ARCHIVED - Order CRTC 2001-876

Order CRTC 2001-876

Ottawa, 14 December 2001

Interim 2002 revenue-percent charge, national subsidy requirement and procedures for the revenue-based contribution regime

Reference: 8695-A53-01/01

Summary

In response to a Part VII application requesting clarification of contribution related changes taking effect on 1 January 2002, the Commission sets:

On 30 November 2000, the Commission issued Decision CRTC 2000-745, Changes to the contribution regime, which replaced the per-minute contribution collection mechanism with a national revenue-based approach, changed the definition of the subsidy requirement and changed the distribution of subsidy amounts. In particular, Decision 2000-745 based the calculation of subsidy requirement on high-cost serving areas (HCSAs) which were to be determined in the proceeding initiated by Public Notice CRTC 2000-27 entitled Restructured bands, revised local loop rates and related issues, dated 18 February 2000.

On 27 April 2001, the Commission issued Decision CRTC 2001-238, Restructured bands, revised loop rates and related issues (amended by Decisions 2001-238-1 and 2001-238-2), which established the costs to be used as the basis for the determination of the subsidy requirement under the new contribution regime. This included the adoption of a uniform approach for the identification of HCSAs in the territories of the large incumbent local exchange carriers (ILECs) and a more consistent set of costing methodologies by which large ILECs are to determine the costs for local loops and residential primary exchange services.

On 29 June 2001, Aliant Telecom Inc., Bell Canada, MTS Communications Inc. and Saskatchewan Telecommunications (collectively, the companies) filed a Part VII application seeking clarification from the Commission regarding certain changes to the contribution regime directed by the Commission to occur on 1 January 2002.

Specifically, the companies sought clarification regarding the calculation of the total subsidy requirement (TSR), the subsidy per network access services (NAS) and the distribution of the subsidy from the national contribution fund effective 1 January 2002. The companies note that, while these issues would be determined on a final basis in the proceeding initiated by Price cap review and related issues, Public Notice CRTC 2001-37, dated 13 March 2001, some interim determinations were required as a decision in the PN 2001-37 proceeding will not come into effect before later in 2002.

The companies submitted that there is a need to provide for an interim revenue-percent charge and subsidy requirement, effective 1 January 2002.

The companies submitted that an interim solution should be put in place in order to ensure that large surpluses do not accrue in the central fund that would need to be refunded following the price cap review decision. To do otherwise, will result in large adjustments to the fund and the subsidy distributed resulting in an increase in complexity of administration.

AT&T Canada Corp., GT Group Telecom Services Corp., Microcell Telecommunications Inc., O.N.Telcom, Rogers Wireless Inc., Telesat Canada, TELUS Communications Inc. and Vidéotron Télécom ltée filed comments regarding this application.

All of these parties agreed with the companies that an interim solution was required effective 1 January 2002 in order to avoid large surpluses being accrued in the National Contribution Fund that would need to be refunded later in the year.

2002 National subsidy requirement

The Commission notes that, effective 1 January 2002, significant changes are required to the calculation of the national subsidy requirement (NSR) as a result of Decision 2000-745. The Commission expected that the NSR would decrease significantly in 2002 as a result of these changes.

According to Decision 2000-745, the subsidy requirement per residence NAS in each high-cost band will consist of:

a) the average annual primary exchange residential service revenue, plus

b) the approved annual target implicit contribution from optional local services ($60/NAS), less

c) the Phase II costs as determined in Decision 2001-238, adjusted for certain cost factors; plus

d) the approved mark-up on Phase II costs (15%).

Decision 2000-745 further states that the 2002 NSR will consist of the following:

a) the TSRs for all of the high-cost bands in each ILEC territory, including the small ILECs; plus

b) the supplemental funding for Northwestel Inc.; plus

c) the administrative costs for the Central Fund Administrator (CFA) and the Canadian Portable Contribution Consortium (CPCC).

