ARCHIVED - Telecom Decision CRTC 2002-67

Telecom Decision CRTC 2002-67

Ottawa, 25 October 2002

TELUS Communications Inc. - Application to review and vary Decision 2000-745 and Decision 2001-238

Reference: 8662-T42-03/01

Table of contents

Paragraph

Summary

I     Introduction

1

II   Timing of the application by TELUS

10

III TELUS' grounds for review of Decision 2000-745

17

Errors of law

18

Failure to consider principles

66

Conclusion regarding a review and variance of Decision 2000-745

92

IV  TELUS' grounds for review of Decision 2001-238

93

Errors of law

94

Errors of fact

145

Failure to consider principles

165

Additional comments regarding the ILECs' Phase II
cost differences

175

Conclusion regarding a review and variance of
Decision 2001-238

218

The Commission finds that TELUS Communications Inc. (TELUS) has failed to demonstrate that there is substantial doubt as to the correctness of Decision 2000-745 and Decision 2001-238. The Commission therefore denies TELUS' request to vary Decision 2000-745 so that, beginning 1 January 2002, the total subsidy requirement (TSR) would be calculated using a mark-up of 25%, instead of 15%. The Commission also denies TELUS' request to vary Decision 2001-238 by making interim the unbundled loop rates and primary exchange service (PES) costs, setting loop rates at a level calculated by TELUS including a 25% mark-up and revising the residential PES costs used in the TSR calculation. The Commission also denies TELUS' request for certain follow-up proceedings relating to Phase II costs and the Commission's mark-up policies. The Commission will consider, however, the treatment of portfolio expenses in the Phase II review proceeding.

I  Introduction

1.

On 14 September 2001, TELUS Communications Inc. (TELUS) filed an application pursuant to Part VII of the CRTC Telecommunications Rules of Procedure (the Rules) asking the Commission to review and vary Changes to the contribution regime, Decision CRTC 2000-745, 30 November 2000 (Decision 2000-745) and Restructured bands, revised loop rates and related issues, Decision CRTC 2001-238, 27 April 2001 (Decision 2001-238).

2.

TELUS requested the Commission to vary Decision 2000-745 so that, on an interim basis, beginning 1 January 2002, the total subsidy requirement (TSR) would be calculated using a mark-up of 25% on primary exchange service (PES) costs, instead of the 15% mark-up found to be appropriate in the decision. TELUS further requested that the Commission initiate a process to consider its mark-up policies for the purposes of the TSR calculation and consider the evidence filed in that process, as well as any additional evidence relevant to the mark-up on PES costs that might be required.

3.

With respect to Decision 2001-238, TELUS asked that it be varied to include a determination that, effective 1 January 2002, unbundled loop rates be made interim and be set at a level calculated in accordance with TELUS' response to TELUS(CRTC) 30Jan01-1 PN 2000-27, subject to the reclassification of certain wire centres into different rate bands, as required by Decision 2001-238. TELUS' proposed method of calculating the interim loop rates would use TELUS' current average working fill factors (AWFFs), instead of the AWFFs set in Decision 2001-238; would use functional operating expenses based on what TELUS considered to be its actual expenses, instead of at the level set in Decision 2001-238; and, would use a mark-up on Phase II loop costs of 25%.

4.

TELUS also requested that Decision 2001-238 be varied so that PES costs be made interim effective 1 January 2002 and that, for the purposes of the TSR calculation, residential PES costs be determined in accordance with the methodology established in Final rates for unbundled local network components, Telecom Decision CRTC 98-22, 30 November 1998 (Decision 98-22), as interpreted by TELUS in its response to TELUS(CRTC) 30Jan01-1 PN 2000-27 and that a mark-up of 25% be used, instead of the 15% specified in Decision 2001-238.

5.

TELUS further requested that the Commission initiate a review of Phase II costing which would examine, at a minimum, the costing issues arising from the proceeding leading to Decision 2001-238 relating to AWFFs, functional operating expenses and maintenance expense, as well as the level of mark-up on PES costs. TELUS submitted that the objectives of that proceeding should be to establish an accurate reflection of incumbent local exchange carrier (ILEC) specific Phase II costs.

6.

By letter dated 12 October 2001, the Commission modified the procedures under the Rules, setting 16 November 2001 and 26 November 2001 as the deadlines for comments on TELUS' application and reply comments by TELUS, respectively. Aliant Telecom Inc. (Aliant Telecom), Bell Canada and MTS Communications Inc. (MTS) (collectively, the Companies), Saskatchewan Telecommunications (SaskTel), AT&T Canada Corp. on behalf of itself, AT&T Canada Telecom Services (AT&T Canada) and Call-Net Enterprises Inc. (Call-Net) (collectively, AT&T/Call-Net), GT Group Telecom Services Corp. (Group Telecom) and Rogers Wireless Inc. (RWI) filed comments in response to TELUS' application on or before 16 November 2001. TELUS filed its reply comments on 26 November 2001.

7.

In a letter dated 20 September 2001, TELUS proposed that all ILECs refile with the Commission their unbundled loop rates and PES costs in accordance with the information provided in response to the 30 January 2001 interrogatories referenced above, and adjusted to take into account the reassignment of some exchanges to new bands. In a subsequent letter dated 18 October 2001, TELUS requested that, in view of the delayed process established by the Commission to address its review and vary application, the Commission should rule immediately on its 20 September 2001 request for the ILECs to file unbundled loop rates and PES costs. TELUS submitted that this would give the Commission sufficient time to establish interim rates effective 1 January 2002.

8.

In Telecom Order CRTC 2001-831, 15 November 2001, the Commission denied TELUS' 18 October 2001 request, noting that the loop rates set out in Decision 2001-238 had been approved on an interim basis and that the PES cost information sought by TELUS to recalculate the TSR under its proposal was available.

9.

On 18 January 2002, TELUS made an additional submission which it stated was relevant to the proceeding and should be considered by the Commission. TELUS' 18 January 2002 submission stated that there were differences in the measures of Phase II costs between TELUS and the Companies due to differences in the treatment of certain expenses that are causal to a group of services but are not causal to any individual service within this group. These expenses are referred to as "portfolio expenses". On 24 January 2002, the Companies provided comments on TELUS' 18 January 2002 letter. AT&T/Call-Net, Group Telecom and SaskTel also filed additional comments on 19 February 2002. TELUS filed reply comments on 26 February 2002.

II  Timing of the application by TELUS

10.

A preliminary issue raised by RWI related to the characterization of TELUS' application as a review and vary application in light of the timing of the application. In Guidelines for review and vary applications, Telecom Public Notice CRTC 98-6, 20 March 1998 (PN 98-6), the Commission indicated that an application to review and vary a Commission decision should generally be filed within six months of the date of the decision. The Commission stated that review and vary applications made after that time would generally only be considered in exceptional circumstances and if the Commission is satisfied that there are good reasons for the delay. One example of exceptional circumstances would be where a fundamental change in circumstances occurring more than six months after the decision raised substantial doubt as to the correctness of the original decision.

11.

RWI submitted that TELUS' application failed to meet the six-month timeframe with respect to Decision 2000-745 and, therefore, could not be considered an application to review and vary that decision. RWI noted that nowhere in its application did TELUS address the fact that the timeframe established by the Commission in PN 98-6 for review and vary applications had been passed, nor did TELUS attempt to justify its use of the review and vary process.

12.

RWI submitted that no fundamental change in circumstances had occurred since 30 May 2001, the date when the six-month window elapsed, and that TELUS had not provided any credible reason for its delay. RWI submitted that TELUS' attempt to shelter its request to review and vary Decision 2000-745, by linking its request to Decision 2001-238, should not be permitted.

13.

In reply, TELUS argued that there was a direct and substantial connection between Decision 2000-745 and Decision 2001-238. TELUS noted that in Decision 2001-238, the Commission indicated that the residential PES costs determined in that decision would be used in the calculation of each ILEC's TSR for the purposes of the national subsidy fund (NSF) established pursuant to Decision 2000-745. TELUS further submitted that, to the extent that a mark-up was permitted over Phase II costs in Decision 2000-745, the amount of that mark-up was directly affected by the Phase II costs permitted by Decision 2001-238.

14.

TELUS submitted that, in any event, the Commission's six-month rule was only a general rule. TELUS further submitted that when, as was the case here, a subsequent decision by the Commission had significant effects on the ability of a company to recover its costs, there was every reason to review both related decisions simultaneously.

15.

In the Commission's view, there is a linkage between Decision 2000-745 and Decision 2001-238 that would justify a delay in the filing of the application to review and vary Decision 2000-745. The Commission agrees with TELUS that, since the residential PES costs determined in Decision 2001-238 would be used to determine each ILEC's TSR, the total impact on parties of Decision 2000-745 would not have been known until Decision 2001-238 had been issued. Accordingly, it would not have been unreasonable to wait until Decision 2001-238 had been issued before filing an application to review and vary both decisions.

16.

Accordingly, the Commission has treated TELUS' application as a review and vary application and has applied the tests set out in PN 98-6 in assessing the merits of the application. In the following sections, the Commission first examines TELUS' application as it relates to Decision 2000-745 and then turns to TELUS' arguments and requested relief in respect of Decision 2001-238.

III  TELUS' grounds for review of Decision 2000-745

17.

TELUS sought a review of Decision 2000-745 on the following grounds:

· The Commission committed errors of law by: (a) failing to provide notice in Review of contribution collection mechanism and related issues, Telecom Public Notice CRTC 99-6, 1 March 1999 (PN 99-6) of its intention to consider a change to its long-standing mark-up policy, and; (b) failing to provide adequate reasons for its decision.

· There was substantial doubt as to the correctness of the decision since it was contrary to certain regulatory principles established by the Commission.

Errors of law

TELUS' position

18.

TELUS stated that it was seeking a review of paragraph 65 of Decision 2000-745 on the grounds that no notice of the Commission's intention to consider this change to its mark-up policy had been given in PN 99-6. Paragraph 65 of Decision 2000-745 reads as follows:

The Commission considers that the ILECs' Phase II costs includes the obligation to serve. In pricing certain services, the Commission has in the past applied a 25 percent mark-up on the Phase II costs to consider the recovery of both (a) the company's fixed and common costs and (b) differences between Phase III (embedded) costs and Phase II (current) costs. In the context of calculating the TSR, the Commission does not consider it appropriate to include the latter component.

19.

According to TELUS, the Commission was obliged to give full and complete notice of the case to be met. TELUS acknowledged that one of the issues in the proceeding was whether the mark-up should be lower, but TELUS argued that there was no indication in the public notice that the Commission might choose to lower the mark-up by excluding costs, in this case embedded costs, from the mark-up. Neither, in TELUS' view, did the public notice give any indication that a contribution discount was being considered through a reduction in the level of mark-up. According to TELUS, this is exactly what the Commission did by excluding embedded costs in Decision 2000-745. Therefore, TELUS argued, no fair hearing was given.

20.

TELUS further stated that it was unable to determine whether the Commission's definition or calculation of embedded costs were reasonable. According to TELUS, there was no foundation for assessing what the Commission was considering when it made the reduction in the mark-up from 25% to 15% on the finding that it was appropriate that embedded costs were to be excluded.

21.

TELUS submitted that the Commission's decision on the matter of the exclusion of embedded costs should have addressed the major points at issue, set out the reasoning of the Commission and demonstrated consideration of the main relevant factors. According to TELUS, based on the reasons given in Decision 2000-745, it was not possible to deduce the Commission's rationale for having made such a fundamental change to its policy on the recovery of embedded costs. In TELUS' submission, the Commission's failure to provide adequate reasons was an error of law.

Comments of other parties

The Companies

22.

The Companies agreed with TELUS that PN 99-6 gave no indication that the exclusion of certain costs from the mark-up was at issue and stated that although the level of the mark-up was among the issues that were being addressed, the specific cost inclusions and exclusions for purposes of determining this mark-up were not at issue.

23.

