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Introduction
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1.
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In Long-distance competition and improved service for Northwestel customers, Decision CRTC 2000-746, 30 November 2000 (Decision 2000-746), the Commission established, effective 1 January 2001, the terms and conditions for long distance competition in Northwestel Inc.'s (Northwestel's) territory. The Commission also:
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· approved increases in the monthly local rates for Northwestel's residential and business subscribers of $3 and $5, respectively;
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· decided to continue regulating Northwestel on a total company, rate base/rate of return basis, and approved a rate of return on equity (ROE) of 10.5%, with rates set to achieve this ROE level;
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· approved a four-year service improvement plan (SIP) for 2001 to 2004 inclusive to extend and improve the existing telecommunications network in Yukon, the Northwest Territories, Nunavut and northern British Columbia, but denied Northwestel's SIP proposals to provide toll-free Internet access and enhanced calling features, which were found to be cost-prohibitive, and in the case of toll-free Internet access, potentially anti-competitive;
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· approved a bundled carrier access tariff (CAT) rate of $0.07 per minute, with competitors required to pay this CAT on all traffic that they originate or terminate in Northwestel's territory;
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· approved a revenue deferral account to measure the difference between forecast and actual toll, settlement and CAT revenues in 2001;
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· utilized a 2 percent total implied productivity (TIP) factor in determining the approved operating expense amount for Northwestel in 2001;
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· approved Northwestel's proposed changes in depreciation life characteristics; and
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· approved supplemental funding totalling $15.1 million for 2001.
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2.
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The Commission also noted that it would conduct an annual funding review. The first annual review was to include, among other things, a review of the progress made towards the implementation of Northwestel's SIP and an assessment of the amount of supplemental funding required for Northwestel in 2002.
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3.
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In Interim 2002 revenue-percent charge, national subsidy requirement and procedures for the revenue-based contribution regime, Order CRTC 2001-876, 14 December 2001 (Order 2001-876), the Commission approved, on an interim basis, a 2002 supplemental funding requirement of $18.7 million for Northwestel. The Commission also noted that the final 2002 supplemental funding requirement would be adjusted to reflect the Commission's determination in the first annual funding review proceeding for Northwestel.
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4.
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On 9 January 2002, Northwestel filed a letter outlining some of the topics that it felt should be included in the scope of the first annual review. Northwestel also stated that its CAT rate should remain at $0.07 per minute until competition had evolved to a greater extent. Further, the company stated that the current regulatory regime (rate base/rate of return regulation) should be maintained for at least three more years, until long distance competition had further developed in the north.
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5.
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Taking these comments into account, the Commission issued Northwestel Inc. - Initial annual review of supplemental funding, Telecom Public Notice CRTC 2002-1, 1 March 2002 (Public Notice 2002-1), establishing the scope of the initial supplemental funding review. Issues that were to be addressed in the proceeding included the following:
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· an assessment of the roll-out of Northwestel's SIP;
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· the availability of toll-free Internet service by community;
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· the progress made towards competition and the level of competitive entry;
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· the progress made concerning the roll-out of equal access;
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· the disposition of any amounts in Northwestel's revenue deferral account;
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· the impact of any depreciation life changes proposed by Northwestel;
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· productivity improvements; and
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· the determination of the company's supplemental funding requirement for 2002.
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6.
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Parties to the proceeding were specifically invited to comment on Northwestel's proposals concerning the regulatory regime and the CAT rate, in light of the fact that the Commission established a revenue-based contribution collection mechanism in Changes to the contribution regime, Decision CRTC 2000-745, 30 November 2000 (Decision 2000-745).
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7.
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Northwestel, by letter dated 27 May 2002, requested a delay in the proceeding as a result of a work stoppage by its union members. On 30 May 2002, Commission staff issued a letter to all parties deferring the proceeding pending a resolution of the company's labour dispute. A settlement between Northwestel and its unionized staff was reached on 24 July 2002, and by letter dated 7 August 2002, the Public Notice 2002-1 proceeding was resumed.
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8.
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The Commission received comments pursuant to Public Notice 2002-1 from the Public Interest Advocacy Centre on behalf of the Consumers' Association of Canada, Action Réseau Consommateur, the Fédération des associations coopératives d'économie familiale and the National Anti-Poverty Organization (CAC et al.), the Government of the Northwest Territories (GNWT), TELUS Communications Inc. (TELUS), the Yukon Government (YG), Northern Rockies Regional District (NRRD), Sakku Arctic Technologies Inc. (Sakku), and two private individuals.
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9.
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In this decision, the Commission first examines Northwestel's SIP-related capital expenditures, specifically the SIP roll-out and the company's proposed modifications to its SIP. The Commission goes on to assess Northwestel's capital plan, followed by the company's new toll-free Internet access and call management services (CMS) proposals.
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10.
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The decision next addresses competitive issues, such as equal access, level of competitive entry and forecast toll minutes. Northwestel's regulatory framework is then reviewed, along with the company's bundled CAT rate of $0.07/minute. Subsequent sections of the decision deal with issues impacting on the amount of supplemental funding required by Northwestel, such as the disposition of the 2001 revenue deferral account, revenues, depreciation, operating expenses and productivity, and a number of accounting matters raised by the company. Finally, the Commission deals with quality of service issues and addresses the appropriate process for the next annual review of Northwestel's supplemental funding.
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11.
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In Decision 2000-746, the Commission found that Northwestel's proposal to upgrade its toll network and extend individual line service to unserved and underserved customers over its four-year SIP was reasonable. The Commission also stated that it expected Northwestel to be guided by the goals and priorities set out in Telephone service to high-cost serving areas, Telecom Decision CRTC 99-16, 19 October 1999 (Decision 99-16) in developing its detailed annual plans to extend service to unserved customers and upgrade underserved customers. In Decision 99-16, the Commission established a basic service objective (BSO) which sets out the basic components of telephone service that the Commission considered should be extended to as many Canadians as feasible. The BSO was comprised of: (a) an individual line local service with Touch-Tone dialling, provided by a digital switch with the capability to connect via low-speed data transmission to the Internet at local rates; (b) enhanced calling features, including access to emergency services, Voice Message Relay service, and privacy protection features; (c) access to operator and directory assistance services; (d) access to the long distance network; (e) and a copy of a local phone directory.
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12.
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The Commission approved a four-year SIP for Northwestel, for the years 2001 to 2004. However, the Commission denied Northwestel's proposals to provide toll-free Internet access, CMS and custom calling features as part of the SIP. The Commission found Northwestel's proposals to be cost-prohibitive and, in the case of toll-free Internet access, potentially anti-competitive. For unserved territories, the Commission approved as part of the SIP a construction allowance of $25,000 per premise, with the requirement that a new customer in premises without service would contribute $1,000 towards the construction cost.
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13.
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The Commission notes that Northwestel did commence its SIP in 2001 with the provision of service to unserved territories, and upgrades of transport and switching technology. The 2001 view of the SIP, filed on 30 March 2001 as part of Northwestel's 2001-2004 capital plan, was $67.1 million, essentially unchanged from the 2000 view of the SIP approved by the Commission in Decision 2000-746.
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Northwestel's position
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14.
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Northwestel submitted that the roll-out of Northwestel's SIP was essentially on schedule. Northwestel, in its 2002 view of the SIP, proposed introducing additional projects resulting from unforeseen circumstances, projects that it had previously overlooked, and an adjustment for inflation. Northwestel proposed additional capital expenditures of $4 million over the 2001 view of the SIP. Northwestel grouped the additional capital expenditures into four categories: access, transport, switching, and inflation. Northwestel also proposed to reintroduce two major programs that the Commission had not approved as part of its SIP in Decision 2000-746, namely, toll-free Internet access and CMS. Northwestel submitted that the 2002 view of the four-year SIP was estimated at $71.1 million, before consideration of the company's toll-free Internet access and CMS proposals.
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15.
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Northwestel submitted that an additional access project costing an estimated $375,000 in capital was added to the proposed SIP in 2003 for the Halfway River region of northern British Columbia. During the proceeding leading to Decision 2000-746, Northwestel had stated that it was unaware of any unserved customers in that area. However, Northwestel stated that it subsequently received requests for service in the Halfway River region. Northwestel estimated that there were 15 to 20 potential customers in the region, and that the $375,000 capital cost equated to less than $25,000 per premise and was within the guidelines established in Decision 2000-746.
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16.
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Northwestel submitted that an additional $1.7 million was required in the transport category for three areas. Northwestel submitted that in its previous SIP proposal it had overlooked a project that would upgrade the toll connecting trunks to the community of Swift River in Yukon from analogue to digital radio. This project was added to the proposed SIP, and would be implemented in 2004. In addition, Northwestel submitted that Industry Canada's change to some radio frequency allocations caused the company to modify its terrestrial radio system planning. Specifically, Northwestel had previously proposed to achieve a least-cost design by relocating several low capacity digital radio systems from routes scheduled to be overbuilt with newer high capacity systems, but now would be required to purchase new systems instead. Finally, Northwestel submitted that a new radio site required for the community of Aklavik and the technical difficulties experienced in the MacKenzie Valley radio system were also causing additional capital investments to complete the program.
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17.
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Northwestel submitted that an increase of $900,000 in the switch category was due to additional DC power upgrades not included in its original estimate. When Northwestel prepared detailed specifications for switch replacements, the company determined that the DC power plant had to be replaced in a number of communities. The condition of the existing DC power systems could cause total failure of the new switches resulting in community isolation. Consequently, power upgrades were required to complement the switch replacements to ensure that the overall quality of service would not be jeopardized.
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18.
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In the final category, Northwestel submitted that inflation should be added to all SIP projects for the years 2003 and 2004 in the amount of $1.1 million, to be consistent with the inflation rate used in its capital plan.
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Position of parties
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19.
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CAC et al. submitted that it was incumbent on the Commission to ensure that the forecast increase in SIP expenditures was fully justified and necessary.
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20.
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YG submitted that the SIP as previously approved was an important tool in achieving telecommunications policy goals in the north. YG commended Northwestel for its efforts in obtaining stakeholder input in the development of the SIP.
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Commission analysis and determinations
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21.
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The Commission notes that in Decision 2000-746, it directed Northwestel to provide annual results and updated estimates demonstrating the progress of its four-year SIP. The Commission notes that the roll-out of Northwestel's SIP is essentially on schedule.
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22.
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The Commission finds that the proposed increase of $375,000 in the access category for 15 to 20 households meets the Commission's capital criterion of $25,000 per premise. The Commission therefore finds that the increased capital cost for service extension in the Halfway River region in 2003 is appropriate.
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23.
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The Commission notes that, in the transport category, the changes made by Industry Canada were beyond Northwestel's control and resulted in additional cost to its terrestrial radio system planning. The Commission also notes that the changes to the scope of the project required for Aklavik, technical difficulties experienced in the MacKenzie Valley radio system, and the omission of one project when the original SIP proposal was compiled, increased the estimates of capital expenditures. The Commission is of the view that the above-noted changes are typical engineering changes that occur when telephone companies roll out major projects in the field. The Commission finds that the proposed $1.7 million additional capital cost is reasonable.
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24.
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With regard to the $900,000 increase in switching costs, the Commission notes that this capital cost was not included in the original SIP because Northwestel was unable to determine the requirement at the time. The Commission recognizes the extensive travel and time limitations involved in visiting all the sites. The Commission considers that the DC power plant is fundamental for reliable switch operation. The Commission therefore finds that the forecast increase is acceptable in the circumstances.
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25.
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With regard to the $1.1 million amount for inflation, the Commission notes that the forecast rate of inflation used by Northwestel for the expenditures in question is 2%, and is consistent with the inflation rate used in the company's capital plan. The Commission finds that the forecast inflation rate is acceptable.
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26.
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In summary, the Commission finds that Northwestel has adequately explained the forecast increase in capital costs to its SIP, and finds that the increases are reasonable. Accordingly, the Commission approves Northwestel's revised SIP estimate of $71.1 million, before consideration of the company's toll-free Internet access and CMS proposals.
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Northwestel's position
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27.
