ARCHIVED - Telecom - Commission Letter - 8638-C12-59/02 - Public Notice CRTC 2001-61, Newregulatory framework for small independent telephone companies and related issues

Letter

Our file: 8638-C12-59/02

Ottawa, 4 April 2003

BY E-MAIL

Parties and Interested Parties listed in Appendix C
Other Parties listed in Appendix D

In Public Notice CRTC 2001-61, New regulatory framework for small independent telephone companies and related issues, 30 May 2001 (PN 2001-61), the Commission noted that relying on Phase III costs and originating and terminating toll minutes to estimate the small incumbent local exchange carrier (ILEC) direct toll (DT) costs and rates may no longer be appropriate. Accordingly, the Commission invited proposals from the small ILECs to modify the existing method of identifying, quantifying and recovering DT costs in their territories.

In Decision CRTC 2001-756, Regulatory framework for the small incumbent telephone companies, 14 December 2001 (Decision 2001-756), which resulted from PN 2001-61, the Commission concluded that what constitutes an appropriate DT cost recovery methodology and the requirement for a transition mechanism could not be determined based on the record of the proceeding. The Commission therefore determined that it would initiate a CRTC Interconnection Steering Committee (CISC)-like consultative proceeding in the first quarter of 2002 to address this issue. The Commission further determined that the consultative proceeding would also include a review of network access (NA) costs in order to determine a final methodology for cost recovery.

Also in Decision 2001-756, the Commission considered that Cochrane, NorthernTel and O.N.Telcom may be disadvantaged by their earlier conversion from DT Phase III based costing to direct connect (DC) and equal access (EA) Phase II based costing established in Decision CRTC 2001-583, O.N.Telcom - Implementation of toll competition and related matters, 13 September 2001 (Decision 2001-583). The Commission therefore determined in Decision 2001-756 that the DC and EA rates set for these three companies in Decision 2001-583 would be made interim effective 1 January 2002. However, the Commission specifically reassured parties that it clearly did not envisage significant changes to the terms and conditions of toll competition that would in any way hinder the rollout of interexchange toll competition in the territory of O.N.Telcom.

As indicated, the DC and EA rates for Cochrane, NorthernTel and O.N.Telcom were determined by the Commission in Decision 2001-583. In that proceeding the Commission explored in detail numerous issues pertaining to the impacts on interconnection rates. Commission staff is of the view that the DC and EA rates established in Decision 2001-583 should be made to apply on a final basis.

Commission staff is not persuaded that information introduced in the current proceeding would have sufficient bearing as to change the DC and EA rates as established in Decision 2001-583. Commission staff remains of the view that the level of these rates was determined specifically to ensure that toll competition would commence and flourish in O.N.Telcom's traditional toll territory. However, Commission staff notes that new or revised trunking tariffs are proposed for the small ILECs as part the DT proposal in Appendix A to this letter. Commission staff considers that these same trunking tariffs would be appropriate for use by Cochrane, NorthernTel and O.N.Telcom.

During the consultative proceeding, parties have presented different proposals as to how much of the overall DT and NA costs should be recovered, from where and over what period of time. This letter constitutes the next step in the consultative proceeding.

Commission staff is of the view that a balance must be struck in order to ensure that the objectives of the Telecommunications Act (the Act) and the interests of the small ILECs, and interexchange carriers (IXCs) and their customers are properly considered. In light of this, Commission staff has carefully considered the proposals and comments of all parties related to cost recovery of DT and NA costs for the small ILECs.

At this time, Commission staff is putting forth a proposal for DT recovery that represents a baseline for consensus among the small ILECs and interested parties. This proposal embodies the use of national tariffs for digital network services, the recovery of remaining EA costs and the establishment of a uniform proxy DC rate to determine total DT cost recovery over a four-year transition period. For the NA service, the Commission staff proposal embodies the use of national tariffs for digital network services.

