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I Background
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1. |
In Review of regulatory framework,
Telecom Decision CRTC 94-19, 16 September
1994 (Decision 94-19), the Commission
developed a regulatory framework for the telecommunications industry intended
to allow all Canadians, over time, ubiquitous and affordable access to an
increasing range of competitively provided telecommunications services. At
the time of its release, the Decision 94-19
framework applied to certain large incumbent local exchange carriers (ILECs)
including AGT Limited (AGT), BC TEL, Bell Canada, The Island Telephone
Company Limited (Island Tel), Maritime Tel & Tel Limited (MTT), The New
Brunswick Telephone Company Limited (NBTel) and Newfoundland Telephone
Company Limited (NewTel). |
2. |
Following the release of the Supreme Court of
Canada's decision in Attorney-General of Quebec et al. v. Téléphone
Guèvremont Inc, Québec-Téléphone (now TELUS Communications
(Québec) Inc. (TELUS Québec)) and Télébec ltée (now Société en commandite
Télébec (Télébec)) began to be regulated by the Commission under the
Telecommunications Act. An initial question faced by the Commission was
whether Télébec and TELUS Québec (collectively, "the Companies") should be
subject to the regulatory regime outlined in Decision
94-19. |
3. |
In Regulatory Framework for Québec-Téléphone
and Télébec ltée, Telecom Decision CRTC 96-5,
7 August 1996 (Decision 96-5), the
Commission decided that the regulatory framework set out in Decision
94-19 would apply to the Companies. Under
that framework, the Companies would eventually be subject to a transitional
period of earnings regulation, followed by price cap regulation. |
4. |
In Implementation of Regulatory Framework for
Québec-Téléphone and Télébec ltée, Telecom Decision CRTC
97-21, 18 December 1997 (Decision
97-21), the Commission approved a split
rate base regime for the Companies which divided their operations into
utility and competitive segments, effective 1 January 1998. The utility
segment relates mainly to the local and access operations of the companies
(the Utility Segment) and the competitive segment refers to services subject
to varying degrees of competition (the Competitive Segment). Decision
97-21 also initiated a transitional period
of earnings regulation, beginning 1 January 1998, for the Companies' Utility
Segments. This transitional period was deemed necessary in order to create
conditions conducive to price regulation; more specifically, to bring local
service rates closer to costs and decrease the subsidy provided by long
distance services. |
5. |
Earlier in 1997, the Commission had issued
Price cap regulation and related issues, Telecom Decision CRTC
97-9, 1 May 1997 (Decision
97-9). This decision established the price
regulation framework applicable to AGT and BC TEL (now TELUS Communications
Inc. (TELUS)), MTS Netcom Inc. (MTS), Bell Canada, and Island Tel, MTT, NBTel
and NewTel (now Aliant Telecom Inc. (Aliant Telecom)). Implementation details
of the price cap framework were decided in Implementation of price cap
regulation and related issues, Telecom Decision CRTC
98-2, 5 March 1998 (Decision 98-2). |
6. |
The Commission initiated a proceeding to
determine the appropriate form of price regulation for the Companies in
Implementation of price cap regulation for Québec-Téléphone and Télébec,
Public Notice CRTC 2001-36, 13
March 2001 (PN 2001-36). The
Commission indicated that the price regulation regime would commence in 2002. |
7. |
On the same date, the Commission also issued
Price cap review and related issues, Public Notice CRTC
2001-37, 13 March 2001 (PN
2001-37), initiating a
proceeding to review the Decision 97-9 price
cap regime and to establish the terms of the next price regulation regime for
Aliant Telecom, Bell Canada, MTS, Saskatchewan Telecommunications (SaskTel)
and TELUS (collectively, "the other large ILECs"). |
8. |
In PN
2001-36, the Commission noted that it was also issuing PN
2001-37. In order to permit
parties to the PN 2001-36
proceeding to have access to the evidence, interrogatories and argument of
parties in the PN 2001-37
proceeding prior to making their filings in the PN
2001-36 proceeding, the
Commission set the deadlines for the filing of materials in the present
proceeding some two weeks later than the PN
2001-37 filing deadlines. |
9. |
The Commission issued its determinations arising
from the PN 2001-37 proceeding
in Regulatory framework for the second price cap period, Telecom
Decision CRTC 2002-34, 30 May 2002 (Decision
2002-34 That decision set out, among other
things, the price regulation regime for the next four years for the other
large ILECs. |
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Scope of the proceeding
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10. |
In PN
2001-36, the Commission indicated that the scope of the proceeding would
be twofold: first, to develop and implement an appropriate price cap
methodology for the Companies by establishing the principles and components
of price cap regulation; and second, to conduct a financial review for the
Companies in order to set just and reasonable going-in rates coincident with
the implementation of price cap regulation. |
11. |
With respect to the price regulation regime, the
Commission invited proposals on the principles and components of price
regulation for the Companies, including: |
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a) the components of a price cap formula,
including the appropriate measure of inflation, the level and applicability
of a productivity factor, and the treatment of any exogenous factors; |
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b) the definition and treatment of capped and
uncapped services; |
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c) the service basket structure; |
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d) the length of the price cap period; |
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e) the appropriate treatment of any Utility
Segment competitive service rates that may be excluded from the capped
services basket as well as the appropriate treatment of Competitive Segment
service rates that are subject to tariff regulation; |
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f) the appropriate self-correcting mechanism,
including an earnings-sharing overlay, as a measure of protection for
consumers against possible errors in setting the price cap parameters; |
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g) the appropriate ancillary regulation and
reporting requirements under the price cap proposals and how the
effectiveness of price cap regulation should be monitored; |
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h) the appropriateness of including a quality of
service component in the price cap regime, or other methods such as targeted
refunds to customers, to address inadequate service quality; and |
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i) the extent to which the Companies' adherence
to other benchmarks for consumer service, if any (e.g., billing policies,
consumer bill of rights), should be linked to the price cap regime and what
form any such benchmarks might take. |
12. |
The Commission indicated that the Companies'
proposals could also address whether there should be any departure from the
use of uniform parameters for the Companies to recognize company-specific
circumstances. |
13. |
In Telephone Service to High-Cost Serving
Areas, Telecom Decision CRTC 99-16,
19 October 1999 (Decision 99-16), the
Commission set a basic service objective (BSO) for telephone service in
Canada. To ensure that the telephone companies met that objective, the
Commission ordered all ILECs to either submit a service improvement plan
(SIP) for approval or show that they met and would continue to meet the BSO
in their respective areas. The Commission directed Télébec and TELUS Québec
to submit their SIPs in the present proceeding. |
14. |
As far as the financial review was concerned,
the Commission indicated that, in order to calculate the Companies' going-in
rates, it would examine the sum of any incremental revenue requirement
impacts arising from material changes that the Companies proposed to the
financial assumptions used to finalize their 2001 contribution requirements.
Those changes could include: |
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a) any SIP proposals; |
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b) any additional depreciation expense from
proposed changes to asset service lives over those reflected in the
determination of the 2001 contribution requirement; |
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c) any changes to the allowed Utility Segment
rate of return on common equity (ROE). In this regard, the Commission sought
comments as to why the Companies' going-in rates should not reflect the same
ROE and capital structure that were used in setting the other large ILECs'
initial going-in rates; |
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d) net annualized revenue impacts of pending and
planned tariff items; |
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e) adjustments for the amortization of any
deferral accounts; and |
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f) any proposed recovery of Phase III/Phase II
contribution shortfalls that may be warranted. |
15. |
The Commission also indicated that it would
review the continued application to the Companies of the restrictions on
basic toll prices established in Forbearance – Regulation of toll services
provided by incumbent telephone companies, Telecom Decision CRTC
97-19, 18 December 1997 (Decision
97-19). |
16. |
Finally, the Commission indicated that it would
deal with a number of issues related to the total subsidy requirement (TSR)
of the Companies. The Commission also invited proposals on the appropriate
treatment of rates in high-cost serving areas (HCSAs). |
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The proceeding
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17. |
Télébec and TELUS Québec were made parties to
the present proceeding and were directed to file evidence. |
18. |
The Commission also invited evidence and
submissions from interested parties. A total of 20 interested parties
registered to participate in the proceeding. However, Action Réseau
Consommateur, the Consumers' Association of Canada, Fédération des
associations coopératives d'économie familiale, and the National Anti-Poverty
Organization (ARC et al.) was the only party, other than Télébec and TELUS
Québec, to file evidence. ARC et al. also submitted comments on the
Companies' proposals, as well as final argument and reply argument. |
19. |
The Commission received 316 letters and several
petitions containing a total of 563 signatures. Of those letters, 287 (91%)
were from Télébec subscribers. |
20. |
An oral hearing was held in Québec City from 13
November to 15 November 2001 before Commissioners Jean-Marc Demers (chairman
of the hearing), David Colville and Andrée Noël. |
21. |
The oral hearing began with comments from the
general public, followed by opening remarks from each of the Companies and
ARC et al., followed by cross-examination of the evidence by the parties.
Final arguments were filed on 27 November 2001. Reply comments were filed on
11 December 2001. |
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II Design of the price regulation regime
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The circumstances of Télébec and TELUS Québec
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22. |
As noted above, the Commission concluded in
Decision 96-5, and reiterated in subsequent
decisions, that it is appropriate to apply the same regulatory framework to
the Companies as it applies to the other large ILECs. Nonetheless, when
establishing the price regulation regime for the Companies, including setting
going-in rates, it is necessary to consider the Companies' specific
circumstances in order to determine the appropriate regulatory mechanisms and
parameters. |
23. |
In the present proceeding, the Companies put
forward proposals that were similar to those filed by their affiliated
companies in the PN 2001-37
proceeding. However, the Companies' proposals included certain differences
which, in their view, indicated that they operate under unique circumstances. |
24. |
In contrast, ARC et al. submitted that Télébec
and TELUS Québec did not provide conclusive evidence to warrant them being
treated differently from the other large ILECs. On the contrary, ARC et al.
argued that the Companies should be subject to the same price regulation
regime as the Commission would develop for the other large ILECs pursuant to
the PN 2001-37 proceeding. |
25. |
In the Commission's view, while it is true that
the Companies face their own unique operating circumstances, the price
regulation regime set out in this Decision is sufficiently flexible to
accommodate these differences. |
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Prospects for local competition
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26. |
In designing the price regulation regime for the
Companies, including the appropriate basket structure and pricing
constraints, the Commission considers it essential to take into account the
prospects for local competition in the territories of the Companies. The form
of regulation depends, in part, on the extent to which market forces can be
relied on to discipline the Companies' behaviour. |
27. |
In Commission approves terms and conditions
for local exchange and local payphone competition in the territories of TELUS
Communications (Québec) Inc. and Télébec ltée, Order CRTC
2001-761, 3 October 2001 (Order
2001-761), the Commission
determined that local exchange and local payphone competition would be
permitted as of 1 September 2002 in the territories of the Companies. In
Order 2001-761, the Commission
set terms and conditions for local competition that are similar to those
applicable in the territories of the other large ILECs. |
28. |
In the present proceeding, both Télébec and
TELUS Québec submitted that the cost of providing local service in their
territories was higher than in the territories of the other large ILECs.
Nonetheless, the Companies stated that they expected competition to develop
in the local business market once it was permitted. They also noted that the
tariffs of both Companies permit resale of local services. |
29. |
Télébec submitted that in local markets it faced
competition from Centrex resellers and from resellers of services such as
digital network access and interexchange circuits. In support of its
position, Télébec provided forecast market share information, on a
confidential basis, for Centrex lines that would be used by resellers for
competitive purposes. Télébec also provided similar confidential information
for digital network access and interexchange private line markets. |
30. |
TELUS Québec expected competition to develop for
business exchange services, particularly from Bell Canada. TELUS Québec
submitted that Bell Canada was providing service to the head offices of many
companies in Québec and could easily serve these companies' branches in TELUS
Québec's territory. In support of its position, TELUS Québec provided
forecast market share information, on a confidential basis, regarding the
business access market and Centrex lines. |
31. |
TELUS Québec anticipated that Cogeco Cable
Canada inc. (Cogeco), a cable distributor in TELUS Québec's territory, would
enter the market for residential exchange services since, in TELUS Québec's
view, it would not make business sense for Cogeco not to use its
bi-directional network to provide telecommunications services. |
32. |
ARC et al. noted that according to the Report
to the Governor in Council: Status of Competition in Canadian
Telecommunications Markets and Deployment/Accessibility of Advanced
Telecommunications Infrastructure and Services, September 2001 (GIC
Report), competitive entry into the business market had occurred only in
large urban centres. ARC et al. also noted that there were no large urban
centres in the territories of either Télébec or TELUS Québec. In light of
these two facts, ARC et al. submitted that it was questionable whether
effective competition would develop in the Companies' territories. |
33. |
ARC et al. noted that TELUS Québec had not
submitted a market analysis in support of its views. ARC et al. argued that
geographic and economic realities would make it difficult for Bell Canada to
compete in TELUS Québec's territory. ARC et al. submitted that strategic
considerations might limit Bell Canada's competitive impact, since, if Bell
Canada were to make inroads into TELUS Québec's territory, TELUS Québec could
also expand into Bell Canada's territory, with financing from TELUS Québec's
parent, TELUS. |
34. |
RSL COM Canada Inc. indicated that it did not
plan to enter the market for primary local exchange services in the
territories of Télébec and TELUS Québec. In response to a Commission
interrogatory, Rogers Communications Inc. stated that it was not providing
wire-line services in the Companies' territories and that it did not expect
any impact from local competition in the Companies' territories on its
revenues. Bell Canada indicated that it had not made any decision whether or
not to enter TELUS Québec's local market. Bell Canada also indicated that it
had recently begun providing other wire-line services in TELUS Québec's
territory and that it did not provide wire-line services in Télébec's
territory. |
35. |
The Commission considers that local competition
in the Companies' territories will likely begin in the business market and be
concentrated in urban areas. Competitors without facilities could serve the
business access market through resale of the Companies' services and
facilities, especially Centrex service where Télébec and TELUS Québec offer
this service. The Commission notes that, where available, Centrex service may
generally be obtained at discounts that depend on national volumes,
permitting profitable Centrex resale through volume aggregation. Thus, the
Commission considers that some resale competition is likely. |
36. |
Further, the Commission is of the view that once
local competition becomes possible, national or regional organizations with
offices or plants in the territories of Télébec and TELUS Québec could elect
to receive local service, as well as other telecommunications services, from
a single supplier. |
37. |
Given that Bell Canada's serving territory is
adjacent to that of TELUS Québec, the Commission is of the view that Bell
Canada could enter either as a facilities-based carrier or as a reseller. If
this were to occur, TELUS Québec would face competition in the business
market, especially in parts of its territory close to Bell Canada's
facilities. |
38. |
The Commission does not anticipate significant
facilities-based entry into the market for residential services. If
competitors enter certain exchanges to serve large business customers, they
could also serve residential customers. However, the Commission considers
that such limited competition will not be sufficient to protect the interests
of residential subscribers. |
39. |
The Commission notes TELUS Québec's submission
that Cogeco may enter the local residential services market. However, the
Commission is of the view that possible entry by cable distributors during
the upcoming price cap period is unlikely to limit the Companies' market
power in the market for residential services in their serving territories. |
40. |
The Commission notes that residential optional
local services may also be resold. However, as these services are not
available at volume discounts, the Commission does not consider that a resale
market for these services is likely to develop. While competitors with their
own facilities would be in a position to offer such services profitably, and
since the Commission does not expect significant facilities-based residential
competition in the foreseeable future in the territories of the Companies, it
is of the view that the Companies will face little, if any, competition for
residential optional local services. |
41. |
Accordingly, the Commission does not anticipate
that competition will be sufficient to discipline the Companies' residential
local exchange and residential optional local service rates during the price
cap period. |
42. |
In light of the prospects for local competition
over the next several years, the Commission has established a price
regulation regime for the Companies that places regulatory constraints on
particular services, while still providing the benefits and incentives of
price cap regulation. Details of the regime are set out in Parts III, IV and
V of this Decision. |
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Objectives of the price cap regime
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43. |
In Decision 2002-34,
the Commission identified a number of objectives for the price regulation
regime applicable to the other large ILECs. Those objectives were as follows: |
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a) to render reliable and affordable services of
high quality, accessible to both urban and rural area customers; |
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b) to balance the interests of the three main
stakeholders in telecommunications markets, i.e., customers, competitors and
incumbent telephone companies; |
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c) to foster facilities-based competition in
Canadian telecommunications markets; |
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d) to provide incumbents with incentives to
increase efficiencies and to be more innovative; and |
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e) to adopt regulatory approaches that impose
the minimum regulatory burden compatible with the achievement of the previous
four objectives. |
44. |
In the present proceeding, Télébec, TELUS Québec
and ARC et al. were all of the view that the regime for the Companies should
resemble the regime developed for the other large ILECs. |
45. |
In light of the Commission's view that the
Companies should be subject to the same general regulatory regime as the
other large ILECs, the Commission considers it appropriate to set the same
objectives for the Companies' price regulation regime as for the regime
applicable to the other large ILECs. |
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46. |
An earnings sharing mechanism involves setting
an earnings threshold which, when reached, triggers the sharing of additional
revenues with customers – typically either through rebates or via other rate
adjustments. |
47. |
In PN
2001-36, the Commission sought comments on whether an earnings sharing
mechanism would be appropriate in the price cap regime for the Companies. |
48. |
Neither Télébec nor TELUS Québec supported the
inclusion of an earnings sharing overlay to the price cap regime. Both
submitted that the length of the price cap period would be sufficient to
ensure the protection of the various stakeholders. In addition, the Companies
expressed the view that allowing an exogenous factor in the price cap formula
(as discussed in Part IV of this Decision) would adequately address
unexpected circumstances or events during the price cap period. |
49. |
ARC et al. submitted that in establishing a
price cap regime for the Companies, the Commission needed to seek a balance
between the desire of consumers of telecommunications services to pay the
lowest rates possible, and that of the telephone companies' shareholders to
achieve the highest possible return on their investment. ARC et al. submitted
that a price cap regime with an earnings sharing overlay would be one way of
achieving this balance. In ARC et al.'s view, earnings sharing would ensure
that customers would not pay higher rates for services than necessary, based
on the cost of providing these services. |
50. |
In the Commission's view, an earnings sharing
mechanism would introduce elements of earnings regulation that would diminish
the incentive for the Companies to reduce their costs and improve
productivity. Further, in the Commission's view, any form of earnings
regulation would negate the regulatory streamlining benefits inherent in
price cap regulation, since most of the details relating to the current
reporting requirements would have to be maintained. Overall, the Commission
considers that the disadvantages of such an approach outweigh its benefits.
Consequently, the Commission has decided not to include an earnings sharing
overlay in the price regulation regime for Télébec and TELUS Québec. |
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Price cap period
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51. |
In PN
2001-36, the Commission invited comments on the length of the price cap
period to be applied to Télébec and TELUS Québec. |
52. |
Télébec proposed a four-year price cap period.
Télébec submitted that a longer period would expose the company to undue
risks associated with the rapidly evolving telecommunications industry while
a shorter period would not give the company the opportunity to benefit from
the advantages of the price cap regime. |
53. |
TELUS Québec proposed a price cap period of four
years with an automatic renewal for an additional three years, unless the
Commission felt it necessary to have a review in the last year of the initial
four-year period. TELUS Québec also proposed that the Commission allow
interested parties the opportunity to request a revision in the last year of
the initial four-year price cap period. |
54. |
No other party commented on the length of the
price cap period. |
55. |
The Commission agrees with the Companies that a
four-year plan would allow the benefits of price cap regulation to be
realized, while providing for the possibility of a timely adjustment to
correct the regulatory framework for any errors in its structure or to
reflect the evolution of competition over the price cap period. Accordingly,
the Commission determines that the price cap period will be for a four-year
term. |
56. |
The Commission notes that automatic extensions
to the four-year price cap period, as proposed by TELUS Québec, could result
in staggered price cap periods among the Companies and the other large ILECs.
This could favour some ILECs over others, depending on market conditions and
other factors present at the time of a particular review. As well, plan
assessments performed at different times would result in administrative
inefficiency. |
57. |
The Commission considers that a review toward
the end of the price cap period offers the Commission the best opportunity to
examine how well the plan is working and to modify the regulatory framework,
as necessary. Accordingly, the Commission determines that a review of the
price cap regime will be initiated in the final year of the plan. |
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III Services, baskets and pricing constraints
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58. |
As noted above, the Commission concluded in
Decision 96-5 that the same basic regulatory
framework as the Commission had developed for the other large ILECs in
Decision 94-19 should apply to Télébec and
TELUS Québec. The Commission noted that this framework would eventually
include price regulation. |
59. |
The Commission established the initial price cap
regime for the other large ILECs in Decisions
97-9 and 98-2. In Decision
97-9, the Commission imposed an overall
price cap constraint equal to inflation less a productivity offset on
revenues from a single basket of ILEC services. This basket was divided into
three sub-baskets that were also subject to additional sub-basket, service or
rate element pricing constraints: |
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- Basic residential local services;
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- Single and Multi-line Business local services; and
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60. |
Services that were priced to
maximize contribution before the implementation of price caps, such as
optional local services, and services for which the Commission considered
that a price cap would be redundant, such as Special Facilities Tariffs
(SFTs), were generally not assigned to a capped services sub-basket.
Competitor Services, as defined in Decision 98-2,
were also not included in capped services. Rates for certain other services,
such as 9-1-1 service and Message Relay Service, were subject to a price
freeze over the four-year price cap period. |
61. |
In PN
2001-36, the Commission
directed Télébec and TELUS Québec to file proposals with regard to the
principles and components of price cap regulation for themselves, including
but not limited to: |
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a) the definition and treatment of
capped and uncapped services; |
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b) the service basket structure; |
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c) the appropriate treatment of any
Utility Segment competitive service rates that may be excluded from the
capped services basket as well as the appropriate treatment of Competitive
Segment service rates that would be subject to tariff regulation; and |
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d) whether or not any departure from
the use of uniform parameters for either telephone company is appropriate. |
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General
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62. |
Télébec, TELUS Québec and ARC et al.
were the only parties who provided specific comments on how the next price
regulation regime should be designed. |
63. |
The Companies' proposals were
significantly different from one another, as well as from the initial price
cap regime established in Decision 97-9 for
the other large ILECs. However, aspects of the Companies' proposals were
similar to those submitted in the proceeding leading to Decision
2002-34. |
64. |
In particular, Télébec proposed a
basket structure similar to that proposed by its affiliate, Bell Canada, but
with different pricing constraints. TELUS Québec's proposal was similar to
that of its affiliate, TELUS, in respect of the proposed basket structure and
pricing constraints. Furthermore, TELUS Québec argued that it should be
subject to the same regulatory framework that would be established for the
other large ILECs provided that modifications were made to certain specific
price cap parameters. |
65. |
The proposal of ARC et al. was
substantially the same as its proposal in the PN
2001-37 proceeding. In ARC et
al.'s view, the Companies should be subject to the same form of price
regulation as would be established for the other large ILECs. In general, ARC
et al. was of the view that the initial price cap regime established in
Decision 97-9 for the other large ILECs was
flawed. ARC et al. submitted that the Commission should learn from past
experience and take the opportunity to establish a regime that balanced the
interests of the three main stakeholders (i.e., consumers, ILECs and
competitors). |
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Télébec's proposal
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66. |
Télébec's proposal assigned Utility
Segment services to the following categories: |
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a) services subject to an upward
pricing constraint; and |
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b) services not subject to an upward
pricing constraint. |
67. |
Télébec took the position that a
productivity offset should not apply to any basket or sub-basket of services
or to Utility Segment revenues as a whole. Télébec proposed that a
productivity offset should apply only to the costs for residential local
exchange service in HCSAs. |
68. |
Télébec noted that its business
primary exchange service (PES) revenues represented only 27% of its total PES
revenues. Télébec submitted that, since residential rates were not
compensatory, establishing a link between the residential and business
sub-baskets under an overall price cap constraint would result in strong
pressure to lower business rates. The company argued that this would result
in lower local rates for business services which, in turn, could dampen the
incentive for competitive entry. |
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Services subject to upward
pricing constraints |
69. |
Télébec assigned its services that
would be subject to upward pricing constraints to the following service
groupings: Basic Residential Local Services, Basic Business Local Services,
Other Capped Services, services with frozen rate treatment. The company also
proposed that it receive a special subsidy from the national contribution
fund (NCF). |
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1) Basic Residential Local
Services |
70. |
As discussed in more detail in Part
IX of this Decision, Télébec proposed residential individual
line service rate increases to take effect during the price cap period.
Télébec requested: (1) monthly rate increases of $4.17 and $3.52 for
residential individual line service in rate bands N1 and N2, respectively, in
2002; (2) a $3.33 monthly rate increase in 2003 for residential individual
line service in rate bands N1, N2 and N3; and (3) residential monthly rate
increases to take effect in 2004 and 2005 that the company would propose,
following the decision in the proceeding initiated by Implementation of
competition in the local exchange and local payphone markets in territories
of Télébec and TELUS (Québec), Public Notice CRTC 2001-69,
14 June 2001 (PN 2001-69).
Télébec proposed no other upward pricing constraints on these services. |
71. |
Télébec submitted that its proposed
pricing flexibility was essential for the harmonious introduction of a price
cap regime. The company stated that the rate increases proposed for 2002 and
2003 were necessary to bring rates closer to costs. Télébec also indicated
that its proposed banding structure in the PN
2001-69 proceeding would
differ from the banding structure established in Restructured bands,
revised loop rates and related issues, Decision CRTC
2001-238, 27 April 2001 (Decision
2001-238) for the other large ILECs. As
such, Télébec anticipated a need for residential PES rates to increase in the
years 2004 and 2005 to continue to bring rates closer to costs. |
72. |
Télébec proposed rate increases that
would result in additional revenues of $0.5 million and $5.1 million in 2002
and 2003, respectively. Télébec suggested that, notwithstanding the pricing
flexibility requested, residential local rates would remain affordable.
Télébec noted that, if its proposal were approved, residential local rates in
all its exchanges would rise to $34.43. Télébec submitted that this rate had
already been deemed affordable when it was approved by the Commission for
certain Télébec exchanges. Further, Télébec noted that the rates it would
propose in 2004 and 2005 would be developed by the company following the
outcome of the proceeding initiated by PN
2001-69 and would be subject
to Commission approval during the price cap period. |
|
2) Business and Other Capped
Services |
73. |
Télébec submitted that average price
changes should be constrained by the rate of inflation each year for those
services assigned to the business and other capped services group. Télébec
also proposed an annual 10% limit on price increases for these services at
the rate element level. The company argued that this pricing flexibility
would encourage the growth of local competition in the business market.
Télébec also submitted that such flexibility would provide the incumbents
with incentives to increase efficiencies and to be more innovative, which
would allow them an opportunity to earn a fair return on their investments. |
|
3) Services with frozen rate
treatment |
74. |
Télébec was in agreement with the
approach taken in Decisions 97-9 and
98-2 whereby the Commission froze the rates
or terms of certain services (e.g., 9-1-1 service, Message Relay Service)
given the nature of these services. |
|
4) Special Subsidy |
75. |
Télébec argued that it should
receive an annual recurring special subsidy of $12.3 million from the NCF for
the duration of the price cap period in order to recover its going-in revenue
requirement shortfall. Télébec submitted that its rate proposal would permit
a gradual reduction in its proposed special subsidy since additional revenues
resulting from the rate increases would be directed towards reduction of the
subsidy. |
|
Services not subject to an upward
pricing constraint |
76. |
Télébec submitted that a service
should not be subject to upward pricing constraints if any of the following
conditions were met: |
|
- the service was subject to sufficient competition to discipline
pricing;
|
|
- the service was discretionary; or
|
|
- the service was a substitute for services whose rates were constrained
by market forces or regulatory pricing constraints.
|
77. |
On this basis, Télébec proposed that
there be no upward pricing constraint imposed on the following baskets of
services: |
|
a) a "value added" services basket
that would include services such as Centrex, Megalink and Microlink; |
|
b) an "other non-capped services"
basket that would include services such as optional and special facilities
and assemblies; |
|
c) a competitor services basket that
would include services such as equal access, and switching and aggregation;
and |
|
d) a payphone services basket. |
78. |
Télébec argued in favour of the
assignment of services to these four sub-baskets and the absence of upward
pricing constraints primarily on the ground that competition would develop in
its territory. Télébec noted that toll competition was well established and
that local and payphone competition would be introduced in its serving
territory on 1 September 2002. |
79. |
Télébec submitted that the
Commission should allow payphone rates to be adjusted in accordance with
costs. The company recommended that no price cap be imposed on payphone
services. |
|
TELUS Québec's proposal
|
80. |
TELUS Québec proposed that all
Utility Segment services except residential local service in HCSAs be
uncapped and placed into one of three categories: |
|
a) non-forborne services subject to
both an upper pricing constraint and a price floor; |
|
b) non-forborne services subject
only to a price floor; or |
|
c) forborne services that are not
subject to pricing constraints. |
81. |
TELUS Québec noted that forborne
services were constrained by the terms and conditions on which forbearance
was granted. TELUS Québec's proposal with respect to local payphone services
is discussed separately below. |
|
Non-forborne services subject to
an upper pricing constraint and a price floor |
|
1) Residential local exchange
service |
82. |
TELUS Québec requested the
flexibility to increase rates for residential local exchange service
(including extended area service) by an annual maximum of $2.50, to a maximum
monthly rate of $31.00, to be reached over the four-year price cap period.