The Companies agreed with TELUS' argument that the Commission failed to provide sufficient reasons for its decision to exclude the difference between Phase II and embedded costs from the calculation of the mark-up to be used to determine the TSR. According to the Companies, the Commission's reasons for this decision amounted to a simple recitation of the positions of the various parties regarding the level of the mark-up, a comment that the mark-up had in the past been intended to recover both (i) fixed common costs and (ii) differences between current and embedded costs, followed by a statement that in the context of calculating the TSR, the Commission did not consider it appropriate to include the latter component. The Companies also submitted that the Commission did not elaborate on how it defined embedded costs or on how it determined the specific adjustment that it made to exclude this cost component from the mark-up.

24.

The Companies submitted that these reasons did not meet the test established by the courts as an element of procedural fairness. In this regard, the Companies cited the Federal Court of Appeal in Via Rail Canada Inc. v. National Transportation Agency et al. (2000), 193 D.L.R.(4^th)357, which stated at 363-4:

The obligation to provide adequate reasons is not satisfied by merely reciting the submissions and evidence of the parties and stating a conclusion. Rather, the decision-maker must set out its findings of fact and the principal evidence upon which those findings were based. The reasons must address the major points in issue. The reasoning process followed by the decision-maker must be set out and must reflect consideration of the main relevant factors.

25.

The Companies submitted that the Commission's reasons provided no logical connection between the evidence in the proceeding and the conclusion reached by the Commission. According to the Companies, the Commission expressed absolutely no reasons in support of its conclusion.

AT&T/Call-Net

26.

AT&T/Call-Net submitted that a party was entitled to be provided with sufficient information to allow it to be apprised of the nature of the matters in issue. Nevertheless, according to AT&T/Call-Net there are limits to what the law required with respect to notice. AT&T/Call-Net noted that the Supreme Court of Canada had examined the issue of notice in relation to a Commission decision in CRTC v. CTV Television Network et al. [1982] 1 S.C.R. 530. In AT&T/Call-Net's submission, the Court made it clear that notice included more than a narrow reading of the public notice that was issued by the Commission. It included considerations that enter into the broader context of these two proceedings, such as questions and comments from interveners and the Commission. AT&T/Call-Net submitted that, as the record of the proceeding indicated, there was ample notice of the broad spectrum of issues that the Commission was considering.

Group Telecom

27.

Group Telecom submitted that TELUS was provided with more than adequate notice that the mark-up to be used for purposes of the TSR calculation was within the scope of the PN 99-6 proceeding. Group Telecom argued that it was clear from PN 99-6 that the scope of the proceeding included the issue of how the TSR should be defined and calculated. In particular, it was evident that if the Commission adopted a Phase II cost-based subsidy requirement, it would also have to rule on the appropriate level of, and principles governing, the mark-up. Group Telecom also submitted that TELUS should have known that this issue was within the scope of the proceeding since the Companies proposed the use of a 25% mark-up in their initial PN 99-6 submission.

28.

In Group Telecom's view, TELUS received further notice that the mark-up was at issue when AT&T Canada provided an extensive discussion of the appropriate mark-up in response to the interrogatory AT&T Canada(Clearnet)14Jan00-102 RCM. In particular, AT&T Canada recommended that the mark-up used for the purpose of establishing the TSR not exceed 11%, a figure which AT&T Canada indicated was based on the percentage mark-up required to recover forward-looking fixed common costs.

29.

Group Telecom noted that in the first round of interrogatories, the Commission addressed interrogatories to both the Companies and TELUS exploring the appropriate level of mark-up. Group Telecom argued that TELUS received yet further notice in the second round of interrogatories, when the Commission again requested quantitative evidence in support of the 25% mark-up level and sought the ILECs' views on AT&T Canada's analysis regarding the appropriate level of mark-up.

30.

In Group Telecom's view, TELUS demonstrated that it knew the mark-up was at issue when, in its final comments in the PN 99-6 proceeding, TELUS noted that certain parties considered that the mark-up applied to the Phase II costs should be lower than 25%. Group Telecom noted that TELUS proposed to retain a 25% mark-up on Phase II costs in order to ensure adequate recovery of a portion of an ILEC's fixed common costs.

31.

Group Telecom also noted that both TELUS and the Companies dealt extensively with the issue of the mark-up in their reply comments in the PN 99-6 proceeding. At no time, in either final comments or reply comments, did either the Companies or TELUS suggest that the issue of the appropriate mark-up was outside the scope of the proceeding.

32.

On the question of the adequacy of the Commission's reasons, Group Telecom submitted that it was incorrect to suggest that the use of a 15% mark-up departed from a pre-existing policy regarding the level of the mark-up in the context of the contribution requirement. Group Telecom argued that the Commission had not previously ruled on the question of the mark-up to be used in determining the amount of contribution to be collected.

33.

Group Telecom also submitted that, given the long-standing inability of the ILECs to provide cost support for the 25% mark-up, it was beyond belief that TELUS felt entitled to argue that the Commission had given insufficient reasons for the decision.

RWI

34.

RWI submitted that in PN 99-6, at subparagraph 11 ii), the Commission identified the TSR as an issue to be addressed in the proceeding. Moreover, the Commission specifically asked how the TSR to be recovered from any new contribution mechanism should be defined and calculated. In RWI's view, it was clear from this statement that the issue of the calculation of the TSR was within the scope of the proceeding. RWI also noted that various parties proposed the use of Phase II costs as the method by which the subsidy requirement should be calculated, and that the issue of the appropriate mark-up over Phase II costs was also raised.

35.

In RWI's view, the level of mark-up over Phase II costs to be used to calculate the TSR was addressed on the record of the PN 99-6 proceeding. RWI noted that various parties argued for mark-ups well below 25% throughout the course of the proceeding. For example, AT&T Canada argued for a mark-up of 11%. According to RWI, TELUS had ample and timely notice and, therefore, the Commission did not commit an error of law.

36.

RWI submitted that the Commission gave full and complete reasons for its decision. RWI further submitted that based on Commission practice and settled law, the adjudicator did not need to address each and every detail of a proponent's argument.

TELUS' reply

37.

In reply, TELUS submitted that the issue for the Commission to determine was whether it was enough to say that the mark-up was an issue in the proceeding or whether, as TELUS believed, the Commission should have expressly engaged the debate on whether embedded costs incurred in the obligation to serve should be excluded from recovery.

38.

According to TELUS, it had every right to expect that any review of the amount of the mark-up would be limited to whether the percentage mark-up would recover the costs the Commission had always determined that the mark-up should recover. TELUS submitted that recovery of embedded costs incurred in the obligation to serve is squarely within the nature of a property right and not a simple indulgence. Accordingly, TELUS submitted that procedural fairness required that express notice be given by the Commission of the possibility that it would disallow recovery of embedded costs by changing an express determination made in the past and confirmed in Local competition, Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8). TELUS further submitted that the mere issuance of interrogatories did not adequately cure a breach of notice of an important issue such as whether a whole category of costs that had traditionally been included in the mark-up might be omitted from the mark-up.

39.

On the question of the adequacy of reasons, TELUS submitted that it was not until TELUS applied for leave to appeal Decision 2000-745, and the Commission filed a Memorandum of Fact and Law with the Federal Court of Appeal, that TELUS learned that the denial of recovery of embedded costs for the purposes of the TSR was not intended to be an absolute denial in all cases and for all purposes.

40.

TELUS argued that RWI failed to indicate how the Commission's decision complied with the settled law of the VIA Rail case. TELUS submitted that the Commission's decision regarding the exclusion of embedded costs was a significant aspect of the decision. In TELUS' view, the decision should have, at a minimum, set out the major points at issue, including the elementary issue as to what was meant by embedded costs, as well as the reasoning of the Commission and that it should have demonstrated a consideration of the main relevant factors.

41.

According to TELUS, Group Telecom itself could not decide whether the Commission thought that the quantitative record did not support the 25%, on the one hand, or did not support the need for the mark-up to recover the difference between forward-looking costs and embedded costs, on the other. This demonstrated, in TELUS' view, that the Commission's reasons for its decision to exclude recovery of embedded costs were deficient.

42.

TELUS submitted that parties should not have to speculate about the reasons for a decision. In TELUS' view, the fact that Group Telecom was unsure about what the Commission's actual reasoning might have been was enough to demonstrate that the reasons were insufficient. TELUS argued that a simple statement that the exclusion of recovery of embedded costs was appropriate begged the questions of what criteria were used to reach this conclusion and how embedded costs were calculated. In TELUS' view, no adequate reasons were given.

The Commission's findings and determinations

Notice

43.

PN 99-6 expressly stated that the scope of the proceeding included an examination of how the TSR, to be recovered through any new contribution mechanism, should be defined and calculated. While the public notice did not specify precisely what the Commission might do with respect to the mark-up, the Commission considers that an experienced party like TELUS should have been aware from a reading of the public notice that all aspects of the TSR, including the definition and calculation of the mark-up, were within the scope of the proceeding.

44.

In the Commission's view it would be impossible to identify in a public notice, every specific question that the Commission might address in the course of a comprehensive proceeding. It is sufficient that a public notice identify the broad scope of the proceeding.

45.

Furthermore, as noted by Group Telecom, the Commission had not previously ruled on the appropriate mark-up to be used in determining the amount of contribution to be collected. Consequently, if the Commission adopted a Phase II-based subsidy requirement, it was clear that it would also have to rule on the appropriate level of, and principles governing, the mark-up.

46.

The Commission notes that in the first round of interrogatories in the PN 99-6 proceeding, the Commission addressed interrogatories to both the Companies and to TELUS exploring the appropriate level of mark-up. For example, in the interrogatory TELUS(CRTC)14Jan00-202 RCM, the Commission requested:

a) For each [of] TCI and TCBC, comment on the appropriateness, including any supporting evidence (e.g. quantitative analysis) for the use of a 25% mark-up value to recover an appropriate portion of fixed and common costs.

b) Confirm that the mark-up would be intended to recover the company's fixed and common costs where such costs are defined according to each company's Phase II costing and procedures manual (i.e., based on the detailed cost classifications of the company's operating expense accounts). If not, explain why not, and for each of TCI and TCBC, provide a detailed list of the cost components that fall into this category of costs. For each of TCI and TCBC, if available, provide an estimate of the percentage of the company's costs associated with fixed and common costs, with supporting calculations.

... Comment on the appropriateness of using a mark-up value that is lower than 25% to recover an appropriate portion of fixed and common costs.

47.

The Commission also notes that in response to AT&T Canada(Clearnet)14Jan00-102 RCM, AT&T Canada provided a discussion of the appropriate mark-up to be used and recommended that the mark-up not exceed 11%.

48.

Responses to interrogatories are evidence, and TELUS had the opportunity to file evidence on this matter and to present its views. Indeed, in its final comments in the PN 99-6 proceeding, TELUS stated:

The TELUS proposal retains a 25% mark-up on Phase II costs to account for the recovery of fixed and common costs in the calculation of the per NAS residential subsidy requirement. A 25% mark-up should be applied.

Although all parties to the Proceeding generally agree that the Phase II costing methodology with a mark-up for fixed and common costs is the best approach for calculating the subsidy requirement, not all parties appear to agree that the appropriate mark-up to be applied to the Phase II costs is 25%. AT&T Canada suggested in its evidence that a reasonable mark-up should be used in the calculation and then indicated in response to interrogatory AT&T Canada(Clearnet)14Jan00-102 RCM that the mark-up should not exceed 11%. Call-Net stated that the mark-up should be lower than 25% in light of the fact that the public interest supports a lower total subsidy requirement. TELUS and the Companies submitted that a 25% mark-up was necessary to ensure adequate recovery of a portion of a company's fixed and common costs.

49.

In the Commission's view, these remarks demonstrate that TELUS was aware that all aspects of the mark-up were under consideration.

50.

Further, the issue of the level of mark-up in the subsidy calculation and whether this mark-up would be intended to recover the differences between the current and embedded costs associated with residence basic local service was examined by the Commission through a number of questions posed to TELUS.

51.