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Northwestel submitted its proposed 2002 view of forecast capital expenditures by the basic usage categories (growth, modernization, replacement, and support) for the entire company operating territory of Yukon, northern British Columbia, the Northwest Territories, and Nunavut. Northwestel's proposed 2002 view of $159 million included its proposed SIP expenditures, before consideration of the company's proposed toll-free Internet access and CMS expenditures.
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Position of parties
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28.
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TELUS submitted that Northwestel's proposed Fort Nelson to Fort St. John fibre optic transport project in northern British Columbia was outside Northwestel's operating territory. TELUS was concerned that Northwestel may be financing this type of construction either directly or indirectly with supplemental funding. TELUS requested that the Commission satisfy itself that these types of projects would not increase the supplemental funding that southern carriers would be required to pay. In the alternative, TELUS requested that the Commission deduct the value of such projects from Northwestel's supplemental funding requirement.
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29.
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YG submitted that it was generally satisfied that the expenditures planned by the company were reasonable and appropriate for the provision of quality telecommunications services to Yukoners, consistent with YG's policy objectives.
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30.
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YG submitted that it remained concerned that the priorities of construction projects, particularly of those related to the SIP, should remain intact and not be significantly affected by any pressure to reduce capital expenditures. If circumstances were to arise where Northwestel intended to change the priority or schedule of projects affecting service, YG requested that prior consultation be required.
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Northwestel's reply comments
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31.
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In reply, Northwestel submitted that the Fort Nelson to Fort St. John fibre optic transport project supplemented interconnection facilities on an existing route. Northwestel stated that it must increase the capacity in the transport network to handle increased traffic. Northwestel stated that it already had existing interexchange facilities in that area. Northwestel submitted that it would be inappropriate to treat this project any differently than the rest of the capital plan.
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Commission analysis and determinations
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32.
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With regard to the Fort Nelson to Fort St. John fibre optic transmission project, the Commission notes that one end of the system, Fort Nelson, is in Northwestel's operating territory while the other end, Fort St. John, is in TELUS' operating territory. The Commission notes that the largest part of this construction project is in Northwestel's territory and involves the expansion of existing facilities on an interconnecting trunk route. The Commission finds that it is reasonable for this project to be included in Northwestel's capital plan and supplemental funding requirement.
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33.
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The Commission has considered the request for prior consultation if circumstances were to arise where Northwestel intended to change the priority or schedule of projects affecting service. The Commission notes that this issue was also raised in the proceeding leading to Decision 2000-746. In that decision, the Commission stated that Northwestel would be given the flexibility to manage its capital plan to reflect varying circumstances. The Commission did direct Northwestel, however, to provide a fully-detailed explanation for any delays in projects prerequisite to the fulfilment of the SIP and, in the event of any delay, to describe its plan to get back on track. The Commission considers that these directives continue to be sufficient to allow for management flexibility while promoting the timely implementation of the SIP.
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34.
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The Commission notes that Northwestel has filed a detailed and comprehensive capital plan. The Commission considers that all significant variances between the company's 2001 and 2002 views have been satisfactorily explained. The Commission notes that economic evaluations have been provided where requested. Accordingly, the Commission finds Northwestel's 2002 capital plan reasonable.
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35.
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In the proceeding leading to Decision 2000-746, Northwestel proposed to install local dial-up Internet facilities in every community under 2,000 network access services (NAS) and to develop wholesale rates to encourage local Internet service providers (ISPs) to use the facilities. As part of its submission, Northwestel also agreed to be the provider of last resort in the event that an ISP did not enter a given community.
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36.
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In Decision 2000-746, the Commission denied Northwestel's proposal to provide toll-free Internet access as part of its SIP, stating its concern about the extent of the costs and potential anti-competitive effects. The Commission recognized, however, that in some very small communities, it may never be economic to provide toll-free access to the Internet without some form of subsidy. The Commission stated that it would monitor the roll-out of toll-free Internet access, and that it would assess the success of this approach and review the issue of making Northwestel the ISP of last resort during the initial review of 2002.
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Northwestel's position
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37.
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Northwestel provided a summary of correspondence from over 65 communities throughout its entire operating territory emphasizing the need for toll-free Internet access in the north. Northwestel submitted that this need was especially vital in the north given the very high cost of travel. Reliable affordable toll-free Internet access was critical for the continued growth and development of the north. Northwestel submitted that as of March 2002, there were 54 communities without a local dial-up ISP. This represented over 56% of the communities served by Northwestel. By making local access to the Internet available, a whole new range of opportunities would emerge for northerners: these would include, among others, enhancing education, the purchasing of services, and the selling of services.
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38.
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Northwestel submitted that independent ISPs have not demonstrated a willingness to provide toll-free Internet service in most remote communities. With a few exceptions, natural market forces have not encouraged independent Internet providers to establish service in communities with less than 2,000 NAS. Even when independent ISP entry had occurred, there was no guarantee that the ISP would continue to provide service over the long term.
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39.
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Northwestel provided the specifics of its revised proposal as follows:
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a) toll-free Sympatico service would be offered in the 54 unserved communities of less than 2,000 NAS. Pricing would be based on Northwestel's prevailing rate for the "regular use" dial-up Sympatico service;
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b) the one-time capital costs were estimated at $2 million. These capital costs included a local router and single-modem pool in each community. The total capital also included $120,000 for additional hardware in several communities served by satellite not presently served by frame relay service. The company proposed that these capital costs be included as part of its SIP;
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c) the revenues and operating costs would be included in the regulated rate base of the company. Operating costs included: network bandwidth, Internet gateway, equipment maintenance, and subscription fees (billing, help desk/customer support, advertising, application services); and
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d) a two-year roll-out schedule was proposed, from 2003 to 2004, commencing with the larger communities. Northwestel stated that in general, its intent was to complete the larger communities prior to the smaller communities.
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40.
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Northwestel submitted that without such a plan, most remote communities under 2,000 NAS would be without local access to the Internet for the foreseeable future. The company submitted that its Internet proposal was both achievable and the most cost-effective way to address the expressed interest of northerners. Furthermore, with this project, Northwestel submitted that it would be in a better position to achieve the BSO.
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41.
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Northwestel submitted that with regard to concerns about competition, while the independent ISPs had previously indicated that they would launch dial-up Internet service in remote communities without federal funding, evidence clearly indicated that independent ISPs were not prepared to provide service to these communities. There were still 54 communities without a local dial-up ISP. In addition, even with subsidized wholesale rates, Northwestel did not believe that independent ISP entry would be guaranteed. Northwestel submitted that any concerns regarding competition were outweighed by the public benefits of providing local dial-up Internet access to these communities.
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42.
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Northwestel provided a Phase II cost study that set out the incremental impacts of its Internet access proposal on its supplemental funding requirement. Northwestel estimated that the impacts, net of associated revenues, were $0.77 million for 2003 and $1.17 million for 2004.
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43.
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Northwestel stated that it was prepared to be the ISP of last resort for the 54 communities unserved provided the related investments were included in the rate base. Northwestel stated that it was also prepared to be the provider of last resort in any served community under 2,000 NAS, if other ISPs cease operation within the two-year roll-out period (2003-2004).
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Position of parties
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44.
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NRRD submitted that because of remoteness, distance, and small populations in Northwestel's territory, the Internet became even more of an essential tool. NRRD submitted that the independent ISP community had not, and would not, step in to fill the void. NRRD stated that it might be another two years before residents received this service. NRRD urged the Commission to direct Northwestel to provide Internet access to its underserved areas.
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45.
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Sakku questioned why the Commission would approve supplemental funding when there were many Canadian-owned businesses with a far better perspective on regional requirements. Sakku submitted that the best plan would be the subsidization of local companies rather than Northwestel, which had the monopoly on the communications infrastructure.
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46.
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CAC et al. submitted that it might be appropriate to expand the SIP to make toll-free Internet service available to all of Northwestel's subscribers. CAC et al. submitted that the provision of toll-free Internet access service should be accomplished in a manner that is competitively neutral. In particular, it should permit interconnection by other ISPs in competition with Northwestel. Northwestel should remain the ISP of last resort.
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47.
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GNWT submitted that, in light of the continued failure of market forces to provide toll-free Internet access to many northern communities, it was important to determine without further delay how best to extend toll-free Internet access in a timely manner, while addressing the Commission's concerns regarding cost and competition. GNWT submitted that these objectives would be achieved by Northwestel's revised proposal to act as an ISP of last resort and to include in its SIP a roll-out of such service through 2003 and 2004.
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48.
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GNWT noted that the capital costs associated with this proposal were just under $2 million and were approximately half those of the proposal put forward in the proceeding leading to Decision 2000-746. GNWT noted that the average capital cost would be $586 per subscriber. GNWT submitted that both these amounts were reasonable and would not impose a significant burden on the national subsidy system. Accordingly, GNWT submitted that Northwestel's revised proposal to serve as provider of last resort should be approved, but should be extended to apply to all northern communities regardless of their size. GNWT also proposed that rates for toll-free Internet access in Northwestel's territory should not be changed at this time.
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49.
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TELUS submitted that the Commission had already considered the issue of toll-free access to the Internet in Decision 2000-746. TELUS stated that the Commission was concerned with the extent of the costs and the potential anti-competitive effects of Northwestel's plan, and went on to deny Northwestel's proposal at that time. TELUS submitted that nothing had materially changed since Decision 2000-746 that should lead the Commission to alter its previous determination. TELUS submitted that Northwestel's current proposal failed to answer the cost concerns. Northwestel's plan to be the ISP of last resort similarly failed to answer the independent ISPs' concerns relating to the anti-competitive effects that this would have on the Internet market in the north.
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50.
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TELUS noted that in Regulatory framework for second price cap period, Telecom Decision CRTC 2002-34, 30 May 2002 (Decision 2002-34), the Commission denied proposals by TELUS and the other incumbent carriers to provide toll-free Internet access as part of their respective SIPs except for a few specific exchanges, on the basis of high cost and projected low penetration rates. Further, the Commission noted its intention to examine, at some future date, whether the obligation to serve included an obligation to provide toll-free access to the Internet. TELUS therefore suggested that it would be premature for the Commission to approve Northwestel's request for additional SIP funding in advance of the review anticipated by the Commission in Decision 2002-34 and given the Commission's denial of similar SIP proposals from other telecommunications service providers.
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51.
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YG supported the concept of a provider of last resort for Internet access service, and submitted that it was appropriate for Northwestel to adopt this role. YG noted that Northwestel, as the incumbent service provider, was subject to an obligation to serve. YG also noted that the BSO set out in Decision 99-16 included access to Internet service within the definition of basic local access. YG strongly supported the extension of Internet access to all communities, but submitted that Northwestel's proposal did not fully address the competitive market for Internet access.
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52.
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YG submitted that independent ISPs were competitively disadvantaged by Northwestel's current pricing policies. YG submitted that Northwestel had conceded that its ISP Gateway rates were likely higher than those charged by Bell Canada and TELUS. On the other hand, YG noted that Northwestel stated that user packages would be priced consistent with the philosophy of comparable rates for comparable services that are available in the south. YG argued that this type of price squeeze would likely impede competition, and deter further entry in the future.
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53.
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YG requested that the Commission approve Northwestel's toll-free Internet access proposal, with amendments, as follows: (a) establish a provider of last resort obligation for Northwestel that was not restricted by size of community or in duration; (b) require Northwestel to provide access to the subsidized facilities for independent ISPs; and (c) establish a competitor tariff that allowed independent ISPs to have affordable access to the services they needed to provide service on competitive terms.
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Northwestel's reply comments
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54.
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Northwestel noted that in Decision 2002-34, the Commission denied part of TELUS' SIP plan for Internet access on the basis of its high costs. Northwestel noted that TELUS had proposed to spend $20.6 million in capital to extend local Internet to 3,302 NAS in Alberta. Northwestel calculated that the average capital cost per NAS would have been $6,238 under TELUS' proposal. Northwestel argued that the average cost per NAS in TELUS' proposal was more than ten times the average cost per NAS in Northwestel's current proposal. Northwestel also noted the argument that the average capital cost of $586 per subscriber in the company's proposal was, under any criteria, well within the boundaries of reasonableness and would not impose any significant burden on the national subsidy system.
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55.