Appendix A outlines Commission staff's proposal for the recovery of DT and NA costs by the small ILECs. Commission staff is of the view that, this proposal provides a suitable framework to address issues such as alternate routing, financial viability, and transition to a new DC regime under price regulation for the small ILECs.

Commission staff is of the view that rates for interconnection will affect the decisions made by IXCs as to whether to compete for traffic in the territories of the small ILECs. Where rates are set too high, potential competitors may not be able to offer their services, to the detriment of residents and businesses in that territory. In addition, high rates may be accompanied by a significant level of alternate routing of long distance traffic and related conversation minutes which would lead to revenue erosion for the affected company.

Commission staff considers that, if widely differing rates are allowed in neighbouring territories, either among the small ILECs themselves or between a small ILEC and an adjacent large ILEC, the potential risk of alternate routing or non-economic decisions by service providers is likely to be heightened.

Commission staff also notes that, based on prior Commission decisions, resellers of long distance service are not required to compensate the small ILECs directly for originated and terminated conversation minutes. However, an IXC is permitted to receive compensation for any difference in costs associated with carrying originating and terminating minutes on behalf of an alternate provider of long distance service (APLDS) using flow through tariffs. Under the Commission staff DT proposal, IXCs will be required to file flowthrough tariffs, where appropriate, in order to be compensated for traffic carried into the territories of the small ILECs.

Finally, Commission staff notes that there is a proceeding underway related to Public Notice CRTC 2001-126, Trunking arrangements for the interchange of traffic and the point of interconnection between local exchange carriers, 19 December 2001 (PN 2001-126). The local competition issues under review within PN 2001-126 will not have any bearing on the outcome of this proceeding since local competition is not yet permitted in the territories of the small ILECs.

Attachments 1 to 5 of Appendix B (.xls) (.pdf) contain the preliminary supporting data used by Commission staff to develop the proposals outlined in Appendix A. Parties are requested to review the information provided in relation to DT and where parties do not agree with the data, they are to provide revised numbers along with detailed supporting rationale for any changes to the Commission, serving a copy on all parties, by 5 May 2003.

Parties are also requested in part D of Appendix A to provide additional data pertaining to NA to the Commission, serving a copy on all parties, by 5 May 2003.

Parties may file comments with the Commission related to this letter and Appendix A, serving a copy on all parties by 5 May 2003.

Parties may file reply comments with the Commission, serving a copy on all parties by 20 May 2003.

Where a document is to be filed or served by a specific date, the document must be actually received, not merely sent, by that date.

Parties can file their submissions electronically or on paper. Where the submission is filed by electronic means, the line ***End of document*** should be entered following the last paragraph of the document as an indication that the document has not been damaged during electronic transmission. Each paragraph of your submission should be numbered.

Please note that only those submissions electronically filed will be available on the Commission's web site and only in the official language and format in which they are submitted.

Should you have questions or require further clarification on any of the above, please do not hesitate to contact Donna Malliff at (819) 997-9253.

Yours sincerely,

Scott Hutton
Director, Contribution and Costing
Telecommunications
(819) 997-4573

Attachments: Appendix A, Commission Staff Proposal

Appendix B (.xls) (.pdf), Preliminary Supporting Data

• Attachment 1: Proposed Total Revenue(DC + EA + Trunking);
• Attachment 2: Proposed DC and EA Revenues;
• Attachment 3: Proposed Trunking Revenues (2005);
• Attachment 4: Proposed Tariff Rates to Determine Trunking;
• Attachment 5: Proposed Tariff Rates to Determine NA.

Appendix C, List of Parties and Interested Parties
Appendix D, List of Other parties

APPENDIX A

Commission Staff Proposals

Commission staff seeks comments from parties on the following proposals for direct toll (DT) and network access (NA) cost recovery. The proposals would be applicable to the small ILECs except for Cochrane, NorthernTel and O.N.Telcom, which would retain the direct connect (DC) and equal access (EA) rates as determined in Decision 2001-583.

