, among ILECs, and that a national subsidy regime requires that all ILECs use a nationally uniform methodology to determine HCSAs and to determine the subsidy requirements relating thereto.

151. Bell Canada et al. submitted that under the national subsidy pool, subsidy payments would be estimated on the basis of Phase II costs. Since these payments are financed from all telecommunications service providers, this in turn will lead to payments between ILECs. Bell Canada et al. argued that where such payments result from differences in costing methodology, rather than in operating conditions or provisioning practices, they are completely unacceptable. Hence, the Commission must ensure that the costing approaches, including calculation of working fill factors, are based on a consistent methodology across ILECs.

152. TELUS also submitted that it supported the use of a common methodology for calculating the subsidy requirement in each band.

153. The Commission notes that a number of common costing assumptions have in general been proposed between the loop and PES cost studies filed by each ILEC, i.e.:

  1. the same study period (2002-2006);
  2. similar unit cost inputs and methods to restate the 2000 unit costs into 2002 unit costs;
  3. similar cost and expense increase factors and productivity offsets;
  4. the same financial parameters; and
  5. similar ILEC demand forecasts.

The Commission considers it appropriate to apply, wherever possible, common costing methods and assumptions between the loop and PES cost studies, consistent with the stated objectives of Decision 2000-745.

154. With the exception of the expense category, which will be discussed below, the Commission further considers that the following cost assumptions approved in this decision for the loop cost study should also apply to the PES cost studies, i.e., use of the approved accounting plant lives, the national uniform AWFFs for feeder and distribution, the adjustments to restate the 2002 capital unit cost, TCBC's loop length adjustment, and the changes made to SaskTel's and MTS' loop capital unit cost assumptions. The Commission finds that the residential PES costs determined in this decision for the purpose of calculating the subsidy requirement are necessary and appropriate to ensure that the national subsidy fund established persuant to Decision 2000-745 will operate in a manner consistent with the objectives of the Act.

155. The Commission further considers that for purposes of the annual TSR calculation, as discussed in paragraph 132, an adjustment to the PES costs for each ILEC and each band will have to be made each year to reflect the additional cost of the new revenue charges associated with residential PES.

Removal of productivity and inflation factors from the residential primary exchange service cost studies

156. The ILECs agreed to a methodology whereby the PES costs are to exclude both annual cost/expense increase factors and annual productivity offsets, and are adjusted annually for productivity and inflation for purposes of the TSR calculation.

157. The PES costs determined in this decision for each ILEC exclude both the annual cost/expense increase factors and productivity offsets, and further exclude the costs associated with the revenue charge. These residence PES costs are being provided separately to each ILEC by letter (due to the potential confidential nature of the information). These costs are to be used as the basis to calculate the annual TSR. The exact amounts of the productivity and inflation factors to be applied in the TSR formula are to be determined in the price cap review proceeding. The components associated with inflation, productivity and the revenue charge are to be added explicitly to the PES costs each year.

Residential primary exchange service expense inclusions

158. The Commission considers it appropriate to apply expense restrictions to the residence PES cost studies that are similar to those applied to the loop cost studies. The Commission therefore finds that the ILECs' PES maintenance expense forecast, expressed as a percentage of the total capital loop plant, not exceed 10% for all ILECs and all bands except for the remote Band G. Consistent with the loop cost adjustments, the per NAS maintenance expense for the ILECs' remote band should not exceed 20% of the total capital costs, except for Bell Canada's and NewTel's remote band, which is to be limited to $20 per NAS. This latter expense level for Bell Canada's and NewTel's remote band has been set higher than for the loop service to account for the higher expenses expected for the residential PES service.

159. The categories of FOE expenses for the residence PES studies include primarily service provisioning, sales management, billing and collection, product management and advertising.

160. Similar to the loop FOE adjustments, the Commission considers it appropriate to cap the total FOE associated with the residence PES at $2.50 per NAS, uniformly across all ILECs and across all bands. By contrast with the loop service, the higher approved FOE levels recognize the additional FOE activities and expenses expected for the retail PES service.

Adjustments to SaskTel's and MTS' proposed residential PES costs

161. With respect to SaskTel's residence PES cost study, the Commission has carried forward the adjustments made to SaskTel's loop capital cost estimates. The adjustments include the uniform expense limits applied to each ILEC, as discussed above. The Commission notes that by contrast with SaskTel's proposal, the adopted residence PES costs exclude the costs associated with service connection activities. These latter costs are associated with the company's service connection charges.

162. With respect to MTS, the Commission considers it appropriate to make adjustments to the Band E PES capital costs, consistent with the adjustments adopted for MTS' loop capital cost estimates for that band.