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Northwestel submitted that it was clear that local access to the Internet would not be available to the 54 communities in the north without Northwestel's SIP proposal. The Commission stated in Decision 2000-746 that "providing Internet access should be an important priority". Northwestel argued that any concerns regarding competitive entry would be outweighed by the benefits to the general public of providing toll-free Internet access without further delay.
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56.
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Northwestel submitted that it was not necessary to make it the ISP of last resort for communities over 2,000 NAS. Northwestel argued that there was a rational business case for all the communities with more than 2,000 NAS, and as a result, these communities were served, often by several ISPs. Northwestel argued that there was only a requirement for an ISP of last resort in the 54 communities where there was no local access to the Internet.
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57.
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Northwestel noted GNWT's argument that rates for toll-free Internet access in Northwestel's territory should not be changed at this time. The company replied that it had not proposed any changes to its rates for toll-free Internet access. Furthermore, the company stated that it was proposing to charge the same rates for toll-free Internet access service throughout its operating territory.
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58.
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In response to YG's proposal that the Commission institute a review of the pricing of the Internet Gateway services and their effect on competition, Northwestel submitted that such services were forborne and that any consideration of the pricing of Internet Gateway services was outside the scope of this proceeding.
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Commission analysis and determinations
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59.
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The Commission notes that in Decision 2000-746, it stated that it would monitor the roll-out of Internet service to communities in Northwestel's operating territory. The Commission further noted that some ISPs had stated that they were prepared to provide Internet service to communities in the north. The Commission denied Northwestel's SIP proposal for Internet access at that time and stated that it would assess the situation and review the issue of making Northwestel the ISP of last resort during the initial review in 2002.
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60.
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The Commission notes Northwestel's submission that, in the last two years, there have been eight communities in the company's service area that have gained an ISP and two communities where an existing ISP has withdrawn service, leaving a net of 54 communities without ISP service. The Commission notes that, even with a substantial window of opportunity of two years since the issuance of Decision 2000-746, no ISPs have elected to serve the 54 communities in question. The Commission considers that one of its options would be to extend the competitive window for another two years and to continue to monitor the situation. The Commission is of the view however that there is no evidence that a sufficient number of the 54 unserved communities would be served in that timeframe. The Commission therefore considers that the option of waiting another two years would not be acceptable.
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61.
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The Commission remains of the view that providing toll-free Internet service to the north is an important priority, and notes that more than half of the communities in the north are without toll-free Internet access. The Commission also notes the general agreement of parties that toll-free Internet access is a valuable and necessary service in the public interest.
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62.
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The Commission recognizes that should it approve the company's toll-free Internet access proposal, and its impact on supplemental funding, the potential for competition would be eliminated. The Commission, however, is of the view that subsidization of local ISP businesses is not practicable. The Commission considers that, at this time, there is no alternative that would be competitively neutral. The Commission is also of the view that these concerns regarding competition are outweighed by the public benefits of providing toll-free Internet access in a timely and cost-effective manner to the communities in Northwestel's proposal.
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63.
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The Commission finds that Northwestel's plan, involving a capital expenditure of $2 million to equip all 54 communities of less than 2,000 NAS, at an average cost of $586 per subscriber, is cost-effective. The Commission notes that this average cost is much less than that which it considered for TELUS in Decision 2002-34. The Commission alsofinds that Northwestel's proposal is in the public interest because it provides service to a large number of exchanges in a timely manner and it expands the availability of a component of the BSO. Further, the Commission is of the view that toll-free Internet access should be provided as soon as possible. The Commission therefore approves Northwestel's proposal for toll-free Internet access, and finds that the roll-out of the toll-free Internet access plan should commence in 2003 and be completed in 2004.
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64.
|
The Commission considers that Northwestel should be the ISP of last resort for the 54 unserved communities under 2,000 NAS and for any served community under 2,000 NAS, if other ISPs cease operation within the two-year roll-out period (2003 to 2004). The Commission therefore directs Northwestel to provide toll-free Internet service to any customer requesting such service in the aforementioned communities. The Commission considers that there would be no reason to make Northwestel the ISP of last resort for communities over 2,000 NAS since these communities are generally served by several ISPs.
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|
65.
|
The Commission directs Northwestel to recalculate its toll-free Internet access Phase II cost study to reflect any changes to depreciation life characteristics in this decision. The Commission will consider this new study in the 2003 supplemental funding review.
|
|
66.
|
The Commission finds that YG's request for a review of the pricing of the Internet Gateway services and its effect on competition in Northwestel's territory is outside the scope of this proceeding. Competitors are free to apply to the Commission should they feel that the issue of the pricing of Internet Gateway services, or other similar competitive services, should be explored further.
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|
|
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|
67.
|
In the proceeding leading to Decision 2000-746, Northwestel proposed to provide enhanced calling features, including local CMS and custom calling features, in 67 communities that did not have these services at that time. Northwestel estimated that it would cost $4.7 million to provide intra-exchange capability for CMS to these communities. In Decision 2000-746, the Commission denied Northwestel's SIP proposal to provide enhanced calling features because they were cost-prohibitive.
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|
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Northwestel's position
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|
68.
|
Northwestel submitted that, while the Commission denied Northwestel's proposal to include enhanced calling features as part of its SIP in Decision 2000-746, the Commission concluded that Northwestel could continue to roll-out these features according to its normal provisioning criteria. Northwestel noted that it had provided enhanced calling features in seven additional communities where switches were replaced in 2001.
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|
69.
|
Northwestel's General Tariff lists the following features under CMS: call display, call return, call trace and automated call display block. Northwestel submitted that, due to high customer demand for these CMS features, it proposed to reintroduce local CMS at all locations where the features were not available and to include the capital costs in the SIP. Northwestel proposed to implement its CMS proposal for a total NAS of 7,771 over a two-year period, 2003 and 2004, at an estimated cost of $5.9 million. Northwestel stated that its proposal would provide CMS to the remaining 40 communities that did not have these services or were not currently scheduled to receive them under the company's regular capital plan.
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|
70.
|
Northwestel submitted that it had received requests for service from many communities throughout its operating territory. Northwestel submitted that it was clear that northern communities felt that call display in particular was a necessity due to privacy issues and security concerns. Northwestel argued that CMS would be the most cost-effective method of reducing unwanted calls. In addition, Northwestel submitted that where it had provided CMS in 2001, penetration rates were about 60%, in contrast with the lower expectation anticipated in Decision 2000-746. Northwestel argued that there was clearly substantial pent-up demand for CMS in the smaller communities.
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|
71.
|
Northwestel provided a Phase II cost study that set out the incremental impacts of providing CMS on the supplemental funding requirement. Recognizing the penetration rates for recent introductions of CMS, Northwestel submitted that the revenue forecast was based on estimates of 60% penetration of residential customers in Nunavut communities and of 25% in Yukon, the Northwest Territories and British Columbia communities. Northwestel estimated that the supplemental funding requirement would increase by $0.39 million for 2003 and $1.11 million for 2004.
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Position of parties
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72.
|
CAC et al. stated that it was not convinced that the subsidization of enhanced calling features via the supplemental fund was appropriate.
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|
73.
|
GNWT argued that CMS serves a vital function in safeguarding privacy and addressing the deterrence or identification of unwanted calls. The high level of service penetration, where the features have been made available, and the large volume of customer and community requests received by Northwestel all attest to the importance subscribers attach to such services. GNWT urged the Commission to adopt Northwestel's plan for the roll-out of CMS through the SIP. GNWT argued that, if the Commission considered that the estimated cost of the project was too high, the proposal should be modified to provide these features over a more extended period, e.g., five years.
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|
74.
|
TELUS submitted that the Commission dealt with CMS for Northwestel in Decision 2000-746, where it concluded that the cost of equipping smaller exchanges with CMS would be too high and penetration rates too low to justify the associated expenditure.
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|
75.
|
TELUS further submitted that in Decision 2002-34, the Commission denied the proposals made by TELUS to provide universal CMS capabilities, including call display, on the basis that the costs to undertake these upgrades were prohibitive. TELUS submitted that given the similarly high costs associated with Northwestel's proposal to provide CMS functions in its operating territory, the Commission should likewise deny this portion of Northwestel's proposal.
|
|
76.
|
YG supported the proposed amendment to the SIP for provision of CMS throughout Northwestel's territory. According to YG, the services that would be made available through this program would increase the value of service to customers and the investment would also improve service quality and reduce maintenance costs.
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Commission analysis and determinations
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|
77.
|
The Commission, in Decision 2000-746, noted the relatively high cost and the estimated low rates of penetration for CMS features in determining that the extension of CMS to smaller communities as part of the SIP was not warranted.
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|
78.
|
Although Northwestel has increased its estimate of penetration, the Commission is again not convinced that the company's overall proposal to extend CMS service to all communities is cost-effective. However, the Commission finds that the project costs for four of the 40 communities are cost-effective. Specifically, those communities are Dawson City (1,385 NAS), Watson Lake (1,117 NAS), Baker Lake (709 NAS), and Pangnirtung (563 NAS) for a total of 3,774 NAS, with the estimated total cost being $1.676 million. The Commission notes that its finding will allow for CMS to be provided to 49% of the company's underserved NAS, at a cost representing only 28% of the original proposal. Accordingly, the Commission approves Northwestel's proposal to add CMS features in these four communities, commencing in 2003 and completing by 2004.
|
|
79.
|
The Commission directs Northwestel to recalculate the CMS Phase II cost study to reflect (a) the new total of $1.676 million, and (b) any changes to depreciation life characteristics in this decision. The Commission will consider this new study during the 2003 supplemental funding review.
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|
80.
|
For the remaining communities, the Commission finds that the estimated costs do not warrant the extension of CMS as part of the Northwestel's SIP at this time. The Commission concludes that Northwestel may continue to roll out the CMS features as part of its normal provisioning criteria.
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|
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|
81.
|
In the proceeding leading to Decision 2000-746, Northwestel proposed to install equal access facilities to enable competitors to provide the same long-distance service options as Northwestel. At that time, Northwestel proposed that equal access facilities would be installed in Yellowknife, Whitehorse, Iqaluit, and Fort Nelson by 1 January 2001. Northwestel indicated that competitors should generally be able to conclude agreements within 30 days of a request to connect to Northwestel's network where equal access facilities are available. The Commission approved Northwestel's plan in Decision 2000-746 subject to an annual review of equal access progress and expenditures.
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|
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Northwestel's position
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|
82.
|
Northwestel submitted that it had made modifications to the switches in Yellowknife, Whitehorse, Fort Nelson and Iqaluit to allow for equal access. Northwestel also submitted that it had purchased and installed a primary interexchange carrier/customer account record exchange (PIC/CARE) system.
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|
83.
|
Northwestel submitted that in 2001, one competitor requested provision of equal access service in Yellowknife, Whitehorse and Fort Nelson. Northwestel stated that the request was modified in 2001. Northwestel submitted that feature group D facilities had been installed for Whitehorse and Yellowknife and customers in these cities had been able to select this competitor as their primary interexchange carrier since mid-March 2002.
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|
84.
|
Northwestel submitted that, in Decision 2000-746, the Commission approved the company's plan to install equal access facilities in four locations in addition to Yellowknife, Whitehorse, Iqaluit and Fort Nelson in 2002 and 2003, depending on competitor demand. Northwestel submitted that there had been no demand for equal access in other locations and therefore no other equal access facilities have been installed. Northwestel indicated that it was in the process of negotiating interconnection arrangements with a second carrier.
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|
85.
|
The Commission received no comments on this issue.
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Commission determination
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|
86.
|
The Commission considers that Northwestel has carried out its equal access roll-out as directed by the Commission. The Commission will continue to review Northwestel's equal access progress and expenditures annually.
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|
|
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|
87.
|
In the proceeding that led to Decision 2000-746, Northwestel forecasted, for 2001, a market share loss of 15.2% on total market minutes. In Decision 2000-746, the Commission found that Northwestel's forecasted market share loss was overstated. The Commission considered that the company's toll market share loss would more likely be in the range of 5% in the first year of toll competition. Accordingly, the Commission reduced Northwestel's forecast of market share loss to 5% of the total market minutes for originating minutes.
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|
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Northwestel's position
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|
88.
|
Northwestel submitted that entry by competitors in the long distance market first developed on a resale basis followed by entry using equal access arrangements. Northwestel reported that during 2001 competitive entry took the form of calling cards, resale of bulk services and prepaid cards.
