ARCHIVED - Telecom Decision CRTC 2003-14

Telecom Decision CRTC 2003-14

Ottawa, 18 March 2003

Aliant Telecom Inc.

2002 Annual price cap filing

In this decision, the Commission approves, on a final basis, with some exceptions, applications filed by Aliant Telecom Inc. (Aliant Telecom) and by Bell Canada, on behalf of Aliant Telecom, proposing rate changes pursuant to Regulatory framework for second price cap period, Telecom Decision CRTC 2002-34, 30 May 2002. The Commission also approves, with some exceptions, the remainder of Aliant Telecom's rates on a final basis.

Introduction

1.

In Regulatory framework for second price cap period, Telecom Decision CRTC 2002-34, 30 May 2002 (Decision 2002-34), the Commission established the price regulation regime that is now applicable to the following incumbent local exchange carriers (ILECs): Aliant Telecom Inc. (Aliant Telecom), Bell Canada, MTS Communications Inc., Saskatchewan Telecommunications and TELUS Communications Inc. (collectively, the ILECs).

2.

In Decision 2002-34, the Commission directed the ILECs to file their 2002 annual price cap filings, including updates to the price indices, on 1 August 2002. In Decision 2002-34, the Commission also made all of the ILECs' tariff rates interim, effective 1 June 2002, to ensure that the annual price cap period for 2002 would reflect a full year, with the expectation that any rate changes approved for the ILECs to meet their price cap commitment would become effective retroactive to that date.

3.

The Commission received applications by Aliant Telecom and by Bell Canada, on behalf of Aliant Telecom, dated 1 August 2002 and amended on 8 August 2002 and 29 November 2002, respectively, proposing tariff revisions for Aliant Telecom to meet its 2002 price cap commitment.

4.

The Commission received comments from Call-Net Enterprises Inc. (Call-Net), on 15 August 2002 and AT&T Canada Corp., on behalf of itself and AT&T Canada Telecom Services Inc. (collectively, AT&T Canada), on 3 September 2002. Reply comments were received from Aliant Telecom and Bell Canada on 13 September 2002.

5.

In Part I of this decision, the Commission addresses the proposed tariff revisions. In Part II of this decision, the Commission addresses specific requests made by parties.

Part I - Aliant Telecom's application

6.

In their applications, Aliant Telecom and Bell Canada proposed revisions to the following tariff items:

7.

In particular, Aliant Telecom and Bell Canada proposed the following tariff revisions:

8.

Aliant Telecom submitted that the proposed tariff revisions would ensure that the service basket index (SBI) would not exceed the service basket limit (SBL) for the other capped services basket.

9.

Aliant Telecom requested that the proposed tariff revisions become effective on 1 June 2002.

10.

Aliant Telecom submitted that the proposed tariff revisions complied with all of the pricing constraints set out in Decision 2002-34. Aliant Telecom also submitted that the proposed tariff revisions would ensure that it met its price cap obligations for 2002.

AT&T Canada's comments

11.

AT&T Canada submitted that one clear objective of the ILECs' annual price cap proposals appeared to have been to obstruct competition. AT&T Canada stated that the ILECs have proposed price increases for business local exchange services in rural areas where there was little, if any, competition. AT&T Canada stated that in contrast the ILECs have proposed significant rate reductions to the access and link components of DNA service and, in some cases, to Megalink, Digital Channel and Digital Exchange Access services. AT&T Canada argued that the ILECs have targeted the required rate reductions in such a way as to undermine any potential advantage the creation of competitor-DNA service might have offered competitors. AT&T Canada submitted that the proposed rate reductions would squeeze the margins available to competitors through the use of the newly established competitor-DNA service.

Reply comments

12.

In its reply comments, Aliant Telecom denied that its price cap proposal was designed to obstruct competition. Aliant Telecom submitted that it was fully compliant with all the Commission's determinations set out in Decision 2002-34. Aliant Telecom argued that the proposed rates are supported by cost information clearly demonstrating that they satisfy the imputation test. Aliant Telecom stated that the imputation test is the accepted basis for determining whether a rate change might be anti-competitive.

Commission analysis

Costing issues

13.

The Commission notes that for a new service or a rate decrease, the proposed rates must satisfy the imputation test. The Commission considers that the imputation test is the accepted method, under the current regulatory regime, of determining whether the proposed rates would be anti-competitive.

14.

The Commission finds that the proposed DNA rates pass the imputation test.

15.

The Commission notes that the imputation tests filed by Aliant Telecom in support of the proposed rates for DCS - access, DEA, and Microlink services included the use of cost proxies. In the Commission's view, Aliant Telecom's first proxy proposal, to use the costs for DNA service - Low speed access as a proxy for DCS - access, is acceptable as these services provide similar functionality and are likely to be provisioned on the same basis. Aliant Telecom's second proxy proposal was to use DEA service costs for Nova Scotia and Prince Edward Island as a proxy for Newfoundland's costs and Newfoundland's costs for Microlink service as a proxy for the remainder of Aliant Telecom's serving territory. The Commission considers that Aliant Telecom's second proxy proposal is reasonable because, as Aliant Telecom aligns its provisioning practices, the costs of providing a service across its serving territory should converge. The Commission additionally notes that there are large margins in the imputation test for both DCS - access and DEA service. In light of the above, the Commission is satisfied that the proposed rates for DCS - access and DEA service pass the imputation test.