163. With respect to MTS' remote Band G, the Commission notes that the company's proposed per NAS residence PES capital cost is much higher than its corresponding per NAS loop capital cost. MTS explained that this is caused by the high back-haul transport costs (i.e., radio technology facilities between IDLCs and the host switch covering long distances) which are not included in the loop costs. The Commission notes that these transport capital costs are more than double the total loop capital costs for that band. The Commission expects the utilization of this shared facility to increase over time. In setting the MTS rates in this decision, the Commission has therefore included a 30% reduction to these additional transport costs in MTS' Band G in recognition of the unusually high transport capital costs by comparison with the other ILECs and the potential efficiencies associated with these shared facilities.

Imputation test issues

164. During the proceeding, in response to a Commission interrogatory, Bell Canada et al. proposed that a process should be initiated to identify which of the new bands are considered to be essential following the adoption of a new banding proposal. Bell Canada et al. further proposed that, on an interim basis, those new bands for which all or the majority of demand is drawn from the existing essential bands also be considered as essential.

165. By contrast, TELUS proposed that the imputation test be modified so that all bands are treated as non-essential for costing purposes. For imputation test purposes, TELUS submitted that all tariffs that include non-essential components must calculate the cost of the non-essential components based on Phase II costs plus a mark-up of 25%. TELUS submitted that this modification to the imputation test would recognize actual costs in relation to proposed rates for all tariffed services.

166. Bell Canada et al. later indicated that the imputation test should continue to be applied at the level of the existing retail rate bands.

167. AT&T et al.objected to Bell Canada et al.'s proposed approach since this would permit the ILECs to pass the imputation test where the test would not be passed if it were applied on the new HCSA bands separately. With respect to TELUS' proposal, AT&T et al. submitted that it is not worthy of serious consideration since the company has provided no evidence to support the view that loops no longer meet the essential services definition in any band.

168. AT&T et al. further submitted that the following should be considered to be essential:

  1. loops remaining in existing essential bands after band re-structuring; and
  2. loops in new bands for which all or a majority of demand is drawn from the existing essential bands.

AT&T et al. indicated that the ILECs have presented no evidence to suggest that any loops currently designated as essential should no longer be so designated.

169. The Commission considers that with the definition of new bands, essential facilities such as loops in the current essential bands should continue to be included in the imputation test based on tariffed rates. The Commission notes that additional HCSA bands are being created as a result of the adoption of the alternative uniform band structure. The loops in these new HCSA bands are for the most part being drawn from the existing essential bands. The Commission therefore finds that all bands that were considered to be essential prior to this decision should continue to be essential. Furthermore, the new HCSA bands are also considered essential.

170. Effective the date of this decision, the following imputation test rules are to apply.

  1. Retail exchange service price reductions (implicit or explicit) or new service introductions (including bundled services) will have to meet the imputation test under the new rate band structure from now on.
  2. No rate changes to current retail rates will be required in light of the new band structures.
  3. For residence retail exchange service rates that are below costs, the ILECs will not be permitted to reduce rates, since this would imply that rates would be moved further away from costs.

171. AT&T et al. submitted that given the essential nature of loops, it is important that the new pricing for unbundled loops and the rules for ILEC pricing of retail services be compatible. Ultimately, if the prices CLECs pay for essential services are such that CLECs are not able to compete with the market prices established by ILECs, there will never be sustainable competition.

172. AT&T et al. expressed concerns that Bell Canada's imputation tests filed in support of narrowly targeted retail services will continue to reflect estimates of highly disaggregated costs notionally applicable to the loops used for a specific location, service or customer, or any aggregation below the band level. For example, the experience of the EEWD filing suggests that the costs included in support of such filings do not reflect the high degree of homogeneity that Bell Canada claims is exhibited by loop costs in band B and that they can be significantly below the band-average costs upon which loop prices are based.

173. AT&T et al. further submitted that imputing the loop price in all bands would be a more effective means to ensure that amounts included in the imputation test price floor for loops are in all cases consistent with the costs used to establish unbundled loop prices. AT&T et al. submitted that this would ensure that ILEC retail services bear the same amount of mark-up on near-essential facilities that is imposed on local competitors through loop prices. Given the CLEC reliance on ILEC loops, the current imputation rules provide the ILECs with an artificial cost advantage. Therefore, imputing loop prices in all bands better accords with competitive equity and avoids unjust discrimination vis-à-vis CLECs.

174. The Commission recognizes the competitive equity issues that may arise under the current retail imputation test methodology which allow the disaggregation of costs for loops. In this decision, the Commission is addressing this issue in part through its banding refinements to re-classify several downtown core wire centres for Bell Canada and TCBC into lower-cost bands. Moreover, the Commission directs the ILECs to show cause, by 8 June 2001, as to why the ILECs' imputation tests for retail exchange services in non-essential bands should not be changed to impute the average per-band loop cost in order to increase fairness and competitive equity. In responding, the ILECs should also comment on the appropriateness of relying on the costing methodologies and parameters approved in this decision for future imputation tests of retail exchange services.

