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Terms and acronyms used in this decision
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Additional income tax deductions carry forward (Additional tax
deductions or ATDs) - result from the process of privatization
when the tax value of the assets exceeds their book value. The ATDs
are supported by a tax ruling from Revenue Canada and eliminate
income tax expense for several years.
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Average net investment base (ANIB) - the average cost of the
investment facilities used by a regulated telecommunication carrier
to provide telecommunications services. The ANIB lists by major
components the average cost of the telecommunication facilities and
other assets that are normally reported in a company's financial
statement.
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Directory affiliate - a related company that produces white
and yellow page telephone books and sells associated advertising.
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Price cap index (PCI) - a constraint under price caps that
specifies the maximum allowable price changes for total capped
services. The PCI consists of an inflation factor, a productivity
offset and in some cases, an exogenous factor.
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Return on equity (ROE) - the rate of return on the average
shareholder's investment, also known as average common equity. The
ROE is calculated by dividing the net income after taxes by the
average common equity.
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Sub-basket limit (SBL) - a price cap constraint which limits
the increase or decrease in the price level of a sub-basket of
services.
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Utility segment - services of a regulated telecommunications
carrier that include local service, access, local transport and a
share of certain common facilities.
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The decision in brief
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This decision sets out the Commission's determinations in setting
the rate increases necessary to allow MTS Communications Inc. (MTS)
to recover its income tax expense for the years 2000 and 2001.
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In assessing MTS' income tax expense, the Commission has treated
the company in the same manner as the other telecommunications
companies regulated under price caps. The other companies were
taxable at the beginning of price caps and their income tax expense
was based on the approved ANIB, deemed capital structure and the
allowed ROE used in setting rates at the start of the price cap
regime.
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In the Commission's view, using a similar approach will not claw
back the additional earnings resulting from the efficiencies gained
under price caps but will, in the same manner as the other
price-capped companies, require MTS' shareholders to be responsible
for the income tax expense on these additional earnings.
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The Commission finds that MTS' Utility segment ATDs were fully
used by July 2000 and the company's earnings would then attract
income tax. MTS' regulatory income tax expense is calculated as
$20.2 million for 2000 and $39.1 million for 2001, a portion of
which will be recovered through rate increases.
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The Commission gives final approval to the residential and
business rate increases approved on an interim basis in Order 2000-677,
as well as to an additional residential rate increase of $1.85 and
various business rate increases effective 1 April 2001.
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Background
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1. |
MTS Communications Inc. was privatized in 1997, and thus became a
taxable corporation. As a result of a Revenue Canada ruling, MTS
received a tax deduction of approximately $359 million, arising from
its contribution to a new employee pension trust fund. These tax
deductions eliminated the company's income tax expense for 1997 and
produced ATDs to offset future income tax expense for several years.
In MTS Communications Inc. – Mechanism to recover future income
tax expense, Telecom Decision CRTC 99-2,
dated 4 March 1999, the methodology for allocating the ATDs was
approved. As a result, $243.3 million of ATDs were allocated to MTS'
Utility segment.
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2. |
Unlike the other companies under price caps, MTS' going-in
revenue requirement did not include any recovery of income tax
expense because the company was non-taxable at the beginning of the
price cap period.
|
3. |
In Decision 99-2 the Commission
recognized that when MTS became taxable, its income tax expense
would meet the criteria for an exogenous factor, as defined in Price
cap regulation and related issues, Telecom Decision CRTC 97-9,
dated 1 May 1997, and that the company would be given the
opportunity to recover the income tax expense.
|
4. |
In MTS Communications Inc. – Interim rate increases to
recover income tax expense, Order CRTC 2000-677,
dated 21 July 2000, the Commission concluded on a prima facia basis
that MTS would incur income tax expense in the year 2000 and
therefore approved interim rate increases, effective 1 August 2000,
for the recovery of the Utility segment income tax expense.
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5. |
The Commission issued MTS Communications Inc. - Recovery of
2000 and 2001 income tax expense, Public Notice CRTC 2000-108,
dated 21 July 2000, initiating a proceeding to determine the
appropriate amount of MTS' Utility segment income tax expense and
the rates necessary for its recovery.
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Regional consultation
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6. |
As part of the public process the Commission held an oral hearing
in Winnipeg from 10 to 11 January 2001. See appendix 2 for
further details.
