ARCHIVED - Decision CRTC 2001-737

Decision CRTC 2001-737

Ottawa, 29 November 2001

Issues related to imputation test methodology - Rebanding decision follow-up

Reference: 8661-C12-02/00

Table of contents

Paragraph

Summary

Background

1

Imputing per-band loop costs

3

(a) Determination with respect to alternative imputation test proposals

10

(b) Determination on the use of per-band loop costs

17

The use of the rebanding decision costing parameters

22

Residential service in high cost bands

26

Other matters

Preliminary view regarding SaskTel's Band C

29

Clarification regarding Bands B and C in Aliant Telecom territory formerly served by NBTel, NewTel and Island Tel

31

Summary

In its May 1997 local competition decision, the Commission prescribed an imputation test for incumbent local exchange carriers' (ILECs) retail local exchange services as a safeguard against anti-competitive pricing. In its April 2001 rebanding decision, the Commission proposed changes to that methodology and raised three issues relating to the imputation test's methodology.

In this decision, the Commission concludes that the per-band loop cost is a reasonable estimate of service-specific loop costs within a band for the purpose of safeguarding against anti-competitive pricing. The Commission considers that using per-band loop costs, which form the basis of loop rates, will increase fairness and competitive equity. It therefore modifies the imputation test for ILECs' retaillocal exchange service and service bundles that include local exchange services.

The Commission also requires ILECs to use, in their imputation tests, the accounting plant lives and capital cost parameters used in the rebanding decision, to the extent applicable, for the non-loop portion of local exchange services and service bundles that include local exchange services.

The Commission concludes that the imputation test for residential primary exchange services in high cost serving area bands remains appropriate and should not be modified to take account of the explicit subsidies ILECs receive from the Central Fund Administrator.

In addition, the Commission is of the preliminary view that unbundled loops in SaskTel's Band C should be treated as essential for purposes of the imputation test. The Commission invites comments from all parties to the proceeding regarding this view.

The Commission also clarifies, for the purpose of the imputation test, the treatment of unbundled loops in certain bands in Aliant Telecom territory formerly served by NBTel, NewTel and Island Tel.

Background

1.

In Decision CRTC 2001-238, Restructured bands, revised loop rates and related issues, dated 27 April 2001 (the rebanding decision), the Commission raised three issues relating to the methodology of the imputation test that certain incumbent local exchange carriers (ILECs) apply for tariffed retail local exchange services. This test was prescribed by the Commission in Telecom Decision CRTC 97-8, Local competition, dated 1 May 1997, as a safeguard against anti-competitive pricing by ILECs for various local services.

2.

The ILECs involved in this proceeding are Aliant Telecom Inc. (formerly Island Telecom Inc., Maritime Tel & Tel Limited, NBTel Inc., and NewTel Communications Inc.), Bell Canada, MTS Communications Inc. and Saskatchewan Telecommunications (collectively, Bell Canada et al.), and TELUS Communications Inc. (TCI). These ILECs filed comments on 8 June 2001 and replied on 24 July 2001 to comments filed on 9 July 2001 by GT Group Telecom Services Corp. on behalf of itself, AT&T Canada Telecom Services Company, AT&T Canada Corp. and Call-Net Enterprises Inc. (collectively, Group Telecom et al.). Group Telecom et al. are competitive local exchange carriers (CLECs) and provide local services in competition with the ILECs.

Imputing per-band loop costs

3.

In the rebanding decision, the Commission directed the ILECs to show cause why the imputation test for retail local exchange services in non-essential bands should not be changed to impute the company's per-band loop cost instead of its service-specific loop costs.

4.

The ILECs opposed the Commission's proposal. Bell Canada et al. submitted an alternative proposal whereby the lesser of the following two amounts would be included in an imputation test for loops in non-essential bands:

5.

Bell Canada et al. submitted that, because the unbundled loop rates represent the maximum cost of a loop to CLECs in non-essential bands, CLECs could not be disadvantaged if unbundled loop rates are used in the imputation test. Further, to ensure fairness and competitive equity in non-essential bands, ILECs must be allowed to use the service-specific cost of provisioning both the loop and non-loop components in imputation tests because CLECs can maximize their efficiency on both these components in non-essential bands.

