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Telecom Order
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Ottawa, 1 June 1999
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Telecom Order CRTC 99-494
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PRICING POLICY FOR SERVICES SUBJECT TO PRICE CAPS
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File No.: 8678-C12-05/99
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I INTRODUCTION
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1.In NBTel Inc. - Application to Review and Vary Telecom Order
CRTC 98-468 and Telecom
Decisions CRTC 97-9
and 98-2, Telecom Decision CRTC
99-3, 5 March 1999 (Decision 99-3), the Commission determined,
on an interim basis, that it would not require NBTel Inc. (NBTel)
to file rate reductions below Phase II costs plus a mark-up of 25%
in order to meet price cap requirements. The Commission also stated
that NBTel would still have the option of reducing rates to the
imputation test price floor.
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2.In Pricing Policy for Services Subject to Price Caps, Telecom
Public Notice CRTC 99-9,
15 March 1999, the Commission sought comments on the appropriateness
of making final and extending this pricing policy to all incumbent
local exchange carriers subject to price caps.
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3.On 6 April 1999, Bell Canada, on behalf of itself, Island Telecom
Inc., Maritime Tel & Tel Limited, MTS Communications Inc., NBTel
and NewTel Communications Inc. (the companies) and BC TEL and TELUS
Communications Inc. (BCT'TELUS) filed comments in support of the
Commission's proposal to extend this pricing policy. NBTel also
filed separate comments. On 15 April 1999, London Telecom Network
Inc. (London Telecom) filed reply comments.
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4.In this Order, the Commission considers the question raised
by NBTel in its comments as to the intent of Decision 99-3 in addition
to the subject of PN 99-9, notably, the appropriateness of making
final and extending the pricing policy found to be appropriate for
NBTel to other local exchange carriers subject to price cap regulation.
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II THE INTENT OF DECISION 99-3
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5.NBTel submitted that in Decision 99-3 the Commission stated
that it would not mandate price reductions for capped services in
order to meet a company's price cap obligations, if the revenues
for the entire capped basket of services are below the price cap
requirement floor. NBTel noted that the price cap requirement floor
was to be calculated as the Phase II cost plus a 25% mark-up associated
with all capped services, with the 25% mark-up included in recognition
of the need to recover fixed and common costs.
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6.NB Tel also submitted that, although not explicitly stated in
Decision 99-3, the Commission also made an implicit determination
that once a company "bottoms out", there is no requirement to reach
into other services to meet the price cap requirement.
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7.NBTel asserted that Decision 99-3 is consistent with the relief
sought in its application to review and vary Telecom Order CRTC
98-468, 12 May 1998 and Telecom Decisions CRTC
97-9 and 98-2 (Price Cap Regulation and Related Issues, Telecom
Decision CRTC 97-9,
1 May 1997 and Implementation of Price Cap Regulation and Related
Issues, Telecom Decision CRTC
98-2, 5 March 1998). NBTel noted that the principles adopted
by the Commission in Decision 99-3 modified the price cap requirement,
with the result that the company can now meet its price cap requirements
as evidenced by its 1999 annual price cap filing.
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8.NBTel noted that it had encountered problems early in the price
cap regime because of its unique situation. NBTel expected that
similar issues would arise for other companies.
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9.NBTel submitted that Decision 99-3 provides an additional framework
to the price cap formula by defining a floor price at the basket
level, thus enhancing the price cap regime. For reasons discussed
above, NBTel was of the view that it would be appropriate to apply
the pricing policy that the Commission adopted for NBTel, to all
companies subject to price cap regulation.
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10.The Commission notes that, in Decision 99-3, it made no statement
about price reductions for capped services not being required if
the revenues for the entire basket of capped services are below
the price cap requirement floor as asserted by NBTel. Rather, Decision
99-3 only states that "in satisfying the price cap requirements
for capped services, NBTel should not be required to reduce rates
to the imputation test price floor, and that it is appropriate to
not require reductions below Phase II costs plus 25%."
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11.The Commission does not agree that Decision 99-3 can be interpreted
in the manner suggested by NBTel. The Commission notes that the
imputation test price floor is service-specific. Within the context
of the proceeding that led to Decision 99-3, the Commission considers
that only one interpretation is possible, notably, that it will
not require NBTel to file, for a service, a rate reduction below
its Phase II costs plus a mark-up of 25% in order for NBTel to meet
its price cap requirements.
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III THE APPROPRIATENESS OF MAKING FINAL AND EXTENDING THE PRICING
POLICY ESTABLISHED IN DECISION 99-3
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12. The companies requested that the Commission make final its
interim ruling in Decision 99-3 that NBTel not be required to file
rate reductions below Phase II costs plus a 25% mark up in order
to meet price cap requirements, although NBTel would still have
the option of reducing prices to the imputation test price floor.
The Companies and BCT'TELUS requested that the Commission extend
this pricing policy to the other companies subject to price caps.
