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Telecom Order

Ottawa, 25 July 1997
Telecom Order CRTC 97-1034
On 27 January 1997, Northwestel Inc. (Northwestel) filed Tariff Notice 603 (TN 603) providing for a revenue-neutral rebalancing of local and long distance rates.
File No.: Tariff Notice 603
1. Northwestel stated that the objectives of the application are to meet customer demand for lower long distance rates, to rebalance rates while recognizing the need to provide affordable local service rates, and to make rate schedules more uniform.
2. Northwestel proposed to fund long distance rate reductions in its Adjacent and Trans Canada Rate Schedules with a local service rate increase of $4.00 across rate groups within each service category on a revenue neutral basis. Northwestel submitted that this would move rates closer to the cost of providing service.
3. Northwestel stated that the proposed rebalancing reflects the reality that the company can no longer rely on excessively high long distance rates to subsidize the cost of local network access service. Northwestel submitted that its network access rates are among the lowest in Canada and its long distance rates are among the highest. Given this disparity, Northwestel submitted that the rebalancing of its local access and long distance rates is not only appropriate, but necessary to maintain affordable telecommunications services.
4. According to Northwestel, on average, customers would save 1.51% of their total bill or $1.49 per month. Low-volume customers of long distance service would not benefit to the same extent as higher-volume users, who pay a disproportionately higher level of contribution to subsidize local network access.
5. Under Northwestel Inc. - Tariff Revisions Providing for Rebalancing of Local and Long Distance Rates, Telecom Public Notice CRTC 97-9 dated 24 February 1997 (PN 97-9), the Commission initiated a public proceeding to allow for the examination and the filing of comments by interested parties.
6. Letters were received from 18 customers as well as from the Lower Post First Nation and the Village of Mayo. All these parties were opposed to the Northwestel application, citing high increases in local rates, insufficient reductions in long distance rates and poor quality of service.
7. Comments were also received from AT&T Canada Long Distance Services Company, the Consumers' Association Canada (NWT) (CAC(NWT)), Westel Telecommunications Ltd. (Westel), the Yukon Government and the Utilities Consumers' Group.
8. CAC(NWT) submitted that the company's claim that the proposed rate rebalancing is revenue neutral depends on the accuracy of the company's estimate of the elasticity rate for message toll. CAC(NWT) expressed concern that Northwestel made no attempt to provide an empirical basis for its elasticity estimate. CAC(NWT) submitted that the company has a strong incentive to underestimate the elasticity in order to produce a low estimate of the stimulation of demand and the resulting revenue increase.
9. Westel generally endorsed the rate rebalancing approach but submitted that Northwestel should also decrease the rates in the Intra Schedule. Westel also recommended that any revenues generated by the local rate increases be applied to reduce basic toll rates equally in all three toll schedules applicable to the Western Region and that such rate reductions should be apportioned equally among all mileage bands in each of the three rate schedules.
10. The Yukon Government proposed that Northwestel examine existing base rate areas to determine what can be done to eliminate or significantly reduce mileage charges.
11. In reply to concerns expressed that the extent to which local service rates will increase is burdensome for the average customer and is especially burdensome for those on a low or fixed income, Northwestel noted that local service is generally provided below cost and that local service rates are currently among the lowest local service rates charged by any telecommunication company in Canada.
12. Northwestel replied that it focused its rate reductions on the Adjacent and Trans Canada rate schedules to respond to its customers' demands for low long distance rates where the greatest comparative disparities exist and to pursue the objective of reducing the discrepancy between the Intra Schedule rates and the Adjacent and Trans Canada Schedule rates. Northwestel submitted that the Intra Schedule rates are low when compared to the Adjacent and Trans Canada Schedule rates over the same mileage bands.
13. Northwestel stated that, when comparing the Intra with the Adjacent and Trans Canada schedules of the southern telephone companies, the greatest disparity was determined by the company to exist in the Adjacent and Trans Canada Schedules. Further, during the company's last rate rebalancing, the Commission approved a rate rebalancing plan which reduced rates in more mileage bands in the Intra Schedule rates than in any other schedule.
14. With respect to the assertion by CAC(NWT) that the company has used too low an estimate of the elasticity rate for message toll in its calculations of revenue neutrality, Northwestel replied that the results of an internal study indicated that an elasticity rate of -0.2 is a figure which most closely accords to the experience of the company given its operating area.
15. Northwestel stated that its customers are very aware of the low long distance rates available in the south, and while the proposed rate rebalancing will reduce the long distance rates, they will not be reduced so as to make the rates level with those offered in the south. Northwestel submitted that, as a result, customers are unlikely to increase significantly their long distance calling and it is unlikely that directional bypass will be reduced.
16. In response to the urging of the Yukon Government for Northwestel to examine existing base rate areas to determine what can be done to eliminate or significantly reduce mileage charges, the company replied that it is monitoring industry trends relating to the elimination of lower rate groups based on community size and the elimination of mileage charges.
17. The Commission considers that the rate rebalancing proposed by Northwestel is appropriate and consistent with the approach taken by other telephone companies to move local service rates closer to costs.
18. Having reviewed the study used by Northwestel to justify the proposed price elasticity of demand factor of -0.2, the Commission is of the view that Northwestel has not provided persuasive evidence to support its proposed elasticity factor of -0.2. In the circumstances, the Commission finds that a price elasticity factor of -0.4, which it has previously accepted in Northwestel filings, remains appropriate.
19. The Commission shares the concerns expressed by the Yukon Government regarding the need to eliminate or significantly reduce mileage charges. In the circumstances of this rate restructuring, the Commission considers that a $15.00 cap on exchange line mileage charges is appropriate.
20. In the light of the foregoing and having considered all the information before it in this proceeding, the Commission approves the rate restructuring submitted under TN 603, effective 1 August 1997, with the following changes:
(a) toll rates calculated based on a price elasticity factor of -0.4 as per Response to Interrogatory NWTEL(CRTC)9May97-2; and
(b) exchange line mileage charges are to be capped at $15.00 per month.
21. The Commission orders that Northwestel issue revised tariff pages reflecting this Decision by 31 July 1997.
Laura M. Talbot-Allan
Secretary General
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