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Telecom Order
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Ottawa, 12 March 1999
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Telecom Order CRTC 99-239
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LOCAL COMPETITION START-UP COSTS PROCEEDING, Telecom Public Notice
CRTC 98-10
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File No.: 8622-S1-03/98
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I Introduction
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1.In Local Competition, Telecom Decision CRTC
97-8, 1 May 1997 (Decision 97-8) and in Responsibility for Carrier
Specific Costs for the Provision of Local Number Portability, Telecom
Order CRTC 97-591, 1
May 1997 (Order 97-591), the Commission determined that start-up
costs to be incurred by the Stentor Resource Centre Inc. (Stentor)
member companies to implement local competition should not be recovered
from interconnecting carriers, but that each carrier should be responsible
for recovering its own costs. In Order 97-591, the Commission also
indicated that it would initiate a proceeding to address the appropriate
approach for the Stentor member companies to recover their start-up
costs.
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2.In Implementation of Price Cap Regulation and Related Issues,
Telecom Decision CRTC
98-2, 5 March 1998 (Decision 98-2), the Commission excluded
local competition start-up and local number portability (LNP) costs
incurred by some of the Stentor member companies from the expense
forecasts used in establishing contribution and going-in rates.
In so doing, the Commission referred to its intention to initiate
a proceeding to determine the means to achieve recovery of these
costs.
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3.The Commission issued Local Competition Start-up Costs Proceeding,
Telecom Public Notice CRTC
98-10, 12 May 1998 (PN 98-10). The focus of the proceeding established
by PN 98-10 was to quantify the local competition start-up costs
and costs specific to LNP and to determine the appropriate mechanism
to address the recovery of these costs.
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4.Submissions and/or comments were received from the following
parties to the proceeding: Stentor, on behalf of BC TEL, Bell Canada
(Bell), Island Telecom Inc. (Island Tel), Maritime Tel & Tel Limited
(MT&T;), MTS Communications Inc. (MTS), NBTel Inc. (formerly The
New Brunswick Telephone Company, Limited) (NBTel), NewTel Communications
Inc. (NewTel), TELUS Communications Inc. (TCI), and TELUS Communications
(Edmonton) Inc. (TCEI) (collectively, the Companies); the Alberta
Council on Aging, the Consumers' Association of Canada, the Fédération
nationale des associations de Consommateurs du Québec and the National
Anti-Poverty Organization (collectively ACA et al.); AT&T; Canada
Long Distance Services Company; Call-Net Enterprises Inc.; the Canadian
Business Telecommunications Alliance; Rogers Cantel Inc.; Clearnet
Communications Inc.; the Director of Investigation and Research;
GT Group Telecom Networks Inc.; MetroNet Communications Group Inc.;
and Microcell Telecommunications Inc.
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5.In reaching its determinations set out herein, the Commission
has reviewed and considered the submissions filed by all parties.
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II Methodology for Recognition of Costs
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6.During the proceeding, two costing methodologies were examined
for the purposes of recognizing the local competition start-up and
LNP costs:
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i) a present worth of annual costs (PWAC) approach, which estimates
the present value of costs incurred within the study period (1997-2002);
and
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ii) a revenue requirement costing methodology that recognizes
the annual expenses based on accepted accounting principles and
includes a return on equity.
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7.The Companies proposed, using the PWAC approach, to recover
all of the costs incurred over the six-year study period, except
for the terminal value, over periods ranging from three to five
years, depending on the company. Those companies that requested
a three-year PWAC recovery period (BC TEL, Bell, Island Tel, MT&T;
and NBTel) proposed to recover their costs by the end of 2001.
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8.The Companies argued that too long a recovery period would lessen
their chances of ever recovering all of their costs given forecast
market share losses to competitors.
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9.Under the revenue requirement approach, the Commission notes
that, among other things, the capital costs are recovered through
an annual depreciation expense. Based on the approved depreciation
life characteristics, this approach would defer the recovery of
some of the local competition start-up and LNP costs beyond the
proposed PWAC recovery periods.
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10.The Commission notes that in Decision 98-2 and in TELUS Communications
(Edmonton) Inc. - Implementation of Price Cap Regulation and Related
Issues, Telecom Decision CRTC
99-1, 18 February 1999 (Decision 99-1), the depreciation life
characteristics established for the Companies at the outset of their
respective price cap regimes were determined based on a historical
view of plant as well as a prospective view that included the impacts
of future competition.
