ARCHIVED - Telecom Decision CRTC 2003-21

Telecom Decision CRTC 2003-21

Ottawa, 4 April 2003

O.N.Telcom

Reference: 8662-O4-02/02

Application to review and vary Decision 2001-583 and Decision 2001-756

In this decision, the Commission approves an application by O.N.Telcom to vary Regulatory framework for the small incumbent telephone companies, Decision CRTC 2001-756, 14 December 2001 (Decision 2001-756) with respect to the amount of subsidy for O.N.Telcom. The Commission finds that an additional amount of subsidy of $435,290 is due to O.N.Telcom for the years 2002 to 2005, inclusive.

The Commission finds that O.N.Telcom has failed to demonstrate that there is substantial doubt as to the correctness of other aspects of Decision 2001-756. The Commission therefore denies O.N.Telcom's request regarding the rates for direct connect and equal access services and related issues.

The Commission finds that O.N.Telcom has failed to demonstrate that there is substantial doubt as to the correctness of O.N.Telcom - Implementation of toll competition and related matters, Decision CRTC 2001-583, 13 September 2001. The Commission therefore denies O.N.Telcom's request to alter the terms and conditions for the provision of host-remote toll links in O.N.Telcom's operating territory.

The application

1.

The Commission received an application dated 11 March 2002 by O.N.Telcom, pursuant to section 62 of the Telecommunications Act, to review and vary Regulatory framework for the small incumbent telephone companies, Decision CRTC 2001-756, 14 December 2001 (Decision 2001-756), and O.N.Telcom - Implementation of toll competition and related matters, Decision CRTC 2001-583, 13 September 2001 (Decision 2001-583).

2.

O.N.Telcom requested that the Commission review and vary Decision 2001-756 as follows:

With respect to Decision 2001-583, O.N.Telcom requested that the Commission review and vary the terms and conditions for the provision of host-remote (HR) toll links in O.N.Telcom's operating territory.

Process

3.

Bell Canada and Northern filed comments on 10 April 2002.

4.

O.N.Telcom filed reply comments on 22 April 2002 and included market share data in confidence. O.N.Telcom stated that it would not provide an abridged version for the public record as deletion of the confidential data would render the data meaningless. O.N.Telcom also filed a copy of the prospectus for the Bell Nordiq Income Fund dated 9 April 2002.

5.

Northern submitted, in a letter dated 3 May 2002, that the confidential data on market share and the prospectus for the Bell Nordiq Income Fund constituted new evidence that should be stricken from the record of the proceeding as parties were not given an opportunity to comment on it.

6.

O.N.Telcom argued, in a letter dated 8 May 2002, that it filed this information in response to Northern's claim that O.N.Telcom's financial situation was not as dire as the company claimed.

7.

The Commission considers that the information provided by O.N.Telcom in its reply comments is new evidence and accordingly, determines that it should not form part of the record of this proceeding.

Background

8.

In Decision 2001-583, the Commission established the framework for toll competition in the area of north eastern Ontario served by O.N.Telcom. In that decision, the Commission set, among other things, rates for various services for O.N.Telcom, Northern, Cochrane and Bell Canada, effective 1 January 2002 and established the 2002 subsidy requirement for O.N.Telcom. The Commission determined that the regulatory framework for the area served by O.N.Telcom was to reflect the regulatory regime that the Commission put in place for the rest of Canada. Specifically, any local exchange carrier (LEC) would have the option of connecting its own hosts and remotes by self-provisioning, or by leasing dedicated circuits or otherwise acquiring transport from a third party such as O.N.Telcom. Because O.N.Telcom had been the monopoly provider of HR toll links under the previous regulatory framework, the Commission established a two-year transition period during which time O.N.Telcom would remain the monopoly provider of HR toll links. The Commission considered that the two-year transition period would encourage competitive entry while allowing the parties to resolve any contractual issues and would give O.N.Telcom time to prepare for competition in this market.

9.

In Changes to the contribution regime, Decision CRTC 2000-745, 30 November 2000, the Commission determined that, as of 1 January 2002, all small incumbent local exchange carriers (ILECs) must use a Phase II costing approach to calculate their subsidy requirements. In Decision 2001-756, the Commission established a new regulatory regime for the small ILECs with a focus on prices rather than earnings and specified a methodology to calculate the subsidy requirement. To reduce the regulatory burden of performing detailed Phase II costing studies, the Commission allowed the small ILECs to use a proxy approach to calculate their subsidy requirements. A four-year transition period, from 2002 to 2005, was established by the Commission to reduce the possible financial impact on those companies that received less subsidy under the new regulatory regime. Since no immediately workable proposals were brought forward with respect to the methodology for the calculation and recovery of direct toll (DT) and network access costs, the Commission determined that a follow-up consultative proceeding would examine proposals for an appropriate methodology. Consequently, the Commission determined that the approved 2001 DT rates for the small ILECs, other than O.N.Telcom, Northern and Cochrane, and the DC and EA rates for O.N.Telcom, Northern and Cochrane, would be made interim, effective 1 January 2002, pending the outcome of the follow-up consultative proceeding.

