ARCHIVED - Telecom Decision CRTC 2003-27

Telecom Decision CRTC 2003-27

Ottawa, 7 May 2003

Follow-up proceeding to Telecom Decision CRTC 2002-56 - Foregone toll revenue compensation for expanded local calling areas

Reference: 8638-C12-68/02

In this decision, the Commission establishes that compensation to toll service providers for expanded local calling areas will be equal to three years worth of foregone toll revenues.

1.

In Framework for the expansion of local calling areas, Telecom Decision CRTC 2002-56, 12 September 2002 (Decision 2002-56), the Commission established a new framework for expanding local calling areas (LCAs). As part of the new framework, the Commission also established a compensation plan designed to compensate all long distance service providers (toll providers) for foregone toll revenue resulting from the expansion of LCAs. The Commission concluded that subscribers within the expanded LCA would pay the costs associated with foregone toll revenues through a temporary monthly surcharge collected by both incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs). The Commission indicated that the recovery of foregone toll revenues for an indefinite period was unreasonable as the telecommunications market continues to change with respect to its technology, the prices and the number of competitors and their market share. The Commission also considered that to compensate toll providers on a permanent basis based on the market picture at one point in time could lead to customers overpaying for the expanded LCA service. Accordingly, the Commission announced its preliminary view that the ILECs and competitors would be compensated for their foregone toll revenues for a period of three years. In Decision 2002-56, the Commission initiated a follow-up proceeding to allow parties to comment on this preliminary view.

2.

In the follow-up proceeding, the Commission received comments from A & A Call Link Telesolutions Ltd. (A & A); Aliant Telecom Inc., Bell Canada, MTS Communications Inc., Société en commandite Télébec and NorthernTel Limited Partnership, (the Companies); Grand Council of the Crees Eeyou Istchee - Cree Regional Authority (GCCEI-CRA); Microcell Telecommunications Inc. (Microcell); City of Ottawa (Ottawa); Saskatchewan Telecommunications (SaskTel); City of Greater Sudbury (Sudbury); TELUS Communications Inc. (TELUS); and West Coast Teltech Ltd. (West Coast).

3.

The Commission received reply comments from AT&T Canada Corp. on behalf of itself and AT&T Canada Telecom Services Company (collectively, AT&T Canada); the Companies; Ottawa; Primus Telecommunications Canada Inc. (Primus Canada); SaskTel; Sudbury; TELUS and l'Union des consommateurs.

Positions of parties

Comments

4.

A & A and West Coast were both of the view that Decision 2002-56 would put some toll-free calling companies in the Greater Vancouver Regional Area out of business and therefore, the compensation period should be five years. According to A & A, five years of toll revenues were required in order to recoup the costs of fixed assets and software programming and the costs associated with winding down a business, and to compensate the principals of the company for lost revenues over the next few years.

5.

The Companies argued that it was unreasonable for the Commission to limit compensation for foregone toll revenues as a result of changes in the telecommunications market factors identified in Decision 2002-56, such as technology, prices, number of competitors and market share. According to the Companies, by limiting the amount of compensation for foregone toll revenue, expanded local calling would be perceived by customers as being relatively inexpensive compared to its true value. As a result, there would be too many requests for expanded LCAs. The Companies further submitted that such uneconomic LCA expansion would unfairly burden ILECs and threaten sustainable competition.

6.

The Companies further submitted that the concern expressed by the Commission in Decision 2002-56, that compensation on a permanent basis could lead to customers overpaying for expanded LCA service, would best be addressed by linking the duration of compensation to actual changes in the market factors identified by the Commission. According to the Companies, compensation for lost toll revenue should only be eliminated when there was a material change in the determining factors.

7.