6.

TCI considered that the current imputation test should not be changed. TCI argued that CLECs can economically duplicate loops in non-essential bands, and that using average per-band loop costs would influence choices made by CLECs between facilities-based entry and entry using ILEC unbundled loops. This could preclude efficient facilities-based entry where it would otherwise be warranted.

7.

Group Telecom et al. also opposed the Commission's proposal. It argued that the greater of the following two amounts should be included in the imputation test for loops in non-essential bands:

8.

Group Telecom et al. argued that, contrary to the presumption underlying non-essential bands, even aggressive facilities-based entrants have no choice, and will have no choice for the foreseeable future, but to rely on ILEC loop facilities in most areas of non-essential bands. Thus, imputing loop rates only in essential bands is not sufficient to achieve the imputation test's objectives.

9.

TCI argued that non-essential loops are simply not essential. TCI disagreed with Group Telecom et al. that ILECs have a price advantage relative to CLECs as ILECs must price services to recover fixed and common costs. Bell Canada et al. also disagreed that CLECs are unavoidably reliant on leased loops in non-essential bands.

(a) Determination with respect to alternative imputation test proposals

10.

Bell Canada et al. and Group Telecom et al.'s proposed changes to the imputation test rely on identical elements, but Bell Canada et al. would impute the lesser of the two amounts, and the competitors would impute the greater of the two amounts.

11.

The Commission considers that the proposals to impute loop ratesraisethe issue of whether the Commission should treat loops in non-essential bands as essential for imputation test purposes. Group Telecom et al.'s proposal is grounded in their view that local loops are essential, even in bands now designated as non-essential. The extent to which ILEC loops in non-essential bands should be characterized as essential is also the basis for the ILECs' objection to Group Telecom et al.'s position.

12.

The Commission notes that Bell Canada et al.'s proposal presupposes that economic loop options are readily available to CLECs, in all instances, in non-essential bands. The Commission disagrees and considers that Bell Canada et al.'s proposal does not take sufficient account of competitive realities that CLECs face. Group Telecom et al. argued that it is simplistic to assume that the path to facilities-based competition in non-essential bands can involve the exclusive use of CLEC-owned facilities at every stage. In Order CRTC 2001-184, Local competition: Sunset clause for near-essential facilities,dated 1 March 2001, the Commission stated that near-essential facilities, including loops, are critical inputs required by entrants. The Commission noted that in virtually all cases only ILECs provide such facilities. The Commission maintains this view and considers that CLECs are not in a position to use only, or even mainly, CLEC-owned loops during the transition to facilities-based local service competition.

13.

With respect to Bell Canada et al.'s proposal, the Commission expects that the service specific loop costs will almost always be less than the loop rate, given that the rate includes a mark-up. The Commission also anticipates that Bell Canada et al.'s proposal, if applied for non-essential bands, would typically result in the use of service-specific loop costs, as is the case with the current imputation test.

14.

The Commission distinguished between "essential" and "other" facilities for pricing purposes in Decision 97-8. Group Telecom et al. referred in this proceeding to an application made in May 1999 by AT&T Canada (formerly MetroNet Communications Group Inc.) with respect to Bell Canada's enhanced exchange-wide dial (EEWD) service. EEWD service provides the customer with a combination of exchange and intercommunicating services and is offered in the restricted geographic area of Ottawa-Hull. In its application, AT&T Canada argued that the imputation test does not adequately prevent anti-competitive pricing and proposed using loop rates in all bands for imputation test purposes. The Commission denied AT&T Canada's application in Order CRTC 2000-208, Commission denies MetroNet Communications Group's request to modify the imputation test, dated 20 March 2000. The Commission notes its finding in that order that AT&T Canada's application sought to review and vary Decision 97-8, and that AT&T Canada failed to demonstrate that there is substantial doubt as to the correctness of that decision.

15.