Issues and Commission analysis and determinations

a) Subsidy

10.

O.N.Telcom claimed that the Commission had committed an error in fact in the calculation of the company's subsidy in Decision 2001-756. O.N.Telcom argued that while its 2005 subsidy remains unchanged, its subsidy for each of the years 2002 to 2004 inclusive, was erroneously calculated on the assumption that the company's estimated subsidy requirement for the year 2002 was $770,000. O.N.Telcom claimed that the 2002 interim subsidy requirement of $1,008,040, approved by the Commission in Decision 2001-583, should have been used to determine the amount of subsidy for O.N.Telcom over the four-year transition period. O.N.Telcom submitted that the Commission should review and vary Decision 2001-756 accordingly.

11.

Neither Bell Canada nor Northern commented on this aspect of O.N.Telcom's application.

Commission analysis and determinations

12.

The Commission notes that in the proceeding leading to Decision 2001-583, O.N.Telcom estimated that its 2002 subsidy requirement was $770,000, based on the company's proposal that assumed, among other things, certain local rate increases. After reviewing O.N.Telcom's proposal, the Commission approved an interim 2002 subsidy requirement of $1,008,040 for O.N.Telcom, subject to the outcome of the proceeding initiated by New regulatory framework for small independent telephone companies and related issues, Public Notice CRTC 2001-61, 30 May 2001.

13.

The Commission noted that in the determination of O.N.Telcom's subsidy for each year of the four-year transition period in Decision 2001-756, the Commission used O.N.Telcom's 2002 estimate of $770,000 instead of the 2002 interim subsidy requirement of $1,008,040, approved by the Commission in Decision 2001-583.

14.

The Commission finds that it did make an error of fact in its calculation of the subsidy for O.N.Telcom.

15.

In Decision 2001-756, the Commission determined that O.N.Telcom's annual subsidy would be reduced over the four-year transition period. Because the subsidy requirement for 2002 was incorrect, the Commission finds that the subsidy for each of the years 2002 to 2004 should be adjusted upwards. Consequently, an additional $435,290 in subsidy is due to O.N.Telcom over the four-year transition period.

16.

The Commission concludes that, as a result of an error on the part of the Commission, there is substantial doubt as to the correctness of Decision 2001-756, consistent with the guidelines contained in Guidelines for review and vary applications, Telecom Public Notice CRTC 98-6, 20 March 1998 (Public Notice 98-6). Accordingly, the Commission hereby approves O.N.Telcom's application to a review and variance of the amount of subsidy that O.N.Telcom is entitled to over the four-year transition period, 2002 to 2005 inclusive.

17.

The Commission accordingly revises the subsidy amounts set out in Decision 2001-756 for O.N.Telcom as follows:

2002

$913,880

2003

$806,835

2004

$712,675

2005

$631,400

18.

In Interim 2002 revenue-percent charge, national subsidy requirement and procedures for the revenue-based contribution regime, Order CRTC 2001-876, 14 December 2001, the Commission provided the payment details of subsidy for the small ILECs for 2002. The Commission finds that the payment details should be amended to reflect the revised subsidy for O.N.Telcom as set out in paragraph 17.

b) DC and EA rates

19.

O.N.Telcom requested that the Commission review and vary Decision 2001-756 to make the DC and EA rates for O.N.Telcom, Northern and Cochrane final. O.N.Telcom submitted that because the DC and EA rates would remain interim until the consultative follow-up proceeding was completed, this uncertainty placed the company's financial viability at risk. Therefore, O.N.Telcom argued there was substantial doubt as to the correctness of the decision.

20.

O.N.Telcom expressed concern that the follow-up consultative proceeding established in Decision 2001-756 would likely only address concerns specific to the other small ILECs, none of which conduct business under circumstances similar to O.N.Telcom, and requested that the Commission initiate a separate proceeding for O.N.Telcom, Northern and Cochrane.

21.

Specifically, O.N.Telcom requested that the Commission:

22.

Northern submitted that the Commission's determination concerning the calculation of appropriate DC and EA rates must take into account the difference arising from the change in costing methodologies, and claimed that O.N.Telcom actually benefited from Decision 2001-583 because of this difference.

23.