TELUS Québec noted that the rate increases in HCSAs would be offset by an
equivalent reduction in its TSR. |
83. |
TELUS Québec submitted that an
imputation test would continue to apply to these services. It argued that a
monthly rate of $31.00 was affordable, and had been deemed so by the
Commission when it approved the current rate for Télébec ($34.43). |
84. |
TELUS Québec argued that any
proposal to limit price increases to residential services to a greater degree
than it proposed could limit competitive entry in non-HCSAs and would delay
these rates from reaching market levels. The company submitted that
competitors would pick and choose only attractive markets where the rates
were compensatory. TELUS Québec also argued that competitors had an advantage
over the company, considering its obligation to serve. |
|
2) Services with frozen rates |
85. |
TELUS Québec proposed to freeze
rates for services with social welfare considerations and public safety
concerns at their current rates. These services include 9-1-1 service,
Message Relay Service and Toll restriction service. |
|
3) Competitor Services |
86. |
TELUS Québec proposed that
Competitor Services be priced at Phase II costs plus an approved mark-up. |
|
4) Business local exchange
service |
87. |
TELUS Québec proposed that there not
be any pricing constraint imposed on rates for business local exchange
services. TELUS Québec noted that the imputation test would continue to apply
to these services. The company was opposed to the application of an
additional pricing constraint on these services on the basis that doing so
would further limit its pricing flexibility. |
|
5) Subsidy |
88. |
TELUS Québec proposed that an upper
pricing constraint equal to inflation minus productivity be applied to the
TSR. |
|
Non-forborne services subject
only to a price floor |
89. |
TELUS Québec proposed that rates for
those non-forborne Utility Segment services that were not included in the
baskets described above should be subject to a price floor to protect against
anti-competitive below-cost pricing. The company noted that the Commission's
current imputation test, established for the other large ILECs, would
determine the price floor. |
90. |
TELUS Québec did not support the
application of a pricing constraint to optional local service rates on the
basis that these services were discretionary in nature. It further submitted
that the rate increases on these services would be subject to Commission
approval to ensure that rates levels would continue to be appropriate. |
91. |
TELUS Québec argued that its pricing
flexibility proposal for optional services was warranted on the grounds that
competition could be expected to develop for these services. TELUS Québec
argued that it should be afforded the opportunity by the Commission to
respond to market conditions. |
|
Comments on the Companies' proposals
|
92. |
ARC et al. argued that the
Companies' residential customers had seen their rates significantly increase
over the last few years. ARC et al. noted that Télébec's subscribers
currently pay the highest telephone rate in Canada for basic telephone
service. ARC et al. also noted that TELUS Québec's residential monthly rates
had risen from approximately $14.00 in 1995 to the current rate of $23.50. |
93. |
ARC et al. submitted that the
further rate increases proposed by the Companies over the price cap period
would be significant to consumers. |
94. |
ARC et al. also argued that the
proposals submitted by Télébec and TELUS Québec as part of this proceeding
would not properly balance the interests of the three main stakeholders and
should be rejected. |
|
ARC et al.'s proposal
|
95. |
ARC et al. submitted that the other
large ILECs had been able to make significant productivity gains and had
earned consistently higher than normal rates of return on equity over their
initial price cap period. ARC et al. also noted that at the same time,
residential customers had been subjected to ever increasing rates for local
service, that few competitors had entered the residential markets and that a
number of competitors had failed. ARC et al. submitted that the result was
that not enough of the productivity gains generated by the industry under
price cap regulation had accrued to residential subscribers. |
96. |
ARC et al. argued that the
Commission should learn from its experience with the initial price cap regime
established for the other large ILECs, to ensure that imbalances in benefits
that had occurred would be avoided in the price cap regime established for
Télébec and TELUS Québec. |
97. |
ARC et al. submitted that it would
be appropriate to establish the same basket structure and pricing constraints
for Télébec and TELUS Québec as those established for the other large ILECs
pursuant to the PN 2001-37
proceeding. |
98. |
ARC et al. argued that Télébec and
TELUS Québec were similar enough in size, operating structure, and faced
comparable geographical and territorial challenges to those faced by a number
of the other large ILECs. ARC et al. further argued that the Companies could
achieve significant productivity gains over their price cap period,
particularly considering their affiliations with larger ILECs (i.e., Télébec
with Bell Canada and TELUS Québec with TELUS). |
99. |
ARC et al. proposed the following
basket structure and price constraints which, in its view, would balance the
interests of the three main stakeholder groups: |
|
- For the Residential service basket, a price cap index (PCI) would be
set to equal inflation less productivity. Further, the price of any
individual rate element would not be allowed to increase by more than
inflation on an annual basis.
|
|
- For the Business service basket, no price cap formula would apply.
Instead, an individual rate element would not be allowed to increase by
more than 10% per annum.
|
|
- For the Optional local services basket, the PCI would be set to equal
inflation. Further, the price of an individual rate element would not be
allowed to increase by more than 10% per annum.
|
|
Commission consideration of parties' proposals
|
100. |
While it considers that certain
aspects of the proposals had merit, the Commission is of the view that no
party submitted a proposal that would adequately balance the interests of
customers, competitors and ILECs. |
101. |
The Commission notes that Télébec
and TELUS Québec did not propose that either customers or competitors would
receive any of the benefits of the productivity gains that they can be
expected to achieve under price regulation. At the same time, as discussed in
Part II of this Decision, the Commission is not convinced that certain
markets will be sufficiently competitive to discipline the Companies' prices.
The Commission therefore considers the proposals made by the Companies to be
unsuitable. |
102. |
The Commission notes that the
proposal of ARC et al. focused primarily on ensuring that residential
customers would benefit from a proportionate share of the productivity gains
to be achieved by the Companies under price regulation. In the Commission's
view, ARC et al.'s proposal would result in residential rate decreases that
would discourage competitive entry in the serving territories of Télébec and
TELUS Québec. If implemented without modification, ARC et al.'s proposal
would not adequately take into account the Commission's objective of
fostering facilities-based competition. The Commission therefore declines to
adopt the proposal made by ARC et al. |
103. |
As discussed in Parts I and II of
this Decision, the Commission has indicated in a number of decisions its
intention to establish the same general regulatory regime for the Companies
as it has developed for the other large ILECs. The Commission notes that all
three parties to the present proceeding filed proposals which were similar to
proposals submitted in the proceeding leading to Decision
2002-34. The Commission also notes ARC et al.'s
suggestion that the Companies be subject to the same price regulation regime
as is developed for the other large ILECs. |
104. |
In light of the above, and in order
to meet the objectives identified in Part II of this Decision, the Commission
has decided to adopt a regulatory framework which, while drawing on certain
elements of the proposals of the parties, closely resembles the regime
established in Decision 2002-34 for the other
large ILECs. Specifically, the Commission has decided to introduce a price
cap regime that involves multiple baskets and service groups with
individualized basket constraints, as well as specific rate element
constraints in some cases. The overall scheme of the framework is illustrated
in Figure 1. |
105. |
In the Commission's view, this
framework allows regulatory constraints to be focused on particular services,
while still providing the benefits and incentives of price cap regulation.
However, in order to avoid the possibility that the operation of the price
cap constraints might force price reductions that could have a negative
impact on the development of local competition, the Commission has included a
deferral account mechanism. The full rationale for and operation of the
deferral account is discussed in the context of the relevant service basket. |
|
General conclusions regarding the basket structure and
the application of a productivity offset
|
106. |
In a price cap regime, a
productivity factor or offset is generally applied to a basket of services if
competition in those services is insufficient to ensure that subscribers will
benefit from productivity gains. Consequently, a decision to group services
into a single basket and apply a productivity factor involves an assessment
of whether competition sufficient to discipline prices exists for those
services. |
107. |
In Part II of this Decision, the
Commission discussed the general environment under which Télébec and TELUS
Québec operate, as well as the prospects for the development of local
competition in their serving territories. Based on that analysis, the
Commission has reached the following conclusions regarding the general
grouping of services into baskets and the need for a productivity offset. The
classification of specific services within these baskets is dealt with later
in this Part. |
|
Residential market
|
108. |
As discussed in Part II of this
Decision, significant competition is not expected to develop over the next
several years in the residential local exchange and optional local services
markets of Télébec and TELUS Québec. Consequently, the Commission does not
anticipate that competition will be sufficient to discipline the Companies'
residential local exchange and residential optional local service rates
during the price cap period. |
109. |
In light of the above, the
Commission considers it appropriate, with the exception of services provided
in HCSAs, to subject residential services to a productivity offset. The
treatment of residential services in non-HCSAs, as well as a full explanation
of the basket structure for these services in HCSAs, is set out below. |
|
Business market
|
110. |
The Commission notes that none of
the parties proposed that a productivity offset be applied to business
services. As discussed in Part II of this Decision, facilities-based
competition in markets for business local exchange services in the Companies'
serving territories will probably be concentrated in urban areas. Competitors
are already established in some exchanges that are adjacent to the serving
territories of Télébec and TELUS Québec. Finally, some competition already
exists, notably through Centrex resale. |
111. |
In order to ensure a proper balance
among stakeholders, and given that competition is likely to develop first in
the business market, the Commission considers that it would not be
appropriate to subject these services to a productivity offset. |
|
Market for Other capped services
|
112. |
In Decision
97-9, the Commission assigned a number of
services offered by the other large ILECs to Other capped services (e.g.,
Digital Network Access). The Commission notes that Télébec and TELUS Québec
offer these same services. Further, the Companies' rates for these services
were often established based on the rates of large ILECs, typically those of
Bell Canada and TELUS. |
113. |
While competitors are likely to
attempt to enter the markets for services identified as Other capped
services, they are not likely to make significant inroads into these markets,
since the pricing of these services is such that resale would not be a viable
option. Accordingly, the Commission considers that there will not be
sufficient competition to discipline the rates for Other capped services. |
114. |
The Commission also notes that
technological advances continue to reduce the cost of providing many of these
services. The Commission considers it reasonable to expect that Télébec and
TELUS Québec will achieve productivity and efficiency gains with respect to
these services over the next few years. Accordingly, the Commission finds it
appropriate to subject these services to a productivity offset. |
|
Market for non-forborne Competitive Segment services
|
115. |
In Decision
97-21, the Commission assigned services to
Télébec's and TELUS Québec's Competitive Segments based chiefly on the
consideration that competition was permitted in these services at that time.
Most of the services assigned to the Competitive Segment, however, are
offered in markets that are not sufficiently competitive to support a
decision to forbear from regulation of the services pursuant to section 34 of
the Telecommunications Act. |
116. |
The Commission notes that it has
received no applications from Télébec or TELUS Québec to reduce rates for
non-forborne Competitive Segment services. In fact, both Companies have filed
applications to raise rates for some of these services over the last few
years. In the Commission's view, non-forborne Competitive Segment services
are offered in markets that have not been sufficiently competitive to
discipline rates for these services. The Commission considers that it is
necessary to apply a productivity offset to non-forborne Competitive Segment
services to ensure that customers derive some benefit from productivity and
efficiency gains that will be achieved by the Companies. The Commission
accordingly concludes that it is appropriate to include non-forborne
Competitive Segment services in the price cap framework and to subject them
to a productivity offset. |
117. |
As determined later in this
Decision, the Commission has decided to include non-forborne Competitive
Segment services in the Other capped services basket. |
|
Market for Competitor Services
|
118. |
In Decision
2002-34 the Commission established two categories of Competitor Services.
Category I Competitor Services were those services deemed to be in the nature
of an essential service. Competitor Services not classified as Category I
were assigned to Category II Competitor Services. |
119. |
The Companies offer a number of
services comparable to the services classified as Competitor Services in
Decision 2002-34. In the Commission's view, there
are few, if any, competitive alternatives for those of the Companies'
services which are comparable to services classified as Category I Competitor
Services under Decision 2002-34. The Commission
is also of the view that the Companies, like the other large ILECs, are
likely to experience productivity and efficiency gains in respect of these
services. Consequently, the Commission concludes that rates for those of the
Companies' services that will be classified as Category I Competitor Services
should reflect productivity gains on an ongoing basis. |
120. |
In Decision
2002-34, the Commission determined that it would not be appropriate to
apply a productivity offset to the rates for Category II Competitor Services.
The rates for these services were either mandated or market-based and were
based on considerations in addition to or other than Phase II costs. The
Commission also considers that the rates for services that will be classified
as Category II Competitor Services for Télébec and TELUS Québec should not be
subject to a productivity offset. |
|
Basket structure and pricing constraints: specific
conclusions
|
|
General
|
121. |
In this proceeding, Télébec, TELUS
Québec and ARC et al. argued in favour of establishing specific price cap
constraints for individual service baskets rather than an overall price cap
constraint. The Commission agrees that it is preferable to design constraints
that can be tailored to more closely match the circumstances of individual
baskets or groups of services. |
122. |
The Commission has determined that
two different types of constraints will be in effect in the price cap regime
established for the Companies. First, there will be "basket constraints" that
will impose a constraint on the revenues derived from a basket or sub-basket
of the Companies' services. Basket constraints will apply on an annual basis
and operate through service basket limits. The second type of constraint is a
"rate element constraint" that will impose a restriction on the price of a
specific service. A service that is subject to a basket constraint will, in
many cases, also be subject to a rate element constraint. |
123. |
The Commission notes that the basket
structure and pricing constraints adopted in this Decision reflect its view
of the expected state of competition and the degree to which market forces
will be sufficient to protect customers by disciplining the Companies'
pricing during the price cap period. They are also designed with a view to
fostering facilities-based competition and providing the Companies with
incentives to increase efficiencies and to promote innovation. |
|
Basket structure for residential local exchange services and residential
optional local services
|
124. |
As discussed in Part II of this
Decision, the Commission does not anticipate that competition will be
sufficient to discipline the Companies' residential local exchange and
residential optional local service rates during the price cap period.
Accordingly, these services will be subject to the basket structure and
pricing constraints discussed below. |
125. |
TELUS Québec was of the view that
there should be separate baskets for residential local exchange services in
HCSAs and non-HCSAs, while Télébec's proposal did not differentiate between
HCSAs and non-HCSAs. |
126. |
Given that significantly different
circumstances will apply in HCSAs and non-HCSAs, the Commission concludes
that it is appropriate to establish two baskets for residential local
services for these companies: a basket of residential local services in HCSAs
and a basket of residential local services in non-HCSAs. Each of these
baskets will include both residential local exchange services and residential
optional local services. |
127. |
The Commission notes that Télébec
and TELUS Québec do not currently offer bundles that include a residential
local exchange service or a residential optional local service with other
telecommunications services. The Commission notes that, from the perspective
of a residential customer, service bundles would be discretionary. In view of
this, the Commission finds it appropriate to consider service bundles that
would include a residential local exchange service or a residential optional
local service as a residential optional local service. In the event that
Télébec or TELUS Québec choose to offer such service bundles, the revenues
derived from these service bundles will be included in the calculation of the
revenues for the HCSA residential local services basket or the non-HCSA
residential local services basket, as appropriate. |
128. |
The Commission notes that different
pricing policy considerations apply to residential local exchange and
residential optional local services, including service bundles that include a
residential local exchange service or a residential optional local service.
As residential local optional services are discretionary, the Commission
considers that less price protection is warranted than for residential local
exchange service. |
129. |
In light of these differences, the
Commission concludes that each basket of residential services should be
divided into two sub-baskets: a sub-basket of residential local exchange
services and a sub-basket of residential optional local services which
includes service bundles that include a residential local exchange service or
a residential optional local service. |
130. |
The constraints applicable to the
two residential services baskets and their respective sub-baskets are
discussed in the following sections. |
|
Residential local exchange
services and residential optional local services in non-HCSAs |
131. |
As indicated above, the Commission
has concluded that it does not anticipate that market forces will be
sufficient to discipline the Companies' prices for residential local exchange
and residential optional local services during the price cap period and that
a productivity offset should be applied to these services in non-HCSAs. The
Commission therefore considers it appropriate to apply a basket constraint
equal to inflation less a productivity factor to the non-HCSA basket of
residential local services. |
132. |
As noted earlier, residential PES
costs have yet to be determined for Télébec and TELUS Québec. Further, the
Commission considers that it would be inappropriate to mandate reductions to
residential local service rates as such reductions might force rates below
compensatory levels. The Commission also considers that such reductions could
have a negative impact on the development of competition. Consequently, the
Commission has decided to use a deferral account mechanism to mitigate these
potential effects. |
133. |
With a deferral account mechanism,
an amount equal to the revenue reduction required by a basket constraint is
assigned to the deferral account and retained in that account, instead of
reducing the revenues of the basket by means of rate reductions. The monies
in the deferral account are then available for other purposes, including
possible subscriber rebates. |
134. |
The Commission considers that the
use of a deferral account for residential local services will assist in
achieving the objective of balancing the interests of the three main
stakeholders in telecommunications markets: customers, competitors and ILECs. |
135. |
The Commission notes that it has
implemented rate rebalancing initiatives over the last several years for both
Télébec and TELUS Québec. These initiatives and Commission determinations in
other decisions have brought rates much closer to the costs of providing
residential local service. This, in turn, has fostered competition in the
residential long distance market. The Commission considers that residential
local rate reductions that flow from market forces would be generally
preferable to mandated rate reductions. |
136. |
In light of the above and consistent
with its approach in Decision 2002-34, the
Commission concludes that, in non-HCSAs, it is appropriate to use a deferral
account in conjunction with the application of a basket constraint equal to
inflation less a productivity offset to all revenues from all residential
local services. Further, the Commission anticipates that an adjustment to the
deferral account would be made whenever the Commission approves rate
reductions for residential local services that are proposed by Télébec or
TELUS Québec as a result of competitive pressures. The Commission also
anticipates that the deferral account would be drawn down to mitigate rate
increases for residential service that could result from the approval of
exogenous factors or when inflation exceeds productivity as discussed below.
Other draw downs could occur, for example, through subscriber rebates or the
funding of initiatives that would benefit residential customers in other
ways. |
137. |
The Commission will review the
amount in each company's deferral account on an annual basis, no later than
the second year of the price cap period, at the time of the annual price cap
filings. Beginning in the second year, it is the Commission's intention to
dispose of amounts outstanding in the deferral account that accrued during
the previous year. The Commission intends to clear these amounts in a manner
that contributes to achieving the objectives for the price cap framework,
including balancing the interests of the three main stakeholders in the
telecommunications markets. Starting 1 August 2002, amounts in deferral
accounts will bear interest at the company's short-term cost of debt, which
is to be adjusted annually thereafter. |
138. |
In addition to the basket constraint
applied to the non-HCSA basket of local residential services as a whole, the
Commission considers it necessary to impose an additional basket constraint
on the sub-basket of basic local exchange services in non-HCSAs in order to
provide additional pricing protection to subscribers to these services. |
139. |
Accordingly, the Commission has
decided that the following basket constraint should apply to this sub-basket
of services: Télébec and TELUS Québec may, subject to the deferral account
mechanism, increase residential local exchange service rates in non-HCSAs, on
average, by inflation less the productivity offset in each year in which
inflation exceeds the productivity offset. If the productivity offset exceeds
inflation in a given year, then the average rates for residential local
exchange services assigned to their respective residential local exchange
service sub-baskets in non-HCSAs may not increase in that year. Should
Télébec and TELUS Québec choose not to increase residential local exchange
service rates in a given year to the extent permitted by this constraint,
they may use any unused "room" to increase residential local exchange service
rates in a subsequent year. Rate increases would still be subject to the rate
element constraint described below. |
140. |
However, the Commission is of the
view that rate element constraints are also required for the services in each
of the non-HCSA residential sub-baskets in order to provide additional
protection to Télébec and TELUS Québec subscribers. |
141. |
The Commission considers it
appropriate to impose a rate element constraint that limits increases in
Télébec's and TELUS Québec's rates for residential local exchange services in
non-HCSAs to 5% per year on a non-cumulative basis. The Commission considers
this 5% limit will provide the Companies with pricing flexibility while, at
the same time, adequately protecting subscribers. |
142. |
As far as residential optional local
services in non-HCSAs are concerned, the Commission is of the view that the
discretionary nature of these services justifies a more liberal rate element
constraint. The Commission has therefore concluded that rate increases for
residential optional local service rates in non-HCSAs should not exceed $1.00
per feature per year for Télébec and TELUS Québec subscribers. This limit
would not apply to the prices of service bundles that include a residential
local exchange service or a residential optional local service. |
143. |
In the PN
2001-69 proceeding, the
Commission will be classifying and identifying HCSAs and establishing bands
for Télébec and TELUS Québec. Once those determinations have been made, rates
for residential local services in non-HCSAs, including bundles consisting of
residential local exchange services and/or optional services, should
generally not be de-averaged within a band. |
|
Residential local exchange
services and residential optional local services in HCSAs |
144. |
The Commission notes that Télébec's
and TELUS Québec's residential subscribers in HCSAs have experienced
significant rate increases in the last few years. In the Commission's view,
residential local subscribers in HCSAs should be protected from rate
increases during the price cap period to the same extent as residential local
subscribers in non-HCSAs. |
145. |
That being said, the Commission does
not consider it appropriate to impose a basket constraint on the HCSA basket
of residential local services. Such a constraint could force down local
exchange rates in HCSAs that are already set below cost. A basket constraint
could significantly impair the ability of the Companies to achieve the annual
implicit contribution target amount of $60.00 per residence Network Access
Service (NAS) included in the subsidy calculation for HCSAs. Consequently,
there will be no basket constraint on the HCSA basket of residential local
services. |
146. |
However, in order to protect
subscribers in HCSAs, the Commission considers it appropriate to impose a
basket constraint on the sub-basket of residential local exchange services in
HCSAs as follows: Télébec and TELUS Québec may increase residential local
exchange service rates, on average, by inflation less the productivity offset
in each year in which inflation exceeds the productivity offset. If the
productivity offset exceeds inflation in a given year, the Companies' average
rates for residential local exchange services assigned to the residential
local exchange service sub-basket in HCSAs may not increase in that year.
Should Télébec and TELUS Québec choose not to increase residential local
exchange service rates in a given year to the extent permitted by this
constraint, they may use any unused "room" to increase residential local
exchange service rates in a subsequent year. Rate increases would still be
subject to the rate element constraint described below. |
147. |
Consistent with its approach above
for non-HCSAs, the Commission also considers it appropriate to impose a rate
element constraint that limits increases in Télébec's and TELUS Québec's
rates for residential local exchange services in HCSAs to 5% per year on a
non-cumulative basis. As noted above, this 5% limit will provide the
Companies with pricing flexibility while, at the same time, adequately
protecting subscribers. Moreover, the Commission considers that residential
local exchange services should not generally be de-averaged within a band. |
148. |
Similarly, consistent with its
approach in non-HCSAs, the Commission is imposing a rate element constraint
on residential optional local services in HCSAs. Specifically, rate increases
for residential optional local service rates in HCSAs should not exceed $1.00
per feature per year. This limit will not apply to the prices of service
bundles that include a residential local exchange service or a residential
optional local service as these services are generally available on a
stand-alone basis and are subject to constraints at the rate element level
when sold on that basis. Consistent with the policy regarding de-averaging of
residential local exchange rates, rates for residential optional local
services in HCSAs, including bundles consisting of residential local exchange
services and/or residential optional local services, should generally not be
de-averaged within a band. |
|
Single and multi-line business local exchange services
|
149. |
As discussed above, the Commission
has concluded that it is not appropriate to apply a productivity offset to
business services. However, since the Companies are expected to retain some
market power with respect to these services in their serving territories, the
Commission concludes that it is appropriate to cap the index of prices for
the basket of single and multi-line business local exchange services basket
at the rate of inflation to provide broad protection for these customers. |
150. |
The Commission therefore establishes
a basket constraint equal to inflation applicable to the basket of single and
multi-line business local exchange services. |
151. |
To provide additional protection
with respect to rate increases, especially to those customers in areas with
limited access to competitive alternatives to Télébec's and TELUS Québec's
services, the Commission adopts a rate element constraint to limit increases
in the Companies' rates for single and multi-line business local exchange
services to 10% per year. The Commission considers that rates for these
services should not generally be de-averaged within a band. |
|
Other capped services
|
152. |
Given that the Companies' rates for
these services have often been established on the basis of other telephone
companies' rates and given the limited competition that is expected to evolve
in respect of Other capped services (including non-forborne Competitive
Segment services), the Commission has concluded that it is appropriate to
apply a constraint equal to inflation less productivity to this basket of
services. |
153. |
In order to provide customers of
these services with additional protection from rate increases, the Commission
considers it appropriate to also impose a rate element constraint which
limits rate increases for a service in the Other capped services basket to
10% per year. |
154. |
The Commission notes that in
Decision 2002-34, it determined that it would not
require an ILEC to file a rate reduction for a service in the Other capped
services basket, below its Phase II costs plus a mark-up of 25% in order to
meet the ILEC's price cap commitments. The Commission determines that the
pricing policy established in Decision 2002-34
will also apply to the Other capped services of Télébec and TELUS Québec. |
155. |
The Commission further considers
that rates for Other capped services should not generally be de-averaged
further within a band. |
|
Competitor Services
|
156. |
As noted above, the Commission
concluded that Télébec and TELUS Québec can be expected to experience
productivity gains in respect of Category I Competitor Services. The
Commission considers that the application of a basket constraint on a basket
of Category I Competitor Services would allow the Companies freedom to assign
the productivity gains for that basket to particular services, possibly
advantaging one competitor over another. Consequently, the Commission has
decided against imposing a basket constraint on Category I Competitor
Services. Instead, the Commission considers it generally appropriate to adopt
a rate element constraint equal to inflation less the productivity offset
(I-X). |
157. |
The Commission notes that the
current rates for most of Télébec's and TELUS Québec's Competitor Services
have been set based on approved rates for Bell Canada or TELUS. The
Commission further notes that some Competitor Services rates approved for the
other large ILECs already reflect productivity gains. In Decision
2002-34, the Commission found it inappropriate to
subject these services to a further productivity offset. The Commission's
determinations with respect to which of the other large ILECs' Competitor
Services rates are subject to inflation less a productivity offset are set
out in Appendix 1 to Decision 2002-34. |
158. |
Therefore, with the exception of
those Category I Competitor Services rates that explicitly reflect
productivity gains, the Commission adopts a rate element constraint equal to
inflation less the productivity offset established in Part IV of this
Decision. This constraint would apply to all the Companies' services that
will be assigned to Category I Competitor Services, with the exception of
those services corresponding to the exempted services identified in
Appendix 1 to Decision 2002-34. The Commission
further considers that, due to these annual I-X adjustments, all usage rates
of less than $1.00 are to be rounded to the fourth decimal place, with the
exception of the Direct Connection and Access Tandem service rates which are
to be rounded to the fifth decimal place. |
159. |
The Commission notes that, later in
this Part of the Decision, all tariffed rates are made interim, effective 1
August 2002. Further, subject to the considerations set out in Part X of this
Decision concerning Télébec, the Commission directs Télébec and TELUS Québec
to file by 1 October 2002 proposed tariff pages to be effective 1 August 2002
with their price cap filing to reflect the application of an I-X constraint
at the rate element level of Category I Competitor Services. Further, the
Commission directs the Companies to issue tariff pages by 31 May of each
year, beginning in 2003, reflecting the application, effective 1 August, of
an I-X constraint at the rate element level to Category I Competitor
Services. |
160. |
In Decision
2002-34, the Commission found it appropriate to cap, at existing levels,
the rates for Category II Competitor Services. The Commission's
classification of Category II Competitor Services is set out in Appendix 1 to
that Decision. |
161. |
With respect to the services that
will be classified as Category II Competitor Services, the Commission
considers it appropriate to also cap the rates for these services at existing
levels. |
|
Services with frozen rate treatment
|
162. |
The Commission notes that Télébec
and TELUS Québec proposed to freeze rates for 9-1-1 service, Message Relay
Service and Toll restriction service for residential subscribers at current
levels considering the importance and social nature of these services. |
163. |
The Commission agrees with Télébec
and TELUS Québec that rates for 9-1-1 service, Message Relay Service and Toll
restriction should be frozen. Further, the Commission notes that the 9-1-1
service rates will be adjusted annually in accordance with Rates modified
for province wide 9-1-1, Order CRTC
2000-630, 6 July 2000 (Order
2000-630). In Order
2000-630, the Commission
outlined the formula to be used by the telephone companies for the annual
recalculation of their province-wide 9-1-1 services rates. |
164. |
In Telecom Order CRTC
98-109, 4 February 1998 (Order
98-109), the Commission concluded
that increased availability of listing information, combined with other
sources, posed a threat to personal privacy for residential subscribers and
capped the rate for Unlisted Number Service for residential subscribers for
the other large ILECs at $2.00 per month. |
165. |
Currently, Télébec and TELUS Québec
charge rates of $4.25 per month and $4.45 per month, respectively, for the
service. The Commission considers that the personal privacy concerns
identified in Order 98-109 are
equally a concern for subscribers in the Companies' serving territories. |
166. |
Télébec and TELUS Québec are
accordingly directed to show cause by 30 August 2002 why they should not also
be subject to the Commission's determination set out in Order
98-109. |
|
Uncapped services
|
167. |
The Commission is assigning tariffed
services that are not included in any basket or subject to a rate element
constraint to a service group entitled Uncapped services. In particular,
Centrex and business optional local services are classified as Uncapped
services. The Commission considers that service bundles that include a
business local exchange service or a business optional service should also be
classified as Uncapped services. |
168. |
The Commission notes that Centrex
service is a premium business service that is used as a substitute for
single-line and multi-line business local exchange services. As this Decision
makes these services subject to a basket constraint and a rate element
constraint, the Commission does not consider it necessary to subject Centrex
services to the same pricing constraints. |
169. |
Similarly, in view of the
substitutes available, the Commission does not consider it necessary to apply
constraints to business optional local services. The Commission considers
that rates for Uncapped services should generally not be further de-averaged
within a band. |
170. |
The Commission considers it
appropriate to generally assign SFTs or Special Assemblies Tariffs (SATs) to
Uncapped services. The Commission will determine when, if any, SFTs or SATs
will be assigned to other baskets or service groups at the time it reviews
the Companies' proposed assignment of services. |
171. |
The Commission also assigns the
Companies' Late Payment charge to Uncapped services. The Commission considers
that it is not necessary to apply a constraint to these charges, given that
they are calculated based on a Commission-approved formula. |
|
|
|
General
|
172. |
The Commission directs the Companies
to file, by 1 October 2002, a complete list of all tariffed services with a
proposed classification of each service by basket, sub-baskets or service
grouping. When developing their proposed classifications, the Companies
should have regard to Figure 1 above and the short descriptions provided
below, as well as Appendices 1 and 2 to Decision
2002-34. |
173. |
As discussed earlier, in non-HCSAs,
residential local services are assigned to a basket of services. This basket
is composed of two sub-baskets: residential local exchange services and
residential optional local services, including service bundles that include a
residential local exchange service or a residential optional local service.