175. Furthermore, in light of the explicit subsidies that are currently received from the Central Funds Administrator (CFA) associated with the provision of residential service in the HCSA bands, the Commission is of the preliminary view that, from now on, any imputation test involving residential PES in HCSA bands should be modified to take account of the explicit subsidies to be received from the CFA. The ILECs are directed to submit their proposals on this matter along with the above show cause request.

176. The ILECs shall serve a copy of their show cause and other submissions pursuant to the above two paragraphs on all interested parties to this proceeding by 8 June 2001. Interested parties may by 9 July 2001, file comments, serving a copy on the ILECs. The ILECs may by 24 July 2001 file a reply, serving a copy on those interested parties who filed comments.

Quality of service issues

177. ARC et al. submitted that, in light of restructuring the bands, the Commission should undertake a follow-up proceeding to review the existing quality of service indicators and the subdivision of "rural" into "remote" and "general rural".

178. The ILECs submitted that the restructuring of bands involving the segregation of high-cost areas into separate bands would not necessitate any changes to the current model of monitoring quality of service. They submitted that, if quality of service information was required for high-cost areas, it would be appropriate to use the existing complaint process already approved for the independent telephone companies, with less than 25,000 total NAS, in Regulatory framework for the Independent Telephone Companies in Quebec and Ontario (except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec ltée), Telecom Decision CRTC 96-6, dated 7 August 1996. 

179. Currently, the proposed high-cost area bands are part of "rural" for the ILECs which are required to report on the existing quality of service indicators in rural and urban areas separately.

180. The Commission therefore directs the ILECs that are currently required to report on the existing quality of service indicators to include the proposed high-cost bands in their reporting on "rural".

Approval of loop rates

181. The Commission finds that the loop rates as approved on an interim basis based on the loop costs adopted in this decision are just and reasonable, and consistent with the objectives of the Act.

182. In PN 2000-27, the Commission indicated that any revisions to bands and local loop rates would be expected to become effective 1 January 2002. In accordance with PN 2000-27, the ILECs proposed that their revised loop rates under the revised band structures would be implemented as at 1 January 2002. 

183. AT&T et al. submitted that it would be inconsistent with the intent of the essential services pricing principle to wait until 1 January 2002 to reduce loop prices under the existing band structure to reflect any cost reductions. AT&T et al. proposed that revised loop rates under existing bands reflecting the Commission's determinations in this proceeding be implemented coincident with this decision.

184. None of the ILECs objected to this proposal.

185. The Phase II loop costs filed by the ILECs in this proceeding are generally lower than the current loop costs (implied by the current loop prices). Under the essential services pricing principle, when costs change, prices are generally expected to be revised to reflect the changes in costs, especially if they are significant.

186. In light of the foregoing, the Commission approves, on an interim basis, effective 27 April 2001, the Type A and B loop rates set out in Attachment 1, pending the resolution of certain follow-up processes. The ILECs are hereby directed to issue revised tariff pages in accordance with the determinations in this decision, by 29 May 2001.

187. All documents required to be filed by a specific date must be received, and not merely mailed, by the dates indicated.

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

Attachment 1

Loop rates per month ($)
(Based on Phase II costs + 25%)

Type A loops Band A Band B Band C Band D Band E Band F Band G
BELL CANADA 9.04 12.82 15.10 17.35 28.07 28.68 48.04
ISLANDTEL n/a 12.95 12.95 n/a 30.02 31.66 n/a
MTT 11.41 n/a 14.95 n/a 26.70 25.24 n/a
MTS 6.04 13.59 17.53 24.70 44.41 n/a 44.59
NBTEL n/a 12.52 14.69 n/a 25.06 16.44 n/a
NEWTEL n/a 18.51 17.54 n/a 26.61 27.50 40.04
TCI 8.79 14.29 17.47 15.80 29.40 24.31 28.71
TCBC 8.48 17.80 21.00 18.18 50.03 38.88 49.06
SASKTEL 10.09 16.62 23.27 n/a 45.96 38.67 38.68
Type B loops Band A Band B Band C Band D Band E Band F Band G
BELL CANADA 10.21 21.34 34.26 24.86 29.98 32.33 n/a
ISLANDTEL n/a 12.95 12.95 n/a 30.02 31.66 n/a
MTT 11.41 n/a 14.95 n/a 26.70 25.24 n/a
MTS 6.04 16.59 n/a n/a n/a n/a n/a
NBTEL n/a 12.52 n/a n/a n/a n/a n/a
NEWTEL n/a 18.92 20.95 n/a n/a n/a n/a
TCI 8.79 14.29 17.47 15.80 29.40 24.31 n/a
TCBC 8.48 18.87 21.00 18.18 50.03 38.88 49.06
SASKTEL 10.77 22.23 24.25 n/a n/a 38.67 n/a
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