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|
89.
|
Northwestel noted that competition continued to evolve in 2002 with the implementation of equal access. Northwestel indicated that a competing large national telecommunications services provider had recently been awarded the national Government Telecommunications Informatics Systems contract. Northwestel submitted that it anticipated that this competitor would target the equal access markets of Whitehorse, Yellowknife and Fort Nelson in the latter part of 2002 and into 2003. Northwestel expected that once the large national provider had established this point of presence in the north, it would leverage its presence to target other high-volume customers.
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|
90.
|
Northwestel further submitted that it had not only recently implemented an equal access arrangement for one large national facilities-based carrier, it was in the process of negotiating similar arrangements with a second carrier. Northwestel stated that it expected that during 2003 the competition from alternate toll suppliers pursuing northern customers would increase. Northwestel submitted that two of the largest toll customers in the north had switched from Northwestel to alternate toll providers.
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|
91.
|
Northwestel submitted that it assumed that competitors would not build facilities in its operating territory in 2002. Accordingly, Northwestel submitted that, in forecasting toll minutes for 2002, it expected all competitive toll traffic would use Northwestel's facilities for transport.
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|
92.
|
Northwestel submitted that the lower rates for long distance services have had a stimulative effect on the total volume of toll minutes. Northwestel further submitted that it had observed a partial reversal of the bypass of Northwestel's network; while not yet in balance, the proportion of northern originated minutes versus southern originated minutes is much greater now than was the case in the year 2000. Northwestel argued that this indicated that northerners were not seeking bypass opportunities to the same extent as prior to the introduction of competitive long distance rates.
|
|
93.
|
Northwestel submitted that 2002 residential minutes would also be stimulated by its new residential plan "Freedom World", which provided a lower price option for calls within Canada and overseas calling during regular hours. Northwestel submitted that in 2002, no equal access market share loss is expected in the residential market; however it anticipated that residential market share loss would evolve during 2003 and beyond.
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|
94.
|
Northwestel submitted its forecast of 2002 originating and terminating long distance minutes. Northwestel forecasted its average market share loss of minutes to competitors over 2002 to be 7.4%, with the market share loss at year-end 2002 expected to be considerably higher. Northwestel submitted that the average market share loss was comparable to that experienced by the smaller incumbent carriers in southern Canada shortly after the introduction of toll competition.
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|
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Position of parties
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|
95.
|
CAC et al.argued that it was necessary to critically review Northwestel's demand forecasts for 2002. CAC et al. noted that since Northwestel had already reported two quarters of actual results in 2002, these should be taken into account.
|
|
96.
|
YG submitted that the people of Yukon need the benefits of the competitive telecommunications environment. YG argued that market forces were already affecting the provision of long distance service, and that the challenge was to achieve a balance between the benefits and the consequences of competition that was sustainable in the north. Where competition was sustainable, it should be implemented as widely as possible, throughout all sectors of the telecommunications market.
|
|
97.
|
YG pointed out that Northwestel forecasted a market share loss of only 7.4% for 2002, and indicated that the introduction of competition had been slower than anticipated. YG noted that further information provided by Northwestel indicated that the 2001 actual competitor minutes were less than forecast. YG concluded that it was clear that the assumptions for competitive entry in the north cannot be based on the experience of markets in southern Canada.
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|
98.
|
YG submitted that some progress had been made towards the goal of competition, because the reduced long distance rates have provided a significant benefit to Yukon customers and businesses. YG further stated, however, that lower prices turned out to be the only benefit of competition that had been realized by most of Northwestel's customers. YG argued that there was little, if any, choice of suppliers in the long distance market for most customers in the north, and no choices other than Northwestel for local service.
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|
99.
|
YG submitted that the competitive model for the north should be reviewed in light of the experience to date and the recognition of the unique circumstances of the northern market. YG submitted that greater success might be achieved through competition policies that would enable local or regionally based competitors to enter in smaller niches. YG argued that an alternate competitive model where Northwestel would take on the role of infrastructure supplier, and the Commission would closely monitor the terms and conditions of access, as well as the growth of the market, would enable viable competitive choices in Yukon.
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|
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Commission analysis and determinations
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|
100.
|
The Commission notes that, during 2001, it approved new Carrier Access, Resale and Sharing, Billing and Collection and Co-location tariffs to establish the terms of competitive entry in Northwestel's territory.
|
|
101.
|
The Commission notes that actual market share data submitted by Northwestel for 2001 reflects a long distance market share loss of 6.2%, based on originating minutes. The Commission recognizes that this actual market share loss in 2001 is somewhat higher than the 5% level that the Commission anticipated in Decision 2000-746. The Commission considers that this is an indication that some level of competition has been established in Northwestel's operating territory. The Commission views the overall growth in toll minutes forecast by Northwestel as an indication that customers are beginning to benefit from the introduction of competition. The Commission also notes the positive trend in correcting the bypass of Northwestel's network and considers that this may be a direct result of lower toll rates.
|
|
102.
|
The Commission considers that further growth in the competitive market is required in order to provide northern consumers with sufficient choices and to conclude that competition has been firmly established. The Commission will continue to monitor the growth of competition and choice for northerners.
|
|
103.
|
The Commission notes that Northwestel has estimated a market share loss of 7.4% in originating minutes for 2002. The Commission is of the view that, while this average market share loss for 2002 appears to be reasonable, the company's estimated level of market share loss by year-end 2002 was not substantiated. However, the Commission notes that while Northwestel did not provide actual toll minutes for the first half of 2002, its actual total revenues for the first half of 2002 are tracking fairly close to the company's forecast. The Commission finds that no adjustments are required for Northwestel's forecast of toll minutes for 2002.
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|
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|
|
104.
|
In Review of regulatory framework, Telecom Decision CRTC 94-19, 16 September 1994, the Commission announced a transition towards a new telecommunications regulatory framework applicable to the majority of the established incumbent telephone companies. Specifically, the regulatory framework was to become one based on price controls, rather than on the traditional rate base/rate of return approach. At that time, the Commission decided that Northwestel would remain under rate base/rate of return regulation. In determining that Northwestel's method of regulation should differ from that of the incumbent telephone companies in southern Canada, the Commission took into account, among other things, the lower population density and large distances between the communities served by Northwestel.
|
|
105.
|
In Decision 2000-746, the Commission determined that it would continue to regulate Northwestel on a total company, rate base/rate of return basis. The Commission concluded that, with the implementation of many significant changes in 2001, including providing for toll competition in Northwestel's territory, the company's SIP and the increase in local rates, a change to a different form of regulation was not appropriate at that time. The Commission also noted, however, that it had introduced a new national contribution collection mechanism effective 1 January 2001 with the issuance of Decision 2000-745, making a review of the company's regulatory framework appropriate within a two-year timeframe.
|
|
106.
|
As part of Decision 2000-746, the Commission approved a bundled, subsidized CAT rate of $0.07/minute (this single rate included switching and aggregation (S&A), contribution and equal access start-up rates).
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|
|
Northwestel's position
|
|
107.
|
In a letter to Commission staff dated 9 January 2002, Northwestel provided comments on a number of items that it considered should be part of the scope of this proceeding. With the ongoing significant changes, including long distance competitive entry expected in the first quarter of 2002, and the continuation of its SIP, Northwestel submitted that the current regulatory framework should be maintained for at least three more years, until long distance competition had further developed in the north. The company was also of the view that its CAT rate of $0.07/minute should remain unchanged as competition evolved further.
|
|
108.
|
Northwestel submitted that its regulatory framework should reflect the economic, technological and geographic realities of the north rather than being one adopted simply for the sake of uniformity or ease of administration. Northwestel stated that an objective of any regulatory framework must be to meet the BSO as prescribed by the Commission for all Canadians in Decision 99-16 and to do so in the north at prices that are reasonably comparable to those elsewhere in Canada.
|
|
109.
|
Northwestel argued that the regulatory framework established by the Commission in Decision 2000-746 was one that responded to the unique challenges of telecommunication services in the north. Northwestel stated that the Commission recognized in that decision that providing Canada's north with "reasonably comparable services at reasonably comparable rates" entailed challenges significantly unlike those in southern Canada in that (a) costs were generally much higher, (b) network design and operations were very different, and (c) revenues from northern communities were quite limited.
|
|
110.
|
Northwestel submitted that in Decision 2000-746, the Commission issued certain directives that were unique to Northwestel and clearly not applicable to other telephone companies. Northwestel noted that one of the key differences from the methodologies currently or previously employed by the Commission in the rest of Canada was the use of a bundled, subsidized CAT rate. In the company's view, the bundled CAT rate methodology reflected a balanced approach to the fundamental differences of the north. In Northwestel's view, the CAT rate of $0.07/minute established for 1 January 2001 struck a balance between promoting competitive entry and limiting the need for supplemental funding. Northwestel submitted that the Commission's objective of enabling competition was proceeding effectively and the current CAT rate and methodology remained appropriate.
|
|
111.
|
In determining whether any adjustment of the CAT rate was necessary, Northwestel submitted that the following specific matters should be considered concurrently:
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|
|
· an assessment of settlement revenue decrease, when the current term of each interconnection agreement expires, assuming continued use of CAT rates for settlement purposes;
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|
|
· an assessment of Northwestel's market share loss and the associated cross-impact on toll revenues;
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|
|
· an assessment of the need for supplemental funding corresponding to the above revenue losses;
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|
|
· the consideration of whether the need for increased supplemental funding should be offset by higher local exchange rates; and
|
|
|
· the consideration of notice to the general body of subscribers providing the opportunity to comment on the local rate increase as part of a realignment of the CAT rate, toll rates and supplementary funding.
|
|
112.
|
Northwestel submitted that its current bundled CAT rate of $0.07/minute should be maintained. Northwestel argued that it was still in the early stages of the shift to toll competition that would profoundly alter its cost and revenue structure. Northwestel submitted that its CAT rate implicitly included the costs of S&A facilities. Northwestel argued that this differed significantly from the "contribution" component of the CAT rates that previously prevailed in the south. Northwestel submitted that due to the unique configuration of the network and traffic in the north, a carrier's usage of S&A facilities reflected a substantial part of the costs of Northwestel's inter-exchange network which extended over great distances and, in many cases, involved the use of satellite.
|
|
113.
|
Northwestel submitted that the scope and relative size of its SIP was another feature that distinguished it from the other telephone companies regulated by the Commission. Northwestel argued that it was undertaking uneconomic investments to extend and improve not only its local network but also to upgrade its toll network. The total SIP investments were very large for a company of Northwestel's size. The $71 million program constituted nearly 30% of the company's rate base. In addition, the scope of its SIP was being re-examined in this proceeding. Northwestel submitted that this involved a source of uncertainty and risk for the company, which it argued supported the continuance of earnings regulation at least until the end of the SIP.
|
|
114.
|
It was the company's initial position that the present regulatory framework should continue to apply at least for 2003 and 2004. In argument, the company modified its position somewhat, and submitted that its current regulatory framework should remain in place for the foreseeable future.