In HCSAs, residential services are assigned to a sub-basket of residential
local exchange services and to a sub-basket of residential optional local
services, including service bundles that include a residential local exchange
service or a residential optional local service. |
174. |
The residential local exchange
services sub-baskets contain residential local exchange services,
installation charges and non-discretionary services associated with various
grades of residential local exchange services but do not include 9-1-1
service and Message Relay Service. |
175. |
The residential optional local
services sub-baskets include services such as voice mail, call display and
call waiting. As stated above, bundled services that include a residential
local exchange service or a residential optional local service are to be
included in residential optional local services sub-baskets. |
176. |
The single and multi-line business
services basket includes single-line and multi-line business local exchange
services, including contract options, installation charges and
non-discretionary services associated with various grades of business
services, but excludes 9-1-1 service and Message Relay Service. |
177. |
The group of services that will have
their rates frozen over the price cap period includes 9-1-1 service, Message
Relay Service, and Toll restriction. Further, the Commission considers that
Call blocking and the Instalment payment plan for residential subscribers
should be assigned to this sub-basket. |
178. |
The Uncapped services group of
services includes Centrex service, business optional local services, SFTs or
SATs that are not assigned to other baskets or groups and the Late Payment
Charge. |
179. |
The Other capped services basket
includes all services for which a tariff exists that are not assigned to
another basket or service group. |
|
Treatment of new services
|
180. |
Télébec submitted that new services
should not be subject to upward pricing constraints unless they are
competitor services that are essential or near-essential. TELUS Québec
submitted that new services are non-essential by definition and proposed that
they should not be subject to pricing constraints on the basis that doing so
would dampen the companies' incentives to innovate. |
181. |
The Commission notes that Télébec's
and TELUS Québec's proposals regarding the treatment of new services would be
inconsistent with the Commission's determinations in this Decision. |
182. |
The Commission considers that new
services should be assigned to a basket, sub-basket or service group on a
case-by-case basis based on the criteria set out above. |
183. |
Accordingly, Télébec and TELUS
Québec will be required to submit a proposed price cap classification with
tariff applications for new services or new service elements. |
|
|
184. |
A number of additional issues arose
in the present proceeding regarding the pricing of services and related
issues. These issues are addressed below. |
|
Basic toll constraints
|
185. |
In Decision
97-19, the Commission forbore from
regulating ILEC-provided toll and toll-free services, subject to certain
conditions. The Commission required, among other things, that the ILECs
provide to the Commission, and make publicly available, rate schedules
setting out the rates for basic toll service. The ILECs were also required to
update their respective schedules within 14 days of any change to the rates
for basic toll service. The Commission also required that reasonable advance
notice of rate changes be provided directly to subscribers; it prohibited
route de-averaging; and it required that any increases to basic toll rates be
offset by corresponding rate decreases that would ensure no change to the
basic toll schedule's weighted average rate. |
186. |
In PN
2001-36, the Commission stated
that it would examine whether to continue to apply to the Companies the
pricing constraints on North American basic toll schedules (BTS) established
in Decision 97-19. |
187. |
Télébec requested that the basic
toll constraints be removed. The company argued that the interexchange market
was competitive, that the basic toll constraints did not apply and that the
basic toll constraints constituted a disadvantage to the incumbents, notably
Télébec. TELUS Québec did not request any changes to the Decision
97-19 restrictions on the BTS. |
188. |
No other party to the proceeding
commented on this issue. |
189. |
The Commission considers that toll
market conditions have not changed significantly since 1997. The Commission
is of the view that no party provided evidence in this proceeding to warrant
elimination of the conditions regarding the BTS. |
190. |
Accordingly, the Commission
considers it appropriate to maintain the conditions on the BTS for Télébec
and TELUS Québec established in Decision 97-19. |
|
Pay telephone rates
|
191. |
As noted above, Télébec submitted
that the Commission should allow payphone rates to be adjusted in accordance
with costs, and recommended that no constraints be imposed on payphone
service. TELUS Québec also proposed that no constraints be imposed on
payphone service. |
192. |
In Decision
2002-34, the Commission determined that the other large ILECs' public and
semi-public pay telephone services should be assigned to a separate basket
and that rates for these services should remain at current levels until the
Commission considers policy issues related to payphone service in a
forthcoming proceeding. |
193. |
The Commission considers that the
same approach should be adopted for Télébec and TELUS Québec. Accordingly,
the Companies' public and semi-public pay telephone services are to be
assigned to a separate basket and rates for these services are to remain at
current levels until the Commission undertakes its policy proceeding
regarding payphone service. |
194. |
Accordingly, the Commission rejects
the pricing flexibility proposals made by Télébec and TELUS Québec in respect
of public and semi-public payphones. |
|
|
195. |
The Commission notes that Télébec
proposed that the annual price cap filing be made at the end of March each
year. TELUS Québec did not provide any specific comments with respect to the
timing of annual price cap filings. |
196. |
The Commission directs Télébec and
TELUS Québec to file the first annual update to their respective price
indices on 1 October 2002. |
197. |
For service groups subject to upward
pricing constraints, compliance with the applicable overall upward pricing
constraint would be demonstrated by comparing a price index of actual price
changes with a price index of allowable price changes. The allowable average
price changes would be indicated by a service band limit (SBL) while the
actual average price changes would be indicated by a service band index
(SBI). |
198. |
All Télébec's and TELUS Québec's
tariffed rates are made interim, effective 1 August 2002. The Commission
expects that any rate changes approved by the Commission to meet the 2002
price cap commitment would become effective 1 August 2002. The SBLs and SBIs
should be set at 100 effective 1 August 2002. |
199. |
The Commission therefore directs: |
|
- Télébec and TELUS Québec to file the SBL and SBI with supporting
calculations, formulae and spreadsheets, for each basket/sub-basket of
capped services, as applicable, by 1 October 2002; and
|
|
- on an annual basis, by 31 May for the remainder of the price cap
period, Télébec and TELUS Québec are to file updates to the SBL and SBI,
with supporting calculations, formulae and spreadsheets, for each
basket/sub-basket of capped services, as applicable.
|
|
IV Components of the price cap formula
|
|
|
200. |
In Decision
97-9, the Commission established a price cap
formula for the other large ILECs (except SaskTel) that consisted of three
basic components: an inflation factor, a productivity offset (the X-factor)
and an exogenous factor (the Z-factor). |
201. |
These three components were used to
determine the maximum allowable annual price changes for the basket of capped
services. The inflation factor allowed for cost increases in keeping with
changes in the national economy. The X-factor imposed a downward constraint
to reflect productivity improvements. The Z-factor permitted adjustments
required by certain unanticipated events beyond the control of the ILECs. |
202. |
In Changes to the contribution
regime, Decision CRTC 2000-745,
30 November 2000 (Decision 2000-745),
the Commission determined that residence PES costs would be one of the
components of the TSR. The Commission further determined that these PES costs
would be adjusted annually using a pre-determined productivity offset. In
Decision 2001-238, the Commission
determined that the base PES costs in the TSR calculation would also be
adjusted annually for an inflation factor. The TSR is discussed in more
detail in Part XI of this Decision. |
203. |
In PN
2001-36, the Commission sought
comments on the use and value of these components in the price cap regime, as
well as in the TSR calculation. |
|
|
204. |
In Decision
97-9, the Commission used the Gross Domestic
Product – Price Index (GDP-PI), published by Statistics Canada, as the
measure of inflation. The GDP-PI is a measure of the national output price
change. |
205. |
Until recently, there were two forms
of GDP-PI produced by Statistics Canada: a chain-weighted index and a
fixed-weighted index. The chain-weighted index reflects changes in the price
of a basket of goods and is updated to reflect actual expenditures on a
quarterly basis. The fixed-weighted index also tracked price changes for a
basket of goods but was updated less frequently. |
206. |
TELUS Québec proposed that the
GDP-PI be used as the measure of inflation. The company noted that, effective
31 May 2001, the fixed-weighted GDP-PI was no longer published by Statistics
Canada and that Statistics Canada had adopted the chain-weighted GDP-PI as
the official measure of the economy-wide inflation rate. Consequently, TELUS
Québec suggested the Commission use the chain-weighted GDP-PI as the measure
of inflation for the price regulation regime. |
207. |
Télébec proposed that the Consumer
Price Index (CPI) published by Statistics Canada be used in the price cap
formula. In Télébec's view, CPI would be more readily understood by its
subscribers when tariff changes were being proposed. Télébec also submitted
that, over the past five years (1996 to 2000), the GDP-PI and CPI both
averaged 1.7%. |
208. |
No other party commented on the
measure of inflation. |
209. |
The Commission considers GDP-PI to
be preferable to CPI for price regulation purposes since the latter measure
is more limited in scope and is therefore vulnerable to greater fluctuations
due to changes in one or two sectors in the economy (e.g., energy). In
addition, as a broader measure of inflation, the GDP-PI more closely reflects
the cost increases the Companies are likely to face. |
210. |
Given the above and given that the
fixed-weighted GDP-PI is no longer available, the Commission agrees with
TELUS Québec that the chained-weighted GDP-PI is the appropriate
inflation measure. The Commission notes that, in Decision
2002-34, it also decided to use the
chain-weighted GDP-PI. |
211. |
Accordingly, the Commission directs
Télébec and TELUS Québec to use the preceding year's annual chain-weighted
GDP-PI published by Statistics Canada as the measure of inflation for the
price cap indices and pricing constraints, and in the calculation of the TSR. |
|
|
|
Background
|
212. |
In Decision
97-9, the Commission concluded that the
productivity offset should be calculated using the following components: |
|
a) the industry total factor
productivity (TFP) defined as the measure of efficiency of the telephone
companies taking into consideration all the inputs (labour, material, and
capital) and outputs (revenues); |
|
b) the economy-wide TFP defined as
the productivity index for the business sector of the economy as a whole,
produced by Statistics Canada; |
|
c) the input price differential
defined as the difference between the industry and economy-wide input price
growth rates; and |
|
d) the consumer productivity
dividend (stretch factor). |
213. |
The first three components comprised
the basic offset. The stretch factor was included in order to ensure that
consumers shared in the benefits resulting from the streamlining of
regulation and the increased incentives for efficiency for the telephone
companies under price cap regulation. |
214. |
In determining the level of the
basic offset, the Commission relied on time periods that were long enough to
capture the sustained effects of productivity growth and to mitigate the
effect of one-time events and short-term fluctuations. In Decision
97-9, the Commission approved a basic
productivity offset of 3.5% along with a stretch factor of 1.0% for an annual
X-factor of 4.5% for the other large ILECs' initial price cap period. |
215. |
In PN
2001-36, the Commission
invited parties to provide proposals and evidence on the appropriate level
and applicability of a productivity offset, if any, for the price cap regime,
as well as the offset to be used in the calculation of the TSR for the
Companies. |
216. |
The Commission has identified four
issues which must be addressed: |
|
a) whether company-specific
productivity offsets should be used for the Companies; |
|
b) what productivity offset should
be used in the TSR calculation for the Companies; |
|
c) what productivity offset should
be used in the pricing constraints under the price regulation regime applied
to the Companies; and |
|
d) whether a stretch factor should
be applied to either of these productivity offsets. |
|
Positions of parties
|
|
Télébec |
217. |
Télébec did not recommend the
inclusion of a productivity offset in any pricing constraints applied to
capped services. In the company's view, productivity gains would be difficult
to achieve in light of the rural nature of its serving territory, the lack of
large population centres and the limited economies of scale available to it.
In Télébec's submission, the majority of its territory was high cost. |
218. |
Télébec also submitted that it had
already achieved significant productivity gains in the previous six years
through workforce reductions, process/systems re-engineering, and other
measures, and that it would be difficult to achieve comparable productivity
gains over the price cap period. Finally, the company submitted that the
introduction of price caps would not necessarily lighten its regulatory load
and, hence, would provide minimal opportunity for productivity gains. |
219. |
Télébec acknowledged that a
productivity offset should be applied to the Phase II costs used in the
calculation of the TSR, in accordance with Decision
2001-238. |
220. |
As far as methodology was concerned,
Télébec submitted that the productivity offset should be set on a
company-specific basis. In its own case, Télébec argued in favour of the
Total Implied Productivity (TIP) approach. Télébec indicated that TIP was a
method of productivity measurement the company understood and found easy to
produce. |
221. |
Télébec acknowledged that there were
problems with the use of TIP, such as the exclusion of increases in revenues,
capital costs, taxes and other exogenous factors. However, Télébec submitted
that it did not have the expertise or the resources to rely on the TFP and
the marginal cost approaches. |
222. |
Based on the company's TIP for the
period 1996 to 2001, Télébec proposed that a 2.7% company-specific
productivity offset be used in the calculation of the TSR. In accordance with
Decision 2001-238, Télébec submitted
that this productivity offset would be applied to the Phase II costs
associated with the annual update to the TSR in HCSAs. |
223. |
On the issue of a possible stretch
factor, Télébec argued that its proposed 2.7% productivity offset
incorporated a stretch factor in light of the rationalization in the
telecommunications industry caused, primarily, by toll competition. |
224. |
Finally, Télébec submitted that, in
the event the Commission decided to use a common productivity offset for both
Télébec and TELUS Québec, the Commission should use the average of the
offsets being proposed by the two Companies. |
|
TELUS Québec |
225. |
TELUS Québec stated that it favoured
a common price cap regime in Canada, subject to certain adjustments to
reflect its unique circumstances. In keeping with the submissions of the
other large ILECs in the PN
2001-37 proceeding, TELUS Québec did not recommend the inclusion of a
productivity offset in a price cap formula applied to capped services. |
226. |
For the purposes of the TSR
calculation, TELUS Québec proposed a company-specific productivity offset
calculated using a marginal cost approach. The company also submitted that if
the Commission were to decide to include a productivity offset in its price
cap constraints, the offset should be calculated using a marginal cost
approach. |
227. |
TELUS Québec argued that the
productivity offset for the TSR should be set based on the expected
reductions in marginal costs for services provided in HCSAs. TELUS Québec
also argued that the marginal cost methodology would preserve the ideal
incentive properties of price cap regulation by setting the average growth
rate of prices for capped services equal to the average marginal cost growth
rate for those services. |
228. |
TELUS Québec submitted that its
proposal relied, in part, on the evidence of TELUS in the PN
2001-37 proceeding. In its
evidence, TELUS proposed a 3.0% productivity offset based on marginal cost
data of TELUS and Bell Canada. |
229. |
TELUS Québec submitted that the 3.0%
offset developed by TELUS should be modified to reflect what TELUS Québec
considered to be its unique circumstances (e.g., low line density in its
rural territory, lack of dense urban centres, higher costs to introduce
technological changes and slower pace to introduce these changes). TELUS
Québec argued that companies with primarily high cost operating territories
could not benefit from the allocation of fixed costs to a larger number of
subscribers and, therefore, should be subject to a lower productivity offset
than ILECs with more urban territories. On the basis of these considerations,
TELUS Québec proposed an adjusted productivity offset of 1.65% for the TSR
calculation. |
230. |
Even though TELUS Québec's proposal
would apply a productivity offset to the costs for residential service in
HCSAs only, the company indicated that its proposed productivity offset could
be applied to a basket of capped residential services. |
231. |
Finally, TELUS Québec argued that if
the Commission decided to have a common productivity offset for Télébec and
TELUS Québec, the Commission should use TELUS Québec's proposed offset of
1.65%. TELUS Québec argued that the TIP methodology was not appropriate as it
was too narrowly focused. |
|
ARC et al. |
232. |
ARC et al. argued that neither
Télébec nor TELUS Québec provided conclusive evidence in the proceeding that
would warrant a different treatment from the other incumbent telephone
companies in Canada. In ARC et al.'s view, it would be appropriate to
integrate Télébec and TELUS Québec into the overall price cap regime
applicable to the other large ILECs. |
233. |
ARC et al. argued that the Companies
had an incentive to propose a lower productivity offset in order to retain
the benefit of a greater portion of their efficiencies. Accordingly, ARC et
al. submitted that the Commission should ensure that the price cap regime
adopts an X-factor that would properly reflect the opportunities available to
the Companies to achieve productivity gains. |
234. |
ARC et al. noted that the Commission
decided against developing a company-specific productivity offset for MTS in
Decision 97-9. ARC et al. also submitted
that, in order to conclude that a distinct productivity offset would be
warranted for Télébec and TELUS Québec, the Commission would have to
determine that the circumstances of these Companies were significantly
different from the circumstances of the other large ILECs, such as Island
Tel, MTS, TELUS and Bell Canada. ARC et al. argued that, if the Commission
were to grant a lower productivity offset for Télébec and TELUS Québec than
for the other large ILECs, then it could expect that some of the other large
ILECs would ask for similar treatment. |
235. |
ARC et al. submitted that the
productivity measurement should be sufficiently broad-based that it would
include the total company benefits associated with the provision of telephone
services. ARC et al. argued that the TIP methodology proposed by Télébec was
too narrow. In ARC et al.'s view, the TFP approach would provide a good
indicator of company-wide productivity gains and, hence, a good indicator of
Utility Segment productivity gains. |
236. |
ARC et al. argued that the
experience with the other large ILECs confirmed that the productivity offset
of 4.5% set in Decision 97-9 was too low and
had resulted in extraordinarily high profits for the other large ILECs. |
237. |
According to ARC et al., the fact
that Télébec and TELUS Québec considered themselves smaller ILECs or served
HCSAs, did not justify a lower productivity target. ARC et al. submitted that
Island Tel and NewTel had no difficulty in surpassing the 4.5% productivity
target despite their smaller size and operating circumstances. |
238. |
In ARC et al.'s view, an
industry-wide productivity factor would be appropriate for the Companies and
that offset should be significantly higher than 4.5%. |
|
Conclusions
|
239. |
Having considered the positions of
the parties, the Commission concludes as follows in respect of the four
issues identified above. |
|
Company-specific offsets |
240. |
The Commission notes that, in
Decision 97-9, it concluded that an
industry-wide X-factor rewards those companies that have achieved higher than
average productivity results and forces those companies with lower
productivity results to become more efficient. The Commission reiterated this
view in Decision 2002-34. Accordingly, the
Commission used the same productivity offset for all of the other large ILECs
subject to those Decisions. |
241. |
Based on the evidence in the present
proceeding, the Commission acknowledges that Télébec and TELUS Québec face
their own specific challenges in their operating territories. However, some
of the other large ILECs have larger and more diverse territories to serve
than Télébec and TELUS Québec. Others have a greater mix of population
centres and demographic groupings. |
242. |
The Commission concludes that
neither Télébec nor TELUS Québec have demonstrated that their operating
circumstances are sufficiently different from the other large ILECs or from
each other to warrant company-specific productivity offsets in their cases. |
|
Productivity offset for the TSR |
243. |
In the Commission's view, there are
problems with the TIP approach advocated by Télébec to define a productivity
offset for the TSR calculation. The TIP methodology is too narrow and fails
to adequately take into account capital costs or new service revenue streams.
Accordingly, consistent with Decision 97-9,
the Commission rejects the use of the TIP approach to set the productivity
offset. |
244. |
As noted above, ARC et al. argued in
favour of a TFP approach for setting the productivity offset. The Commission
acknowledges the merits of a TFP approach when establishing a productivity
offset which would be applied to the entire Utility Segment or to a regulated
company as a whole. However, for the purposes of the TSR calculation, the
Commission agrees with TELUS Québec that a marginal cost approach would more
accurately reflect the actual productivity gains which a company could be
expected to achieve in respect of residential local services in HCSAs. |
245. |
The Commission notes that TELUS
Québec relied on evidence submitted by TELUS in the PN
2001-37 proceeding when
deriving its proposed productivity offset of 1.65%. In the Commission's view,
the adjustments proposed by TELUS Québec to derive its productivity offset
are not justified. As indicated above, the Commission has concluded that
neither Télébec nor TELUS Québec have sufficiently different operating
circumstances to warrant company-specific productivity offsets. |
246. |
In the Commission's view, based on
the evidence in this proceeding, the Companies have not demonstrated that the
marginal cost trends for residence PES costs in high-cost bands in their
territories are significantly different from those in the territories of the
other large ILECs. In Decision 2002-34, the
Commission set the basic productivity offset for the TSR calculation for the
other large ILECs at 3.5%, based on a marginal cost approach. In the
Commission's view, it is appropriate to set the basic productivity offset for
the TSR calculations of Télébec and TELUS Québec at the same level. |
|
Productivity offset for pricing
constraints |
247. |
In light of the basket and service
group structure the Commission has adopted in Part III of this Decision, the
Commission is of the view that the productivity offset used in the relevant
pricing constraints should be based on a marginal cost approach. In this way,
the offset will reflect the actual productivity gains that are likely to be
achieved for individual capped baskets. |
248. |
Since company-specific offsets have
not been justified by Télébec and TELUS Québec, and since the Commission
considers that an industry-wide productivity offset would be desirable, the
Commission concludes that it is appropriate to adopt the same basic
productivity offset for the Companies as approved for the other large ILECs
in Decision 2002-34 (i.e., 3.5%). |
|
Stretch factor |
249. |
The Commission notes that in
Decision 2002-34, it did not include an explicit
stretch factor. This determination was based, in part, on the view that the
basic productivity offset of 3.5%, based on the marginal cost approach,
incorporates a limited stretch factor. The implicit stretch factor results
from the fact that the marginal cost growth for the years 1998 to 2001
included the productivity gains achieved by the other large ILECs under price
cap regulation. |
250. |
The Commission is of the view that
the same approach is appropriate for the Companies. Accordingly, the
Commission concludes that no stretch factor should be applied to the
productivity offset. |
|
The value of the productivity offset
|
251. |
Based on the above, the Commission
determines that an annual X-factor of 3.5% will be used in the TSR
calculation and in the price cap indices and pricing constraints, as
applicable, in the price cap regime for both Télébec and TELUS Québec. |
|
|
|
Background
|
252. |
In Decision
97-9, the Commission established an
exogenous factor as a component of the price cap formula for the initial
price cap regime of the other large ILECs (except SaskTel). This Z-factor
flows through the impact associated with certain events not captured by the
other elements of the price cap formula. Adjustments would be considered for
events or initiatives which satisfy the following criteria: |
|
a) they are legislative, judicial or
administrative actions which are beyond the control of the company; |
|
b) they are addressed specifically to the
telecommunications industry; and |
|
c) they have a material impact on the Utility
Segment of the company. |
253. |
The Commission also directed that
the impact of an exogenous event be determined on a company-wide basis and be
assigned between the Capped and Uncapped Services on a cost-causal basis. In
addition, the Commission considered that, in general, actual data should be
used to determine the impact. |
254. |
In PN
2001-36, the Commission
invited comments on whether a Z-factor should be included in the price cap
formula for Télébec and TELUS Québec and, if so, how it should be treated. |
|
The need for an exogenous factor
|
255. |
Both Télébec and TELUS Québec
submitted that it would be appropriate to allow for exogenous adjustments in
the price cap regime to account for variations in expenses and revenues
associated with events that would be beyond their control. |
256. |
Other parties did not comment on the
need for an exogenous factor in the price cap formula. |
257. |
In the Commission's view, if there
were no mechanism in place to make adjustments for exogenous events, Télébec
and TELUS Québec would unfairly be required to bear the risk associated with
events beyond their control that increase their costs to a significant
extent. At the same time, consumers and competitors using the Companies'
services would not benefit from cost savings that could be passed on to them
through these adjustments. |
258. |
The Commission considers that the
most appropriate way to capture an exogenous event is as a component of the
price cap formula that is triggered when that event occurs. Accordingly, the
Commission determines that the price cap regime for Télébec and TELUS Québec
will include exogenous adjustments. |
|
Criteria for exogenous treatment
|
259. |
Télébec and TELUS Québec agreed to
use the criteria established in Decision 97-9
to determine an exogenous event subject to certain proposed adjustments to
the criteria. |
260. |
Télébec submitted that an exogenous
adjustment should be considered in cases where events did not specifically
address the telecommunications industry. As an example, Télébec referred the
possible costs associated with access to public rights-of-way. |
261. |
TELUS Québec proposed to add a
fourth criterion that would summarize the reason for an exogenous adjustment:
a firm would be entitled to an exogenous adjustment for an event where it
would have otherwise been possible to recover the impact of such an event in
the absence of price cap regulation. TELUS Québec further submitted that a
firm should be entitled to an exogenous adjustment for a significant natural
disaster, for changes to the rules for establishing larger local free calling
areas and for the imposition of fees for access to public rights-of-way. |
262. |
In addition, both Télébec and TELUS
Québec submitted that an exogenous adjustment should be allowed for
fluctuations in the percentage of contribution payments the Companies would
make into the NCF. |
263. |
Other parties did not comment on the
criteria to be used to identify an exogenous event. |
264. |
In the Commission's view, events
which affect more than just the telecommunications sector would likely be
reflected in changes to inflation and, hence, should not qualify as exogenous
events, contrary to the proposals of Télébec and TELUS Québec. |
265. |
The Commission considers that
exogenous events should be events of a material impact beyond the control of
the Companies that are not otherwise accounted for in the price cap
parameters. The Commission notes that in Part XI of this Decision, it has
determined that Télébec and TELUS Québec are no longer required to produce
Phase III/Split Rate Base (SRB) results. Therefore, no separate financial
reporting of the Utility Segment will be available in the price cap regime.
