Telecom Decision
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Ottawa, 1 May 1997
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Telecom Decision CRTC 97-9
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PRICE CAP REGULATION AND RELATED ISSUES
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TABLE OF CONTENTS
Para. No.
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I INTRODUCTION 1
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A. Background 1
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B. Public Hearing 7
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II GENERAL CONCLUSIONS 10
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A. General 10
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B. The Price Cap Regime 12
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C. Rate Rebalancing 23
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D. Contribution 26
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III PRICE CAP FORMULA 29
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A. Introduction 29
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B. Inflation Index 30
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C. Productivity Offset (X-factor) 42
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D. Exogenous Factors (Z-factor) 101
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E. Other Factors 112
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IV SERVICE BASKETS AND TARIFF MATTERS 118
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A. Service Baskets 118
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B. Services Excluded from the Price Cap Regime 142
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C. Other Pricing Issues 155
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D. Disposition of Tariff Filings 166
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V MTS NETCOM INC. SPECIFIC ISSUES 190
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A. General 190
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B. Privatization 191
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C. Service for the Future Initiative 195
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VI SELF-CORRECTING MECHANISMS AND REVIEW PERIOD 199
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VII ANCILLARY REGULATION AND REPORTING REQUIREMENTS 206
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A. General 206
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B. Phase III/Split Rate Base Results 215
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C. Broadband 222
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D. Construction Program Review 226
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E. Financial Results 230
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F. Intercorporate Transactions 234
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G. Phase I Directives (Excluding Depreciation) 238
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H. Total Factor Productivity Data 243
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I. Local Competition Review 244
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VIII RATE REBALANCING AND CONTRIBUTION 249
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A. General 249
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B. Positions of Parties 254
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C. Determinations 263
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D. Reporting Requirements 272
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E. Other Related Matters 275
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IX DEPRECIATION AND RELATED ISSUES 281
A. Introduction 281
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B. Factors Impacting on Appropriate Depreciation Life Characteristics 284
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C. Appropriateness of Bell's Depreciation Life Characteristics 302
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D. Allocation of Over/Under Accruals Between Utility and Competitive Segments 328
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E. Recovery of Depreciation Reserve Deficiency 331
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F. Recovery Period for Depreciation Expense Over/Under Accruals 367
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G. Phase I Directives and Reporting Requirements for Depreciation 374
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X OTHER ISSUES RELATED TO GOING-IN RATES 378
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A. Other Deferred Charges 378
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B. Utility Segment ROE 385
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XI FOLLOW-UP PROCEEDING 390
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I INTRODUCTION
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A. Background
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1. In Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision
94-19), the Commission determined that, among other things, earnings regulation would be
replaced with price cap regulation for the Utility segment, effective 1 January 1998.
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2. In Implementation of Regulatory Framework - Splitting of the Rate Base and
Related Issues, Telecom Decision CRTC 95-21,
31 October 1995 (Decision 95-21), the Commission stated that, commencing in early 1996, it
would hold a proceeding to consider the issues associated with the implementation of a
specific price cap regime that would apply to BC TEL, Bell Canada (Bell), The Island
Telephone Company Limited (Island Tel), Maritime Tel & Tel Limited (MT&T), MTS
NetCom Inc. (MTS) (formerly Manitoba Telephone System), The New Brunswick Telephone
Company, Limited (NBTel), NewTel Communications Inc. (NewTel) (formerly Newfoundland
Telephone Company Limited) and TELUS Communications Inc. (TCI) (formerly AGT Limited) (the
telephone companies).
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3. On 12 March 1996, the Commission issued Price Cap Regulation and Related
Issues, Telecom Public Notice CRTC 96-8
(PN 96-8), initiating a proceeding, including an oral public hearing, to determine the
form of price cap regulation for the telephone companies' Utility segments to be
implemented effective 1 January 1998. The Commission directed the telephone companies to
file information and proposals, and invited submissions from interested parties on this
matter. The Commission stated that it would examine the third rate rebalancing component
(as stated in Decision 95-21) and other issues, such as accelerated depreciation expense,
which could have a significant impact on the rates for services in the Utility segment
prior to the implementation of price caps (going-in rates). The Commission also stated
that it would initiate a follow-up proceeding in 1997 to finalize the going-in rates for
each telephone company (the follow-up proceeding).
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4. On 10 June 1996, Stentor Resource Centre Inc. (Stentor) on behalf of BC TEL,
Bell, Island Tel, MTS, MT&T, NBTel, and NewTel filed evidence including proposals
regarding the form of price cap regulation to be established. In addition, MTS, although a
party to Stentor's submission, filed specific evidence which took into account MTS'
structural and economic characteristics. TCI filed a separate submission regarding a
proposed price cap regime.
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5. The following interveners filed evidence: AT&T Canada Long Distance
Services Company (AT&T Canada LDS) (formerly Unitel Communications Company); Canadian
Business Telecommunications Alliance (CBTA); Canadian Cable Television Association (CCTA);
Call-Net Enterprises Inc. (Call-Net); Consumers' Association of Canada, Fédération
nationale des associations de consommateurs du Québec and the National Anti-Poverty
Organization (CAC/FNACQ/NAPO); Consumers' Association of Canada [Manitoba], and the
Manitoba Society of Seniors Inc. (CAC/MSOS); and the City of Calgary (Calgary).
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6. The Telecommunications Workers Union, the Communications Energy and
Paperworkers Union of Canada, the Atlantic Communications and Technical Workers Union, the
International Brotherhood of Electrical Workers and the Telecommunications Employees
Association of Manitoba filed evidence relating to quality of service. By letter dated 12
September 1996, the Commission indicated that evidence related to the quality of service
should be filed in the proceeding initiated by Review of the Quality of Service
Indicators, Telecom Public Notice CRTC 94-50,
21 October 1994 (PN 94-50).
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B. Public Hearing
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7. The public hearing took place in Hull, Quebec, from 21 October to 13 November
1996, before Commissioners David Colville (chairman of the hearing), Françoise Bertrand,
Gail Scott, Peter Senchuk and Andrée Wylie.
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8. The following appeared or were represented during the public hearing: AT&T
Canada LDS; The British Columbia Old Age Pensioners' Organization, Council of Senior
Citizens' Organizations of B.C., Federated Anti-Poverty Groups of B.C., Senior Citizens'
Association of B.C., West End Seniors' Network, Local 1-217 IWA Seniors, B.C. Coalition
for Information Access, End Legislated Poverty, Tenants' Rights Action Coalition
(collectively, BCOAPO et al.); BC TEL; Call-Net; CAC/FNACQ/NAPO; CAC/MSOS; CCTA; the
Canadian Wireless Telecommunications Association; Calgary; Industry Canada - Director of
Investigation and Research, Bureau of Competition Policy; Microcell Telecommunications
Inc. (Microcell); MTS; NBTel; Québec-Téléphone; Stentor; TCI; and Westel
Telecommunications Ltd. (Westel).
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9. On 13 November 1996, the parties that filed evidence, as well as the
Government of British Columbia (B.C.), Microcell and Westel presented oral argument which
was supplemented by written argument. In addition, the Consumers' Association of Canada -
Alberta Branch filed written argument. During oral argument, BCOAPO et al. and
CAC/FNACQ/NAPO (collectively, the Consumer Coalition) made a joint presentation. On 22
November 1996, all parties that had filed written argument filed reply argument.
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II GENERAL CONCLUSIONS
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A. General
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10. As stated in Decision 94-19, price cap regulation, in general, allows for
more efficient and effective regulation than rate base/rate-of-return regulation. The
Commission's regulatory framework in respect of price caps, as set out in this Decision,
includes a number of interrelated initiatives which collectively are designed to achieve
the objectives and principles described below:
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(1) to render reliable and affordable services of high quality, accessible to
both urban and rural area customers;
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(2) to foster competition in the Canadian telecommunications markets;
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(3) to provide incumbents with incentives to increase efficiencies and to be more
innovative, and with a reasonable opportunity to earn a fair return for their Utility
segments; and
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(4) to implement a price cap plan that is simple, straightforward, easy to
understand and reduces the regulatory burden to the greatest extent possible.
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11. Highlights of the Commission's determination in this proceeding are listed
below. Detailed discussion of the various issues and rationale are set out in Parts III to
XI of this Decision.
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B. The Price Cap Regime
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12. Effective 1 January 1998, a four-year price cap plan, with no earnings
sharing overlay, will commence for the telephone companies. The price cap plan will be
reviewed prior to the end of the period. Certain of the telephone companies' Utility
segment services will be grouped into a single basket of capped services subject, in
aggregate, to the Price Cap Index (PCI). The PCI will include the Gross Domestic Product
Price Index (GDP-PI) as the inflation measure, a productivity offset (X-factor) of 4.5%
and limited exogenous factors arising from events which are beyond the telephone
companies' control. The single basket of capped services will be divided into three
sub-baskets subject to additional pricing constraints.
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13. The first sub-basket will be comprised of basic residential local services.
The weighted-average annual rate increase for the sub-basket of basic residential local
services will not exceed the level of inflation (i.e., GDP-PI) during the price cap
period. In addition, no rate element in this sub-basket will increase by more than 10% in
any year. This constraint would not apply for primary exchange services within the bands
for which local loops are considered non-essential as determined in Local Competition,
Telecom Decision CRTC 97-8, 1 May 1997
(Decision 97-8), which would typically include urban exchanges where local competition
will likely evolve more rapidly.
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14. The second sub-basket comprising single and multi-line local business
services will not be subject to an overall sub-basket pricing constraint. However, as with
basic residential local service, there will be a 10% constraint in any year on individual
rate elements for single-line business services, other than the rates for primary exchange
services within the bands for which local loops are considered non-essential as determined
in Decision 97-8.
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15. The third sub-basket will consist of the remaining Utility segment services,
which do not qualify as services excluded from price caps nor included in the other
sub-baskets. The index of prices for the services included in this third sub-basket will
be constrained by the level of inflation (i.e., GDP-PI). The list of services to be
included in this sub-basket will be finalized in the follow-up proceeding set out in Part
XI of this Decision.
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16. Services that were priced to maximize contribution prior to the
implementation of price caps, such as optional local services, and those services under
which a cap on prices would be redundant, such as Special Facilities Tariffs (SFTs), will
not be included with capped services.
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17. Competitor services required by local and toll competitors will also not be
included with capped services, but will be priced to recover Phase II costs and make an
appropriate contribution to fixed and common costs.
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18. The rates for 9-1-1 and message relay services will be frozen at the levels
approved, as at 1 January 1998, for the duration of the price cap period.
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19. Tariff filings related to those services, which in the past have been priced
to maximize contribution but now will be uncapped services, will generally be treated on
an ex parte basis. Further, de-averaging of rates for these services will be
permitted.
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20. Generally, subject to the imputation test requirements, tariff applications
for changes to the rates for capped services that meet the price cap constraints will be
disposed of without waiting for comments from interveners; however, tariff applications to
de-average capped services rates, on the basis of smaller geographic areas than those
defined by rate bands, will not be disposed of on the same basis.
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21. Tariff applications to introduce bundled services and the classification of
these bundled services, as capped or uncapped services, will be considered on a
case-by-case basis.
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22. Finally, the telephone companies' regulatory burden will be minimized to the
greatest extent possible in order for the companies to achieve the full benefits of moving
from rate base/rate-of-return regulation to price cap regulation. To this end, the
ancillary regulation and reporting requirements during the price cap period will be
reduced. For example, the telephone companies will not be required as they are currently
under rate base/rate-of-return regulation to (1) file annual capital plan submissions
including any specific broadband costing information, (2) seek approval for accounting
changes including those relating to asset lives and associated depreciation rates, (3)
file financial forecasts and variance analysis of actuals from budget, and (4) adhere to
many of the existing intercorporate transactions policies, rules and procedures.
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C. Rate Rebalancing
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23. In Decision 95-21, the Commission affirmed the monthly local rate increase of
$2 approved in Decision 94-19 for each of the years 1996 and 1997, with the amount of the
third rate rebalancing component to be considered in this proceeding. In this regard, the
telephone companies are to file applications during the follow-up proceeding for
increasing the rates for basic residential local service by a maximum of $3 (on a
weighted-average basis), effective 1 January 1998.
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24. The additional revenues arising from the above-noted applications cannot
exceed the revenues required to offset the items noted below. These additional revenues
will first be used to reduce toll contribution rates to no less than 2 cents per minute.
Any revenues not required to reduce the contribution rates to the 2 cent level will be
used to reduce or eliminate any going-in revenue requirement shortfall in setting the
going-in rates.
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25. In the event that a company could not implement rates that would allow for
recovery of any revenue requirement shortfall under the going-in rates, the telephone
companies will have the opportunity to implement further local rate increases in order to
recover this shortfall during the term of the price cap plan. The mechanism to recover any
such shortfall will be considered in the follow-up proceeding.
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D. Contribution
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26. The 1997 toll contribution rates will be finalized in the follow-up
proceeding. In calculating these rates, the depreciation life characteristics approved as
of the date of this Decision will be used. Any changes to depreciation life
characteristics proposed during the follow-up proceeding, and the consequent impact on the
depreciation reserve deficiency (DRD) or surplus, will be considered for implementation
with the going-in rates on 1 January 1998. Any DRD, as determined in the follow-up
proceeding, would be reflected in the going-in revenue requirement as of 1 January 1998 by
amortizing the DRD on a straight-line basis over the average remaining service life of
each company's assets as of that date.
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27. In addition, the toll contribution rates effective 1 January 1998, which will
also be determined in the follow-up proceeding, will take into account, among other
things, (1) the revenues from the maximum $3 increase in the rates for basic residential
local service as described above, and (2) the determinations made in Telecom Order CRTC 97-590, 1 May 1997, regarding the scope of
contribution paying services and the appropriateness of the existing treatment of Direct
Access Lines.
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28. In Decision 97-8, the Commission froze the toll contribution rates for all
the telephone companies during the price cap period in order to maintain a subsidy that
will allow residential rates in high-cost areas, where competition will likely not evolve
as quickly, to remain affordable and, at the same time, will not hinder the development of
effective competition. However, in the case of TCI, when its shareholder entitlement
(which relates to the additional tax deductions arising from privatization) is completely
amortized at the end of 1998, TCI will be required to reduce its contribution rate,
effective 1 January 1999, which will then remain frozen for the remaining price cap
period.
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III PRICE CAP FORMULA
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A. Introduction
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29. The price cap formula is composed of three basic components which, in total,
reflect changes in the industry's long-run unit costs and determine the maximum allowable
change in prices, on an annual basis, for a basket of capped services. These are inflation
index, productivity offset and exogenous factors. The formula could also include other
factors which relate to the recovery of any going-in revenue requirement shortfall during
the price cap period and to quality of service.
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B. Inflation Index
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30. In PN 96-8, the Commission identified the general criteria to be used to
select the appropriate measure of inflation in a price cap plan, namely: (1) it should
attempt to accurately reflect the changes in the telephone company's costs; (2) it should
be available from an independent source, on a timely basis; and (3) it should not be
subject to manipulation.
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31. In addition to the criteria identified in PN 96-8, Stentor considered that
the inflation index should (1) be broad based such that it reflects output price changes
of a large bundle of goods and services, (2) be consistent with a total factor
productivity (TFP) measure for the economy as a whole and (3) not be subject to
significant revisions. Based on these criteria, Stentor proposed that inflation in the
price cap formula be measured by the GDP-PI. Stentor stated that this measure is the
broadest available measure of output price changes in the Canadian economy and is produced
on a timely basis by Statistics Canada. Stentor also stated that the GDP-PI is closely
related to the Business Sector TFP produced by Statistics Canada. The economy-wide TFP is
discussed below in Section C, Productivity Offset (X-factor). Stentor suggested that,
while the GDP-PI is subject to revisions, the impact of revisions to this index has been
historically negligible.
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32. TCI proposed criteria for selecting the measure of inflation that were
generally consistent with those proposed by Stentor. However, TCI proposed the use of the
Consumer Price Index (CPI) as its inflation measure. TCI stated that the CPI is
well-understood by all parties, available from an independent source on a timely basis,
and subject to neither periodic revisions nor manipulation by participants in the price
cap plan.
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33. Call-Net stated that the use of the GDP-PI would result in a bias in the PCI.
Call-Net also suggested that, if the Commission used Stentor's proposed approach to price
caps, Call-Net's proposed input price differential should be included and Statistics
Canada's Business Sector Output Price Index should be used as the measure of inflation.
Call-Net stated that the Business Sector Output Price Index is a more consistent measure
of economy-wide output price growth and is consistent with the Business Sector TFP.
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34. The Commission agrees with Stentor that using Call-Net's proposed inflation
measure and input price differential in the PCI would yield the same results as those
derived using Stentor's proposed measures for these variables. The Commission notes that
the same results are achieved because a higher (or lower) Business Sector Output Price
Index relative to the GDP-PI will generate a higher (or lower) input price differential
and X-factor by the same amount, thereby leaving the PCI unchanged. In the Commission's
view, the use of the GDP-PI would not result in a bias in the PCI as suggested by
Call-Net.
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35. Further, the Commission notes that the Business Sector Output Price Index (1)
is published by Statistics Canada with a significant lag, (2) is not understood as well as
the GDP-PI, and (3) is still considered experimental.
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36. The Commission notes that the GDP-PI is more widely used than other inflation
measures in price cap plans for the regulated telecommunications industry in the United
States (U.S.).
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37. The Commission also notes that most parties preferred the GDP-PI to the CPI
for two main reasons: (1) the CPI has a narrower coverage in that it measures the average
price level of goods and services purchased by consumers, rather than the average price
level of domestic output in the economy and therefore, is more volatile than the GDP-PI
and more subject to atypical price changes in one or two sectors of the economy; and (2)
the GDP-PI, although not directly associated with the Business Sector TFP, is more
consistent with this economy-wide TFP measure.
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38. In light of the above, the Commission is of the view that the GDP-PI is a
more appropriate measure of inflation than the other measures that were proposed in this
proceeding for the telephone companies' PCIs.
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39. In Teleglobe - Review of the Regulatory Framework, Telecom Decision CRTC 96-2, 2 February 1996 (Decision 96-2), the
Commission approved the use of the CPI as a measure of inflation in the price reduction
commitment regime for Teleglobe Canada Inc. (Teleglobe). The Commission notes that, in
contrast to the telephone companies' productivity offset, Teleglobe's productivity offset
was not calculated using TFP or a TFP differential. Rather, Teleglobe's proposed 6%
productivity offset was estimated using the percentage decrease in average unit revenue
for telephone services as a whole (which was 3.0%) plus CPI (which was 2.8%) over the
period 1989 to 1994. Therefore, the Commission considers that the use of the CPI in
Teleglobe's price reduction commitment was appropriate in the context of Decision 96-2.