In the Companies' view, any expansion of LCAs must be economically neutral to be fair to ILECs, toll competitors and customers. Furthermore, economic neutrality and fairness to both customers and toll providers could only be achieved if the compensation period was linked to measurable changes in relevant market factors. Accordingly, compensation should continue until there was a material change in the relevant market factors that would justify having the Commission terminate compensation. According to the Companies, this approach would be administratively simple and would ensure equitable compensation while limiting the risks of customer overpayment for LCA expansion and toll providers being under-compensated.

8.

The GCCEI-CRA stated that it supported the Commission's preliminary view that the amount of compensation for foregone toll revenues should be equal to three years worth of toll revenues.

9.

Microcell submitted that the compensation period should not exceed one year. In its view, CLECs, such as itself (that are also wireless service providers), would have to contribute to the compensation plan but, at the same time, they could neither charge their subscribers the temporary surcharge to pay for their contribution to the plan, nor collect compensation for foregone toll revenue.

10.

Ottawa stated that Decision 2002-56 did not provide a detailed rationale for the Commission's preliminary view on the compensation period, and that to the extent possible, there should be some principled underlying rationale for whatever period or amount was ultimately adopted. Ottawa submitted that with respect to the amount of compensation, the Commission's preliminary view represented over-compensation, as there was no reduction for cost savings taken into account that resulted from not providing toll service.

11.

Ottawa was of the view that the appropriate margin for short-distance toll calls was 33%. According to Ottawa, toll providers should only be compensated for margin and not revenue and, therefore, a temporary surcharge based on 1/3 of three years worth of lost toll revenue should be collected from ILECs and CLECs over one year, as opposed to over three years.

12.

SaskTel submitted that a three-year compensation period was unreasonably short given the value of the long distance business that was being eliminated. In SaskTel's view, the foregone toll minutes resulting from an expanded LCA were high margin minutes given the lack of significant avoidable costs associated with providing these same toll minutes. That is, the toll revenues would be lost while at the same time the associated toll costs would still be incurred.

13.

According to SaskTel, there was a fundamental flaw in the compensation plan. In SaskTel's view, there would be no revenue stream after three years to compensate the ILEC for its base facilities between exchanges that became toll-free as a result of expanding a LCA. This could deter some ILECs from making future investments necessary to provide an adequate level of service.

14.

SaskTel believed that a fixed compensation period for all LCA expansions did not reflect the economic impact that would actually occur on the affected ILEC and competitors. SaskTel proposed that there should be a case-by-case approach to compensation that provided a level of fairness to all parties. It submitted that the appropriate compensation period should be determined by the Commission based on an economic study prepared for each application to expand LCAs.

15.

According to Sudbury, the correct approach would be to estimate compensation based on the principle of awarding damages, i.e. to compensate toll providers for lost profits, not lost revenue. Sudbury submitted that the amount of compensation that would be awarded, based on the Commission's preliminary view, would be punitive, as it did not recognize the cost savings associated with not having to provide toll service. In its view, the Commission's compensation plan would give the toll providers a windfall. Alternatively, if the Commission wished to rely on foregone revenue, it should reduce the compensation period to considerably less than three years.

16.

According to TELUS, there should be different compensation periods for toll competitors, CLECs and ILECs. In its view, with expanded LCAs, toll competitors would no longer be required to carry toll traffic that became local traffic, while ILECs and CLECs would still carry this traffic. In its view, a three-year compensation period would over-compensate toll competitors. TELUS submitted that at the most, toll competitors should only receive six months worth of lost toll revenues representing compensation only for their foregone margin on lost toll traffic and for any direct costs required to re-deploy assets to markets where such assets could be re-used.

17.

TELUS stated that the compensation period for the CLEC component of the temporary surcharge should be eliminated. According to TELUS, the requirement for CLECs to collect surcharges and remit such revenues to the ILEC will impose an administrative burden on the CLECs. As well, requiring CLECs that operate in exchanges affected by LCA expansion to include the surcharge in their local rates, regardless of whether or not they planned to adopt the same expanded LCA as the ILEC, would severely constrain, if not altogether eliminate, the CLECs' ability to compete.

