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Telecom Decision CRTC 2005-76
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Ottawa, 22 December 2005 |
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Follow-up to Decision 2002-43 - Société en commandite Télébec's
request to recover the start-up costs for local competition and local
number portability
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Reference: 8678-T78-200506420 |
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In this Decision, the Commission
approves for Société en commandite Télébec the recovery of certain
costs associated with the implementation of local competition and local
number portability through draw-downs from the company's deferral
account. |
1. |
The Commission received an application by
Société en commandite Télébec (Télébec), dated 31 May 2005, in which the
company proposed an exogenous adjustment to recover its estimated local
number portability (LNP) start-up costs of $7.45 million. In support of
its application, the company filed a Phase II cost study. |
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Background
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2. |
In Local competition start-up costs
proceeding, Telecom Public Notice CRTC 98-10, Telecom Order
CRTC 99-239, 12 March
1999 (Order 99-239), the
Commission determined that for the large incumbent local exchange
carriers' (ILECs) other than Télébec and TELUS Communications (Québec)
Inc., now known as TELUS Communications Inc., LNP and local competition
start-up costs should be calculated on a revenue requirement basis.
Under the revenue requirement approach, the capital costs would be
recovered through an annual depreciation expense. The Commission also
concluded that these costs should be allocated among capped and uncapped
services on the basis of retail switched exchange service network
access services (NAS), with non-residence NAS weighted by a factor
of 1.5. The recovery of costs allocated to capped Utility segment
services would be by way of an exogenous factor. |
3. |
In Local competition start-up and LNP
costs established, Order CRTC 2000-143,
23 February 2000 (Order 2000-143),
the Commission approved the local competition start-up costs and local
LNP costs for ex-Stentor telephone companies. |
4. |
In Commission approves terms and conditions
for local exchange and local payphone competition in the territories
of TELUS Communications (Québec) Inc. and Télébec ltée, Order CRTC
2001-761, 3 October
2001 (Order 2001-761),
the Commission determined that Télébec and TELUS Communications (Québec)
Inc. (the Companies) would each be responsible for recovering its
own local competition and LNP start-up costs and that such costs would
not be recovered from the National Contribution Fund (NCF). In addition,
in order to control the magnitude of these costs, the Commission determined
that both Companies should incur expenses only when and if required. |
5. |
In Implementation of price regulation
for Télébec and TELUS Québec, Telecom Decision CRTC 2002-43,
31 July 2002 (Decision 2002-43),
the Commission determined that an exogenous factor would be a
component of the price cap formula. An exogenous factor flows through
the impact associated with events not captured by other elements of
the price cap formula, provided the events or initiatives satisfied
the following criteria: |
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a) they are legislative, judicial, or
administrative actions which are beyond the control of the company; |
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b) they are addressed specifically to the
telecommunications industry; and |
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c) they have a material impact as measured
against the total company. |
6. |
In Decision 2002-43,
the Commission was of the preliminary view that the methodology used
for the recovery of local competition and LNP start-up costs by the
other large ILECs, as set out in Order 99-239,
would be appropriate for the Companies. The Commission considered
that, in their filings for an exogenous factor, the Companies should
include the amount of local competition and LNP start-up costs, as
well as the method of recovery, calculated using the methodology set
out in Order 99-239. In
addition, the Commission directed the Companies to distinguish between
recurring and non-recurring costs. |
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The application
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7. |
Télébec noted that competition had been
allowed in its territory since 1 September 2002 and that several competitive
local exchange carriers were present and active in its territory.
Télébec submitted that, pursuant to Order 2001-761
and Decision 2002-43, it was proposing
to recover its local competition and LNP start-up costs though an
exogenous factor. Télébec estimated that the costs the company had
incurred were $7.45 million, of which $4.60 million were non-recurring
costs and the balance of $2.85 million were recurring costs. The company
indicated that its estimated costs included a mark-up to recover its
fixed and common costs of 15 percent on costs allocated to NAS
in high-cost serving areas (HCSAs) and 25 percent mark-up on costs
allocated to other baskets. |
8. |
Télébec submitted that, in accordance with
the Commission's directives in Decision 2002-43,
it had allocated its local competition and LNP start-up costs on the
basis of NAS, with non-residential NAS weighted by a factor of 1.5
and residential NAS weighted by a factor of 1.0. |
9. |
Télébec proposed the following method for
recovery of costs associated with the implementation of local
competition and LNP: |
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- the recovery of costs allocated to Residential Local Exchange
Services in HCSAs sub-basket from the NCF;
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- the recovery of costs allocated to Residential Local Exchange
Services in non-HCSAs sub-basket and to the Other Capped Services
basket from its deferral account;
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- the recovery of costs allocated to the Business Local Exchange
Services basket through an exogenous adjustment; and
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- the recovery of costs allocated to uncapped services through rate
increases.