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|
|
Position of parties
|
|
115.
|
CAC et al. submitted that moving to a price cap mechanism for Northwestel was premature. CAC et al. also argued that, under the current regulatory framework, Northwestel had virtually no incentive to accurately forecast costs and expenses, to become more productive, or to minimize spending on competitive activities.
|
|
116.
|
CAC et al. submitted that measures should be taken to further protect the company's ratepayers. Specifically, CAC et al. submitted that the company should be subject to a split rate base form of regulation to ensure that the company's utility subscribers were, at a minimum, not forced to fund its competitive activities. In addition, CAC et al. submitted that Northwestel's 2002 supplemental funding requirement should be reduced by the amount of any 2001 earnings above the approved ROE midpoint of 10.5%.
|
|
117.
|
GNWT submitted that (a) limited long distance competition had occurred since the issuance of Decision 2000-746, (b) Northwestel anticipated that no equal access entry into the residential market would occur in 2002, and (c) the company's projections of increased losses in the business market seemed highly speculative. GNWT attributed this, at least in part, to the deterrent effect that a high CAT rate had on competitive entry.
|
|
118.
|
GNWT argued that eventual reductions to the CAT rate were essential. GNWT recognized, however, that lowering this rate could increase Northwestel's supplemental funding requirement at a time when the SIP expansions proposed by Northwestel, and supported by GNWT, would, if approved, entail increases in such funding. For this reason, GNWT did not take a position as to whether the CAT rate should be lowered at this time. GNWT proposed that the Commission identify this issue as one that will be revisited in detail in next year's annual review of supplemental funding. GNWT contended that Northwestel should be directed to include, in its submission to that proceeding, a detailed study of the impacts of existing and lower CAT rates.
|
|
119.
|
TELUS argued that the Commission should establish a transitional Utility segment rate of return regulation regime. TELUS submitted that the competitive segment should be removed from close scrutiny now that the uncertainties related to the introduction of long distance competition in the north were considerably less than they were at the time of Decision 2000-746. TELUS also submitted that the Commission should specify an end date for the transitional period, and allow for a full debate, prior to the end of the period, on how to adapt price cap regulation to the north.
|
|
120.
|
TELUS also submitted that Northwestel's CAT rate unnecessarily limited long distance competition in the territory of Northwestel and contained a hidden contribution component that should be removed. TELUS argued that in all other areas of Canada, the CAT rate excluded a contribution component. In TELUS' view, Northwestel's bundled CAT rate was a needless exception and the structure of the CAT rate should be harmonized with the rest of Canada.
|
|
121.
|
YG submitted that a move toward price cap regulation for Northwestel was not required at this time. YG argued that there was no reason to harmonize regulatory methodologies between the north and the south. YG argued that rate of return regulation remained necessary for Northwestel. Calculation and administration of the supplemental funding requirement were more easily addressed and made directly visible through a revenue requirement approach. The establishment of productivity targets for the company, and the annual review process provided sufficient safeguards for any inefficiency on the part of Northwestel. YG argued that a unique model of regulation was necessary to reflect the fundamental economic realities of the north, but recommended that further examination be undertaken to ensure that the model of regulation adequately recognizes the interests of the customers and competitors as well as Northwestel. YG concluded that the terms and conditions of long distance competition, including the CAT rate, should remain in place and unchanged, through the completion of the SIP.
|
|
122.
|
YG recommended that consideration be given to a regulatory model that would allow Northwestel to earn a fair rate of return for satisfying the obligation to provide basic infrastructure. In addition, YG submitted that a mechanism should be established to enable locally-based service providers to compete on a niche market basis. The definition of markets open to competition should be flexible enough to enable entry, while protecting the need to ensure access to service.
|
|
|
Northwestel's reply comments
|
|
123.
|
In reply, Northwestel submitted that the Commission had specifically considered earnings sharing in Decision 2000-746 and rejected it. The Commission established an ROE range of 100 basis points with a midpoint ROE of 10.5%, which was intended to provide the company with an incentive to be more efficient.
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|
|
Commission analysis and determinations
|
|
124.
|
The Commission considers that the regulatory framework that it instituted in Decision 2000-746 continues to respond to the unique challenges of telecommunications services in the north. The Commission notes that the key components of that framework included the continuation of total company, rate base/rate of return regulation, the introduction of long distance competition, the establishment of a bundled, subsidized CAT rate of $0.07/minute, and the approval of a relatively large SIP to extend and improve not only Northwestel's local network but also to upgrade its toll network.
|
|
125.
|
The Commission considers that safeguards are in place to effectively regulate Northwestel while balancing the interests of customers and competitors. The Commission is of the view that the current regulatory framework provides the company with incentives to minimize costs. The Commission particularly notes that productivity improvements are required annually in the calculation of the supplemental funding requirement.
|
|
126.
|
The Commission concludes that any consideration of a change in Northwestel's regulatory framework should be examined as part of Northwestel's 2004 supplemental funding review. At that time, the Commission will determine whether the current form of regulation continues to be appropriate or needs to be replaced by either a transitional regime or a direct move to price regulation.
|
|
127.
|
The Commission notes the concern expressed during the proceeding that the current bundled, subsidized CAT rate of $0.07/minute was having a limiting effect on competitive entry in Northwestel's territory. The Commission further notes, however, the point raised that the timing is not yet appropriate for reducing the CAT rate. The Commission recognizes that a reduction in the CAT rate cannot be done in isolation, and would require a detailed analysis of Northwestel's competitive and financial environment. In light of the early stage of the evolution of competitive entry, the Commission is of the view that any lowering of the CAT rate at this time, without a full review of the implications of such a move, would be inappropriate. Accordingly, the Commission finds that the bundled, subsidized CAT rate should remain at $0.07/minute at least until the completion of the company's SIP at the end of 2004.
|
|
128.
|
The Commission finds that Northwestel's current regulatory framework, in its entirety, should remain in place during this early period of competitive evolution. Given the significance of the company's SIP in the context of the regulatory framework established in Decision 2000-746, the Commission is of the view that Northwestel's regulatory framework should remain in place at least until the completion of the SIP, at the end of 2004. Maintenance of this regulatory framework means, among other things, that:
|
|
|
· the company would continue to be regulated on a total company, rate base/rate of return basis;
|
|
|
· a bundled, subsidized CAT rate would remain in place;
|
|
|
· as determined in Decision 2000-746, there would be no earnings sharing mechanism for amounts earned in excess of the upper end of the company's ROE range; and
|
|
|
· the company would be required to continually take steps in order to improve its overall productivity level.
|
|
|
|
|
|
|
|
129.
|
In Decision 2000-746, the Commission found that with the substantial reduction in toll rates and the introduction of toll competition in 2001, there was uncertainty with respect to the company's forecast of long distance revenues. Given the potential significant differences between forecast and actual toll, settlement and CAT revenues that could occur, the Commission directed Northwestel to accumulate the difference between the forecast 2001 toll, settlement and CAT revenues of $43.4 million and the actual revenues in a deferral account. The Commission further directed that any amount accumulated in the deferral account, in any given year, would be disposed of in conjunction with the determination of any supplemental funding requirement for the following year.
|
|
|
Northwestel's position
|
|
130.
|
Initially, Northwestel requested that, effective 1 January 2002, the deferral account mechanism be revised to include all elements of long distance competition: toll, settlement and CAT revenues, as well as leased circuit revenues from interexchange competitors. However, during the proceeding, Northwestel withdrew its request to expand the deferral account noting that the risk of significant variances in leased circuit revenues was not as significant as the possible variance of toll, settlement and CAT revenues.
|
|
131.
|
Northwestel submitted that its actual toll, settlement and CAT revenues in 2001 totalled $44.2 million, resulting in $740,000 in the deferral account. Noting that it had already received monthly payments based on the $18.7 million interim supplemental funding, Northwestel initially proposed that the deferral account amount be applied as an adjustment to the remaining 2002 monthly payments once the supplemental funding requirement for 2002 was finalized. Northwestel later argued that, given the delays in the proceeding, its supplemental funding for 2003 should be adjusted to reflect the disposition of the 2001 deferral account balance. Northwestel proposed that the remaining monthly payments due to the company for 2003 should be adjusted downward for the 2001 deferral account disposition.
|
|
|
Position of parties
|
|
132.
|
CAC et al. submitted that Northwestel's 2002 supplemental funding amount should be reduced by the revenue surplus of $740,000, to ensure that the company is not over-compensated. TELUS agreed that Northwestel's 2002 supplemental funding amount should be reduced by $740,000. YG supported Northwestel's proposed process for the disposition of the deferral account.
|
|
|
Commission analysis and determinations
|
|
133.
|
The Commission determined, in Decision 2000-746, that it would dispose of any amount accumulated in Northwestel's deferral account, in any given year, in conjunction with the determination of any supplemental funding requirement for the following year. The Commission intended that the balance in the deferral account would be applied so as to increase or decrease the supplemental funding in that year. The Commission considers that the supplemental funding, which service providers in the rest of Canada are required to pay, should be kept at an annual minimum. Accordingly, the Commission is of the view that Northwestel's proposal to adjust its 2003 supplemental funding requirement downwards by $740,000 is not appropriate. The Commission finds that the company's supplemental funding requirement for 2002 should be reduced by $740,000.
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|
|
|
|
|
Northwestel's position
|
|
134.
|
Northwestel forecasted its toll, settlement and CAT revenues for 2002 to be $43.2 million. In estimating revenues, the company assumed that, among other things, the stimulation in minutes observed for its residential long distance base during the second half of 2001 would be sustained throughout 2002, resulting in an overall growth in base minutes from 2001. Business base minutes for 2002 were also forecast to grow over 2001 levels. Northwestel also expected equal access competitive entry in 2002. The company anticipated that the equal access competitive focus in 2002 would be in the business market, with expansion to the residential market after 2002. The company estimated its average market share loss in minutes to competitors over all of 2002 to be 7.4%, with the market share loss at year-end 2002 expected to be considerably higher.
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Position of parties
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135.
|
CAC et al. argued that it was necessary to critically review the company's forecast level of demand and revenue, stating that Northwestel has virtually no incentive under the current regulatory framework to accurately forecast costs or to become more productive. CAC et al. again noted that since Northwestel has already reported two quarters of actual results in 2002, these should be taken into account.
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136.
|
TELUS fully supported the concerns expressed by CAC et al. with respect to Northwestel's revenue forecasts.
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Commission analysis and determinations
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137.
|
The Commission considered Northwestel's actual revenues for the first half of 2002 in evaluating its forecast of toll, settlement and CAT revenues for 2002. The Commission notes that Northwestel's actual total revenues for the first half of 2002 tracked fairly closely to the company's estimates. The Commission also notes that in Decision 2000-746, it directed Northwestel to accumulate any difference between forecast and actual 2001 toll, settlement and CAT revenues in a deferral account since there was some uncertainty with respect to Northwestel's long distance market share and revenues. The Commission considers it appropriate to continue this accumulation in a deferral account for 2002. Accordingly, the Commission finds that no adjustment is required to the company's 2002 forecast toll, settlement and CAT revenues.
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Northwestel's position
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138.
|
Given that equal access competition had just commenced, Northwestel argued that the revenue deferral account should remain in place for at least two full years of competition, 2003 and 2004. The company argued that with the recent arrival of a significant competitor from the south, the uncertainty of its toll revenues was greater now than ever before. Northwestel submitted that the revenue deferral account was even more necessary going forward and that it should continue for the next several years as an element of the unique regulatory model developed by the Commission for Northwestel.
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Position of parties
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139.
|
YG submitted that there was value in keeping the deferral account mechanism in place until at least 2004. YG argued that the deferral account was an effective tool for the Commission in regulating the transition of Northwestel to a more competitive environment.
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Commission analysis and determination
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140.
|
The Commission is of the view that there continues to be uncertainty surrounding the level of the company's forecast toll minutes. This uncertainty carries over to the forecast of toll, settlement and CAT revenues. In light of this uncertainty, the Commission finds that the revenue deferral account should remain in place until at least the end of the company's SIP in 2004.
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Northwestel's position
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141.
|
In light of the expected length of time required to complete future annual reviews, Northwestel proposed that the disposition of the revenue deferral account amount be dealt with outside the annual review proceeding. Under the company's proposal, beginning with the 2002 amount in the revenue deferral account, Northwestel would file a letter with audited financial statements and supporting calculations for the prior year's deferral account by the end of the first quarter. The Commission could then make a determination with regard to the disposition of the prior year's deferral account, resulting in a more timely disposal of the account.
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Position of parties
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142.
|
TELUS disagreed with Northwestel's proposal, noting in argument that the Commission, in Decision 2000-746, had determined that any amount accumulated in the deferral account, in any given year, would be disposed of in conjunction with the determination of any supplemental funding for the following year.
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Commission analysis and determinations
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143.
|
The Commission is of the view that Northwestel's proposal has merit. As evidenced in this proceeding, the calculation of the amount in the deferral account is straightforward, and it was not challenged by any interested party. Should a separate process be established to dispose of any such amounts in the future, it is unlikely that the determination of the amount itself would be contentious. Accordingly, a process to consider the amount and adjust the supplemental funding should involve minimal time and effort for all parties involved. The Commission considers that such a process would allow for the over- or under-recovery of toll, settlement and CAT revenues from the previous year to be reflected in the company's interim supplemental funding requirement in a timely manner.