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13. The companies and BCT'TELUS argued that the imputation test
price floor is not the appropriate threshold for mandated price
reductions to meet their price cap obligations. The companies and
BCT'TELUS noted that competitive market forces might sometimes drive
prices for services to incremental costs. They submitted that a
company cannot price all or the majority of its services at this
level if it is to remain viable in the long run. If a company is
to survive, other services must generate sufficient revenues in
order to compensate for services that are priced at incremental
cost such that the company's total costs are recovered.
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14. The companies and BCT'TELUS submitted that while price reductions
mandated to Phase II costs may appear to benefit customers in the
short run, the long-term impact on competition, and therefore on
both competitors and consumers will be negative. BCT'TELUS further
submitted that by requiring prices to be reduced to the imputation
test price floor to meet their price cap commitment, the Commission
would jeopardise the financial health of the incumbent local exchange
carriers. BCT'TELUS noted that this would be contrary to one of
the Commission's objectives stated at paragraph 10 of Decision 97-9,
which is "to provide incumbents with ... a reasonable opportunity
to earn a fair return for their Utility segment".
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15. London Telecom noted that the companies and BCT'TELUS advocated
that the Commission implement a policy across all federally regulated
incumbent local exchange carriers subject to price cap regulation
whereby prices for capped services would not be required to be reduced
below Phase II costs plus 25% when meeting the yearly price cap
requirement.
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16.London Telecom submitted that such an option must not prevent
these same companies from meeting their yearly Commission-mandated
price reductions. London Telecom considered that the integrity of
the price cap regime demands that these price reductions be attained
on a yearly basis.
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17.London Telecom submitted that, if an incumbent local exchange
carrier finds itself in a position of not being able to meet its
price cap obligations for a specific year, it would be able to make
an alternate proposal and obtain the Commission's approval for the
same. London Telecom noted that in Stentor's 23 June 1998 letter,
sent to the Commission within the context of NBTel's application
that led to Decision 99-3, and included as part of the companies'
6 April 1999 comments in this proceeding, the incumbent local exchange
carriers appeared to agree with its position.
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18.In that letter, Stentor stated at paragraph 14: "If the Commission
finds that a particular company is unable to meet the price cap
requirements, then that company should be permitted to make an alternate
proposal which meets the intent of Review of Regulatory Framework,
Telecom Decision CRTC
94-19, 16 September 1994, without having rates imposed to force-fit
the price cap constraints in a manner which will ultimately both
restrict competition and impede the company's ability to recover
its costs."
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19.London Telecom submitted that in the event that the Commission
opts to review alternate proposals submitted by companies who cannot
meet their price cap obligations on an ad hoc basis, the process
must be public and interested parties must be afforded an opportunity
to comment. London Telecom submitted that the Commission should
issue general policy guidelines in this proceeding which would inform
and direct future alternate proposals by incumbent local exchange
carriers subject to price cap regulation. London Telecom maintained
that the Commission should clarify which uncapped services are not
available to be included in price capped sub-baskets.
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20. The Commission notes that the imputation test price floor
for a service is constructed so that it includes only the Phase
II costs of providing the service (except where an essential service
component is used in the provision of this service). Phase II costs
are incremental costs, and specifically exclude fixed costs. It
follows that a company pricing its services at the imputation test
price floor would not recover all of its fixed costs. The Commission
agrees with the companies and BCT'TELUS that requiring price reductions
to Phase II costs would not sustain a company's financial viability
over the long term.
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21. The Commission notes that London Telecom did not raise any
objections to the extension of the pricing police found to be appropriate
for NBTel, rather its comments addressed the type of process that
would be appropriate if a company found itself unable to meet its
price cap requirements.
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22. In Decision 97-9, the Commission established rules with respect
to the disposition of tariff filings under the price cap regime.
The Commission determined that it must be satisfied, where applicable,
that the imputation test requirements are met and that there are
no other concerns such as those relating to unjust discrimination,
consumer safeguard or privacy issues, and finally that no issues
relating to essential/bottleneck facilities are present. Subject
to these considerations, the Commission expressed its intention
to grant final approval to tariff filings, without waiting for comments
from interveners, where it is satisfied that the corresponding price
cap parameters are met.
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23.The Commission notes that the alternate proposals referred
to by London Telecom would not fall under the criteria set out in
Decision 97-9 for final disposition of tariff applications without
waiting for comments from interveners. As such, these applications
would be subject to comments by interveners, and reply comments
by the applicants. The Commission notes, for example, the current
proceeding initiated by Telecom Public Notice CRTC
99-5 to review the frozen contribution rate policy.
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24.The Commission does not consider it necessary or appropriate
at this time to issue general policy guidelines that would inform
and direct future alternate proposals by incumbent local exchange
carriers subject to price cap regulation.
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IV CONCLUSION
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25.In light of the foregoing, the Commission finds it appropriate
to make final its determination with respect to NBTel, that it will
not require the company to file, for a service, a rate reduction
below its Phase II costs plus a mark-up of 25% in order for NBTel
to meet its price cap requirements, and to extend this pricing policy
to other incumbent local exchange carriers subject to price cap
regulation. The companies have the option to reduce rates to the
imputation test price floor.
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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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