In the first round of interrogatories in the proceeding leading to Decision 2000-745, the Commission posed the following question in part (c) of TELUS(CRTC)14Jan00-202 RCM concerning the Companies' proposal to include a 25% mark-up to recover an appropriate portion of fixed common costs:

At paragraph 40 of TELUS' submission, TELUS proposed that the Commission make the provision for the recovery of historical embedded costs that have been incurred by the telephone company in fulfilling their obligation to serve. Provide the company's view on whether the mark-up is also intended to recover the differences between the current and embedded costs associated with residence basic local service. ... For each of TCI and TCBC, if available, provide an estimate of the magnitude of the difference between embedded and current costs associated with residence basic local service.

52.

In response, TELUS stated:

...the 25% mark-up was adopted, as an interim measure, in CNCP Telecommunications, Interconnection with Bell Canada, Telecom Decision CRTC 79-11, and has become the accepted mark-up to approximate the revenues required from all Utility segment services to achieve the revenue requirement based on Phase III costs. Until such time (if ever) that TELUS has better information upon which to base the mark-up, TELUS is willing to continue to accept the 25% mark-up to recover the required portion of the shared and common costs from individual services.

53.

In part (d) of the same interrogatory, the Commission asked that TELUS provide revised residence subsidy requirement estimates under scenarios whereby the proposed mark-up value of 25% would be replaced by 0%, 10%, 15% and 20%. In response to the question on the mark-up sensitivity, TELUS further stated:

TELUS is prepared to continue using a mark-up of 25% for calculating the prices necessary to generate revenues from all Utility services to achieve the revenue requirement based on Phase III costs.

54.

These interrogatories and the responses provided by TELUS demonstrate unambiguously that the mark-up was at issue in the PN 99-6 proceeding and that TELUS was aware of this fact.

55.

In light of the above, the Commission finds that there was adequate notice that the definition and calculation of the mark-up was an issue to be addressed in the proceeding and that there was no error of law.

Adequacy of reasons

56.

In the Commission's view, the reasons set out in Decision 2000-745 regarding the purpose and level of the mark-up to be used in the TSR calculation were not inadequate. In particular, the Commission disagrees with TELUS' implicit suggestion that paragraph 65 of Decision 2000-745 should be read in isolation and, when so read, should be considered inadequate.

57.

The Commission's determination with respect to the purpose and level of the mark-up must be read in its full context within the section of Decision 2000-745 entitled "Quantifying the subsidy requirement amount". In that section, the Commission decided to calculate the TSR using the Phase II costs of providing residential PES in high-cost bands. The Commission then went on to decide how to implement this decision, including what level of mark-up, if any, on the Phase II costs might be appropriate. In this regard, the Commission took into consideration a number of competing objectives and concerns that had implications for the level of the mark-up.

58.

At paragraph 54 of Decision 2000-745 the Commission determined that the TSR should be based on the approved rates in a high-cost serving area, rather than a theoretical threshold that might be higher than the rates actually in effect. In the Commission's view, this approach would ensure that the subsidy received by competitors would be sufficient to permit them to provide service at the prevailing rates.

59.

At the same time, the Commission was concerned that the subsidy not be set at so high a level as to encourage uneconomic entry. The Commission therefore concluded, at paragraph 68, that a minimum level of mark-up should be used in order to send "the appropriate economic signals for competitive entry". The use of a minimum level of mark-up was also justified, in that same paragraph, on the grounds that it would promote "efficient provision of service in high-cost serving areas".

60.

When setting the level of the mark-up, the Commission noted, at paragraph 65, that the ILECs' Phase II costs compensated them for the costs they incurred in fulfilling their regulatory obligation to provide service. There was, therefore, no need to inflate the mark-up in order to provide for recovery of these costs.

61.

The Commission went on to note, also at paragraph 65, that, when pricing services, a mark-up on Phase II costs is intended to assist in the recovery of fixed common costs and the difference between embedded and current costs. There has never been a determination by the Commission that a single, fixed level of mark-up is required for all services in order to help recover these costs. On the contrary, when pricing services on the basis of Phase II costs, the Commission has varied the level of the mark-up depending on the nature of and market for the relevant services.

62.

It is also important to emphasize that the revenues generated by a mark-up on Phase II costs are subsumed in the ILEC's overall revenues. The regulatory regime established by the Commission provides an ILEC with a reasonable opportunity to earn sufficient revenues to cover all of the ILEC's costs which are recognized and approved by the Commission. If TELUS thought its revenues would be inadequate as a result of the revised subsidy mechanism established by Decision 2000-745, it had the opportunity in the proceeding initiated by Price cap review and related issues, Public Notice CRTC 2001-37, 13 March 2001 (PN 2001-37) to request a revenue requirement review of its rates, so as to ensure that it would have a reasonable opportunity to recover its costs. TELUS did not make such a request in the PN 2001-37 proceeding.

63.

Finally, it is important to recognize that, as noted by the Commission at paragraph 66 of Decision 2000-745, there was a limited amount of quantitative evidence on the record of the proceeding regarding the appropriate level of the mark-up. In particular, neither TELUS nor any other ILEC had provided any significant quantitative evidence in support of a 25% mark-up.

64.

In summary, when paragraph 65 is read in context, it is evident that the Commission made a deliberate attempt to set the mark-up (and hence the subsidy) at a level that would make it viable for competitors to provide service at prevailing rates while, at the same time, establishing the proper incentives for the efficient delivery of PES in high cost bands and minimizing distortions in the competitive market. The Commission concluded that a mark-up of 15% would be sufficient for this purpose. In the Commission's view, Decision 2000-745 adequately explains the Commission's reasoning on this point.

65.

In light of the foregoing, the Commission concludes that it did not fail to provide adequate reasons in relation to the purpose and level of the mark-up and, hence, did not commit an error of law.

Failure to consider principles

TELUS' position

66.

TELUS also sought a variation of paragraph 65 of Decision 2000-745 on the grounds that there was substantial doubt as to the correctness of the decision because it was contrary to one of the Commission's longstanding principles.

67.

TELUS submitted that embedded costs were not recovered from the sum of revenues derived from residential PES and contribution per network access service (NAS). Consequently, in TELUS' view, the embedded costs of residential service in high cost areas would be borne by the ILECs, thereby imposing an additional contribution burden on ILECs, as compared to competitors. This was, in TELUS' view, equivalent to granting a contribution discount to competitors.

68.

TELUS submitted that the Commission had ended its policy of granting contribution discounts to competitors. TELUS noted that in Competition in the provision of public long distance voice telephone services and related resale and sharing issues, TelecomDecision CRTC 92-12, 12 June 1992 (Decision 92-12) the Commission adopted contribution discounts with the express proviso that the discounts would be phased out over a pre-determined schedule. According to TELUS, in Per-minute contribution mechanism for line-side connections, Telecom Decision CRTC 96-12, 12 December 1996, the Commission also restricted the opportunities for entrants to gain implicit contribution discounts. TELUS also argued that the move to a revenue-based contribution mechanism in Decision 2000-745 was intended to eliminate the potential for this sort of market distortion.

69.

TELUS argued that the Commission did not make any statement in Decision 2000-745 or anywhere else, indicating that it had changed its policy on contribution discounts. According to TELUS this demonstrated that the Commission failed to consider its own regulatory framework. TELUS submitted that this raised substantial doubt as to the correctness of the Commission's decision to exclude recovery of embedded costs from the mark-up for the purposes of the TSR calculation.

70.

TELUS submitted that the creation of an additional burden on the ILECs to fund high cost areas was not only in direct contradiction to the policy against contribution discounts. It was also directly contradicted by one of the foundational principles that resulted in the reform of the contribution mechanism. According to TELUS, one of the dominant principles in reforming contribution was competitive neutrality.

71.

TELUS submitted that it and many other parties supported the reform of the contribution regime and the principle of competitive neutrality and, in particular, that the contribution mechanism should not adversely affect one service provider over another. TELUS argued that it was therefore unusual that the Commission would in the same decision entrench an asymmetric obligation to fund high-cost areas by excluding recovery of embedded costs from the mark-up for the purposes of the TSR calculation. In TELUS' view, a failure to consider the stated policy of competitive neutrality demonstrated that there was substantial doubt as to the correctness of Decision 2000-745.

Comments of other parties

The Companies

72.

The Companies agreed with TELUS' view that the Commission had essentially provided a contribution discount to competitors. According to the Companies, this cast substantial doubt as to the correctness of Decision 2000-745 with regards to the determination of the mark-up.

AT&T/Call-Net

73.

AT&T/Call-Net submitted that TELUS was incorrect in two ways when it suggested that the Commission had changed its policy on contribution discounts and failed to consider its own regulatory framework in Decision 2000-745.

74.

First, according to AT&T/Call-Net, all Commission decisions could be viewed as changing earlier Commission determinations. AT&T/Call-Net argued that, while it was possible for a party to construe such changes as involving a change in underlying principles, they did not consider that such an interpretation, in and of itself, could form the basis for an appeal. Accordingly, AT&T/Call-Net submitted that, even if one were to agree with TELUS' view that the Commission had changed its policy, the changes made by the Commission were entirely appropriate and within the scope of the proceeding.

75.

Second, AT&T/Call-Net submitted that TELUS' claim that the Commission had established an inappropriate contribution discount depended on TELUS' view that the Commission's costing determinations were incorrect. If on the other hand, one accepted that the Commission's findings were appropriate, then, according to AT&T/Call-Net, there would be no perceived contribution discount.

Group Telecom

76.

With regard to TELUS' argument that the Commission had granted a contribution discount to entrants, Group Telecom submitted the ILECs had failed to provide, on the record of the PN 99-6 proceeding, quantitative information in support of the 25% mark-up or to demonstrate in that proceeding any practical need for the mark-up to recover the difference between total forward-looking costs and embedded costs. Group Telecom argued that there was simply no support on the record of the proceeding for the Commission to include explicit provision for the recovery of embedded costs in the mark-up and, consequently, there was no basis on the record of that proceeding to argue that any sort of subsidy discount was provided.

77.

Group Telecom submitted that in Decision 2000-745, the Commission established the TSR at the minimum level necessary to sustain the provision of residence service in high-cost areas. Group Telecom argued that it was important to establish the TSR at the minimum necessary level in order to minimize the distortions and anti-competitive consequences that could flow from excessive subsidy collection. Given that the ILEC-specific TSRs were summed to arrive at a national revenue subsidy charge, in Group Telecom's view, all service providers would benefit from such an approach to the TSR, including ILECs.

78.

Group Telecom submitted that the subsidy obligations of entrants and ILECs were symmetrical, as were withdrawals from the central fund. As a result, in Group Telecom's view, the subsidy collection mechanism established by the Commission in Decision 2000-745 involved no contribution discount for entrants.

RWI

79.

RWI submitted that TELUS' argument about competitive neutrality was exaggerated. RWI was of the view that, since subsidies would be limited to high-cost serving areas beginning in 2002, only the ILECs would receive contribution revenues. RWI expected that this would remain true for the foreseeable future. In addition, RWI submitted that TELUS had conveniently ignored the fact that there were other aspects of Decision 2000-745 that could result in non-ILEC telecommunication service providers subsidizing the ILECs.

TELUS' reply

80.

In reply, TELUS summarized the three steps of its argument. First, embedded costs were real costs incurred to provide services. Second, if they were not recovered in the mark-up, they would have to be recovered elsewhere by the ILECs' own services. Third, competitors did not have to contribute to their recovery through the TSR and therefore received a contribution discount.

81.

In response to AT&T/Call-Net's argument that regulatory changes of necessity would affect underlying principles, TELUS submitted that direct conflict with an established Commission principle was an appropriate ground for a review and vary application.

82.

TELUS further submitted that a conflict with one of the fundamental principles upon which Decision 2000-745 was made must create substantial doubt as to the correctness of the determination to exclude embedded costs from recovery through the mark-up used to calculate the TSR. According to TELUS, such a determination made Decision 2000-745 internally inconsistent.

83.