Decision CRTC 2001-756 released on 14 December 2001, Regulatory framework for the small incumbent telephone companies, which implemented a new regulatory framework for the small ILECs, has been taken into account in this proceeding.

The Commission notes that the following issues, among others, are currently under consideration by the Commission in various proceedings and may impact on the determination of the final NSR for 2002:

a) 2002 rates for primary exchange residence services are being reviewed in the price cap review proceeding;

b) service improvement plans submitted in price cap review;

c) the results from the price cap proceeding for Télébec ltée and TELUS Communications (Québec) Inc.;

d) the components associated with inflation, productivity and the revenue charge are to be added explicitly to the primary exchange service costs each year. As indicated in Decision 2001-238, the cost increase factors will be determined during the price cap review proceeding;

e) TELUS Communications Inc. application to review and vary Decision 2000-745 and Decision 2001-238; and

f) the final 2002 supplemental funding requirement for Northwestel.

The Commission is of the view that it is appropriate to set an interim subsidy requirement and an interim revenue-percent charge effective 1 January 2002:

a) since there are significant changes in the determination and distribution method of the NSR effective 1 January 2002; and

b) final Commission determinations are pending on issues that directly impact the revenue-based contribution regime.

Large ILECs

The Commission is of the view that, since at this time there are no known rate changes in 2002, the TSR for the interim period for the large ILECs should be calculated using the average current rates at 31 December 2001, adjusted for the implicit subsidy from optional services of $60/NAS. The final TSR calculation for 2002 will be adjusted to reflect any adjustments to rates resulting from the price cap decision.

With respect to the costs to be used in determining the TSR, Decision 2001-238 set out the Phase II costs for the large ILECs. Decision 2001-238 stated that the productivity and inflation factors for the determination of the TSR would be determined in the proceeding initiated by PN 2001-37. Therefore, in order to implement a simplified interim solution, the Commission considers it appropriate to use the Phase II costs as determined in Decision 2001-238-2 with a mark-up of 15%.

Since the Commission has not made a decision regarding the productivity offset or inflation factor for HCSAs, the Phase II costs in the calculation of the interim TSR will not reflect these adjustments. The final TSR and revenue-percent charge will be adjusted to reflect the determinations coming out of the price cap review proceeding.

Based upon the assumptions in this order, the Commission sets the interim monthly subsidy per NAS in the HCSAs of the large ILECs effective 1 January 2002 as shown in appendix A to this order.

Télébec and TELUS Québec

On 13 March 2001, the Commission issued Implementation of price cap regulation for Québec-Téléphone [now TELUS Québec] and Télébec, Public Notice CRTC 2001-36.

This proceeding is considering the issues associated with the implementation of an appropriate form of price cap regulation that would apply to Télébec and TELUS Québec starting in 2002. Among other things, PN 2001-36 indicated that the specific timing of the annual TSR updates would depend on the nature of the regulatory mechanism after 1 January 2002 and that the basis for distributing the subsidy would be determined in that proceeding.

Télébec and TELUS Québec filed their estimated 2002 subsidy requirements in that proceeding which were calculated in accordance with the directives set out in the Decision 2001-238. Based upon these assumptions, the 2002 subsidy requirements would be $13.7 million and $5.9 million for Télébec and TELUS Québec respectively.

Since these figures are significantly below the 2001 subsidy requirements, Télébec and TELUS Québec requested that the Commission provide for a transition period to fully implement the use of Phase II costs in the determination of the subsidy requirement. As part of this transition period, Télébec and TELUS Québec have requested additional subsidy from the central fund and permission to use their deferral accounts.

In order to implement a simplified interim solution, the Commission:

a) approves an interim 2002 TSR of $18.7 million for Télébec and $17.3 million for TELUS Québec based on the companies' proposed amounts adjusted to exclude the impact of the proposed rate increases; and

b) directs the CFA to distribute a monthly payment equivalent to 1/12 of the interim 2002 subsidy requirement to Télébec and TELUS Québec. This would result in monthly payments of approximately $1.56 million for Télébec and $1.44 million for TELUS Québec.