18.

TELUS further stated that there should be no regulatory limit on the duration of compensation placed on the ILECs. Market forces would decide the sustainability of the temporary surcharge.

19.

TELUS submitted that by compensating toll competitors, subscribers would pay a temporary surcharge that is 40% higher than it otherwise would be if only the ILECs were being compensated.

Reply comments

20.

AT&T Canada stated that TELUS was merely rearguing its original position from the proceeding leading to Decision 2002-56 that only ILECs should be compensated. In AT&T Canada's view, all classes of toll providers, or none at all, should be allowed to recover foregone toll revenues.

21.

AT&T Canada stated that any method of compensation would be problematic, and in particular, the administrative burden could ultimately outweigh the benefits of compensation. AT&T Canada submitted that the compensation period should not exceed one year.

22.

According to the Companies, the appropriate compensation period could only be determined in the future when there was a material change in relevant market factors.

23.

L'Union des consommateurs stated that any compensation should be for foregone toll profits and not for foregone toll revenue.

24.

Ottawa submitted that TELUS had incorrectly concluded that CLECs were obliged to charge the temporary surcharge resulting in CLECs being put at a competitive disadvantage. In Ottawa's view, Decision 2002-56 did not require CLECs to charge the temporary surcharge, but rather, it would be assumed that it was being collected. However, the likelihood that a CLEC would be willing to absorb the surcharge in order to remain competitive would increase as the period of the surcharge was shortened.

25.

Ottawa noted TELUS' argument that toll competitors should not be compensated for toll traffic that they would no longer carry. Ottawa submitted that the same would be true for ILECs. Ottawa agreed with TELUS, that to the extent there were increased net operating expenses, ILECs should be compensated through higher local rates.

26.

Ottawa, in support of its view that the compensation period should be short, submitted that the market factors identified in Decision 2002-56, had already lowered the value of short-distance calling. In this regard, Ottawa disagreed with the Companies' view that these factors needed to be monitored for their future impact on the value of foregone toll revenue.

27.

Ottawa disagreed with A & A on the basis that the Commission had never been in the business of guaranteeing a particular competitor a return on investment.

28.

Primus Canada submitted that compensation was appropriate to allow competitors an opportunity to pursue new business alternatives. Primus Canada supported the Companies' position that all toll providers be treated equally and that a three-year compensation period was too restrictive.

29.

SaskTel submitted that there was no justification for Ottawa's proposed compensation period of one year. SaskTel agreed with Sudbury that entities should be put back into the position that they were in prior to expansion of a LCA.

30.

TELUS reiterated its view that toll competitors should not be compensated for services that they would no longer provide. TELUS submitted that the ILECs would continue to use their facilities to provide expanded local calling, and that the volume of traffic would double as a result of toll charges disappearing.

31.

TELUS agreed with the Companies that the compensation period should be dynamic and not be based on a fixed compensation period. TELUS submitted, however, that it should be based on market forces and not on regulatory intervention.

32.

TELUS was of the view that West Coast and A & A would not be entitled to compensation. TELUS submitted that they were local service resellers and had never been regarded as toll competitors. Moreover, when the toll contribution regime to subsidize local service providers was in effect, local service resellers were exempt from paying toll contribution because they were considered to be providing extended local service.

Commission analysis and determinations

Issues outside the scope of this proceeding

33.

The Commission notes that in Decision 2002-56, it stated that any new regulatory framework for the expansion of LCAs should treat all entities fairly and accordingly, concluded that both ILECs and competitors would be compensated for foregone toll revenues resulting from expanded LCAs. The Commission asked for comments "with respect to the Commission's preliminary view regarding the length of the period for which foregone toll revenues should be compensated".

34.

In Decision 2002-56, the Commission determined that all types of toll providers are to be treated in the same way with respect to compensation. Accordingly, the Commission considers that any proposal, such as the one made by TELUS, to treat different types of toll providers differently in terms of compensation falls outside the scope of this proceeding.