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40. With respect to updating the PCI, the Commission notes that Stentor proposed
to use as a proxy for the annual change in inflation the percent change in GDP-PI for the
fourth quarter of a given year relative to the fourth quarter of the previous year. The
Commission is of the view that it would be more appropriate to use the percent change in
the GDP-PI over the entire year relative to the previous year to avoid the problem of
seasonality. The Commission notes that the figures for the previous year's GDP-PI are
generally available at the end of February. Given that a five-year lag generally exists
between the initial and final figures of GDP-PI, the Commission would not expect the
telephone companies to adjust their PCIs due to revisions in the GDP-PI.
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41. Therefore, the Commission directs the telephone companies, when filing
updates to their PCIs (as identified in Part IV of this Decision), to use the most
recently published GDP-PI calculated as described above. These submissions are to be filed
by 31 March of each year.
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C. Productivity Offset (X-factor)
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1. General
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a. Introduction
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42. The productivity offset or X-factor, in general, includes the following
components: (1) the industry TFP; (2) the economy-wide TFP; (3) the input price
differential defined as the difference between the industry and economy-wide input price
growth rates; and (4) the consumer productivity dividend (stretch factor). The first three
components constitute the basic offset. In addition to the above, Stentor and TCI proposed
that a competition adjustment be made to their productivity offset for the onset of local
competition.
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43. In reaching its determinations on a reasonable productivity offset, the
Commission examined evidence and studies on historical TFP, in order to first establish an
accurate productivity baseline, i.e., a level that the telephone companies would be
expected to achieve without (1) a change in the form of regulation and (2) the emergence
of local competition. The Commission then assessed the impact of a change in regulation
from rate base/rate-of-return to price caps and of local competitive entry in order to
determine a productivity offset that balanced the interests of consumers and shareholders,
while providing the telephone companies with incentives to be more efficient.
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44. With respect to the measurement of the X-factor, the Commission considers
that the time period used to estimate TFP and the various components of the productivity
offset should reflect the long term in order to capture the sustained effects of
productivity growth and to mitigate the effect of one-time events and short-term
fluctuations on annual TFP.
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b. Industry-wide Versus Company-specific X-factors
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45. Stentor proposed an industry-wide X-factor of 2.7% rather than
company-specific X-factors, in order to set an X-factor that would be independent of any
one company's actions. In response to a Commission interrogatory, Stentor stated that, if
a company achieved above-average productivity gains in the past, it did not necessarily
mean that the company would continue to achieve above-average productivity in the future
and, in fact, the company's potential for further gains could be reduced because of the
magnitude of past gains.
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46. TCI proposed an industry-wide X-factor of 1.3% for the period 1998 to 2000
and 0.8% for the period 2001 to 2003. TCI's proposal regarding company-specific stretch
factors is described in subsection 5 below.
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47. No intervener supported company-specific X-factors.
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48. The Commission considers that a major role of price caps is to establish
targets for a company's performance that reflect changes in a company's input costs but,
at the same time, are based on measures that are outside of the control of a single
company. As a result, an X-factor should be based on data that are independent of the
actions of any one individual company. As noted by Stentor, the use of an industry-wide
X-factor has major benefits to consumers and the general economy as it will enhance
companies' incentives to increase their efficiency. Further, the Commission notes that the
use of an industry-wide X-factor rewards those companies that have achieved above-average
productivity gains in the past and provides an appropriate incentive to those companies
that have had below-average productivity in the past.
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49. MTS proposed adopting Stentor's industry-wide X-factor of 2.7% and reducing
it to 1.5% due to MTS' smaller size, history and geography.
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50. CAC/MSOS argued that special treatment for MTS by means of a small company
productivity offset or special exogenous factors, as discussed in Part V of this Decision,
would be inappropriate, and would simply enhance the profitability of the company. As
well, the Consumer Coalition submitted that MTS' proposal is contrary to the objective of
price cap regulation of promoting efficiency.
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51. CCTA argued that MTS' historical productivity holds up well against the other
telephone companies and has been above average.
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52. With respect to MTS' proposal that an adjustment to the X-factor is required
due to its smaller size, the Commission notes that MTS is approximately in the middle of
the range for the Stentor companies in terms of network access lines (NAS). In addition,
the Commission notes that, in recent years, MTS' productivity growth has been among the
highest of the Stentor companies.
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53. In light of the above, the Commission is of the view that an industry-wide
X-factor is appropriate, and that a small company adjustment is not required for MTS.
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c. Direct Versus Full Differential Approach
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54. Call-Net proposed to use the direct approach in its specification of the
price cap formula as an alternative to Stentor's proposed differential approach. Under the
direct approach, instead of using the economy-wide variables, the PCI is calculated solely
in terms of the telephone companies' input inflation and TFP rates. Given that Call-Net
supported the use of publicly-available data, it recommended the use of Statistics
Canada's estimates of TFP and Statistics Canada's Business Sector Output and Input Price
Indices.
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55. As noted earlier, there are practical limitations associated with the
Business Sector Output/Price Index. Further, the Commission agrees with Stentor that the
direct approach is equivalent to the full differential approach in calculating the
X-factor when (1) an input price differential is included, and (2) the internal
consistency among the economy-wide TFP, output and input price growth rates is maintained.
The Commission has adopted these conditions in arriving at its X-factor.
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56. In light of the above, the Commission considers that the differential
approach is more practical than the direct approach to implement and, accordingly,
approves the use of the differential approach.
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2. Industry TFP
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a. Methodology
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57. The first component of the productivity offset is the industry TFP.
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58. Stentor proposed using the industry (historical) TFP of 4.2% for the period
1988 to 1995, based on the user cost of capital methodology.
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59. B.C., CCTA, Calgary and Westel supported Stentor's basic approach, while
Call-Net and the Consumer Coalition advocated using the residual rate of return method to
measure capital input prices.
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60. Stentor stated that the method used to measure cost of capital (i.e.,
residual rate of return or user cost) for purposes of calculating TFP, has little impact
on the Stentor companies' TFP growth estimate. However, it stated that the measure used
can have a significant impact on the Stentor companies' input price growth, particularly
if the period is characterized by a marked deterioration in earnings at the end. Stentor
stated that the use of the residual rate of return approach over the period 1988 to 1995
results in a higher input price differential than otherwise and is therefore an inadequate
approach for the Stentor companies over this period. Given that several of the companies
experienced a marked deterioration in earnings at the end of the 1988 to 1995 period, the
Commission agrees with Stentor that the residual rate of return approach is inadequate
over the above period.
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61. In light of the above, the Commission accepts Stentor's TFP methodology based
on the user cost of capital approach.
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b. Time Period
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62. Several interveners submitted that the 1995 data should be excluded from
Stentor's 1988 to 1995 historical calculation, arguing that the telephone companies had an
incentive not to reduce costs in 1995 as this would have resulted in a lower historical
TFP estimate. Interveners also suggested that the Commission could include the 1995
results if 1996 and 1997 forecasts were also included.
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63. The Commission notes that by either excluding 1995 data, or by including data
for the years 1996 and 1997, the TFP would be 4.5% rather than Stentor's proposal of 4.2%.
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64. The Commission is of the view that, if the telephone companies had an
incentive not to reduce costs in 1995, they would have had a similar incentive in 1996 and
1997. The Commission is also of the view that it is preferable to use actual TFP data, for
consistency and accuracy, rather than a mix of actual and forecast TFP data. For these
reasons, the Commission is not convinced that either approach advocated by the interveners
is appropriate.
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65. The Commission notes that the Stentor historical TFP growth of 4.2% for the
period 1988 to 1995 is consistent with Bell's long-term TFP of 4.1% (1962 to 1995). Given
that Bell's average revenue weight used in calculating the Stentor industry-wide TFP is
approximately 67% over the period 1988 to 1995, the Commission notes that Bell's
productivity performance has a significant impact on the industry-wide productivity
estimate.
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66. The Commission is of the view that it is reasonable to use Bell's long term
TFP as a proxy for all the Stentor companies in determining whether 1988 to 1995 is
representative of the long term in calculating the industry-wide productivity.
Accordingly, the Commission adopts the 1988 to 1995 period for purposes of calculating the
industry (historical) TFP for the telephone companies.
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3. Economy-wide TFP Growth
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67. The second component of the productivity offset is the economy-wide TFP.
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68. Stentor used Data Resources Inc.'s (DRI) forecast economy-wide productivity
growth of 0.8% to derive the expected productivity differential for the 1998 to 2002
period. Stentor noted that the recent (i.e., 1988 to 1995) trend of zero percent
economy-wide productivity growth will not continue and the economy-wide TFP will revert
back, over the 1998 to 2002 period, to its long-term trend. Stentor further noted that the
economy-wide TFP, based on Statistics Canada's estimated Business Sector TFP, is 1.0% over
the period 1962 to 1995.
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69. and Call-Net questioned the reliability of DRI's forecasts and several
parties, including B.C., Calgary, Call-Net and the Consumer Coalition, disagreed with the
way that Stentor mixed the use of an industry (historical) TFP and a forecast economy-wide
TFP.
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70. The Commission agrees with parties that it is preferable, where possible, to
avoid mixing the use of an industry (historical) TFP and a forecast economy-wide TFP.
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71. The Commission notes that the poor economy-wide productivity performance
during the 1988 to 1995 period was due, in part, to weak economic conditions and the
recession of the early 1990s. However, the Commission also notes that weak economic
conditions do not affect the productivity of the Stentor-member companies in the same way
that they affect the economy as a whole and therefore the economy's performance over the
1988 to 1995 period is not likely indicative of a lower industry productivity offset than
otherwise. The Commission agrees with Stentor that major productivity improvements tend to
be driven by technological breakthroughs and industry restructuring which are generally
industry-specific.
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72. As stated earlier, the Commission is of the view that the economy-wide TFP
should be determined over the long term in order to average out the impacts of any
short-term events on the economy-wide productivity performance.
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73. In light of the above, the Commission approves the use of Statistics Canada's
long-term estimate (1962 to 1995) of 1.0% economy-wide TFP when calculating the basic
productivity offset.
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4. Input Price Differential
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74. The third component of the productivity offset, which completes the basic
offset, is the input price differential (IPD).
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75. Stentor proposed that the IPD for the period 1988 to 1995 be excluded due to
its statistical insignificance. However, Stentor suggested that the IPD be included if the
period 1988 to 1997 were used.
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76. As noted earlier, the Commission is of the view that an IPD, among other
things, must be included in the price cap formula in order to eliminate the potential for
bias in the PCI.
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77. The Commission further notes that, during the proceeding, Stentor provided a
0.3% IPD that was based on the long-term period 1962 to 1995 and on Bell's estimate of the
input price growth rate. The Commission is of the view that using the long-term period is
more appropriate because it is consistent with the use of the long-term economy-wide
productivity discussed previously. The Commission is also of the view that the long-term
IPD of 0.3%, based on Bell's input price growth, is representative of the telephone
industry as a whole.
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78. Therefore, the Commission finds appropriate to include, in its calculation of
the basic productivity offset, a long-term IPD estimate of 0.3% based on the period 1962
to 1995.
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5. Consumer Productivity Dividend (Stretch Factor)
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79. The fourth component of the productivity offset is the consumer productivity
dividend or stretch factor.
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80. All parties agreed during the proceeding that a consumer productivity
dividend, or stretch factor, should be applied to the basic offset. The stretch factor is
intended to provide a dividend to consumers resulting from the streamlining of regulation
and increased incentives for efficiency for the telephone companies. The principal issue
was the level of the stretch factor that should be applied to the basic offset and whether
that adjustment should be revised during the price cap period.
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81. Stentor stated that, although there is no empirical basis for quantifying a
specific value for the stretch factor, it proposed a 0.5% stretch factor for the entire
price cap period.
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82. TCI proposed a 1.0% stretch factor for the first three years and a 0.5%
stretch factor for the remaining three years in its price cap plan. Under TCI's proposal,
the stretch factor could be adjusted during the follow-up proceeding, depending on the
extent of cost-cutting or productivity-improving initiatives undertaken by the companies
prior to the onset of the price cap regime. The proposed adjustment would be in the form
of a partial or total exemption from the stretch factor (stretch factor exemption).
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83. The Commission notes CCTA's argument that the Commission established a 1.0%
consumer productivity dividend for Teleglobe in Decision 96-2, in recognition of the
incentives embodied in a price cap formula to increase productivity.
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84. The Commission is of the view that it is reasonable for consumers to expect
that the benefits to the telephone companies of moving to price cap regulation would be
passed on to consumers in the form of price reductions. The Commission notes that TCI's
proposal of a 1.0% stretch factor was supported by most interveners, but that its proposal
to reduce the stretch factor during the price cap term received little support. The
Commission considers that a 1.0% stretch factor is appropriate for the duration of the
price cap period.
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85. In the Commission's view, a stretch factor exemption as proposed by TCI is
not necessary, in light of the Commission's determinations in subsection 1.b. above that
an industry-wide X-factor rewards those companies that have achieved above-average
productivity gains in the past relative to those companies that have had below-average
productivity.
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6. Competition Adjustment
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86. The fifth component of the productivity offset is the competition adjustment.
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87. Stentor submitted that local competition will give rise to market share loss
and increased sales and marketing expenses, which in turn will raise the unit costs for
the telephone companies. Stentor also submitted that local competitors will focus first on
high margin services. As a result, Stentor proposed a reduction to the X-factor of 1.2% to
reflect these factors.
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88. TCI submitted that the onset of local competition is likely to render overly
optimistic any forecast of productivity gains. TCI proposed a reduction to the X-factor of
0.6%. In contrast to Stentor's adjustment mechanism, TCI derived its competition
adjustment by comparing the average rates of output growth for two periods: 1988 to 1995
and 1988 to 1997.
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89. CCTA, supported by Westel, submitted that the telephone companies'
productivity is expected to increase as they begin to face competition in the local
exchange market and proposed an additional increase to the basic offset of 0.25%. CCTA
submitted that Stentor's proposal sought to emphasize certain increased costs without
considering any benefits accruing from offsetting cost savings.
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90. The Commission agrees with Calgary's argument, supported by Call-Net and the
Consumer Coalition, that competition is likely to have a strong effect on incentives to
improve productivity beyond those that price cap regulation provides.
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91. The Commission agrees with B.C.'s argument that, since the average TFP growth
for the period includes the introduction of toll competition and is not very different
from the long-term TFP, it does not appear that competition has dampened the telephone
companies' productivity.
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92. In Decision 97-8, the Commission set out the terms and conditions for local
competition. In the price cap proceeding, parties put forward various views as to the rate
of competitive entry into the local market. The Commission considers that the pace of
local competition will not proceed as quickly as predicted by the Stentor companies.
Although the telephone companies will incur some market share loss as a result of the
emergence of local competition, the Commission is of the view that the telephone companies
will continue to find innovative ways of reducing costs and increasing their output, thus
improving productivity. In light of the above, the Commission is of the view that an
adjustment to reflect the impact of competitive entry in the local market is not required.
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7. Capped Services
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93. In PN 96-8, the Commission stated that, given that price cap regulation will
apply to the Utility segment only, productivity studies for the Utility segment would be
desirable. However, the Commission directed the telephone companies to provide estimates
of productivity for the entire company in addition to any estimates of the Utility segment
productivity.
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94. TCI separated capped service prices from all service prices. TCI subtracted
the estimated inflation rate for non-capped services (3.8%) from its basic offset for all
services (4.7%). This resulted in a basic offset of 0.9% for capped services versus
Stentor's basic offset of 3.4% for all services which Stentor then applied to capped
services.
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95. The Commission notes that Stentor did not recommend the use of TFP results
based on the Utility segment only. Instead, it calculated TFP for all services and applied
the TFP results to capped services.
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96. Calgary argued that TCI's methodology is valid only if there is strong
evidence that the growth in TFP has a different impact on the costs of capped and
non-capped services. Calgary further stated that Stentor's evidence on Cost Comparisons
and Rate Rebalancing, filed in the proceeding leading to Decision 95-21, showed that total
company TFP does not have a substantially different impact on local service costs and toll
service costs; therefore, there is no need to separate the impact of productivity growth
on capped versus non-capped services.
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97. Calgary also argued that TCI's reliance on the historical price changes of
local services and toll services (especially on the relative price changes between these
two classes of service) assumes that these relative prices will continue to change at the
same rate in the future. Calgary submitted that these relative price changes will not
continue to change at the same rate after the third step of rate rebalancing in January
1998.
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98. The Commission notes that cross-subsidization from toll to local services
existed to a great extent during the period 1988 to 1995 and that, as a result, local and
toll service prices differed significantly from their respective true costs. Therefore,
the Commission is of the view that historical local prices should not be used as a basis
for determining the productivity offset for capped services.
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99. In light of the above, the Commission considers it more appropriate to use
the company-wide TFP (as proposed by Stentor) as a proxy for the Utility segment TFP.
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8. Productivity Offset (X-factor) Summary
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100. In light of the determinations included in this Section, the Commission
approves an industry-wide productivity offset (X-factor) of 4.5% for the telephone
companies during the price cap period. This productivity offset is derived as follows:
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Industry (Historical) TFP 4.2%
less: Economy-wide TFP 1.0%
plus: Input Price Differential 0.3%
Basic Offset (sub-total) 3.5%
plus: Stretch Factor 1.0%
Competition Adjustment 0.0%
Total Target X-factor 4.5%
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D. Exogenous Factors (Z-factor)
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101. Most parties agreed that an exogenous adjustment, or Z-factor, should be
used to flow-through costs associated with events that result from conditions uniquely
applicable to regulated telecommunications utilities.
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102. TCI proposed a tax-factor (T-factor) to limit the circumstances under which
the price cap plan could be varied for exogenous factors. TCI stated that the T-factor in
its price cap plan would deal with industry specific taxes or tax-like orders, and changes
in its effective tax rate as its additional tax deductions (ATDs) are depleted during the
price cap period.
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103. TCI also noted that in AGT - Issues Related to Income Taxes, Telecom
Decision CRTC 93-9, 23 July 1993, and in City
of Calgary - Application to Review and Vary Telecom Decisions CRTC 93-9 and 93-18, Telecom Decision CRTC 94-22, 4 November 1994, the Commission
stated that it intended to adjust TCI's rates in future years, as necessary, to reflect
any difference between the amount of ATDs used for regulatory purposes and the amount
ultimately permitted by Revenue Canada. TCI also proposed that the T-factor be used to
account for changes in ATDs that could occur through the Revenue Canada appeal process.
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104. MTS proposed that any future unknown costs associated with the privatization
of the company be treated as an exogenous factor to be recovered through an adjustment to
the PCI.
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105. The Commission determines that a Z-factor or exogenous factor adjustment
will be considered for inclusion in the PCI for events or initiatives which satisfy the
following: (1) they are legislative, judicial or administrative actions which are beyond
the control of the company; (2) they are addressed specifically to the telecommunications
industry; and (3) they have a material impact on the Utility segment of the company.