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7. |
A regional consultation was held on the first day of the hearing
to allow members of the public to express their concerns regarding
MTS' proposed rate increases.
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8. |
A number of individuals and groups who participated in the
consultation expressed specific complaints regarding the quality,
reliability and affordability of MTS' telephone service.
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9. |
The Commission notes MTS' submission that it has always taken the
quality of its services seriously and that there have been no major
outages during the past year. The Commission also notes MTS'
submission that it provides bill management tools and affordability
monitoring. However, the Commission notes that many of the
presenters were not aware that these tools are available.
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10. |
The Commission expects MTS to investigate the specific complaints
raised by the consultation participants and to report its findings
as to each complaint to the particular customer and to the
Commission within 30 days of the date of this decision.
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MTS' proposal
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11. |
MTS submitted that its Utility segment ATDs were fully utilized
by July 2000 and it became taxable at that time.
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12. |
The company proposed that its income tax expense for 2000 and
2001 should be calculated on the basis of forecast income before
income taxes. In order to fully recover its Utility segment income
tax expense, MTS submitted that it would require additional revenues
of $38 million in the year 2000 and $75.2 million in the year 2001.
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13. |
Based on its forecast July 2000 to June 2001 income tax expense,
the company requested an adjustment to its PCI of $75.6 million, as
opposed to the forecast 2001 revenues of $75.2 million.
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14. |
In order to minimize the impact on both consumers and itself, MTS
proposed to recover only a portion of its 2000 and 2001 Utility
segment income tax expense from additional Utility segment revenues.
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15. |
MTS requested (a) final approval of the residential and business
rate increases approved on an interim basis in Order 2000-677,
(b) approval of additional rate increases (including a $3.00 per
month local residential rate increase effective 1 January 2001) and
(c) the draw-down of the amounts in a deferral account that had been
established to accumulate revenues from certain business rate
reductions that MTS had been permitted to forego.
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16. |
The company expected the total interim and additional rate
increases as well as the draw-down of the deferral account to
generate revenues of $18.1 million in 2000 and $46.3 million in
2001.
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Draw-down of the additional tax deductions
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17. |
MTS' Utility segment becomes taxable when the $243.3 million of
ATDs allocated to that segment are fully drawn-down. The company and
the Consumers' Association of Canada (Manitoba Branch) and the
Manitoba Society of Seniors (CAC/MSOS) proposed different
methodologies for drawing-down the ATDs, and depending on the
methodology used, MTS becomes taxable at different dates.
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18. |
MTS submitted that its ATDs should be drawn-down on the basis of
actual/forecast income before income taxes. Using this approach, the
company stated that it became taxable in July 2000.
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19. |
CAC/MSOS submitted that the ATDs should be drawn-down using a
regulated income based on a 60% deemed common equity and the 11% ROE
used for the determination of the revenue requirement at the start
of the price cap method of regulation. In addition, CAC/MSOS
submitted that before calculating a regulated income for the purpose
of drawing-down the ATDs, MTS' ANIB should be reduced by the amount
of working capital that is not needed for regulatory purposes.
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20. |
Under CAC/MSOS' proposal, MTS would become taxable for regulatory
purposes in 2001 with no adjustment to the ANIB and in 2002 if the
ANIB were adjusted.
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21. |
CAC/MSOS submitted that the above approach would ensure that the
full benefit of the ATDs would flow to customers and that this was
the Commission's intent in Implementation of price cap regulation
and related issues, Telecom Decision CRTC 98-2,
dated 5 March 1998, when it denied the shareholder entitlement.
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22. |
The Commission disagrees with CAC/MSOS' submission on the link
between the shareholder entitlement and the draw-down of the ATDs.
The Commission is of the view that the ATDs and shareholder
entitlements are different. For instance, ATDs are drawn-down based
on actual income whereas any shareholder entitlement would be
amortized over a reasonable period of time. The Commission also
notes that when AGT Limited (now TELUS Communications Inc.) was
privatized, its ATDs were drawn-down on the basis of actual income.
Accordingly, the Commission considers that there is no link between
the denial of the shareholder entitlement in Decision 98-2
and the draw-down of the ATDs.