The Commission notes that it made a comparable change in the regime
applicable to the other large ILECs in Decision
2002-34. In that decision, the Commission modified the third criterion
for an exogenous event by requiring that the effects of an event be material
as measured against the company as a whole. The Commission has decided that
the same approach is appropriate for the Companies. Accordingly, the
Commission determines that an exogenous event will be defined to be material
as measured against the total company. |
266. |
In light of the above, the
Commission concludes that the criteria for exogenous events should be as
follows: |
|
a) they are legislative, judicial or
administrative actions which are beyond the control of the company; |
|
b) they are addressed specifically to the
telecommunications industry; and |
|
c) they have a material impact as measured
against the total company. |
|
Assignment of the impact of an exogenous event
|
267. |
Both Télébec and TELUS Québec
submitted that it would be difficult to establish an assignment methodology
that could be generally applied to all exogenous events. They were of the
view that there should be some flexibility for assigning the impact of an
exogenous event to the various service baskets. Télébec proposed that where
possible, the assignment should take into consideration the cost causal basis
of the event. TELUS Québec proposed that the impact of an exogenous event
should be assigned to the different service baskets based on the revenue
weight of each service basket affected by the event. |
268. |
Other parties did not comment on the
assignment of the impact of an exogenous event to the various service
baskets. |
269. |
As each exogenous adjustment
proposed in the price cap regime will be reviewed on an individual basis,
taking into consideration the particular circumstances of each event, the
Commission is of the view that the basis of assigning the exogenous
adjustment should be determined on a case-by-case basis. This will provide
the flexibility needed to ensure that the amounts are properly assigned to
the appropriate baskets. Accordingly, Télébec and TELUS Québec will be
expected to file a proposal, with supporting rationale, with each application
for an exogenous adjustment stating the preferred basis of assignment. |
270. |
The Commission is also of the view
that exogenous factors should not be assigned to the Frozen Rates and the
Competitor Services baskets. If it is determined that all or part of an
exogenous adjustment should be assigned to the Competitor Services basket,
the Commission considers that this event would likely affect the Phase II
costs directly, which would require the revised rates to be filed using the
Phase II costing methodology. |
|
Identification of an exogenous event
|
271. |
Télébec and TELUS Québec proposed
that they and other interested parties should be required to notify the
Commission of any exogenous adjustments, either positive or negative. Télébec
proposed that the adjustments should be identified within 30 days of the
event's occurrence. However, TELUS Québec was of the view that the 30-day
window would be unfair to interested parties as it would be unlikely that it
would provide enough time to identify and analyze the impacts of any
potential exogenous adjustments. TELUS Québec proposed no time limit for the
identification of an exogenous event. |
272. |
Other parties did not comment on the
need to identify an exogenous event. |
273. |
The Commission is of the view that
in order to ensure fairness to all stakeholders, the Companies should be
required to notify the Commission of all proposed exogenous adjustments as
soon as possible after they have been identified. The Commission shares the
concern voiced by TELUS Québec that 30 days may not allow enough time to
identify and analyze the impacts of any potential exogenous adjustment.
Therefore, Télébec and TELUS Québec are required to notify the Commission of
any proposed exogenous adjustment within 60 days of the event's occurrence.
Other parties who believe an exogenous adjustment is required should notify
the Commission as soon as possible after they learn of the relevant facts. |
274. |
The Commission also concludes that
the impact of any proposed exogenous adjustments should be initially captured
in a separate deferral account pending a ruling from the Commission as to its
applicability. The impact of any proposed adjustment is to be measured from
the time the event occurred. The disposition of the deferral account would
follow the Commission's ruling on the proposed exogenous adjustment. |
|
V Quality of service
|
|
The current regime
|
275. |
The Commission has had a quality of
service monitoring regime in place since 1982. In Decision
94-19, the Commission decided it was
necessary to review that regime in light of the introduction of
facilities-based competition and the proposed shift to a price cap regulatory
regime for the large ILECs. |
276. |
In Quality of service indicators
for use in telephone company regulation, Telecom Decision CRTC
97-16, 24 July 1997 (Decision
97-16), the Commission set out its revised
regime for the monitoring and reporting of quality of service by the large
ILECs (except SaskTel). Under this regime, ILECs must file quarterly reports
on performance of approved quality of service indicators. An ILEC that does
not meet the approved standard for a particular indicator for three
consecutive months or seven out of twelve consecutive months is required to
report that indicator's performance monthly, rather than quarterly until such
time as performance has met or exceeded the approved standard for three
consecutive months. In addition, the ILEC is required to explain the reasons
for non-compliance and provide a detailed plan describing how it intends to
rectify the situation and prevent it from recurring. |
277. |
Since 1998, Télébec and TELUS Québec
have filed quality of service reports as required by Decision
97-16. Those reports indicated that quality
of service problems occurred during much of the period from 1998 to 2000 for
each of the Companies. |
278. |
In PN
2001-36, parties were invited
to comment on the appropriateness of implementing a quality of service
component or other regulatory mechanisms in the price cap regime (e.g.,
targeted refunds) in order to address quality of service issues. |
|
Positions of parties on the need for changes to the
regime
|
279. |
The Companies expressed the view
that the current monitoring regime was sufficient to ensure quality of
service. |
280. |
Télébec submitted that its
performance was and had been excellent, considering its low density of
population, its weather and geographical conditions. Télébec stated that it
did not adjust its reports to take into account weather conditions and noted
that its service quality had been like that of other ILECs on some
indicators. |
281. |
Télébec submitted that the
indicators established by the Commission were exhaustive in their coverage
and were all that the Commission required to assure itself that service
quality was being maintained. In the company's view, under the current
regime, the Commission had all the powers necessary to inquire into service
quality issues and, if necessary, impose sanctions. |
282. |
Télébec submitted that the
introduction of local competition would, in and of itself, act as an
incentive to provide quality service, and that adding safeguards to the
existing regime would result in an undue level of regulation and bureaucracy.
The company also argued that it was not necessary to link quality of service
with the price cap regime because the Terms of Service in its General Tariffs
provide a mechanism for compensating customers. |
283. |
TELUS Québec submitted that it was
delivering very high quality customer service and that there was no need to
establish a quality of service component in the price cap regime. In its
view, the current regime effectively protected the interest of consumers and
assured the maintenance of an appropriate level of service quality. |
284. |
TELUS Québec argued that there was
no relationship or link between quality of service and price caps. The
company submitted that any reductions in service quality that may have been
observed in other serving territories were likely due to the impacts of the
introduction of competition, industry rationalization and restructuring, and
that these adverse consequences were temporary. TELUS Québec argued that it
would be premature to conclude that the introduction of local competition in
its serving territory would have a negative effect on the quality of service. |
285. |
TELUS Québec argued that market
forces, combined with the established indicators, would ensure that service
quality would be maintained. In the company's view, quality of service was at
the heart of its business because, by building a good relationship with its
customers, it improved its chances of retaining customer loyalty. The
pressures of present and future competition, in TELUS Québec's view, would
provide a sufficient incentive to maintain its high quality service. |
286. |
TELUS Québec submitted that, if the
Commission were to require a higher level of service, it would have to adjust
its cost of doing business, which would impact part of its submissions in
this proceeding. |
287. |
ARC et al. submitted that there was
a need to establish, for Télébec and TELUS Québec, the same quality of
service component as the Commission established for the other large ILECs
pursuant to the PN 2001-37
proceeding. |
288. |
ARC et al. argued that competition
in Télébec's territory would be limited to urban centres and that, under a
price cap regime, the Companies would have an incentive to cut their cost of
doing business which would have a negative impact on quality of service. |
|
The Commission's conclusions regarding the need for
change
|
289. |
The quality of service standards
established by the Commission are intended to be the minimum level of
performance for each associated indicator. The Commission notes that, during
the period from 1998 to 2001, although the service levels delivered by
Télébec were markedly better than those delivered by TELUS Québec, overall
service quality performance of the Companies, like that of the other large
ILECs, was significantly below standard and, in the Commission's view, not
satisfactory. |
290. |
The Commission is not persuaded
that competitive pressures in either the retail or competitor services
markets will be sufficient to ensure that the Companies meet approved service
quality standards. The Commission notes that, even where limited local
competition has taken hold in the operating territories of the other large
ILECs, service quality has been below standard. In the Commission's view,
under the price regulation regime for the Companies, the drive to improve
earnings at the expense of quality of service would not be adequately offset
by competitive pressures. |
291. |
The Commission notes that TELUS
Québec suggested it would have to adjust its cost of doing business if the
Commission were to require a higher level of service. As set out below, the
Commission is not changing the level of service expected of the Companies and
is maintaining the quality of service indicators that have been applicable
for the past several years. |
292. |
The Commission disagrees with
Télébec's submission that the Terms of Service are sufficient for the
purposes of quality of service. The quality of service indicators focus on
issues which are not addressed in the Terms of Service and hence, a quality
of service component in price cap regulation would not duplicate the Terms of
Service. |
293. |
In light of the above, the
Commission considers that the existing monitoring regime is not sufficient to
ensure that the Companies' service quality performance meets the Commission's
approved standards. In the Commission's view, it is necessary to establish
incentives to ensure the Companies' compliance with quality of service
performance standards for services provided to the Companies' own customers,
as well as services that would be provided by the Companies to competitors. |
|
Classification of services for a quality of service
mechanism
|
294. |
TELUS Québec submitted that no
change to the current regime was required. However, the company argued that
if the Commission deemed a new quality of service mechanism to be necessary,
it should be in the form of direct rebates to customers who actually suffered
substandard quality of service. This would require the mechanism to
distinguish between residential and business customers and competitors. |
295. |
No other party commented
specifically on the classification of services for the purposes of a quality
of service mechanism. |
296. |
The Commission notes that the
current retail quality of service indicators are not reported by customer
type. The Commission notes that establishing separate quality of service
components for business and residential services would require separate
monitoring and reporting of indicator results. |
297. |
The Commission believes that the
costs associated with establishing separate business and residential
mechanisms outweigh the potential benefits. The Commission has therefore
determined that a single quality of service mechanism should be established
to cover both residential and business services. |
298. |
As far as competitor services are
concerned, the Commission notes that most of the competitor indicators,
established in previous decisions including those to be effective for the
Companies on 1 September 2002, will be reported by customer. The Commission
is of the view that this monitoring and reporting regime for competitor
services remains appropriate. Accordingly, the Commission has decided to
establish a separate quality of service mechanism for competitors. |
|
Form of quality of service mechanism
|
|
Q-factor
|
299. |
One of the issues in this
proceeding was whether there should be a quality of service component (or
Q-factor) incorporated in the price cap formula. A Q-factor is a numerical
factor which reflects the compliance (or non-compliance) of the regulated
company with quality of service standards. The inclusion of a Q-factor in a
price cap formula permits quality of service performance to have a direct
effect on the pricing constraints. |
300. |
The Companies did not support the
use of a Q-factor as the remedy for substandard quality of service. Télébec
argued that a Q-factor would be complex and would add an additional layer of
regulation. TELUS Québec submitted that a Q-factor would be inappropriate
because, in its view, it would have no effect on customer satisfaction. TELUS
Québec also argued that a Q-factor would be inappropriate because a single
below-standard performance, which might only reflect a single occasion, could
have a long term negative effect on the income of the company. In addition,
TELUS Québec argued that a Q-factor would constitute a burden on the company
without ensuring that the subscribers who suffered a temporary reduction in
quality of service were actually compensated. Finally, TELUS Québec submitted
that there was no relationship between a Q-factor and quality of service
because, regardless of the introduction of a Q-factor, the focus of the
company was and would continue to be the delivery of quality service. |
301. |
The Commission considers that, if a
Q-factor were in place, substandard performance would result in rate
reductions by the ILEC. In such a situation, the Commission considers that
customers might delay or refrain from moving to competitors while awaiting,
and obtaining, the benefit of the reduced rates. |
302. |
In the Commission's view, a
Q-factor could have a distorting effect on competition and, therefore, would
be less suitable for use as a quality of service component than other
possible mechanisms. The Commission also notes that a Q-factor would not
provide a competitor-specific remedy for non-compliance with competitor
indicators. In light of these considerations, the Commission has decided not
to include a Q-factor in the price regulation regime for the Companies. |
|
Approaches to rate adjustments for
residential and business customers |
303. |
Parties to the proceeding
identified two forms of rate adjustments for residential and business
customers as possible alternatives to a Q-factor. The first would involve
customer-specific rate adjustments and would be structured to provide
compensation only to each customer actually affected by a service quality
failure. The second approach would not be customer-specific but instead would
provide for rate adjustments either to the aggregated class of residential
and business customers or separately to residential and business customers as
distinct classes. |
304. |
Télébec opposed customer-specific
rate adjustments, such as the targeted rebates proposed by TELUS Québec.
Télébec argued that a rate adjustment plan would not be appropriate because
it would duplicate rebates that were already provided for in its General
Tariff. Télébec submitted that its employees were already empowered to deal
with problems on a case-by-case basis and that customer satisfaction surveys
indicated no customer dissatisfaction. Télébec also argued that a rate
adjustment plan would be expensive to establish and administer and, yet,
there would be no assurance it would respond to the needs of customers. |
305. |
TELUS Québec stated that, if the
Commission mandated a rate adjustment mechanism, the company would prefer a
customer-specific rate rebate approach for business and residential
customers. Under TELUS Québec's approach, the company would provide rebates
solely to those customers that suffered quality of service degradation as
measured by certain specific indicators. Only indicators that could measure
effects on individual customers would be included. TELUS Québec submitted
that its approach would be appropriate because it would constitute, in
effect, a market response rather than a regulatory penalty. |
306. |
ARC et al. stated that it would not
oppose the further study of targeted rebates in a consumer rights proceeding.
However, it was of the view that, if the Commission were to adopt this
approach, interim measures would be necessary. In ARC et al.'s submission,
the Commission should establish the same mechanism for the Companies as would
apply to the other large ILECs. |
307. |
The Commission notes that a
customer-specific rebate plan would not be compatible with several of the
established indicators for business and residential customers, which do not
measure customer-specific performance. The Commission also considers that it
would be highly impractical, in light of the administrative burden, to track
an indicator's results customer by customer. The current Commission-approved
indicator results are reported in aggregate for non-competitor customers. As
a result, adopting the TELUS Québec approach would require changes to the
definition and application of most, if not all, of the non-competitor service
quality indicators. |
308. |
On the other hand, a customer
non-specific rate adjustment scheme for residential and business customers,
as a single group, would be administratively reasonable since the same
quality of service indicators are used by the Companies for both types of
customers. |
309. |
In light of the above, the
Commission considers that a customer non-specific rate adjustment approach is
the most appropriate quality of service mechanism for ILEC business and
residential customers. |
|
Rate adjustment plan for residential and business
customers
|
310. |
As indicated above, neither Télébec
nor TELUS Québec specifically addressed issues regarding rate adjustment plan
models for residential and business customers. |
311. |
ARC et al. submitted that the
Commission should impose on the Companies, the same rate adjustment plan as
ARC et al. proposed for the other large ILECs in the PN
2001-37 proceeding. |
312. |
In Decision
2002-34, the Commission adopted, on an interim basis, a rate adjustment
plan based primarily on ARC et al.'s proposal for the other large ILECs.
However, the Commission considered it necessary to explore certain aspects of
the rate adjustment mechanism in greater detail before establishing a plan on
a final basis. |
313. |
The Commission notes that Télébec
and TELUS Québec are currently subject to the same quality of service
standards as the other large ILECs. In the Commission's view, it is also
appropriate to adopt the same remedial approach to the Companies as was
adopted for the other large ILECs in Decision 2002-34. |
314. |
Accordingly, the Commission
approves on an interim basis, effective 1 October 2002, the rate adjustment
mechanism adopted in Decision 2002-34 for
business and residential customers of Télébec and TELUS Québec. The mechanism
is to be based on a maximum annual adjustment of 5% of total annual business
and residential local revenues. This revenue base is not to be restricted to
local exchange services; it is to include revenues from all other local
retail business and residential services that are not forborne. Worksheets
for the calculation of rate adjustments are presented in Appendix 1 to this
Decision. Sample calculations are also included. Any rate adjustments flowing
from this interim regime will be addressed in the follow-up proceeding. |
315. |
The Commission is of the view that
periodic audits of quality of service results would enhance the effectiveness
of the rate adjustment plan. The Commission will gather input from parties on
the methodology of an audit process, in the proceeding to establish a final
retail quality of service regime. The Commission will issue a public notice
shortly, initiating this process. |
|
Rate adjustment plan for competitors
|
316. |
None of the parties specifically addressed the
issue of a rate adjustment plan for competitors. |
317. |
Télébec opposed the general concept
of a customer-specific rebate plan on the grounds that it would be expensive
to establish and administer, and it would be duplicative of the refund
provisions in its Terms of Service. |
318. |
TELUS Québec argued that if the
Commission were to conclude that a quality of service component were
required, then the most appropriate mechanism would be a customer-specific
rebate plan. |
319. |
ARC et al. submitted that the
quality of service regime for the Companies should be as similar as possible
to the regime the Commission implements for the other large ILECs in the PN
2001-37 proceeding. |
320. |
In Decision
2002-34, the Commission established, on an interim basis, a rate
adjustment plan for competitors based primarily on the proposal submitted by
GT Group Telecom Services Inc. The plan, as approved, provides for a rate
adjustment mechanism which is triggered when there is substandard performance
with respect to one or more competitor-specific indicators. |
321. |
As stated in Decision
2002-34, it is the Commission's view that for
competition to succeed, competitors must be able to provide service to their
customers of a quality that is comparable to that which the ILECs provide to
their own customers. If a competitive local exchange carrier (CLEC) cannot
provide comparable quality of service, it will not be able to compete
effectively. Further, CLECs must be able to quickly correct substandard
service to their customers if they are to be able to retain customers and
minimize any possible customer rebates. |
322. |
Given the importance of ILEC
quality of service to the introduction of local competition, the Commission
considers it necessary to implement a rate adjustment mechanism for
competitor services. However, the Commission also believes it is necessary to
explore certain aspects of a rate adjustment mechanism in greater detail
before establishing a plan on a final basis. Consequently, the Commission
will initiate a follow-up proceeding for this purpose in the near future. In
the meantime, the Commission considers that an interim mechanism is required. |
323. |
Accordingly, the Commission has
decided to establish, effective 1 October 2002, an interim
competitor-specific rate adjustment plan that is the same as the plan
established in Decision 2002-34. A description of
the interim rate adjustment plan, including worksheets, is set out in
Appendix 2 to this Decision. |
324. |
As provided for under the retail
quality of service regime, the Commission is of the view that an audit
process should be incorporated into the rate adjustment plan for competitors.
The Commission will consider proposals for the methodology of an audit
process, in the proceeding to establish a final competitor quality of service
regime. |
|
VI Consumer service issues
|
|
|
325. |
In PN
2001-36, the Commission
invited comments on the extent to which the Companies' adherence to
benchmarks for consumer service, such as billing policies or a consumer bill
of rights (CBOR), should be linked to the price regulation regime and what
form any such benchmarks might take. |
|
|
326. |
ARC et al. submitted
that the presentation of consumer rights was scattered over several pages of
the telephone directories, and that much of the information was written in
legal style. According to ARC et al., this could be frustrating for a large
number of consumers. To rectify this situation, ARC et al. suggested that the
Commission require the publication of a CBOR, setting out the basic rights of
consumers in plain language, without technical or legal expressions. |
327. |
ARC et al. proposed that
the CBOR be linked to the price regulation regime by a Q-factor, with the
mechanism to be defined at a subsequent proceeding. ARC et al. requested the
Commission to initiate a public process to consider the CBOR proposal, and
also proposed that the proceeding be used to clarify the language of the
Companies' Terms of Service. |
328. |
ARC et al. submitted
that the CBOR for Télébec and TELUS Québec should be identical to the CBOR
for the other large ILECs. |
329. |
Télébec argued that
consumer rights were explained well in the introductory pages of its
directories, and that the Terms of Service constituted an existing CBOR.
Télébec submitted that there should be no link between the price regulation
regime and the CBOR. |
330. |
Télébec submitted that
there was no need for a broad public hearing on the CBOR issue, and
recommended that the CRTC Interconnection Steering Committee be used to
clarify the introductory pages of the directory. |
331. |
TELUS Québec submitted
that many consumer rights were already set out in the Terms of Service
published in telephone directories, and that a separate CBOR was unnecessary. |
332. |
TELUS Québec argued that
ARC et al.'s request for a proceeding on consumer rights and its comments
regarding that proceeding constituted additional evidence, since ARC et al.'s
full proposal had only been filed in the PN
2001-37 proceeding. |
333. |
In the Commission's
view, ARC et al. has raised an important issue for consumers. The white pages
and the Terms of Service are not always easy to understand, nor do they
contain all the rights of consumers. The Commission agrees with ARC et al.
that consumers would benefit from a comprehensive and concise statement of
consumer rights. |
334. |
Given that the Terms of
Service and the rights of consumers are essentially the same for all ILECs,
the Commission concludes that the CBOR should also be essentially the same
for all large ILECs. |
335. |
The Commission does not
agree with TELUS Québec's argument that ARC et al.'s proposal constitutes
additional evidence. ARC et al.'s submission on this issue was included in
its final argument, giving other parties a reasonable opportunity to respond
in their final reply arguments. |
336. |
In Decision
2002-34, the Commission announced that it would
hold a proceeding on the development of a CBOR. That proceeding would also
determine whether it was necessary to review the Terms of Service. The
Commission intends to make Télébec and TELUS Québec parties to that
proceeding. |
|
|
337. |
ARC et al. submitted
that billing policy should be one of the issues considered in its proposed
consumer rights proceeding. |
338. |
In Decision
2002-34, the Commission required Bell Canada and
Aliant Telecom to show cause why they should not send monthly itemized
billing statements to their customers. The Commission is of the preliminary
view that the practice of sending monthly itemized billing statements to
customers should be extended to the Companies. Accordingly, the Commission
directs Télébec and TELUS Québec to show cause, by 30 August 2002, why they
should not be directed to send their customers monthly itemized billing
statements at the same level of detail as is currently provided on an annual
basis, copying parties to the proceeding leading to Commission modifies
reporting requirements for affordability, Order CRTC
2000-393, 10 May 2000 (Order 2000-393).
Any interested parties may file comments on the Companies' responses to this
direction to show cause by 10 September 2002, copying parties to the
proceeding leading to Order
2000-393. Télébec and TELUS Québec may file reply comments by
20 September 2002, copying those interested parties who filed comments. All
material must be received, not merely sent, by these dates. |
339. |
In Decision
2002-34, the Commission also decided that issues
relating to the content of billing statements should be addressed by the
Committee on Bill Management Tools and Access to Telephone Service (the BMT
Committee) established by Order CRTC
2000-393. The Commission
directs Télébec and TELUS Québec to participate in the BMT Committee's work
on billing issues. |
|
VII Service improvement plans
|
|
|
340. |
In Decision
99-16, the Commission examined the level of
telecommunications service in Canada and concluded that it was, in general,
very high. The noted exceptions were HCSAs which are generally found in
remote, rural regions and in the far north. Telephone service to these areas
generally costs more to provide and is often of lower quality than service in
other regions. |
341. |
In light of the lower
service levels in some areas, the Commission decided it was appropriate to
define a BSO which set a basic level of telephone service that the Commission
would attempt to ensure is available to the public throughout Canada. |
342. |
In Decision
99-16 the Commission defined the BSO as
comprising: |
|
a) individual line local service
with Touch-Tone dialling, provided by a digital switch with 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 (included in call management services); |
|
c) access to operator and directory
assistance services; |
|
d) access to the long distance
network; and |
|
e) a copy of a current local
telephone directory. |
343. |
The Commission then set three goals
for service improvement in HCSAs: |
|
- to extend service to the few areas that are unserved;
|
|
- to upgrade service levels in those areas where customers do not have
access to telecommunications services which meet the BSO (i.e., underserved
areas); and
|
|
- to maintain service levels, and ensure that existing levels do not
erode under competition.
|
344. |
In order to implement
these goals, the Commission directed all ILECs to file SIPs for approval, or
to demonstrate that the BSO has been and will continue to be achieved in
their territory. ILECs were required to consult stakeholders prior to
preparing their SIPs. |
345. |
The Commission also
stated that it would require the ILECs to provide a tracking plan to monitor
SIPs as they are implemented. |
346. |
In connection with the
design of a SIP, the Commission decided that where construction is taking
place in a specific area pursuant to the SIP, the customer's contribution to
the costs should not exceed $1,000 per customer premises. Furthermore, where
payment instalment plans are not available in a company's tariffs, the
Commission directed the ILECs to file with their SIPs, proposed tariffs
giving customers the option to pay for extensions on a reasonable basis. |
347. |
The Commission also
required the SIPs to incorporate least-cost technology, target larger
communities or areas first, serve unserved areas prior to providing upgrades,
and serve permanent dwellings before seasonal ones. |
348. |
In PN
2001-36, the Commission
directed Télébec and TELUS Québec to file SIP proposals which would include
the following: SIP roll-out plans; forecasts of capital expenditures for each
year of the SIP; any related operating costs; and associated revenue
requirement impacts and SIPs cost recovery proposals. The Commission
indicated that it would review the Companies' SIPs to ensure that Télébec and
TELUS Québec were meeting the BSO and other key elements of Decision
99-16. |
|
|
349. |
On 6 July 2001, Télébec
filed its SIP proposal. Télébec proposed to provide service to 194 unserved
dwellings for total capital expenditures of $149,000. On 9 November 2001,
Télébec revised its SIP proposal to extend service to 327 dwellings requiring
capital expenditures of $344,000. The company included in its going-in
revenue requirement an annual expense of $36,000 related to its SIP proposal. |
350. |
In preparing its SIP, Télébec
conducted a sample survey of premises whose prior requests for service were
denied by the company. In addition, the company published information on its
SIP in 22 local newspapers covering its territory. Based on the survey
results, Télébec proposed a construction cost limit of $5,000 per permanent
and seasonal dwelling, including a maximum $1,000 customer contribution. The
company stated that any higher construction cost limits would result in rate
increases to current subscribers. |
351. |
With respect to the
$1,000 maximum customer contribution, Télébec proposed that premises
receiving service under the SIP should pay a deposit of $100 before work
commences, and the remainder in eleven equal monthly instalments. |
352. |
Télébec indicated that
respondents to its survey cited the cost of obtaining service and the
possibility of obtaining wireless service as reasons for stating that they
would not be participating in its SIP. Télébec also stated that several of
its urban customers expressed concerns that additional rate increases could
be triggered by extending service in remote areas. |
353. |
Based on the results of
its survey, Télébec expected that about 21% of unserved permanent dwellings
and 11% of unserved seasonal dwellings would elect to receive wireline
service if it became available. Télébec submitted that, in view of the
widespread use of wireless communications, the participation rates used in
its SIP were realistic. |
354. |
In response to
Commission interrogatories, Télébec provided data regarding the number of
unserved premises which would be captured under its SIP if the capital cost
criterion varied. The company indicated that there were 22 premises that
exceeded a capital cost limit of $25,000. According to Télébec, the average
capital cost to provide service to these premises would be $85,000. |
355. |
The James Bay Cree
Communications Society, the Grand Council of the Crees and the Cree Nation of
Chisasibi indicated that the SIP proposed by Télébec did not address their
concerns with respect to the lack of Internet access, the organization of the
telephone book and the lack of 9-1-1 emergency service. |
356. |
In reply, Télébec
submitted that its network could support Internet access in all locations,
but there were no Internet Service Providers (ISPs) offering Internet
services in the localities identified by the interveners. Télébec also
submitted that its network was capable of providing 9-1-1 service in all
locations. The company indicated this service would be provided following
receipt of a formal request. With respect to the organization of the
telephone book, Télébec indicated that its telephone book was organized along
the lines of its administrative regions while the interveners wanted it to be
organized on the basis of the relevant Cree communities. |
|
TELUS Québec's SIP proposal
|
357. |
TELUS Québec did not
include any capital expenditures for unserved premises in its SIP proposal.
