ARCHIVED - Order CRTC 2001-100

Order CRTC 2001-100

Ottawa, 2 February 2001

Bell Canada's savings from gross receipts tax reductions

Reference: 8661-C25-02/00

The Commission directs Bell Canada to include a downward exogenous adjustment to its price cap formula to recognize certain gross receipts tax (GRT) savings resulting from the reduction in the GRT rate.

On 21 August 2000, Call-Net Enterprises Inc. filed a Part VII application, on behalf of itself and its affiliates (including Call-Net Technologies Services Inc. and Call-Net Communications Inc.), seeking a ruling from the Commission addressing the regulatory treatment, with retroactive effect to 1999, of the savings for Bell Canada resulting from the reduction in the Ontario gross receipts tax (GRT) rate.

The Ontario government's May 1999 budget reduced the GRT rate levied on the incumbent telephone companies operating in the province of Ontario from 5% to 4% effective 1 January 1999. The following year, in its May 2000 budget, the Ontario government announced additional annual reductions in the GRT rate starting 1 January 2000 that would result in the eventual elimination of the tax by 2003.

Call-Net's position

Call-Net submitted that since 1999, Bell Canada's Utility segment has inappropriately benefited from the decrease in the GRT rate.

Call-Net proposed the following three potential remedies for the Commission's consideration:

b) reduce rates that competitors and others pay for services from Bell Canada which are cost based and rebate overpayments for past years, or at the very least, adjust these rates on a going-forward basis; and

c) apply a downward exogenous factor adjustment under the price cap formula.

Call-Net submitted that since residential rates are generally priced below cost and that business rates have been reduced to a level that may impede local competition, its preference was for Bell Canada to apply any savings resulting from the GRT rate reductions to the Utility segment shortfall, recalculate the contribution rates and issue rebates for past periods.

In support of its submission, Call-Net submitted that the Commission has the legal power to change, retroactively, previously established final rates. Call-Net relied on arguments made in a separate application for relief with respect to direct connection rates (the direct connection proceeding). Specifically, Call-Net submitted that the Commission's authority is found in section 62 and section 32(g) of the Telecommunications Act.

Bell Canada's position

Bell Canada concurred with Call-Net that, in this particular case, in the event that a regulatory adjustment is considered appropriate, it would be inappropriate to pass through any future savings associated with the GRT rate reduction to customers through reductions in capped service prices, and that contribution rate reductions should be considered instead.

Bell Canada submitted that given that the GRT is a revenue-based tax, the amount of the GRT rate reduction that is applicable to capped services can be readily determined based on the capped revenue base to which the tax is applied.

Bell Canada submitted that it would be inappropriate and unfair to impose any adjustments related to an exogenous event for any time period prior to its identification for exogenous treatment.

Bell Canada further submitted, relying on arguments made in the direct connection proceeding, that to the extent that any of Call-Net's proposed remedies adjust rates for prior time periods, it is doubtful that the Commission has jurisdiction to implement them.

Commission determination

Regulatory treatment of GRT savings

In Price cap regulation and related issues, Telecom Decision CRTC 97-9, dated 1 May 1997, the Commission stated that an exogenous factor adjustment will be considered for inclusion in the Price Cap Index (PCI) for events or initiatives which satisfy the following:

a) they are legislative, judicial or administrative actions which are beyond the control of the company;

b) they are addressed specifically to the telecommunications industry; and

c) they have a material impact on the Utility segment of the company.

The Commission agrees with Call-Net that the savings resulting from the reduction in the GRT rate qualify for exogenous treatment as contemplated in Decision 97-9.

The Commission notes that the application of the GRT savings to reduce contribution rates would be inconsistent with the framework established in Decision 97-9.

The Commission further notes that the reduction in the GRT rate has reduced, and its eventual elimination in 2003 will further reduce, the cost of local residential and business services.

Treating the GRT savings related to capped services as an exogenous factor will mitigate any upward pressure caused by the exogenous factor resulting from Changes to the contribution regime, Decision CRTC 2000-745, dated 30 November 2000. Decision 2000-745 permits companies currently under price cap regulation, such as Bell Canada, to reflect in their 2001 price cap filing an upward exogenous factor adjustment of 4.5% to the Service Band Limit (SBL) for each of the Residence Local Services and Other Capped Services sub-baskets and to the overall PCI.

Accordingly, the Commission considers that the GRT savings related to capped services should be included as a downward exogenous adjustment to the overall PCI as well as to the SBL for each of the Residence Local Services and Other Capped Services sub-baskets.

Calculation of GRT savings

The Commission notes that Bell Canada's Split Rate Base (SRB) Manual contains the procedures to assign the GRT expense to the Utility and Competitive segments. Further, Bell Canada has not filed any updates or revisions to its SRB Manual to modify the assignment of the GRT. Consistent with these procedures, the Commission considers that the total company GRT savings should be assigned to the Utility and Competitive segments using the procedures described in Bell Canada's SRB Manual.

Since Bell Canada's SRB Manual does not contain procedures to assign the GRT to services within the Utility segment, the Commission considers that because the GRT is a revenue-based tax, it is appropriate to use revenues to assign the GRT savings within the Utility segment. Accordingly, the allocation of the Utility segment GRT savings between capped and non-capped services is to be based on their respective revenues. Further allocations of the capped services GRT savings among the various sub-baskets are to be based on their respective sub-basket revenues.

GRT savings for 2000

As noted above, the Commission recognized in Decision 97-9 that significant events of a legislative, judicial or administrative nature may occur that are beyond the control of the company and that are specific to the telecommunications industry. To the extent that such exogenous events have a material impact on the operations of companies such as Bell Canada, the Commission established in Decision 97-9 procedures to address the regulatory treatment of the costs or savings stemming from such events.

These procedures, established in Decision 97-9, reflect the fact that, by their very nature, these events cannot always be known in advance. Further, the resulting financial impacts of such events cannot be readily assessed and determined in advance. Decision 97-9 specifically provides that in general, actual data should be used to determine the impact of an exogenous event. The Commission considers that the regime established to address exogenous events means that all parties are on notice that adjustment to the PCI and SBLs stemming from these events may be made in the future to account for past events. The Commission notes that this approach provides for fair and symmetrical treatment of such events for all parties.

In Decision 97-9, the Commission established the procedures available to both the telephone companies and third parties for submitting applications for exogenous factor adjustments. Call-Net's Part VII application is consistent with these procedures.

The Commission considers that parties who do not have an intimate knowledge of a telephone company's operations are not in a position to immediately assess the impact of an exogenous event. Consistent with the regime established in Decision 97-9, the Commission therefore considers that it would be appropriate in the circumstances of this case to include exogenous events related to the year in which Call-Net's application was made. The Commission notes that the GRT savings realized in 2000 are due to the reduction in the GRT rate from 5% to 3%.

Implementation

With respect to the capped services GRT savings for the year 2001, resulting from the reduction in the GRT rate from 5% to 2%, the Commission directs that these savings are to be included as an exogenous adjustment to the SBL for each of the Residence Local Services and Other Capped Services sub-baskets and to the overall PCI.

In accordance with paragraph 22, Bell Canada is also directed to include the capped services GRT savings realized in 2000 as a one time exogenous factor for inclusion in the PCI and SBLs. These savings are to be amortized over a two-year period starting in 2001. This allows for a transition to the eventual elimination of the tax in 2003.

The Commission notes that the current price cap regime will be reviewed in 2001. Accordingly, the regulatory treatment of the GRT savings related to the years 2002 and 2003 are to be in compliance with the regulatory framework established in that proceeding.

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