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11.The Commission notes that based on the determinations made
in Price Cap Regulation and Related Issues, Telecom Decision CRTC
97-9, 1 May 1997 (Decision 97-9), and Decisions 98-2 and 99-1
which utilized a revenue requirement approach, rates were set at
the start of the price cap regimes, based in part on these approved
depreciation life characteristics, to provide the Companies with
a reasonable opportunity to recover their capital costs.
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12.The Commission is not persuaded that the recovery of capital
assets at issue in this proceeding should be treated differently
from the recovery of capital assets at issue in Decisions 98-2 and
99-1. The Commission is also of the view that the depreciation life
characteristics approved in Decisions 98-2 and 99-1 remain appropriate
estimates of the plant lives of local competition start-up and LNP
assets.
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13.In light of the above and consistent with the approach adopted
for the recovery of Bell's Service Improvement Program costs in
Decision 98-2, the Commission finds that a revenue requirement methodology
is appropriate for recognizing the Companies' local competition
start-up and LNP costs.
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III Magnitude of the Costs
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14.The Commission finds that there is insufficient information
on the record to enable it to make a final determination as to the
reasonableness of the local competition start-up costs and LNP costs
identified by the Companies.
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15.In order to examine further the level of the costs submitted,
the Commission is addressing additional interrogatories to the Companies.
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16.The Commission will render a final determination with respect
to this matter, as well as other matters raised in this proceeding
that are not expressly addressed in this Order, at a later date.
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17.Notwithstanding the above, the Commission considers it appropriate
to permit the Companies to include LNP and local competition start-up
costs in the calculation of the revenue reductions they are required
to implement at the Price Cap Index (PCI) level through filings
to be made by the Companies by 31 March 1999 with respect to their
1999 price cap parameters.
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18.For this purpose, the Commission accepts at this time, on an
interim basis, the cash flows submitted by the Companies, modified
to reflect the use of the revenue requirement methodology.
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19.The capped and uncapped revenue requirement amounts for 1997
to 2001 provided in response to interrogatories SRCI(CRTC)5Aug98-43
PN 98-10 and TCEI(CRTC)31July98-43 PN 98-10, and based on the cash
flows referred to in paragraph 18 are set out below:
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BC TEL $ 57,806,000
Bell $ 249,779,000
Island Tel $ 1,256,000
MTS $ 16,742,000
MT&T; $ 10,395,000
NBTel $ 6,178,000
NewTel $ 4,312,000
TCI/TCEI $ 65,316,000
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20.Pending a final determination on the magnitude of the allowed
cost recovery, the Companies are permitted to use, for their respective
31 March 1999 price cap filings, up to one-third of the amounts
identified in paragraph 19, adjusted for the allocation factor for
capped and non-capped services based on the determinations in section
V of this Order, only to mitigate rate reductions otherwise required.
With respect to TCI/TCEI, the amount identified in paragraph 19
is to be revised in the 31 March 1999 price cap filing to reflect
the determinations in Decision 99-1.
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21.The amounts that are determined in accordance with paragraph
20 and used to mitigate the required rate reductions are to be included
in a deferral account.
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IV Recovery Mechanism
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22.The Companies submitted that the local competition start-up
and LNP costs that are allocated to the companies' capped services
should be recovered through the use of an exogenous factor and that
the costs allocated to non-capped Utility services should be recovered
through associated rates.
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23.The Companies also submitted that an exogenous adjustment to
the PCIs and the corresponding adjustments to the Service Band Limits
(SBLs) for their Basic Residential Local Service and Other Capped
Services Sub-Baskets will set a cap on the amount that can be passed
on to residential customers. The Companies stated that this will
give them the flexibility needed to price their services in accordance
with, and subject to, market conditions.
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24.Some parties suggested an end-user surcharge be imposed to
recover local competition start-up and LNP costs. The Companies
stated that such an approach would remove their discretion as to
how local competition start-up and LNP costs would be recovered.
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25.The Commission considers that the local competition start-up
and LNP are initiatives that meet the criteria established in Decision
97-9, for an exogenous factor adjustment for inclusion in the PCI,
namely:
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a) they are legislative, judicial or administrative actions which
are beyond the control of the company;
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b) they are addressed specifically to the telecommunications industry;
and
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c) they have a material impact on the Utility segment of the company.