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23. |
The Commission notes that from 1997 through June 2000, MTS'
customers have received the benefit of the ATDs through lower rates.
The Commission considers that to provide a balance between the
interest of the residential subscribers and MTS' shareholders, the
ATDs should be used to shelter from income tax expense all of the
income realized by the Utility segment.
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24. |
The Commission considers that the methodology proposed by MTS for
drawing-down the ATDs is appropriate. Accordingly, the Commission
finds that the ATDs were fully used in July 2000, and that MTS
became taxable at that time.
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Calculation of income tax expense
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General methodology
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25. |
Two broad methodologies for determining the income tax expense
were identified in this proceeding: |
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a) calculation of income tax expense on the basis of forecast
income before income taxes (total earnings methodology); or
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b) calculation of income tax expense on the basis of a 55%
common equity, 11% ROE (determined in the proceeding that led to
Decision 98-2) and the applicable
income tax rate (the going-in methodology).
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26. |
MTS submitted that the income tax expense for 2000 and 2001
should be calculated on the basis of the total earnings methodology.
Necessary revenues would then have to be increased so that the
incurring of income tax expense would have no impact on the
company's net income. Based on its proposed methodology, MTS
submitted that it would require revenues of $38 million in the year
2000 and $75.2 million in the year 2001 to fully recover its Utility
segment income tax expense.
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27. |
MTS argued that under the price cap method of regulation,
concepts that are based on rate of return/rate base method of
regulation or financial performance are not relevant. The company
submitted that any other methodology for calculating income tax
expense would result in it being regulated differently from the
other price-capped companies and place the company at a disadvantage
relative to its peers, thus denying it the opportunity to recover
the proper amount of income tax expense and confiscating
efficiencies realized under price caps.
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28. |
CAC/MSOS submitted that MTS' income tax expense should be
calculated on the basis of the going-in methodology used to set
income tax expense for the other price-capped companies.
Notwithstanding price cap regulation, CAC/MSOS submitted that this
methodology is appropriate because MTS' application to recover its
post ATD income tax expense is itself a carryover from the pre-price
cap era and involves passing through to customers income tax expense
that was not included in the setting of rates at the start of the
price cap regime.
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29. |
CAC/MSOS also submitted that allowing MTS to recover income tax
expense on earnings above an 11% ROE would give MTS an
"enhanced" reward for having achieved an ROE above the
target established in Decision 98-2,
would penalize MTS' customers and result in inconsistency with the
principles of price caps.
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30. |
The Commission notes that MTS is forecasting an ROE that is
greater than the 11% used to set rates in Decision 98-2.
Under MTS' proposal, the company would have the opportunity to
recover income tax expense on income above the 11% allowed ROE. This
would result in MTS being regulated differently than the other
price-capped companies whose revenue requirements at the start of
the price cap period, reflected income tax expenses on the basis of
an 11% ROE.
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31. |
The Commission agrees with CAC/MSOS that the need to recover
income tax expense flows from the pre-price cap era. In addition,
the Commission considers that the amount of income taxes should not
be dependent on the company's profitability during the price cap
era, but should, similarly to the other priced-capped companies, be
based on a reasonable amount of earnings.
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32. |
The Commission is of the view that using the going-in methodology
to determine MTS' income tax expense does not result in a different
regulatory regime for the company, relative to other
telecommunications carriers regulated under price caps.
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33. |
The Commission is also of the view that determining MTS' income
tax expense using the going-in methodology will not claw back the
additional income that results from the efficiencies gained under
price caps. Similar to the other price-capped companies, under the
going-in methodology MTS' shareholders will be responsible for
income tax expense on any additional income.
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34. |
Based on the foregoing, the Commission finds the going-in
methodology (i.e., a 55% maximum common equity and an 11% allowed
ROE), using the applicable income tax rate and the ANIB calculation
discussed below, to be the appropriate method for estimating MTS'
income tax expense. In the Commission's view this approach respects
the principles of price cap regulation and properly balances the
interests of MTS' customers and shareholders.
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Average net investment base
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35. |
The Commission is of the view that using the going-in methodology
requires a determination with respect to whether the 1997 forecast
ANIB used in Decision 98-2, or the
forecast ANIBs for 2000 and 2001 should be used. The Commission
notes that the 1997 forecast Utility segment ANIB was about $755
million. In this proceeding, MTS forecasts that its 2000 and 2001
Utility segment ANIBs will be approximately $835 million and $855
million respectively. The increase is primarily due to increases in
Working Capital and Investment in Subsidiaries and Affiliates.