Part A: Proposal related to direct toll

Commission staff is of the view that the existing regime using DT rates based on Phase III costing should be replaced by a regime that would include recovery of costs through three main components. The three components consisting of: (a) trunking tariffs applied to the number of trunks and associated mileage; (b) EA costs recovered according to remaining annual amounts of a company's ten-year amortization schedule; and (c) DC component based on transitioning from approved 2001 DT amounts to a 2005 DC amount based on a uniform 2005 DC rate of $0.00370 per conversation minute and frozen 2001 total conversation minutes.

The proposal for DT embodies a four-year transition period from 1 January 2002 to 31 December 2005, coincident with completion of the first price regulation period. For year 2002, which would be considered the first year of the transition period, cost recovery would be based on DT amounts frozen at approved 2001 DT amounts. For the remaining years of the transition period, the 2003 to 2005 DT cost recovery for the small ILECs would be determined as outlined in the following sections dealing with the trunking, EA and DC components.

1.0 Trunking component

Annual trunking revenue in Appendix B (.xls) (.pdf), Attachment 3, would be based on tariffs for DS-1/DS-3 services using the Bell/TELUS National Services Tariff (NST) rates (see Bell tariff items 307.4 and 301.3) for digital network services adjusted for the small ILECs. Adjustments to the NST rates would be to add base charges for DS-1 services in the 0-10 mile band to account for generally shorter trunking lengths in the territories of the small ILECs. The trunking revenue amounts would include: (a) link charges; (b) base charges; and (c) mileage charges. Adjustments to the NST rates would be incorporated in the derived trunking revenues of the small ILECs for the transition period according to the rates in Table 1.

      Proposals relating to the measurement of mileage include the following:

• mileage charges would be applicable to the number of miles between the switch and the point of interconnection (POI) determined as of 31 December 2002;

• mileage determination of toll DS-1/DS-3 distances would be on the basis of vertical/horizontal(V/H) co-ordinates methodology. Where necessary, companies are to provide revisions to the mileage data in Appendix B (.xls) (.pdf), Attachment 3, to reflect changes from route miles to air miles according to V/H co-ordinates;

• where requested, IXCs would provide the V/H co-ordinates for all POIs between a small ILEC and the connecting IXC; and

• POIs for new entrants would be taken as no closer to a small ILEC switch than that of the closest POI as of 31 December 2002. An IXCs could choose to co-locate, but the toll DS-1/DS-3 rates would apply from the closest fixed POI location for the duration of the transition period.

The amount of revenue making up the trunking component would be a function of the monthly link, base and mileage rates proposed in paragraphs a) and b) above times the number of trunks and associated mileage in place as of 31 December 2002. Since the number of trunks and associated mileage as identified in Appendix B (.xls) (.pdf), Attachment 3, would be considered as a floor (a fixed minimum amount) for the duration of the transition period, trunking revenues are assumed to be held constant for 2003, 2004 and 2005.

Revenues resulting from trunks added subsequent to 1 January 2003 would be based on the tariffs in Appendix B (.xls) (.pdf), Attachment 4 using the minimum mileage distance to POI locations outlined in paragraph b) on measurement of mileage.

2.0 EA component

Calculation of EA component

In Decision 96-6, Regulatory Framework for the Independent Telephone Companies in Quebec and Ontario (except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec Ltée), 7 August 1996, the Commission stated that EA is important to encourage the spread of competition and that it should be implemented where technologically feasible. Accordingly, the Commission directed the small ILECs to implement EA by 1 January 1998 and to amortize the EA start-up costs over a ten-year period.

Commission staff notes that EA costs to be recovered for the years 2003, 2004 and 2005, have been identified by small ILEC in Appendix B (.xls) (.pdf), Attachments 1 and 2. Under the proposal, these EA costs would be included without adjustments in the total revenue amount to be received by each company. There would be no requirement to establish individual EA rates for the duration of the transition period. Recovery of remaining EA costs beyond the end of the transition period would be dealt with in a follow-up proceeding prior to the end of the transition period.