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10. |
Télébec proposed that the non-recurring
costs associated with the implementation of local competition and LNP be
fully recovered over four years, from 1 August 2002 to 31 July 2006. |
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Process
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11. |
The Commission received comments from Xit
télécom inc., on behalf of itself, télécommunications Xittel inc., and
9141-8077 Québec inc. (collectively, Xit télécom), dated 5 July 2005 and
reply comments from Télébec, dated 8 July 2005. |
12. |
The Commission addressed interrogatories to
Télébec, dated 4 October 2005. Télébec filed responses to the
Commission's interrogatories on 12 October 2005. |
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Xit télécom's comments
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13. |
With respect to the nature and value of
Télébec's proposed costs, Xit télécom submitted the following: |
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- Télébec's proposed costs were too high;
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- The tax rate on public utility services (PUT), which had replaced
the telecommunications, gas, and electric (TGE) rate, used by Télébec
in its economic study was incorrect; the PUT rate being capped at 0.7
percent on a maximum of $750 million; and
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- Télébec should not be permitted to recover costs associated with
its membership in the Canadian LNP Consortium Inc. (the Consortium)
as Xit télécom did not have the means to recover these costs.
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Télébec's reply comments
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14. |
Télébec stated that it had incurred the
proposed costs to meet the Commission's directives set out in
Order 2001-761 and in
Decision 2002-43. |
15. |
Télébec submitted that since the PUT
threshold of $750 million applied to the combined networks of the
companies affiliated with Télébec, the average PUT rate was comparable
to the old TGE rate. |
16. |
Télébec submitted that the Commission had
approved the establishment of the Consortium to implement LNP and
had required that the company become a member of the Consortium in
Order 2001-761. Télébec
argued that, therefore, it should be able to recover the costs of
its membership in the Consortium. |
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Commission's analysis and determinations
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17. |
The Commission notes that in Decision 2002-43,
it determined that the costs associated with the implementation of
local competition and LNP met the first two criteria for exogenous
events. The Commission considered that the requirement to implement
the upgrades resulting from the Commission's directives to implement
local competition and LNP in Order 2001-761,
were a legislative, judicial, or administrative action that was
both beyond the control of the company and addressed specifically
to the telecommunications industry. |
18. |
The Commission notes that Télébec estimated
the costs associated with the implementation of local competition
and LNP at $7.45 million. Given the magnitude of the costs associated
with this initiative, and consistent with Order 99-239,
the Commission is of the view that Télébec's costs to implement local
competition and LNP are significant and material in relation to the
total company, and meet the third criterion for an exogenous event. |
19. |
Accordingly, the Commission determines that
these costs qualify for exogenous treatment. |
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Télébec's Phase II cost study
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20. |
The Commission notes that it examined Télébec's
Phase II costs associated with the implementation of local competition
and LNP. The Commission also notes that the Télébec's costs are very
similar in nature to the costs approved for the other large ILECs
in Order 2000-143.
The Commission has however made two adjustments to Télébec's proposed
local competition and LNP start-up costs. |
21. |
First, to reflect tax changes resulting
from the applicability of the PUT, the Commission considers it
appropriate to adjust the miscellaneous tax rate used in Télébec's Phase
II cost study from 8 percent to 6.38 percent for the period from 2005 to
2009. |
22. |
Second, the Commission notes that in Decision
2002-43 it determined that only
incremental costs related to the implementation of local competition
and LNP should be recovered. Since fixed and common costs are not
incremental costs, the Commission finds it appropriate to remove the
mark-ups proposed by Télébec for the recovery of fixed and common
costs. |
23. |
The Commission notes that costs related to
membership in the Consortium are related to the implementation of
LNP. The Commission considers that, consistent with its determinations
in Decision 2002-43, Télébec
may recover these costs. |
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Télébec's proposal for cost recovery
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24. |
The Commission notes that it established
the NCF to subsidize basic local service in HCSAs, and not to subsidize
the implementation of competition. Accordingly, the Commission does
not consider it appropriate for Télébec to recover costs allocated
to residential subscribers in HCSAs from the NCF. With respect to
Télébec's proposal to assign to residence subscribers, part of the
start-up costs allocated to the Other Capped Services basket, the
Commission considers that this proposal is not consistent with its
directives in Decision 2002-43. |
25. |
The Commission is concerned that Télébec's
subscribers, which already pay the highest rates for local exchange
services in Canada, could be faced with local rate increases if an
exogenous adjustment was included in the price cap formula. Accordingly,
the Commission considers it preferable to avoid additional rate
increases, to the extent possible. |
26. |
The Commission notes that there are, at present,
sufficient funds in Télébec's deferral account for the recovery of
Télébec's start-up costs for local competition and LNP for the period
from 2005 to 2006. The Commission is of the view that Télébec should
recover these costs from the deferral account as long as there are
sufficient funds in the account. The Commission notes that the decision
to be issued in the Review and disposition of deferral accounts
for the second price cap period, Telecom Public Notice
CRTC 2004-1, 24 March
2004 proceeding will detail the procedures Télébec will follow once
the funds in the deferral account are depleted. |
27. |
The Commission notes that there
is less than one year until the end of Télébec's proposed recovery
period. Accordingly, the Commission is the view that Télébec's recovery
period for non-recurring costs associated with the implementation of
local competition and LNP should be recovered over a four-year period
starting 1 August 2005. The Commission considers that the recovery of
recurring costs should start on the same date. |
28. |
In light of the above, the Commission
approves the following for Télébec: |
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- an exogenous factor of $1,074,900 per year for the recovery of
non-recurring costs over four years, starting 1 August 2005;
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- an exogenous factor of $560,700 for the recovery of recurring
costs each year, starting 1 August 2005; and
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- the recovery of these amounts through draw-downs from Télébec's
deferral account as long as there are sufficient funds in the account.
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Secretary General |
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This document is available in alternative
format upon request, and may also be examined in PDF
format or in HTML at the following Internet site: http://www.crtc.gc.ca
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