The company submitted that its previous regulator, the Régie des
télécommunications du Québec, had required it to make single-line service
available throughout its territory and, as a result, the company had no
unserved areas. TELUS Québec submitted that service extensions in served
areas should continue to be governed by the current provisions in the
company's tariffs. Pursuant to its tariffs, TELUS Québec is required to pay
up to $2,500 in construction costs, and the new subscriber is responsible for
any costs in excess of this amount. |
358. |
At the oral public
hearing, TELUS Québec acknowledged that there might be unserved premises in
its territory. The company also indicated that it had not reviewed past
service requests to determine whether those persons who had requested service
might wish to be included in the company's SIP proposal. |
359. |
In regard to underserved
premises, TELUS Québec proposed a plan to meet the BSO in l'Île-aux-Grues,
Grosse-Île and Aylmer Sound. TELUS Québec also proposed to relieve network
congestion caused by high Internet usage in the Basse-Côte-Nord and other
HCSAs. |
360. |
Other parties did not
comment on TELUS Québec's SIP proposal. |
361. |
In response to an
application by TELUS Québec for an expedited decision on the company's SIP
proposal, the Commission rendered TELUS Communications (Québec) Inc.'s
proposed service improvement plan, Telecom Decision CRTC
2002-16, 19 March 2002 (Decision
2002-16). In that Decision, the Commission
approved the company's capital expenditures required to meet the BSO in
l'Île-aux-Grues, Grosse-Île and Aylmer Sound. The Commission also approved
the capital expenditures required to relieve network congestion but held that
these expenditures did not qualify as a SIP since they did not relate to the
BSO. |
362. |
In Decision
2002-16, the Commission indicated that both
approved expenditures should be included as part of the company's going-in
revenue requirement. The Commission also indicated that the recovery of the
SIP and the network improvement capital expenditures would be addressed in
this Decision. Finally, the Commission directed TELUS Québec to consult with
stakeholders, to identify unserved dwellings, to propose a SIP addressing the
requirements of unserved dwellings and to file a follow-up SIP by 20 December
2002. |
|
|
363. |
Based on its examination
of the Télébec and TELUS Québec SIPs, the Commission finds that, as required
by Decision 99-16, they: (a) use least-cost
technology; (b) provide a tracking plan; and (c) generally comply with the
BSO, except as discussed below. |
364. |
The Commission has
identified a number of issues which are common to the SIPs under
consideration as they relate to unserved premises: |
|
- the capital cost criteria;
|
|
- the take rates used when estimating the cost of a SIP;
|
|
- the terms of an appropriate instalment payment plan for the $1,000
customer contribution;
|
|
- the requirement for an instalment payment plan for large construction
charges;
|
|
|
|
|
|
|
365. |
The Commission also
addresses issues related to Internet access and the cost recovery of current
and follow-up SIP proposals. |
366. |
The Commission's
determinations on each of these issues are set out in the following
paragraphs. |
|
Capital cost criteria
|
367. |
Télébec proposed a
capital cost limit of $5,000 per permanent and seasonal dwelling. Télébec
submitted that its subscribers already faced the highest local rates in
Canada, even without factoring in the possible rate impact of the SIP.
Télébec stated that its proposed capital cost limit was nearly twice the
$2,600 that the company contributed to service extensions under its current
tariff. Télébec also submitted that the capital cost limits proposed by Bell
Canada and TELUS in the PN 2001-37
proceeding would likely result in rate increases for its subscribers if these
limits were applied to its SIP. |
368. |
TELUS Québec submitted
that the capital cost limits of $25,000 per permanent dwelling and $5,000 per
seasonal dwellings that were proposed by Bell Canada in the PN
2001-37 proceeding, would not
be appropriate for TELUS Québec. The company stated that there were numerous
unserved localities in Bell Canada's territory, and that many of Bell
Canada's unserved localities would qualify for service at the capital cost
limits proposed by Bell Canada. By contrast, TELUS Québec provided service to
all localities in its territory, and only a few localities did not have
acceptable access to the Internet. Furthermore, TELUS Québec's rates would
likely increase if it were required to adopt the capital cost limits proposed
by Bell Canada. TELUS Québec also expressed concerns that low income
customers in its territory may have to subsidize the provision of telephone
service to secondary residences like cottages if its SIP proposal were
modified to incorporate higher capital cost limits. |
369. |
The Commission notes
that it is often difficult to differentiate between permanent and seasonal
premises. In addition, the status of a particular dwelling could change.
Accordingly, the Commission is of the view that the capital criteria should
be the same for seasonal and permanent premises. |
370. |
In Long distance
competition and improved service for Northwestel customers, Decision CRTC
2000-746, 30 November 2000, the
Commission approved a capital cost limit of $25,000 for unserved premises,
with no distinction between permanent and seasonal premises. The Commission
adopted the same approach for the other large ILECs in Decision
2002-34. In both cases, the customer was required
to pay the first $1,000 of capital costs, as decided by the Commission in
Decision 99-16. |
371. |
In the Commission's
view, it would be appropriate to approve capital cost criteria which would
ensure that service is provided to as many unserved premises as is reasonably
possible over the next four years. The Commission notes, as discussed later
in this Decision, that monies will be available to offset the costs of the
SIPs without rate increases to customers. |
372. |
In light of the above,
the Commission finds that the capital cost criterion of $25,000 for both
permanent and seasonal premises is appropriate for both Télébec and TELUS
Québec. In accordance with Decision 99-16,
the customer would be required to contribute $1,000 toward the capital costs. |
|
Take rates
|
373. |
As noted above, when
estimating the cost of the SIP, Télébec used take rates of 21% for permanent
dwellings and 11% for seasonal dwellings. TELUS Québec's proposal did not
address this issue. |
374. |
The Commission considers
that it would be appropriate to assume a take rate which reflects the maximum
extension of service, thereby ensuring that funding is available for the
maximum number of unserved premises which meet the capital cost criteria. |
375. |
Accordingly, the
Commission concludes that the total cost of the SIPs for Télébec and TELUS
Québec is to be calculated using a 100% take rate in each locality. |
|
Instalment payment plan for $1,000 customer contribution
|
376. |
In Decision
99-16, the Commission decided that a new
customer should pay up to a $1,000 contribution towards the capital costs.
The Commission also directed the ILECs to file an instalment payment plan
with their SIPs, unless such plans were already available in the company's
tariffs. |
377. |
Télébec proposed an
instalment payment plan that would require a customer to pay a deposit of
$100, with the balance payable in 11 equal monthly instalments. |
378. |
In light of its
objective to extend service to as many unserved premises as possible, the
Commission considers Télébec's proposal to be appropriate. |
379. |
TELUS Québec did not
address this issue in its SIP proposal. |
380. |
Accordingly, the
Commission directs TELUS Québec to institute an instalment payment plan that
is the same as Télébec's plan. |
381. |
The Commission notes
that the Companies would be allowed to charge their tariffed late payment
interest rate for late payment of instalments that are due each month. Each
of the Companies should file their instalment payment plan with the
Commission for approval as part of their follow-up SIP proposal. |
|
Instalment payment plan for large construction charges
|
382. |
The Commission notes
that even with the approved capital cost limit, a number of unserved premises
would still not qualify for service. The Commission is of the view that it
would be appropriate for the Companies to offer a plan whereby the customer
could pay an amount over and above the $1,000 maximum customer contribution
whenever the cost of a service extension exceeds the $25,000 capital cost
limit. For example, if the cost to serve a premises were $34,000, then the
cost to the customer would be $10,000 (i.e., $1,000 + [$34,000-$25,000]). |
383. |
Accordingly, the
Commission directs Télébec and TELUS Québec to notify any premises that do
not currently qualify for service under the SIP that the occupants of the
premises can pay the additional costs to obtain service. These costs would be
described as large construction charges. |
384. |
In the Commission's
view, it would also be appropriate to institute an additional instalment
payment plan that would enable customers to pay for large construction
charges over a reasonable period of time. This would mitigate the
disincentive to take service because of a high up-front cost. |
385. |
In Decision
2002-34, the Commission required the other large
ILECs to adopt a large construction instalment plan with the following terms: |
|
a) instalments may be spread over a
period of up to 36 months; |
|
b) interest is charged on the unpaid
balance of construction charges at a rate of the company's cost of capital; |
|
c) a minimum deposit of 20% of the
construction charge is to be paid prior to the start of the construction; |
|
d) maximum construction charges of
$10,000 per customer premise (calculated as the difference between the actual
construction charges and $24,000) are eligible for the instalment payment
plan; and |
|
e) the instalment plan is available
to residence customers only. |
386. |
The Commission directs
Télébec and TELUS Québec to adopt this instalment plan for the period of the
SIP roll-out. Each of the Companies should file its large construction
instalment plan with the Commission for approval as part of its follow-up SIP
proposal. |
387. |
The Commission also
wishes to explore an instalment payment plan for large construction charges
greater than $10,000 per customer premise. Accordingly, Télébec and TELUS
Québec are directed to file such a plan, as part of their follow-up SIP
proposals, for Commission consideration. |
|
Roll-out of SIPs
|
388. |
In light of the above,
the Commission directs Télébec and TELUS Québec to start a project in a
locality if it meets the following criteria: (a) the maximum average cost per
premises is $25,000 using a 100% take rate, and (b) at least one customer
requests service and is willing to contribute $1,000. The Commission directs
the Companies to start with those localities that have the highest demand. |
389. |
Télébec proposed to roll
out its SIP in 2002. However, in view of the expanded scope of the SIP as
determined in this Decision, the Commission directs Télébec to file for
approval a revised roll-out plan as part of its follow-up SIP proposal
discussed later in this section. |
390. |
In Decision
2002-16, the Commission directed TELUS Québec to
file, by 20 December 2002, a further SIP to extend service to unserved
dwellings. With its filing, the company should include a proposed roll-out
plan for the expanded SIP. |
|
Tracking plans
|
391. |
Télébec proposed to file
tracking reports before 1 April of each year, which would provide the
following information: |
|
a) a list of exchanges where
extension projects are forecast; |
|
b) a list of exchanges where
extension projects are completed, and exchanges where the work is forecast to
complete in the current year; and |
|
c) total capital expenditures for
the year. |
392. |
TELUS Québec proposed to
file tracking reports on 1 June of each year, which would provide the
following information: |
|
a) work completed the previous year; |
|
b) work which was deferred to the
current year; |
|
c) summary of the work remaining for
the SIP; |
|
d) total capital expenditures for
the year; and |
|
e) if the company deems it
necessary, an additional proposal which would meet the criteria for a SIP. |
393. |
In Decision
2002-34, the Commission established tracking
plans for the other large ILECs which were similar to the tracking plans
approved for the small ILECs modified to add a number of reporting
requirements to track the efficiency and effectiveness of the roll-out, as
well as track additional premises that will be added to the SIPs. This
information would be used to support a request for additional capital
funding. |
394. |
The Commission finds it
appropriate that tracking plans be consistent amongst ILECs. Therefore, the
Commission directs Télébec and TELUS Québec to file, by 31 March of each
year, the following tracking information: |
|
a) a list of localities scheduled for completion in the
previous year and those actually completed; |
|
b) the forecast and actual number of premises to which
service was upgraded or was made available in the previous year; |
|
c) the total capital investment for the previous year; |
|
d) the projected service upgrades and extensions for the
upcoming year; |
|
e) any changes to the yearly program with supporting
reasons; |
|
f) operating expenses for the previous year related to the
SIP; |
|
g) the number and location of new customers requesting
service; |
|
h) the number of customers whose past requests have been
reassessed and now qualify for service; |
|
i) the number of customers requesting service who do not
qualify because of cost; |
|
j) the number of customers who have
been offered service but refused because of cost; |
|
k) the status of new ISPs locating
in upgraded exchanges; and |
|
l) the status of a new plan to serve
residents in those remaining exchanges that currently do not have access to
the Internet via a local call, using new or alternative technologies. |
|
Tariff pages
|
395. |
Neither Télébec nor
TELUS Québec proposed to submit tariffs implementing its SIP for approval.
Nonetheless, as part of the Companies' follow-up SIP proposals, the
Commission directs Télébec and TELUS Québec to file tariff pages to implement
the Commission's determinations related to its SIP. These tariff pages should
include: |
|
|
|
- conditions for a project start up ($25,000 capital criterion, 100% take
rate and one customer service request);
|
|
- the instalment plan for the $1,000 customer contribution;
|
|
- the treatment of new premises built during the roll-out period;
|
|
- the reassessment of premises denied in the past;
|
|
- the opportunity for customers to pay additional charges in the case of
large construction projects;
|
|
- the instalment plans for large construction charges; and
|
|
- the treatment of service requests in localities already established
before the commencement of the SIP.
|
|
Internet access
|
396. |
As noted above, Télébec
indicated that customers in some locations may not have toll-free Internet
access available to them. In the Commission's view, the company should
monitor this situation. If there is no ISP providing toll-free Internet
access to these locations by the second quarter of 2003, the Commission will
consider whether Télébec's obligation to serve includes an obligation to
provide toll-free access to the Internet. |
|
Follow-up SIP proposals
|
397. |
As indicated above, the
Commission has altered the criteria applicable to Télébec's SIP. Under these
revised criteria, more dwellings should qualify for service. The Commission
directs Télébec to file, by 31 October 2002, a revised SIP proposal showing
the dwellings included in the SIP and the capital expenditures by year over
the price regulation period. In addition, the dwellings and capital
expenditures should be segregated between HCSAs and non-HCSAs. The company
should also provide all assumptions, including the percentage penetration
forecast for subscribers who will take the service. |
398. |
In Decision
2002-16, the Commission directed TELUS Québec to
consult with stakeholders and to submit a further SIP by 20 December 2002.
The company's follow-up SIP should comply with the criteria established
above. |
|
SIP cost recovery
|
399. |
In Decision
99-16, the Commission determined that SIPs
should include proposals to fund service improvements. The Commission noted
that ILECs could fund SIPs in a number of ways, including through rate
increases. The Commission stated that when funding proposals included rate
increases, a reasonable balance should be achieved between the speed and cost
of implementation and the need to maintain affordable rates. |
400. |
The Commission finds
that the expenses to extend services to unserved dwellings, estimated by
Télébec at $36,000, are reasonable. These expenses have been included in the
company's going-in revenue requirement. |
401. |
As noted above, in
Decision 2002-16, the Commission approved TELUS
Québec's proposed capital expenditures for underserved premises, together
with certain capital expenditures for network improvements and determined
that these expenditures should be included in the calculation of the
company's going-in revenue requirement. |
402. |
As far as the follow-up
SIPs are concerned, the Commission notes that the price regulation regime
approved in this Decision is similar to the regime for the other large ILECs
in Decision 2002-34. In that Decision, the
calculation of the TSR for the other larger ILECs includes SIP-related costs
for HCSAs. Since the Commission determined in Decision
2002-34 that it was not appropriate to increase
rates to recover the SIP-related costs in HCSAs, the Commission considers
that the Companies' SIPs in HCSAs should be funded from the NCF. Accordingly,
each company is directed to add its Phase II SIP costs for HCSAs to the costs
that flow into its TSR calculation. |
403. |
With respect to
non-HCSAs, the Commission considers that funds accumulated in the deferral
account established in Part III of this Decision can be used to compensate
the Companies for expenditures associated with their SIPs in non-HCSAs. |
404. |
The Commission directs
each of the Companies to identify, at the time that it files its follow-up
SIP proposal, pursuant to the determinations in this Decision, the related
Phase II SIP costs. These Phase II costs should be separated by HCSAs and
non-HCSAs. |
|
VIII Going-in revenue requirement
|
|
|
|
Background
|
405. |
A revenue requirement is the amount
of revenue that a regulated company needs in a given year to recover its
operating expenses and capital and financial costs, including a reasonable
return on shareholders' equity. The revenue requirement is then used to set a
company's rates. |
406. |
The objective of the Commission's
financial review in the present proceeding was to set just and reasonable
rates for both Companies, coincident with the implementation of price
regulation (going-in rates). As indicated in PN
2001-36, the Companies'
proposed going-in rates were assessed by examining the sum of any incremental
revenue requirement impacts arising from material changes to the financial
assumptions used to finalize the Companies' 2001 contribution requirements. |
407. |
PN
2001-36 further stated that
these material changes could include, but were not limited to, the following:
a) any SIP proposals; b) any additional depreciation expense associated with
proposed changes to average service lives; c) any changes to the allowed rate
of return on common equity (ROE); d) net annualized impacts of pending and
planned tariff items; e) adjustments for the amortization of any deferral
accounts; and f) any proposed recovery of Phase III/Phase II contribution
shortfalls that may be warranted. |
408. |
The going-in revenue requirement
methodology described in PN
2001-36 was similar to that used in calculating the going-in revenue
requirement for the other large ILECs in Decision
98-2. |
409. |
In the present proceeding, Télébec
and TELUS Québec filed, as part of their price cap proposals, their going-in
revenue requirements and associated going-in rates based on their 2001
proposed contribution requirements. The Companies' contribution proposals
were then being considered in separate proceedings. |
410. |
In Télébec final 2001
contribution requirement and rate, Order CRTC
2001-598, 26 July 2001, the
Commission approved Télébec's 2001 contribution requirement of $27.3 million.
In TELUS Québec final contribution requirement and rate, Order CRTC
2001-641, 10 August 2001 (Order
2001-641), the Commission
approved adjustments to TELUS Québec's 2001 contribution calculations that
resulted in an approved contribution requirement of $32.6 million. As a
result, on 31 August 2001, TELUS Québec filed revised evidence and responses
to interrogatories reflecting the new contribution requirement figures
approved by the Commission. |
|
Positions of parties
|
411. |
Télébec submitted a proposal that
included rate increases for the first two years of its proposed four-year
price cap plan. More specifically, Télébec proposed to amortize in the first
year of its proposed four-year price cap period the balance of $5.1 million
accumulated in its deferral account and to increase most residential rates by
$3.33 in 2003 to offset the full depletion of its deferral account. Télébec
also stated that it might propose further rate adjustments after it finalized
its banding classification and applicable costs, and the Commission rendered
its decision in the proceeding initiated by PN
2001-69. |
412. |
TELUS Québec proposed that its
revenue requirement be re-calculated each year based on proposed rate
increases and certain revenue and expense adjustments. As a result of these
proposed rate increases and other adjustments, the amount of subsidy payments
from the NCF would gradually decrease to $5.9 million in 2005, the last year
of the company's proposed price cap plan. |
413. |
Other parties did not provide
comments on the Companies' proposed going-in revenue requirement
methodologies. |
|
Conclusions
|
414. |
In the Commission's view, once
price regulation is implemented, rates should be adjusted only in accordance
with the regulatory framework. If rates were modified during the price
regulation period based on other considerations, such as revenue and expense
adjustments as suggested by the Companies, the regulatory framework would
become a mix of price and earnings regulation, thereby undermining the
benefits of price regulation. |
415. |
The Commission considers that the
methodology used to determine the going-in revenue requirement for Télébec
and TELUS Québec should be similar to the methodology used to set the
going-in revenue requirement for the other large ILECs (except SaskTel) in
Decision 98-2. In that Decision, the
going-in revenue requirement was calculated by taking the sum of the
incremental changes to an ILEC's approved Utility Segment forecast (for
example, additional depreciation expense from proposed changes to asset
service lives). This calculation yielded the revenues that would be required
from rate adjustments at the start of the price cap period. |
416. |
The following sections discuss the
application of this methodology to the Companies' price cap proposals. |
|
|
|
Introduction
|
417. |
The Commission has developed its
depreciation policy and practice within the Phase I Directives established in
Inquiry into Telecommunications Carriers' Costing and Accounting
Procedures Phase I: Accounting and Financial Matters, Telecom Decision
CRTC 78-1, 13 January 1978 and subsequent decisions and orders. The Phase I
Directives were designed to promote intergenerational equity between
customers, and their main objective has been to recover the investment in
plant and equipment equally over its useful service life. |
418. |
Over the years, the Commission has issued
specific directives on the procedures to be used by regulated carriers to
determine how depreciation rates are calculated and how to account for
over/under accruals. To date, the Commission has encouraged carriers to
develop depreciation life characteristics based on their own particular
circumstances. The Commission has emphasized two main factors when
determining depreciation life characteristics: historical retirement patterns
and future expectations. |
419. |
In PN
2001-36, the Commission
directed the Companies to include in their price cap filings any proposed
modifications to their depreciation expense and associated changes to asset
service lives. |
420. |
During this proceeding, Télébec
maintained that, due to competitive and technological factors, there was a
need to substantially reduce the service lives of some of its existing plant
prior to the implementation of price caps. If these adjustments were accepted
by the Commission, they would give rise to a Depreciation Reserve Deficiency
(DRD), as the recovery of the value of the assets to date would be less than
what would have been recovered had the proposed service lives been
implemented when the assets came into service. The method for recovering the
DRD would then have to be addressed when setting going-in rates for Télébec. |
421. |
TELUS Québec did not propose any
changes to the service lives of its plant. However, as discussed below, the
company did propose an adjustment to the level of its depreciation expense
for 2002. |
|
Télébec's proposed changes to its depreciation life characteristics
|
|
Positions of parties |
422. |
Télébec identified a number of
asset accounts which, in its view, required adjustments to their depreciation
life characteristics in light of technological changes and the advent of
local competition. The company filed a depreciation study in support of its
proposed changes. In total, the company's proposed changes would result in an
increase in the going-in revenue requirement of $3.8 million. |
423. |
Other parties did not provide
comments on Télébec's proposed changes to the depreciation life
characteristics of its accounts. |
|
Account 225 – Circuit & TV |
424. |
This account includes various
transmission equipment in central offices, test panels, other centres and
repeater stations together with fibre optic transmission equipment. |
425. |
Télébec requested a service life
reduction of four years to an Average Service Life (ASL) of 10 years for this
account using an Iowa R-1 dispersion curve. To support its proposal, the
company indicated that 25% of the assets consisted of obsolete analog
equipment which was vulnerable to effects of new technology and competition.
The company further noted that retirements of about $5 million made in 2001
were not included in its depreciation study. |
426. |
The Commission notes that Télébec's
historical analysis resulted in an ASL of 15 years for the 1998 to 2000
experience band. Although the impact of the retirements in 2001 was not
evaluated by the company, the Commission did take this information into
account in its analysis. The Commission considers that an ASL of 12 years
would be more appropriate than either the 10 years proposed by Télébec or the
current approved figure of 14 years, since 12 years would be more in line
with historical data. Accordingly, the Commission approves an ASL of 12 years
with an Iowa R-1 dispersion curve. |
|
Account 226 – Radio |
427. |
This account includes radio
transmission equipment located in central offices, test centres and repeater
stations. Télébec requested a service life reduction of four years to an ASL
of 13 years for this account. The company noted that assets in this account,
including analog equipment, were subject to increasing obsolescence as the
present equipment line had been discontinued and was not expected to be
supported starting in 2006. In Télébec's view, fibre-based facilities would
replace parts of the old radio investment, and significant retirements should
be expected in the near term. The company submitted that these retirements
would affect a large portion of the investment added before the 1990s. |
428. |
The Commission notes that historical
analysis for this account resulted in an ASL of 11 to 12 years for the 1998
to 2000 experience band. The Commission considers that the proposed ASL of 13
years with an Iowa R-1 dispersion curve is a very close match to historical
analysis. Therefore, the Commission finds the company's proposal to be
reasonable and approves the proposed change. |
|
Account 227 – Digital switching |
429. |
This account comprises electronic
digital multiplex switching (DMS) systems for local and toll services.
Télébec requested a reduction of one year in the approved service life for
this account to an ASL of 12 years. |
430. |
Télébec submitted that its
historical life analysis supported its proposed change. The company also
argued that the life of DMS central processing units was similar to that of
computers which was significantly shorter than the current approved life of
13 years. According to Télébec, the same was true of the lives of line and
trunk peripherals. |
431. |
Télébec argued that the present DMS
technology and installed equipment had an increased exposure to obsolescence
which was expected to continue for a variety of reasons, including:
proliferation of the Internet protocol, the convergence of communications,
computing, information and entertainment, the continued proliferation of
fibre into the network, the explosive increase of the use of the Internet and
the continuing local and global competitive pressures. |
432. |
The Commission notes that Télébec's
historical analysis resulted in an ASL of 11 to 12 years for the 1998 to 2000
experience band. Although the company's analysis did not reflect the
retirement of 8% of these assets in 2001, the Commission took this
information into account in its analysis. The Commission is of the view that
the proposed ASL of 12 years with an Iowa R-1 dispersion curve is a good
match to the historical analysis. Therefore, the Commission finds the
proposed ASL of 12 years to be reasonable and approves the proposed change. |
|
Accounts 232 – Outside wiring,
242 – Aerial cable – Metallic, 243 – Underground cable – Metallic, 244 –
Buried cable – Metallic |
433. |
These accounts comprise aerial,
underground and buried metallic cables and metallic outside wiring. Télébec
requested a reduction of four years in the service life to an ASL of 16 years
for account 232, of two years in the service life to an ASL of 18 years for
account 242, of four years in the service life to an ASL of 16 years for
account 243 and of two years in the service life to an ASL of 19 years for
account 244. |
434. |
To support its proposed changes,
Télébec submitted that copper-based networks were facing increasing
obsolescence due to the demand for greater bandwidth. In the company's view,
the need to offer simultaneous voice and data, and possibly video
communication, required more robust networks with increased accuracy and
capacity. Consequently, the company anticipated ongoing migration to more
efficient technologies such as fibre and wireless. The company noted,
however, that the effect of technological change had not yet materialized in
a significant way. |
435. |
Télébec also submitted that an
estimated 40% of its aerial, buried and underground copper pairs were not
utilized and could be classified as being "retired in place". The company
noted, however, that it did not have an accounting system in place to keep
track of copper pairs retired in place. Hence, in the company's submission,
recorded retirements that were used in the historical life analysis were
deficient and did not reflect pairs retired in place. |
436. |
With respect to accounts 242, 243
and 244, the Commission notes that the historical analysis diverges
significantly from the proposed ASLs. The Commission also notes that the
approved ASLs for copper cables already diverge substantially from the ASLs
that resulted from historical analyses. In the past, the Commission has
accepted this divergence as reasonable, given the anticipated impact of new
technologies, new services and competition on the ASLs of copper cables. The
Commission further notes that the company recognized that this impact had not
yet materialized in the case of copper cables. |
437. |
The Commission also notes that while
the company stated that more than 40% of the copper pairs were "retired in
place", it also indicated that there was no accounting system in place to
quantify the impact on the ASLs for metallic cables. |
438. |
The Commission is of the view that
the ASLs already approved by the Commission sufficiently reflect the future
impact that new technologies, the introduction of new services and
competition would have on the ASLs of metallic cables. In addition, the
Commission is of the view that cable pairs that are "retired in place" should
not be considered in establishing ASLs since, according to the company, there
is no accounting system in place to quantify their impact on ASLs. |
439. |
With respect to account 232 –
Outside wiring, the Commission notes that Télébec did not carry out an
historical analysis since the retirements in this account are computed with
those of accounts 242 – Aerial cable – Metallic and 244 – Buried cable –
Metallic. The Commission further notes that the currently approved
depreciation life characteristics for account 232 are identical to those of
account 242. Given that no analysis or rationale has been provided to justify
a change, the Commission is of the view that the depreciation life
characteristics for account 232 should remain identical to account 242 –
Aerial cable – Metallic. |
440. |
In sum, the Commission considers
that the company has not justified the proposed changes to the ASLs of the
four metallic cable/wiring accounts and denies the company's application with
respect to these accounts. |
|
Account 246 – Underground conduit |
441. |
Télébec proposed to reduce the
current ASL for this account from 55 years to 40 years. To support its
proposal, the company argued that the retirement of conduit would be caused
by three factors: physical limitations and events; public utility
requirements; and, the replacement of underground copper cables with fibre
optic cable. This latter factor would also lead to under-utilization of
existing conduit given the smaller size and much greater transmission
capacity of fibre optic cable as compared to copper cable. |
442. |
Télébec also submitted that the
currently-approved life parameters produce an average remaining life of 42
years, which the company considered inordinately long and unrealistic. The
company was of the view that the historical analysis for this account was
inconclusive because of the scarcity of past retirements. |
443. |
In the Commission's view, Télébec
has not provided any compelling evidence or analysis which would justify
reducing the ASL for this account from 55 years to 40 years. In particular,
the fact that copper cable is often replaced by fibre optic cable has no
apparent effect on the service life of underground conduit. Consequently, the
Commission has decided that the currently-approved ASL of 55 years should be
retained. |
|
Method of recovery of the Depreciation Reserve Deficiency
|
444. |
The Commission has accepted, in
whole or in part, a number of Télébec's proposed adjustments to the
depreciation life characteristics of its asset accounts. These changes give
rise to a DRD since the relevant assets have not been depreciated to the
extent they would otherwise have been if the revised ASLs had been in effect.