3.0 DC component:

Under the proposal, conversation minutes would be determined according to the following:

• proxy conversation minutes(originating and terminating) would be frozen for the duration of the transition period at the level approved for each company's final 2001 carrier access tariff.

• should the actual conversation minutes increase by more than 15% in any one year over the preceding year, the small ILECs would have the option of approaching the Commission to request an adjustment to the company's monthly DC revenue requirement for the remaining years of the transition period.

Step one: A 2005 target DC revenue amount was determined by taking the proxy 2005 DC rate of $0.00370 (paragraph a) and multiplying it by the proxy conversation minutes frozen at 2001 levels. See Appendix B (.xls) (.pdf), Attachment 2.

Step two: A 2002 DC amount, from which to transition down to the target DC revenue amount for 2005, was determined by subtracting the trunking component and the EA component from the total 2002 DT amount. This calculation was made on the basis that the trunking and EA components are fixed amounts for each of the years 2003 to 2005, as indicated in sections 1.0 and 2.0 above. See paragraph 4.0 below where the 2002 DT amount would be fixed at 2001 levels.

Step three: The difference between the proxy DC amount in step two (starting point) and the 2005 target DC revenue amount in step 1(end point) was determined. This difference provided a required transition reduction amount, which was divided by three, to produce an annual transition DC reduction amount for the years 2003-2005. See Appendix B (.xls) (.pdf), Attachment 1 for the resulting DC transition amounts by company.

Note: Should the proposed 2005 amount be greater than the amount determined in step two, no transition period is necessary. The proposed 2005 amount would take effect 1 January 2003.

4.0 Transition revenue for 2002

The total 2002 DT transition revenue would be equal to the approved 2001 DT amounts.

5.0 Payments to the small ILECs by IXCs

The following outlines the proposed manner in which payments by IXCs, for the use of trunking + EA + DC services from the small ILECs, would be made in situations where: (a) only one IXC would be operating in a territory; and, (b) multiple IXCs would be operating in a territory.

(a) Where there is only one IXC operating in a small ILEC territory, the required monthly payments to the small ILECs would be based on the total estimated annual revenue requirement (DC+EA+Trunking), as determined in Appendix B (.xls) (.pdf), Attachment 1, divided by 12.

(b) Where there are multiple IXCs operating in a small ILEC territory:

• payments related to the DC and EA components would be allocated among the IXCs directly connected to that small ILEC, including the small ILEC's own toll traffic or that of its affiliates as the case may be, based on the proportions of actual monthly conversation minutes of traffic by carrier.

• payments for the trunking component would be allocated among the IXCs directly connected to that small ILEC, including the small ILEC's own toll traffic or that of its affiliates as the case may be, on the basis of the proportion of actual number of DS-1s/DS-3s in service per month where POIs are of the same distance. In cases where IXCs have differing POIs, allocation of payments would be determined based on the trunking tariff rates from part 1.0 a) above;

• payments for new DS-1/DS-3s requirements, added subsequent to the 31 December 2002 counts of DS-1/DS-3s used to determine the transition trunking component, would be the direct responsibility of the IXC requesting the service. Payments would be based on the trunking rates in part 1.0 d) above as well as appropriate service charges;

• where appropriate, allocations of payments resulting from an IXC entering the territory of a small ILEC, or the withdrawal of service by an IXC, would be based on the effective dates of entry or exit into the territory as appropriate; and

• should the actual total number of DS-1s/DS-3s fall below the minimum floor number of DS-1s/DS-3s frozen at 31 December 2002 levels, the IXCs in the territory directly connected to the small ILEC would assume an appropriate share of any trunking revenue shortfall based on the proportions of actual numbers of DS-1s/DS-3s in service per month.

6.0 Flowthrough tariffs for IXCs

The Commission has previously determined that IXCs carrying originating or terminating minutes of toll traffic in the territories of the small ILECs, on behalf of APLDS, can charge the APLDS an amount equal to the difference between the small ILEC per minute carrier access tariff (CAT) and the IXC's CAT. Commission staff notes that as a result of Decision 2001-756, the per minute contribution portion of the CAT was replaced by a contribution mechanism whereby contribution is recovered from the National Contribution Fund. This leaves only the DT portion of the small ILEC CAT subject to flowthrough tariff arrangements.