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26.The Commission considers that the use of an exogenous factor
is more appropriate than end-user surcharges, as it provides the
Companies with greater pricing flexibility.
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27.In light of the above, the Commission considers that the Companies'
local competition start-up and LNP costs allocated to capped Utility
services should be recovered through an exogenous factor.
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V Allocation of Revenue Requirement Costs
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28.The Companies proposed that costs be allocated between capped
and uncapped services and among the separate capped services sub-baskets,
in the same proportion as the number of Network Access Services
(NAS) or equivalents.
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29.Other approaches examined in this proceeding included the allocation
of costs by:
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a) 1998 forecast revenues;
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b) NAS weighted by 1998 forecast revenues;
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c) retail switched exchange service NAS;
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d) retail switched exchange service NAS weighted by 1998 forecast
revenues; and
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e) retail switched exchange service NAS with business NAS weighted
by a factor of 1.5.
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30.In the Commission's view, a revenue-based allocation places
a larger burden of cost recovery on those customers who already
pay compensatory rates. In addition, a revenue allocator would result
in costs being allocated to other services which are neither NAS-based
nor associated with local telephone numbers and therefore are not
linked to the costs to be recovered.
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31.Accordingly, the Commission considers that a NAS-based allocator
is more appropriate than a revenue-based allocator.
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32.However, the Commission notes that the use of NAS as an allocator
results in costs being allocated to Competitor services.
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33.In Order 97-591, the Commission stated:
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"... it is appropriate that each carrier be responsible for the
recovery of its own costs associated with the implementation of
LNP."
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34.In addition, in Decision 97-8, the Commission stated:
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"The Commission notes that in [Order 97-591] it has concluded that
the carrier specific costs associated with the implementation of
LNP should be borne by the carriers incurring the costs. Noting
that the LNP start-up costs are likely to be the most significant
portion of total start-up costs, the Commission considers that approach
to be appropriate for the start-up costs referred to in this proceeding."
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35.During the proceeding, the Companies confirmed that BC TEL,
Bell, MTS, NBTel, NewTel and TCI had included NAS associated with
certain Competitor services for purposes of allocating costs between
Capped and Uncapped services, thus raising the prospect of potential
increases in these Competitor services rates and understating the
portion of costs allocated to capped services. The Commission considers
that to recover these costs through higher rates for Competitor
services would be contrary to its previous rulings.
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36.In the Commission's view, the use of retail NAS as an allocator
would avoid costs being allocated to Competitor services and local
private line services, since these services are not retail switched
exchange services.
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37.The use of retail NAS as the basis for allocating revenue requirement
costs raises the issue of whether residence and business retail
NAS should be weighted equally, weighted by revenues or weighted
by some other factor.
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38.The Commission is of the view that in the present environment
business and residence retail NAS should not be weighted equally.
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39.In the Commission's view, business customers can be expected
to benefit from the roll-out of LNP and local competition to a greater
degree than residence customers during the current price cap period.
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40.Accordingly, the Commission considers it appropriate to weight
the retail NAS to recognize the current competitive market and to
recognize the higher value of local competition and LNP to business
customers.
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41.The Commission concludes that a weighting factor of 1.5 applied
to non-residence retail NAS is an appropriate weighting factor to
reflect the greater benefit derived by business customers.
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42.Accordingly, the Commission directs that the revenue requirement
costs should be allocated between Capped and Uncapped services and
among Capped services on the basis of retail switched exchange service
NAS with non-residence NAS weighted by a factor of 1.5.
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43.In response to an interrogatory, the Companies indicated that,
for BC TEL, the NAS associated with Centrex service had been included
in the Competitive segment.
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44.In accordance with Decision 98-2, the Commission directs BC TEL
to include the NAS associated with Centrex service in the Uncapped
services category.
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VI Issues Related to Final Determinations
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45.Following the final determination on the magnitude of allowable
local competition start-up and LNP costs, the exogenous factors
to be implemented at the level of the total basket of capped services
and at the level of the Basic Residential Local Service and Other
Capped Service Sub-baskets will be based on the various findings
in this Order. At that time, the Companies will be required to file
any price changes required to meet the price cap commitments, taking
into consideration any amount in the deferral account.
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Secretary General
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This document is available in alternative format upon request and may also be viewed at the following Internet site: http://www.crtc.gc.ca
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