TELUS also addressed the objection made by AT&T/Call-Net and Group Telecom that if the Commission's findings were appropriate, there was no contribution discount. According to TELUS, the Commission acknowledged in Decision 2000-745 that embedded costs incurred to provide residential services in high cost areas existed and that they had been excluded from the subsidy calculation. TELUS submitted that this meant these costs must be recovered by the ILEC from its other services while the competitors did not have to contribute to the recovery of those costs. In TELUS' view, this constituted a discount. In addition, TELUS submitted that paragraph 125 of Decision 97-8 showed that the Commission itself thought that the 25% mark-up was not excessive since ILEC Phase III costs exceeded Phase II costs by more than 25%. Moreover, the evidence filed by TELUS in the follow-up proceeding established by Decision 2001-238 (the loop mark-up proceeding) showed, in TELUS' view, that the difference between Phase II and Phase III costs was greater than 25% and, therefore, there was a subsidy discount being provided even at a 25% mark-up.

84.

With regard to Group Telecom's argument that the subsidy obligations of entrants and ILECs were symmetrical, TELUS replied that this argument was completely wrong. According to TELUS, what Group Telecom's assertion would actually mean in practice was that in order to make the contribution mechanism competitively neutral, all the Commission would have to do is to make sure that the same revenue charge was paid into the fund by everyone. In other words, even a revenue charge of zero would be competitively neutral despite the fact that the ILECs would have to internally subsidize the customers receiving service at rates below cost. TELUS submitted that such a proposition made no sense.

85.

TELUS also responded to the point made by Group Telecom that the TSR should be set at the minimum level necessary in order to minimize distortions and anti-competitive consequences that could flow from excessive subsidy collection. TELUS replied that just as there were distortions and anti-competitive consequences that could flow from excessive subsidy collection, there were distortions and anti-competitive consequences that could flow from deficient subsidy collection. If setting the contribution amount at the minimum level meant that costs that were actually incurred would be purposely excluded, then, according to TELUS, the Commission should have said so and should have addressed the issue of whether a contribution discount arising from such a decision should be granted. In TELUS' view, the objective should have been to achieve accurate costs and mark-ups, not costs and mark-ups that were artificially low.

The Commission's findings and determinations

86.

Contrary to TELUS' argument, setting the TSR mark-up at 15% does not, in the Commission's view, grant competitors a contribution discount. In Decision 92-12, the Commission determined the level of contribution required and then granted competitors a discount in light of a number of considerations. Decision 2000-745 does not establish such a discount. On the contrary, all telecommunications service providers are subject to the same revenue percent charge on their contribution eligible revenues. Competitors are in no better or worse position than the ILECs in this regard. Similarly, all local exchange carriers providing local residential service to customers in a high-cost band will receive the same level of subsidy per NAS. Once again, there is no differentiation between ILECs and competitors.

87.

TELUS' argument that the 15% mark-up provides competitors with a contribution discount appears to be based on the idea that there is some predetermined amount that the contribution mechanism must provide toward the recovery of fixed common costs and the difference between embedded and current costs. This is not the case.

88.

The manner in which fixed common costs and the difference between embedded and current costs are recovered has varied over time according to the pricing of ILEC services, the revenues generated by those services, underlying ILEC costs and the contribution mechanism itself. For example, the level of the mark-up over Phase II costs varies from service to service, depending on pricing policy considerations such as the nature of the services and market conditions.

89.

When establishing the new contribution mechanism, the Commission decided for policy reasons to use a mark-up on Phase II costs which would provide a reasonable contribution to fixed common costs. As indicated above, this mechanism does not differentiate between ILECs and competitors. It does not provide competitors with a contribution discount.

90.

The Commission notes that the 2001 subsidy requirement calculations were determined based on Phase III estimates and, hence, there is no issue with respect to the recovery of the difference between embedded and current costs for that year. As far as 2002 and subsequent years are concerned, as noted above, if TELUS or any other ILEC was concerned that, in light of the changes in the contribution mechanism established by Decision 2000-745, it would not have a reasonable opportunity to earn adequate revenues to recover its costs, it had the opportunity to raise this concern in the PN 2001-37 proceeding and request a revenue requirement review. Neither TELUS nor any other ILEC raised such a concern or requested such a review.

91.

For the reasons set out above, the Commission finds that TELUS has not demonstrated that there is substantial doubt as to the correctness of Decision 2000-745.

Conclusion regarding a review and variance of Decision 2000-745

92.

The Commission has determined above that TELUS has not met the threshold requirement set out in PN 98-6 for a review of a Commission decision. In particular, TELUS has failed to demonstrate that the Commission committed an error of law or fact or that there was otherwise substantial doubt as to the correctness of Decision 2000-745. Accordingly, the Commission concludes that it is unnecessary to review or vary Decision 2000-745. The Commission therefore denies TELUS' application as it relates to Decision 2000-745, including TELUS' request for a process to examine the Commission's mark-up policies.

IV  TELUS' grounds for review of Decision 2001-238

93.

TELUS sought a review of Decision 2001-238 on the following grounds:

· The Commission committed an error of law by failing to give proper notice of the Commission's intention to revisit the Decision 98-22 costing methodology.

· The Commission committed an error of law by failing to provide adequate reasons explaining and justifying its costing changes.

· If the Commission found that the new costing method actually reflected TELUS' costs, the Commission committed an error of fact in that the costs approved in Decision 2001-238 under the new costing methods were not an accurate reflection of TELUS' true Phase II costs.

· If, on the other hand, the Commission realized that the new costing method understated TELUS' costs, there was substantial doubt as to the correctness of Decision 2001-238 because the Commission failed to take into account the principle of competitive neutrality in respect of PES costs used to calculate the TSR and also failed to take into account, and offended, the determination in Decision 97-8 that competitors should not be granted contribution discounts.

Errors of law

TELUS' position

94.

TELUS submitted that in Decision 2001-238, the Commission made significant changes to the ILECs' Phase II costs without providing proper notice to parties that such changes were being contemplated. On the contrary, in TELUS' submission, the Commission actively represented to all participants in the proceeding initiated by Restructured bands, revised local loop rates and related issues, Public Notice CRTC 2000-27, 18 February 2000 (PN 2000-27) that the costing determinations made in Decision 98-22 would form the basis of the costs used to establish unbundled loop rates for the new bands.

95.

TELUS submitted that with respect to unbundled loops, the Commission increased the AWFFs approved in Decision 98-22 for both TELUS Communications Inc. operating in Alberta (TCI) and TELUS Communications (B.C.) Inc. operating in British Columbia (TCBC). TELUS noted that these AWFFs were also used to determine the loop capital costs associated with PES. TELUS further submitted that the effect of increasing fill factors was to reduce the amount of capital costs allowed in the Phase II cost studies.

96.

TELUS noted that in Decision 98-22, the Commission determined for TCI and MTS that a loop maintenance expense for Phase II cost studies should not exceed 10% of the loop capital cost. TELUS also noted that in Decision 2001-238, the 10% rule was applied to all ILECs. TELUS argued that because Decision 2001-238 had reduced the loop capital through the raising of the AWFFs, the effect of the application of the 10% of capital rule was to reduce the maintenance costs from the amount allowed in Decision 98-22.

97.

TELUS noted that in Decision 2001-238, the Commission imposed a cap of $2.50 on functional operating expenses for PES cost calculation purposes. TELUS indicated that it did not know how this cap level was reached or why the cap set aside the ILECs' forecasts based on their own best available information. TELUS argued that there was no notice in PN 2000-27 or Decision 2000-745, that functional operating expense costs were the subject of the proceeding and might be capped.

98.

TELUS also submitted that there was no indication in Decision 2000-745 that the Commission was planning to make, or even considering making changes to the cost parameters approved in Decision 98-22. In TELUS' submission, the Commission's statements in Decision 2000-745 reinforced TELUS' view that the Phase II costing parameters used for PES costs should mirror those used for unbundled loop costs in Decision 98-22, as applicable.

99.

TELUS stated that, relying on the clear words of PN 2000-27, it filed its proposal for restructuring the bands and provided extensive evidence explaining why the TELUS proposal met the Commission's criteria for bands as set out in the public notice. TELUS did not file any evidence explaining its costing method or proposing any changes to the Decision 98-22 costing method because, in TELUS' view, the public notice did not disclose that these types of issues would be considered in the proceeding.

100.

According to TELUS, it used the Decision 98-22 costing method as the foundation for its proposed PES Phase II costs in its restructured band proposal. TELUS submitted that it was a reasonable expectation that any refinements to the costing method determined by the Commission, after the extensive review that occurred in the proceeding leading to Decision 98-22, would also be applied to the costing of PES in the PN 2000-27 proceeding.

101.

TELUS noted that a Commission interrogatory, TELUS(CRTC)30Oct00-3 PN 2000-27, asked that the Commission's proposed banding structure be costed by TCI and TCBC. The Commission specified that the costing parameters were to be based on the company's proposed loop and residential PES Phase II costs filed in response to earlier interrogatories posed by the Commission, but modified in a number of ways, including the use of an AWFF of no less than 75% for the feeder plant and no less than 65% for the distribution plant.

102.

TELUS stated that, in its response to the interrogatory, it objected to the fact that the Commission was departing from the Decision 98-22 costing methods by increasing the AWFFs. TELUS stated that it constructed its outside plant network based on AWFFs that were lower than the values proposed by the Commission.

103.

TELUS argued that in the comment phase of the PN 2000-27 proceeding, it was confronted with proposals made by AT&T Canada to revise the costing method determined in Decision 98-22. TELUS stated that, in that same proceeding, it had argued in its reply comments that these proposals were outside the scope of the proceeding on the grounds that in PN 2000-27 the Commission specified that the ILEC submissions in the proceeding were to contain proposed revised local loop rates and related proposed tariff revisions with supporting cost studies as per Decision 98-22.

104.

TELUS submitted that, somehow and without notice, a suggestion by AT&T Canada led the Commission to conclude that the proceeding convened to develop new bands should also be used to build upon Decision 98-22 in a way that fundamentally changed the cost determinations made in Decision 98-22. According to TELUS, this determination was made by the Commission without seeking any comments from parties on the expansion of the public notice.

105.

TELUS submitted that the development of a new issue (i.e., to adjust costing determinations made in Decision 98-22) in the third round of interrogatories and continuing into the comment phase was not equivalent to amending the public notice and allowing the parties to amend evidence or pleadings. According to TELUS, parties should have been able to rely on the public notice and any announced changes to it. TELUS submitted that while interrogatories that were technically out of scope were sometimes answered in order to provide the Commission with information it could use to formulate future proceedings or better understand the context in which the current proceeding was being held, it was only by clearly and openly amending the public notice that the duty to provide a fair proceeding could be discharged. TELUS submitted that no such amendment or addition to PN 2000-27 was made.

106.

TELUS submitted that, if the Commission had any intention of revisiting the costs for unbundled local loops and changing the costs for PES to something other than costs consistent with the findings in Decision 98-22, it had an obligation at law to say so. In TELUS' view, the Commission did not say so in PN 2000-27 or in any amendment to the public notice and, therefore committed an error of law.

107.

TELUS further submitted that the Commission's decision to revise the Decision 98-22 costing method was flawed by another error of law, a failure to provide adequate reasons. TELUS noted that at paragraph 154 of Decision 2001-238, the Commission stated that the residential PES costs determined in that decision for the purpose of calculating the subsidy requirement were necessary and appropriate to ensure that the NSF would operate in a manner consistent with the objectives of the Telecommunications Act (the Act). TELUS further noted that the Commission also established the loop mark-up proceeding to deal with the level of mark-up and some of the costing differences made in the decision.

108.

According to TELUS, what was not clear from Decision 2001-238 was whether the Commission considered that, with the benefit of the loop mark-up proceeding, the costs would be a reasonable reflection of the actual costs of TELUS or whether the Commission did not consider it necessary to use the ILECs' true costs. In TELUS' submission, the Commission's failure to provide clear reasons on this point constituted an error of law.

Comments of other parties

The Companies

109.