It is, therefore, necessary to consider the appropriate method for recovering
the DRD. |
445. |
Under the current Phase I DRD
recovery method, Télébec would be entitled to recover a greater portion of
the DRD in the initial years than in subsequent years. If this method were
applied in the present circumstances, it would result in going-in rates
higher than needed to ensure full recovery of the DRD. |
446. |
In Decision
97-9, the Commission decided it was not
appropriate to use the Phase I DRD recovery method when setting the going-in
rates of the other large ILECs. Instead, the Commission chose to use an
alternative linear method to recover the DRD in equal amounts based on the
core composite average remaining service life of each company's assets. This
approach involved amortizing the DRD on a straight-line basis over the
average remaining service life of the plant and equipment for regulatory
purposes. This ensured that the amount included in the going-in rates would
not change relative to the amounts reflected in the rates for subsequent
years of the price cap plan. |
447. |
The Commission notes that Télébec is
currently using the Phase I method of DRD recovery (i.e., non-linear
amortization). The company stated that it would find the linear method
appropriate provided the same method were applied to TELUS Québec. |
448. |
The Commission further notes that
TELUS Québec indicated that, prior to being regulated by the Commission, it
was already using the linear method of DRD recovery. Following the release of
Decision 97-9, the company decided to
continue with the linear method. |
449. |
In light of the above, the
Commission considers it appropriate to use the same approach in the present
context as was adopted in Decision 97-9.
Consequently, the Commission directs each of the Companies to amortize any
DRD, as of the implementation date of the price regulation plan, for
regulatory purposes, using the core composite average remaining service life
of each company's assets as of that date. Using this approach, the
amortization of the DRD would be on a straight-line basis for regulatory
purposes. As noted above, this would ensure that the amount included in the
going-in rates would not change relative to the amounts reflected in the
rates for subsequent years. |
|
Depreciation expense adjustments to the going-in revenue requirement
|
450. |
Based on its proposal, Télébec's
depreciation expense would have increased by $3.8 million. However, based on
the approved adjustments to Télébec's various depreciation life
characteristics and the approved DRD recovery method discussed above,
Télébec's depreciation expense is reduced by $2.2 million, resulting in a
$6 million reduction to the going-in revenue requirement proposed by the
company. |
451. |
The Commission notes that, relative
to 2001, TELUS Québec proposed to reduce its 2002 depreciation expense by
approximately $12.3 million without any changes to depreciation life
characteristics. The Commission further notes that the company confirmed this
reduction in depreciation expense several times during the proceeding. |
452. |
Accordingly, Commission has accepted
TELUS Québec's proposed going-in depreciation expense reduction of $12.3
million. |
|
Capital Structure and Return on Equity
|
|
Introduction
|
453. |
In order to determine the going-in
revenue requirement of Télébec and TELUS Québec, it is necessary to establish
the appropriate capital structure for the Companies (i.e., proportion of
common equity and debt capital), as well as the appropriate ROE for the
Utility Segments of the Companies. |
454. |
In Decision
98-2, the Commission decided that the
going-in revenue requirement for the other large ILECs should generally be
determined using a capital structure with a maximum common equity of 55% and
a Utility Segment ROE of 11%. |
455. |
In PN
2001-36, the Commission sought
comments as to why the going-in revenue requirement for Télébec and TELUS
Québec should not reflect the same capital structure and Utility Segment ROE
as were used in Decision 98-2. |
|
Capital Structure
|
456. |
In Decision
97-21, the Commission determined that for
regulatory purposes the Companies' capital structure would be deemed not to
exceed 55%. |
457. |
Télébec submitted that the capital
structure used by the Commission in Decision
98-2 would be appropriate for determining its going-in revenue
requirement in the present proceeding. Télébec's capital structure in 2001
was approximately 54% common equity. |
458. |
In the present proceeding, TELUS
Québec forecast that its actual consolidated common equity ratio would be
55.8%, approximately the same capital structure as was used by the Commission
in Decision 98-2. TELUS Québec submitted
that there was no reason to conclude that it faced a materially different
level of business risk than the other large ILECs so as to justify a
different capital structure. Consequently, the company supported the use of
the Decision 98-2 capital structure for the
purpose of setting its going-in revenue requirement. |
459. |
No party who filed comments objected
to the capital structure proposed by the Commission in PN
2001-36. |
460. |
In light of the above, the
Commission has used a capital structure with a maximum common equity of 55%
for the purposes of determining the going-in revenue requirements of Télébec
and TELUS Québec. |
|
Return on Equity
|
|
Background |
461. |
For the past several years, Télébec
and TELUS Québec have been subject to rate base/rate of return regulation
with ROEs approved by the Commission in Decision
97-21. In that Decision, Télébec was
granted a Utility Segment ROE range of 10.4% to 12.4% while TELUS Québec was
granted a Utility Segment ROE range of 10.3% to 12.3%. For the purposes of
calculating the contribution requirement, the Commission used the midpoints
of the Utility Segment ROE ranges (i.e., 11.4% and 11.3% for Télébec and
TELUS Québec, respectively). |
|
Positions of parties |
462. |
Télébec agreed with the
Commission's proposal that its going-in revenue requirement be set using a
Utility Segment ROE of 11.0%. Télébec submitted that this rate reflected the
company's historical average over the last four years and indicated that the
company was seeking an ROE that would be competitive in the market and in
line with what the other large ILECs earned during their initial price cap
period. It further submitted that its proposal was fair and would lead to the
proper balance amongst all stakeholders. |
463. |
TELUS Québec did not agree with the
Commission's proposal to use 11%, but instead proposed to use an ROE of 12%
for setting its going-in revenue requirement. The company filed expert
evidence, prepared by Ms. McShane, proposing that the company's going-in
Utility Segment ROE be set to reflect the operating environment and
regulatory framework that would be implemented in 2002. It submitted that the
use of the equity risk premium method combined with the analysis of business
and financial risk indicated a cost of equity range of 12.0% to 12.5%. This
range was derived using a forecast of long-term Canada bonds at 6.0%,
"bare-bones" equity risk premium of 5.5% to 6.0% (made up of a Market Risk
Premium (MRP) of 6.5% to 7.5% and a beta of 0.8 to 0.85) and an adjustment
for financing flexibility of 50 basis points. |
464. |
ARC et al. submitted that the
target ROE should be set so that Télébec and TELUS Québec could expect to
earn a normal return on equity taking into account all of the benefits of the
pricing flexibility that would be permitted under a price cap plan.
ARC et al. also submitted that the use of an alternate methodology, such as
the formula employed by the National Energy Board (NEB), would result in
lower cost of equity than proposed by the Commission or the Companies (i.e.,
10.25%). |
465. |
In its final argument, ARC et al.
stated that it had re-calculated TELUS Québec's proposed Utility Segment ROE
using a 6.0% long-term Canada bond rate, a beta of 0.60 and an MRP of 3.5% on
a forward looking basis and 5.0% on a historical Canadian estimate basis. ARC
et al. submitted that the resulting cost of equity was less than 10% and,
therefore, a rate lower than the 12% proposed by TELUS Québec or the 11%
proposed by the Commission was appropriate. |
|
Analysis of the technical
evidence |
466. |
The Commission has traditionally
employed three tests to estimate the cost of equity: equity risk premium,
discounted cash flow (DCF) and comparable earnings. Increasingly, however,
the Commission has relied upon equity risk premium evidence. The NEB formula
has not previously been used by the Commission. |
|
1) National Energy Board formula |
467. |
Under the NEB formula, the risk
premium increases 0.25% for every 1.0% decline in the long-term Canada bond
yield forecast. For example, if the long-term Canada bond yield were 7.0%,
then the associated cost of equity would be 11.0% (assuming a risk premium of
4%, as was the case in Decision 98-2). Using
the NEB formula, if the bond yield were reduced to 6.0%, the decrease of 1.0%
would result in an increase of 0.25% in the risk premium, resulting in a cost
of equity of 10.25% (i.e., 6% plus 4.25%). |
468. |
ARC et al. submitted that the
Ontario Energy Board, the British Columbia Utilities Commission and the
Public Utilities Board of Manitoba all use a formula similar to that of the
NEB. In response, TELUS Québec submitted that a number of the companies
subject to this approach were dissatisfied with the results and had requested
that the approach be reviewed. |
469. |
Although the Commission considers
that the NEB formula has merit, it is concerned that this approach assumes
that business and financial risk is relatively constant across an industry.
The Commission concludes that it should continue to rely on the equity risk
premium supplemented by an analysis of the business and financial risks faced
by the regulated company. In the Commission's view, this approach is more
comprehensive in nature as it takes into account both general industry
factors, as well as each company's individual circumstances. The Commission
also notes that retaining this approach has the benefit of promoting
regulatory consistency, as it has been used by the Commission in several
previous decisions. |
|
2) Equity risk premium
methodology |
470. |
TELUS Québec proposed to calculate
the cost of equity using the equity risk premium method, noting that this
approach was consistent with previous Commission determinations. TELUS Québec
also submitted that this approach should be supplemented by an analysis of
the company-specific business and financial risks. |
471. |
The equity risk premium method is
based on the concept that there is a direct relationship between the level of
risk assumed and the return required. Since an investor in common equity
takes greater risk than an investor in bonds, the former requires a premium
above bond yields in compensation for that greater risk. |
472. |
The equity risk premium method
consists of two basic components: the risk-free rate and the equity risk
premium. This latter component has two elements – the MRP and the beta. The
sections that follow examine these basic components. Together, these
components provide a "bare-bones" cost of equity which may then be adjusted
by a flotation charge to ensure that the regulated company can raise
additional equity without diluting the book value of existing equity. |
473. |
The equity risk premium method to
calculate the cost of equity is: R = Rf + B x (Rm – Rf) + Fltn Cost
Where R is the cost of equity
Rf is the risk free rate
Rm is the market return
B is the beta
Rm-Rf is the market risk
premium
Fltn Cost is the
flotation cost |
474. |
The "bare-bones" equity risk
premium proposed by TELUS Québec was calculated based on Canadian and
international market data, using historical and forward-looking estimates,
over a post-World War II timeframe using an average of compound and
arithmetic holding periods. TELUS Québec then adjusted this figure, referred
to as the MRP, by the beta, which measures risk as the volatility of an
individual stock or portfolio of stocks relative to the volatility of the
market. Finally, the company added a flotation adjustment for financial
flexibility. |
|
a) Risk-free rate |
475. |
TELUS Québec used a risk-free rate
of 6.0% in its measure of equity risk premium. In arriving at the 6.0%
figure, TELUS Québec used a combination of consensus economic forecasts
3-months forward and 12-months forward of 10-year long-term Canada (LTC) bond
yields, longer term forecasts of these bonds from 2002 to 2006, and forecasts
of the 30-year U.S. treasury bond. TELUS Québec then compared its results to
the rate used by the Commission in Decision 98-2
to ensure consistency over time. |
476. |
ARC et al. also used a risk-free
rate of 6.0% in its calculation of the equity risk premium. |
477. |
The Commission notes that both
parties that addressed this issue used a 6.0% LTC bond rate. The Commission
considers this to be an appropriate measure of the long term risk-free rate. |
|
b) Market risk premium |
478. |
The primary approach to estimating
the required risk premium involves measuring the risk premium for the entire
stock market derived from an analysis of achieved market risk premiums. Those
market risk premiums are then adjusted to reflect the risk of the benchmark
company relative to the market as a whole. This is accomplished through the
use of a beta factor. The elements of this approach are discussed in the
following sections on holding periods, U.S. data and use of historical and
forward-looking data. |
|
i) Holding periods |
479. |
TELUS Québec provided data on both a
compound and arithmetic holding period basis, using a combination of both in
arriving at its proposed estimate. It submitted that consideration of the
arithmetic average was appropriate as it recognized market uncertainty,
whereas the compound average tended to smooth out any uncertainty over time. |
480. |
The Commission notes that in
previous decisions it has not used the arithmetic average on the grounds that
it could give undue emphasis to short term variations in the market. The
Commission has held that it was appropriate to take a longer term perspective
when establishing the equity risk premium. In the Commission's view, TELUS
Québec did not justify any modification to this approach. Accordingly, the
Commission continues to consider it appropriate to rely on the compound
average when calculating the equity risk premium. |
|
ii) U.S. data |
481. |
TELUS Québec submitted that the
historical risk premiums should not be limited to the Canadian experience but
should include an international weighting to reflect the increasing
globalization of capital markets. TELUS Québec also submitted that Canadian
and international markets should both be utilized as Canadian investors were
increasingly concerned with the mediocre performance of the Canadian equity
market. TELUS Québec used a weighting of 70% for Canadian and 30% for U.S.
data based on the fact that investment in registered retirement savings plans
(RRSPs) was limited to 30% foreign content. |
482. |
TELUS Québec submitted evidence
indicating that Canadians were increasing their foreign investment, and that
there were factors specific to the historical Canadian risk premiums which
cast doubt on the premise that historical data was a proxy for investor
expectations. In TELUS Québec's submission, these factors included the
increasing recognition of the under-performance of the Canadian market, the
fact that the market had undergone significant structural changes and the
fact that the Canadian market remained significantly less diversified than
the U.S. market. |
483. |
ARC et al. submitted that
international data might be of use, but that the Commission should not place
too much reliance on it as the United States had different monetary and tax
policies, both of which affected rates of return. |
484. |
The Commission agrees that markets
are becoming global in nature, and that a level of reliance on international
data is appropriate. The Commission has used a methodology based on the
concept of foreign content within RRSPs in previous decisions, and considers
that a split of 70% Canadian and 30% U.S. is appropriate. |
|
iii) Use of historical and
forward-looking data |
485. |
In developing the MRP, TELUS Québec
used measures of both historical and forward-looking risk premiums. In TELUS
Québec's submission, consideration of both measures was required to ensure
that the resulting estimate would be compatible with current market
expectations. |
486. |
ARC et al. submitted that TELUS
Québec had used only one source of historical data instead of the three
sources that were used in the evidence filed in Decision
98-2. ARC et al. argued that this had
increased the value of the historical MRP estimates, as compared to the
evidence filed in Decision 98-2, given that
the source used by TELUS Québec contained the largest risk premium estimates
of the three possible sources. |
487. |
In defence of its approach, TELUS
Québec indicated that the other two sources of data had not been updated
since Decision 98-2. |
488. |
With respect to the forward-looking
measure, TELUS Québec indicated that this was used primarily as a check on
historical estimates. TELUS Québec submitted that investment analysts'
forecasts had been optimistic, were not sustainable over the longer term, and
that these forward-looking risk premiums confirmed that historical averages
were likely to understate current investor expectations. TELUS Québec
calculated the MRP using these estimates at 8.5% and acknowledged that the
estimates were optimistic. Nonetheless, TELUS Québec did not consider it
appropriate to adjust them downward. |
489. |
ARC et al. submitted that TELUS
Québec's forward-looking estimates were in the magnitude of 6.0% too high and
suggested that the Commission disregard these as they were optimistic. |
490. |
The Commission concludes that TELUS
Québec's forward-looking data was based on estimates that were optimistic
and, therefore, the Commission has placed minimal reliance on this data. |
|
iv) Conclusions regarding the
Market Risk Premium |
491. |
By way of summary, TELUS Québec
calculated its proposed MRP using an average of compound and arithmetic
holding periods, weighted 70% to 30% for Canadian and U.S. data, based on
historical returns for the timeframe from 1947 to 2000. The result of this
calculation was then compared to the calculation using forward-looking data
for reasonableness. In the end, TELUS Québec proposed an MRP of 6.5% to 7.5%. |
492. |
ARC et al. submitted that an MRP of
3.5% would be appropriate on a forward-looking basis and that a 5.0% MRP
would be appropriate on a historical basis. |
493. |
In accordance with the conclusions
set out above, the Commission is of the view that the MRP should be
calculated using a compound average holding period, based predominantly on
historical data using a 70/30 split between the Canadian and U.S. experience.
The Commission has made adjustments to the calculations submitted by both ARC
et al. and TELUS Québec to reflect this approach. On the basis of these
adjustments, the Commission concludes that an appropriate range for the MRP
would be 6.0% to 6.5%. |
|
c) Beta |
494. |
The beta serves to adjust the MRP to
reflect the risk of a benchmark company relative to the market. It indicates
the change in the rate of return on a stock associated with a one percentage
point change in the rate of return on the market. |
495. |
The beta is measured in two ways –
raw or adjusted. The raw (or unadjusted) beta represents the calculated beta
using market data, without adjustment. The adjusted beta effectively gives a
two-thirds weighting to the raw beta and a one-third weighting to the market
beta of 1.0. |
496. |
TELUS Québec proposed that the
relative risk recognize total market risk as measured by the adjusted beta.
TELUS Québec submitted that this was the most appropriate measure of beta as
it was more consistent with relative standard deviations of market returns
and the explicit consideration of telephone company (telco) common equity
shares' interest rate sensitivity. |
497. |
TELUS Québec proposed an adjusted
beta of 0.80 to 0.85 which equates to a raw beta of 0.75 to 0.80. TELUS
Québec indicated that its beta was based on Canadian telephone company betas
for three five-year periods ending in 1998, 1999 and 2000. |
498. |
ARC et al. submitted that the
higher beta estimates provided by TELUS Québec should be disregarded as they
were calculated using data which reflected BCE Inc.'s ownership of Nortel
Networks Corporation (Nortel) and, hence, did not properly capture the
relative risk of telecommunications carriers. ARC et al. also submitted that
the beta estimate used by TELUS Québec was too high as it took into
consideration the period in which there was vigorous long distance
competition and limited local competition. In the view of ARC et al., the
period prior to the one used by TELUS Québec would be more appropriate,
resulting in a lower beta of 0.60. |
499. |
The Commission has ruled in
previous decisions, including Decision 98-2,
that raw betas are appropriate given that, in the Commission's view, there is
no basis in theory for the use of an adjusted beta. In the present
proceeding, TELUS Québec has provided no new evidence or arguments that would
justify using an adjusted beta. The Commission therefore concludes that,
consistent with its previous decisions, it is appropriate to use the raw
beta. |
500. |
The Commission notes that betas measured using
the Toronto Stock Exchange (TSE) Telco Index have been used in past
decisions. The Commission agrees with ARC et al. that the use of the Telco
Index, including BCE Inc., is not appropriate as it would skew the results
due to the impact of the ownership of Nortel. The Commission is of the view
that the Telco Index (less BCE Inc.) is the best basis for determining the
beta. The Commission is also of the view that a five-year average (1996 to
2000) is an appropriate measure as it encompasses a period that is long
enough to smooth out any distortions in the data that may occur. Using this
data results in a beta of 0.72 to 0.76. |
|
d) Flotation costs |
501. |
TELUS Québec submitted that an
adjustment for financing flexibility was required to permit a company to
recover all costs that would be incurred to issue additional stock, if
necessary, without harming its existing shareholders. TELUS Québec also
submitted that its proposed adjustment of 50 to 75 basis points would
compensate for flotation costs plus two additional considerations – a margin
for unanticipated capital market conditions and a recognition that regulation
continued to be a surrogate for competition. |
502. |
Other parties did not comment on
this issue. |
503. |
The Commission is of the view that
firms should only be able to recover legitimate flotation costs that are a
necessary cost of doing business. In past decisions, the Commission allowed a
flotation cost adjustment of between 20 to 30 basis points to recognize these
costs. The Commission considers that this level of recovery is still
appropriate and, consequently, does not accept TELUS Québec's proposed higher
range. |
|
3) Direct estimates of risk
premium |
504. |
An alternative approach used to
estimate the equity risk premium develops the risk premium for a particular
stock or industry directly, either by reference to the stock's or the
industry's market performance or by reference to a series of DCF studies.
DCF-based estimates of the equity risk premium rely on the projected dividend
yield plus investor expectations of long-term growth. |
505. |
TELUS Québec calculated direct
estimates using both of the methods described in the previous paragraph. |
506. |
First, TELUS Québec estimated the
equity risk premium by using a direct measure of telco risk premium. This was
accomplished by measuring the historical risk premium using (1) the TSE 300
Telco Index (2) the TSE 300 Utility Index and (3) the TSE 300 Gas and
Electric Index. TELUS Québec submitted that the results obtained through this
measure of risk premium were in line with its proposed amount. |
507. |
Second, TELUS Québec provided a DCF
estimate that consisted of the forecast dividend yield plus expected growth.
TELUS Québec submitted that the results of this method further supported its
proposal. |
508. |
With respect to TELUS Québec's DCF
estimate, ARC et al. submitted that TELUS Québec had based its dividend yield
on an inappropriate timeframe and that the dividend yield should have been
2.0%, not the 5.4% that TELUS Québec used. ARC et al. argued that this
correction would result in a cost of equity for the market as a whole of 9.0%
(made up of a dividend yield of 2.0% and a growth rate of 7.0%). |
509. |
The Commission is of the view that
TELUS Québec's direct measure of the telco risk premium should be discounted
as it relied predominantly on stock market indices of other industries whose
overall risk exposure would be different from that of the incumbent telephone
companies. The Commission also notes that TELUS Québec's DCF estimate was put
forward solely to support or confirm the results of other tests. Accordingly,
the Commission has placed minimal reliance on this direct approach to
estimate the company's equity risk premium. |
|
4) Risk assessment |
510. |
Business risk encompasses the basic
operating characteristics of a firm which can lead to variations in operating
income or affect the ability of the firm to recover and obtain a return on
capital investment. Financial risk is the additional risk exposure resulting
from the use of leverage, which to the common shareholder includes both
preferred stock and debt. Business and financial risk are factors which are
generally considered when assessing the cost of equity. |
511. |
TELUS Québec submitted that the
business risk of its Utility Segment was not materially different from the
total risk faced by the other large ILECs. The company based this conclusion
on a large number of factors. |
512. |
According to TELUS Québec, its
Utility Segment had a lesser ability to expand demand than either toll or
full service providers. At the same time, it had greater capital intensity
and operating leverage than toll networks, but less ability to offset market
share loss than toll providers. TELUS Québec also argued that its Utility
Segment faced a high risk of obsolescence and a lack of risk-reducing
benefits as among technologies and services compared to a larger, more
integrated telephone company. In TELUS Québec's view, it faced strong
potential competitors in the new converged market for services. |
513. |
On the question of financial risk,
TELUS Québec submitted that its financial risk had been similar to that of
Aliant Telecom, Bell Canada and TELUS over the last five years. In arriving
at this conclusion, TELUS Québec indicated that its debt rating was
investment grade, its capital structure was forecast for 2001 at 55.8% common
equity (approximately at the level of 55.0% deemed by the Commission to be
acceptable for the other large ILECs), and its interest coverage ratios were
within an acceptable range. |
514. |
None of the other parties to this
proceeding commented on the risk evidence filed by TELUS Québec. |
515. |
The Commission agrees with TELUS
Québec's assessment of the business and financial risks faced by the company. |
|
Conclusion on cost of equity for
TELUS Québec |
516. |
In light of the foregoing, the
Commission concludes that a going-in Utility Segment ROE of 11.0% is
appropriate for TELUS Québec. This ROE is based on a risk-free rate of 6.0%,
an MRP of 6.0%-6.5%, a beta of 0.72 to 0.76 and a flotation adjustment of 20
to 30 basis points. The Commission has also determined that no adjustment to
this ROE is required as a result of the risk assessment set out above. |
|
Risk differentials between the Companies
|
517. |
The final issue considered by the
Commission relating to the cost of equity was whether Télébec and TELUS
Québec faced different risks and, hence, should have different costs of
equity. |
518. |
In Decision
97-21, the Commission set the current ROE
ranges for Télébec and TELUS Québec. These were based on the same risk-free
premium and the same business risk premium for each company. The overall
range for Télébec was slightly higher due to a higher financial risk premium
for this company. |
519. |
In PN
2001-36, the Commission
proposed to use the same Utility Segment ROE for both Télébec and TELUS
Québec, namely the 11% ROE used for the other large ILECs in Decision
98-2. |
520. |
In the present proceeding, Télébec
submitted that the going-in Utility Segment ROE of 11% proposed by the
Commission would be appropriate. The Commission has determined above that the
going-in Utility Segment ROE for TELUS Québec should be 11%. Accordingly, the
Commission concludes that there is no basis for setting different going-in
ROEs for Télébec and TELUS Québec. |
|
Conclusions on cost of equity
|
521. |
In light of the above, the
Commission determines that the going-in Utility Segment ROE for both Télébec
and TELUS Québec should be 11.0%. The Commission has calculated the
Companies' going-in revenue requirement on this basis. |
|
Net annualized revenue impacts of pending and planned
tariff items
|
522. |
As discussed above, in
PN 2001-36 the Commission
directed Télébec and TELUS Québec, when calculating their going-in revenue
requirements, to include the net annualized revenue impacts of any pending
and planned tariff items as one of the required incremental adjustments to
their final 2001 contribution requirements. |
523. |
Télébec and TELUS Québec
have included $0.6 million and $1.1 million, respectively, in the calculation
of their going-in revenue requirements to reflect the net annualized revenue
impacts of any pending and planned tariff items. |
524. |
Other parties to this
proceeding did not comment on this issue. |
525. |
In the Commission's
view, Télébec and TELUS Québec have properly included the net annualized
revenues arising from any pending and planned tariff filings as part of their
going-in revenue requirement calculations. |
526. |
Accordingly, in setting
the Companies' going-in revenue requirements, the Commission has accepted
Télébec's and TELUS Québec's proposed net annualized revenue impacts of
pending and planned tariff items of $0.6 million and $1.1 million,
respectively. |
|
|
|
Background
|
527. |
In PN
2001-36, the Commission
directed Télébec and TELUS Québec to include in their proposed going-in
revenue requirement any adjustment that might arise in connection with
proposed changes to the amortization of their respective deferral accounts. |
528. |
Télébec's deferral account resulted
from two related Commission orders, one in 2000 and another in 2001. In
Télébec ltée – Rate restructuring, Order CRTC
2000-531, 9 June 2000 (Order
2000-531), the Commission
approved, effective 1 July 2000, a residential rate restructuring proposal of
Télébec. In CRTC approves an application to review and vary Order CRTC
2001-531 – Télébec ltée – Rate
restructuring, Telecom Order CRTC
2001-216, 14 March 2001 (Order
2001-216), the Commission
directed that the rate restructuring approved in Order
2000-531 be maintained, but
that as of 1 July 2000, funds generated by this residential rate
restructuring be placed in a deferral account to be used for the benefit of
Télébec's residential subscribers to mitigate future rate increases that
would have otherwise been approved by the Commission. |
529. |
In Decision
97-21, the Commission directed TELUS Québec
to place excess earnings in a deferral account should the Utility Segment
achieve earnings above the upper limit of the allowed rate of return on
average equity range during the split rate base regime. In the proceeding
leading to Québec-Téléphone 1999 final contribution rate approved,
Order CRTC 2000-860, 19
September 2000 (Order 2000-860),
TELUS Québec reported excess earnings in 1998 that were placed in a deferral
account. In Order 2000-860, the
Commission stated that it would use the deferral account to mitigate any
future residential local rate increases during the transition period or at
the start of the price cap regime. |
|
Positions of parties |
530. |
Télébec proposed to withdraw the
$5.1 million balance in its deferral account in 2002 ($4.9 million principal
plus interest accumulated in 2002). The company also submitted that it should
no longer be required to place $3.2 million per year (i.e., the annual
revenue associated with the residential rate restructuring approved in Order
2000-531 as of 1 January 2002)
in the deferral account. The resulting total decrease in Télébec's proposed
revenue requirement would be $8.3 million for 2002 and $3.2 million annually
for subsequent years. |
531. |
In response to an interrogatory
from the Commission, Télébec disagreed with the idea of amortizing the
balance of the deferral account equally over the entire price cap period.