Since this proposal embodies the replacement of the DT portion with a combined Trunking + EA + DC amount as outlined in the above sections, IXCs carrying originating and terminating toll traffic into the territory of the small ILECs, on behalf APLDS, would be able to file proposed tariffs in order to be compensated, where appropriate, for any difference between the IXCs DC rate and the estimated Trunking + EA + DC rate of a small ILEC.

7.0 Shortfall recovery

Commission staff recognizes that for most of the companies there will be a reduction of revenues from the frozen 2001 DT amounts to the total annual Trunking + EA + DC revenues for 2005.

Commission staff is of the view that there will be no recovery of shortfalls from the national central contribution fund.

Commission staff considers that companies will benefit from:

(a) a transition period of four years which will assist companies in coping with a reduction of revenues (noting that in year 2002 no reduction in revenues has been calculated); and

(b) companies would have the option of submitting Phase II costing studies requesting approval of Phase II cost-based DC tariffs plus an appropriate mark-up in lieu of the proposed DC portion. Changes to DC rates resulting from Phase II applications would be used to update a company's transition adjustment on a going forward basis.

8.0 True-up mechanism

There would be no requirement for a true-up mechanism under the proposal given that minutes, trunks and mileage would be fixed for the duration of the transition period.

9.0 Alternate routing

Commission staff is of the view that there would be no requirement to make provisions for possible conversation minute decreases related to alternate routing arrangements on the basis that safeguards are proposed to protect the revenue of the small ILECs for the duration of the transition period. The following proposed safeguards would be subject to review in a follow-up proceeding prior to the end of the transition period:

(a) proxy conversation minutes would be frozen at approved 2001 levels;

(b) the number of toll DS-1s/DS-3s in service as of 31 December 2002 would be considered as a minimum floor amount; and

(c) mileage related to POIs as of 31 December 2002 would be considered as minimum distances for the purpose of calculating trunking tariffs.

10.0 Co-location considerations

Under the proposal, co-location of IXCs at the small ILEC switch would be considered appropriate for toll carrying facilities.

The small ILECs would be required to file co-location tariffs upon application by an IXC.

Part B: Proposal related to network access tariff (NAT)

Commission staff is of the view that the treatment of network access services as private line facilities by the small ILECs should generally be similar to the treatment of such services in the rest of Canada. This would include allowance for appropriate aggregation of bandwidth, channelization of circuits and provisions of volume or term discounts as are generally available in the rest of Canada.

The proposal for NAT embodies the use of existing Bell/TELUS National Services Tariff (NST) rates, with the exception of a proposed change to NST rates for the 0-25 mile band, to replace the current ¼ mile or circuit based regimes.

NA revenue would be based on tariffs for DS-0/DS-1/DS-3 services using as a base, the Bell/TELUS National Services Tariff (NST) rates (see Bell tariff items 307.4 and 301.3) for digital network services. Commission staff is of the view that an adjustment would be warranted to compensate the small ILECs for circuits of less than one mile. The proposed rates to be used in determining NAT revenues are provided in Table 2 and these rates would be effective as of 1 January 2003.

1.0 NAT costing and recovery methodology

Table 2 outlines the proposed tariff rates, which would be applied to the number of circuits/trunks and related mileage in determining NA revenues. In addition to base and mileage rates, service charge rates of $80.00 per DS-0 and $1100.00 per DS-1 would also be applicable. Also see Appendix B (.xls) (.pdf), Attachment 5.

Table 2

Link rates

Link charges would are calculated at $60.00 per month for each DS-0/DS-1. Also see Appendix B (.xls) (.pdf), Attachment 5.

Proposals relating to measurement of mileage include the following:

• mileage charges would be applied to the number of miles between the POI and network termination point ;

• mileage determination of DS-0/DS-1 distances would be based on V/H co-ordinates methodology; and

• where requested, IXCs would be required to provide V/H co-ordinates for all POIs between a small ILEC and an interconnecting ILEC.