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36. |
The Commission notes that the 1997 forecast ANIB does not reflect
the current investment and financing of the company, as it becomes
taxable. In addition, the Commission considers that if the 1997
forecast ANIB were used to determine MTS' income tax expense, the
income tax rates that were in effect at that time should also be
used. However, the Commission notes that the federal corporate
income tax rate has been reduced. Consequently, using the going-in
income tax rate would not be in compliance with income tax rates
applicable when MTS became taxable.
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37. |
In order to reflect MTS' current financial circumstances, the
Commission is of the view that the forecast ANIBs for 2000 and 2001,
adjusted for the regulatory treatment of directory operations as
discussed below, should be used for calculating MTS' income tax
expense.
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Working capital
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38. |
CAC/MSOS stated that the amount of working capital included in
the forecast ANIB is overstated and is disproportionate to the
revenues and operating expenses. CAC/MSOS submitted that the working
capital should be no more than 45 days operating expense, excluding
depreciation.
|
39. |
MTS submitted that contributing factors to the increase in its
working capital were the re-deployment of its engineering staff as a
result of the 1998 flood and the 1999 strike by some of its
employees. MTS noted that it expects that this short-term trend will
reverse as the company undertakes capital projects.
|
40. |
MTS also submitted that it has calculated its working capital
using the methodology approved in the company's Phase III manual.
Any adjustment to the working capital would be a departure from the
methodology used to calculate the ANIB at the start of the price cap
regime.
|
41. |
The Commission notes that principles of finance would dictate
that a company would only maintain sufficient working capital to
finance its operation and to comply with any financial covenants
that a company may have with respect to debt financing. The
Commission also notes MTS' submission that it expects that the
increase in working capital will reverse itself, as the company
undertakes capital projects.
|
42. |
The Commission notes MTS' assertion that working capital has been
calculated in accordance with the approved Phase III methodology. As
a result, the Commission considers that under the current form of
regulation a reduction to MTS' working capital for the purpose of
calculating income tax expense, as proposed by CAC/MSOS, is not
appropriate.
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Directory services
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43. |
In Implementation of the regulatory framework – Splitting of
the rate base and related issues, Telecom Decision CRTC 95-21,
dated 31 October 1995, the Commission was of the view that when
directory services are provided by an affiliate, the affiliate's
earnings, for regulatory purposes, should be treated as if they were
earnings of the regulated company.
|
44. |
The Commission considers that if the directory services were
provided by MTS, the company would require a certain amount of
investment to provide that service. The amount of the investment
would be limited to that required to provide the directory service
and would be financed on the same basis as MTS' telecommunications
investment.
|
45. |
In the case of MTS, directory services are provided by the
affiliate MTS Advanced Inc.
|
46. |
For regulatory financial reporting purposes, MTS reported the
income of the directory operations in its financial results. This
has resulted in a higher regulated income and an annual increase to
the investment in subsidiaries and affiliates.
|
47. |
CAC/MSOS submitted that under no circumstances should the amount
in investment in subsidiaries and affiliates included in the ANIB
exceed the common equity of the directory affiliate.
|
48. |
The Commission notes that MTS' deemed investment in the directory
operations included in its ANIB is forecast to increase from $22
million in 1997 to $64 million in 2000 and $80 million in 2001.
|
49. |
The Commission notes that in BC TEL – Revenue requirements
for 1993 and 1994, Telecom Decision CRTC 94-1,
dated 25 January 1994, the issue of how deemed directory earnings
should be recorded was addressed. In that decision, the Commission
stated that it was mindful that the inclusion of the cumulative
earnings as an adjustment to the regulated common equity would
result in a continuing increase in regulated average common equity.
