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Telecom Decision CRTC 2003-2
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Ottawa, 23 January 2003
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Follow-up to price cap Decision 2002-34: Large construction charges instalment payment plan for high-cost residential premises as part of the service improvement plans
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Reference: 8638-C12-63/02
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In Regulatory framework for second price cap period, Telecom Decision CRTC 2002-34, 30 May 2002, the Commission stated that it would explore a large construction charges instalment payment plan for the provision of residential telephone service in high-cost serving areas for charges to the customer greater than $10,000. In this decision, the Commission approves such a plan for Bell Canada, TELUS Communications Inc. and Aliant Telecom Inc.
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Background
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1.
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In Telephone service to high-cost serving areas, Telecom Decision CRTC 99-16, 19 October 1999 (Decision 99-16), the Commission defined the basic service objective (BSO) as, among other things, an individual line with privacy features and the capability to connect via low-speed data transmission to the Internet at local rates. The Commission set three goals: (i) to extend service to the few areas that are unserved; (ii) to upgrade service levels in those areas where customers do not have access to telecommunication services that meet the BSO; and (iii) to maintain service levels. In order to achieve these goals, the Commission directed the incumbent local exchange carriers (ILECs) to develop service improvement plans (SIPs) which would be reviewed in the proceeding leading to Regulatory framework for second price cap period, Telecom Decision CRTC 2002-34, 30 May 2002 (Decision 2002-34).
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2.
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In approving the expenditures related to the SIPs, in Decision 2002-34, the Commission concluded that a capital cost criteria of $25,000 per premise was to be used to determine whether to provide service to previously unserved areas. The $25,000 capital cost allowance included the $1,000 initial payment that must be paid by the customer requesting service. The Commission noted that the requirement that the customers requesting service under the SIP pay the initial $1,000 construction fee in a lump sum might be a hardship and a disincentive to taking the service. The Commission therefore directed the ILECs to institute an instalment plan for the $1,000 payment.
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3.
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In Decision 2002-34, the Commission also noted that, even with the approved capital cost allowance of $25,000, a number of unserved areas would still not qualify for service under the SIPs because of higher construction costs. The Commission noted that occupants of premises in these areas could undertake to pay the additional construction costs to obtain services. The Commission concluded that, as an incentive to the customers who were willing to pay additional construction costs, it would require the ILECs to institute an instalment plan for customer payments limited to a maximum of $10,000. The Commission endorsed the conditions related to a customer instalment plan for charges up to a maximum of $10,000 per customer.
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4.
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In the event that the total construction costs exceeded the amounts described above and to further encourage the provision of service to unserved premises, the Commission stated, in Decision 2002-34, that it would explore a large construction charges instalment payment plan (LCCIPP) for additional charges greater than $10,000 per customer premise. Accordingly, the Commission directed Aliant Telecom Inc. (Aliant Telecom), Bell Canada and TELUS Communications Inc. (TCI) (collectively the ILECs) to file such a plan by 2 July 2002.
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Position of parties
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5.
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Bell Canada and TCI submitted LCCIPP proposals as requested but argued against the inclusion of such plans in their tariffs.
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6.
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Bell Canada and TCI both argued that they would face a high level of lending risk. In their view, customers would be receiving service for the first time and therefore would have no previous credit history with the company. They further submitted that construction is often in remote areas increasing the potential for the companies' investment to be "stranded" should the customer move or otherwise abandon the premises. In the case of a move, the companies indicated that they would have no means of collecting any outstanding balance on the LCCIPP from the occupant of the premises to which service was extended.
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7.
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Bell Canada and TCI also submitted that the cost of arranging appropriate security on a case-by-case basis could be significant. Bell Canada submitted that a bank would be able to arrange security at a lesser cost or simply add the construction amount to an existing security arrangement. Bell Canada also anticipated that bank interest rates would compare favourably to its cost of capital (8.03% per annum at the time of the Bell Canada's submission). Bell Canada argued that the cost of arranging specific security, combined with interest on the outstanding balance at Bell Canada's cost of capital, would represent a prohibitive cost of borrowing for customers when compared with other financing alternatives available in the marketplace.
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8.
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Bell Canada and TCI submitted that if an LCCIPP were required, they would have to devote resources to developing policies and procedures for a service whose expected demand will be low. Bell Canada submitted that it would also face the burden of complying with provincial and federal regulations relating to consumer lending activities. Bell Canada anticipated that such compliance costs would be wasted should there be no demand for the LCCIPP.
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9.
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In summary, both Bell Canada and TCI expected that the demand for an LCCIPP would be quite low and argued that implementation of such a plan (a) would represent a lending risk, (b) could be quite costly for the consumer, and (c) would require a significant outlay of their resources.
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10.
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Bell Canada and TCI, nevertheless, submitted that an LCCIPP should include the following terms and conditions:
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· the customer must pay 20% of the construction charges as a non-refundable deposit prior to the start of construction;
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· the balance of construction charges would be payable in equal monthly instalments over a period of 60 months;
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· interest equal to the company's cost of capital at the time the LCCIPP is entered into by the customer would be chargeable on the outstanding balance and would be calculated and payable with each monthly instalment; and
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· prior to the company commencing construction, the customer would be required to provide security for the instalment payment plan in an amount and form acceptable to the company at its reasonable discretion. The customer would be responsible for arranging the security, including the cost of arranging security.