The approval of the interim 2002 TSR, based upon the companies' respective proposal is not a decision by the Commission regarding additional compensation from the central fund or the use of their respective deferral accounts by the companies in 2002. A determination on these issues will be made by the Commission in its decision related to PN 2001-36. The final 2002 TSRs and NSR will be adjusted accordingly.

Small ILECs

On 14 December 2001, the Commission issued Decision 2001-756, which approved, among other things, the methodology for the calculation of the subsidy requirements for the small ILECs.

Consistent with that decision, the 2002 final subsidy requirements have been established for all small ILECs (see appendix B attached).

The Commission notes that the small ILECs are subject to the revenue-based contribution regime effective 1 January 2002. In order to facilitate the transition to the new regime and to keep the interim contribution regime as simple as possible for the small ILECs, the Commission considers it appropriate, for the interim period, to distribute the subsidy to each small ILEC based on fixed monthly amounts equivalent to 1/12 of its 2002 subsidy amount. Any adjustments to the distribution procedures and NAS reporting will be addressed following the issuance of the price cap decisions.

Northwestel supplemental funding

In Decision CRTC 2000-746, Long-distance competition and improved service for Northwestel customers, dated 30 November 2000, the Commission stated that the supplemental funding level for Northwestel in 2001 will continue to be made available on an interim basis effective 1 January 2002, pending review and approval of the final 2002 supplemental funding requirement. The Commission notes, however, that it is anticipated that the level of supplemental funding is expected to increase in 2002.

In response to Commission interrogatories, Northwestel estimated its supplemental funding requirement at $18.7 million for 2002.

The Commission sets Northwestel's interim 2002 supplemental funding at $18.7 million. The final 2002 supplemental funding requirement will be adjusted to reflect the Commission's determination in the annual review proceeding for Northwestel to be initiated early in 2002.

Therefore, the Commission directs the CFA to increase the monthly supplemental funding to $1,558,333 for Northwestel effective 1 January 2002.

CFA/CPCC operational and administrative costs

The Commission notes that the 2001 costs for the CFA/CPCC are projected to be approximately $2.5 million. The Commission expects that there will be further significant changes in 2002 due to the new distribution method and addition of many participants, which will result in administrative costs in 2002 being similar to those incurred in 2001.

Decision 2000-745 indicated that the CFA/CPCC costs would be added to the NSR in 2002 and beyond. The Commission considers it appropriate to use the estimated 2001 costs for the determination of the 2002 interim NSR. The Commission will monitor these costs during the interim period and consider changes in the determination of the final 2002 subsidy requirement.

Therefore, the Commission approves the use of the 2001 administrative costs of the CPCC and the CFA of $2.5 million as the estimate for the 2002 administrative costs for the CPCC and the CFA in the establishment of the interim 2002 NSR.

National subsidy requirement

Based upon the assumptions above, the Commission approves, on an interim basis, the 2002 NSR as follows:

$

CPCC/CFA Costs

2,500,000

Northwestel

18,700,000

Small ILECs

34,216,200

Télébec

18,700,000

TELUS Québec

17,300,000

Large ILECs

187,570,135

NSR

278,986,335

Procedures for the distribution of the funds

The Commission recognizes the possibility that there may be a shortfall in the National contribution fund in a particular month. The Commission notes that, although the true-up process established in Decision 2000-745 ensures that every local exchange carrier (LEC) will receive the TSR due, there could be a delay in receiving full payment that could extend to the following year. The Commission acknowledges that the timely receipt of the total monthly subsidy for the small ILECs is important to their financial stability. Therefore, the Commission directs the CFA to remit the total monthly subsidy for the small ILECs prior to the normal distribution of subsidy to the remaining LECs (including Télébec and TELUS Québec), but subsequent to the payments to the CFA/CPCC and Northwestel.