Northern argued that O.N.Telcom, Northern and Cochrane should participate in the follow-up consultative proceeding because these companies were no different than any other small ILEC and that a separate proceeding for these three companies was unnecessary.

24.

O.N.Telcom replied that the issues regarding DC and EA service rates for those companies operating in its serving territory should be handled in a proceeding separate from the follow-up consultative proceeding for the following reasons:

Commission analysis and determinations

25.

In Decision 2001-756 the Commission considered that the determination of what constitutes an appropriate DT cost recovery methodology and the requirement for a transition mechanism could not be determined on the record of that proceeding. Therefore, a follow-up consultative proceeding was established to address those issues for the small ILECs.

26.

The Commission notes that at the time Decision 2001-756 was released, O.N.Telcom provided both local and toll services. Northern, which at that time provided only local service, announced its intention to enter the toll market as of 1 January 2002. This left Cochrane as the only small ILEC in O.N.Telcom's operating territory not providing toll service. The Commission wanted to ensure that O.N.Telcom, Northern and Cochrane would not be disadvantaged if the follow-up consultative proceeding for the other small ILECs provided for different DC and EA rates. For this reason, the Commission determined that the DC and EA rates, established in Decision 2001-583 for O.N.Telcom, Northern, and Cochrane, would be frozen at 2001 levels, and made 2002 rates interim effective 1 January 2002, until a decision was issued in the follow-up consultative proceeding.

27.

The Commission notes that it denied Northern's TN 171 in Request by Northern Telephone Limited Partnership to increase its direct connection service rate, Telecom Decision CRTC 2002-41, 22 July 2002. The Commission also stated that the issues raised by O.N.Telcom relating to setting Northern's DC rates on a final basis and other related issues would be addressed in the follow-up consultative proceeding.

28.

The Commission finds that O.N.Telcom has not substantiated its claim that its financial viability was placed at risk because the DC and EA rates for O.N.Telcom, Northern and Cochrane would remain interim until the follow-up consultative proceeding was completed. Accordingly, the Commission finds that there are no grounds for a review and variance of Decision 2001-756.

29.

Accordingly, the Commission finds that O.N.Telcom has not met the criteria set out in Public Notice 98-6 for a review and variance of a Commission decision. The Commission therefore denies O.N.Telcom's application to vary Decision 2001-756 regarding DC and EA rates and related issues.

c) HR toll links

30.

O.N.Telcom argued that there was substantial doubt as to the correctness of Decision 2001-583 and that the Commission erred in law and failed to address the evidence presented in the proceeding on its merits. O.N.Telcom argued that the decision was based on a mistaken understanding of the technical restrictions inherent in the existing networks and that competition in the provision of HR toll links would negatively impact O.N.Telcom's financial situation unless further regulatory relief was obtained.

31.

O.N.Telcom submitted that throughout the proceeding leading to Decision 2001-583, it maintained that the unavoidable pooled nature of the facilities made HR toll links a highly undesirable competitive service offering. For this reason, O.N.Telcom requested that the Commission vary its decision and prohibit competition in this market segment.

32.

O.N.Telcom stated that it would exit this market after a four-year transition period provided there was reasonable compensation for its stranded investment in HR toll links. O.N.Telcom submitted that while competition in the provision of HR toll links would benefit new entrants and the ILECs within the territory, O.N.Telcom would suffer significant financial harm without compensation for its stranded investment. Since the company's HR toll links provided monopoly toll services throughout its operating territory, and since this change would benefit other stakeholders, O.N.Telcom argued that compensation was warranted.

33.

Specifically, O.N.Telcom requested that the Commission:

34.

Bell Canada and Northern argued that O.N.Telcom did not meet the Commission's guidelines for review and vary applications set out in Public Notice 98-6. Bell Canada and Northern submitted that O.N.Telcom merely demonstrated that the company disagreed with the determinations in Decision 2001-583 on the basis that the Commission had not endorsed O.N.Telcom's submissions on matters related to the provisioning of HR toll links.

35.

Bell Canada and Northern submitted that the HR toll links should be 'normalized' to reflect the industry standard that existed elsewhere in Canada. That is, any LEC should have the option of connecting its own hosts and remotes by self-provisioning, or by leasing dedicated circuits or otherwise acquiring transport from a third party such as O.N.Telcom.

36.

Bell Canada submitted that O.N.Telcom was attempting to derive maximum revenues from the assets in question and argued that Decision 2001-583 already represented a concession to O.N.Telcom, compared to the terms and conditions in place in the rest of Canada. Bell Canada argued that in mandating a two-year transition period, the Commission made a reasonable compromise between O.N.Telcom's position, that it should continue to be the monopoly provider of HR toll links indefinitely, and that of the ILECs, including Bell Canada. Bell Canada argued that unique circumstances did not exist and that a departure from either the Commission's previous determinations to implement toll competition within O.N.Telcom's toll operating territory effective 1 January 2002, or from the terms and conditions that prevailed throughout the rest of Canada, was not warranted.