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106. The Commission considers TCI's proposed T-factor, which deals with industry
specific taxes or tax-like orders and changes in its effective tax rate as its ATDs are
depleted during the price cap period, to be subject to the same criteria applicable to
exogenous factor adjustments.
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107. With respect to changes in ATDs that could occur through the appeal process
with Revenue Canada, on 10 January 1997, TCI informed the Commission that the company had
reached a settlement with Revenue Canada concerning the amount of allowable ATDs. In a
letter dated 1 May 1997, the Commission considered that the applicability of the T-factor
to any change in allowable ATDs will be dealt with in the follow-up proceeding as
discussed in Part XI of this Decision.
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108. With respect to MTS, the Commission acknowledges that certain costs relating
to the privatization of the company may qualify for exogenous treatment. However, the
Commission is not prepared to characterize unknown costs as being exogenous (see Part V of
this Decision).
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109. The Consumer Coalition proposed that a minimum dollar impact should be
identified for each company below which no adjustment would be allowed even if the cause
of the cost change qualified as an exogenous factor. The Commission is of the view that
such specific restrictions are not required as the criteria to qualify for the Z-factor
adjustment ensures that the event must have a material impact on the Utility segment of
the company. The reasonableness of each application pertaining to the Z-factor will be
assessed, and will be subject to comments by interveners, to ensure that all requirements
for a Z-factor adjustment are met.
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110. The Commission agrees with Stentor's proposal that the impact of an
exogenous event should be determined on a company-wide basis and assigned between the
capped and uncapped services on a cost-causal basis. If this is not possible, the
telephone company is expected to propose a reasonable allocator at the time it files its
application. The Commission considers that, in general, actual data should be used to
determine the impact of an exogenous event. Proposed Z-factor adjustments to the PCIs are
to be filed with the annual updates to the PCIs as discussed in Part IV of this Decision.
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111. The Consumer Coalition proposed that interveners be permitted to submit
applications for Z-factor adjustments. The Commission does not consider that a specific
process is necessary to accommodate such applications. In this regard, the Commission
notes that pursuant to the CRTC Telecommunications Rules of Procedure (the Rules),
parties will have 30 days to comment on a company's proposed Z-factor adjustment. Further,
parties have the option of filing a Part VII application under the Rules as required.
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E. Other Factors
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1. Factor-A
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112. Stentor noted that there may be situations where it is not feasible for a
company to set going-in rates which would allow for the recovery of the going-in revenue
requirement shortfall. Stentor submitted that each company's financial circumstances are
different and that therefore, a specific provision must be made in order to allow for the
recovery of costs that are not reflected in the going-in rates. Stentor proposed that this
revenue shortfall be explicitly recognized in the price cap formula as factor-A.
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113. Under Stentor's proposal, the going-in revenue requirement for the Utility
segment of each company would be determined. Each company would then assess how much of
the revenue requirement could reasonably be recovered through going-in rates. The
remaining revenue requirement shortfall divided by the forecast revenues for 1997 would be
included as a component of the PCI at the start of the price cap period.
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114. The Commission notes that, under Stentor's proposal, a company with a
factor-A would be able to increase prices during the price cap period to recover the
going-in revenue requirement shortfall in a manner that best suits its market conditions.
The Commission also notes that, to the extent that a company is required by market
conditions to defer implementation of the permitted rate increases, its ability to recover
the shortfall would be correspondingly reduced.
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115. As discussed in Part VIII of this Decision, the telephone companies are
permitted to implement weighted-average rate increases for basic residential local service
of up to $3 as at 1 January 1998. These additional revenues will first be used to reduce
the toll contribution rate to no less than 2 cents per minute. Any revenues that are not
required to reduce the contribution rate to the 2 cent level will be used to reduce or
eliminate any going-in revenue requirement shortfall.
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116. The Commission considers that, in the event that a company could not
implement rates that would allow for the recovery of any revenue requirement shortfall
under the going-in rates, it would be appropriate to provide for an opportunity to recover
this shortfall during the term of the price cap plan. However, the Commission considers
that it would be more appropriate to consider the mechanism to recover this shortfall
during the follow-up proceeding. Consequently, the Commission directs the telephone
companies to provide, as part of the follow-up proceeding, the calculation of the proposed
mechanism to recover this shortfall, as well as the telephone companies' views as to when
they expect to be in a position to implement rates to recover any revenue shortfall and
the required rate adjustments.
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2. Q-Factor
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117. In the interest of ensuring that parties are aware, in a timely fashion, of
all components of the price cap formula, the Commission hereby announces that it has
decided not to include a quality of service factor, i.e., Q-factor, in the PCI. That
determination will be addressed more fully in the decision, to be issued shortly, in the
proceeding initiated by PN 94-50 to review the quality of service indicators.
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IV SERVICE BASKETS AND TARIFF MATTERS
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A. Service Baskets
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118. In most price cap plans, telephone services are generally grouped into
baskets, subject to a price cap index. Generally, services are grouped into baskets based
on criteria such as homogeneity and/or similarity in demand price elasticities. The price
cap index typically determines the allowable annual weighted-average price change for
services subject to the price cap. Prices for individual services may increase or decrease
provided that, in aggregate, they conform to the price cap index. Sometimes, additional
pricing constraints on services within a particular basket are imposed to further limit
the magnitude of the telephone company's pricing actions in relation to the price cap
index. These additional constraints can be upper or lower limits to price changes for
services within the basket.
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119. Most parties proposed that basic residential local service be treated
differently from other Utility segment services in light of the subsidies flowing to this
service. Parties generally proposed that basic residential local service form a basket
unto itself and that the pricing of this service be constrained by specified maximum
annual price increases.
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120. Parties' proposals as to the specific basic residential local service
pricing constraints varied widely, particularly on the appropriateness of rationalizing
rates during the price cap period. Stentor, AT&T Canada LDS and Call-Net based their
proposals on the view that rate increases for basic residential local service during the
price cap period are necessary and that the subsidies flowing to this service should be
reduced. The Consumer Coalition and CCTA based their proposals on the view that rate
rationalization during the price cap period would not be in the public interest.
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121. Parties generally proposed that services provided to competitors that are
used in the provision of competitive local and interexchange (IX) services should be
subject to separate treatment under the price cap regime in light of the telephone
companies' ability to "price squeeze" competitors through their control of both
retail and essential/bottleneck services' pricing.
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122. Parties also proposed that, if a local contribution mechanism was
established with the introduction of local competition, the local and the current toll
contribution should comprise individual baskets or sub-baskets.
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123. Stentor proposed that services need not be capped if customers do not
require protection from price increases because of market conditions or other factors, or
if inclusion of the service under price caps would be redundant or impractical. TCI
proposed that only basic residential local and single-line business services considered
essential for policy reasons and essential facilities supplied on a non-competitive basis
should be capped.
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124. AT&T Canada LDS and CCTA suggested that most services, other than basic
residential and business local exchange service and competitor services, need not be
capped. Microcell was of the view that the main characteristic distinguishing capped
services from uncapped services should be whether the customer must rely on the dominant
incumbent or whether a customer has a choice of suppliers under competitive market
conditions.
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125. Under the price cap plan approved by the Commission, all capped services
will form a single basket subject to the PCI as defined in Part III of this Decision. This
basket will be sub-divided into three sub-baskets which are (1) Basic Residential Local
Service, (2) Single and Multi-Line Business Local Services and (3) Other Capped Services.
The aggregate price levels for Basic Residential Local Service and the Other Capped
Services sub-baskets will be limited to annual increases equal to the inflation rate. A
maximum increase of 10% in any year will apply to individual rates for residential and
single-line business basic services in smaller exchanges. Further, certain Utility segment
services will not be capped (the uncapped services), and the rates for certain of the
Utility segment services not subject to the price cap plan, such as competitor services,
9-1-1 service, message relay service and contribution, will be accorded special treatment.
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126. In the Commission's view, the framework for the treatment of the Utility
segment services set out in this Decision will allow the telephone companies sufficient
pricing flexibility to adequately respond to competition. At the same time, this framework
facilitates policy objectives such as affordable telecommunications services and
non-discriminatory access rates for competitor services and limits the funding of price
reductions for services subject to competitive pressures through higher rates for services
that are less competitive.
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1. Basic Residential Local Service Sub-basket
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127. The Commission, in making its findings related to the pricing of basic
residential local service under the price cap regime, is guided by the objectives set out
in section 7 of the Telecommunications Act (the Act). The Commission considers that
the price cap framework should, among other things, "render reliable and affordable
telecommunications services of high quality accessible to Canadians in both urban and
rural areas in all regions of Canada." AT&T Canada LDS', Call-Net's and Stentor's
proposals, in the Commission's view, could possibly allow the rates for basic residential
local service, especially for subscribers in rural areas, to rise to unaffordable levels.
At the same time, the Commission recognizes that competitive pressures will erode the
subsidies from other Utility segment services to basic residential local services. As
described in Decision 97-8, the Commission has developed a portable contribution approach
to provide an explicit stable subsidy for the maintenance of affordable basic service.
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128. Furthermore, the Commission has recognized in the past that the
rationalization of basic service rates is necessary as telecommunications markets become
more competitive. The Commission has approved, on an ongoing basis, telephone company
applications to consolidate rate groups since 1992, and, as noted in Part VIII of this
Decision, will provide the opportunity for the telephone companies to further consolidate
rate groups in conjunction with the third round of rate rebalancing. Given these
initiatives and the expectation that local competition will not evolve quickly,
particularly in rural areas, the Commission is of the view that the requirement to further
rationalize rates for basic residential local services during the price cap plan should be
limited.
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129. Therefore, the Commission determines that the index of prices for the
sub-basket comprising basic residential local services will be allowed to increase by, at
most, the annual inflation rate, as measured by the GDP-PI, over the term of the price cap
plan. The Commission considers that this approach of providing limited rationalization of
rates over the price cap period balances the objectives of the Act of fostering increased
reliance on market forces with the introduction of local competition, while rendering
affordable telecommunications services. The Commission notes, however, that for some of
the telephone companies, additional rate increases may be necessary during the price cap
period in order to allow the companies to recover costs which the Commission considers to
be appropriate for recovery but which are not reflected in the rates effective at the
implementation of the price cap regime. The Commission notes that this will be addressed
in the follow-up proceeding (see Part III, Section E of this Decision).
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130. The Commission notes that the above price cap on the average basic
residential local service rates permits the telephone companies to implement rate
increases greater than the rate of inflation for specific rate elements, provided that the
overall average increase does not exceed the rate of inflation. Rates for basic
residential local services in smaller exchanges have in some cases increased substantially
as a consequence of rate rebalancing and other rate rationalization initiatives. In order
to provide these subscribers with more certainty regarding the maximum rates they will be
charged during the price cap plan, and to ensure that future increases are kept to an
affordable level, the Commission is of the view that individual rate elements in the
sub-basket of basic residential local services should be constrained in a manner similar
to that proposed by Stentor and TCI. Given the overall cap of inflation on the Basic
Residential Local Service sub-basket, the Commission considers that the potential exists,
for some telephone companies, to significantly increase rates for residence primary
exchange service in smaller exchanges or for other services which are non-optional with
residence primary exchange service (e.g., mileage charges). The Commission notes that the
smaller, less dense exchanges, were generally characterized as constituting Bands C and D
by Stentor in the proceeding leading to Decision 97-8, but that some exceptions exist, for
instance, for NBTel. For the purposes of administering the individual rate element
constraint, the Commission intends to employ the rate band definitions. The Commission
will finalize the rate band classifications in the follow-up proceeding discussed in Part
XI of this Decision.
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131. Therefore, the Commission concludes that, in any year, no rate element in
the Basic Residential Local Service sub-basket is to increase by more than 10%. This
constraint would not apply for primary exchange services within the bands for which local
loops are considered non-essential, as determined in Decision 97-8, which would typically
include urban exchanges where local competition will likely evolve more rapidly. For most
of the telephone companies, the exemption applies to Bands A and B.
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132. Services included in the Basic Residential Local Service sub-basket are the
basic residence primary exchange services, with the exception of 9-1-1 and message relay
services, and any other services which are non-optional with the various grades of basic
residence primary exchange services.
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2. Single and Multi-line Business Local Services Sub-basket
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133. Most parties proposed that single-line business local service be included in
a basket of capped services. Stentor committed to individual rate element constraints for
single-line business local service in order to provide assurances for subscribers of these
services.
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134. Stentor proposed that, for Bell and BC TEL, multi-line business local
service be included in the capped services basket. Stentor was of the view that it was
necessary to include multi-line business local service in the capped services basket to
accommodate the companies' proposed rationalization of Utility segment rates. Stentor
indicated that, for Bell, multi-line and single-line business local services are not
distinguished as separate services. For the other telephone companies, Stentor proposed
that multi-line business local service not be capped primarily on the basis that market
conditions would protect the interests of users.
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135. The Commission is not satisfied that, during the initial stages of the price
cap regime, market conditions will assert sufficient pricing discipline in all areas of
the telephone companies' respective operating territories to provide such protection.
Accordingly, the Commission considers it appropriate to include multi-line business local
services, with the exception of Centrex-like services, in the capped services basket for
all the telephone companies. In order to limit the extent to which business service rate
reductions can be offset by increases to other capped Utility segment services, the
Commission adopts a sub-basket for single and multi-line business local services. The
sub-basket is also to include any additional services which are non-optional, with the
various grades of business single and multi-line services, except 9-1-1 and message relay
services.
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136. The Commission is of the view that primary exchange service for single-line
business in smaller exchanges should be subject to the same maximum annual rate increase
applicable to rural basic residential local services. Accordingly, the Commission finds
that increases to individual rate elements for single-line business local customers are
not to exceed 10% in any year. As with basic residential local service, this constraint
would not apply to single-line business primary exchange services within bands for which
local loops are to be treated as non-essential as determined by Decision 97-8.
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3. Other Capped Services Sub-basket
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137. Stentor proposed that those services not qualifying as uncapped, or not
otherwise included in a sub-basket, should comprise a residual sub-basket. Stentor
submitted that services should be excluded from price caps when customers do not require
protection from price increases because of market conditions or other factors, or if the
inclusion of the service under price caps would be redundant or impractical. However,
Stentor proposed that, for Bell and BC TEL, in order for those companies to meet the price
cap parameters, certain services be subject to price caps, although these services meet
Stentor's criteria for classification as uncapped services. Under Stentor's proposal, the
remainder of the Utility segment services would form the other capped services basket,
subject to the exceptions noted above. TCI proposed that only basic residential and
single-line business services and essential facilities not subject to competition be
capped.
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138. In the Commission's view, it is appropriate to define the services to be
included in the Other Capped Services sub-basket as those remaining Utility segment
services which do not qualify as services excluded from price caps nor included in other
sub-baskets. A discussion of the services to be included in the Other Capped Services
sub-basket is set out below in Section B.
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139. The Commission concludes that the index of prices for the Other Capped
Services sub-basket will be capped at the rate of inflation, as measured by the GDP-PI, in
order to provide broad protection for the customers of the services in this sub-basket.
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140. The services to be categorized as Other Capped Services or uncapped services
will be finalized in the follow-up proceeding discussed in Part XI of this Decision.
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141. Stentor argued that, should the Commission decide that optional local
services should be outside the price cap basket for Bell, the company should be afforded
the opportunity to propose a restructure of its local rates such that a removal of
optional local services from the basket of capped services not preclude moving basic
residential local rates to appropriate levels over the price cap period. Further
rationalization of basic residential local rates will be allowed in accordance with this
Part of this Decision and in accordance with the provisions set out in Part VIII of this
Decision.
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B. Services Excluded from the Price Cap Regime
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1. Uncapped Services
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142. The Commission's policy with respect to certain Utility segment services,
such as optional local services, has been to price these services to maximize contribution
in order to keep rates for basic residential local service as low as possible. Given the
discretionary nature of this class of services, the Commission is of the view that an
upper pricing constraint is not warranted. Accordingly, the Commission concludes that
services priced to maximize contribution are appropriately excluded from the price cap
regime.
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143. As well, the Commission concludes that it would be redundant or impractical
to include under price caps certain services, such as services provided under the terms of
SFTs. The Commission notes that most parties did not object to this aspect of Stentor's
proposal.
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144. While Stentor and TCI proposed to exclude services from the price cap where
customers do not require protection from price increases because of market conditions, the
Commission is not satisfied that, particularly during the initial stages of the price cap
regime, market conditions will assert sufficient pricing discipline across all areas of
each of the telephone companies' respective operating territories. Accordingly, the
Commission considers that the services, such as Megalink and Microlink, that Stentor and
TCI proposed to exclude on the basis that market conditions would protect customers should
generally be included in the Other Capped Services sub-basket at the outset of the price
cap plan. Should competition develop to sufficiently discipline pricing over the term of
the price cap plan, the Commission notes that the telephone companies can apply to have
services removed from under the price cap. The initial inclusion of these services under
price caps will provide some price protection for those customers in areas where
competition will be slow to develop.
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145. The Utility segment services to be designated as uncapped services according
to the general principles above will be finalized in the follow-up proceeding discussed in
Part XI of this Decision.
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2. Competitor Services
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146. Most parties proposed that competitor services should be treated separately
from retail services. Stentor proposed that competitor services be placed into two
separate baskets delineated by whether the services are employed for the provision of
local or toll services, each subject to the PCI. TCI proposed that these services be
priced at Phase II costs plus an approved mark-up.
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147. AT&T Canada LDS agreed with Stentor's proposal with two exceptions.
First, AT&T Canada LDS argued that some toll competitor services are employed only by
competitors and not by the telephone companies' Competitive segments. In AT&T Canada
LDS' view, grouping these services with services used by the telephone companies'
Competitive segments allows the telephone companies to disadvantage competitors by
targeting reductions to services primarily used by themselves. AT&T Canada LDS
recommended that the competitor services not used primarily by the telephone companies be
included in a separate sub-basket subject to the PCI.
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148. The Commission considers that TCI's proposal to price competitor services at
Phase II costs plus an approved mark-up has merit in that it is appropriate that rates for
these services recover Phase II costs and make a contribution to the fixed and common
costs of the telephone companies, the level of which has been reflected in approved rates.
Under such a regime, rates for these services would be subject to change only upon
application by the telephone companies, competitors or through a proceeding initiated by
the Commission. The Commission considers that the primary rationale for a change in these
services' rates would be a change in Phase II costs. The Commission notes that under such
a regime it is unnecessary to form a sub-basket of services primarily used only by
competitors, as suggested by AT&T Canada LDS, as the telephone companies would not
have the opportunity to target rate reductions for specific services primarily used by the
telephone companies. Further, the Commission is of the view that it is unnecessary to
include competitor services in the basket of capped services, given the pricing regime
established in this Decision.