According to the Companies, in PN 2000-27, the Commission explicitly stated that the ILECs were to file unbundled loop and PES costs for their proposed restructured bands based on the costing parameters set out in Decision 98-22. The Companies argued that the Commission did not issue any further modifications to the scope of the proceeding or provide any indication that it was considering adopting changes to the Decision 98-22 costing parameters for purposes of setting loop rates and PES costs. The Companies agreed with TELUS that given the scope of the proceeding as identified in the public notice, the Commission's determinations to change certain costing parameters from those set out in Decision 98-22 amounted to a denial of natural justice and therefore an error of law.

SaskTel

110.

SaskTel submitted that in Decision 2001-238, the Commission made many adjustments to both the unbundled loop and residential PES costs filed by the ILECs, including the establishment of standard costing parameters and cost limits such as standard AWFFs and standard ceilings on maintenance costs and functional operating expenses. According to SaskTel, these adjustments were not consistent with the Phase II costing methodology established in Decision 98-22. SaskTel agreed with TELUS' position that in Decision 2001-238 the Commission modified the Phase II costing methodology without providing any notice that such modifications were being contemplated. SaskTel submitted that these actions represented an error of law and warranted a review of the Phase II costs established in Decision 2001-238.

111.

SaskTel noted that in Public Notice CRTC 2001-37 - "Price cap review and related issues" - procedural matters, Decision CRTC 2001-610, 28 September 2001 (Decision 2001-610), the Commission indicated its intention to initiate a proceeding to examine new estimates of PES costs. SaskTel submitted that the upcoming proceeding would be an appropriate venue to address all issues related to the Phase II costs of PES and unbundled loops, including what, if any, changes to the Decision 98-22 methodology would be appropriate.

AT&T/Call-Net

112.

AT&T/Call-Net submitted that changes to loop rates were anticipated in PN 2000-27. In this regard, AT&T/Call-Net noted that the Companies' submissions filed on both 31 March 2000 and 30 June 2000, employed cost assumptions with respect to asset lives that differed from Decision 98-22.

113.

AT&T/Call-Net noted that the Commission posed interrogatories to both TELUS and the Companies requesting that they develop cost estimates for unbundled loops based on assumptions that differed from those employed in Decision 98-22 and that TELUS responded to interrogatories posed by AT&T/Call-Net and in its response indicated that certain changes should be made to the assumptions employed in Decision 98-22. AT&T/Call-Net also noted that it had proposed a number of changes to the assumptions employed to develop cost estimates for unbundled loops. AT&T/Call-Net further submitted that, in its reply comments in the PN 2000-27 proceeding, TELUS only identified two of these proposals as being out of scope, one relating to the mark-up on Phase II costs and the other relating to the methodology proposed for calculating expense and capital productivity. AT&T/Call-Net pointed out that neither of these changes formed part of the changes to loop cost methodology as a result of Decision 2001-238.

114.

AT&T/Call-Net submitted that the Phase II costing methodology was not changed by Decision 2001-238, but rather, the Commission determined new costing parameters within the established methodology. AT&T/Call-Net submitted that this was entirely appropriate given that the data used in the proceeding leading to Decision 98-22 was filed in July 1997 and, therefore, it was both reasonable, and should not have been unexpected, that changes or updates to the costing parameters would be contemplated.

Group Telecom

115.

Group Telecom submitted that the purpose of PN 2000-27 was to initiate a proceeding to revise ILEC band structures in a manner that would improve cost homogeneity within bands and to establish loop prices for the revised band structures. In that regard, Group Telecom noted that the Commission stated at paragraphs 7 and 8 of PN 2000-27 that it expected ILECs to develop revised loop rates for each proposed band based on revised loop costs using the all-carrier demand of competitive local exchange carriers and ILECs, and in accordance with the costing methodologies used to determine the rates approved in Decision 98-22.

116.

Group Telecom submitted that the purpose of paragraph 7 of PN 2000-27 was to specify the type of information that the Commission expected the ILECs to provide in their initial submissions. In Group Telecom's view, the wording of the public notice neither prevented ILECs from filing additional costing scenarios which would be inconsistent with the findings of Decision 98-22 nor indicated that the Commission's decision would simply repeat the Decision 98-22 findings.

117.

Group Telecom noted that the Companies, both in their 31 March 2000 and 30 June 2000 submissions, proposed loop costs based on significant departures from Decision 98-22 findings with respect to asset lives and expense inclusions. In Group Telecom's view, this indicated that the Companies did not consider these matters outside the scope of the proceeding. Group Telecom also noted that while the Commission required Bell Canada to refile its 31 March 2000 submission to reflect the asset life determinations in Implementation of price cap regulation and related issues, Telecom Decision CRTC 98-2, 5 March 1998 (Decision 98-2) and in Decision 98-22, it did not indicate that the issue of asset lives was outside the scope of the proceeding. On the contrary, the Commission addressed a number of interrogatories to the Companies regarding asset lives, as did interveners. Group Telecom noted that the final comments of AT&T Canada, Call-Net, and C1.com Inc. dealt extensively with the asset lives issue, among other matters related to Decision 98-22. Group Telecom submitted that, based on the record of the PN 2000-27 proceeding, neither the Companies, the Commission nor interveners took as narrow a view of the scope of the proceeding as TELUS now claimed it did.

118.

Group Telecom submitted that in the PN 2000-27 proceeding, TELUS proposed departures from Decision 98-22 in the area of expense productivity. Group Telecom noted that while Decision 98-22 determined that a minimum productivity factor of 3.5% would apply to expense forecasts, TELUS included explicit productivity factors of zero in TCI's and TCBC's loop and PES cost studies. It also appeared, in Group Telecom's view, that TELUS relied on different working fill factors than those forming the basis of the rates approved in Decision 98-22.

119.

Group Telecom argued that, in light of the above, the question of the appropriate role of the Decision 98-22 findings and how best to remain consistent with those findings were significant issues in the proceeding from the beginning, and both the Companies and TELUS proposed significant departures from Decision 98-22 determinations.

120.

Group Telecom submitted that, contrary to TELUS's claim, the Commission's treatment of maintenance expense, functional operating expenses and AWFFs were entirely consistent with the determinations of Decision 98-22.

121.

Group Telecom noted that in Decision 98-22, the maintenance expense forecasts of TCI and MTS were reduced to a maximum level of 10% of the total loop capital given that they were found to be too high by comparison with other ILECs' forecasts. Group Telecom argued that this demonstrated that the Commission's use of the 10% threshold in Decision 2001-238 was entirely consistent with its determinations in Decision 98-22.

122.

Group Telecom also noted that in Decision 2001-238, the Commission found that the ILECs' proposed total functional operating expense levels were consistently higher than the Decision 98-22 levels. The Commission found this result to be counter to what was expected, especially in light of the ILECs' past productivity performance improvements and given the incentives provided under the price cap regime to reduce costs. As a result, the Commission capped the total functional operating expense loop expenses for all ILECs except Bell Canada to an amount equal to the national functional operating expense average determined in Decision 98-22. Group Telecom submitted that this approach with respect to functional operating expenses in Decision 2001-238 was consistent with the Decision 98-22 approach. Group Telecom also noted that the Commission had explained the basis for the figures used.

123.

Group Telecom also noted that in Decision 98-22, the Commission found that TCBC's AWFF associated with copper distribution plant was significantly lower than any other AWFF estimate submitted in that proceeding and, consequently, the Commission decided to use the AWFF estimate submitted by Bell Canada, TCI, NBTel Inc. and NewTel Communications Inc. to estimate the copper-distribution AWFF for TCBC. Group Telecom submitted that the Commission's finding in Decision 98-22 was consistent with its responsibility to assess ILEC Phase II cost estimates and modify them where it was concerned that the costs may reflect inefficient practices or otherwise be insufficiently justified. Group Telecom argued that it was therefore clear that the decision to establish uniform national AWFFs in Decision 2001-238 was motivated by the same concern that motivated the Commission's prescription of BC TEL's (subsequently TCBC) copper-distribution AWFF in Decision 98-22.

RWI

124.

RWI submitted that a variety of costing issues were addressed by the Commission, and weighed by it when reaching its decision. RWI argued that just because TELUS did not agree with the Commission's decision did not mean that the Commission did not consider TELUS' submissions. It merely meant that, when all of the evidence on the record of the proceeding was weighed against both the objectives of the proceeding and those of the Act, the Commission reached a different conclusion than that advocated by TELUS. Accordingly, RWI submitted that TELUS' request to review and vary Decision 2001-238 was without foundation and should be dismissed.

TELUS' reply

125.

TELUS stated that it reviewed the record and acknowledged that Group Telecom was correct that the Commission had addressed interrogatories regarding scenarios involving different costing methodologies. TELUS submitted that the Commission's interrogatories were in the nature of "what if" questions (i.e., the Commission had asked what the cost results would look like if this parameter or that parameter were changed). TELUS submitted that the Commission did not ask whether, for example, any particular level of AWFF would be correct for the company, nor did it ask for evidence of what the fill factors actually were. TELUS submitted that the Commission did not need to ask such questions because it had already made these determinations in Decision 98-22.

126.

TELUS submitted that, in the circumstances, it was fair to assume that the Commission was simply testing the sensitivity of the outcome to changes in the input parameters. TELUS further submitted that if the Commission had been thinking of departing from one of the fundamental findings in Decision 98-22 such as the percentage fill factors, it would have been forthright about its intentions and asked for the ILECs' views on using those parameters.

127.

TELUS argued that it should not be necessary for parties to guess at what the scope of a proceeding might be or whether the fact that an interrogatory was asked by the Commission meant that everything that touched that interrogatory was within the scope of the proceeding. In TELUS' view, parties were entitled to rely on the public notice as TELUS did.

The Commission's findings and determinations

Notice

128.

In the Commission's view, Decision 2001-238 determined loop and PES costs in accordance with the Decision 98-22 costing methodologies, subject to reasonable modifications that were based on changes to cost study inputs made by the ILECs or that were made in response to proposals of the ILECs. The Commission also considers that reasonable notice of the possibility of such modifications was provided to TELUS and other parties.

129.

PN 2000-27 clearly stated that the Commission intended to restructure each ILEC's rate bands in order to better identify high-cost areas, and to set revised loop rates based on the restructured bands. This necessarily would involve the re-assessment of the updated loop costs under the restructured bands in accordance with the cost study methodologies and other costing-related determinations used to establish the rates approved in Decision 98-22.

130.

The Commission considers that it was or should have been apparent to all parties that such a review of the loop costs would necessarily contemplate revisions to the cost study inputs such as changes to the various cost study demand forecasts, unit costs, cost increase factors and cost study parameters such as AWFFs in order to reflect three years of change between the cost studies filed in the proceeding leading to Decision 98-22 (the 1997 cost studies) and the cost studies filed in the PN 2000-27 proceeding leading to Decision 2001-238 (the 2000 cost studies).

131.

Indeed, both TELUS and the Companies filed their 2000 cost studies based on significant departures from Decision 98-22 cost findings. In particular, both TCI's and TCBC's cost studies proposed AWFF values in their 2000 cost studies that differed significantly from those forming the basis of the rates approved in Decision 98-22. Furthermore, contrary to a specific Decision 98-22 determination, TELUS proposed to not include an explicit productivity factor applicable to expenses.

132.

TELUS also filed different economic parameters in the year 2000 cost study by comparison with the 1997 cost study. For example, in its 2000 cost study, TCI assumed a lower average cost of debt of 7.2% compared to 7.9% in the 1997 cost study. Similarly, in its 2000 cost study, TCBC assumed a lower average cost of debt of 7.5% compared to the 8.0% in the 1997 cost study. Further changes included the use by TCI of a different variable common cost factor of 3.2% in the 2000 cost study compared to 4.2% in the 1997 cost study.

133.