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144.
|
The Commission finds that, beginning with the year-end amount in the 2002 revenue deferral account, a separate process for the disposition of the amount in the account should be implemented. With respect to the 2002 revenue deferral account, the amount to be accumulated in the account is the difference between the company's estimate of 2002 toll, settlement and CAT revenues of $43.2 million and the actual revenues for 2002.
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145.
|
The Commission directs Northwestel to file audited financial statements and detailed supporting calculations for the 2002 deferral account amount within 30 days of the release of this decision. The Commission directs Northwestel to file similar information for 2003 by 31 March 2004. The Commission will consider the continued need for a revenue deferral account in the review of the company's regulatory framework for 2004.
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146.
|
In Decision 2000-746, the Commission established that the 2001 supplemental funding requirement for Northwestel was $15.1 million. The Commission made adjustments to Northwestel's proposed supplemental funding requirement of $30.6 million relating to the company's local rate increases and long distance rate reductions, its forecast revenues, operating expenses, depreciation expense, and its ROE and capital structure. In Order 2001-876, the Commission determined the interim supplemental funding of $18.7 million for Northwestel for 2002.
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Northwestel's position
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147.
|
In its initial submission, Northwestel estimated that its 2002 supplemental funding requirement was $18 million. Northwestel revised this estimate downwards to $16.875 million to reflect a new estimate of the expenses related to the company's transponders. In support of its 2002 supplemental funding requirement, Northwestel submitted its forecast 2002 depreciation expense and operating expenses. Northwestel also proposed treatment of a number of accounting matters.
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Northwestel's position
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148.
|
On 30 January 2002, Northwestel filed, for Commission approval, depreciation studies that included both the 2000 and 2001 depreciation study results. As set out in Public Notice 2002-1, these studies were placed on the public record of this proceeding.
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149.
|
Northwestel's estimated depreciation expense for 2002 was $28.9 million. Northwestel submitted that its depreciation studies were prepared in accordance with Commission depreciation directives. In Revisions to certain phase I directives concerning depreciation, Telecom Decision CRTC 89-11, 24 August 1989, the Commission mandated that depreciation life studies should merge past experience with future expectations. For each account studied, Northwestel performed an analysis of historical retirement patterns and took into account other factors such as expected technological changes, operational considerations, and future investment plans, including the impact of its SIP. Northwestel argued that deviating from the fundamental principles for determining appropriate life parameters by giving undue weight to historical experience would involve certain risk. Northwestel submitted that increasing lives without regard to future expectations would increase its accumulated depreciation reserve deficiency and would lead to an increased risk of stranded investment.
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150.
|
Northwestel submitted depreciation studies of 34 asset codes (accounts), 26 of which were studied in detail. For the remaining eight accounts, Northwestel proposed combining most of them with existing accounts after considering the small investment involved and the economics of operation. Of the accounts studied in detail, Northwestel proposed changes to life parameters for 11 accounts. Northwestel's submissions concerning these 11 accounts, as well as for account 60 - cable - aerial/underground, are set out below.
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151.
|
For account 60 - cable - aerial/underground, Northwestel proposed to retain the current average service life (ASL) of 22 years with an Iowa R-3 dispersion curve. Northwestel submitted that the survivor curve that more closely matched the historical data for this account was an Iowa R-3 curve, with an indicated average life of about 36 years. The company argued that this long life did not include obsolescence factors that were expected to affect the plant in the future. Northwestel argued that in the long run fibre optic cable and electro-optical equipment, rather than copper cable, would best meet customer demand for advanced services and higher speeds of information transfer. Accordingly, Northwestel submitted that an average life of 36 years was unrealistic for this account.
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152.
|
For account 120 - cable - fibre optic, Northwestel proposed a service life reduction of three years to an ASL of 22 years using an Iowa R-3 dispersion curve. Although most of its fibre optic cable was used for interoffice trunking and microwave links, Northwestel submitted that it had begun to place fibre cables in the access network. Northwestel noted that older fibre cable technology such as multi-mode had been retired due to changes in technology. Northwestel noted that, due to the newness of this investment and the scarcity of retirements, the historical analysis of this account was inconclusive.
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153.
|
For account 150 - computers - administration, Northwestel proposed a service life reduction of one year to an ASL of 5 years using an Iowa S-4 dispersion curve. Northwestel argued that increasing requirements for information and speed, both for its customers and for its own operations, were leading to retirements of current investment.
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154.
|
For account 170 - telephone exchange equipment, Northwestel proposed to reduce the ASL by one year to 11 years using an Iowa L-4 dispersion curve. Northwestel argued that this account included digital switches of older technologies which were expensive to upgrade. Northwestel submitted that the pressure to have these switches retired would continue due to the increasing cost of upgrades, the declining support from manufacturers and the expected increasing demand and proliferation of service features. The company noted that many of its switches would be retired or upgraded in the foreseeable future as part of the SIP or as they became manufacture discontinued.
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155.
|
For account 190 - Internet data equipment, Northwestel proposed an ASL of six years using an Iowa S-4 dispersion curve. Northwestel argued that historical life analysis was not possible since this was a new account. The investment was previously assigned to account 160 - data switching systems with an approved ASL of 10 years. Northwestel argued that most of the equipment in account 190 was similar to computers where changes were continuous and competition to provide faster services and features was fierce. This resulted in high rates of obsolescence and uncertainty about the viability of the equipment, even in the short term. The company noted that the proposed life parameters corresponded to an average remaining life of 3.3 years from the end of 2002 and a maximum life of about 9 years.
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156.
|
For account 230 - carrier telephone equipment - solid state, Northwestel proposed a service life reduction of two years to an ASL of 10 years using an Iowa R-2 dispersion curve. Northwestel indicated that significant retirements of existing investment were taking place and were expected to continue due to the digitization of its network and the realignment of transmission equipment with the conversion from analogue to digital radio. The company submitted that the Hughes system and the Newbridge equipment in over 100 sites were susceptible to retirement in this decade. Northwestel submitted that technological changes would lead to continued retirements of existing equipment such as channel banks, analogue carrier systems, analogue radio multiplexers and older generation fibre optic equipment.
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157.
|
For account 350 - furniture, Northwestel proposed a service life reduction of three years to an ASL of 12 years using an Iowa R-2 dispersion curve. Northwestel submitted that this better represented future retirement patterns since the investment involved relatively small items that were affected by physical factors and ergonomic changes. Northwestel submitted that this proposal corresponded to an average remaining life of about six years from the end of 2002 and a maximum life of about 21 years.
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158.
|
For account 520 - Centrex, Northwestel proposed to reduce the ASL by two years to 12 years using an Iowa L-4 dispersion curve. Northwestel submitted that there were only two main Centrex customers. The company submitted that its Centrex switches were subject to the same technological changes and obsolescence as switches contained in other asset codes. Northwestel further noted that when the GTD-5 switch in Yellowknife was retired, the Centrex switch would also be retired since the new switch would serve its Centrex customers. In addition, Northwestel submitted that existing line cards might be retired, as they were not suitable for use with Meridian telephones.
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159.
|
For account 550 - radio plant - point-to-point - under 2 GHz, Northwestel proposed a two-year reduction in ASL to 12 years with an Iowa L-3 dispersion curve. Northwestel submitted that a significant portion of the investment was in analogue facilities and equipment, which was expected to be retired within five years. The company also submitted that its 900 MHz radio system would be replaced.
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160.
|
For account 570 - satellite earth stations, Northwestel proposed a reduction of two years in the ASL to nine years using an Iowa R-4 dispersion curve. Northwestel submitted that historical life analysis and survivor curve fitting produced lives mostly in the six-year to seven-year range for the 1996-1999 experience band. The company argued that significant upgrades were expected in the future due to the demand for increasing capacity and additional bandwidth for Internet and video. Northwestel submitted that the life estimate of nine years for this account corresponded to an average remaining life of about four years from the end of 2002 and a maximum life of about 13 years.
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161.
|
For account 650 - batteries, Northwestel proposed a reduction of two years in the ASL to 14 years with an Iowa R-5 dispersion curve. Northwestel submitted that battery retirements were expected to increase due to replacement with more modern batteries with new valve design that decreased positive electrode growth, and hence battery deterioration. In addition, the company proposed a major DC power plant upgrade in its SIP involving $900,000 in new power plant capital investment in the 2003-2004 timeframe. Northwestel indicated that the proposed Iowa R-5 dispersion curve with a life estimate of 14 years corresponded to an average remaining life of about seven years from the end of 2002 and a maximum life of about 19 years.
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162.
|
For account 900 - air conditioning and heating systems, Northwestel requested a service life reduction of five years to an ASL of 15 years using an Iowa R-3 dispersion curve. Northwestel argued that historical life analysis and survivor curve fitting of this account's data was not meaningful due to scarcity of past retirements. The company submitted that major retirements were expected in the near future due to growth and the effects of age. The proposed life characteristics corresponded to an average remaining life of about seven years from the end of 2002 and a maximum life of about 24 years.
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Position of parties
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163.
|
CAC et al. submitted that the appropriate life parameters must be balanced against the historical experience of the asset with a realistic view of the factors that might impact future retirements. If this approach was taken, CAC et al. submitted that Northwestel's depreciation expense in 2002 would likely be much less than forecast.
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164.
|
CAC et al. submitted that Northwestel's proposal would significantly impact its annual depreciation expense. This impact would be magnified as Northwestel's SIP-related facilities were added to its network. CAC et al. argued that inappropriately shortening the plant lives of equipment would needlessly increase Northwestel's expenses and directly impact ratepayers and the supplemental funding requirement. CAC et al. noted that in addition to proposing to reduce the ASL for a number of accounts, Northwestel proposed not to adjust the life estimates for some accounts where historical experience strongly indicated that the old life parameter was inappropriate. As an example, CAC et al. noted that for account 60 - cable - aerial/underground, Northwestel proposed to retain an average life of only 22 years even though the survivor curve that most closely fitted the historical data was approximately 36 years. Northwestel had concluded that the historical experience of this account was unlikely to continue in the future. CAC et al. argued that recent experience has demonstrated that copper plant was still being deployed and that the significant retirements predicted by Northwestel have not materialized.
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165.
|
CAC et al. argued that the recent experience for larger incumbent local exchange carriers (ILECs) indicated that copper cable was still being deployed and was a very viable technology. CAC et al. submitted that in the proceeding initiated by Restructured bands, revised local loop rates and related issues, Public Notice CRTC 2000-27, 18 February 2000, Bell Canada forecasted that between 1996 and 2002, its total copper plant in service was expected to increase from $5.9 billion to $6.5 billion. CAC et al. also argued that the high penetration of copper-based asynchronous digital subscriber line services for high-speed Internet access significantly illustrated the ongoing value of copper.
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166.
|
YG submitted that the proposed net impact on Northwestel's depreciation expense for 2002 was reasonable, and that the implementation of the proposed changes would stabilize the effect of depreciation expense on Northwestel's supplemental funding requirement. YG argued that CAC et al.'s reference to Bell Canada's forecast of copper deployment was not relevant due to the significant differences in the environment and the operation of Northwestel.
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Northwestel's reply comments
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|
167.
|
In reply, Northwestel argued that it did not propose to adjust the life estimate for account 60 even though historical experience indicated otherwise. Northwestel argued that account 60 is an example where historical experience had not reflected obsolescence and other factors that were expected to affect the plant in the future. Northwestel submitted that the Commission often recognized the divergence between historical indications and future expectations for Canadian telephone companies.
|
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168.
|
Northwestel also argued that an average life of 22 years for account 60 corresponded to an average remaining life of about 12 years and a maximum life of about 33 years. Northwestel submitted that, in contrast, the indicated life based on historical patterns of 35.6 years, would correspond to an average remaining life of about 25 years and a maximum life of about 53 years. Northwestel argued that this was clearly unrealistic and unreasonable.
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Commission analysis and determinations
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|
169.
|
The Commission notes that Northwestel submitted depreciation studies for 34 accounts, 26 of which were studied in detail. The Commission notes that Northwestel proposed combining eight of its depreciation accounts with other accounts for the most part because of the small amount of investment involved and the economics of operation. The Commission also notes that implementation of these types of housekeeping matters are common practice in the industry. Under the circumstances, the Commission considers that the merging of these accounts is reasonable. The Commission approves the removal of the eight accounts and the movement of the investment to other accounts as proposed by Northwestel.