37.

Bell Canada stated that O.N.Telcom's investment in HR links would not become stranded because of the Commission's decision and submitted that it was prepared to compensate O.N.Telcom for the HR toll links between Temiscaming and North Bay.

38.

Northern argued that O.N.Telcom did not provide any evidence to support its claim that it might have stranded investment, and submitted that the toll, data and Internet markets were growing. Because this traffic flowed over the same facilities used to provide the HR toll links, Northern submitted that O.N.Telcom could eventually make full use of these existing facilities.

39.

Northern submitted that O.N.Telcom had yet to file a tariff application for its long-term competitive HR toll link rate and that once this rate was approved by the Commission, Northern would be able to make an informed decision on the provisioning issues related to HR toll links.

40.

Northern disagreed that O.N.Telcom's transition period should be extended to 31 December 2005 during which time O.N.Telcom would continue to be the designated monopoly provider of HR toll links. Northern argued that the Commission sent a signal to O.N.Telcom that toll competition in its territory was on the horizon in Regulatory Framework - Ontario Northland Transportation Commission, Telecom Decision CRTC 98-14, 1 September 1998. Northern submitted that O.N.Telcom was given sufficient time to review its situation and put in place the business strategies necessary to face toll competition and that therefore, an extension to the transition period was not justified.

41.

O.N.Telcom replied that Northern had already invested in the required transmission facilities and would likely never make use of O.N.Telcom's HR toll links, regardless of the level of O.N.Telcom's HR toll link rate. O.N.Telcom reiterated that competition in the provision of HR toll links was not viable and therefore the company should be compensated for its stranded investment in those facilities.

Commission analysis and determinations

42.

The Commission notes that in Decision 2001-583, it directed O.N.Telcom and Northern to file revised HR toll link rates before the end of the transition period to reflect the market conditions if Northern decided to provide its own HR toll links. The Commission was of the view that if O.N.Telcom were to propose a rate for HR toll links that was competitive, the ILECs would be more likely to utilize O.N.Telcom's HR toll links than invest in those facilities themselves.

43.

Until O.N.Telcom files a tariff for its HR toll link rate, the Commission notes that the ILECs are understandably not in a position to state whether they will use O.N.Telcom's HR toll links at the end of the transition period. The Commission acknowledges that Northern has facilities in place that would allow new entrant toll providers to connect to the Timmins DMS 100 and that O.N.Telcom could have stranded investment at the end of the transition period. However, the Commission is of the view that extending the transition period by another two years will do little to alleviate the situation in the long term. Further, the longer O.N.Telcom waits to propose a competitive rate for HR toll links, the greater the possibility that the company will have stranded investment in these facilities.

44.

In Decision 2001-756, issued three months after Decision 2001-583, the Commission determined that the small ILECs are to be regulated under a framework that focuses on prices, rather than earnings. Moreover, in Regulatory framework for second price cap period, Telecom Decision CRTC 2002-34, 30 May 2002, the Commission considered that the concept of a Utility segment no longer has relevance due in part to the introduction in 2002, of a Phase II-based determination of the subsidy requirement. Therefore, the assignment of the HR toll links, whether to the Utility or Competitive segment, is a moot point.

45.

The Commission notes that O.N.Telcom was given the option of not providing HR toll links at the end of the transition period. Therefore, the Commission does not consider that the distinct HR toll link rates should be eliminated and that Northern should be required to file a DC rate that would include HR toll link components.

46.

The Commission notes that, in Decision 2001-583, it introduced a competitive regime in O.N.Telcom's territory that would be more consistent with the competitive regime in the rest of Canada. In the Commission's view, establishing a two-year transition period for O.N.Telcom was a concession in recognition of the company's unique circumstances, and was intended to afford O.N.Telcom sufficient time to develop business strategies for that competitive environment.

47.

The Commission finds that there are no grounds for a review and variance of Decision 2001-583 insofar as the terms and conditions for the provision of HR toll links in O.N.Telcom's operating territory is concerned. The Commission notes that a competitive model was established for the provision of HR toll links, and in order to give O.N.Telcom time to prepare for competition, a two-year transition period was granted to the company during which time O.N.Telcom continues to be the designated monopoly provider of those services.

48.

The Commission finds that O.N.Telcom has not met the criteria set out in Public Notice 98-6 for a review and variance of a Commission decision. The Commission therefore denies O.N.Telcom's application to vary Decision 2001-583 insofar as HR toll links is concerned.

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