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149. Competitor services include services utilized by local and toll competitors,
including interconnection services required by wireless carriers. They include, for
example, all services for which rates were approved in Unbundled Rates to Provide Equal
Access, Telecom Decision CRTC 97-6, 10
April 1997 and rates for Directory File Service. The Commission intends to designate the
services considered competitor services in the follow-up proceeding discussed in Part XI
of this Decision.
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150. AT&T Canada LDS also argued that an additional basket should be created
comprised of telephone company services which are not yet available on a widespread basis
from competitive access providers (CAPs), nor designated as bottleneck facilities, and
which are used by competitors for direct connection to customers. AT&T Canada LDS
considered that, given their virtual monopoly in the supply of access services, the
telephone companies have the ability to charge more for stand-alone access, while
insulating their own customers from the effects of the increase through bundled service
offerings. AT&T Canada LDS suggested that services such as Digital Network Access,
Local Megaroute, Co-location tariffs and Support Structures be included in an Access
Services Basket.
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151. Stentor argued that the services comprising an Access Services Basket are
subject to competitive conditions and should not be capped. Stentor noted that local high
bandwidth services offered by Rogers Network Services and Vidéotron ltée compete with
the services offered by the telephone companies.
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152. As noted earlier, the Commission is not satisfied that market conditions
will assert sufficient pricing discipline across all areas of the telephone companies'
respective operating territories. Accordingly, for these services to be classified as
uncapped services rather than form a separate basket as proposed by AT&T Canada LDS,
the Commission generally finds it appropriate to include services which were characterized
by AT&T Canada LDS as Access Services in the Other Capped Services sub-basket.
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3. 9-1-1 and Message Relay Services
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153. The Commission notes that 9-1-1 and message relay services are generally
rated on the basis of Phase II costs and a mark-up which reflects the nature of these
services. Given the manner in which the rates for these services have been determined and
the nature of these services, the Commission considers it appropriate to freeze the levels
of these rates, as approved at 1 January 1998, for the duration of the price cap period.
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4. Contribution
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154. As discussed in Part VIII of this Decision, the Commission concludes that
toll contribution should be treated as a special category, with rates not subject to
change during the price cap period.
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C. Other Pricing Issues
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155. Stentor and TCI proposed that an imputation test be employed to limit
downward pricing rather than establishing pricing constraints on specific services.
Stentor was of the view that floor price levels determined by the imputation test are
superior to a service pricing band and would provide the companies with greater
flexibility.
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156. TCI proposed to file imputation test information with all tariff
applications other than those for market trials and promotions. Stentor proposed that the
telephone companies simply attest to the passing of the imputation test.
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157. The Commission notes the requirement for imputation tests as determined in
Decision 97-8. Recognizing the use of the imputation test as a price constraint, the
Commission notes that existing Phase II information requirements for Utility segment
services need to be maintained. Further, the Commission considers that an attestation is
not sufficient to demonstrate that rates meet an imputation test, given that judgment is
exercised when determining whether a service has passed the imputation test. Therefore,
the Commission concludes that any required imputation test information must be filed with
tariff applications.
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158. The Commission has also determined that price changes for services that are
currently priced below cost should generally not move rates further from costs. The
Commission considers that this is consistent with its policies relating to
anti-competitive pricing.
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159. Stentor and TCI submitted that the telephone companies require the ability
to de-average rates because consumer demand, and the costs of meeting that demand, can
vary by geographic location. Stentor argued that, if competitors are targeting services
and pricing in consideration of geographic factors, the companies need this flexibility as
well. TCI submitted that there is no expectation in competitive markets that prices in all
locations or all sub-markets will be uniform even when costs are the same.
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160. CCTA expressed the view that the Commission must maintain a policy of
uniform pricing of services in various geographic areas within the rate bands in order to
prevent targeting of rate reductions on a geographic basis. In CCTA's view, the rate bands
embody areas with similar cost characteristics, and deviation from average pricing
policies is not justified and will discriminate against subscribers. CCTA stated that it
accepts price de-averaging based on cost differences as recognized in the telephone
company rate bands.
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161. The Commission notes that, for many of those services which will now be
uncapped services, the Commission's policy in the past has been to maximize contribution.
The Commission is of the view that given that the roll-out of local competition will
likely not occur uniformly across geographic regions of a particular Stentor company's
territory, allowing the companies to de-average rates for uncapped services would permit
them to continue to maximize contribution from these services. The Commission therefore
finds that, subject to imputation test requirements, the telephone companies should have
the flexibility to de-average rates on a geographic basis for uncapped services which, in
the past, have been priced to maximize contribution.
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162. With respect to basic residential local service and single-line business
local service, the Commission is of the view that, as suggested by the Consumer Coalition,
it is appropriate to maintain rural rates at levels which are not greater than the rates
paid by urban customers, unless it can be demonstrated that circumstances warrant higher
rates in rural areas. The Commission concludes that any application proposing to increase
rates for rural basic local service to levels higher than urban rates will not be disposed
of without waiting for comments from interested parties, as discussed below in Section D.
The Commission also concludes that any application which does not meet current rating
criteria, such as the Extended Area Service criteria, will generally be dealt with on the
same basis.
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163. For multi-line business local and the other capped services, the Commission
considers that applications to de-average rates, on the basis of smaller geographic areas
than those defined by rate bands, will not be disposed of without waiting for comments
from interested parties. Among other things, the Commission is concerned that a policy of
pricing these services at de-averaged rates, as the Stentor companies have proposed, would
permit the companies to impose excessive increases in exchanges that are not likely to
experience, in the near term, the benefits of local service competition.
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164. Stentor and TCI submitted that the bundling of services within the Utility
segment and the bundling of certain of those services with Competitive segment services
will be required in order to satisfy customers' needs and to compete effectively, and that
service bundling should not be a concern as long as the bundled price meets the
appropriate imputation test.
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165. The Commission notes that interveners generally did not comment on matters
concerning service bundling. The classification of a bundled service as a capped or an
uncapped service will be considered on a case-by-case basis, similar to the assignment
process for all new services, as discussed in the following Section.
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D. Disposition of Tariff Filings
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1. General
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166. A number of parties submitted proposals for streamlining the tariff
disposition process addressing such considerations as the length of time required to
dispose of tariff applications, the use of an ex parte process for the
filing of tariffs for Utility segment services and the extent to which information filed
in support of Utility segment services should be held in confidence.
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167. The Commission notes that pre-determining aggregate price levels over a
multi-year period significantly reduces the regulatory burden by eliminating revenue
requirement proceedings. Earnings regulation proceedings are replaced with a streamlined
regulatory process for the disposition of price changes that comply with the price cap
formula and other pre-determined pricing constraints. In addition, under the price cap
regime, the Commission does not consider that it should impose on the telephone companies
a requirement to notify customers of proposed price changes to basic local services as is
frequently required at present. However, the Commission would expect the telephone
companies to notify customers of price changes to basic local services, consistent with
their current practices.
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2. Timeframes for the Disposition of Tariff Filings
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168. The Commission notes that the actual price index (API) for the basket of
capped services is to remain less than, or equal, to the overall PCI. The Commission has
also approved pricing constraints for the Basic Residential Local Services and Other
Capped Services sub-baskets set at the inflation rate. These constraints are referred to
as service band limits (SBLs). The APIs for these sub-baskets necessary to ensure
compliance with the SBLs are referred to as service band indices (SBIs).
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169. Stentor and TCI proposed that tariff filings for price changes which comply
with the PCI and the SBL constraints and which meet imputation test requirements be
allowed to be implemented within seven days and five days, respectively. CCTA recommended
that such proposed tariff revisions be effective upon filing. Other parties argued that
interested parties should be given a fair opportunity to comment on any proposed pricing
change, change in terms and conditions or the introduction of a new service.
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170. Stentor proposed that tariff filings which would cause an SBL to be violated
be accompanied by justification for non-compliance and disposed of within 30 days. Stentor
also proposed that filings for the introduction of new price elements, new services or new
conditions related to service elements other than price approval be disposed of within 14
days.
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171. Stentor and TCI argued that, as the filing requirements for uncapped
services should be no more onerous than those for capped services, a similar filing regime
should be instituted for uncapped services.
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172. Stentor and TCI submitted that the Commission could establish internal
procedures to ensure that individual tariff applications which comply with the price cap
constraints are approved within the proposed timeframes. Alternatively, Stentor suggested
that the Commission could conditionally forbear from the application of section 25 of the
Act to allow any individual tariff filing which complies with the price cap parameters to
come into effect without an explicit determination. Stentor also submitted that the
Commission could retain its powers to suspend or disallow any tariff that the Commission
subsequently determined did not comply with the price cap parameters.
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173. TCI argued that the Act provides that the Commission may establish a range
of prices for telecommunications services, including a maximum or minimum price, or both.
In TCI's view, the imputation test establishes the price floor and the price cap
constraint establishes the upper limit of the price range. Prices within that range,
according to TCI, should pose no problem for the Commission, either in terms of issuing
expeditious approval or of being deemed approved within five days of being filed.
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174. The processes contemplated by Stentor and TCI under which no explicit
disposition is involved would require that the Commission specifically disallow a proposed
tariff application prior to a set date expiring or suspend the tariff once the Commission
had made a determination that section 27 of the Act was violated. The Commission is of the
view that the timeframes suggested would: (1) preclude an analysis of the information
provided and of any additional concerns related to, for example, unjust discrimination,
consumer safeguard or privacy issues; (2) be inconsistent with the requirement that the
Commission be satisfied that the rates are just and reasonable and are not unjustly
discriminatory and do not give an undue preference prior to either interim or final
approval; and (3) essentially require that the Commission give automatic approval to
filings for Utility segment services. The Commission also considers that suspending or
disallowing tariff initiatives once implemented would cause greater uncertainty for
consumers and in the marketplace than would a positive approval scheme.
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175. The Commission considers TCI's view, that no actual determination need be
issued, to be problematic in that the range of prices defined by the imputation test and
the price cap parameters would not be clearly defined for a particular service. For
instance, the maximum rate for a particular service depends on the rates charged for other
services in the basket.
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176. The Commission considers that determinations of whether proposed price
changes comply with the PCI and other pricing constraints will in most cases not be
difficult. However, the Commission must be satisfied that, where applicable, the
imputation test requirements are met and that there are no other concerns such as those
relating to unjust discrimination, consumer safeguard or privacy issues and issues
relating to essential/bottleneck facilities are present. Subject to these considerations,
it is the intention of the Commission to grant final approval to tariff filings, without
waiting for comments from interveners, where it is satisfied that the corresponding price
cap parameters are met. As well, the Commission intends to expeditiously dispose of tariff
applications for uncapped services.
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3. Ex Parte Tariffs
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177. Stentor proposed that filings for revisions to existing services and the
introduction of new services be allowed on an ex parte basis. Under TCI's
proposal, tariff applications proposing rate changes only would be filed in confidence
with the Commission until such time as the proposed rates become effective.
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178. In Decision 94-19, the Commission established a general policy for the
disposition of tariff filings on an ex parte basis. The Commission
recognized that there are several considerations to be balanced in a determination to
permit ex parte tariff filings. These include traditional public interest
concerns, such as (1) the procedural rights to notice to interveners adverse in interest,
(2) the public interest in an open regulatory process and (3) the benefit to the
regulatory process derived from comment by interveners.
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179. In Decision 94-19, the Commission found it appropriate to consider an ex
parte process for interim disposition only for discount toll and 800 Service tariff
filings, and only if these filings met all of the Commission's tariff criteria concerning
the imputation test, bottleneck services, consumer safeguards and privacy.
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180. In Tariff Filings Relating to Promotions, Telecom Decision CRTC 96-7, 18 September 1996 (Decision 96-7),
the Commission broadened its general policy for the use of ex parte
procedures to permit the specified details of the ex parte applications to
remain confidential during the interval from interim disposition to the effective date of
the amendments. In addition, the Commission expressed the view that maintaining
confidentiality for the specific details of denied ex parte filings for
discount toll and 800 Service promotions is generally in the public interest.
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181. The Commission considers that, as in the case of the ex parte
process for tariff applications for toll services, a general policy for ex parte
consideration of Utility segment tariff filings should have regard to the benefits of an
open regulatory decision-making process weighed against the harm to the telephone
companies from advance knowledge given to competitors of their initiatives. The Commission
is of the view that the greatest harm to the telephone companies will likely occur in the
context of tariff applications for uncapped services, such as Centrex. The Commission
therefore considers it appropriate that ex parte tariff filings for uncapped
services be considered under a process, similar to that established in Decision 96-7, if
they meet all the Commission's criteria concerning matters such as the imputation test,
consumer safeguards and privacy.
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182. The Commission considers that the presence of market forces and regulatory
safeguards and the opportunity to comment after interim disposition are sufficient, in
these instances, to ensure that parties are not unduly prejudiced by an ex parte
process, and to address concerns related to the impact of the adoption of an ex parte
process on the benefits derived from comments by interveners. The Commission is of the
view that the above approach is consistent with the telecommunications policy objectives
in section 7 of the Act.
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4. Information Requirements
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183. Stentor and TCI proposed that, for tariff filings for capped services, the
telephone companies would demonstrate compliance, with the PCI and SBL constraints. In
situations where the SBL constraint is violated but the API remains in compliance with the
PCI, or in exceptional circumstances where the PCI is violated, Stentor proposed to file
justification for non-compliance. The Commission agrees that justification for
non-compliance with the constraints must be submitted with the filing.
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184. Stentor proposed that, at the implementation date of price caps, each of the
PCI, API, SBLs and SBIs would be set to an index of 100, where the corresponding rates
reflect 1 January 1998 rate rebalancing and any rate adjustments from the 1997
implementation proceedings. Stentor and TCI proposed processes for submitting information
with respect to updating the PCI, API, SBLs and SBIs and any rate changes required to meet
annual commitments as set out by the price cap constraints. Stentor also proposed that, on
31 March of each year, the companies would file updates to the relevant PCIs as well as
any proposed rate changes that may be necessary to ensure that the companies' rates will
be in compliance with the PCI and the SBL constraints. The proposed rates would be
effective 1 May of each year. TCI proposed a similar process where required information
would be filed by 1 December and proposed rates would be effective 1 January.
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185. The Commission notes that other parties in the proceeding generally did not
comment on the outlined processes for submitting annual information with respect to price
cap constraints and indices. The Commission is of the view that the dates and process as
outlined by Stentor for submitting information with respect to the filing of the PCI, API,
SBLs and SBIs and resulting changes are generally appropriate.
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186. Compliance with the PCI and SBL involves a demonstration of the impact of
individual rates on the relevant price indices. The Commission also notes that, where
relevant, the telephone companies are required to demonstrate compliance with the
individual rate element constraints.
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187. Stentor proposed that new services be subject to Commission review and
approval, whether bottleneck/essential or otherwise. The new service would be subject to
the constraint that it could not be priced below the minimum level as indicated by the
imputation test. Stentor and TCI noted that, if it is deemed that a new service was
required to be included in the basket of capped services, they would require sufficient
time to accumulate actual revenue and cost information on new services before the new
service was subject to price cap regulation. Stentor and TCI also noted that, under their
proposals, very few new services would require price cap regulation as they would
generally be offered based on competitive need.
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188. The Commission agrees with Stentor's submission that information will need
to be gathered prior to the inclusion of new services in the capped sub-baskets. The
Commission notes that where debate exists as to whether or not a new service should be
included in a basket of capped services, the time required to accumulate the pertinent
revenue information will provide sufficient time to resolve the issue.
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189. Stentor proposed that re-classifying services as competitive could be done
by making an application to the Commission. Removal of the service from the overall basket
will have no impact on the price index for capped services until the annual PCI update.
TCI proposed that the telephone company be responsible for the burden of proof that a
service should be removed from the basket of services. The Commission considers that
applications to remove services from the basket of capped services should take the form of
a Part VII application as outlined in the Rules, and the applicant will be required to
provide justification as to the basis for the request.
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V MTS NETCOM INC. SPECIFIC ISSUES
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A. General
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190. MTS proposed a price cap plan that was essentially the same as that proposed
by Stentor, except for certain differences that account for its structural and economic
characteristics. MTS proposed to adopt Stentor's X-factor of 2.7%, but to reduce it to
1.5% to account for MTS' smaller size, its history and geography. This issue was dealt
with in Part III, Section C of this Decision. MTS also proposed that costs relating to the
Government of Manitoba's decision to privatize MTS' parent company, The Manitoba Telephone
System, as well as those relating to a major provincial initiative to improve rural
telephone service in Manitoba (Service for the Future) should be reflected in the price
cap plan applied to MTS.
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B. Privatization
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191. On 27 May 1996, the Government of Manitoba introduced legislation to
privatize The Manitoba Telephone System. One of the objectives of privatization was to
bring MTS' capital structure in line with the other Stentor-member companies.
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192. MTS proposed that the Commission reflect the impact of all known costs of
privatization in setting MTS' Utility segment going-in rates. MTS further requested that
the Commission indicate in this Decision that it would reflect the impact of any unknown
costs of privatization which cannot be recognized in setting the Utility segment going-in
rates as an exogenous cost in setting its PCI.
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193. CAC/MSOS submitted that any costs of privatization should be fully
scrutinized in a public hearing process. MTS indicated that virtually all costs of
privatization should be known prior to setting the going-in rates for the Utility segment.
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194. The Commission is of the view that any issues related to privatization can
be fully dealt with in the follow-up proceeding, rather than in a separate process which
would add additional cost and administrative burden. Accordingly, the Commission will
examine the impact of privatization on MTS' Utility segment during the follow-up
proceeding. The Commission is of the view that in the absence of full details of the costs
of privatization it would not be appropriate, in this Decision, to determine whether any
unknown costs not included in the going-in rates should be treated as an exogenous factor.
Therefore, any unknown financial impacts of privatization which cannot be addressed during
the follow-up proceeding and which meet the criteria for exogenous treatment outlined in
Part III, Section D of this Decision, may be addressed as part of the annual updates to
the PCI.
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C. Service for the Future Initiative
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195. MTS submitted that part of its public mandate has been to provide low-priced
residential and business services anywhere in Manitoba. As a result of this public
mandate, the Minister responsible for MTS announced in September 1988 the Service for the
Future initiative. MTS noted that this initiative will be completed in 1997. MTS further
submitted that this initiative has resulted in rural rates being very heavily subsidized
by revenues from other sources. MTS proposed that any unrecovered costs related to this
initiative which are known, quantifiable and verifiable and which cannot be addressed
during the follow-up proceeding should be treated as an exogenous variable for the
purposes of setting MTS' PCI.
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196. MTS' definition of "unrecovered" costs relates to costs not
specifically recovered from customers who subscribe to the services within the Service for
the Future initiative. The Commission notes that all costs associated with this initiative
are expected to be incurred prior to the implementation of price caps. In addition, the
Commission notes that MTS' forecast rate of return on average common equity (ROE) for the
Utility segment for 1997 is expected to be within the currently-approved range. Therefore,
the Commission considers that all costs associated with the Service for the Future
initiative are expected to be recovered from MTS' general body of subscribers.