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170.
|
The Commission notes that for 15 accounts, the detailed studies resulted in no proposed changes to the depreciation life characteristics. The Commission approves the company's proposals for 14 of these accounts, with the exception of account 60. The Commission notes that parties provided specific comments on Northwestel's submission regarding only one account, account 60. The Commission also notes that there are 11 other accounts for which detailed studies were preformed where Northwestel proposed changes to depreciation life characteristics. The Commission's analysis and determinations regarding these 12 accounts are set out below. The Commission focused on two main factors in its analysis of Northwestel's depreciation studies: historical retirement patterns and future expectations. A complete listing of the Commission's approved depreciation life characteristics for the 26 accounts for which detailed studies were performed is provided in the appendix.
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Account 60 - cable - aerial/underground
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|
171.
|
The Commission has consistently taken into account historical analysis along with future expectations in approving depreciation life characteristics. The Commission notes that this can create a divergence between the ASL resulting from a purely historical analysis and the ASL established after due consideration of future expectations. In the case of copper cable, the Commission has accepted this divergence as reasonable, given the anticipated impact of new technologies, new services and competition on the future of copper cable.
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172.
|
The Commission notes that the ASL for account 60 is currently 22 years and Northwestel is proposing no change. The Commission notes that in 1996 when it reduced the ASL of this account from 25 years to 22 years in Telecom Order CRTC 96-420, 14 May 1996, the historical evidence in the company's depreciation study showed an ASL of 29 to 35 years. In the proceeding that led to Decision 2000-746, the historical evidence filed showed an ASL in the 30-year range at that time. The Commission notes that Northwestel has now provided a study showing that the historical ASL of this account has increased to about 36 years. The Commission recognizes that the appropriate ASL must balance the historical experience of the account with a realistic view of the factors that may impact future retirements. The Commission considers that Northwestel's study results indicate that the retirement activity expected in this account over the past few years has failed to materialize.
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173.
|
On balance, the Commission considers that some change in the depreciation life characteristics for this account is warranted at this time, and finds that the ASL for this account should be increased from 22 to 26 years. Based on information filed in this proceeding, Northwestel's estimated depreciation expense for 2002 will decrease by approximately $549,000.
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174.
|
The Commission will undertake a detailed review of this account during Northwestel's next supplemental funding review to determine whether the ASL should be further adjusted. The Commission directs Northwestel to provide an updated study of account 60 at the same time as it files its evidence for the next supplemental funding review.
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Account 120 - cable - fibre optic
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|
175.
|
The Commission notes that Northwestel proposed a three-year reduction in ASL for this account but did not provide conclusive historical analysis. The Commission recognizes that this investment is relatively new and that retirements have been scarce. The Commission considers, however, that the company has not provided sufficient justification to support the requested change in life characteristics. Accordingly, the Commission finds that the proposed reduction of the ASL by three years is not appropriate at this time and the ASL of 25 years with an Iowa S-3 dispersion curve should be retained. Based on information filed by the company in this proceeding, Northwestel's estimated depreciation expense for 2002 will decrease by approximately $114,000.
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Account 150 - computers - administration
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|
176.
|
The Commission notes that Northwestel proposed an ASL reduction of one year to five years for this account. The Commission notes however that the historical analysis resulted in average lives in the seven-year to eight-year range in the 1998-2000 experience band. The Commission is of the view that the impact of technological change, operational requirements and obsolescence has been reflected in the seven-year to eight-year historical ASL. The Commission considers that the current ASL of six years sufficiently reflects future expectations and is still appropriate. Therefore, the Commission finds that the current ASL of six years should be retained. Based on information filed by the company in this proceeding, Northwestel's estimated depreciation expense for 2002 will decrease by approximately $176,000.
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Account 170 - telephone exchange equipment
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|
177.
|
The Commission notes that Northwestel proposed an ASL reduction of one year to 11 years for this account based on the expectation that many of its switches would be retired or upgraded in the foreseeable future. The Commission notes that historical life analysis resulted in average lives in the 18-year to 19-year range for the 1997-1999 experience band and in the 15-year to 16-year range for the 1987-1999 experience band for this account. Recognizing that Northwestel has forecast substantial retirements, the Commission considers that changes to the life characteristics for this account should be implemented after these retirements have occurred. The Commission therefore finds that the current ASL of 12 years should be retained at this time. Based on information filed by the company in this proceeding, Northwestel's estimated depreciation expense for 2002 will decrease by approximately $171,000.
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Account 190 - Internet data equipment
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|
178.
|
The Commission notes that the investment in this new account was previously part of account 160. The Commission further notes that Northwestel submitted a depreciation study for account 160 that concluded that the current life characteristics of 10 years should be maintained. The Commission recognizes that historical analysis for the new account is not available. The Commission also considers that the equipment in account 190 should be subject to higher rates of retirement than the equipment remaining in account 160 due to expected rates of technological change. The Commission is of the view however that the proposed reduction of four years in the ASL for new account 190 is not fully justified at this time. In light of this, the Commission finds that an ASL of eight years would be more appropriate. Based on information filed by the company in this proceeding, Northwestel's estimated depreciation expense for 2002 will decrease by approximately $183,000.
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Account 230 - carrier telephone equipment - solid state
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|
179.
|
The Commission notes that Northwestel proposed an ASL reduction of two years to 10 years for this account. The Commission notes that historical analysis for this account resulted in average lives of 10 years for the 1996-2000 experience band and 10 to 11 years for the 1999-2000 experience band. The Commission considers that these results are a very close match to Northwestel's proposal for an ASL of 10 years. The Commission also recognizes the considerable impact of the investment related to moving from analogue to digital equipment. The Commission therefore finds that the proposed reduction from an ASL of 12 years to an ASL of 10 years is reasonable.
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Account 350 - furniture
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|
180.
|
The Commission notes that Northwestel proposed an ASL reduction of three years to 12 years for this account. The Commission notes that Northwestel maintained that retirements in this furniture account in the past years have been limited and that an ASL reduction of three years for this account would better represent future retirements. The Commission considers however that the proposed reduction of the ASL by three years has not been sufficiently justified and is not appropriate at this time. The Commission finds that the current ASL of 15 years with an Iowa R-4 dispersion curve should be retained. Based on information filed by the company in this proceeding, Northwestel's estimated depreciation expense for 2002 will decrease by approximately $43,000.
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Account 520 - Centrex
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|
181.
|
The Commission notes that Northwestel proposed an ASL reduction of two years to 12 years for this account. The Commission notes that historical analysis of this account showed lives in the range of 13 to 14 years for the 1997-1999 experience band. Considering technological changes and obsolescence factors and the major retirements forecast by Northwestel, the Commission finds that the proposed reduction of two years to an ASL of 12 years is reasonable.
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|
Account 550 - radio plant - point-to-point - under 2 GHz
|
|
182.
|
The Commission notes that Northwestel proposed an ASL reduction of two years to 12 years for this account. The Commission notes that historical life analysis of this account showed lives mostly in the 23-year to 26-year range for the 1998-1999 experience band, representing a substantial divergence from the currently-approved ASL of 14 years. The Commission is of the view that it is premature to further increase this divergence by two years as requested by Northwestel. Should substantial retirements in analogue equipment take place as forecasted by Northwestel, any changes to the life characteristics could be implemented when this account is re-studied. The Commission therefore finds that the current ASL of 14 years should be retained. Based on information filed by the company in this proceeding, Northwestel's estimated depreciation expense for 2002 will decrease by approximately $135,000.
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Account 570 - satellite earth stations
|
|
183.
|
The Commission notes that Northwestel proposed an ASL reduction of two years to nine years for this account. The Commission recognizes that increased demand for capacity and increased bandwidth will have an impact on investment in this account. In view of the fact that historical analysis resulted in lives that are shorter than the proposed ASL of nine years, the Commission finds that Northwestel's proposal for a two-year reduction in the ASL for this account is reasonable.
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Account 650 - batteries
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|
184.
|
The Commission notes that Northwestel proposed an ASL reduction of two years to 14 years for this account. The Commission notes that historical analysis for this account showed average lives mostly in the 15-year to 17-year range for the 1998-2000 experience band. Considering that the ASL based on historical data alone is very close to the proposed ASL of 14 years and that retirements are expected to increase substantially, the Commission finds that the proposed ASL of 14 years is appropriate.
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Account 900 - air conditioning and heating systems
|
|
185.
|
The Commission notes that Northwestel proposed an ASL reduction of five years to 15 years for this account. Given that retirements to date have been scarce in this account, the Commission is of the view that the proposed reduction of the ASL by five years is not appropriate at this time. Accordingly, the Commission finds that the current ASL of 20 years should be retained. Based on information filed by the company in this proceeding, Northwestel's estimated depreciation expense for 2002 will decrease by approximately $54,000.
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|
|
|
186.
|
In the proceeding leading to Decision 2000-746, Northwestel's forecasted operating expenses (less depreciation and operating taxes) for 2001 were $70.3 million. In Decision 2000-746, the Commission applied a 2% TIP to the company's base operating expenses for 2001, as an incentive for the company to reduce costs. This resulted in Northwestel's base operating expenses for 2001, used for revenue requirement purposes, being reduced by $1.4 million. In addition, the Commission stated that it expected Northwestel to achieve a minimum 2% TIP in 2002, excluding the impact of its SIP, and that it would monitor the company's productivity in this initial review.
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|
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Northwestel's position
|
|
187.
|
Northwestel submitted an operating expenses forecast, less depreciation and operating taxes, of $71.2 million for 2002. Northwestel submitted that it had applied a 2% TIP to its 2002 expense forecast, in accordance with the Commission's expectations set out in Decision 2000-746. Northwestel excluded its transponder costs from the calculation of the TIP. Northwestel's TIP calculation assumed NAS growth of 2% and an inflation rate of 2.2%. Northwestel based its inflation rate forecast on the consumer price index (CPI) forecasts of major Canadian banks.
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|
188.
|
Northwestel submitted that its actual TIP for 2001 was 2.7%, excluding the company's transponder costs. In excluding the impact of the company's transponder costs from the actual TIP calculation, Northwestel submitted that the transponders were leased from Telesat Canada (Telesat) and represented a very large component of its operating expenses. Northwestel argued that the significance of transponder costs and the potential magnitude of change in year-over-year expenses could distort the TIP results. Northwestel submitted that in order to avoid such distortions, its transponder costs should be excluded from the calculation of TIP. Moreover, Northwestel argued that the other telephone companies normally provision growth in facilities by way of capital investments, which would not impact on the TIP calculation.
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|
189.
|
Northwestel submitted that the productivity gains achieved in 2001 were due to a number of factors. These factors included implementing cost curtailment policies in response to lower than forecast revenues.
|
|
190.
|
Northwestel submitted that, with respect to transponder costs, the actual cost in 2001 for its three full RF channel transponders was $5.7 million. Northwestel indicated that the cost associated with the partial transponder (approximately 0.4 of one transponder) was about $300,000, for a total expense of about $6 million for 3.4 transponders.
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|
191.
|
For 2002, Northwestel submitted that it had originally forecasted the need for four transponders at an estimated cost of $7.5 million. During the proceeding, Northwestel reviewed the need for a fourth full transponder, and concluded, based on an expected change in demand and increased flexibility in supply and pricing arrangements, that it would require only 0.6 of a transponder. Northwestel forecasted the cost associated with the 3.6 transponders to be approximately $6.4 million. This resulted in an expected total increase in transponder costs, year-over-year, of $400,000, or about 6.6%.
