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Order CRTC 2001-100
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Ottawa, 2 February 2001 |
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Bell Canada's savings from gross receipts tax reductions
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Reference: 8661-C25-02/00 |
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The Commission directs Bell Canada to include a downward exogenous
adjustment to its price cap formula to recognize certain gross receipts
tax (GRT) savings resulting from the reduction in the GRT rate.
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1. |
On 21 August 2000, Call-Net Enterprises Inc. filed a Part VII
application, on behalf of itself and its affiliates (including Call-Net
Technologies Services Inc. and Call-Net Communications Inc.), seeking a
ruling from the Commission addressing the regulatory treatment, with
retroactive effect to 1999, of the savings for Bell Canada resulting from
the reduction in the Ontario gross receipts tax (GRT) rate.
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2. |
The Ontario government's May 1999 budget reduced the GRT rate levied
on the incumbent telephone companies operating in the province of Ontario
from 5% to 4% effective 1 January 1999. The following year, in its May
2000 budget, the Ontario government announced additional annual
reductions in the GRT rate starting 1 January 2000 that would result in
the eventual elimination of the tax by 2003.
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Call-Net's position
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3. |
Call-Net submitted that since 1999, Bell Canada's Utility segment has
inappropriately benefited from the decrease in the GRT rate.
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4. |
Call-Net proposed the following three potential remedies for the
Commission's consideration:
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a) apply the Utility segment GRT savings against the Utility segment
shortfall, recalculate contribution rates and issue rebates for past
overpayments, or at the very least, modify contribution on a
going-forward basis;
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b) reduce rates that competitors and others pay for services from
Bell Canada which are cost based and rebate overpayments for past
years, or at the very least, adjust these rates on a going-forward
basis; and
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c) apply a downward exogenous factor adjustment under the price cap
formula.
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5. |
Call-Net submitted that since residential rates are generally priced
below cost and that business rates have been reduced to a level that may
impede local competition, its preference was for Bell Canada to
apply any savings resulting from the GRT rate reductions to the Utility
segment shortfall, recalculate the contribution rates and issue rebates
for past periods.
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6. |
In support of its submission, Call-Net submitted that the Commission
has the legal power to change, retroactively, previously established
final rates. Call-Net relied on arguments made in a separate application
for relief with respect to direct connection rates (the direct connection
proceeding). Specifically, Call-Net submitted that the Commission's
authority is found in section 62 and section 32(g) of the Telecommunications
Act.
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Bell Canada's position
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7. |
Bell Canada concurred with Call-Net that, in this particular case, in
the event that a regulatory adjustment is considered appropriate, it
would be inappropriate to pass through any future savings associated with
the GRT rate reduction to customers through reductions in capped service
prices, and that contribution rate reductions should be considered
instead.
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8. |
Bell Canada submitted that given that the GRT is a revenue-based tax,
the amount of the GRT rate reduction that is applicable to capped
services can be readily determined based on the capped revenue base to
which the tax is applied.
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9. |
Bell Canada submitted that it would be inappropriate and unfair to
impose any adjustments related to an exogenous event for any time period
prior to its identification for exogenous treatment.
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10. |
Bell Canada further submitted, relying on arguments made in the direct
connection proceeding, that to the extent that any of Call-Net's proposed
remedies adjust rates for prior time periods, it is doubtful that the
Commission has jurisdiction to implement them. |
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Commission determination
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Regulatory treatment of GRT savings
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11. |
In Price cap regulation and related issues, Telecom Decision
CRTC 97-9, dated 1 May
1997, the Commission stated that an exogenous factor adjustment will be
considered for inclusion in the Price Cap Index (PCI) for events or
initiatives which satisfy the following:
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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 on the Utility segment of the
company.
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12. |
The Commission agrees with Call-Net that the savings resulting from
the reduction in the GRT rate qualify for exogenous treatment as
contemplated in Decision 97-9.
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13. |
The Commission notes that the application of the GRT savings to reduce
contribution rates would be inconsistent with the framework established
in Decision 97-9.
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14. |
The Commission further notes that the reduction in the GRT rate has
reduced, and its eventual elimination in 2003 will further reduce, the
cost of local residential and business services.