Télébec argued that if this approach were adopted, its average basic local
residential rate would be approximately $33.65 per month for the four years
of the price cap regime. The company noted that this would be less than its
proposed maximum rate of $34.43. Télébec also submitted that the average rate
should increase, in any case, at the end of the four-year period because the
deferral account would be depleted. |
532. |
TELUS Québec proposed to withdraw
$7.3 million from the deferral account in 2002 and $1.6 million in 2003. |
533. |
In response to an interrogatory
from the Commission, TELUS Québec disagreed with the idea of amortizing the
balance of the deferral account equally over the entire price cap period.
TELUS Québec submitted that amortizing the deferral account in this manner
would require it to increase rates in its non-HCSA rate bands. The company
argued that this could result in an unfavourable positioning of its
residential rates compared with those of Bell Canada. For that reason, TELUS
Québec preferred its proposal to amortize the deferral account primarily at
the start of the price cap regime. |
534. |
With respect to Télébec, ARC et al.
noted that during the public hearing, Télébec stated that the majority of its
residential rates were compensatory before the rate increase approved by the
Commission in Order 2000-531.
ARC et al. submitted that the company's going-in rates should be set at a
level where they would be compensatory (i.e., the same as the rates in effect
before the increase approved in Order
2000-531). ARC et al. also
argued that Télébec's deferral account should be used to mitigate rate
increases only in the areas where rates were not compensatory. |
535. |
Other parties did not file comments
on TELUS Québec's proposed use of its deferral account. |
|
Conclusions
|
536. |
The Commission notes that Télébec's
proposal to stop placing $3.2 million in the deferral account would reduce
the company's going-in revenue requirement by the same amount. These
additional revenues would mitigate the need for further residential rate
increases, which would be in accordance with the determinations in Order
2001-216. Accordingly, the
Commission directs Télébec to stop placing the annual rate restructuring
revenues of $3.2 million in the deferral account, effective 1 August 2002. |
537. |
With respect to the funds currently in the
deferral accounts of Télébec and TELUS Québec, the Commission is of the view
that it is generally preferable to amortize a large amount over a longer
period of time in order to maintain rate stability. Using all or almost all
of the balance of the deferral account in the first year would distort the
Companies' first year revenues and could lead to a situation where
substantial rate increases would be required in the second year to compensate
for the elimination of a non-recurring item (i.e., the draw down of the
deferral account). This type of rate increase during the price regulation
period would run counter to the overall scheme and purpose of price
regulation and, in the Commission's view, should be avoided if possible. |
538. |
In order to minimize fluctuations
in local rates and maintain the integrity and uniformity of the price
regulation regime, the Commission has decided, for the purposes of
establishing the going-in revenue requirements of the Companies, to amortize
their deferral accounts equally over the price regulation period of four
years. The Commission notes that it has taken into account the accumulation
of interest and, in the case of Télébec, any amounts placed in the deferral
account after the filing of its materials in this proceeding but prior to the
release of this Decision. |
|
Local number portability and local competition start-up
costs
|
|
Background
|
539. |
In the present
proceeding, the question arose whether there was a need to take into account
the start-up costs associated with local number portability (LNP) and local
competition when determining the going-in revenue requirements of Télébec and
TELUS Québec. |
540. |
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, the Commission
determined that LNP and local competition start-up costs incurred by the
other large ILECs should not be recovered from interconnecting carriers, but
that each carrier should be responsible for recovering its own costs. |
541. |
In Decision
98-2, the Commission decided that the
contribution payments made by toll service providers should not be used to
fund the other large ILECs' LNP and local competition start-up costs. As a
result, these costs were excluded from their expense forecasts in
establishing their going-in contribution requirement and going-in rates. In
addition, the Commission stated that it would initiate a proceeding to
determine whether any LNP and local competition start-up costs should be
recovered from subscribers. |
542. |
In Local Competition
Start-up Costs Proceeding, Telecom Order CRTC
99-239, 12 March 1999 (Order
99-239), the Commission
determined that the other large ILECs' LNP and local competition start-up
costs should be calculated on a revenue requirement basis. Under the revenue
requirement approach, the capital costs would be recovered through an annual
depreciation expense. The Commission also concluded that these costs should
be allocated among Capped and Uncapped services on the basis of retail
switched exchange service NAS, with non-residence NAS weighted by a factor of
1.5. The recovery of costs allocated to capped Utility Segment services would
be by way of an exogenous factor. |
543. |
In Order
2001-761, the Commission
determined that Télébec and TELUS Québec would each be responsible for
recovering its own LNP and local competition start-up costs and that such
costs would not be recovered from the NCF. In addition, in order to control
the magnitude of these costs, the Commission determined that both Companies
should incur expenses only when and if required. |
|
Positions of parties
|
544. |
Télébec initially
proposed to recover its anticipated expenses of $2.6 million for the
implementation of LNP and local competition directly from the NCF. The
company submitted that it had already incurred some start-up costs related to
the introduction of local competition. Télébec stated that to enable local
competition, the costs to modify systems and procedures were necessary before
competition was permitted. In addition, Télébec submitted that one competitor
had indicated that it planned to provide services in Télébec's territory. |
545. |
Upon the release of
Order 2001-761, and in response
to the Commission's interrogatories, Télébec altered its proposal and
suggested instead that LNP and local competition start-up costs be recovered
through an exogenous factor in the price regulation regime. |
546. |
Télébec submitted that
its proposed method of recovery would be consistent with the Order
99-239 methodology, except with
respect to the allocation of costs to business services in high-cost bands.
In this regard, Télébec did not agree with the application of the 1.5
weighting factor for business NAS in those bands. In Télébec's view, the
expectation of profit in high-cost bands was more risky due to lower density
and higher costs. Consequently, Télébec argued that in high-cost bands the
benefits of competition to business subscribers would be the same as for
residential subscribers. On that basis, the company submitted that the
allocation of costs for business NAS should carry the same weight as for
residential NAS. That is, a factor of 1.0 should be used for both residential
NAS and business NAS in high-cost bands. |
547. |
TELUS Québec initially
proposed to include its LNP and local competition start-up costs in its
going-in revenue requirement. The company forecast these costs at $2.6
million. The company also submitted that it would require six months to
prepare its network so that it could provide service to competitors. |
548. |
Upon the release of
Order 2001-761, TELUS Québec
altered its proposal. Instead of including the start-up costs in its revenue
requirement, the company proposed to set aside $2.6 million of its deferral
account to recover those costs when incurred. |
549. |
In response to
Télébec's proposal, ARC et al. noted that in Order
2001-761, the Commission
determined that the Companies should incur expenses to implement LNP and
local competition only as required. ARC et al. submitted that this approach
was necessary so as to ensure that consumers would not pay, through
residential rates, for the cost of facilities that would not be needed for
several years. ARC et al. also stated that it was surprised Télébec had
incurred start-up costs before the Commission allowed competition in the
company's serving territory, while acknowledging that competition in its
territory might not actually start on 1 September 2002. In ARC et al.'s
submission, incurring start-up costs before permitted or necessary was
disrespectful of Order 2001-761. |
550. |
ARC et al. proposed that
the Commission require competitors to register before providing local
services in the Companies' territories. ARC et al. argued that this would
help ensure that the Companies comply with Order
2001-761 by incurring start-up
costs for LNP and local competition only when services are required by
competitors. |
|
Conclusions
|
551. |
In Order
2001-761, the Commission
concluded that Télébec and TELUS Québec should incur LNP and local
competition start-up costs only as and when required. In the present
proceeding, the Companies provided estimates of their anticipated start-up
costs. |
552. |
In the Commission's
view, it is not possible to properly assess the reasonableness of the
Companies' anticipated costs in advance of the implementation of LNP and the
start-up of local competition. Consequently, it would be premature to allow
recovery of such costs at this time. |
553. |
The Commission also
considers that LNP and local competition start-up costs should not be
included in the going-in revenue requirement as this would result in
permanent increases to rates, despite the fact that some of these costs are
non-recurring costs that, once recovered, should be removed from rates. |
554. |
In light of these
considerations, and in keeping with the approach adopted in Order
99-239, the Commission has
decided that the Companies should recover LNP and local competition start-up
costs by means of an exogenous factor which they may apply for when the
relevant costs are incurred. |
555. |
On a preliminary basis,
the Commission also considers that the methodology used for the recovery of
LNP and local competition start-up costs by the other large ILECs, as set out
in Order 99-239, would be
appropriate for Télébec and TELUS Québec. Accordingly, in their filings for
an exogenous factor, the Companies should include the amount of LNP and local
competition start-up costs, as well as the method of recovery, calculated
using the methodology set out in Order
99-239. In addition, the
Companies should distinguish between recurring and non-recurring costs. |
556. |
The Commission notes
that Télébec argued that the cost allocation methodology of Order
99-239 should be modified in
respect of business services in high-cost bands since, in its view, business
and residential customers in these bands would benefit in a comparable manner
from local competition. |
557. |
Generally, the
Commission assigns costs on the basis of causality. Under this approach, the
services or customer groups that expect to use the services or facilities are
assigned the costs. In the case of high-cost bands in Télébec's territory,
the Commission is not convinced that local competition would develop in these
areas in a significantly different manner from non-HCSAs. |
558. |
Consequently, the
Commission reiterates its preliminary view that when Télébec and TELUS Québec
file for an exogenous factor, they should allocate their LNP and local
competition start-up costs on the basis of retail switched exchange service
NAS, with non-residence NAS weighted by a factor of 1.5 and residence NAS by
a factor of 1.0 as described in Order
99-239. |
559. |
The Commission notes
that TELUS Québec proposed to set aside $2.6 million of funds in its deferral
account that would be drawn down as LNP and local competition start-up costs
were incurred. In light of the Commission's view that such costs should be
recovered, after they have been incurred, within the parameters of the price
regulation regime (i.e., by means of an exogenous factor), the Commission
does not consider TELUS Québec's proposal to be appropriate. |
560. |
The Commission also
notes that TELUS Québec included $2.6 million for LNP and local competition
start-up costs in its proposed going-in revenue requirement. The Commission
has removed this amount from the determination of the company's going-in
revenue requirement. |
561. |
Finally, the Commission
notes that, as set out in Decision 97-8 and
Order 2001-761, CLECs must
register with the Commission before they are eligible to operate in the
territory of the Companies or of the other large ILECs. They must also update
their registration information whenever they intend to serve new areas not
already identified in their registration materials. |
562. |
In the Commission's
view, it would be inappropriate to require, as a precondition of the
Companies incurring LNP or local competition start-up costs, a further
registration from a CLEC, which has complied with the requirements noted in
the preceding paragraph, and decides to actually commence offering services
in Télébec's or TELUS Québec's territory. The Commission believes that the
current registration and updating requirements continue to be adequate. |
|
Amortization of TELUS Québec employee benefits
|
563. |
In Order
2001-641, the Commission
approved TELUS Québec's final 2001 contribution rate. The analysis of
revenues and expenses showed that TELUS Québec had followed the new
accounting standards of the Canadian Institute of Chartered Accountants
(CICA) relating to the treatment of employee benefits on a prospective basis,
and had selected reasonable amortization periods for the various benefits,
based on their nature. The annual amortization expense for the total benefits
liability for the Utility Segment was $1.3 million for 2001. |
564. |
In the present
proceeding, TELUS Québec proposed to change the amortization period
associated with employee benefits. Specifically, TELUS Québec proposed to
amortize this liability over the four-year price cap period proposed by the
company. |
565. |
This change would
reduce the amortization period for medical expenses and life, accident and
disability insurance by 17 years (i.e., from 21 to four years). It would also
reduce the amortization period for the Annuities Readjustment and the
Regulatory Derestriction from 10 years to four. These proposed changes would
increase the going-in revenue requirement of the company's Utility Segment by
$2.3 million. |
566. |
In support of its
proposal, TELUS Québec argued that the existence of the employee benefits
transitional liability meant that past contributions to the plans had not
been as high as necessary. As a result, in the company's view, subscribers
benefited from lower than normal rates. TELUS Québec also noted that, for
accounting purposes, it had retroactively charged the entire liability
against its earnings in the year in which the liability was recognized. The
company submitted that, for regulatory purposes, it would be appropriate to
amortize the liability prospectively over four years so as to prevent too
great a rate shock to its customers. |
567. |
Other parties did not
file comments on this issue. |
568. |
The Commission notes
that when it approved the company's 2001 contribution requirement and
contribution rate in Order 2001-641,
amortization periods were set for the employee benefits in accordance with
the CICA's new accounting standards and were determined based on the specific
nature of the various benefits. |
569. |
In the Commission's
view, TELUS Québec has provided no compelling reasons for decreasing, for
regulatory purposes, the amortization periods of the employee benefits in the
manner proposed. The Commission notes that if the company's proposal were
accepted, rather than preventing rate shock as suggested by TELUS Québec, it
would result in a $2.3 million increase in the company's going-in revenue
requirement which would, in turn, increase the potential need to raise rates. |
570. |
The Commission
concludes that, for regulatory purposes, the approved CICA-based amortization
periods for the different employee benefits should be maintained.
Consequently, the Commission has not accepted TELUS Québec's proposal to
amend the amortization period for the company's employee benefits
transitional liability. As a result, the $2.3 million associated with the
amortization of the liability has been removed from the calculation of the
company's going-in revenue requirement. |
|
Non-existent assets
|
571. |
TELUS Québec proposed to write off
$1.7 million in assets, and charge that amount directly as an expense for
purposes of calculating the going-in revenue requirement. The company
submitted that such treatment would comply with regulatory accounting
principles, which stipulate that written-off assets should be considered
fully depreciated. |
572. |
TELUS Québec stated that when a new
accounting system was implemented, assets were categorized according to a new
accounting structure, and that some assets from the old accounting system
could not be categorized under the new structure. Despite efforts to identify
those assets, the company indicated that they still represented unidentified
residual assets. TELUS Québec estimated the value of these assets, as of 31
January 2001, at $2.5 million, $1.7 million of which represented the Utility
Segment portion. In response to an interrogatory, TELUS Québec stated that
the assets in question were investments made in the internal network, and
were unidentifiable or "non-existent" network components. |
573. |
Other parties did not comment on
this issue. |
574. |
The Commission notes that TELUS
Québec was unable to provide more detail on the nature of the assets in
question. The Commission also notes that if it were to allow TELUS Québec to
expense the $1.7 million, the going-in revenue requirement would be higher,
which, in turn, would likely result in higher rates. |
575. |
The Commission recognizes that, for
accounting purposes, it may be appropriate to expense non-existing assets
when there are no more assets remaining in a class of assets and there is
still a net book value. However, the Commission also notes that, under the
Phase I Directives, any remaining net book value in an asset class would
normally not be expensed, but would instead be depreciated over the remaining
useful life of that class. |
576. |
Given the uncertainty as to the
nature of the assets at issue in the present case, the Commission is
concerned that the costs relating to those assets may have been included in
other asset classes and could either still be in use or may already have been
fully depreciated. In these circumstances, the Commission is of the view that
the write-off of non-existent assets should not be included in the
calculation of the going-in revenue requirement. Accordingly, TELUS Québec's
going-in revenue requirement, as proposed by the company, has been reduced by
$1.7 million. |
|
Contribution payment to the national contribution fund
|
|
Background
|
577. |
In order to determine the going-in
revenue requirements of Télébec and TELUS Québec, it is necessary to
establish the contribution payments these companies will be required to make
to the NCF. In accordance with the Commission's determinations in Decision
2000-745, the Companies' contribution
payments must be calculated by multiplying the applicable revenue-percent
charge times the amount of contribution-eligible Utility Segment revenues. |
578. |
In the 2001 contribution
requirement proceeding for Télébec and TELUS Québec, the Companies calculated
their respective contribution payments to the NCF using the interim
revenue-percent charge of 4.5%. Subsequently, in Decision
2001-238, the Commission determined
that, based on a preliminary calculation, the revenue-percent charge for 2002
should be 1.5%. More recently, 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
determined that an interim revenue-percent charge of 1.4% should be used
effective 1 January 2002. |
|
Positions of parties
|
579. |
Télébec proposed a reduction in its
contribution payment to the NCF of $2.8 million based on the reduction in
Decision 2001-238 of the revenue-percent
charge from 4.5% to 1.5%. |
580. |
Télébec also proposed to include in
its going-in revenue requirement an additional contribution payment of
$141,000 to the NCF based on $9.4 million of additional contribution-eligible
revenues and a revenue-percent charge of 1.5%. Télébec indicated that these
additional revenues comprised the annualized revenues from pending and
planned tariff filings, the additional revenues from the rate restructuring
in Order 2001-216 that would no
longer accrue in the deferral account and the revenues from the proposed rate
increases for 2002 and 2003. |
581. |
As a result of these two
adjustments, the net reduction of the contribution payment to the NCF
proposed by Télébec was $2.7 million. |
582. |
TELUS Québec calculated the
reduction of its contribution payment to the NCF by using the estimated
Utility Segment contribution-eligible revenues for 2002 and the interim
applicable revenue-percent charge of 1.5% approved in Decision
2001-238. On that basis, TELUS Québec
calculated in a supporting schedule that the reduction of its contribution
payment to the NCF should be $4.3 million. However, in the calculation of its
proposed going-in revenue requirement, the company included a reduction of
$4.1 million instead of the $4.3 million set out in the supporting schedule. |
583. |
Other parties did not comment on this issue. |
|
Conclusions
|
584. |
Based on the interim revenue-percent
charge of 1.4% set out in Order
2001-876, the Commission has determined that the reduction in Télébec's
contribution payments to the NCF is $2.9 million, instead of the $2.8 million
proposed by the company. This constitutes a further reduction of $0.1
million. |
585. |
The Commission also notes that in
Part IX of this Decision it has denied Télébec's proposed rate increases for
2002 and 2003. Consequently, the additional contribution-eligible revenues
only comprise the additional revenues from pending and planned tariff filings
and the additional revenues from not accruing the revenues from Order
2001-216 in the deferral
account. In total, these additional contribution-eligible revenues are
$3.8 million. Applying the 1.4% revenue-percent charge, established in Order
2001-876, to the $5.6 million
reduction in revenues results in a further reduction to the contribution
payment to the NCF of $0.1 million. |
586. |
Combining the two adjustments set
out above, the Commission has reduced Télébec's going-in revenue requirement
by $0.2 million. |
587. |
With respect to TELUS Québec, the
Commission notes that the company included in its contribution-eligible
revenue base additional revenues from proposed going-in rate increases and
excluded certain revenues for telecommunications services that had been
included in the base for calculating the contribution expense as part of the
2001 contribution requirement. |
588. |
The Commission has determined that
the company's contribution-eligible revenues should be calculated as the sum
of the 2001 revenues used to calculate the NCF expense for the 2001
contribution requirement, plus the additional revenues from pending and
planned tariffs filings. Using the contribution-eligible revenue base used
for 2001, the additional $1.1 million in revenues from the 2001 pending and
planned tariff filings and applying the revenue-percent charge of 1.4%
approved in Order 2001-876, the
Commission has determined that TELUS Québec's contribution payment to the NCF
should be reduced by $4.4 million rather than the $4.3 million proposed by
the company. The Commission has also corrected for the discrepancy of $0.2
million introduced by the company when it used $4.1 million in its going-in
revenue requirement calculation, instead of the $4.3 million set out in its
supporting schedule. Taken together, these two adjustments result in a
reduction of $0.3 million in TELUS Québec's proposed revenue requirement. |
|
Total subsidy requirement to serve the high-cost
residential bands
|
|
Background
|
589. |
The Utility Segment revenues of
Télébec and TELUS Québec include the subsidy they receive from the NCF in
respect of their high-cost residential bands. In order to determine the
Companies' going-in revenue requirements, it is therefore necessary to
determine for each company its TSR. |
590. |
In Decision
2000-745, the Commission determined that
the subsidy for residential NAS in each high-cost band was the Phase II cost
plus an appropriate mark-up, less the sum of the primary exchange residential
service revenues and the annual target implicit contribution from other local
services. The subsidy for each high-cost band was determined by multiplying
the subsidy requirement per residential NAS by the number of residential NAS
in that band. The TSR for a telephone company was the sum of the total
subsidies required in each high-cost band. |
591. |
In a letter dated 30 May 2001, the
Commission asked Télébec and TELUS Québec to determine the TSR that they
would receive from the NCF using the formula established in Decision
2000-745. In addition, the Companies
were given, on an interim basis, the choice of either using their costs
developed using the Phase II methodology, or using the national average of
Phase II costs established in Decision
2001-238. |
592. |
The banding structure and the Phase
II costs for Télébec and TELUS Québec are currently being considered in the
proceedings initiated by PN
2001-69. |
|
Positions of parties
|
593. |
Télébec calculated its TSR using
both the formula established in Decision
2000-745 and the national average of Phase II costs established in
Decision 2001-238. Using its proposed
rates for 2003, the company estimated that its TSR for determining its
going-in revenue requirement would be $5.9 million. |
594. |
TELUS Québec also used the
methodology established in Decision 2000-745
to calculate its proposed TSR of $13.7 million. However, in its calculation,
the company used its 2001 effective rates rather than its proposed going-in
rates. In light of the fact that its proposed rate increases in high-cost
bands would reduce its TSR, TELUS Québec included an expense of $1.4 million
in its proposed going-in revenue requirement to reflect this
revenue impact. |
595. |
Other parties did not comment on
this issue. |
|
Conclusions
|
596. |
In the Commission's view, the TSR
for 2002, used to estimate the Companies' going-in revenue requirements,
should be calculated using the proxy national Phase II costs, the associated
band structure and the Companies' average going-in rates, including the
implicit optional local service revenues for the NAS in each of the high-cost
bands eligible for subsidy. |
597. |
The going-in rates approved by the
Commission in Part IX of this Decision for Télébec are $3.33 lower than those
proposed by Télébec for 2003 and used by the company for calculating its TSR
for 2002. Using the approved going-in rates, the Commission has determined
that Télébec's TSR to be approximately $8.1 million for 2002, or $2.3 million
more than that proposed by Télébec as part of its going-in revenue
requirement. The Commission has adjusted the company's going-in revenue
requirement by the same amount. |
598. |
As far as TELUS Québec is
concerned, in Part IX of this Decision, the Commission has denied the rate
increases proposed by the company. Consequently, the TSR as calculated by the
company is correct. However, there is no basis for TELUS Québec's proposed
adjustment of $1.4 million as there will be no TSR reduction from rate
increases. Accordingly, the Commission has excluded the proposed expense for
the reduction of the TSR from the company's going-in revenue requirement. |
|
Additional uncollectible revenues
|
599. |
Télébec included in its proposed
going-in revenue requirement an expense to reflect uncollectible revenues.
Based on its proposed rate increases for 2002 and 2003, Télébec estimated
that it would receive additional going-in revenues of $9.4 million. Using the
uncollectible ratio of 0.55%, Télébec then estimated additional uncollectible
revenues of $52,000. |
600. |
Other parties did not comment on
this issue. |
601. |
In Part IX of this Decision, the
Commission has denied the rate increases proposed by Télébec for 2002 and
2003. Consequently, the company's additional uncollectible expense should be
based solely on the forecast revenues from the annualized impact of the 2001
planned and pending tariff filings and the residential rate restructuring
revenues deferred by Order 2001-216.
On this basis, the Commission determines that Télébec's additional
uncollectible expense should be $20,700, a reduction of $31,300 from the
company's proposed $52,000. The company's going-in revenue requirement has
been adjusted accordingly. |
|
Termination of integrality adjustment
|
602. |
Under rate base/rate of return
regulation, the Commission generally treated the earnings of affiliates that
provided directory services as if they were earnings of the regulated company
pursuant to section 33 of the Telecommunications Act. In
Québec-Téléphone – Development plan for 1995-1999 and revenue requirement for
1995, Telecom Decision CRTC 95-1, 25 January 1995, the Commission made
such a finding with respect to Québec-Téléphone and its affiliate, Les
Annuaires du Québec Enr. (LAQ). |
603. |
As a result of TELUS' acquisition of
Québec-Téléphone in 2000, TELUS Québec is no longer affiliated to LAQ. The
company, therefore, proposed to eliminate the regulatory adjustment used to
treat the earnings of the directory affiliate as if they were earnings of the
company. |
604. |
Other parties did not comment on
this issue. |
605. |
The Commission considers that TELUS
Québec's proposed removal of the integrality adjustment of $0.4 million is
appropriate and has reflected this adjustment in its determination of the
company's going-in revenue requirement. |
|
Going-in revenue requirements
|
606. |
The basic calculations to determine
the going-in revenue requirements of Télébec and TELUS Québec are set out
below in Table 1 and Table 2, respectively. |
607. |
The starting point for the going-in
revenue requirement calculation is the approved "2001 contribution
requirement (Phase III)" as shown at Line A in the Tables. The incremental
revenue requirement is then calculated by adding a number of incremental
financial adjustments, including the adjustments to expenses, the full year
impact of rate initiatives proposed or implemented during 2001, the
disposition of the deferral account, and the estimated impact of any rate
proposals implemented at the initiation of the price cap method of regulation
(Line B). The difference between the 2001 contribution requirement (Phase
III) and the incremental revenue requirement is the going-in revenue
requirement before the subsidy for the high-cost bands (Line C). The TSR that
will be paid from the NCF is then deducted from the going-in revenue
requirement (Line D). The difference is the residual going-in revenue
requirement shortfall or surplus (Line E). |
608. |
The financial adjustments resulting
from the Commission determinations discussed in the various sections of this
Decision are listed under the "Commission adjustments" column of the Tables
and the going-in revenue requirement impacts are listed under the
"Commission's view" column. |
609. |
Télébec proposed a residual
going-in revenue requirement shortfall of $12.3 million that would be
recovered from the NCF for each year of the four-year price cap period. On
the basis of determinations made in this Decision, the Commission has
calculated a residual going-in revenue requirement shortfall of $7.6 million
for Télébec. In light of the magnitude of this shortfall, the Commission
concludes that regulatory action is required to permit its recovery by the
company. The method of recovery of Télébec's residual revenue requirement
shortfall is discussed in Part X of this Decision. |
610. |
TELUS Québec proposed a residual
going-in revenue requirement shortfall of $2.4 million that could be funded
from the NCF, funds in the deferral account or from further rate increases.
On the basis of determinations made in this Decision, the Commission
calculated a residual going-in revenue requirement surplus of approximately
$0.1 million for TELUS Québec. Given that the surplus is very small, the
Commission concludes that no further action is required to eliminate the
surplus. |
Figures may not add due to rounding $0.036 million.
|
IX Setting 2002 going-in rates
|
|
|
611. |
In PN
2001-36, the Commission
indicated that as part of the present proceeding it would set going-in rates
coincident with the implementation of price cap regulation. |
612. |
Télébec and TELUS Québec each filed
proposals seeking rate increases in order to meet their proposed going-in
revenue requirements. |
613. |
Télébec proposed to increase its
residential local service rates in stages over the price cap period. The
company also proposed to restructure its business rates at the commencement
of the period in order to achieve greater uniformity and simplicity in its
rate structure. |
614. |
TELUS Québec proposed to increase
its residential local service rates in stages over the price cap period. It
also proposed to increase its single-line business rates in band C. |
|
Télébec's residential rate proposals
|
615. |
Télébec proposed to increase its
residential rates as follows: |
|
a) in 2002, a $4.17 and $3.52
monthly rate increase to residential individual line rate in rate bands N1
and N2, respectively; and |
|
b) in 2003, a $3.33 monthly rate
increase to residential individual line rate in rate bands N1, N2 and N4. |
616. |
In addition, Télébec indicated that
it would expect to apply for further rate increases in 2004 and 2005 as a
result of the Commission's decision in the PN
2001-69 proceeding related to
the classification and identification of high-cost serving areas and the
establishment of bands. |
617. |
Télébec submitted that its proposed
residential rate increases, along with those it proposed for business
services, were essential for a harmonious introduction of a price cap regime. |
618. |
In Télébec's view, the residential
rate increases it proposed for 2002 and 2003 were necessary in order to bring
rates closer to costs. |
619. |
Télébec noted that, under its
proposal, only a limited number of customers would face rate increases.