Furthermore, if there was any doubt as to the scope of the Commission's review of costs, that doubt should have been removed when the Commission issued its second round of interrogatories on 11 August 2000. These interrogatories examined the ILECs' initial cost submissions, and asked a number of specific questions concerning cost methods and assumptions. For example, in part (a) of interrogatories The Companies(CRTC) 11Aug00-110 PN 2000-27 and TELUS(CRTC)11Aug00-118 PN 2000-27, the Commission asked each ILEC to identify and describe the changes in costing methodology and assumptions for each cost line item of its 30 June 2000 loop cost submission compared to its earlier 1997 loop cost study. In response to this interrogatory, the Companies and TELUS identified several changes to their cost study inputs. Examples of such changes for TCI and/or TCBC included:

· the estimation of loop costs by allocation area (whereas loop costs were established by rate band in the 1997 study);

· increases in the estimated feeder cable AWFFs;

· a loop survey that was much expanded beyond what was done for the 1997 study to provide the required data to develop information at the allocation area level; and

· loop outside plant maintenance expense based on actual outside plant maintenance annual expenses, compared to maintenance expenses based on a percentage of loop capital in the 1997 cost study.

134.

The Commission notes that the specific costing changes reported by the Companies were similar to those reported by TELUS. These included changes to various cost study inputs and/or parameters, such as changes to the AWFFs, unit costs, or to the sources of data, for example, revised loop surveys, and revised expense estimates based on revised activity-based cost information.

135.

Moreover, in response to the interrogatory The Companies(CRTC)11Aug00-110 PN 2000-27, the Companies stated that there were no significant methodology changes between the 1997 and 2000 loop cost studies, and that the changes in costs reflected in their replies were the result of a multiplicity of changes, which were often cross-impacting, making an exact comparison impossible. The Companies indicated that these changes reflected three years of experience and additional data and network structure changes which impacted costs and caused them to change.

136.

These submissions demonstrate that the parties, including TELUS and the Companies, understood that the various cost study assumptions such as the demand forecasts, cost study parameters including AWFFs, and certain expense estimates, that were used to estimate the costs in the proceeding leading to Decision 98-22, would be subject to change to reflect the most current and accurate costing information.

137.

Decision 2001-238 did not depart from fundamental cost methodology findings in Decision 98-22, except to reflect changes in costing inputs over time or in response to costing proposals by the ILECs. Consequently, the Commission considers that the determination of what estimates should be assumed for each ILEC's cost inputs such as AWFFs, maintenance and functional operating expenses were clearly within the scope of the proceeding and all parties had the opportunity to make submissions on what the appropriate costs should be.

138.

Accordingly, the Commission finds that adequate notice was provided and that there was no error of law.

Adequacy of reasons

139.

In the Commission's view, Decision 2001-238 adequately explained the Commission's reasoning regarding its costing determinations. In particular, the treatment of AWFFs is discussed in detail at paragraphs 83 to 103, while the treatment of maintenance and functional operating expenses is discussed at paragraphs 116 to 129 with respect to loops and at paragraphs 158 to 160 with respect to residential PES.

140.

By comparison with Decision 98-22, the AWFFs approved in Decision 2001-238 were revised to take into account the new seven band rating structure. The Commission notes that during the course of the PN 2000-27 proceeding, an investigation of AWFFs was initiated by the Commission as a result of the different AWFF proposals filed by the ILECs which revealed numerous discrepancies in fill measures and definitions across ILECs. Furthermore, there were numerous AWFF changes proposed by the ILECs in the 2000 cost studies by comparison with the 1997 cost studies. As noted at paragraph 103 of Decision 2001-238, to the extent that costs were disallowed for Phase II purposes as a result of changes in the AWFF values, the question of compensation for the difference between embedded and current costs would be considered in other proceedings.

141.

With respect to maintenance expenses, Decision 98-22 established a maintenance expense limit of 10% of the total loop capital. In Decision 2001-238, the Commission determined that maintenance expenses for each ILEC and in each band should not exceed 10% of the total loop capital, consistent with the approach used in Decision 98-22. The Commission notes that the maintenance expense levels approved for TCI were similar to those approved for Bell Canada and Maritime Tel & Tel Limited, for which the loop capital cost levels are comparable.

142.

Finally, in Decision 2001-238, the ILECs proposed functional operating expense levels that were higher than the Decision 98-22 levels. The Commission concluded that the per loop functional operating expenses of each ILEC, except Bell Canada, should not exceed the national functional operating expense average of Decision 98-22 (i.e. $1.65 per loop). The Commission notes that the $1.65 limit is higher than the company-average per loop functional operating expense levels approved in Decision 98-22 for both TCI and TCBC. Furthermore, on a combined TCI and TCBC basis, the $1.65 limit is higher than the company-average per loop functional operating expenses proposed by TELUS in its 2000 cost studies.

143.

Decision 2001-238 also adopted a uniform functional operating expense level of $2.50 per NAS associated with residential PES, for all ILECs and across all bands. This limit represents approximately 1.5 times the per loop functional operating expense limit. The Commission notes that the 1997 cost studies were not conducted for residential PES and, therefore, a comparison of functional operating expenses for residential PES between the 1997 and 2000 cost studies was not possible.

144.

In the Commission's view, the reasoning for these costing determinations was adequately set out in Decision 2001-238. The Commission therefore concludes that it did not fail to provide adequate reasons and, hence, did not commit an error of law.

Errors of fact

TELUS' position

145.

TELUS noted that in Decision 2001-238, the Commission ordered the ILECs to conduct their Phase II costing studies for unbundled local loops and PES using AWFFs for the feeder loop plant of 77% in Bands A to D and 72% in Bands E to G. The Commission also ordered each ILEC to employ AWFFs for the distribution loop plant of 60% in Bands A to D and 56% in Bands E to G.

146.

According to TELUS, the AWFFs ordered by the Commission were greater than the ILECs' actual estimated working fill factors. The AWFFs were also greater than the AWFFs allowed by the Commission in Decision 98-22. TELUS submitted that its evidence demonstrated that the AWFFs ordered by the Commission in Decision 2001-238 were not a reasonable approximation of TELUS' actual working fill factors. Further, the Commission ordered all ILECs to use the same fill factors. According to TELUS, it would be extremely unlikely that all ILECs would have the same AWFFs. Therefore, there was substantial doubt as to the correctness of the Commission's decision to order use of uniform fill factors for all ILECs and to establish TELUS' AWFFs at the levels ordered in the decision.

147.

According to TELUS there was also doubt as to the correctness of the Commission's decision to establish allowed maintenance expense recovery at 10% of loop capital. TELUS submitted that maintenance would vary among ILECs as a real number and as a percentage of other values such as capital.

148.

TELUS argued that by ordering fill factors that were higher than the actual working fill factors, the Commission produced Phase II capital costs that were lower and, hence, the resulting allowed maintenance costs were lower since they were calculated as a percentage of loop capital.

149.

According to TELUS, by increasing the fill factors, the Commission in effect disallowed significant amounts of maintenance cost recovery and a significant amount of fixed common cost recovery that it had previously found to be recoverable.

150.

TELUS stated that, in Decision 2001-238, the Commission also disallowed functional operating expenses of the companies and decided to use a uniform flat cost of $2.50 per month for all ILECs. TELUS submitted that this was not a reasonable estimate of TELUS' functional operating expenses.

Comments of other parties

AT&T/Call-Net

151.

AT&T/Call-Net noted that TELUS argued that the new costing parameters established by the Commission were not reflective of TELUS' real costs. AT&T/Call-Net submitted that they considered this position somewhat presumptuous since Phase II costing was based on assumptions regarding forward-looking incremental costs and, hence, necessarily employed judgement. In AT&T/Call-Net's view, when establishing the costing parameters, the Commission used the information provided on the record of the proceeding and its judgement. AT&T/Call-Net argued that, while TELUS could reasonably disagree with the Commission's judgement, this disagreement could not form a basis for a conclusion that the Commission had made an error of fact.

Group Telecom

152.

Group Telecom submitted that TELUS had demonstrated no errors of fact. Group Telecom argued that the Commission's determinations regarding AWFFs and functional operating expenses were well founded, reasonable and consistent with its determinations in Decision 98-22. According to Group Telecom, TELUS could not seem to comprehend the possibility that the Commission may have had legitimate grounds for disagreeing with the ILECs' Phase II cost estimates. As such, a Commission finding which modified an ILEC's Phase II costs was not evidence, in and of itself, of a Commission error but rather was merely an instance in which the Commission considered that the ILECs' estimates were likely to be wrong or, at a minimum, to have been inadequately supported.

153.

Group Telecom noted that Phase II cost estimates were estimates of forward-looking costs. As such, they depended on a wide variety of forecasts, estimates and assumptions, many of which involved varying degrees of judgement and the potential for bias and error. According to Group Telecom, Phase II costs, by their very nature, could not be known with absolute certainty and the ILECs were not the sole source of knowledge and expertise in these matters. Group Telecom stated that the Commission had over 20 years experience in evaluating Phase II studies and was certainly in a position to make valid judgements as to reasonableness of, and the adequacy of support for, Phase II cost estimates.

154.

Group Telecom also submitted that the ILECs had clear incentives to inflate Phase II costs for unbundled loops and residence PES in high-cost bands. According to Group Telecom, the Commission was aware of these incentives and carefully scrutinized the Phase II cost estimates to limit the anti-competitive impact of the resulting biases. Group Telecom also submitted that the Commission had a responsibility to assess ILEC Phase II cost estimates and modify them where it was concerned that they would reflect inefficient practices or otherwise be insufficiently justified.

155.

Group Telecom stated that it was arithmetically obvious that reducing estimated capital costs would reduce maintenance costs estimated by means of a percentage of capital and that reducing estimated overall Phase II costs would reduce the provision for recovery of fixed common costs that flowed from a percentage mark-up. Group Telecom emphasized, however, that if one believed that one could legitimately estimate maintenance costs by means of a percentage factor, as the Companies and the Commission clearly believed and as TCBC did when conducting its 1997 cost studies, then no concerns would arise from the fact that estimated maintenance costs varied with estimated capital costs.

TELUS' reply

156.

TELUS submitted that if the Commission considered that the new costing method produced an accurate reflection of the costs of TELUS, this was an error of fact. In its review and vary application, in support of this argument, TELUS filed evidence to show that the costs determined in Decision 2001-238 could not be the costs of TELUS.

157.

TELUS stated that the Commission had heard from parties other than TELUS on this point. For example, SaskTel filed an application on 12 September 2001 requesting that the Commission establish both loop and PES costs at a level that was reflective of SaskTel's true Phase II costs. MTS also had filed an application to review and vary aspects of Decision 2001-238. Bell Canada had updated its loop and PES costs. In short, according to TELUS, there was a ground swell of evidence showing that the costs established by Decision 2001-238 were not reflective of the costs of the ILECs.

158.

TELUS stated that the Commission should be interested in ensuring that accurate ILEC costs were used for loop cost and PES cost estimates. Otherwise, in TELUS' view, the sustainability of the contribution mechanism and the efficiency of competitive entry into the local telecommunications business would be threatened.

159.

According to TELUS, the costing determinations made in Decision 2001-238 moved away from an accurate reflection of ILEC-specific costs. TELUS submitted that it was also a matter of common sense that the imposition of uniform national standards, as the Commission did in the case of AWFFs, would create costs that were less accurate than those which used the actual provisioning methods of each ILEC.

160.

In TELUS' submission, it was not credible to contend that Decision 2001-238 provided for more accurate cost estimations than use of the ILEC-specific AWFF parameters such as those that were employed in Decision 98-22.

The Commission's findings and determinations

161.

The Commission notes that the SaskTel and MTS applications to review and vary certain aspects of the loop and PES costs determined in Decision 2001-238 were denied in Saskatchewan Telecommunications - Review and vary application regarding the rebanding decision, Telecom Decision CRTC 2002-30, 1 May 2002, and MTS Communications Inc. - Review and vary application regarding the rebanding decision, Telecom Decision CRTC 2002-29, 1 May 2002, respectively. In contrast, Bell Canada's application to revise its PES cost estimates following Decision 2001-238 was addressed in Decision 2001-610. In that decision, the Commission determined that Bell Canada's application should be examined as a new application, not a review and vary application, since Bell Canada's revised PES cost study adopted a new methodology that was not at issue in the rebanding proceeding and the application did not question the original correctness of Decision 2001-238.