The Commission notes that the true-up mechanism in Decision 2000-745 provides, as of the year 2002, for any shortfall at the end of the current year for all of the LECs by adding it to the NSR of the following period.

Required contributors

Decision 2000-745 indicates that the required contributors to the central fund would be determined each year following the annual contribution filing required each 31 March.

The Commission directs the 2001 required contributors to continue to contribute to the fund in January 2002 unless a required contributor advises the Commission, with supporting evidence, that:

a) changes in corporate status of the telecommunications service provider (TSP) have occurred that will bring its Canadian Telecommunications Services Revenues (CTSR) below the minimum threshold of $10 million; and/or

b) the CTSR results for 2001 are expected to be below the minimum threshold.

In these cases, the Commission will consider the information provided and determine whether or not the TSP remains a required contributor in 2002.

As stated by the Commission in Decision 2001-756, some small ILECs are expected to be required contributors in 2002. As well, some TSPs will become required contributors in 2002 as a result of revenue growth or change in corporate status.

The Commission notes that this determination will not be made until the 2001 annual contribution reports are filed on 31 March 2002. However, small ILECs and all other TSPs that are determined to be required contributors, following the filing of 31 March 2002, should be aware that they will be liable for contribution payments effective 1 January 2002.

Therefore, the small ILECs and TSPs who were not required contributors in 2001 but are expected to be required contributors in 2002 may wish to file their monthly contribution-eligible revenues and remit the appropriate funds to the CFA effective 1 January 2002.

Interim 2002 revenue-percent charge

In Decision 2000-745, the Commission stated that the subsidy would be limited to HCSAs as determined in Decision 2001-238. Decision 2001-238 established the Phase II cost per high-cost band. The Commission also determined that the subsidy would only be applicable to primary exchange residential services.

The companies noted that the Commission indicated in Decision 2001-238, that it expected the subsidy requirement to decline significantly in 2002 due to the limited application of the subsidy and the reduction in Phase II costs. In that decision, the Commission estimated that the revenue charge would decline by approximately two-thirds from the 2001 revenue charge of 4.5%.

The companies argued that maintaining the 2001 revenue charge of 4.5%, during the interim period, would be detrimental to the industry as large amounts of cash would be tied up until the price cap review decision was issued and the appropriate reconciliation process was completed. The companies submitted that an interim revenue-percent charge could be estimated using the contribution-eligible revenues filed for the first ten months of 2001 and project the remaining two months of the year. No other parties to the proceeding disagreed with this approach.

The Commission notes that if the 2001 revenue charge of 4.5% were retained for the interim period with distribution based on a fixed amount per NAS for high-cost bands, a large surplus would accrue in the central fund. In the Commission's opinion, it is not in the best interest of the industry or the public to have large surpluses accrue in the fund only to be refunded later in 2002.

As stated in Decision 2000-745, the Commission's intent was to limit the amount of regulatory burden in a revenue-based contribution regime. To allow a significant amount to accumulate in the fund resulting in large adjustments at a later date would be contrary to that intent.

The Commission considers it appropriate to establish the interim revenue-percent charge using the 2001 contribution-eligible revenues filed with the CFA and projected to year end and the interim 2002 NSR established in this proceeding.

Accordingly, the Commission sets the interim 2002 revenue charge at 1.4% effective 1 January 2002.

Final 2002 revenue-percent charge

As outlined in this order, many issues are unresolved with respect to the 2002 revenue-percent charge and subsidy requirements. Following the issuance of the price cap decisions and the receipt of the annual contribution filing on 31 March 2002 for 2001 contribution-eligible revenues, adjustments to the TSR and revenue-percent charge may be necessary to reflect the following:

a) rate increases effective during 2002;

b) adjustments to the Phase II costs including inflation and productivity factors as determined in the price cap review decisions for the large ILECs, Télébec and TELUS Québec;

c) any changes to the 2002 supplemental funding for Northwestel;

d) estimated 2002 CFA/CPCC costs as approved by the CPCC Board of Directors; and

e) contribution-eligible revenues for 2001 filed by all required contributors, including new contributors and small ILECs.