The purpose of this proceeding is to consider the Commission's preliminary view that was expressed in the context of the rebanding decision, regarding a change to the imputation test whereby ILECs would use the per-band loop costs set out in that decision, and not service-specific loop costs in that test.The Commission also notes that various issues relating to ILEC services used by competitors to provide local services, including the pricing of these services, are currently being considered in the proceeding begun by Public Notice CRTC 2001-37, Price cap review and related issues, dated 13 March 2001.

16.

Based on the foregoing, the Commission considers that neither of the proposals made by Bell Canada et al. and Group Telecom et al. is appropriate.

(b) Determination on the use of per-band loop costs

17.

Bell Canada et al. argued that requiring ILECs to impute per-band loop costs would result in an unfair cost advantage to CLECs because CLECs have access to cost options lower than the average per-band loop cost. As discussed above, the Commission disagrees that such alternatives are readily available to CLECs in most circumstances. Group Telecom et al. objected to the Commission's proposed approach on the basis that it would result in a price floor that does not recover causal costs in situations where an ILEC's service-specific loop costs are greater than its average per-band cost.

18.

The Commission recognizes that there will be instances where an ILEC's service-specific loop costs are greater than the per-band loop cost. The Commission also notes there are ILEC services for which the service-specific loop costs will be less than the per-band loop cost. The Commission notes that costs within bands are more homogeneous as a consequence of the rebanding decision and considers that, as a result, the per-band loop cost will be more representative of the cost of any given loop within that band than previously.

19.

The Commission recognized in the rebanding decision that competitive equity issues may arise under the current imputation test methodology insofar as it allows de-averaging of loop costs within a rate band. Rates for ILEC loops are based on per-band loop costs and, as the Commission stated in Order 2001-184, loops are a critical input required by entrants. As noted above in paragraph 12, it remains the Commission's view that CLECs are not in a position to use only, or even mainly, CLEC-owned loops during the transition to facilities-based local competition. The Commission therefore considers that, as it proposed in the rebanding decision, using the per-band loop cost will increase fairness and competitive equity. Moreover, the Commission considers that the per-band loop cost is a reasonable estimate of service-specific loop costs within a band for the purpose of safeguarding against anti-competitive pricing.

20.

The Commission considers that it is appropriate to use consistent costs for various regulatory purposes. For example, in Decision CRTC 2000-745, Changes to the contribution regime, dated 30 November 2000, the Commission stated that, to the extent applicable, various costing parameters used to determine the loop rates in the proceeding begun by Public Notice CRTC 2000-27, Restructured bands, revised local loop rates and related issues, dated 18 February 2000, should also be used to determine primary exchange services (PES) costs for purposes of calculating the subsidy requirement. The Commission considers using the per-band loop costs used to develop loop rates in the imputation test for local exchange services is consistent with this general approach. This is particularly relevant because loop costs represent a large proportion of retail local exchange costs.

21.

In view of the foregoing, the Commission therefore modifies the imputation test for retail local exchange services and service bundles that include such local exchange services to require ILECs to impute per-band Phase II loop costs underlying the approved loop rates.

Use of the rebanding decision costing parameters

22.

In the rebanding decision, the Commission asked ILECs to also comment on the appropriateness of using costing methodologies and parameters approved in the rebanding decision for future imputation tests of retail exchange services.

23.

Bell Canada et al. and TCI argued that the costing methodologies and parameters approved in the rebanding decision will not result in costs that reflect an ILEC's true incremental costs and thus are not appropriate for imputation tests of retail local exchange services. Bell Canada et al. identified numerous adjustments with which they disagreed. TCI, while also not agreeing with various adjustments in the rebanding decision stated that the methodologies and parameters for local loop pricing in that decision should also be used for imputation test purposes so that consistent costs are used for both purposes. Group Telecom et al. argued that, to ensure retail rates are not set at anti-competitively low levels relative to unbundled local loop rates, the Phase II cost of imputed test components must be at or above the levels that result from using the costing methodologies and parameters approved in the rebanding decision.

24.

The Commission considers it desirable to use consistent cost methodologies for rating local loops and for imputation tests associated with retail local exchange services, as doing so increases the consistency between costs for the services provided to CLECs and costs determined by the ILECs for their retail services. With respect to the costing parameters adopted in the rebanding decision, the Commission does not expect that capital cost parameters (e.g. various average working fill factors and life estimates) and use of accounting plant lives would vary with each service.