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15. |
Treating the GRT savings related to capped services as an exogenous
factor will mitigate any upward pressure caused by the exogenous factor
resulting from Changes to the contribution regime, Decision CRTC 2000-745,
dated 30 November 2000. Decision 2000-745 permits companies
currently under price cap regulation, such as Bell Canada, to
reflect in their 2001 price cap filing an upward exogenous factor
adjustment of 4.5% to the Service Band Limit (SBL) for each of the
Residence Local Services and Other Capped Services sub-baskets and to the
overall PCI.
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16. |
Accordingly, the Commission considers that the GRT savings related to
capped services should be included as a downward exogenous adjustment to
the overall PCI as well as to the SBL for each of the Residence Local
Services and Other Capped Services sub-baskets.
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Calculation of GRT savings
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17. |
The Commission notes that Bell Canada's Split Rate Base (SRB) Manual
contains the procedures to assign the GRT expense to the Utility and
Competitive segments. Further, Bell Canada has not filed any updates or
revisions to its SRB Manual to modify the assignment of the GRT.
Consistent with these procedures, the Commission considers that the total
company GRT savings should be assigned to the Utility and Competitive
segments using the procedures described in Bell Canada's SRB Manual.
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18. |
Since Bell Canada's SRB Manual does not contain procedures to assign
the GRT to services within the Utility segment, the Commission considers
that because the GRT is a revenue-based tax, it is appropriate to use
revenues to assign the GRT savings within the Utility segment.
Accordingly, the allocation of the Utility segment GRT savings between
capped and non-capped services is to be based on their respective
revenues. Further allocations of the capped services GRT savings among
the various sub-baskets are to be based on their respective sub-basket
revenues. |
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GRT savings for 2000
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19. |
As noted above, the Commission recognized in Decision 97-9
that significant events of a legislative, judicial or administrative
nature may occur that are beyond the control of the company and that are
specific to the telecommunications industry. To the extent that such
exogenous events have a material impact on the operations of companies
such as Bell Canada, the Commission established in Decision 97-9
procedures to address the regulatory treatment of the costs or savings
stemming from such events.
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20. |
These procedures, established in Decision 97-9,
reflect the fact that, by their very nature, these events cannot always
be known in advance. Further, the resulting financial impacts of such
events cannot be readily assessed and determined in advance. Decision 97-9
specifically provides that in general, actual data should be used to
determine the impact of an exogenous event. The Commission considers that
the regime established to address exogenous events means that all parties
are on notice that adjustment to the PCI and SBLs stemming from these
events may be made in the future to account for past events. The
Commission notes that this approach provides for fair and symmetrical
treatment of such events for all parties.
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21. |
In Decision 97-9, the
Commission established the procedures available to both the telephone
companies and third parties for submitting applications for exogenous
factor adjustments. Call-Net's Part VII application is consistent with
these procedures.
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22. |
The Commission considers that parties who do not have an intimate
knowledge of a telephone company's operations are not in a position to
immediately assess the impact of an exogenous event. Consistent with the
regime established in Decision 97-9,
the Commission therefore considers that it would be appropriate in the
circumstances of this case to include exogenous events related to the
year in which Call-Net's application was made. The Commission notes that
the GRT savings realized in 2000 are due to the reduction in the GRT rate
from 5% to 3%.
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Implementation
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23. |
With respect to the capped services GRT savings for the year 2001,
resulting from the reduction in the GRT rate from 5% to 2%, the
Commission directs that these savings are to be included as an exogenous
adjustment to the SBL for each of the Residence Local Services and Other
Capped Services sub-baskets and to the overall PCI.
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24. |
In accordance with paragraph 22, Bell Canada is also directed to
include the capped services GRT savings realized in 2000 as a one time
exogenous factor for inclusion in the PCI and SBLs. These savings are to
be amortized over a two-year period starting in 2001. This allows for a
transition to the eventual elimination of the tax in 2003.
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25. |
The Commission notes that the current price cap regime will be
reviewed in 2001. Accordingly, the regulatory treatment of the GRT
savings related to the years 2002 and 2003 are to be in compliance with
the regulatory framework established in that proceeding. |
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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 |