ARCHIVED - Telecom Decision CRTC 2003-16

Telecom Decision CRTC 2003-16

Ottawa, 18 March 2003

MTS Communications Inc.

2002 Annual price cap filing

In this decision, the Commission approves, on a final basis, with some exceptions that are given interim approval, applications filed by MTS Communications Inc. (MTS) and by Bell Canada, on behalf of MTS, 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 MTS' 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., Bell Canada, MTS Communications Inc. (MTS), 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 MTS and by Bell Canada, on behalf of MTS, dated 1 August 2002, proposing tariff revisions for MTS 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.

5.

MTS and Bell Canada each filed reply comments on 13 September 2002.

6.

In Part I of this decision, the Commission addresses the tariff revisions proposed by MTS and Bell Canada. In Part II of this decision, the Commission addresses specific requests made by AT&T Canada and Call-Net.

Part I - MTS' application

7.

In their applications, MTS and Bell Canada proposed to revise the following tariff items:

8.

In particular, MTS proposed the following tariff changes to services within the single and multi-line business local exchange services basket:

9.

MTS submitted that the proposed tariff revisions would ensure that the service basket index (SBI) does not exceed the service basket limit (SBL) for the single and multi-line business local exchange services basket.

10.

MTS and Bell Canada also proposed the following tariff changes to services within the other capped services basket:

11.

MTS submitted that the proposed tariff revisions would ensure that the SBI does not exceed the SBL for the other capped services basket.

12.

MTS requested that the proposed rate decreases become effective on 1 June 2002 with the exception that the proposed rate increases to business individual line services and to certain Megalink components be approved effective on 1 September 2002.

13.

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

14.

MTS also proposed to introduce a time-limited promotion for Megalink customers who sign a new contract for access digital trunk controller port or PSTN connections. MTS stated that the promotion would allow the company to offer customers committing to a new 3 or 5-year contract for these components to benefit from the service free of charge for a period of one month. MTS proposed that the promotion would commence 1 November 2002 and end 31 January 2003.

AT&T Canada's comments

15.

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

16.

MTS submitted that AT&T Canada had provided no evidence that the proposed rate increases to business single line service were anti-competitive. MTS submitted that the proposed rate increases to business single line service complied with the price cap parameters and met all of the pricing constraints set out in Decision 2002-34. MTS requested that these rate increases be approved without delay.

17.

MTS argued that the proposed DNA rates could not be considered anti-competitive as they satisfied the imputation test. MTS argued that the imputation test was the accepted basis for determining whether a rate change might be anti-competitive.

Commission analysis

Costing issues

18.

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.

19.

The Commission finds that the proposed rates for Megalink service, DNA service and FLEX Access service pass the imputation test.

Compliance with the pricing constraints in Decision 2002-34

20.

In Decision 2002-34 the Commission applied a number of constraints to the rates for services in the single and multi-line business local exchange services basket and the other capped services basket, in order to provide customers of those services with price protection.

21.

The pricing constraints which apply to services in the single and multi-line business local exchange services basket include:

22.

The Commission notes that the proposed rate increases for business individual line services do not exceed the rate element constraint of 10%. The Commission finds that the proposed tariff revisions comply with the basket constraint requirement that the SBI not exceed the SBL for the single and multi-line business local exchange services basket.

23.

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 business local exchange services within a band.

24.

The pricing constraints which apply to services in the other capped services basket include:

25.

The Commission notes that the proposed rate increases to the components of Megalink service do not exceed the rate element constraint of 10%. 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.

26.

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

27.

Accordingly, the Commission is satisfied that MTS' proposals are consistent with the pricing constraints established in Decision 2002-34.

28.

In Review of promotions, Telecom PublicNotice CRTC 2003-1-1, 13 March 2003, the Commission decided to suspend consideration of all applications for ILEC promotions in the local wireline market, until a decision is issued on the matters raised in that Public Notice. Accordingly, the Commission defers, to a later date, consideration of MTS' proposal to introduce a promotion for Megalink service customers who sign a new contract for access digital trunk controller port or PSTN connections.

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

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

29.

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.

30.

Bell Canada submitted that the Commission should reject AT&T Canada's proposal to link the pricing of wholesale and retail rates. Bell Canada stated 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 submitted that retail rates were based on margins determined by market conditions and conformity with the price cap rules, including the imputation test.

31.

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.

32.

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

33.

Call-Net and AT&T Canada requested that the rates for DNA service and related services currently 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.

34.

In reply, Bell Canada and MTS 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.

35.

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

36.

In light of the foregoing, the Commission concludes the following:

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