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11.
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TCI submitted that an LCCIPP would have to include the following additional terms and conditions:
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· interest would be charged on late payments of instalments due each month in accordance with the company's tariffed late payment interest rate;
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· customers would be required to satisfy specific credit criteria; and
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· customers would be required to sign an agreement with the company, consistent with the above terms and conditions, as part of the LCCIPP.
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12.
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Aliant Telecom concurred with the views expressed by Bell Canada, noting that Bell Canada had suggested that an LCCIPP was neither necessary nor practical. Aliant Telecom requested that it not be required to include an LCCIPP in its tariffs.
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13.
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The Commission received no comments with respect to this application.
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Commission analysis and determination
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14.
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The Commission recognizes that a lending risk exists since the investment could become stranded if a customer moves before the LCCIPP is paid down. The Commission, however, considers that the lending risk associated with the LCCIPP is not significantly greater than the risk associated with the current instalment payment plan that is limited to $10,000. The Commission finds that contractual agreements between the LCCIPP customer and the ILEC can be developed that would offer protection to the ILEC where a customer moves before the loan is paid in full. The Commission expects that the ILECs will develop security measures that will further reduce the lending risk and become part of the contractual agreement. The Commission notes that customers are required to pay 20% of the construction charges as a non-refundable deposit prior to the start of construction. The Commission considers that this non-refundable deposit will secure customers' commitment to, and agreement with, the cost of the service extension.
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15.
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The Commission acknowledges that the cost to the ILEC of administering the LCCIPP on the basis of an ILEC's cost of capital would be higher than if the customer were to use the traditional forms of financing such as a bank loan. However, the cost of arranging financing is unlikely to be any higher for the LCCIPP when compared with the cost related to the current instalment payment plan limited to $10,000. The Commission finds that the possibility of financing through the ILEC for telephone service provides the customer with a necessary alternative where traditional financing may be impractical or unavailable.
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16.
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The Commission recognizes that the implementation of an LCCIPP would require the telephone companies to devote resources to developing policies and procedures and ensuring compliance with provincial and federal regulation. However, the Commission notes that the telephone companies already expend resources to administer instalment payment plans involving construction charges up to $10,000, and considers that the additional resources required to administer an LCCIPP for charges greater than $10,000 should be minimal.
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17.
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The Commission is of the view that there could be a limited demand for an LCCIPP based on the relatively high costs of service that would be eligible for this plan. However, as noted in Decision 99-16, one of the Commission's goals is to extend individual line service to the few areas that continue to be unserved. The Commission is of the view an LCCIPP will aid in the achievement of the BSO as it will allow any customers, who would be burdened in paying for the high cost of obtaining service in one payment, to pay gradually through instalments.
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18.
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In Decision 2002-34, the Commission recognized that a number of unserved premises would not qualify for service under the approved capital cost limit. The Commission further stated its view that it would be appropriate for the ILECs to offer a plan whereby the customer could pay an amount over and above the $10,000 currently approved. This type of plan would mitigate the disincentive to take service because of a high up-front cost.
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19.
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The Commission finds that the public interest in achieving the BSO outweighs the ILECs' concerns with regards to lending risk, extra cost and low demand. Accordingly, the Commission considers it appropriate to require an LCCIPP for construction charges greater than $10,000.
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20.
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The Commission notes that the criteria proposed by the ILECs for the LCCIPP are generally similar to those currently in place for the instalment plan for construction charges of up to $10,000. The Commission approves the LCCIPP criteria proposed by the ILECs, including the additional terms proposed by TCI with one minor modification to the ILECs' discretion regarding security requirements.
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21.
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Specifically, the Commission approves the following criteria:
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· the customer must pay 20% of the construction charges as a non-refundable deposit prior to the start of construction;
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· the balance of construction charges would be payable in equal monthly instalments over a period of 60 months;
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· interest equal to the ILEC's cost of capital at the time the LCCIPP is entered into by the customer would be chargeable on the outstanding balance and would be calculated and payable with each monthly instalment;
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· prior to the ILEC commencing construction, the customer would be required to provide security for the instalment payment plan in an amount and form to be agreed to by the company and the customer. The customer would be responsible for arranging the security, including the cost of arranging security;
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· interest would also be charged on late payments of instalments that are due each month in accordance with the ILEC's tariffed late payment interest rate;
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· customers would be required to satisfy specific credit criteria; and
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· customers would be required to sign an agreement with the ILEC, consistent with the above terms and conditions, as part of the LCCIPP.
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22.
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The Commission considers that the principles set out in this decision as well as the terms and conditions of the LCCIPP should be reflected in the contractual agreements offered to the customers. The Commission finds it appropriate to require Aliant Telecom, Bell Canada and TCI to develop a draft customer agreement that would set out the conditions of the LCCIPP and that would describe the security requirements that would be offered to the customers under the LCCIPP.
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23.
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The Commission:
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i) approves an LCCIPP for Aliant Telecom, Bell Canada and TCI construction charges greater than $10,000, which includes the criteria set out above; and
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ii) directs the ILECs to file, for approval, tariff pages along with a draft customer agreement, specifying the proposed security arrangements, within thirty days of the date of this decision.
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Secretary General
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This document is available in alternative format upon request and may also be examined at the following Internet site: www.crtc.gc.ca
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Date Modified: 2003-01-23