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197. The Commission further notes that the definition of exogenous variables
outlined in Part III, Section D of this Decision envisages a revenue shortfall/surplus
caused by circumstances beyond a company's control. The Commission agrees with CAC/MSOS
that MTS has not demonstrated that a shortfall has occurred or will occur as a result of
the Service for the Future initiative.
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198. In light of the above, the Commission denies MTS' request to treat costs
related to the Service for the Future initiative, which cannot be addressed during the
follow-up proceeding, as an exogenous variable.
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VI SELF-CORRECTING MECHANISMS AND REVIEW PERIOD
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199. In PN 96-8, the Commission identified a number of self-correcting mechanisms
which could be used to minimize the impact of errors that may occur in setting the price
cap parameters incorrectly or of distortions in the parameters that may occur due to rapid
unforeseen change.
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200. Both Stentor and TCI proposed a true price cap plan (i.e., with no earnings
sharing overlay or other self-correcting mechanism). Stentor proposed a five-year price
cap plan while TCI proposed a six-year plan. Other parties suggested that any approved
price cap plan should be reviewed after a period ranging from two to five years.
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201. Some interveners advocated the adoption of an earnings sharing mechanism to
address concerns surrounding the difficulty of calculating an appropriate X-factor and the
impact on customers and shareholders of errors in setting the productivity offset. The
Consumer Coalition proposed that the telephone companies have the option of choosing
either a relatively higher X-factor which would not include an earnings sharing mechanism
or a lower X-factor which would include some form of earnings sharing. Stentor submitted
that, if the Commission decided to adopt the Consumer Coalition proposal, its members
should also have the option of choosing to remain with the current form of rate
base/rate-of-return regulation.
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202. The Commission is of the view that allowing the Stentor-member companies to
operate under different regulatory regimes would complicate the regulatory process and
create confusion and uncertainty in the industry. Further, in the Commission's view, any
form of earnings regulation for the Stentor-member telephone companies 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.
Further, the Commission is of the view that an earnings sharing mechanism may run counter
to the objectives of price caps by reducing a telephone company's incentive to cut costs
and improve productivity.
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203. In light of the above, the Commission considers that, rather than
implementing an earnings sharing mechanism, the length of the price cap plan should be
used as the only self-correcting mechanism to allow the benefits of a true price cap plan
to be realized. The Commission notes that a longer price cap period would provide a
greater opportunity for the benefits of price cap regulation to materialize, while a
shorter price cap period would reduce the cumulative effects of any error in setting the
price cap parameters.
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204. In view of the commencement of local competition during the price cap
period, the Commission's decision to freeze toll contribution during the price cap period
and the fact that this is the first time for the Commission to implement price cap
regulation for the telephone companies, the Commission considers that a four-year period
for the price cap plan will result in an appropriate balancing of the factors noted above.
Therefore, the Commission approves for the telephone companies a true price cap plan for a
period of four years commencing 1 January 1998, with a review to be completed prior to the
end of the period.
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205. The Commission agrees with Stentor and TCI that the focus of a review of the
price cap parameters prior to the end of the period, should be the performance of the
Canadian telecommunications market in terms of pricing and the competitive nature of the
industry. However, as stated in Part VIII of this Decision, the Commission is of the view
that the magnitude of the contribution requirement remaining at the end of the price cap
period will also need to be examined. The Utility segment financial results will therefore
be one of the factors examined in re-setting the price cap parameters.
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VII ANCILLARY REGULATION AND REPORTING REQUIREMENTS
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A. General
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206. The Commission has traditionally relied on a number of procedures, processes
and ongoing reporting requirements in carrying out its mandate under rate
base/rate-of-return regulation.
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207. Currently, the Commission requires the telephone companies to file ongoing
financial and operating information. The Commission is thus able to ensure that the
telephone companies are earning an ROE which is within their allowed rate of return
ranges, that their operating expenses are at a reasonable level, and that they are making
prudent plant investments. Further, the Commission requires intercorporate transaction
reports to guard against any cross-subsidies from the telephone companies' operations to
those of affiliates. Phase III and cost separation studies are used to monitor against any
cross-subsidies from near-monopoly to competitive services.
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208. Both Stentor and TCI submitted that the regulatory reporting requirements
established under rate base/rate-of-return regulation no longer serve any purpose under
price cap regulation and should therefore be abandoned.
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209. The Consumer Coalition recommended that the Commission maintain its current
reporting requirements and identified additional requirements which it believed would be
necessary for the Commission to ensure that the telecommunications policy goals of the Act
are being met.
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210. Other interveners proposed that the Commission maintain most of the current
regulatory requirements only if an earnings sharing mechanism were adopted.
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211. In Decision 94-19, the Commission concluded that price caps would allow for
more efficient and effective regulation in a number of ways. The Commission noted that,
among other things, price caps could eliminate the need for regulatory assessment of
investment, expenses and earnings between price cap reviews. The Commission recognizes
that the telephone companies will be operating in a different environment during price cap
regulation and believes the telephone companies' regulatory burden should be minimized to
the greatest extent possible in order to give them a reasonable opportunity to achieve the
full benefits of price cap regulation.
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212. At the same time, the Commission notes that it has a statutory obligation to
ensure that rates remain just and reasonable regardless of the form of regulation adopted
and considers it prudent during the first cap period to reduce the need for regulatory
reporting requirements in a gradual manner, rather than all at once, as suggested by
Stentor and TCI.
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213. Furthermore, the Commission is of the view that there is a continued need
for sufficient information to allow the monitoring of the price cap parameters to ensure
that its objectives are being met and to review the price cap parameters at the time of
the price cap review.
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214. The following Sections outline the specific reporting requirements which the
Commission has determined are necessary during the price cap period. Reporting
requirements related to the PCI updates and tariff filings, contribution and depreciation
are discussed in Parts IV, VIII and IX respectively, of this Decision.
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B. Phase III/Split Rate Base Results
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215. Currently, the telephone companies file, for a given year, annual historical
Phase III/Split Rate Base (SRB) results on 30 September of the following year, along with
an external Auditor's Report indicating whether the statements filed are in accordance
with the assignment procedures described in the telephone companies' approved Phase III
Manuals. Any proposed revisions to the methodologies used to produce these results are
filed by the telephone companies for Commission approval, normally four times annually,
and are subject to a public process. The telephone companies file, on a quarterly basis,
any revisions to their Accounting Manuals in support of Phase III Manual revisions. The
telephone companies file forward test year Phase III/SRB results annually in conjunction
with the annual contribution proceeding.
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216. As noted in Part VIII of this Decision, the Commission considers that there
is a need to maintain some Phase III/SRB monitoring and reporting, in order to allow the
Commission to review the magnitude of the contribution requirement remaining at the end of
the price cap period. This will allow the Commission to determine what changes to
contribution rates and/or local rates may be appropriate at that time.
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217. The Commission concludes that, during the price cap period, the telephone
companies are to continue to file annual historical Phase III/SRB results on or before 30
September of the following year. However, commencing with the 1996 Phase III/SRB results,
the Commission finds that there is no further requirement for an external audit to be
conducted.
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218. In Telecom Order CRTC 97-144, 31
January 1997 (Order 97-144), the telephone companies were directed to file their 1995
audited Phase III/SRB results by 1 April 1997. In light of the delayed filing requirements
for the 1995 Phase III/SRB results, the Commission directs the telephone companies to file
their 1996 Phase III/SRB results by 31 December 1997.
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219. In light of the number of changes required to ensure the Phase III costing
system and SRB results reflect the operations of the telephone companies in providing
services/products to its customers, the Commission considers it appropriate that the
telephone companies file Phase III/SRB updates periodically rather than updates in
aggregate at the end of the price cap period. Therefore, the Commission directs the
telephone companies to file their Phase III/SRB Manual updates with the Commission either
annually on 31 March, or twice a year on 31 March and 31 October, according to each
company's preference. Any changes to the telephone companies' Accounting Manuals are to be
filed at the same time.
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220. Effective 30 June 1997, the telephone companies are required to file copies
of their Phase III/SRB Manual updates with the Commission only, with copies to the public
examination rooms. The Phase III/SRB Manual updates will be subject to a public process on
a case-by-case basis, as determined by the Commission. After 60 days from the filing of
the updates, unless the Commission indicates otherwise, the Phase III/SRB Manual updates
are to be considered approved.
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221. The Commission stated in Decision 95-21 that those telephone companies that
have reported Phase III Access sub-category results are directed to maintain the
capability of producing such results, at least until the price cap regime has been
implemented. The Commission considers that there is no longer any requirement to maintain
this breakdown. In addition, in view of the fact that there will be no annual contribution
proceeding during the price cap period (see Part VIII of this Decision), the Commission
considers that there is no requirement to file annual forward test year Phase III/SRB
results. However, the Commission notes that forward test year Phase III/SRB results for
the year 2001 may be required at the end of the price cap period in order to assess the
contribution requirements at that time.
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C. Broadband
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222. In Decision 95-21, the Commission stated that, during the transition period
before the implementation of price caps, the telephone companies were required to identify
and track, for each of the Utility and Competitive segments, all capital investment and
expenses associated with Beacon and any other new broadband initiatives, i.e., for
investment incurred after 31 December 1994. The telephone companies were also directed to
include detailed information regarding broadband investment levels in their annual
construction program review (CPR) submissions.
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223. In Decision 95-21, the Commission also stated that, once price caps are
implemented, the reporting requirements noted above may no longer be necessary. However,
the Commission stated that it expected the telephone companies to retain such records as
would be required for the purposes of reviewing the price cap plan at the end of the price
cap period. The Commission stated that the level of detail necessary for such a review
would be considered further in the price cap proceeding.
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224. The Commission notes the concern raised in Decision 95-21, namely, that
Utility segment subscribers must be protected from bearing the risk associated with the
telephone companies' new broadband investments, and that, if this is not assured, the
Utility segment rate base could be inflated, resulting in upward pressure on rates.
However, with the implementation of price cap regulation, as noted below in Section D, the
Commission considers that there is a reduced incentive for the telephone companies to
inflate the Utility segment rate base with new broadband investments. Further, the
Commission considers that it is unnecessary to require the telephone companies to file
specific broadband costing information at the time of the price cap review as long as the
procedures, set out in Order 97-144, remain in place. Accordingly, subject to the above
requirements, the Commission will not require the telephone companies to file specific
broadband costing information effective 1 January 1998.
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225. Notwithstanding the above, the Commission notes Stentor's statement that the
telephone companies intend to maintain investment records at the account level by vintage
in any event during the price cap period. The Commission considers that this level of
detail should be sufficient for review purposes, should any broadband information be
required either during, or at the end of the price cap period.
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D. Construction Program Review
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226. Stentor proposed that the requirement of annual CPRs be eliminated once
price cap regulation was implemented. However, BC TEL proposed to continue reporting on
the status of provisioning of service to unserved and underserved areas under its Service
Extension Program and, similarly, to report regularly on the progress of its Rural Upgrade
Program until the program has been implemented. Bell proposed to file a report on the
percentage of customers satisfied with the availability of facilities for new services
outside the Base Rate Area, as well as the percentage of customers satisfied with the
availability of facilities for service regrades outside the Base Rate Area.
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227. In Decision 94-19, the Commission was of the opinion that, under price cap
regulation, there would no longer be a need for an ongoing assessment of investment.
However, the Commission considered that there may still be a need for some examination of
investment in the context of price cap performance reviews, given the influence
depreciation may have on prices over time and the relationship of investment to network
modernization and service quality. Having reviewed the evidence in this proceeding, the
Commission remains of the view that the incentive to over-invest under price cap
regulation is reduced and therefore, there is no longer a need to require reports to
assess the telephone companies' levels of investment during the price cap period.
Therefore, the telephone companies will not be required to file annual construction
program submissions beginning in 1998.
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228. Notwithstanding the above, in order to assess any changes that may be
required to capped service rates after the initial price cap period, the Commission may
require the telephone companies to file forecast Utility segment capital plans at the time
of the price cap review.
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229. The Commission agrees with the concerns raised by B.C. and CAC/FNACQ/NAPO
regarding reductions in capital investment in unserved and rural areas of BC TEL's
territory, and therefore accepts BC TEL's proposal to continue filing annual progress
reports for its Service Extension and Rural Upgrade Programs until completion. The
Commission also accepts Bell's proposal to report on customer satisfaction with respect to
availability of facilities for new services/service regrades outside its Base Rate Area.
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E. Financial Results
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230. In order to assist the Commission in monitoring financial performance, the
telephone companies have traditionally filed, in confidence, yearly financial forecasts
and monthly year-to-date actual financial results along with explanations for significant
variances. Commencing with 1996, these financial reports were filed on a quarterly rather
than on a monthly year-to-date basis. The telephone companies were also requested to file
other information, such as planned tariff filings, demand and productivity data, and a
description of the general economic outlook and major underlying assumptions used to
produce its forecasts.
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231. The Commission considers that the focus during price cap regulation should
be on the level of prices and the development of competition in the local exchange market.
However, as discussed in Part VI of this Decision, the Commission is of the view that
Utility segment results will be one of the factors examined during the review of the price
cap parameters given that the magnitude of the contribution requirement remaining at the
end of the price cap period will need to be examined.
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232. The Commission also recognizes that the telephone companies will be
operating in a different environment during price caps and is of the view that financial
performance for any particular year should not be examined in isolation to determine
whether the price cap parameters result in just and reasonable rates.
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233. In light of the above, the Commission considers that the requirement to file
yearly financial forecasts and quarterly year-to-date actual financial results can be
further streamlined. Therefore, the telephone companies will only be required to file with
the Commission actual financial results for the Utility and Competitive segments on a
semi-annual year-to-date basis. This information is to be filed 45 days after the end of
each period, in the format provided in Attachment B of Decision 95-21.
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F. Intercorporate Transactions
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234. The Commission has recently reviewed intercorporate transactions policies,
rules and procedures under the current rate base/rate-of-return regulation in a separate
proceeding which led to Review of Intercorporate Transactions Policies, Rules and
Procedures, Telecom Decision CRTC 97-5,
21 March 1997 (Decision 97-5). In that Decision, the Commission reduced the regulatory
burden of the telephone companies by, among other things, eliminating intercorporate
transactions rules and procedures relating to the telephone companies' Competitive
segments.
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235. The Commission is of the view that the telephone companies' regulatory
burden should be streamlined as much as possible during the price cap period in order for
them to achieve the full benefits of price cap regulation. In this regard, the Commission
finds that the intercorporate transactions requirements approved in Decision 97-5 can be
further streamlined.
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236. Therefore, the telephone companies will be required to file with the
Commission intercorporate transactions reports relating to the Utility segment or integral
affiliates and non-integral affiliates, as prescribed in Parts II and III of Decision
97-5, on a semi-annual basis. The remaining directions outlined in Decision 97-5 relating
to the telephone companies are no longer applicable. These changes are effective beginning
with the year 1998.
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237. The telephone companies are required to file the above-noted information for
the six-month report by 1 October of each year and the annual report by 1 April of the
following year.
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G. Phase I Directives (Excluding Depreciation)
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238. In Inquiry into Telecommunications Carriers' Costing and Accounting
Procedures - Phase I: Accounting and Financial Matters, Telecom Decision CRTC 78-1, 13
January 1978 (Decision 78-1), the Commission established, among other things, a number of
accounting and costing directives known as the Phase I Directives. These Phase I
Directives were initially established to (1) recognize the need for greater consistency in
matching revenues to expenses through uniform accounting practices and procedures, and (2)
make meaningful comparisons among the various carriers.
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239. Since Decision 78-1 was issued, the Commission has updated these Phase I
Directives in various decisions and has also prescribed a number of regulatory accounting
procedures in the context of other proceedings.
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240. Both Stentor and TCI proposed that, during the price cap period, the
Commission not direct the telephone companies to continue using Phase I Directives.
Instead, in the price cap regime, Stentor and TCI proposed to follow Generally Accepted
Accounting Principles (GAAP) in accounting for such items.
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241. The Commission is of the view that, with the change to price cap regulation,
some of the Phase I Directives and those accounting procedures derived after the Phase I
Directives may not conform with GAAP for financial reporting purposes since the link
between prices for services and the underlying costs may be difficult to establish.
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242. The Commission has decided to allow the telephone companies to use GAAP for
regulatory reporting purposes. However, the telephone companies are required to inform the
Commission of any changes during the price cap period to their accounting practices which
deviate from current Phase I Directives and those accounting procedures derived after the
Phase I Directives, along with the financial impact of any such changes on the company's
Utility segment. The Commission will notify the telephone companies in the event that it
wishes to review these accounting change proposals for regulatory purposes.
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H. Total Factor Productivity Data
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243. All of the telephone companies, with the exception of NBTel and NewTel,
provided company historical TFP data. The Commission is of the view that all of the
telephone companies, including NBTel and NewTel, should be prepared to provide the
Commission, at the end of the review period, annual total company TFP results for the
period 1995 to 2000, calculated in a manner consistent with the method of calculating
productivity approved in this Decision.
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I. Local Competition Review
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244. TCI proposed that the Commission conduct a review of the state, extent and
intensity of competition in the local telecommunications market during the price cap
period. Under TCI's proposal, the Commission would collect and analyze data from incumbent
telephone companies, new entrants, suppliers and foreign jurisdictions. With this
information, TCI considered that the Commission would have the necessary tools, at the end
of the price cap period, to assess whether the price cap parameters had been set properly,
and realign or correct them, if necessary.
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245. Stentor supported TCI's competition review proposal.
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246. Most interveners agreed that the Commission should review the state of
competition at the end of the price cap period, but objected to the suggestion that the
Commission should collect as much data as TCI recommended. They were of the view that
TCI's review (1) was intrusive, (2) would increase the regulatory burden, (3) would be
costly, (4) would mainly benefit incumbent telephone companies, and (5) would deter
competitive entry. Calgary also stated that deciding the scope and nature of the review
going into price caps was premature.
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247. In the Commission's opinion, an important goal of price cap regulation is to
reduce the regulatory burden. While the Commission agrees that it will need to assess the
competitiveness of the local market at the end of the price cap period, it does not
consider that a regulatory process as extensive as the one proposed by TCI is warranted.
The Commission also agrees with Calgary that it is premature to decide the nature and the
scope of such a review in the present proceeding.
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248. At the same time, the Commission is cognizant that it will need a certain
amount of information to review the price cap plan at the end of the price cap period. In
this regard, the Commission notes that the telephone companies' service-by-service review
to classify new services or re-classify existing ones will provide some evidence on the
competitiveness of the local market. In addition, the Commission plans to monitor the
evolution of competition by requiring the filing of information with respect to, among
other things, the number of residential NAS served by each Local Exchange Carrier (LEC),
by band, as described in Part VIII below.