According to Télébec, 90% of its residential customer base would not face any
rate increase in 2002, while only 10.7% of its residential customers would
face a rate increase in 2003. |
620. |
Télébec argued that the additional
revenues generated by its proposed rate increases would reduce the special
subsidy it would require. Télébec submitted that, in 2002, the company's
proposed residential rate increases would generate $0.5 million and that, in
2003, the next proposed rate increase would generate an additional $5.1
million. According to Télébec, from a revenue requirement perspective, the
additional 2003 revenues were necessary to replace the revenues Télébec
proposed to draw down in 2002 from its deferral account. |
621. |
ARC et al. emphasized that Télébec
customers were already paying the highest rates in Canada for basic
residential telephone service. ARC et al. argued that it would be
inappropriate for the Commission to allow Télébec to increase residential
monthly rates over the next four years. ARC et al. submitted that at least
40% of Télébec's customer base lived in areas that the company identified as
non-HCSAs. According to ARC et al., rates in these areas were already
compensatory and should not be raised. |
622. |
ARC et al. also opposed Télébec's
proposed rate increases on the grounds that they would be significant, up to
10.7% in some cases, and would involve rate shock to consumers. |
623. |
ARC et al. noted that one of
Télébec's reasons for its proposed rate increases was to establish a uniform
rate of $34.43 per month in 2003 for all its residential individual line
customers. ARC et al. submitted that a uniform rate should not be a
Commission priority since rates would not reflect true costs. ARC et al.
concluded that Télébec's goal of a uniform rate did not justify its proposed
rate increases. |
624. |
ARC et al. submitted that Télébec's
rate proposals were improper since they were developed using a 2001 ROE of
11.2% and Télébec's calculation excluded the monies currently held in a
deferral account. ARC et al. also argued that the funds in the deferral
account should be used to offset potential rate increases in those areas
where rates were not compensatory. |
625. |
A number of Télébec subscribers
commented on Télébec's proposed residential rate increases. All were opposed
to any residential rate increases. They emphasized that Télébec's residential
subscribers had seen their rates significantly increase over the last few
years, and several subscribers noted that these increases had been much
greater than the rate of inflation over the past several years, up to 11
times the rate of inflation in some cases. They also noted that Télébec
customers were already paying the highest rates in Canada and that the
proposed rate increases were significant. |
|
Commission determinations regarding Télébec's
residential rate proposals
|
626. |
In the Commission's view, Télébec's
residential rate proposal would mix elements of traditional earnings
regulation with price regulation and thereby diminish the benefits of the
latter approach. Consequently, the Commission has determined that it would be
inappropriate to approve any rate increases for 2003 at this time. Télébec
can, of course, apply for residential rate increases in the future, provided
they are within the parameters of the price regulation regime established by
the Commission in this Decision. |
627. |
With respect to the proposed
residential rate increases for 2002, the Commission notes that Télébec's
residential monthly rates increased from $16.89 in 1994 to $31.00 in 2000.
Further, on 1 July 2000, residential subscribers experienced monthly basic
rate increases ranging from $0.47 to $4.00. |
628. |
The Commission considers that
Télébec's subscribers should not be subject to further increases at this
time, in light of the significant rate increases which have been approved in
recent years and the current level of Télébec's rates. The Commission also
notes that the additional revenues generated by the proposed increases would
not significantly diminish Télébec's going-in revenue requirement shortfall.
The method of recovery of Télébec's residual going-in revenue requirement
shortfall is discussed in Part X of this Decision. |
629. |
Accordingly, the Commission does not
approve Télébec's proposed residential rates. Instead, the Commission sets
Télébec's going-in residential rates at their current level. |
|
Télébec's business rate proposals
|
630. |
Télébec proposed to restructure
business service rates as follows: |
|
a) a single-line business rate
restructuring that involves monthly rate changes ranging from a reduction of
$14.35 to an increase of $20.35 resulting in a uniform monthly rate of
$60.08; |
|
b) a multi-line business rate
restructuring that involves monthly rate changes ranging from a reduction of
$46.95 to an increase of $13.95 resulting in a uniform monthly rate of
$75.08; |
|
c) a Centrex "Forfait affaire de
base" rate restructuring that involves monthly rate changes ranging from a
reduction of $23.01 to an increase of $16.98 resulting in a uniform monthly
rate of $72.48; |
|
d) a Centrex "Forfait A" rate
restructuring that involves monthly rate changes ranging from a reduction of
$17.86 to an increase of $27.25 resulting in a uniform monthly rate of
$77.08; |
|
e) a Centrex "Forfait B" rate
restructuring that involves monthly rate changes ranging from a reduction of
$29.20 to an increase of $21.11 resulting in a uniform monthly rate of
$84.78; |
|
f) a Centrex "Forfait C" rate
restructuring that involves monthly rate changes ranging from a reduction of
$30.85 to an increase of $24.37 resulting in a uniform monthly rate of
$92.48; and |
|
g) a Megalink service rate
restructuring that involves monthly rate changes ranging from a reduction of
$16.64 to an increase of $22.56 resulting in a uniform monthly rate of
$60.08. |
631. |
In support of its proposed business
rate restructuring, Télébec argued that the business tariff modifications,
along with those it proposed for its residential services, were essential for
a harmonious introduction of a price cap regime. |
632. |
Télébec submitted that its business
rate restructuring proposal was effectively revenue neutral, as it would
result in a minimal increase in revenues. Accordingly, the company submitted
that its proposal was comparable to other revenue neutral proposals approved
by the Commission in the past and should be considered appropriate as it
would introduce a more uniform rate structure without affecting revenues. |
633. |
Other parties did not comment on
Télébec's proposed business rate restructuring. |
634. |
The Commission agrees with Télébec
that its proposed business rate restructuring is effectively revenue neutral
and, therefore, would have no impact on the going-in revenue requirement. The
Commission considers that Télébec's proposal would introduce greater business
rate uniformity, as well as increase administrative simplicity. |
635. |
In light of the above, the
Commission considers Télébec's proposed business rate restructuring
appropriate and approves the proposed rates, effective 31 July 2002. The
Commission is therefore setting Télébec's going-in business rates in
accordance with Télébec's proposal. The Commission directs Télébec to issue
tariff pages by 30 August 2002. |
|
TELUS Québec's residential rate proposals
|
636. |
TELUS Québec proposed the following
residential rate increases: |
|
a) in 2002, a $0.95 monthly rate
increase to its basic residential service in rate bands C, D, E, F and G
(i.e., those bands TELUS Québec considers high cost); |
|
b) in 2003, a $2.50 monthly rate
increase to its basic residential service in rate bands D, E, F, and G; |
|
c) in 2004, a $2.25 monthly rate
increase to its basic residential service in rate bands D, E, F, and G; and |
|
d) in 2005, a $1.40 monthly rate
increase to its basic residential service in rate bands E, F, and G and a
$0.55 monthly rate increase to its basic residential service in rate band D. |
637. |
TELUS Québec submitted that its
residential rate proposal would ensure that basic local service would remain
accessible to all residents of its territory at an adequate quality of
service level. The company also argued that its proposed graduated rate
increases would minimize any rate shock to its customers. |
638. |
TELUS Québec justified its proposed
residential rate increases on the basis of the revenue and expense
adjustments it estimated for each year of the four-year price cap period. |
639. |
ARC et al. opposed TELUS Québec's
proposed residential rate increases on the grounds that consumers had already
seen rates increase from $14.00 in 1995 to the current rate of $23.50. |
640. |
The Commission also received two
letters from subscribers opposing TELUS Québec's proposed residential rate
increases. |
|
Commission determinations regarding TELUS Québec's
residential rate proposals
|
641. |
In the Commission's view, TELUS
Québec's proposal for residential rate increases would mix earnings
regulation and price regulation in much the same manner as Télébec's
residential rate proposal and it would give rise to the same concerns. In
particular, this approach would undermine the incentives for increased
efficiency and innovation under price regulation. |
642. |
Under the price regulation regime
established by the Commission for TELUS Québec in this Decision, once
going-in rates are set, rates for individual services may increase or
decrease provided that they conform with all of the applicable pricing
constraints. Consequently, the Commission does not consider it appropriate to
approve any rate increases for 2003, 2004 or 2005. If TELUS Québec wishes to
implement residential rate increases in 2003, 2004 or 2005, it must do so
within the parameters of the price regulation regime. |
643. |
As far as TELUS Québec's proposed
residential rate increase for 2002 is concerned, the Commission concludes
that TELUS Québec does not require any increase to its current residential
rates since, as determined in Part VIII of this Decision, the company has a
negligible going-in revenue requirement surplus based on existing rates. |
644. |
Accordingly, the Commission denies
TELUS Québec's proposed residential rate increases in 2002. The Commission is
therefore setting TELUS Québec's going-in residential rates at their current
levels. |
|
TELUS Québec's business rate proposal
|
645. |
TELUS Québec proposed to increase
its single-line business band C monthly rate from $55.90 to $58.00. The
company submitted that this proposed change would generate approximate $0.1
million in additional annual revenues. |
646. |
TELUS Québec did not provide any
specific rationale in support of its proposed rate increase. TELUS Québec did
indicate that it expects local competition to develop in its serving
territory over the four-year price cap period, particularly in the business
market. |
647. |
Other parties did not comment on
TELUS Québec's business rate proposal. |
648. |
The Commission has determined that
TELUS Québec does not require any adjustments to its business rates in order
to meet its going-in revenue requirement. |
649. |
Accordingly, the Commission denies
TELUS Québec's proposed increase of $2.10 to its business band C rate. The
Commission sets TELUS Québec's going-in business rates at their current
levels. |
|
X Recovery of Télébec's residual going-in revenue
requirement shortfall
|
|
|
650. |
As a result of the Commission's
conclusions in Parts VIII and IX of this Decision, Télébec has a residual
going-in revenue requirement shortfall of $7.6 million. |
651. |
This shortfall is based, in part, on
the use of Phase II cost proxies in the TSR calculation that will be
finalized in the PN 2001-69
proceeding. In PN 2001-69, the
Commission stated that it would review, among other things, the rate band
structure, the definition and the identification of high-cost serving areas,
the local loop rates per band and associated costs for Télébec and TELUS
Québec. |
652. |
In Decision
2000-745, the Commission indicated a
transition period might be required to permit the small ILECs to adjust to
the new contribution mechanism. In Regulatory framework for the small
incumbent telephone companies, Decision CRTC
2001-756, 14 December 2001, the
Commission determined that the small ILECs who received a lower subsidy under
the Phase II methodology would have a four-year transition period. |
|
|
653. |
Télébec calculated its price cap
proposal using a proxy subsidy per NAS based on the criteria established in
Decision 2001-238. Based on this proxy
subsidy, as well as the other adjustments it proposed, Télébec estimated a
residual going-in revenue requirement shortfall of $12.3 million. |
654. |
To fund its shortfall, Télébec
proposed a recurring annual special subsidy of $12.3 million to be funded
from the NCF for the duration of the price cap period. Télébec indicated that
its special subsidy requirement would decrease once the review of its bands
and Phase II costs is completed under PN
2001-69. |
655. |
In response to a Commission question
at the oral hearing, Télébec indicated that it would not object to the
application of a price cap formula (I-X) to the entire Utility Segment
revenues in order to eliminate its special subsidy over time. Télébec was
concerned, however, that it would not be able to adjust its rates, other than
in HCSAs, until the special subsidy was completely eliminated. |
656. |
In its final argument, Télébec
reiterated its view that its going-in revenue shortfall should be funded from
the NCF to allow the company to maintain its financial integrity while
avoiding rate shock for its customers. Télébec also argued that the special
subsidy was necessary to permit the company to maintain its quality of
service and to foster socio-economic development in its regions through
telecommunications. |
657. |
In its final argument, ARC et al.
noted that, in Decision 2000-745, the
Commission determined that the NCF would be used solely to subsidize HCSAs
and that the amount of the subsidy a telephone company would receive would be
based on its Phase II costs. ARC et al. was of the view that the Commission's
intent in Decision 2000-745 was to
create an incentive for the telephone companies to reduce their costs. |
658. |
ARC et al. submitted that a special
subsidy for Télébec would not be appropriate, unless it could be justified
for public policy reasons. In ARC et al.'s view, if the Commission were to
determine that a residual going-in revenue requirement shortfall existed for
Télébec, a special subsidy could be justified, as long as it declined over
time. |
|
|
|
Funding Options
|
659. |
In the present proceeding, several
options were considered to allow Télébec to recover its residual going-in
revenue requirement shortfall of $7.6 million. These funding options included
rate increases, a recurring annual subsidy from the NCF, or a declining
transitional subsidy from the NCF. |
660. |
The Commission decided in Part IX of
this Decision not to permit Télébec to raise its residential local service
rates to fund the residual going-in revenue requirement shortfall since it
would have required significant rate increases for Télébec customers. Amongst
other considerations, the Commission concluded that such increases would not
be appropriate given their magnitude and the fact that significant rate
increases have been approved for Télébec in recent years. |
661. |
In the Commission's view, Télébec's
residual going-in revenue requirement shortfall should be funded by means of
a subsidy from the NCF. However, the Commission shares ARC et al.'s view that
any such subsidy should not be constant but, instead, should decline over
time. |
662. |
As noted above, the small ILECs were
given four years to make the transition to their lower subsidy level. The
Commission is of the view that Télébec, with its larger revenue base, should
be able to make the transition to its lower subsidy level more quickly. |
663. |
Accordingly, the Commission
concludes that Télébec's residual going-in revenue requirement shortfall of
$7.6 million will be funded through a transitional subsidy from the NCF. |
664. |
As stated earlier, Télébec agreed
that if the company had a residual going-in revenue requirement shortfall,
the Commission could apply an I-X constraint to the company's going-in
revenue requirement in order to reduce the shortfall for regulatory purposes.
In this way, any transitional subsidy would be gradually phased out. The
Commission concludes that this is an appropriate approach. |
|
The inflation factor and productivity offset
|
665. |
With respect to the inflation
factor, in Part IV of this Decision, the Commission decided to use the
chain-weighed GDP-PI in the TSR calculation and in the pricing constraints
applicable to the Companies. The Commission considers it appropriate to also
use this factor in the transitional subsidy mechanism discussed below. |
666. |
With respect to the productivity
offset, in response to a Commission interrogatory, Télébec provided an
estimated productivity offset of 2.9% using the TFP approach. The company
indicated, however, that it did not have historical data on TFP. |
667. |
As stated in Part IV of this
Decision, ARC et al. submitted that a TFP approach would provide a good
indicator of Utility Segment productivity gains. ARC et al. recommended that
an industry-wide TFP-based productivity offset be set at a level greater than
4.5%. |
668. |
The Commission notes that Télébec's
residual going-in revenue requirement shortfall was derived from the Utility
Segment. The Commission considers that the productivity offset to be used in
the transitional subsidy mechanism should reflect the productivity gains
achievable by the services formerly classified as being in Télébec's Utility
Segment. In this regard, a TFP-based productivity offset is more
comprehensive than a productivity offset based on marginal costs trends which
is more suitable for individual capped baskets. The Commission also notes
that, in Decision 97-9, a company-wide TFP
approach was found to be an appropriate proxy for the Utility Segment
productivity. |
669. |
As noted above, Télébec indicated
that it did not have historical data on TFP. In the circumstances, the
Commission considers Télébec's 2.9% estimate to be of limited value. |
670. |
The Commission notes that in the PN
2001-37 proceeding, historical
TFP information was provided by the other large ILECs. This information was
for the period 1988 to 2000 and was the only historical TFP data available.
On the basis of this information, the Commission has derived an industry-wide
TFP productivity offset of 4.7%. |
671. |
In light of the above, the
Commission has decided to use a productivity offset of 4.7% for the purpose
of phasing out Télébec's transitional subsidy of $7.6 million. |
|
The transitional subsidy mechanism
|
672. |
The Commission has decided that
Télébec will receive a transitional subsidy from the NCF to fund its residual
going-in revenue requirement shortfall. In order to implement the
transitional subsidy mechanism, the Commission is suspending the application
of the I-X constraint to the baskets of Residential services in
non-HCSAs and the Other capped services. The rate element constraints
applicable to these baskets will remain in force. The application of the I-X
constraint on rates for certain Competitor Services is also suspended. All
other basket constraints and rate element constraints remain in place. |
673. |
The Commission has also decided that
the annual adjustment of inflation less a productivity offset to residential
local exchange costs in HCSAs for the annual TSR calculation will not be
applied for Télébec until the transitional subsidy is eliminated. |
674. |
The effect of the suspension of the
I-X basket constraints will be to permit the company to retain productivity
gains with respect to the services in these baskets in order to reduce the
transitional subsidy. The transitional subsidy will decline annually based on
three types of adjustments discussed below. |
675. |
First, a basic adjustment will be
calculated by applying the I-X formula to a fixed going-in revenue base,
where the inflation will be the chain-weighted GDP-PI for the previous year
and the X-factor will be 4.7%. The I-X adjustment will be applied to a
revenue base to determine the amount by which the transitional subsidy must
be reduced for the current year. |
676. |
The Commission has determined that
the appropriate fixed going-in revenue base will be Télébec's 2001 Utility
Segment revenue of $127.1 million, less the total incremental revenue
requirement adjustments of $11.6 million, for a net amount of $115.5 million. |
677. |
Second, the transitional subsidy
will be reduced by means of revenues derived from rate increases which
Télébec may introduce in accordance with the transitional price regulation
regime discussed above. Any additional revenues generated as a result of rate
increases for services within the baskets identified above will be applied
directly to the reduction of the transitional subsidy. |
678. |
Third, the Commission anticipates
that the decision arising from the PN
2001-69 proceeding will likely
affect Télébec's revenues and subsidy entitlements. The Commission will make
any appropriate adjustments to the transitional subsidy when that decision is
released. |
679. |
Once the transitional subsidy is
completely eliminated, the special measures identified above will cease to
apply. In particular, the I-X basket constraints will be reinstated for the
baskets of Residential services in non-HCSAs and the Other capped
services. The I-X constraint on Competitor Services rates will also be
reinstated. Similarly, the I-X adjustment will be reintroduced in the TSR
calculation for Télébec. |
680. |
In order to monitor the level of the
transitional subsidy, the Commission directs Télébec to indicate the amount
of the transitional subsidy, including supporting calculations, as part of
the annual contribution filing calculations (i.e., on 31 March each year
until the transitional subsidy is eliminated). |
|
XI Other issues
|
|
|
681. |
In Decision
97-21, the Commission established a revised
regulatory regime that segmented the Companies' operations into a Utility
Segment and a Competitive Segment. In connection with this change, the
Commission introduced new reporting requirements. Specifically, Phase III/SRB
reports were introduced to provide the Companies' Income Statement, Average
Net Investment Base, Capitalization Report and Return on Average Common
Equity Report results separated into the two segments. |
682. |
The current reporting requirements
for Télébec and TELUS Québec include: |
|
- filing of annual audited historical Phase III/SRB results on or before
31 October of the following year;
|
|
- filing of Phase III/SRB manual updates, along with any changes to
Accounting Manuals, annually on 31 March, with such updates considered
approved after 60 days from filing, unless the Commission indicates
otherwise;
|
|
- filing of actual non-audited year-to-date financial results for the
Utility and Competitive Segments on a quarterly basis, 45 days after the
end of the quarter;
|
|
- filing of current quarterly intercorporate transaction reports;
|
|
- filing of capital plans for the Utility Segment on an annual basis; and
|
|
- filing of changes to depreciation life characteristics.
|
683. |
Both Télébec and TELUS Québec
submitted that the price cap regime should result in a streamlined form of
regulation. The Companies proposed to eliminate the requirement to file: |
|
- audited Phase III/SRB results;
|
|
|
|
- changes in depreciation life characteristics;
|
|
- updates to the accounting guide manual; and
|
|
- intercorporate transaction reports.
|
684. |
Both Télébec and TELUS Québec
submitted that they would have a residual going-in revenue requirement
shortfall and, therefore, should receive a special subsidy from the NCF. As a
result, the Companies proposed to continue filing annual Phase III/SRB
results in order to allow the Commission to monitor and control the evolution
of their special subsidy requirement. However, to lighten their regulatory
burden, Télébec proposed to file non-audited annual Phase III/SRB results
instead of audited Phase III/SRB results. |
685. |
ARC et al. submitted that without
the discipline inherent in robust competition, continued regulation was a
necessity, and that for effective regulation, some minimum level of reporting
was required for the Commission to be satisfied that rates were just and
reasonable. ARC et al. also submitted that such reporting was needed to
assess the reasonableness and effectiveness of the price cap regime. ARC et
al. noted that company-wide results, while broadly indicative of performance
under price caps, included revenues and costs related to non-regulated
services. ARC et al. argued that, given the absence of competition for much
of the Utility Segment services, the Phase III/SRB results should be
maintained since they can be tied to the Companies' audited financial
statements. |
686. |
ARC et al. also submitted that it
would be important for the Commission to be able to monitor the Companies'
financial performance throughout the price cap period. Consequently, ARC et
al. proposed that existing reporting requirements should be continued. |
687. |
ARC et al. also proposed new reports
on the nature and extent of competition as well as achieved productivity
gains in order to measure the success of price cap regulation. |
688. |
The Commission considers that the
concept of a Utility Segment no longer has relevance. This is due, in part,
to the introduction of a Phase II-based determination of the subsidy
requirement starting in 2002. Previously, the contribution requirement was
based on a Phase III Utility Segment shortfall calculation. As well, as
discussed in Part III of this Decision, the Commission has determined that
the price cap framework will be extended to non-forborne services currently
in the Competitive Segment. |
689. |
The Commission also considers that
the distinction between the Utility Segment and Competitive Segment is no
longer relevant. The meaningful distinction in the price regulation regime is
between tariffed services and forborne services. |
690. |
In light of this regulatory
framework, there is no longer a need for Phase III/SRB inputs on a
going-forward basis. Therefore, the Commission determines that the
requirement for Télébec and TELUS Québec to report their financial results on
a Phase III/SRB basis is eliminated effective immediately. |
691. |
The Commission recognizes that the
financial results for Télébec and TELUS Québec will need to be available for
the purpose of the review of this price cap regime. Sufficient information
must be reported to allow the Commission to gauge the financial state of the
Companies in order to ensure that the objectives of the price cap regime are
being met. |
692. |
The Commission notes that the
information provided by all telecommunications companies as part of the
Commission's annual monitoring process includes, among other things,
financial data. |
693. |
With respect to intercorporate
transaction reporting, the Commission notes that the existing reporting
requirements were introduced when the Companies were under rate of return
regulation to reduce the incentive to overstate the amount of Utility Segment
intercorporate transactions, and thus reduce Utility Segment earnings. |
694. |
The Commission considers that under
the structure of the price cap regime, the incentive to overstate
intercorporate transactions is reduced. Accordingly, the Commission has
determined that the current intercorporate transaction reports for Télébec
and TELUS Québec are no longer required, effective immediately. |
695. |
In addition, the Commission agrees
with Télébec and TELUS Québec that the following reports are no longer
required, effective immediately: |
|
- Annual Capital/Construction Program;
|
|
- Changes in Depreciation life characteristics; and
|
|
- Updates to accounting guides.
|
696. |
The Commission does not consider
that the new reports proposed by ARC et al. are required. All information
necessary to permit a full review of the Companies' price regulation regime
will be available either from the ongoing monitoring reports which the
Companies are required to file or from information to be obtained during the
review process. |
|
|
|
Background
|
697. |
In Decision
2000-745, the Commission introduced a
new national contribution collection mechanism to subsidize the high cost of
local service in rural and remote areas. Under the new mechanism, effective 1
January 2001, a revenue-percent charge is levied on revenues from eligible
telecommunications service providers (TSPs). |
698. |
In Decision
2000-745, the Commission also introduced
a new subsidy requirement calculation that would establish the appropriate
amount of subsidy payable to local exchange carriers which provide service in
HCSAs. In brief, the subsidy requirement consists of the sum of the average
annual residential PES revenue and an annual implicit contribution target
amount of $60.00 less the average annual PES costs, established on the basis
of Phase II costs with an approved mark-up, per residence NAS in each
high-cost band. The TSR for each of the Companies is the total of the annual
subsidy requirements for all residential NAS in all high-cost bands. This TSR
calculation methodology became effective 1 January 2002. |
699. |
In PN
2001-36, the Commission
indicated that a number of TSR-related issues associated with the
implementation of a price cap regime for Télébec and TELUS Québec would be
determined in the present proceeding. |
700. |
In Decision
2002-34, the Commission resolved a number of similar issues involving the
TSR and price regulation regime for the other large ILECs. |
|
Calculation of the TSR
|
701. |
In Part IV of this Decision, the
Commission directed Télébec and TELUS Québec to apply a 3.5% productivity
factor and an inflation factor based on the chain-weighted GDP-PI annually in
the TSR formula. |
702. |
In calculating the appropriate cost
adjustments for the TSR, the Commission considers that the adjustment for the
revenue-percent charge should be the net change in the revenue-percent charge
from year to year. The Commission notes that this will eliminate the
cumulative effect of adding the annual revenue-percent charge directly to the
base average PES cost each year. |
703. |
In Order
2001-876, the Commission
approved an interim revenue-percent charge of 1.4%, effective 1 January 2002. |
704. |
In Decision
2002-34, the Commission adjusted the 2002 TSR calculation for the other
large ILECs in order to reflect the change to the revenue-percent charge from
4.5% to 1.4% as follows: |
|
- assume a 4.5% reduction in the average revenue per NAS;
|
|
- calculate 1.4% of the reduced revenue; and
|
|
- add that amount to the average PES cost per NAS.
|
705. |
The Commission considers that the
same approach should apply to Télébec and TELUS Québec. Accordingly, these
adjustments have been made in Part VIII of this Decision in setting the
Companies' going-in revenue requirements. The Commission notes that, in
subsequent year adjustments, Télébec and TELUS Québec should use a similar
approach. |
706. |
In keeping with the Commission's
conclusion in Decision 2002-34, in general, the
PES costs used in the TSR formula are to be adjusted in the following
sequence: |
|
- the base average PES costs will be adjusted by inflation minus the
annual productivity offset of 3.5%;
|
|
- the 15% mark-up, established in Decision
2000-745, will then be applied to the
adjusted average PES costs; and
|
|
- the net cost adjustment related to the revenue-percent charge will be
included.
|
|
For Télébec, the Commission has
concluded in Part X of this Decision that the annual adjustment of inflation
less a productivity offset to be applied to average PES costs in the TSR
formula will be suspended until Télébec's transitional subsidy is no longer
required. |
|
Timing of annual updates to the TSR
|
707. |
In Decision
2000-745, the Commission determined that
certain information is to be filed annually with the Commission, by 31 March
of each year, by all TSPs or groups of related service providers. Updated
TSRs and NAS counts by band are also required from the ILECs on the same
date. This allows the Commission to verify the contribution amounts remitted
the previous year, review the calculation of contribution-eligible revenues,
determine which companies will be required to pay contribution and calculate
the revenue-percentage charge for the current year. |
708. |
Parties did not comment on this
issue. |
709. |
In Decision
2002-34, the Commission upheld the 1 January effective date for the
annual revenue-percent charge and the 31 March date for the annual filing of
revenue information by all TSPs. The Commission considers that these
requirements also remain valid for Télébec and TELUS Québec. |
710. |
The Commission directs Télébec and
TELUS Québec to file revised 2002 total subsidy requirements and associated
monthly amounts by 30 August 2002 to take into account the Commission's
determination in this Decision. The calculation is to reconcile amounts
already received from the central fund administrator pursuant to Order
2001-876. Télébec and TELUS
Québec are to identify separately the adjustments resulting from the
application of the inflation factor and productivity offset to their base
subsidy amount as determined in Part VIII of this Decision. Télébec is also
required to identify separately the special subsidy requirement as determined
in Part X of this Decision. |
|
Secretary General |
|
This document is available in alternative
format upon request and may also be examined at the following Internet site:
http://www.crtc.gc.ca |