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|
192.
|
Northwestel submitted that its forecasted 2002 corporate expenses for information systems, marketing and public relations, was approximately $10.4 million, an increase of 8.2% as compared to the 2001 actual level of $9.6 million. Northwestel submitted that this increase was primarily due to increases in costs associated with the annual maintenance and licensing fees of the company's customer care and billing systems.
|
|
193.
|
Northwestel submitted that its forecasted 2002 customer services expensesfor sales and operator services, along with residential and business call centres,were approximately $10.2 million, an increase of 4.5% as compared to the 2001 actual level of $9.8 million. Northwestel submitted that the increase was attributable to an expansion of its sales group to more properly address strategic and general business market accounts, and to establish closer ties with aboriginal organizations.
|
|
194.
|
Northwestel submitted an assessment of the impact of the 2002 work stoppage on the company's financial situation. Northwestel submitted that the overall net impact on operating expenses was an estimated saving of approximately $200,000. Northwestel submitted that this net saving in operating expenses would likely be offset by lower than expected revenues in the areas of sales and installation. Northwestel submitted that while efforts were underway to achieve the original sales and installation targets by year-end, it expected that revenues in these areas would be under budget by approximately $200,000. Northwestel projected, therefore, that the work stoppage would not have a material impact on the company's financial situation.
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195.
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Northwestel also submitted that an additional effect of the work stoppage was the delay of two of its productivity initiatives. The company stated that it was attempting to achieve savings elsewhere to minimize the impact on its 2002 results. In particular, Northwestel submitted that it was endeavouring to defer costs and achieve savings in areas such as new hires/filling of vacancies; reduced training for the balance of the year; and the introduction of travel constraints for the remainder of the year. Northwestel emphasized, however, that generally the work stoppage was not expected to have a material impact on the company's overall productivity calculation in 2002.
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196.
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Northwestel submitted that the entrance of competitors into its market was likely to put upward pressure on certain components of costs, such as marketing and advertising. Northwestel nevertheless intended to strive to achieve a 2% productivity gain, on average, over the period 2001 to 2003.
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Position of parties
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197.
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CAC et al. submitted that Northwestel's revision to its 2002 transponder capacity requirements and expenses was evidence of the company's lack of incentive to minimize costs. CAC et al. noted that Northwestel had originally forecast that the cost of four full C-band transponders would be $7.5 million in 2002. CAC et al. submitted that the revised forecast revealed that Northwestel's 2002 expense for transponders was lowered to $6.4 million and that, even by the year 2005, Northwestel would only be leasing 3.7 transponders from Telesat. CAC et al. argued that without the intense scrutiny of transponder bandwidth requirements and usage, Northwestel's 2002 forecasted expenditures would have remained overstated. CAC et al. submitted that the Commission determined, in Decision 2000-746, that a 2% TIP would be applied to Northwestel's 2001 base of operating expenses as an incentive to reduce costs. CAC et al. argued that this 2% TIP applied to all operating expenses, including transponder expenses.
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198.
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CAC et al. submitted that Northwestel's forecast inflation factor was too high and out of date. CAC et al. argued that more recently published forecasts of inflation for 2002 showed that the average inflation rate forecast was 1.7%. CAC et al. also argued that ratepayers should not be forced to fund Northwestel's competitive activities such as the forecast $500,000 increase in sales expenses in 2002, as they are not necessary for the provision of Utility services.
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199.
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TELUS fully supported the comments made by CAC et al. with respect to Northwestel's revenue and expense forecasts and estimates of inflation and productivity.
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200.
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YG submitted that it was not convinced that transponder costs should be excluded from the TIP calculation. YG submitted that the productivity measure would be seriously undermined by selectively excluding expenses that are essential to the overall operation of the company. YG argued that as long as Northwestel remains subject to rate of return regulation, it was important for the Commission to continue to review Northwestel's productivity.
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Northwestel's reply comments
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201.
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In reply, Northwestel argued that a 2% productivity offset, applied to base operating expenses, but excluding transponder costs, was a reasonable and appropriate incentive to reduce costs. Northwestel submitted that achieving a 2% TIP, after excluding transponder costs, would in itself be a significant challenge for the company, given its size and lack of economies of scale. Northwestel stated that equal access competition required the creation of a carrier services group and increased efforts in the areas of marketing and sales. Northwestel noted that it was also undertaking a very large SIP, which upon completion would increase the company's rate base by nearly 30%.
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Commission analysis and determinations
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202.
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In Decision 2000-746, the Commission adjusted Northwestel's 2001 base operating expenses, used for revenue requirement purposes, downward by $1.4 million to reflect a 2% TIP. The Commission notes that Northwestel's actual operating expenses for 2001 were approximately $500,000 higher than the amount approved in Decision 2000-746.
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203.
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The Commission is of the view that one of the safeguards necessary for rate base/rate of return regulation is its ability to establish productivity targets for Northwestel. More precisely, the Commission considers that adherence to the established productivity targets is critical to safeguard against any inefficiency on the part of the company in this type of regulatory regime. Accordingly, the Commission finds that, as a means to provide an incentive to control costs under the current rate base/rate of return form of regulation, the Commission's approved 2001 operating expenses are to be used for the base in the determination of the TIP for 2002.
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204.
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In Decision 2000-746, the Commission also determined that a minimum 2% TIP was expected from Northwestel in 2002. The Commission finds that rather than making specific adjustments to the various components of Northwestel's expense forecast, it is appropriate to apply a 2% TIP to the company's base operating expenses in 2002, as an incentive for the company to reduce costs.
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205.
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The Commission notes that Northwestel's forecasted inflation rate for 2002 was based on forecasts made in 2001 by three of the major Canadian banks. The Commission also notes that even some of the more recent forecasts cited by CAC et al. were subsequently revised upward. Further, the Commission notes that the actual CPI for 2002 was in line with the forecast inflation rate used by Northwestel. Accordingly, the Commission finds that an inflation rate of 2.2% is reasonable to be used in the context of forecasting Northwestel's 2002 operating expenses.
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206.
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The Commission is of the view that Northwestel has provided sufficient information to support the cost savings and additional expenditures incurred during the work stoppage, with the net effect that there was no material impact on the company as a result of the work stoppage.
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207.
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With respect to the inclusion or exclusion of transponder costs in the TIP calculation, the Commission recognizes that transponder costs represent a significant portion of Northwestel's operating expenses and that there could be significant year-over-year variances in such costs. The Commission recognizes that the operating expense base for TIP purposes can be adjusted for abnormal expenses. However, the Commission is of the view that the costs associated with Northwestel's transponders, while being significant, are not abnormal in nature. Transponder costs do not represent a one-time expense, but rather are costs incurred annually which can be forecasted and managed by the company. Accordingly, the Commission finds it appropriate for Northwestel to include the transponder costs in the company's TIP calculation.
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208.
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The Commission notes that with transponder costs excluded, Northwestel calculated its actual 2001 TIP to be 2.7%. With transponder costs included, the Commission estimates that Northwestel's actual 2001 TIP is 0.92%. The Commission emphasizes that this is considerably below the 2% TIP that it applied to Northwestel's 2001 operating expenses in Decision 2000-746.
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209.
|
The Commission notes that, with respect to 2002, Northwestel included a TIP forecast of 2% in its submission based on its actual 2001 operating expense and excluding transponder costs. The Commission estimates that this equates to a TIP of 0.87% when reflecting the approved 2001 operating expenses which included transponder costs in the calculation. The Commission emphasizes that, in Decision 2000-746, it stated that it expected Northwestel to achieve a minimum 2% TIP in 2002, excluding the impact of the SIP and that 2% was based on all of the company's operating costs, including transponder costs.
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210.
|
The Commission finds that, in light of Northwestel's forecasted TIP for 2002 of 0.87% and given the company's statement that the work stoppage was not expected to have a material impact on the overall 2002 productivity calculation, it is appropriate for the company's operating expenses in 2002 to be adjusted downwards by applying a 2% TIP to the company's operating expense base including transponder costs. The Commission's determination in this matter results in a reduction of the company's forecast operating expenses for 2002 of approximately $811,000.
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Northwestel's position
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211.
|
Northwestel submitted that it has been using the liability method of income tax allocation in relation to its telecommunications operations, as directed by the Commission in July 1989.
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212.
|
Northwestel submitted that the Canadian Institute of Chartered Accountants (CICA) issued a new policy relating to accounting for income taxes (section 3465, Income Taxes of the CICA handbook). This policy was to be implemented beginning 1 January 2002. However, according to the new handbook section, a rate-regulated enterprise need not recognize future income taxes. Therefore, Northwestel proposed to maintain the current treatment for income taxes and to continue using the liability method of income tax allocation.
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213.
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Northwestel submitted that its tax rates would be decreasing by 2% per year in each of the years 2002 through 2004. Northwestel estimated that the impact of these changes would amount to an approximate $1 million reduction in its deferred tax liability for each year that the tax rate changes. Given the magnitude of the change in deferred tax liability over the next three years, and recognizing that it continued to be regulated on a rate base/rate of return basis, the company submitted that it was appropriate to defer and amortize the financial impact over five years. The company argued that this was consistent with the manner in which it accounted for a 1989 change in tax rate, and the treatment of restructuring costs incurred in 1995.
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214.
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Northwestel submitted that in January 2002 it received a favourable ruling from Canada Customs and Revenue Agency, settling a dispute regarding research and development (R&D) tax claims between 1989 and 1993. Due to the uncertainty of how the claim would be resolved, the value of potential R&D credits was not recognized prior to the year 2002. With the acceptance of the company's claim, Northwestel received a net credit of approximately $640,000, and a further $817,000 in refund interest. In light of the magnitude of the R&D tax credit and associated refund interest received, the company argued that it was appropriate to defer and amortize the impact over five years.
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215.
|
Northwestel submitted that, as of 31 December 2001, it has deferred unamortized foreign exchange losses of about $4.0 million on its United States (U.S.) long-term debt. The company cited a recent exposure draft on expected revisions to the CICA handbook (section 1650, Foreign Currency Translation) which if implemented would mean that these unamortized foreign exchange losses would be written off 1 January 2002. Northwestel submitted that the implementation of this revision would significantly reduce its retained earnings, and would lead to significant year-over-year volatility in amounts recognized due to fluctuations in foreign currency rates. The company argued that it was appropriate to continue with the current treatment of deferring and amortizing the impact of foreign exchange gains and losses over the life of its remaining U.S. dollar denominated long-term bonds. In preparing its forecast supplemental funding requirement for 2002, the company has assumed this continued treatment.
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Position of parties
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216.
|
CAC et al. recommended that the amortization period for Northwestel's deferred income taxes and R&D settlement be reduced to three years. CAC et al. argued that a shorter amortization period would increase the annual amounts amortized and thus reduce the annual supplemental funding required in the near term. CAC et al. submitted that the selection of the appropriate time period should balance the interests of all parties. Since Northwestel's SIP would lead to annual increases in the supplemental funding requirement, it would be more appropriate to apply a shorter amortization period to mitigate these increases and to smooth out the supplemental funding required each year.
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217.
|
YG submitted that Northwestel's proposed accounting treatment showed that it was taking a reasonable and responsible approach to the need for supplementary funding. YG argued that amortization of deferred tax liability and R&D tax credits resulted in a more stable financial situation for future years' requirements.
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Commission analysis and determinations
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218.
|
The Commission notes that no interested party commented on the company's proposal to maintain the current practice of amortizing the impact of foreign exchange gains and losses over the life of its remaining U.S. dollar denominated long-term bonds. The Commission acknowledges the concerns raised by Northwestel regarding the potential financial impact on the company of the CICA's expected revisions to the handbook, and finds that no change is warranted to its standard practice on this particular accounting matter.
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219.
|
The Commission is of the view that a shorter amortization period has merit in the case of the company's deferred tax and R&D issues, especially in light of the Commission's determination in this decision that the continued appropriateness of Northwestel's regulatory regime should be re-examined when the SIP is completed at the end of 2004. Accordingly, the Commission finds that Northwestel's deferred tax liability and R&D settlement should be amortized over a three-year period.
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220.
|
The Commission notes that the estimated downward impact in 2002 of all of the company's proposals regarding accounting matters was approximately $700,000. This amount was reflected in the company's revised forecast supplemental funding amount for 2002 of $16.9 million. The Commission notes that its finding that the company's deferred tax liability and R&D claim is to be amortized over a three-year period results in a further reduction to the company's 2002 supplemental funding of $481,000.
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221.
|
As a result of its determinations in this decision, the Commission finds that the company's proposed supplemental funding for 2002 should be revised to reflect reductions in a number of areas. The Commission finds that Northwestel's supplemental funding for 2002 is reduced to $13.4 million, as set out below:
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Date Modified: 2003-06-20