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VIII RATE REBALANCING AND CONTRIBUTION
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A. General
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249. In Decision 94-19, the Commission stated that price regulation would not
produce anticipated benefits, such as reduced regulation and increased incentives to
reduce costs, until rates were closer to costs.
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250. In Decision 95-21, the Commission commenced its rate rebalancing initiative.
The process entailed three annual increases in rates for local service, with corresponding
decreases in rates for toll contribution. The Commission ordered a monthly rate increase
of $2 for basic residential local services for each of the years 1996 and 1997. The
Commission also stated that it would consider the magnitude of the third round of rate
rebalancing in this proceeding.
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251. In PN 96-8, the Commission invited comments on the amount of, and the
criteria to evaluate, the third round of rate rebalancing. The Commission also asked
parties whether further local rate increases beyond the third round of rate rebalancing
would be necessary and, if so, how these increases should be dealt with under price cap
regulation.
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252. In PN 96-8, the Commission also stated that, under price cap regulation, any
contribution mechanism should be: (1) streamlined to the extent possible; (2) sustainable
during the evolution to a more competitive marketplace; and (3) simple to administer and
update on a going-forward basis without the requirement for an annual contribution
proceeding.
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253. The Commission further stated that, to the extent that the third rebalancing
amount does not fully recover the local/access shortfall, an issue to be considered in
this proceeding will be how the remaining shortfall should be recovered under price cap
regulation.
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B. Positions of Parties
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254. Stentor submitted that, while full rate rebalancing should precede price cap
regulation, it could not be achieved in one step in 1998. The telephone companies proposed
monthly rate increases for residential and business local services, ranging between $2 and
$3, to take effect on 1 January 1998, along with corresponding reductions in toll
contribution rates. Stentor maintained that these increases would significantly reduce the
gap between local rates and costs and move rates to more rational levels. Stentor also
stated that the proposed increases took into account customer rate shock and served to
reduce toll contribution rates to more sustainable levels.
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255. Stentor did not propose further explicit rate rebalancing during the price
cap period. Stentor proposed that rates for basic residential local services be
constrained by inflation plus a company-specific increase factor necessary to achieve the
telephone companies' needs. Stentor submitted that this proposal would provide the
telephone companies with the pricing flexibility necessary to restructure and rationalize
rates within the basket of capped services to offset the increases. Thus, rather than
reducing toll contribution rates by an amount equivalent to local rate increases, the
telephone companies would have the flexibility to reduce any source of contribution for
capped services that they deemed was most appropriate to respond to competitive entry in
the local market.
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256. TCI proposed to freeze its going-in rates for two years at the 31 December
1997 levels if the Commission approved the company's then pending application for general
rate increases. If the Commission denied TCI's general rate application, the company
proposed to increase its monthly rates for basic residential local services by $5, as its
third round of rate rebalancing, subject to market conditions.
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257. TCI further proposed one basket of capped services and that rates for
residential basic local services, within that basket, be allowed to increase, on average,
by no more than the rate of inflation plus 1%, starting in the third year of the plan and
for the remaining years of the price cap period. In addition, TCI proposed to reduce toll
contribution rates by an amount equivalent to revenues from rate increases for basic
residential local services.
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258. AT&T Canada LDS, CCTA and CAC/FNACQ/NAPO were opposed to both Stentor's
and TCI's plans. AT&T Canada LDS submitted that toll contribution rates had to be
reduced to a level of 0.5 cents per minute before other sources of contribution were
reduced. For AT&T Canada LDS, while the long distance market was almost effectively
competitive, it was too early for the Commission to give telephone companies total
flexibility to target the source of contribution that best suited their competitive
interest. In AT&T Canada LDS' view, introducing local competition at the expense of
the inroads made in the long distance market would be counter-productive.
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259. AT&T Canada LDS maintained that local rate increases had to be offset by
equivalent toll contribution rate reductions. The company proposed that the rates for
basic residential local service be increased by at least $3 going into price caps. It also
recommended that toll contribution rates be ramped down by 20% from the previous year, for
five years, and that telephone companies be allowed, if they chose to do so, to increase
their residential rates by an amount proportionate to the scheduled 20% reduction.
AT&T Canada LDS submitted that, once toll contribution rates are at or below a
sustainable level of 0.5 cents per minute, other sources of contribution could be reduced
proportionately with the remaining toll contribution rates. The company considered that
toll contribution rates should only be at a level sufficient to implement a targeted
subsidy program, if necessary.
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260. CCTA, while not specifying an appropriate amount for the third round of rate
rebalancing, submitted that any rate increase for basic residential local services should
be passed on, dollar for dollar, to toll customers in the form of rate reductions.
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261. CCTA proposed three service baskets segregated by types of services each
subject to the PCI. To prevent the telephone companies from cross-subsidizing services
where competitive entry occurred with increases in bands where subscribers had no
competitive alternatives, CCTA proposed that the residential basket be subject to a
separate upper price ceiling of 5% above the PCI for each of the telephone companies'
service bands. For the business basket, CCTA proposed a one-time rate restructuring plan
prior to price caps. If the Commission did not adopt the one-time rate restructuring plan,
CCTA submitted that the business basket be also subject to an upper price ceiling of 5% by
band.
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262. CAC/FNACQ/NAPO proposed that rates for basic residential local service be
frozen at the 1997 levels for the first three years of the price cap period. They further
contended that, if the Commission ordered a third round of rate rebalancing, the monthly
increase should be no greater than $2 and that the revenues generated should be used to
reduce low volume residential toll rates, so as to maximize the number of ratepayers who
would experience some offsetting rate reductions. CAC/FNACQ/NAPO also proposed limits on
the telephone companies' pricing flexibility to prevent inelastic services from
subsidizing elastic services.
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C. Determinations
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263. The Commission considers that the price cap plan must find the proper
balance between greater reliance on market forces, both in the local and long distance
market, and the necessity to maintain affordable service. Basic telephone service should
remain affordable as local competition evolves and traditional subsidy sources are eroded.
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264. In Decision 97-8, the Commission stated that a certain level of contribution
must be maintained to ensure that local exchange rates in high cost areas permit
continuation of universality of access while minimizing distortion of the competitive
market. The Commission noted that local competition is expected to erode the implicit
subsidy that currently flows from contribution-generating local services, such as optional
local and some business services, to basic residential local service, both through market
share loss and downward pressure on rates. As a result, the Commission determined that, at
least for the price cap period, toll contribution will remain the only explicit source of
subsidy for basic residential local services.
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265. In Decision 97-8, the Commission concluded that, in order to maintain an
adequate overall source of contribution revenue, given that competition will be emerging
in the local services market, the contribution rates will be frozen for all the telephone
companies at the going-in rates, effective 1 January 1998, for the price cap period.
However, in the case of TCI, the Commission notes that, as discussed in Part X of this
Decision, TCI's contribution rate is generally higher due to its income tax situation. As
a result, the Commission considers it appropriate that, when the shareholder entitlement
is completely amortized in 1998, TCI's going-in contribution rate be reduced accordingly
and frozen for the remainder of the price cap period.
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266. In determining the level at which IX toll contribution should be maintained,
the Commission considers it appropriate to set targets towards which toll contribution
rates are to move at the start of the price cap period. In the Commission's view, these
targets should not hinder the implementation and the growth of an effective competitive
market and should generate sufficient revenues to maintain rates for local service that
permit continuation of universality of access in high-cost areas.
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267. In light of the above considerations and to further reduce the cross-subsidy
from toll services to basic residential local services, the Commission considers that the
telephone companies should be allowed a basic residential local service weighted-average
rate increase of up to a maximum of $3 at the start of the price cap regime. The telephone
companies are therefore directed to file applications to restructure their basic
residential local service rates in the follow-up proceeding discussed in Part XI of this
Decision.
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268. The additional revenues arising from the above-noted applications cannot
exceed the revenues required to offset the items noted below. These additional revenues
will first be used to reduce toll contribution rates to no less than 2 cents per minute,
where they will be frozen for the duration of the price cap period (except for TCI as
discussed earlier). If the rate increase for basic residential local service is not
sufficient to reduce toll contribution rates to the 2 cent level, telephone companies'
toll contribution rates will be frozen for the duration of the price cap period at the
level attained with the $3 weighted-average rate increase. Any revenues not required to
reduce the contribution rates to the 2 cent level will be used to reduce or eliminate any
going-in revenue requirement shortfall for the telephone companies. Based on the evidence
provided by the telephone companies in this proceeding, the Commission expects that most
of the telephone companies will be able to fully implement the rate increases referenced
above.
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269. In light of the fact that the Commission is freezing toll contribution rates
effective 1 January 1998, and that the rates for basic residential local service in
aggregate can increase annually up to the rate of inflation during the price cap period
(see Part IV of this Decision), there will be no further mandated rate rebalancing during
the price cap period following the maximum $3 weighted-average rate increase effective 1
January 1998. Among other things, the Commission will consider, during the review period,
whether the toll contribution rate targets, to be established in the follow-up proceeding,
are appropriate.
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270. The Commission considers that this mechanism will streamline the regulatory
process by eliminating the need for annual contribution proceedings. In addition, in the
Commission's view, this approach provides some certainty for the telecommunications
investment market with respect to some of the costs of providing telecommunications
services.
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271. The Commission notes that some interveners, such as CAC/FNACQ/NAPO and CCTA,
proposed that mandated local rate increases be offset by long distance rate reductions.
Given the level of competition and market forces that exist in the toll market, the
Commission considers that such an approach would detract from reliance on those market
forces. Therefore, the Commission concludes that long distance rate reductions will not be
mandated to offset local rate increases.
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D. Reporting Requirements
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272. As discussed in Decision 97-8, the Commission notes that, with entry in the
local services market by competitive local exchange carriers (CLECs), the interexchange
carriers (IXCs) will pay toll contribution to the CLECs as well as to the Incumbent Local
Exchange Carriers (ILECs). In order to streamline the administration of this process, the
Commission expects that all contribution will be remitted to a central fund
administrator/clearing house and paid to the LECs based on the number of residence NAS
that they serve in high-cost bands and the toll contribution available per NAS. Until the
central fund administration is established, the ILEC's will serve as the fund
administrators in their respective territories.
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273. To monitor the evolution of competition in the local and toll markets under
the new contribution regime, the Commission will require that the following quarterly
information be filed by the fund administrator within 60 days of the end of each quarter
for each ILEC's respective territory: (1) originating and terminating toll conversation
minutes by peak and off-peak; (2) the total amount of toll contribution paid to the LECs
by the IXCs; (3) the amount of toll contribution due the LECs; and (4) the number of
residential NAS served by LEC by band.
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274. The Commission further considers that certain periodic reporting of
accounting information, as described in Part VII of this Decision, will be required from
the telephone companies in order to allow the Commission to review the magnitude of the
contribution requirement remaining at the end of the price cap period.
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E. Other Related Matters
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1. General
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275. As discussed in Section C above, the toll contribution rate will be frozen
during the price cap period. As a result, toll contribution rates will be a separate
tariffed rate outside of any service basket and will not be subject to the PCI.
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276. In 1996 Contribution Charges, Telecom Decision CRTC 96-11, 10 December 1996 (Decision 96-11),
the Commission stated that the follow-up proceeding to set the going-in rates will also
finalize the 1997 contribution rates. In order to reduce the contribution rates as much as
possible prior to the implementation of price caps, the Commission has directed the
telephone companies, in Part IX of this Decision, to use the depreciation life
characteristics approved as of the date of this Decision in calculating their 1997
contribution rates.
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2. Bell's Final 1996 Contribution Rate
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277. In Decision 96-11, as amended by Telecom Decision CRTC 96-11-1, 16 December 1996 (Decision
96-11-1), the Commission approved the 1996 contribution rate of $0.0236 per minute for
Bell (as set out in Attachment A of Decision 96-11-1) on an interim basis. The Commission
stated that Bell's 1996 contribution rate would remain interim until a decision had been
rendered in this proceeding with respect to appropriate depreciation life characteristics.
In light of the determinations made in Part IX, Section C of this Decision, the Commission
gives final approval to Bell's 1996 contribution rate as shown in Attachment A of Decision
96-11-1.
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3. TCI Edmonton
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278. The Commission notes that TELUS Communications (Edmonton) Inc. (TCI
Edmonton) was not a party to this proceeding. However, given that TCI Edmonton will not be
under price cap regulation effective 1 January 1998, and given the contribution mechanism
approved in Contribution Regime in Alberta, Telecom Decision CRTC 95-22, 27 November 1995, the Commission
notes that TCI Edmonton's contribution rate will have to be recalculated annually and
combined with TCI's contribution rate to derive a blended Alberta rate. The Commission
intends to initiate a separate annual contribution proceeding during the price cap period
for TCI Edmonton in order to derive the blended Alberta rate.
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4. NewTel
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279. In Decision 95-21, the Commission froze NewTel's toll contribution rate at
the level set in 1994. The Commission stated that the freeze would be removed once the
company's Utility segment ROE was forecast to equal or exceed the midpoint of the
company's approved ROE range, or would be reviewed with the implementation of price caps.
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280. The Commission notes that, in the evidence provided during this proceeding,
NewTel's Utility segment ROE forecast for 1997 is approaching the midpoint of its approved
ROE range. The Commission therefore considers it appropriate to remove the freeze from the
company's contribution rate prior to the implementation of price caps. Based on the
evidence filed in this proceeding, the Commission is of the preliminary view that removal
of the freeze should be effective 1 January 1997. A final determination will be made in
the follow-up proceeding discussed in Part XI of this Decision.
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IX DEPRECIATION AND RELATED ISSUES
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A. Introduction
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281. The Commission has developed its depreciation policy and practice within the
Phase I Directives. The Directives were designed to promote intergenerational equity
between customers. The main thrust of the Directives is to recover the investment in plant
and equipment equally over its useful service life.
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282. The Commission has issued specific directives on the procedures to be used
by the 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.
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283. During this proceeding, the Stentor companies maintained that, due to
competitive and technological factors, there is a need to substantially reduce the service
lives of their existing plant prior to the implementation of price caps. This gives rise
to a 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.
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B. Factors Impacting on Appropriate Depreciation Life Characteristics
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1. Effect of Local Competition on Service Life Estimates
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284. Stentor estimated that the telephone companies' local subscriber line loss
would be 15%, on average, by 2002. The forecast of losses was based on the assumption that
the rules for both local interconnection and price caps would be established in accordance
with the proposals put forward on behalf of the telephone companies.
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285. Stentor argued that it is important, when examining depreciation lives, to
look at future markets and the effect of competition on revenue generation. Stentor
contended that, if regulation fails to take into account the effect of competition and
prescribes depreciation rates that are inadequate when future revenue will be constrained
by competition, then capital recovery will be denied.
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286. Stentor argued that competition in local markets has a significant impact on
the viability of existing technology. Stentor submitted that in a monopoly market, the
incumbent need not move immediately to introduce new generations of technology and may
indeed skip generations, thus producing a lower overall cost of service while delaying the
provision of new features. Stentor submitted that competition has the effect of making the
life cycle of an asset much closer to its technological life cycle. In Stentor's view, if
a competitor deploys a new generation of technology, all suppliers in the marketplace must
match it or suffer a competitive disadvantage, which leads to a shortening of asset life
cycles in a competitive market.
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287. In its assessment of the effect of competition, CCTA stated that the actual
development of local competition is expected to be a lengthy process, even after the rules
have been established. CCTA noted that telecommunications experts in the U.S. have
predicted a period of at least 10 years for effective competition to develop, particularly
for residential and small business customers. CCTA submitted that the reasons for the slow
evolution of a competitive market include (1) the continued subsidization of local
service, (2) significant technical barriers to entry, including the fact that some
technology platforms for the provision of competitive local telephony (such as number
portability) remain in testing phases and have not yet reached the marketplace, and (3)
interconnection and unbundling requirements for the provision of competing local service
are more complicated than for enhanced and long distance services.
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288. The Consumer Coalition noted that the shorter depreciation service lives
claimed to be necessary by the telephone companies are premised on their particular view
of the development of local competition and new technology. The Consumer Coalition argued
that the basis for the higher rates of depreciation was highly suspect, i.e., the
technological forecast was unreasonable, and the forecast technological changes required
to meet competition and service demands are not necessary to provide the basic services
required by ordinary subscribers.
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289. As noted in Part III of this Decision, the Commission does not share the
Stentor companies' views regarding the pace at which competition will unfold in the local
market, at least during the initial price cap period. In order for the Commission to
assess the depreciation studies to be filed during the follow-up proceeding for each
account, the telephone companies have been requested, in interrogatories dated 1 May 1997,
to indicate the impact of varying market share loss estimates on each company's DRD as of
1 January 1998. The telephone companies have also been requested to file with the
Commission the historical data used in each depreciation study.
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290. Further, the Commission directs that the telephone companies' depreciation
life characteristics approved as of the date of this Decision, including approval of
Bell's proposed 1996 depreciation life characteristics on a final basis, as set out in
Section C below, be used to determine the depreciation expense component of their 1997
financial forecasts. Any proposed changes to depreciation life characteristics introduced
during the follow-up proceeding, and the consequent impact on the depreciation reserve
deficiency/surplus, will be taken into account in setting the going-in rates for price
caps on 1 January 1998.
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2. Asset Lives Driven by Broadband Investment
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291. In Decision 95-21, the Commission considered that Utility segment
subscribers should be protected from the impact of the Stentor companies' broadband
initiatives, and therefore, it was not prepared, in general, to approve increases in
depreciation expense that arise solely from the telephone companies' investment in
broadband facilities. However, the Commission was of the opinion that there are
circumstances which may arise during the transition to price caps where changes in
depreciation life characteristics are warranted, independent of any broadband initiatives.
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292. AT&T Canada LDS argued that in proposing to shorten Utility segment
asset lives prior to price caps and estimating a significant DRD as of 1 January 1998, the
companies have failed to address the Commission's concerns in Decision 95-21 respecting
the impact of new fibre deployment on Utility subscribers. Moreover, AT&T Canada LDS
submitted that, because the forecast demand for broadband services is the driving force
for the deployment of fibre in the network and the shortening of Utility segment asset
lives, Stentor's DRD proposal also fails to meet the tests established in Decision 95-21
for determining whether changes to Utility segment depreciation life characteristics are
appropriate. In AT&T Canada LDS' view, neither Stentor nor its witness, Dr. L. Vanston
of Technology Futures Inc. (TFI), provided any evidence to demonstrate that fibre is
currently the most cost-effective technology for the provision of Utility narrowband
services.
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293. In argument, CCTA outlined the test that in its view must be satisfied
before ratepayers be required to bear the costs of accelerated depreciation; either
historical mortality information must support the acceleration of depreciation or evidence
of a reasonable expectation of technological obsolescence must exist. In CCTA's view, this
test has not been met by the telephone companies in this proceeding. Referring to the
Commission's determinations in Decision 95-21, CCTA noted that the Utility segment
subscribers are to be isolated from the impact of the Stentor companies' broadband
competitive ventures.