The final 2002 revenue-percent charge and final 2002 subsidy requirements will be determined when the above issues have been addressed.

Secretary General

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

APPENDIX A

Monthly subsidy per NAS by band

($)

Company

E

F

G

Estimated total residential subsidy requirement

($)

Bell Canada

3.89

4.21

24.73

47,139,210

MTS

22.44

N/A

70.72

28,804,973

SaskTel

22.81

15.73

34.62

41,274,815

Aliant

Island Tel

6.92

8.35

N/A

2,513,025

MTT

2.66

1.45

N/A

3,321,240

NBTel

7.50

0.68

N/A

3,157,265

NewTel

7.52

7.78

14.47

8,447,995

TELUS

TCI

4.38

1.12

6.59

7,137,260

TCBC

27.70

15.62

24.12

45,774,353

Total

187,570,136

APPENDIX B

(page 1 of 2)

Company

2002 subsidy requirement

($000)

Monthly subsidy requirement

($000)

Télébec

18,700.0

1,558.3

TELUS Québec

17,300.0

1,441.6

Small ILECs - Ontario

Amtelecom Inc.

3,896.3

324.7

Brooke Telecom Co-operative Ltd.

384.8

32.1

Execulink Telecom Inc.

1,195.6

99.6

Gosfield North Communications Co-operative Limited

334.9

27.9

Hay Communications Co-operative Limited

859.2

71.6

Huron Telecommunications Co-operative Limited

644.7

53.7

Lansdowne Rural Telephone Co. Ltd.

506.9

42.2

Mornington Communications Co-operative Limited

483.5

40.3

Nexicom Telecommunications Inc.

503.6

42.0

Nexicom Telephones Inc.

400.1

33.3

North Frontenac Telephone Corporation Ltd.

434.1

36.2

North Renfrew Telephone Company Limited

345.9

28.8

People's Telephone Company of Forest Inc.

1,098.9

91.6

Quadro Communications Co-operative Inc.

1,085.7

90.5

Roxborough Telephone Company Limited

96.6

8.1

Tuckersmith Communications Co-operative Limited

517.8

43.2

Westport Telephone Company Limited

471.0

39.3

Wightman Telecom Ltd.

1,219.3

101.6

Northern Telephone Limited

7,705.9

642.2

Small ILECs - Quebec

CoopTel

805.1

67.1

La Cie de Téléphone de Courcelles Inc.

85.3

7.1

Téléphone Guèvremont inc.

983.0

81.9

La Corporation de Téléphone de La Baie

101.4

8.5

Téléphone Milot inc.

902.5

75.2

Compagnie de téléphone Nantes inc.

49.6

4.1

Le Téléphone de St-Liboire de Bagot Inc.

255.9

21.3

Sogetel inc.

2,453.4

204.5

La Compagnie de Téléphone Upton Inc.

329.4

27.5

La Compagnie de Téléphone de Warwick

759.1

63.3

La Compagnie de Téléphone de Lambton Inc.

231.1

19.3

Le Téléphone St-Éphrem Inc.

194.7

16.2

La Compagnie de Téléphone de St-Victor

220.5

18.4

APPENDIX B

(page 2 of 2)

Small ILECs - Tax exempt

Bruce Municipal Telephone System

846.7

70.6

Dryden Municipal Telephone System

90.4

7.5

Kenora Municipal Telephone System

318.9

26.6

O.N.Telcom

735.3

61.3

Prince Rupert City Telephones

372.0

31.0

Thunder Bay Telephone

1,828.4

152.4

Cochrane Public Utilities Commission

468.7

39.1