As a result, the Commission was of the view that the benefit to
subscribers of the earnings adjustment would be diminished over the
years. Therefore the Commission determined that the equity
adjustment for the directory affiliate should be discontinued.
|
50. |
The Commission considers that MTS has recorded directory earnings
in its ANIB in a manner that results in continuing year-over-year
increases to MTS regulated common equity and ANIB which is not in
compliance with previous Commission determinations.
|
51. |
The Commission has determined that it is appropriate to calculate
MTS' income tax expense on the basis of a 55% maximum common equity
ratio applied to the Utility segment ANIB. Otherwise, the benefit to
customers of treating directory earnings as integral would be
diminished through higher financing costs under MTS' treatment of
the regulatory adjustment for directory operations.
|
52. |
In the Commission's view the directory affiliate common equity
included in MTS' common equity should be no higher than that
required to support the affiliate's directory operations. The
Commission, as in previous decisions, also considers that deemed
directory income adjustments should not be carried forward to
further increase MTS' common equity.
|
53. |
The Commission also notes that MTS Advanced Inc. carries out
other functions in addition to directory operations. MTS Advanced
Inc.'s segmented balance sheet for the directory operations includes
an inter-division receivable that is not necessary for the directory
operation.
|
54. |
The Commission is of the opinion that it would be appropriate to
reflect in MTS' ANIB as a regulatory adjustment only the amount of
equity that is necessary to support the directory operations.
|
55. |
Based on the foregoing, the Commission finds that MTS' ANIB
should be reduced by $52 million for 2000 and $66 million for 2001
to reflect the above changes in accounting for the integrality of
the directory affiliate.
|
56. |
Based on the above, MTS is directed to re-file in confidence with
the Commission its regulated split rate-base financial reports for
the period 1997 to 2000 within 30 days of the date of this decision,
to reflect this determination on recording the regulatory adjustment
for directory operations.
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Income tax expense
|
57. |
Based on the going-in methodology and the adjustments to ANIB, as
identified in paragraph 55, the Commission estimates the amounts of
Utility segment income tax expense that MTS should be allowed, for
regulatory purposes, are $20.2 million for 2000 and $39.1 million
for 2001, as shown in Appendix 3.
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Allocation of income tax expense
|
58. |
MTS stated that it considered various recovery methods in order
to determine whether the income tax expense could be allocated on a
cost causality basis. The company submitted that the allocation of
income tax expense to profitable services, that is the majority of
business services and optional services, or on the basis of service
basket revenues would exacerbate the inefficiencies that currently
exist in the pricing within the Utility segment.
|
59. |
In addition, MTS was of the view that to allocate income tax
expense back to the rates of services, for which there is
competition and for which rates cannot be increased, denies the
company the opportunity to recover its income tax expense.
|
60. |
MTS noted that a retail network access services (NAS) allocator
would require the residential sub-basket to absorb about two-thirds
of the income tax expense which would be greater than the increases
proposed by the company. MTS submitted that the use of the weighted
NAS allocator used in Local competition start-up costs
proceeding, Telecom public notice CRTC 98-10,
Telecom Order CRTC 99-239,
dated 12 March 1999, would be inappropriate because such an
allocator would continue to increase inefficiencies.
|
61. |
As a result, MTS proposed to recover the majority of the income
tax expense from capped services with a maximum of $33.9 million
allocated to the residential services sub-basket. MTS noted that
this would provide the company with PCI headroom such that it would
not be required to make any rate reductions required by the annual
price cap plan adjustments.
|
62. |
In arriving at its allocation methodology, MTS submitted that it
has mostly looked to increasing rates for services currently priced
below cost, the majority of which are residential services, and
considered what the market would bear in determining the manner in
which to allocate its income tax expense.
|
63. |
MTS stated that its average cost of providing service in Manitoba
is $34 and that it was of the view that the current residential
rates are not making a substantial enough contribution towards the
cost of providing service. MTS submitted that if its residential
rate application were accepted, the average residential rate would
be about $25. The company was of the view that $25 is a reasonable
amount for consumers to pay, recovers approximately 74% of costs
(about the same as other telephone companies) and is about mid-range
for similar services provided across Canada.
|
64. |
In addition to the increases proposed to residential and business
services, MTS proposed that the incremental revenues from foregone
business service rate reductions under the price cap plan be
utilized to recover a portion of the Utility segment income tax
expense in 2001.