25.

Therefore, the Commission requires ILECs to use in their imputation tests the accounting plant lives and capital cost parameters used in the rebanding decision, to the extent applicable, for the non-loop portion of retail local exchange services and service bundles that include retail local exchange services. The Commission confirms that, when the imputation test is applied to a proposed service bundle, this determination applies only to the retail local exchange portion of that bundle.

Residential service in high cost bands

26.

In the rebanding decision, the Commission asked ILECs to submit their proposals on the Commission's preliminary view that the imputation test for residential PES in high cost serving area (HCSA) bands should be modified to take account of the explicit subsidies to be received from the Central Funds Administrator (CFA).

27.

TCI and Group Telecom et al. considered that the Commission's proposal is appropriate. Bell Canada et al. did not agree with the Commission's proposal, and proposed to retain the existing imputation test rules for residential PES in HCSA bands. Bell Canada et al. submitted that, since the CLECs can resell ILEC residential services in HCSA bands, using residential PES tariffed rates for imputation tests involving residential PES in these bands will not lead to a competitive inequity.

28.

The Commission agrees with Bell Canada et al. that the imputation test for HCSA bands does not lead to a competitive inequity in the current circumstances. As set out in Decision 97-8, an imputation test is not required for below-cost single line residence services and such services, when included in an ILEC's bundled service offering, are costed at the applicable tariffed rates. Moreover, based on the record of this proceeding, the Commission does not consider that a change to the imputation test for HCSA bands is justified. Therefore, the Commission concludes that the current rules concerning the imputation test for residential PES in HCSA bands remain appropriate and should not be modified to take account of the explicit subsidies to be received from the CFA.

Other matters

Preliminary view regarding SaskTel's Band C

29.

In paragraph 15 of its letter regarding The imputation test methodology for local services, dated 27 November 1998 (1998 letter), to interested parties to Telecom Public Notice CRTC 95-36, Implementation of regulatory framework - Local interconnection and network component unbundling, dated 11 July 1995, and Telecom Public Notice CRTC 96-28, Implementation of regulatory framework - Development of carrier interfaces and other procedures, dated 1 August 1996, the Commission identified loops in various then-existing ILEC rate bands as essential facilities for purposes of the imputation test. However, Saskatchewan Telecommunications, which came under Commission jurisdiction effective 30 June 2000, was not referenced in this letter.

30.

Having regard to the relative level of costs associated with SaskTel's Band C, the Commission is of the preliminary view that SaskTel's Band C should be treated as essential for purposes of the imputation test. SaskTel may comment, copying all parties to the rebanding decision proceeding, by 6 December 2001. Parties may comment by 11 December 2001, copying SaskTel and SaskTel may submit reply commentsby 13 December 2001, serving copies on those parties who filed comments. Comments and reply comments must be received, not merely mailed, by these dates.

Clarification regarding Bands B and C in Aliant Telecom territory formerly served by NBTel, NewTel and Island Tel

31.

In the rebanding decision, the Commission found that all bands designated as essential prior to that decision will continue to be designated as essential, and also designated the HCSA bands identified in that decision as essential. However, NBTel and NewTel did not have a Band C prior to the rebanding decision. Therefore, while the rebanding decision has the effect that Band C is designated as essential for all other ILECs (except SaskTel), that decision's identification of Band C for NBTel and NewTel, taken with the Commission's findings in its 1998 letter, create a situation where Band C is not identified as essential in Aliant Telecom territory formerly served by NBTel and NewTel. However, in Aliant Telecom territory formerly served by NewTel, Band C loops are drawn from the former NewTel essential Band B; and in Aliant Telecom territory formerly served by NBTel, Band C loops are drawn largely from the former NBTel essential Band B. In Aliant Telecom territory formerly served by NBTel, NewTel and Island Tel, Band B was previously classified as the non-essential Band A.

32.

The Commission therefore clarifies that for purposes of the imputation test:

Secretary General

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