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294. Similar points were raised by B.C. and the Consumer Coalition during
argument.
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295. In reply argument, Stentor submitted that the Commission should ensure that
its policy enunciated in Decision 95-21 does not have the unintended effect of preventing
or discouraging deployment of the most up-to-date technology for Utility segment
subscribers. Stentor noted that the Commission has not impeded the development of new
technology in the past and Canadian customers, in particular Utility segment subscribers,
have benefited from an advanced public switched telephone network. Stentor submitted that
acceptance of interveners' arguments to deny recovery of past prudent investments would
discourage future investment. Stentor further submitted that the companies' position
regarding the shortening of lives of its existing narrowband plant is premised on sound
reasoning and realistic assumptions with respect to the future local market in which they
will participate.
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296. A number of interveners provided evidence suggesting that the use of fibre
optic cable in the access network is not required and that the continued use of paired
copper is all that is necessary to provide service to customers.
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297. The Commission considers that the evolution of technology has enhanced the
service quality and features available to customers. The introduction of new switching
technology has provided improved service quality and additional features. Furthermore, the
Commission notes that fibre optic digital transmission technology provides advantages over
paired copper facilities in many areas, particularly in the case of interexchange and
feeder transmission facilities. As with any new technology, digital fibre transmission
facilities have the potential to provide a broader range of services than paired copper.
Fibre cable multiplexed in a narrowband format is a new and evolving technology that
brings the advantages of digital technology closer to the customer.
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298. In the Commission's view, the deployment of narrowband multiplexed fibre
transmission in the feeder portion of the access network is appropriate from a cost and
service quality perspective.
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3. Relevance of Depreciation Life Characteristics Used in Other Jurisdictions
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299. In argument, AT&T Canada LDS stated that the same factors that are
currently driving the extent and pace of changes in technology in the U.S. are manifest in
Canada. AT&T Canada LDS suggested that a comparison of the asset lives proposed by
Stentor versus those adopted by the Federal Communications Commission (FCC) would
therefore be of assistance to the Commission. In AT&T Canada LDS' view, the FCC's
prescribed lives provide a more objective and realistic benchmark for assessing Stentor's
proposed asset lives.
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300. Stentor noted that the majority of FCC life ranges (22 of 30 accounts) were
released in June 1994 and are based on FCC service life prescriptions covering the period
1990 to 1992 (the other eight were released in May 1995 and are based on FCC life
prescriptions covering the period 1991 to 1993). Stentor noted that these lives have not
been recently updated, and that they do not reflect the needs of the U.S. LECs, all of
which have deemed it appropriate to reflect more realistic economic lives of their network
assets on their financial books. In Stentor's view, with impending competition and
convergence, a more realistic and objective benchmark for the telephone companies'
proposed asset lives would be obtained by comparisons with the U.S. long distance
carriers. Stentor submitted that the lives proposed by TFI provide a more realistic
benchmark than those proposed by the FCC.
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301. While service life estimates from independent studies (e.g., TFI's study
based on the Fisher-Pry model) or other jurisdictions are useful as a guide in developing
depreciation service life estimates for the telephone companies, it is the Commission's
view that the circumstances of each individual carrier should be taken into account when
determining appropriate depreciation service life estimates. In the Commission's opinion,
service life analysis must be a balance between historical data and an assessment of the
future, the latter being based on the companies' plans which are primarily driven by
technology and customer demand. In the Commission's view, the Phase I Depreciation
Directives provide appropriate guidance in determining depreciation service life estimates
prior to the implementation of price caps.
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C. Appropriateness of Bell's Depreciation Life Characteristics
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1. General
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302. In Telecom Order CRTC 96-1122,
dated 9 October 1996 (Order 96-1122), modified by Telecom Order CRTC 96-1122-1, 15 October 1996 (Order
96-1122-1), the Commission approved, on an interim basis, certain of the depreciation life
characteristics proposed by Bell. The Commission also noted that the depreciation life
characteristics listed in Table 2 (of Order 96-1122-1) warranted further review during the
proceeding initiated by PN 96-8.
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303. In argument, Stentor included Bell's comments on the proposed depreciation
life characteristics set out in Table 2 of Order 96-1122-1. Bell noted that Digital
Multiplex Systems (DMS) switching is a modular technology that has evolved gradually over
time and that, in the short term, the major driver of DMS retirements is not the
substitution by new technology, such as Asynchronous Transfer Mode (ATM) Switching, but
rather internal DMS modular evolution. Bell also stated that ATM switches will be
installed by the companies and/or competitors to provide broadband capability and, as this
network is expanded, cost pressure will eventually result in the migration of narrowband
services to the ATM platform. According to Bell, whether this migration is to the network
of the company or that of a competitor, the economic value of DMS technology will have
been exhausted.
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304. With respect to the average service life (ASL) for outside plant copper
cables, Bell noted that the rate at which new technology is developed and made available
to the industry is an important factor in assessing the life of copper. However, Bell
added that its significance needs to be understood relative to its rate of implementation
and roll out which are influenced by other drivers such as new services, customer demand
and competition. Bell was of the view that there is compelling evidence to demonstrate
that all of the necessary drivers will materialize in sufficient strength over the next
several years to hasten the demise of copper plant.
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305. In arriving at its conclusions with respect to the composite ASL for Central
Office Equipment (COE) - Transmission Equipment, Bell noted that most of the interlinked
drivers that support life reductions for DMS and outside plant copper are also present to
support decreased lives for COE - Transmission Equipment. Bell considered the recent
introduction of Synchronous Optical Network protocol to be a major driver of transmission
lives.
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306. In argument, CCTA contended that Bell is over-estimating the penetration of
fibre in the access network and is placing too much reliance on the TFI analysis. CCTA
also contended that the historical data related to DMS switching does not support Bell's
proposed depreciation service lives. CCTA pointed out that when the transaction band is
extended from the years 1991-1993 to include 1992-1994, the historical service life moves
from the 14 to 16-year range to the 16 to 19-year range. In CCTA's opinion, this analysis
indicates that the service life should be extended rather than shortened.
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307. CCTA noted that Bell, in its 1995 depreciation study, proposed to reduce the
ASL for the account COE - Common Equipment based on the survivor curve for underground
copper cable. Based on its analysis of Bell's proposed treatment of copper plant, CCTA
recommended that the proposal to reduce the ASL to 21 years in 1996 should be denied.
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308. The Commission recognizes two major trends in Bell's service life analysis
of its digital switching and paired copper transmission technology. The first relates to
the continued upgrading of the components within the digital switches which decreases the
service life of the individual components. However, the Commission also notes that
replacing individual components prolongs the service life of the complete switching
machine. The second trend is the deployment of fibre-based digital transmission
technology. The inter-exchange transport network in Bell is now 90% fibre-based digital
transmission technology. Digital fibre technology continues to be deployed in the access
feeder network as a replacement for paired copper.
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2. Determinations
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a. Account 221.7-500 (577C) Multiplex System - Local
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309. Bell requested a service life reduction of 1.5 years for its local DMS
switches in 1996 to 18 years. The dispersion is changed from a GM-5 to an Iowa R-2. Using
a least squares mathematical fit, Bell noted that the 1991 to 1993 experience band
indicates a 14 to 16-year service life. The 1992 to 1994 experience band indicated a 16 to
19-year service life.
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310. In the Commission's view, the mortality data for both experience bands
referenced above is supportive of Bell's proposed 18-year service life and an Iowa R-2
dispersion. Accordingly, the Commission approves for 1996 Bell's proposed depreciation
life characteristics for this account.
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b. Account 221.7-600 (377C) Digital Multiplex System - Toll
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311. Bell combined Account 577C Local and Account 377C Toll for
mortality-analysis purposes. Account 377C Toll comprises approximately 10% of the total
investment in the two accounts. In effect, one set of common life characteristics has been
developed for these two accounts.
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312. The Commission considers that the analysis for Account 577C, which produced
an 18-year service life and an Iowa R-2 dispersion, is also applicable to Account 377C,
and therefore approves the proposed depreciation life characteristics for 1996 for this
account.
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c. Account 221.8-100 (107C, 407C) COE - Common Equipment
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313. This account includes the equipment required to terminate paired copper
cable plant entering a Central Office.
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314. The Commission notes that the observed retirements indicate a very long
service life that is unrealistic for the future, considering that the transition from
paired copper feeder to fibre feeder is becoming more predominant.
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315. The service life of distributing frames will ultimately be controlled by the
service life of the paired copper cables that are connected to the protector assemblies.
Bell proposed to use the service life of underground cable as a proxy for protector
equipment and main frames.
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316. In the Commission's opinion, this approach is reasonable, considering the
reliability of the current main distributing frame/intermediate distributing frame
retirement data. The Commission finds reasonable and approves Bell's proposed 21-year,
Iowa R-2 depreciation life characteristics for 1996 for this account.
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d. Account 242.1 (2C, 12TC, 22C, 32C, 82C, 832C) Aerial Cable - Metallic
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317. The historical analysis for this account indicated a service life in the
range of 29 to 31 years. Bell indicated that the historical analysis for this account is
not indicative of its future service life. In Bell's opinion, while new services and
competition were among the factors that reduced the service life of paired copper, the
main factor was evolving technology.
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318. In the Commission's opinion, fibre-based digital transmission technology
will continue to move further out into the network as service demand and technology
develop, shortening the service life of paired copper plant. Therefore, the Commission
finds reasonable and approves Bell's 21-year, Iowa R-2 service life estimate for 1996 for
this account.
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e. Account 242.2 (5C, 15TC, 25C, 85C, 815TC) Underground Cable - Metallic
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319. Bell proposed to reduce the service life of this account by 10 years. Bell
stated that the historical analysis for this account indicated service lives in excess of
47 years extending to a maximum of 100 years. In Bell's opinion, the historical analysis
for this account is not indicative of the future service life of the plant. Approximately
70% of Bell's underground cable is used as feeder.
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320. Bell's interexchange transport network currently comprises 90% fibre and 10%
paired copper; the 10% copper in the interexchange transport network represents 30% of the
plant in this account.
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321. In the Commission's view, the majority of plant in this account will face
retirement in the near term as fibre-based digital technology moves closer to the customer
and the modernization of the interexchange transport network is completed. Accordingly,
the Commission finds reasonable and approves Bell's 21-year, Iowa R-2 depreciation life
characteristics for 1996 for this account.
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f. Account 242.3 (65C, 75TC, 175TC, 265C, 865C, 775TC, 875TC) Buried Cable -
Metallic
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322. Bell's historical analysis for this account indicated a service life in the
order of 27 years. The maximum service life experienced was over 45 years. Approximately
75% of the cable in this account is used in the feeder portion of the access network with
the remainder in the distribution portion.
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323. As in the case of the previous account (Underground Cable - Metallic), the
Commission is of the view that the majority of the plant in this account will face
retirement earlier as fibre-based digital technology moves closer to the customer.
Accordingly, the Commission finds reasonable and approves Bell's 21-year, Iowa S-1
depreciation life characteristics for this account for 1996.
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g. Account 242.4 (55C, 855TC) Submarine Cable - Metallic
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324. Bell's study indicated that the historical service life of this account is
in the range of 27 years and extends as far out as 45 years. Approximately 55% of the
plant serves as feeder, 35% serves as distribution and 10% serves as inter-office
transport.
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325. For the reasons outlined above for the other cable accounts, the Commission
finds reasonable and approves Bell's 21-year, Iowa R-2 depreciation life characteristics
for this account for 1996.
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3. Other Matters
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326. In approving Bell's proposed depreciation life characteristics for 1996 for
the seven accounts listed above, the Commission notes the company's position that its
depreciation studies for these accounts support much shorter average service lives than
those requested (e.g., in the case of Account 242.2 - Underground Cable - Metallic, Bell's
depreciation study result indicates an ASL of 14 years). Under Bell's proposal, the ASLs
are to be reduced over a three-year transition period due to financial constraints.
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327. As noted earlier, the Commission is of the view that competition in the
local market will not unfold at the pace anticipated by the telephone companies.
Accordingly, the Commission has concerns with the future ASLs proposed by Bell for these
accounts. However, the Commission considers the requested ASLs for 1996 to be reasonable.
Any further proposed changes to depreciation life characteristics for Bell, and the other
Stentor-member companies, will be assessed as part of the follow-up proceeding.
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D. Allocation of Over/Under Accruals Between Utility and Competitive Segments
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328. TCI claimed that the total company DRD is a direct result of rate-of-return
regulation and therefore should be recovered from the Utility segment under price cap
regulation. The other Stentor-member companies have allocated their over/under accruals
between the Utility and Competitive segments.
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329. In TELUS Communications Inc. - General Rate Increase 1996 and 1997,
Telecom Decision CRTC 96-13, 13 December
1996, the Commission stated that it is more appropriate to assign the DRD to both the
Utility and Competitive segments on the basis of Average Net Investment Base, and adjusted
TCI's 1997 depreciation expense accordingly. In that Decision, the adjustment to TCI's DRD
was made using the best information available.
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330. The Commission directs that the allocation of all over/under accruals
between the Utility and Competitive segments be based on individual account splits. In the
Commission's view, in accounts where plant is used for both Utility and Competitive
services, the portion of the investment used for Utility services should be split out to
afford the opportunity for completely separate depreciation studies for the Utility and
Competitive segments. In the Commission's opinion, this is more representative of the
telephone companies' operations.
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E. Recovery of Depreciation Reserve Deficiency
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1. Introduction
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331. The right to recovery of any DRD during the price cap period results from
what Stentor views as being one of the obligations borne from the social contract or
"regulatory bargain" between the Utility customers, represented by the
regulator, and the telephone companies.
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332. Stentor and TCI were of the view that, since the depreciation rates have
been insufficient to recover the full costs of assets employed in the performance of the
regulatory bargain, they are entitled to be reimbursed for those costs. They contended
that failure of the regulator to live up to its side of the bargain would result in a
reluctance by investors to invest capital in the companies.
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333. Stentor and TCI submitted that, given this regulatory bargain, no DRD should
be borne by the telephone companies' shareholders but should be reflected in establishing
going-in rates or, if not practical, explicitly in the price cap formula.
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2. Existence of a Regulatory Bargain and Assurance of an Opportunity to
Recover Any Depreciation Reserve Deficiency
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334. Stentor and TCI submitted that the existence of the regulatory bargain is
evident under the form of rate base/rate-of-return regulation practiced by the Commission,
under the statutory mandate of "just and reasonable" rates, and as an incident
of the obligation to serve at common law.
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335. Stentor and TCI submitted that, to the extent that depreciation rates have
been insufficient to recover the full costs of assets employed in the performance of the
regulatory bargain, the telephone companies are entitled to reimbursement of those costs.
Stentor maintained that depreciation rates were kept at levels deemed appropriate by the
Commission to meet the objectives of Decision 78-1, in particular Directive 8, so as not
to create an undue burden on subscribers or have an undue impact on the carriers' revenue
requirements.
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336. In TCI's view, the Commission has an obligation to ensure recovery of TCI's
investment and a reasonable opportunity to earn a reasonable rate of return. Stentor
maintained that the telephone companies should be provided with an "opportunity"
to recover prudently invested capital. Stentor emphasized that, without such an
understanding, the telephone companies could not reasonably have been expected to make
investments related to the provision of non-compensatory services.
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337. AT&T Canada LDS maintained that, even if a regulatory bargain did exist
in the past, it can only be relevant in a rate base/rate-of-return environment. It
submitted that the transition to price caps severs the link to rate-of-return regulation
and subsection 27(5) of the Act authorizes the Commission to establish a price regulation
regime that does not tie the level of rates to the recovery of capital, depreciation, a
return on capital, or any of the other concepts traditionally associated with rate
base/rate-of-return regulation.
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338. The Consumer Coalition submitted that the approval of depreciation rates and
the findings by the Commission in the CPR process that proposed expenditures are
reasonable do not entitle the telephone companies, as a right, to collect large DRDs going
into price cap regulation.
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339. CBTA took the position that neither Stentor nor TCI presented any evidence
of the existence of a regulatory bargain. Calgary, however, concurred that there is an
established regulatory bargain that should be respected and, that accordingly, investors
should receive a fair return of their investment and a return on their invested capital.
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340. In setting rates which are just and reasonable, the Commission has
traditionally balanced the interests of customers with the requirement that the regulated
company have a reasonable opportunity to recover both operating and capital costs which
have been reasonably incurred in providing service to the public.
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341. In addition, the Commission concurs with Stentor and TCI that the Commission
has set depreciation rates at levels deemed appropriate to meet the objectives of the
Phase I Directives and that, pursuant to this approach, all investment which had been
reasonably incurred in the provision of Utility services would eventually be recovered
through subscriber rates in accordance with the recovery periods prescribed by the
Commission.
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342. The Commission has historically held the view that, as long as regulation
continues to focus on the earnings of the telephone companies, it was necessary to
undertake annually a thorough review of projected capital expenditures and technology
deployment through the CPR process, given that such investment decisions have a
significant subsequent impact on the revenue requirement through depreciation expense.
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343. The Commission notes that no evidence has been presented during this
proceeding which would demonstrate that the telephone companies were
"guaranteed" recovery of their investments, nor is any such guarantee embodied
in the regulatory process. The Commission notes that, if shareholders were assured, rather
than merely allowed, recovery of all prudently incurred investments, they would be
permitted a fair and reasonable return on their equity equivalent to the level of a
highly-rated bond, reflecting the fact that no risk of loss was assigned to shareholders.
However, this has not been the case, as risk premiums have continually been a
consideration when establishing allowed ROE equity ranges.
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344. Accordingly, the Commission considers that, through the regulatory process
described above, the telephone companies have been given a reasonable opportunity to
recover through rates the direct costs of an investment deemed reasonable by the
Commission, including a fair rate of return, as well as the associated operating costs.
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3. Retrospective Rate-making
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345. AT&T Canada LDS submitted that the Commission would be in breach of the
principle against retroactive ratemaking if the Commission were to allow increased rates
during the price cap regime to compensate the telephone companies for the historical
under-depreciation of their assets.
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346. The Commission concurs with Stentor and TCI that depreciation adjustments do
not amount to retroactive or retrospective ratemaking. The Commission notes that the
regulatory process provides for an opportunity to recover past investment. In the event
that capital has been inadequately depreciated in the past, the regulatory process allows
for the adjustment of rates prospectively in order to recover the total amount over a
shorter future period. The Commission made such a determination in AGT - Issues Related
to Income Taxes, Telecom Decision CRTC 93-9,
23 July 1993, when it stated that "... the setting of AGT's rates in future years to
take into account any additional expense (or credit) would not constitute retrospective
rate-making ... any more than do other changes in accounting estimates such as those
related to depreciation or deferred tax liability".