|
65. |
CAC/MSOS was of the view that MTS' proposal allocates the income
tax expense in accordance with the company's desire to rebalance
rates and that MTS' approach increases rates for basic residential
service by more than any reasonable estimate of the increase in
causal costs. CAC/MSOS stated that reliance on a reasonable
allocator is necessary and if costs are not allocated appropriately
there is a danger that rate increases could result in an
inappropriate cross-subsidy.
|
66. |
CAC/MSOS stated that the ideal basis for allocating income tax
expense between capped and uncapped services would be on the basis
of the rate base associated with each basket of services. Assuming
the same ROE and capital structure apply to both service baskets,
this would be a very direct measure of the tax expense
"caused" by services in each basket. CAC/MSOS stated that
it recognizes that a breakdown of the rate base in this way may not
be readily available.
|
67. |
CAC/MSOS further submitted that if the company is unable to
provide a better proxy for allocating income tax expense, such as
suggested above, it should be required to use the total revenue of
each basket and sub-basket as the basis of allocating Utility
segment income tax expense. The implicit assumption of this approach
is that the rate base and the taxes associated with each service
basket, are roughly proportional to revenue.
|
68. |
In Decision 99-2, the Commission
noted that a significant portion of the Utility segment income tax
expense would likely have to be recovered from basic local
residential subscribers since most residential local services are
priced below cost. The Commission also noted that the extent of this
impact will be dictated by MTS' response to the competitive
environment at that time.
|
69. |
The Commission notes that generally business and optional
services are priced above Phase II costs, including income tax
expense. Prior to MTS becoming taxable, the revenue for income taxes
included in these rates was used to subsidize residential services.
Now that the company is taxable this revenue is required to pay
income taxes. In light of the above, the Commission considers that
it would be inappropriate to allocate additional income tax expenses
to business and optional services beyond that proposed by MTS, as
these rates already fully recover their share of income tax
expenses.
|
70. |
The Commission considers that, except for a minor adjustment to
reflect the interim increases of $0.2 million to uncapped services,
$38.9 million of the $39.1 million income tax expense for 2001
should be allocated to capped services. Accordingly, the PCI for the
capped services should reflect an exogenous factor adjustment of
$38.9 million.
|
71. |
The Commission notes that Decision 99-2
allowed MTS to forego certain business rate reductions and to
accumulate these revenues in a deferral account for the benefit of
residential subscribers. The Commission considers that MTS'
estimated foregone business rate reductions of $8.9 million in the
year 2001 should be treated as a portion of business services'
contribution to the recovery of income tax expense.
|
72. |
The Commission also considers that the increases to capped
business services approved on an interim basis in Order 2000-677
as well as those that MTS applied for in this proceeding will
contribute $1.9 million and $1.3 million respectively on an
annualized basis to the recovery of income tax expense. As a result
of these business rate increases and the $8.9 million mentioned
above, business services will contribute $12.1 million to the
recovery of MTS' income tax expense.
|
73. |
The Commission considers that the residual income tax expense of
$26.8 million not recovered from business customers should be
allocated to the residential services sub-basket.
|
74. |
The following is a summary of the allocation of the approved 2001
Utility segment regulated income tax expense of $39.1 million:
|
|
$ million |
|
Business
sub-basket
12.1 |
|
Residential sub-basket
26.8 |
|
Capped
services
38.9 |
|
Uncapped
services
0.2 |
|
Total
39.1
|
75. |
In order to appropriately reflect the above allocation for the
purposes of the 2001 price cap mechanism, MTS is to include the
following in its 2001 price cap filing for the purpose of
calculating the exogenous factors:
|
|
a) $20.1 million should be applied at the PCI level ($38.9
million less $18.8 million approved in Order 2000-677);
|
|
b) in addition, since $8.9 million of the income tax expense
will be the result of foregone business rate reductions, and these
increases have already been reflected in the PCI, the PCI will
require a negative exogenous factor adjustment of
$8.9 million; and
|
|
c) an exogenous factor of $10.0 million should be attributed to
the residential SBL ($26.8 million less $16.8 million approved in
Order 2000-677).
|
|
Rates
|
|
Residential services
|
76. |
Order 2000-677
approved on an interim basis a residential exchange service increase
of $3.00. This rate increase is expected to generate $16.6 million
of additional revenues in 2001. Given the determination above to
allocate $26.8 million of income tax expense to the residence
service sub-basket, the Commission is of the view that an additional
residential rate increase of $1.85 will be required to fund the
difference of $10.2 million.