162.

The Commission also notes that contrary to TELUS' claim, there is no single objective measure of "actual" or "true" Phase II costs. Phase II costs reflect estimates of forward-looking incremental costs of providing a service. As indicated by Group Telecom, these costs depend on a wide variety of forecasts, estimates and assumptions, many of which involve varying degrees of judgement, and which, as a result, cannot be known with absolute certainty.

163.

The Commission considers that the cost assumptions and methods that were determined in Decision 2001-238 were based on the record of that proceeding and were consistent with Decision 98-22. The Commission is of the view that the cost estimates determined in Decision 2001-238 reflected appropriate current levels of each ILEC's loop and residential PES service costs.

164.

Accordingly, the Commission finds that there were no errors of fact in Decision 2001-238.

Failure to consider principles

TELUS' position

165.

TELUS submitted that if the Commission knew that the new costing method would result in costs that were lower than the ILEC's true costs, and nevertheless mandated the use of these costs for the purpose of costing loops and PES, then there was substantial doubt as to the correctness of the decision. According to TELUS, if this truly was the Commission's decision, it amounted to a review of its policy of not granting discounts to competitors.

166.

TELUS argued that, to the extent that ILEC costs were not recovered from the sum of revenues per PES and contribution, the Commission had granted a contribution discount to competitors since, in TELUS' view, to the extent of the discount, competitors were not required to help fund service to customers in high-cost areas. Instead, according to TELUS, any revenues of competitors that would otherwise go to subsidize customers in high-cost areas would subsidize the competitors' shareholders.

167.

TELUS also argued that the reduction of loop costs offended one of the key determinations in Decision 97-8: that competitors should not be granted mandated discounts on loop rates. In support of its argument, TELUS cited paragraph 250 of Decision 97-8 where, in its view, the Commission expressly rejected reliance on mandated discounts. TELUS also submitted that in Decision 98-22 the Commission agreed with Stentor Resource Centre Inc. (Stentor) that setting rates at the level required to make entrants profitable, if that level was below appropriate Phase II costs, would not encourage economically efficient entry and would only serve to subsidize entrants.

168.

TELUS argued that Decision 2001-238 also contradicted the principle of competitive neutrality enunciated in Decision 2000-745. TELUS argued that if PES costs were understated, the TSR was understated; and, if the TSR was understated, the ILECs would bear an additional financial burden to fund high-cost telephone service. TELUS submitted that this was contrary to the Commission's determination to not extend contribution discounts and to the principle of competitive neutrality. Therefore, according to TELUS, there was substantial doubt as to the correctness of Decision 2001-238.

Comments of other parties

169.

Group Telecom submitted that there was no basis to conclude that, in Decision 2001-238, the Commission knowingly established loop and residence PES costs below what it believed to be their true levels. According to Group Telecom, a much simpler and more likely explanation was that the Commission simply disagreed with the ILECs that their cost estimates were the best possible estimates.

170.

Group Telecom also submitted that there was no justification for concluding that the Commission's determinations in Decision 2001-238 granted the entrants the equivalent of a contribution or other discount.

TELUS' reply

171.

According to TELUS, it appeared that Group Telecom would agree that, to the extent Decision 2001-238 understated the costs of the ILECs, an implicit contribution discount had been provided. In TELUS' submission, this could only be construed as raising a substantial doubt as to the correctness of Decision 2001-238. In TELUS' view, the granting of an implicit discount was contrary to one of the Commission's fundamental policies, that of not granting contribution discounts. The granting of an implicit discount also contradicted the Commission's principle of a competitively neutral contribution mechanism as set out in Decision 2000-745.

The Commission's findings and determinations

172.

As discussed above, the Commission is of the view that the cost estimates determined in Decision 2001-238 reflected the appropriate current levels for the loop and residential PES service costs of each ILEC.

173.

Accordingly, the Commission finds that in establishing the loop and residential PES costs in Decision 2001-238, it determined cost assumptions on the basis of the record of the proceeding that it considered reasonable. It did not set costs in order to grant a contribution discount. The Commission's determinations were not inconsistent with established principles.

174.

In light of the above, the Commission finds that it did not fail to consider established principles in establishing the loop and residential PES costs in Decision 2001-238, and it did not make determinations in that decision which were inconsistent with established principles.

Additional comments regarding the ILECs' Phase II cost differences

TELUS' position

175.

According to TELUS, when the Commission established standard functional operating expenses and the loop capital maintenance factor based on data provided by TELUS and the Companies, the Commission was, in effect, comparing apples to oranges. TELUS submitted that the differences between TELUS' and the Companies' reported Phase II functional operating expenses and maintenance expenses could be explained in large measure by the costs that TELUS included in its Phase II cost studies and that the Companies did not.

176.

TELUS stated that in its comments in the loop mark-up proceeding, Group Telecom referred to non-service specific expenses causal to groupings of services of which the service in question was a constituent. TELUS referred to these costs as portfolio expenses. TELUS submitted that it identified these groupings of services and allocated these portfolio expenses among the services in the group. TELUS also submitted that it included these expenses in its Phase II cost studies for individual services as either functional operating expenses or maintenance expenses. TELUS noted that, according to interrogatory response The Companies(CRTC)30Jul01-2 PN 2000-27, these portfolio expenses were not included in the Phase II cost studies of Bell Canada, Aliant Telecom, or MTS, and perhaps SaskTel.

177.

TELUS stated that it did not notice this difference in Phase II approach until it considered Group Telecom's discussion of the Companies' expense inclusions in Group Telecom's comments in the loop mark-up proceeding. TELUS stated that it determined that this difference in approach had existed for some time. According to TELUS, detection of this difference had been made all the more difficult by the fact that, in the case of the Companies, these portfolio expenses were not reported, as a group, anywhere. That is, they were not included in the Companies' Phase II costs and they were not included in the reported fixed common costs.

178.

TELUS submitted that the consequences of the Commission's comparative approach to the review of functional operating expenses had a serious negative financial effect on TELUS when these decisions were applied for the purposes of the calculation of the TSR. According to TELUS, the effect of the Commission's decisions on TELUS may have been to disallow these expenses when the Commission did not know they were there. On the other hand, the Commission may have simply assumed that the Companies did include these portfolio expenses in their Phase II costs because that is what Inquiry into Telecommunications carriers' costing and accounting procedures - Phase II: Information requirements for new service tariff filings, Telecom Decision CRTC 79-16, 28 August 1979 (Decision 79-16) required.

179.

TELUS stated that in Decision 79-16, the Commission established four different classifications for costs. These classifications were (a) direct costs, (b) indirect costs, (c) variable common costs and (d) fixed common costs.

180.

TELUS submitted that this directive was recognized in section 3.04 of the Bell Canada Phase II manual, which stated that causally related cost cash flows include all of the costs categorized by the decision as direct, indirect and variable common costs.

181.

TELUS further submitted that section 4.2 of the TELUS Phase II manual similarly stated that the first three classifications are incremental, that is, they vary with the amount of service provided, and that direct, indirect, and variable common costs must be calculated for all new service filings.

182.

TELUS submitted that Bell Canada assigned all of its operating expenses, by function code, into these four classifications in Appendix O of its Phase II manual. TELUS indicated that it did a similar classification in Appendix U of its manual. TELUS noted that all operating expenses were assigned to one or more of these classifications, and there were no operating expenses that did not fall into one of the four classifications. According to TELUS, all expenses not classified as fixed common costs must therefore be considered to be causal and included in Phase II cost studies.

183.

TELUS noted that in the proceeding initiated by PN 99-6, the Companies stated in response to the interrogatory The Companies(CRTC)14Jan00-202 RCM that fixed common costs did not capture those common costs below the level of corporate overheads, such as, for example, management of portfolios of services, evolving the common network, administration and maintenance systems shared by some but not all services, and a myriad of other functions common to two or more services.

184.

TELUS submitted that, using the cost classification system specified by the Commission, these costs would be assigned to one of the remaining three classifications and would therefore be included in Phase II cost studies. TELUS noted that, as described in the response to the interrogatory The Companies(CRTC)30Jul01-2 PN 2000-27, Bell Canada was not including them in its Phase II studies. In this response, the Companies stated that the costs of these functions were fixed with respect to the services that share them and, therefore, they could not be causally related to any one service and were not included in Phase II costs.

185.

According to TELUS, Bell Canada had, in effect, created a fifth cost classification, one containing costs that were neither fixed common costs nor causal, and one that seemed to have been overlooked until the loop mark-up proceeding. The Phase II costs of Bell Canada were therefore significantly understated by comparison with the costs developed by ILECs such as TELUS, which followed the costing procedures developed by the Commission.

186.

In light of the above, TELUS requested that the Commission consider this information in its deliberations on TELUS' review and vary application. TELUS submitted that the Commission should conclude from this new information that the residential PES costs by band, the resulting TSR calculation, and the percentage revenue charge should be varied on an interim basis effective 1 January 2002 as requested by TELUS in its review and vary application based on the costs filed by the ILECs in January 2001. According to TELUS, in this way, these portfolio expenses would be recognized in Phase II costs as they should be, wholly for TELUS and at least partially in the interim for the Companies.

187.

TELUS further submitted that the discovery of this inconsistency between the Phase II approach employed by TELUS and the Companies' approach, demonstrated the importance of the Commission embarking as soon as possible on a review and audit of all Phase II costs and mark-up methodologies. It also demonstrated, in TELUS' view, the reason why the 2002 TSR charge should not be made final until that review and audit was complete.

188.

TELUS stated that it had not yet been able to quantify the amount of these portfolio expenses included in its Phase II cost studies as part of functional operating expenses and maintenance expenses. TELUS submitted that its preliminary indications were that these portfolio expenses were very significant.

Comments of other parties

The Companies

189.

The Companies submitted that they did now and had always performed Phase II cost studies that followed the costing principles developed by the Commission. The Companies submitted that in Directive 4.1 of Decision 79-16, the Commission specified that direct resources consisted of those units of management, labour, plant, equipment, material and supplies which could be readily identified and quantified, and that these would represent the major resource quantities added to the carrier's operations to provide the service over the period of study. Accordingly, in the Companies' view, the Phase II costs of a specific service would not include expenses that were not causal to a specific service, even though the cost could relate to a group of services that included that service.

190.

According to the Companies, the fact that the Companies and TELUS treated certain costs differently in their Phase II costs studies underscored the importance of a review process whose objective would be to ensure greater consistency in the costing approaches followed by all parties. Both the Companies and TELUS called for such a review, TELUS in its review and vary application, and the Companies in their response to this application. The Companies submitted that the need for consistency was all the more important given that, through the NSF, the quantification of costs by one company affected the customers of other companies. In the Companies' view, equitable treatment required that the quantification be done on the same basis by all incumbents.

191.

In their 16 November 2001 comments, the Companies stated that although they supported TELUS' request for a Phase II review, they did not believe that it would be appropriate to make interim, effective 1 January 2002, the PES costs that were filed in the interrogatories ___(CRTC)30Jan01-1 PN 2000-27, adjusted in the manner proposed by TELUS. Neither, in the Companies' view, would it be appropriate to calculate the TSRs based on those adjusted PES costs and a mark-up of 25%. Rather, it would be appropriate to calculate the TSR that results from this proceeding on a going-forward basis. In the Companies' view, there were a number of outstanding issues related to both loop and PES costs that needed to be resolved, in addition to those that were identified by TELUS. The Companies submitted that these issues should all be dealt with before making changes to the costs. The Companies noted that in Decision 2001-610 the Commission indicated that it would initiate a proceeding shortly to examine Bell Canada's updated loop costs along with any updates by other ILECs who wished to file such updates. The Companies recommended that this same proceeding be used to examine the costing issues identified by TELUS.

SaskTel

192.