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347. The Commission also concurs with Stentor that the proposed amortization of
the DRDs advanced by the telephone companies are prospective accounting changes based on
current views of depreciation lives as well as on the historical accumulation of
depreciation at depreciation rates lower than those now determined appropriate.
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4. Previous Compensation for Depreciation Reserve Deficiency
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a. Introduction
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348. The Consumer Coalition, supported by CBTA and Westel, argued that there is
no need to provide for recovery of any DRD since shareholders have already been
compensated for their risks of non-recovery or under-recovery through the risk premium
awarded in previous return on equity decisions, as well as through the use of a normalized
income tax treatment by the Commission.
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349. Several parties also submitted that there should be no recovery of any DRD
where the market value of a telephone company's shares exceed their book value, as
compensation has been achieved.
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b. Risk Premium
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350. Stentor and TCI maintained that the Commission never compensated the
companies for the risk of non-recovery or under-recovery, as there is no discussion in any
Commission decision of building some form of "extra premium" into the telephone
companies' allowed rates of return to compensate them for the possibility that the
Commission would, in the future, deny recovery of prudent investments and return thereon.
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351. In assessing appropriate ROE ranges for the telephone companies, the
Commission has considered business risk when examining the risk premium component of the
required return. The Commission has compensated the telephone companies, where it deemed
appropriate, for increased business risk due to such factors as increased competition and
technological change.
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352. However, in setting the ROE ranges, the Commission has not specifically
addressed the possibility of non-recovery or under-recovery of capital investments given
that there exists a process which determines how reserve deficiencies are treated. The
Commission concurs with Stentor that the Phase I Directives explicitly prescribe
accounting practices which attempt to achieve exact recovery of the original capital as
well as to recognize changes in the estimates of service lives, as approved annually by
the Commission, and changes in the retirement patterns of assets.
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353. Accordingly, the Commission considers that the shareholders have not been
specifically compensated through a risk premium for the risk of non-recovery or
under-recovery of any DRD.
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c. Normalized Income Tax Treatment (Deferred Taxes)
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354. The Commission notes that normalized tax accounting as implemented by the
Commission requires that the deferred income tax liability be re-calculated in accordance
with enacted tax rates and laws and reflects the currently expected future tax liability.
The Commission also notes that normalized income tax accounting does not remove the
carrier's ultimate liability to pay the deferred taxes.
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355. Based on the foregoing, the Commission finds that the shareholders have not
been compensated through deferred income tax for the non-recovery or under-recovery of any
DRD.
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d. Market-to-Book Value
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356. While a comparison of market-to-book (MTB) value is an accepted indicator of
a company's general financial value, the Commission is mindful of the inherent flaws of
relying on MTB ratios in determining regulatory policy. These include the difficulty of
isolating or quantifying the portion of market value representing investor expectations
about the DRD, the circularity of using MTB ratios in reaching a regulatory decision which
itself will have an impact on the market value, and the subjectivity which would be
involved in deriving a market value for an entity, such as the Utility segment of a
company, which may itself not even be publicly traded. The Commission is of the view that
the problems are significant enough to render a MTB test ineffective as a determinant in
the appropriate treatment of DRDs.
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357. The Commission notes that in British Columbia Telephone Company - Revenue
Requirement for the Years 1988 and 1989 and Revised Criteria for Extended Area Service,
Telecom Decision CRTC 88-21, 19 December
1988, it did not consider it appropriate or feasible to target MTB ratios in
rate-of-return regulation. In the Commission's view, the move from rate
base/rate-of-return regulation to price cap regulation does not render the use of MTB
ratios any more viable as a regulatory tool.
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5. Responsibility for Recovery
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358. Stentor and TCI maintained that any DRD should be recovered fully from
subscribers. TCI noted that all local customers, whether connected to TCI or an
alternative local service provider, must contribute to the capital recovery of investment
stranded as a result of competition.
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359. AT&T Canada LDS, CBTA, CCTA, the Consumer Coalition and Westel stated
that neither the Commission nor any previous regulator has ever denied an application by a
Stentor company for revised rates of depreciation, nor is there evidence that the
Commission has ever imposed depreciation rates on the telephone companies. By failing to
request depreciation life changes before the end of rate base/rate-of-return regulation,
these parties maintained that the regulatory bargain is not applicable or that the
Commission does not have any obligation to guarantee the recovery of that capital
investment.
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360. In response, Stentor and TCI stated that, in light of concern for the impact
on rate increases, it is not reasonable to suggest that the companies ought to have
advanced life changes earlier and, consequently, have relinquished their right to recover
such costs.
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361. If the Commission were to find that a DRD exists that should be explicitly
recovered, AT&T Canada LDS recommended that any such recovery should be permitted
through Utility segment rates as opposed to wholesale charges, such as toll contribution
or other interconnection charges.
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362. The Consumer Coalition proposed that any authorized recovery should take
place through an equitable mechanism, such as a contribution mechanism that is applicable
to all services and all competitors.
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363. CBTA submitted that as a fair balancing of interests, a 50/50 apportionment
of responsibility should be recognized between subscribers and shareholders. CBTA
recognized that the telephone companies may have been reluctant to implement more
aggressive depreciation schedules for some assets, in the belief that the Commission would
not accept such proposals because of their potential impact on subscriber rates.
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364. The Commission notes that the contribution charges applicable to all
interexchange carriers, including the telephone companies themselves, have been
subsidizing, to some extent, the recovery of any DRD. The Commission concurs with AT&T
Canada LDS, as well as the telephone companies, that contribution rates should not be
increased to contribute to the recovery of these costs. The Commission notes that, as
indicated in Section B above, any proposed changes to the depreciation life
characteristics will be taken into account in setting the going-in rates for price caps on
1 January 1998.
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365. Recognizing that the telephone companies have incurred costs under the
Commission's current form of regulation, and that the Commission has reviewed and approved
the depreciation rates as well as the capital expenditures themselves, the Commission is
of the opinion that the telephone companies should continue to have a reasonable
opportunity to recover any DRD that results from a change in depreciation life
characteristics. In light of the above, the Commission is of the view that it would be
inequitable for the shareholders to bear full responsibility for any DRD. Further, the
Commission concurs with Stentor and CBTA that customers have benefited from the delayed
introduction of asset life reductions through prices that are lower than they otherwise
might be.
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366. Accordingly, the Commission considers that the telephone companies have, and
will continue to have during the transition period, a reasonable opportunity to recover
the original capital cost of their assets through subscriber rates. The Commission is of
the view that the approach set out in this Decision regarding the telephone companies'
depreciation practices balances the interests of all parties and provides a reasonable
opportunity for the telephone companies to recover any DRDs.
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F. Recovery Period for Depreciation Expense Over/Under Accruals
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367. In argument, Stentor expressed the view that a five-year amortization period
is reasonable, given the telephone companies' assessment of depreciation lives and the
future environment. The five-year amortization period was chosen as a reflection of how
quickly the companies believe events will unfold. Stentor maintained that it did not
consider a longer amortization period to be appropriate as it is far from certain that
rates can be maintained at a level sufficient to provide for such recovery by the end of
the five-year period.
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368. As noted in its argument, TCI's six-year amortization period for the DRD was
based on its forecast growth of local competition. In the event that competition develops
more rapidly, TCI submitted that it should be allowed to petition the Commission to
accelerate the recovery schedule upon showing that the rate at which competition is
advancing renders the initial recovery schedule infeasible.
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369. Both Stentor and TCI proposed to assume the risks associated with any future
DRDs after the implementation of price caps, i.e., those that have not arisen at the onset
of price cap regulation in 1998, provided that the Commission accepts their respective
price cap plan proposals.
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370. With respect to the appropriate period of recovery, AT&T Canada LDS
submitted that, rather than recovering any DRD over a five-year or six-year amortization
period, the remaining life approach traditionally used by the Commission to reflect the
impact of shorter lives in the revenue requirement already provides a sufficient means to
recover any DRD. Noting that the remaining life approach is specifically designed to
achieve recovery over the useful life of the investment, AT&T Canada LDS submitted
that this approach should be adopted by the Commission for the recovery of any
demonstrated DRDs under price cap regulation.
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371. The Commission notes that the current Phase I Directives stipulate that
reserve over/under accruals are to be amortized over the remaining life of the plant. The
Stentor companies' service life estimates indicate that the majority of their plant will
remain in service well past the initial price cap period. In the Commission's view, the
remaining life directive should remain as the basis for amortization of over/under
accruals. The Commission considers the principle of recovery at the rate of consumption
just as valid under price cap regulation as it has been under rate-of-return regulation.
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372. In the Commission's view, the principle of allowing for the recovery of any
under accruals over the remaining life of the plant affords the telephone companies a
reasonable opportunity to recover any DRDs which exist. Furthermore, allowing any DRDs to
be amortized as suggested by Stentor and TCI could, in the Commission's view,
unnecessarily increase going-in rates. Therefore, the Commission denies the requests of
Stentor and TCI to amortize their DRDs, as of 1 January 1998, over five years and six
years, respectively.
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373. However, the Commission notes the concern of AT&T Canada LDS that should
the going-in rates for a company incorporate an amount relating to any DRDs based on
current Phase I Directives, the revenue requirement associated with recovery of any DRD
would be reduced in each year of the price cap period from the level incorporated in the
going-in rates. Thus, the telephone company could benefit in the form of additional
earnings based on the depreciation life characteristics in effect on 1 January 1998.
Therefore, the Commission has decided that any DRDs of the telephone companies as of 1
January 1998, as determined in the follow-up proceeding, should be amortized, 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 DRDs would
be on a straight-line basis for regulatory purposes, thus ensuring 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.
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G. Phase I Directives and Reporting Requirements for Depreciation
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374. Stentor contended that Phase I Directives and practices should not be
required under price cap regulation. However, Stentor indicated that this did not mean
that the telephone companies would no longer follow procedures currently set out in the
Phase I Directives. Rather, the telephone companies would be following GAAP and, to the
extent that a directive mirrors sound business practice, the telephone companies would
continue to account for depreciation expense and to keep depreciation records as specified
in the Phase I Directives. However, Stentor was of the view that there was generally no
need for the Commission to specifically impose such methodologies or accounting practices
on the telephone companies under a price cap regime.
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375. Stentor and TCI took the position that, under price caps, reporting of
depreciation activity was not required. In general, interveners who considered that some
reporting was required did so in the context of (1) the inclusion of an earnings sharing
mechanism as part of the plan, and (2) the length of the price cap plan.
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376. The Commission is of the view that, under price cap regulation, the
provisions of GAAP should provide sufficient guidance to the telephone companies in
determining, for regulatory reporting purposes, the asset lives during the initial price
cap period. As a result, changes to the telephone companies' depreciation life
characteristics during the price cap period will not require Commission approval.
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377. The Commission recognizes, however, that to effect a successful transition
from rate base/rate-of-return regulation to price cap regulation, some residual regulation
is still required. In this regard, the Commission requires that any future change that
deviates from the current Phase I Directives or the depreciation life characteristics to
be implemented on 1 January 1998, along with the financial impact of any such change, must
be reported to the Commission. In addition, in light of the impact of potential changes to
the telephone companies' depreciation life characteristics on their respective
contribution requirements, the Commission considers that, at the time of the price cap
review, it may review the telephone companies' depreciation studies. A review would be
based on the principles of the currently-approved Phase I Directives.
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X OTHER ISSUES RELATED TO GOING-IN RATES
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A. Other Deferred Charges
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378. In general, expenses incurred by a telephone company in any given year are
recovered from subscribers in that year. However, when recovery of certain extraordinary
expenses (e.g., downsizing, shareholder entitlement) in one year are too onerous to impose
on subscribers, the Commission has allowed the telephone companies to defer and amortize
these costs over several years. Since the telephone companies' current rates are set to
recover these costs, completion of the approved amortization schedules would result in
higher earnings for the companies, all other things being equal.
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379. Stentor proposed that deferred costs, resulting from regulatory decisions
existing on the books of the telephone companies as at 31 December 1997, be amortized over
a five-year period, beginning 1 January 1998. Stentor further proposed to terminate the
policy of capitalizing costs which are primarily supported by regulatory decisions.
Stentor submitted that the five-year amortization period was chosen as a reflection of how
quickly the companies believe events will unfold. In Stentor's view, a longer amortization
period would not be appropriate as it is not certain that rates can be maintained at a
level sufficient to provide for such a recovery by the end of the five-year period.
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380. TCI proposed to recover the other deferred expenses through a special
amortization factor in its price cap plan (the A-factor). Under TCI's proposal, when an
expense has been recovered, the PCI would be reduced accordingly. TCI also proposed that
the company be required to file a proposed amortization schedule with the Commission for
each approved A-factor adjustment. In addition, TCI submitted that the company be
permitted to petition the Commission to accelerate an approved recovery schedule if the
advancing rate of competition renders the initial recovery schedule infeasible.
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381. The Commission notes that Stentor's proposed amortization procedure would
only apply to those deferred charges that arose from regulatory decisions. Costs deferred
as a result of business decisions such as leasehold improvements and software expenditures
would continue to be deferred and amortized on the basis of GAAP.
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382. The Commission considers that, if deferred charges are amortized more
rapidly, this could have a significant impact on going-in rates. The Commission also
considers that, once the initial prices are set, there will not be another opportunity for
a review of the impact of the amortization of any deferred charges and the impact on rates
until the end of the initial price cap period. Therefore, the Commission is of the view
that it would be appropriate to amortize the remaining balance of all regulatory deferred
charges, except as noted below, over a five-year period.
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383. However, the Commission notes TCI's special circumstances with respect to
shareholder entitlement and the fact that the company's contribution rate is generally
higher as a result of its income tax situation. Consequently, when the shareholder
entitlement is completely amortized in 1998, TCI is directed to reduce its contribution
rate accordingly.
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384. The telephone companies are directed to provide, in the follow-up
proceeding, a schedule of all regulatory deferred charges that will be amortized in the
going-in rates. In addition, TCI is directed to provide a schedule showing the derivation
of the contribution rate reduction, as at 1 January 1999, that results when the
shareholder entitlement is completely amortized.
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B. Utility Segment ROE
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385. In Decision 94-19, the Commission adjusted the midpoint of the telephone
companies' ROE ranges downward by 50 basis points, for the transitional period prior to
the implementation of price caps, to reflect the lower risk of the Utility segment
relative to the total company. In Decision 95-21, the Commission subsequently confirmed
that the downward risk adjustment of 50 basis points was still appropriate.
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386. Stentor proposed that rates going into the price cap period to be set in the
follow-up proceeding should reflect the removal of the 50 basis point downward adjustment.
Stentor's main objection to the 50 basis point adjustment was that the rationale
underlying the Commission's original determination does not hold for the future price cap
period due to the expectation of significant competition in the local services market. TCI
supported removal of the downward adjustment in principle, but proposed to deal with it as
part of establishing appropriate ROEs during the follow-up proceeding.
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387. The Commission notes that local competition is only one of a number of
factors that could be considered when adjusting the current Utility segment ROE level.
Further, the Commission notes that both Stentor and TCI supported the idea of setting an
appropriate ROE during the follow-up proceeding, in order to have the most timely
reflection of capital market and industry conditions in determining the level of local
rates required going in to price caps. The Commission is of the view that these factors
would be more properly examined as part of the follow-up proceeding.
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388. The Commission notes that past proceedings, in which a determination was
made to establish an appropriate ROE in the context of a revenue requirement proceeding,
have involved significant expenditure of time and resources by all parties involved. The
Commission further notes that there are already significant time constraints involved in
completing the follow-up proceeding in order to have a timely implementation of the new
form of regulation as of 1 January 1998. As well, the Commission is concerned about the
applicability of many of the traditional methodologies used to estimate cost of capital,
under a split rate base regime.
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389. The Commission is of the view that, since it will be determining an
appropriate ROE level for more than one telephone company in the same proceeding, this
process would be ideally suited to some form of benchmarking. In addition, in an effort to
streamline the process, the Commission intends to restrict its focus to changes in
conditions since Decision 95-21, in which the existing ROE level was confirmed to be still
appropriate. Therefore, when filing their ROE evidence in the follow-up proceeding, the
telephone companies, and interested parties that choose to file evidence, are directed to
quantify, with supporting rationale, any proposed changes to the telephone companies'
current ROE level in terms of the separate impact on the Utility segment ROE. These
adjustments could reflect changes in capital market and economic conditions, as well as
changes in a company's business risk, financial risk and regulatory risk.
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XI FOLLOW-UP PROCEEDING
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390. In Implementation of Price Cap Regulation, 1997 Contribution Charges and
Related Issues, Telecom Public Notice CRTC
97-11, 25 March 1997 (PN 97-11), the Commission initiated a proceeding to determine,
among other things, the appropriate going-in rates for each telephone company's Utility
segment. In PN 97-11, the Commission outlined the scope of the proceeding as it relates to
1997 financial forecasts, split rate base results and contribution charges.
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391. The Commission also stated that it intended to issue decisions in several
other proceedings (in addition to this proceeding) that could impact on the telephone
companies' going-in rates, by 1 May 1997. In light of the above, the Commission stated
that it would set out the remaining scope of the proceeding initiated by PN 97-11 in this
Decision. Therefore, the Commission hereby outlines the remaining scope of the proceeding
initiated by PN 97-11.
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392. In Decision 97-8, the Commission approved a central fund approach to
accommodate the evolution of the local market from a monopoly to a competitive
environment. The contribution scheme approved in Decision 97-8 requires the remittance of
all toll contribution to a central fund and the distribution of proceeds to all LECs based
on subsidy requirements per residential NAS by rate band. The telephone companies' subsidy
requirements by residence NAS for each rate band will be considered in the proceeding
initiated by PN 97-11.
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393. As outlined in this Decision, the Commission will also consider the
following issues in the context of the proceeding initiated by PN 97-11:
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(1) the establishment of the going-in revenue requirement (including an appropriate
ROE) and rates (including contribution) for each telephone company effective 1 January
1998;
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(2) the mechanism to recover any revenue requirement shortfall which cannot be
recovered from going-in rates during the price cap regime (see Part III of this Decision);
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(3) proposals to increase basic residential service rates effective 1 January 1998 (see
Part VIII of this Decision);
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(4) the depreciation life characteristics to be implemented 1 January 1998 (see Part IX
of this Decision);
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(5) the Utility segment services to be designated as uncapped services and as
competitor services (see Part IV of this Decision);
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(6) the finalization of rate band classifications (see Part IV of this Decision);
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(7) any potential financial impacts of privatization on MTS' Utility segment (see Part
V of this Decision);
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(8) the applicability of TCI's T-factor to changes in allowable ATDs (see Part III of
this Decision); and
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(9) the removal of the freeze on NewTel's contribution rate prior to the implementation
of price caps (see Part VIII of this Decision).
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394. As noted in PN 97-11, the telephone companies are to file their evidence and
submissions relating to these issues by 13 June 1997.
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Allan J. Darling
Secretary General
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This document is available in alternative format upon request.
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