Length of the compensation period

35.

The Commission notes that in this proceeding, certain parties supported case-by-case approaches to determine compensation for foregone toll revenue, such as reliance on market forces, dynamic compensation and economic studies. One party agreed with the Commission's preliminary view that compensation should be equal to three years worth of foregone toll revenue, while others argued either for shorter or longer compensation periods.

36.

The Commission notes that TELUS suggested a case-by-case approach, whereby the length of the compensation period should be determined by market forces. Under this approach, compensation would be paid to toll providers for as long as market forces allowed for the collection of the temporary surcharge. In Report to the Governor in Council: Status of Competition in Canadian Telecommunications Markets - Deployment/Accessibility of Advanced Telecommunications Infrastructure and Services, dated December 2002 (the Report), the Commission observed that in the local wireline market for the year 2001, the ILECs continued to provide over 96% of total local lines and to derive over 97% of total local revenues. Based on the Report, the Commission does not consider that there is sufficient competition to rely on market forces to discipline the length of time that subscribers would pay the temporary surcharge. In its view, subscribers would therefore, over-compensate toll providers. Accordingly, the Commission considers that relying on market forces to set the temporary surcharge and the corresponding compensation for foregone toll revenue would be inappropriate.

37.

The Commission notes the Companies' proposal that changes in market factors would determine the amount of compensation. The Commission considers that implementing this dynamic model would require further proceedings in each location where LCA is being implemented in order to adjust compensation as these market factors change. In the Commission's view, assessing the continued appropriateness of the temporary surcharge, in light of changes in one or more of these market factors, would pose an additional regulatory burden. Accordingly, the Commission considers that this approach would be inappropriate.

38.

The Commission notes SaskTel's proposal to estimate compensation using economic studies. The Commission is of the view that, although there is some merit to SaskTel's proposal, there would be practical difficulties in implementing such a proposal. The Commission notes that there is a Commission-approved methodology used by the ILECs for doing economic studies. However, there is no Commission-approved methodology in place for other toll providers that would be eligible for compensation, and that would be required to either do their own economic study or provide input into one being done by the ILEC. Given the absence of a Commission-approved methodology for doing economic studies by toll competitors and the limitations of economic studies in a changing market, the Commission considers that using economic studies to determine compensation would be inappropriate.

39.

The Commission is of the view that there are problems with estimating compensation based on the principle of awarding damages as suggested by Sudbury. The Commission considers that this approach is similar to SaskTel's proposal, in that it would require economic studies in order to calculate damages and, therefore, would have similar shortcomings. Accordingly, the Commission considers that the principle of awarding damages would be inappropriate.

40.

The Commission notes the argument made by Ottawa, Sudbury and l'Union des consommateurs that the appropriate methodology should be to consider the foregone toll revenue, less any associated cost savings from not providing toll services within the expanded LCA. These parties further argued that toll traffic within a small calling area had a very low profit margin. Therefore, in their view, the Commission's proposed three-year compensation period based on foregone toll revenue should be considerably reduced to reflect the associated cost savings. Further, in Ottawa's view, toll compensation should be limited to one year's worth of foregone toll revenue. The Commission also notes that other parties were of the view that the foregone toll traffic would be high margin and, therefore, a one-year compensation period would be too short. The Commission is of the view that foregone toll traffic is likely to have a high profit margin given the lack of avoidable costs of the underlying facilities within any newly expanded LCA. Accordingly, the Commission considers that a one-year compensation period would be too short to adequately compensate toll providers and, therefore, would be inappropriate.

41.

In regard to the argument put forward by A & A and West Coast in support of their proposal for a compensation period of five years, the Commission agrees with Ottawa's view that the Commission has never been in the business of guaranteeing individual competitors a return on investment. In the Commission's view, the proposal for a five-year compensation period is not supported and accordingly, would be inappropriate.