|
77. |
In light of the foregoing, the Commission approves on a final
basis:
|
|
a) the residential exchange service rate increase approved on
an interim basis in Order 2000-677;
and
|
|
b) an additional residential exchange service rate increase of
$1.85 to be effective 1 April 2001.
|
78. |
The resulting residential exchange service rates will be as
follows:
|
|
Band A – Winnipeg
core
$23.87 |
|
Band B – Winnipeg
non-core
$23.87 |
|
Band C –
Brandon
$23.87 |
|
Band
D
$23.87 |
|
Band
E2
$23.87 |
|
Band
E1
$22.82 |
|
Band
EA
$20.30 |
|
Business services
|
79. |
Order 2000-677
approved on an interim basis capped and uncapped business service
increases expected to generate $2.1 million of additional revenues
in 2001. As noted in paragraph 71, the Commission considers the
foregone business rate reductions of $8.9 million should be treated
as a portion of business services' contribution to the recovery of
income tax expense. In addition to the above, MTS proposed further
rate increases, which are expected to generate $1.3 million on an
annualized basis.
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80. |
In light of the foregoing, the Commission approves on a final
basis:
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a) the business service rate increases that were approved on an
interim basis in Order 2000-677;
and
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b) the business rate increases proposed under MTS' current
application, effective 1 April 2001.
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Disposition of the deferral account
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81. |
In Decision 99-2, the Commission
approved a pre-collection mechanism whereby MTS was not required to
make some or all of the rate reductions mandated under the price cap
formula. The Commission required that the additional revenues
resulting from not making these rate reductions be accumulated in a
deferral account and accrue interest. The purpose of the funds in
the deferral account was to mitigate the initial rate increases that
would be required of residential customers when MTS incurred income
tax expense.
|
82. |
MTS stated that in its efforts to protect the residential
customer from the impact of higher rate increases, it has made
maximum use of the foregone business rate reductions to pre-collect
income tax expense from business service rates. As a result, the
deferral account balance at the end of 2000 was $10.3 million.
|
83. |
MTS proposed that the benefit of the deferral account flow to
residential consumers through the calculation of the residential
sub-basket exogenous factor for the 2000 price cap year.
|
84. |
The Commission notes that as stated in paragraph 24, MTS became
taxable in July 2000. As a result, the funds in the deferral account
have been applied directly to reduce the residential income tax
expense for the year 2000.
|
85. |
As stated in paragraph 79, the foregone business rate reductions,
which correspond to $8.9 million in 2001, will be treated as a
portion of business services' contributions to the recovery of
income tax expense. As of 1 January 2001, these business rate
reductions should no longer accumulate in the deferral account which
should be closed at that time.
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Establishing new constraints on rates
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86. |
Under the current price cap plan, there is an overall constraint
of inflation on the residential sub-basket and a further constraint
which specifies that any single rate element in essential bands
cannot increase by more than 10%.
|
87. |
MTS stated that it does not believe that, once the rates
requested have been implemented, it would be appropriate or
necessary for the Commission to establish any new constraint on
residential rates specifically to enable the recovery of its income
tax expense. CAC/MSOS agreed.
|
88. |
The Commission notes that the level of increases to residence
exchange service rates in 2001 for the purpose of allowing MTS to
recover its Utility segment income tax expense do not violate the
10% constraint. As a result no adjustment to the existing constraint
for residential services is necessary.
|
89. |
The Commission notes that none of the parties addressed the issue
of the 10% constraint in relation to business service rates.
|
90. |
In paragraph 80 the Commission approved increases to single line
business rates in Bands E1 and E2 of 13.3% and 16.4% respectively.
In the circumstances, the Commission considers it appropriate to
modify the 10% constraint on single-line business rates in bands E1
and E2 such that they are capped for the year 2001 at 13.3% and
16.4% respectively.
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Other issues
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91. |
By letter dated 5 March 2001, MTS was informed that the
Commission would give the company further instructions as to when to
file its 2001 annual price cap filing. The company is hereby
directed to submit its 2001 annual price cap filing by 17 April
2001.
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Secretary General
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This document is available in alternative format upon request
and may also be examined at the following Internet site: http://www.crtc.gc.ca |