SaskTel submitted that a full review of Phase II costing methodologies and processes was necessary to ensure that the subsidy mechanism was fair and equitable to all market participants and to ensure the continued provision of reliable and affordable service to all residents of Canada.

193.

SaskTel suggested that the Commission should initiate a review of Phase II costing processes specifically related to revised loop and PES cost filings, on an expedited basis, permitting the results of this review to be considered in the proceeding initiated by CRTC to review revised loop and primary exchange service cost filings, Public Notice CRTC 2001-119, 30 November 2001 (PN 2001-119). The objective of this review would be to enhance the consistency of costing approaches followed by all parties in the development of Phase II costs for loop and PES, or at a minimum to ensure that costing differences were understood.

194.

SaskTel proposed that a comprehensive review of Phase II costing methodologies should commence subsequent to the more pressing review of loop and PES Phase II costing processes.

AT&T/Call-Net

195.

In AT&T/Call-Net's view, the differences in cost inclusions or allocations between TELUS and the Companies were simply another example of the degree to which judgement played a role in determining the Phase II costs for a specific service. AT&T/Call-Net submitted that the issue raised by TELUS went directly to the issue before the Commission in the Decision 2001-238 follow-up proceeding to determine the appropriate level of mark-up. According to AT&T/Call-Net, the Commission had the evidence of the differences in approaches before it in that proceeding and therefore could exercise the appropriate judgement as to what inclusions and exclusions should be made in terms of determining the mark-up.

196.

AT&T/Call-Net noted the increased emphasis that the Companies were placing on the need for consistency in Phase II costing in light of the NSF. AT&T/Call-Net argued that the cost structure of entrants had always been affected by the judgement, methodology and assumptions employed by the incumbents in determining their costs. AT&T/Call-Net submitted that the Companies and the other ILECs were simply more interested in consistency in Phase II methodology because, as a result of the NSF, another carrier's estimate of costs would affect each ILEC's cost structure.

197.

AT&T/Call-Net further submitted that the issue of non-service-specific costs was raised in the context of the loop mark-up proceeding and therefore differences in treatment of these costs could be dealt with in that proceeding.

Group Telecom

198.

Group Telecom submitted that the purpose of Phase II costing was to establish the costs causal to individual services. Group Telecom agreed with the Companies that the Phase II costs of a specific service would not include expenses that were not causal to a specific service, even though the cost could relate to a group of services that included that service. By definition, according to Group Telecom, portfolio expenses were not causal to individual services, but rather only to groupings of services. Portfolio expenses were not avoidable unless all of the services that shared them were discontinued. Group Telecom argued that portfolio expenses varied neither with demand for individual services nor as a result of the addition or discontinuation of individual services within the portfolio.

199.

Therefore, according to Group Telecom, current TELUS loop prices included not only a 25% mark-up for the recovery of fixed common costs but also a significant amount of fixed common costs, in the form of portfolio expenses, that had been inappropriately included in the Phase II component of the price. Group Telecom submitted that this amounted to providing for double recovery of portfolio expenses.

200.

Group Telecom submitted that it was clear that TELUS' loop costs and prices and residence PES costs, even after modification by the Commission in Decision 2001-238, remained significantly overstated, contrary to what TELUS had argued in its review and vary application and its 18 January 2002 letter. Group Telecom further submitted that TELUS' revelation regarding its treatment of portfolio expenses merely reinforced the already strong case for denying TELUS' review and vary application.

201.

Group Telecom argued that the ILECs had more than ample opportunity and time over the past five years to investigate the nature of and quantify their fixed common costs, be they portfolio expenses or other costs. Group Telecom submitted that the Commission should therefore reject any suggestions, in light of the new information regarding TELUS' treatment of portfolio expenses, that a final decision as to the mark-up in this proceeding should be delayed until TELUS had an opportunity to quantify the portfolio expenses or that the mark-up should be the subject of any further follow-up process. Group Telecom urged the Commission to make a decision without delay regarding the level of mark-up that would be used to establish final loop rates. Group Telecom submitted that, based on the record of the proceeding and the Commission's statements in paragraph 65 of Decision 2001-238, the level of mark-up used to establish final TELUS loop rates, could not exceed 15%.

202.

Group Telecom recommended that the modification of TELUS' Phase II loop costs to exclude portfolio expenses be dealt with in the proceeding initiated by PN 2001-119. Group Telecom also submitted that immediate measures should be taken to eliminate the double recovery of portfolio expenses in the current TELUS loop rates. Group Telecom proposed that this be accomplished by the use of a 9.5% mark-up, applied to the TCI and TCBC loop costs implicit in the loop prices prescribed in Decision CRTC 2001-238-2, as modified by Interim approval of revised unbundled loop rates for reclassified bands, Order CRTC 2001-848, 28 November 2001. According to Group Telecom, the 9.5% mark-up would be consistent with the numerical analysis presented in its comments in the loop mark-up proceeding, and excluded consideration of portfolio expenses.

TELUS' reply

203.

In reply, TELUS submitted that the comments of the parties clearly demonstrated that a review and audit of company-specific Phase II costs must be conducted. TELUS agreed with SaskTel that an expedited review of company-specific Phase II costs for unbundled local loops and residential PES should be conducted by the Commission. However, according to TELUS, the adjustments made to Phase II costs by the Commission in Decision 2001-238 would not be the subject of the PN 2001-119 proceeding since they were specifically excluded from review in that proceeding.

204.

TELUS submitted that until the Commission determined a common methodology for the treatment of portfolio expenses, unbundled local loop costs and residential PES Phase II costs by band should be established on the basis of the Phase II costs by band filed by the ILECs in the proceeding leading to Decision 2001-238. TELUS suggested that the Phase II costs, the resulting unbundled local loop rates, the TSR and the percentage revenue charge calculations be made interim as of 1 January 2002 and subsequently adjusted and made final after an expedited review of Phase II.

205.

According to TELUS, when the Commission determined how it wished to treat the portfolio expenses in future Phase II studies, the Commission could make necessary adjustments to the Phase II costs or the mark-up as may be required. TELUS stated that all parties appeared to agree that if the portfolio expenses were to be excluded from Phase II studies, those expenses should be included in the mark-up.

206.

According to TELUS, it was important to observe that although TELUS included portfolio expenses in Phase II costs in its cost submissions in both the Decision 98-22 proceeding and in the Decision 2001-238 proceeding, the Commission in both cases adjusted TELUS' functional operating expenses and maintenance expenses for the purposes of those proceedings and did so, in part, by comparing expense inclusions and amounts across the ILECs. Therefore, in TELUS' view, the Commission effectively excluded these expenses in its determinations.

207.

TELUS also noted that all ILECs were allowed precisely the same percentage of loop capital costs as an estimate of maintenance expenses and precisely the same AWFFs. TELUS submitted that this meant that any differences between the Companies and TELUS in calculating Phase II costs were eliminated by the Commission's rulings. At the very least, in TELUS' view, the Commission effectively disallowed recovery of the portfolio expenses that no party claims should not be recoverable. TELUS submitted that, in order for TELUS to be provided with an opportunity to recover its portfolio expenses, the Commission should establish unbundled local loop costs and the residential PES costs by band on the basis of the Phase II costs by band filed by the ILECs in the proceeding leading to Decision 2001-238.

208.

TELUS submitted that what was clear from the record of the loop mark-up proceeding was that the Companies did not include portfolio expenses in their Phase II costs nor had they ever identified and reported them to the Commission in the past. Therefore, in TELUS' view, these portfolio expenses could not have been considered by the Commission to be included in the mark-up in the past and there could be no double recovery of these expenses as Group Telecom suggested. TELUS argued that, as the evidence in the loop mark-up proceeding demonstrated, the 25% mark-up employed in the past was too low by a considerable amount, whether calculated as an average mark-up or a service specific mark-up.

209.

In TELUS' view, a review should take place, at least for unbundled local loop costs and residential PES costs as expeditiously as possible so that the Commission could determine the true company-specific Phase II costs for these services and make adjustments to be effective 1 January 2002. TELUS recognized that a full review and audit of Phase II would be time consuming. TELUS stated that it was for this reason that it offered to engage a recognized auditing firm with experience in telecommunications costing to audit all of its cost inclusions and suggested that the Commission require the other ILECs to do the same. TELUS also suggested that a Commission representative should be present and that other parties could send an independent costing expert to observe the audit, subject, of course, to full confidentiality protections. According to TELUS, the engagement of an auditing firm would permit the Commission to undertake a more expeditious review than would be possible if the Commission's staff were required to undertake the audit without additional assistance.

The Commission's findings and determinations

210.

The Commission considers that TELUS has identified a significant issue regarding the treatment of portfolio expenses. TELUS indicated that it allocated these expenses among the relevant services and included the expenses in TELUS' Phase II cost studies for individual services. On the other hand, the Companies submitted that they regarded portfolio expenses as not causal to the specific service, and had not included them in Phase II cost studies.

211.

The Commission notes that in the Companies' 18 January 2002 reply comments of the loop mark-up proceeding, Bell Canada submitted that its year 2000 fixed common cost value was based on a different definition from previous years and that it reflected not only costs associated with functions that were common to all services but also costs associated with functions that were common to more than one service.

212.

Bell Canada's statements are in contrast to the Commission's directive to Stentor in 1995. In a letter dated 10 August 1995, the Commission expressed its concerns that the imputation tests filed by the ILECs for toll services would understate the services' costs when marketing of a service involved a marketing and promotional program covering a number of toll services. In that letter, the Commission directed Stentor to file its estimates of the incremental costs per minute impact for each of the services offered under the relevant promotional program.

213.

In the Commission's view, the Companies have not provided the necessary justification to demonstrate why this new costing approach is consistent with Phase II costing principles.

214.

For present purposes, the Commission notes that the revised costing approach of the Companies did not affect the determinations in Decision 2001-238. In that decision, the Commission imposed certain limits on loop maintenance and other functional operating expenses. These limits were determined based on the loop expense levels determined in Decision 98-22. The Commission is of the view that the 1997 cost studies filed in the proceeding leading to Decision 98-22 included portfolio expenses, consistent with the directives of the Commission's 10 August 1995 letter and Stentor's practices. The Commission therefore considers that the expenses determined in Decision 2001-238, implicitly recognized the inclusion of portfolio expenses.

215.

However, in light of the above, the Commission is of the view that it is necessary to review whether or not to include portfolio expenses in Phase II cost studies. The Commission concurs with TELUS that this issue should not be the subject of the PN 2001-119 proceeding given that the issue of expense estimation and inclusions were specifically excluded from review in that proceeding.

216.

The Commission notes that, pursuant to Decision 2002-34, a new proceeding will be initiated in the fourth quarter of 2002 to review the ILECs' Phase II costing methodologies and processes (the Phase II review proceeding). The Commission notes that this proceeding will be used to review the merits of Bell Canada's proposal to exclude portfolio expenses from Phase II cost studies. In the interim, all ILEC Phase II cost studies are to reflect the inclusion of portfolio expenses, as applicable, consistent with the Commission's earlier directives, past practice and TELUS' current approach.

217.

The Commission considers, in light of the determinations above, that there is no basis at this point to make loop rates and the TSR percent revenue charge interim as proposed by TELUS. Rather, the Commission considers it appropriate to calculate the TSR and loop rates that result from the PN 2001-119 and the Phase II review proceedings on a going-forward basis only.

Conclusion regarding a review and variance of Decision 2001-238

218.

The Commission has determined in the preceding sections that TELUS has not met the threshold requirement set out in PN 98-6 for a review of a Commission decision. In particular, TELUS has failed to demonstrate that the Commission committed an error of law or fact or that there was otherwise substantial doubt as to the correctness of Decision 2001-238. Accordingly, the Commission concludes that it is unnecessary to review or vary Decision 2001-238. The Commission therefore denies TELUS' application as it relates to Decision 2001-238, including TELUS' request that the Commission initiate a process to consider certain Phase II costing issues. As noted above, the Commission will consider, however, the treatment of portfolio expenses in the Phase II review proceeding.

Secretary General

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