42.

The Commission notes that the Companies argued that a three-year compensation period would understate the value to subscribers of expanding LCAs and therefore would lead to uneconomic expansion of LCAs. The Commission notes that under the new framework, total compensation will approach the value to subscribers of any new LCAs by virtue of the temporary surcharge being higher as a result of compensating all toll providers. Accordingly, the Commission is of the view that, based on the record, there is no evidence to suggest that a fixed three-year period of compensation, where all toll providers are compensated for foregone toll revenues, would necessarily understate the value of expanding LCAs or lead to uneconomic expansion of LCA.

43.

In the Commission's view, in order to compensate ILECs and toll competitors as fairly as possible, the compensation plan must be administratively efficient and reasonable. By basing compensation on foregone toll revenue, the Commission considers that entities are able to provide objective proof to justify their claims for compensation, such as records of the previous year's toll billing. This means that there is a common standard of proof required for all entities.

44.

The Commission notes that, given the evolving competitive telecommunications market, the compensation plan it established in Decision 2002-56 was intended to determine a reasonable estimate of compensation and not a precise quantification. The Commission considers that a three-year period, as proposed in the decision, would give competitors a chance to adjust to the new circumstances of an LCA expansion, and at the same time provide a reasonable amount of compensation to all entities. As well, this compensation for foregone toll revenue represents a reasonable estimate of the value to subscribers of expanded LCA and, as a result, there should not be uneconomic expansion of LCA service. At the same time, subscribers are protected from paying too much. The Commission considers that, on balance, a three-year compensation period ensures fairness to toll providers and subscribers.

45.

In light of the above, the Commission establishes that compensation for expanded LCAs will be equal to three years' worth of foregone toll revenues.

Other matters

Eligibility for compensation

46.

The Commission notes TELUS' comments that local service resellers have never been regarded as toll competitors and, since they are providing their customers only with extended local calling, they would not be eligible for compensation for foregone toll revenue. The Commission further notes that in Bell Canada - Application to deny resale of Centrex III Service by Distributel Communications Limited, Telecom Decision CRTC 89-2, 7 February 1989, the Commission stated that Distributel Communications Limited's (Distributel) Metroplus Service was based on the resale, for a flat monthly fee, of Centrex III Service provided from a core exchange that had toll-free calling with surrounding exchanges. Therefore, Metroplus Service effectively linked two local calls and thus avoided the toll charges that would normally apply. The Commission found that the service provided by Distributel was appropriately described as a local service. Accordingly, in the Commission's view, with respect to the new framework for the expansion of LCAs, resellers of local service are not considered to be toll competitors and therefore are not eligible to receive compensation for foregone toll revenue.

Further process

47.

In its comments, Ottawa raised the issue of what service elements would be included in the calculation of foregone toll revenue as well as the matter of a letter, received from Bell Canada dated 17 September 2002, regarding expanded LCA implementation issues associated with Decision 2002-56. These issues included: potential difficulty in obtaining information from other companies; verifying the accuracy of information provided by other companies; eliminating double counting of foregone toll revenue; and determining eligibility for compensation. Ottawa asked the Commission to address these issues in this proceeding.

48.

In response to Ottawa's submission, Bell Canada indicated that the purpose of its letter was to manage the expectations of municipalities. Bell Canada stated that it did not consider that the issues raised in its letter would be insurmountable, and indicated that it expected these issues to be resolved through interaction with relevant stakeholders, including municipalities. According to Bell Canada, only in the event of an impasse would parties seek the assistance of the Commission to resolve these matters.

49.

In the Commission's view, the record is insufficient to address the issues raised by Ottawa at this time. The Commission agrees that these are implementation issues that can be dealt with as part of an application for expanded LCA. However, the Commission expects stakeholders to make every reasonable effort to resolve issues associated with compensation for foregone toll revenue, in an expeditious manner.

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