16.

The Commission notes that the cost studies relied on by Aliant Telecom to support the proposed rates for Microlink service, Megalink service and DSS were filed prior to the requirement for band-specific imputation tests. The Commission notes that there are large margins in the imputation test for these services. Accordingly, the Commission is satisfied, on a preliminary basis, that the proposed rates for Microlink service, Megalink service and Digital Switched service would pass band-specific imputation tests. The Commission considers, however, that Aliant Telecom should update the costing information filed for Microlink service, Megalink service and DSS to reflect the Commission's current requirement for band-specific imputation test results for all services that make use of unbundled loops. Accordingly, the Commission is not prepared to give final approval to these rates at this time.

Compliance with the pricing constraints in Decision 2002-34

17.

In Decision 2002-34 the Commission applied a number of constraints to the rates for services in the other capped services basket, in order to provide customers of those services with price protection. They include:

18.

The Commission finds that the proposed tariff revisions comply with the basket constraint requirement that the SBI not exceed the SBL for the other capped services basket. As Aliant Telecom proposed no price increase, the rate element constraint limiting rate increases for a service to 10% per year is not pertinent.

19.

The Commission also finds that the proposed tariff revisions comply with the Commission's prohibition, set out in Decision 2002-34, against further de-averaging of rates for other capped services within a band.

20.

Accordingly, the Commission is satisfied that the proposed tariff revisions are consistent with the pricing constraints established in Decision 2002-34.

21.

The Commission notes AT&T Canada's statement that price reductions to retail DNA service could impact the ILECs' competitors by squeezing the available margins through the resale of the newly established competitor-DNA service. The Commission notes, however, that simple resale of competitor-DNA service is prohibited by Decision 2002-34.

Part II - AT&T Canada and Call-Net's requests

AT&T Canada's request for a fixed margin between retail and wholesale rates

22.

AT&T Canada submitted that price reductions applied to services with retail and wholesale counterparts, such as DNA service, should be similar in magnitude so as to protect against anti-competitive targeted pricing strategies by the ILECs aimed at squeezing or eliminating the margins available to their competitors.AT&T Canada argued that such a link between retail and wholesale pricing would ensure that the ILECs could not use the price cap formula to squeeze the competitors' margins.

23.

Aliant Telecom and Bell Canada submitted that the Commission should reject AT&T Canada's proposal. Aliant Telecom and Bell Canada noted that Decision 2002-34 specified that rates for competitor-DNA service should be based on Phase II costs plus a 15% mark-up. Bell Canada noted that retail rates are based on margins determined by market conditions and conformity with the price cap rules, including the imputation test.

24.

Bell Canada argued that AT&T Canada's proposal to link the pricing of wholesale and retail rates would inhibit competition between retail providers of DNA service because it would prevent the ILECs from responding to competitive pressures.

25.

The Commission notes that it explicitly required the ILECs to file rates for a competitor-DNA service based on Phase II costs plus a 15% mark-up. The Commission considers that AT&T Canada's request to establish a link between price reductions to services with retail and wholesale counterparts is inconsistent with Decision 2002-34.

Call-Net and AT&T Canada's request for DNA and Digital Channel services rates to remain interim

26.

Call-Net and AT&T Canada requested that the rates for DNA service and related services in the other capped services basket be approved on an interim basis. Call-Net and AT&T Canada argued that until a decision has been issued in the proceeding initiated by Competitor Digital Network Access service proceeding, Telecom Public Notice CRTC 2002-4, 9 August 2002 (Public Notice 2002-4), the precise components and configurations that will make up the final competitor-DNA service and potentially related services are unknown. Call-Net and AT&T Canada submitted that the retail DNA service and related services could serve as the basis for the competitor-DNA service. Call-Net and AT&T Canada submitted that interim approval would allow any associated rate reductions that might result from the Public Notice 2002-4 proceeding to apply on a retroactive basis to 1 June 2002.

27.

In reply, Bell Canada argued that, as competitor-DNA service rates will not be linked or dependent on retail rates, the retail DNA service rates should be approved on a final basis.

28.

The Commission notes that among the issues being considered in the proceeding initiated by Public Notice 2002-4, are whether specific rate elements of DNA service and Inter-Office Digital Channels should be included in the newly established competitor-DNA service, and whether the reduced rates for any additional service components that might be added to competitor-DNA service at the conclusion of the proceeding should be approved retroactive to 1 June 2002. The Commission further notes that, in the meantime, competitors will be subscribing to potential competitor-DNA service components at DNA service and Inter-Office Digital Channels rates. Accordingly, the Commission finds that it would not be appropriate to grant final approval to the retail rates for DNA service and Inter-Office Digital Channels at this time.

Commission directions

29.

In light of the foregoing:

Secretary General

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