NA rates would be made effective based on in-service records as of 1 January 2003.

2.0 Prior to 1 January 2003

The 2002 NA rates which were made interim based on 2001 final approved rates, and the 2002 NA costs which were fixed at 2001 approved levels, (in accordance with Decision 2001-756), would be made final.

3.0 True-up mechanism

There would not be a requirement for an annual true-up mechanism since network access services would be based on specific tariffs and monthly in-service quantities.

4.0 Transition

Under the NA proposal, there would be no transition adjustments applicable. NA tariffs based on the above rates would be considered a final cost recovery methodology to replace Phase III costing for network services.

5.0 NA related revenues

Charges for local access and terminal equipment related to the use of network access facilities would continue to be applicable in conjunction with the proposed network access tariffs.

Part C: Other matters

1.0 Interconnection agreements

New or revised interconnection agreements would be required according to the following circumstances:

a)  parties would be required to continue with, or undertake negotiations, to update and/or prepare new interconnection agreements to be filed within six months of a final decision to reflect the final determinations for the treatment of DC/EA and Trunking during the transition period;

b)  parties with NA tariffs would be required to undertake negotiations and file new or revised interconnection agreements within six months of a final decision to reflect the determinations for the treatment of network access services; and

c)  parties with existing unapproved agreements or arrangements, which do not conform to the requirements of Section 29 of the Act, and which would not be revised because of part a) or b) above, would be required to file such agreements or arrangements by 1 June 2003, requesting that they be approved by the Commission.

2.0 Tariff filings required

Implementation of the DT and NA proposals as outline in the preceding sections would require most of the small ILECs and their interconnecting IXCs to file tariffs as appropriate in order to cover the following items:

a)  digital network services tariffs in the territories of small ILECs for DS-0, DS-1 and DS-3 services for DC/EA and Trunking and/or NA services to be effective 1 January 2003;

b)  new or updated flow through tariffs; and

c)  co-location tariffs for toll facilities upon request only.

3.0 Follow-up proceeding

A follow-up proceeding related to DT/DC, EA and Trunking issues would be conducted as part of the review of the first price regulation period as determined in Decision 2001-756.

Part D: Summary of requirements

a) 2001 DT amounts;

b) 2001 proxy conversation minutes;

c) EA costs by year for 2002 to 2005 inclusive;

d) number of toll DS-1/DS-3s as at 31 December 2002;

e) number of toll DS-1/DS-3s added or removed from 1 January 2003 to date

f) toll DS-1/DS-3 mileage between switches and POIs based on V/H co-ordinates (IXCs to assist small ILECs with determinations of V/H co-ordinates for POIs and associated V/H miles); and

g) where companies do not agree with the data provided, revised numbers, along with detailed supporting rationale for any changes, are to be provided with comments to be filed by 5 May 2003.

NA Service

a) total estimated 2002 NA revenue amounts;

b) counts of DS-0/DS-1s in service as of 1 January 2003 according to the mileage bands identified in Table 2;

c) number of DS-0/DS-1s added or removed from 1 January 2003 to date;

d) DS-0/DS-1 mileage related to counts in b) and c) above, between the POI and the network terminating point, based on V/H co-ordinate methodology (IXCs to assist small ILECs with determinations of V/H co-ordinates for POIs and associated V/H miles); and

e) total estimated 2003, 2004, and 2005 NAT revenue amounts by company using the NA rates noted in Attachment 5 of Appendix B (.xls) (.pdf) and using the DS-0/DS-1 counts above and corresponding V/H mileage.

  4.0  Parties may file reply comments with the Commission, serving a copy on all parties by 20 May 2003.

Appendix C

PARTIES TO THE 2001-756 FOLLOW-UP PROCEEDING

Appendix D

OTHER PARTIES TO THE 2001-756 FOLLOW-UP PROCEEDING